In re Qimonda Richmond, LLC, 467 B.R. 318 (Bankr. D. Del. 2012)
The liquidating trustee filed an avoidance action against a letter of credit (LC) issuer to recover a $33 million transfer by the debtor to repay the LC issuer for an LC draw made by the debtor’s bondholders under an indenture agreement. The LC issuer filed a motion to dismiss the trustee’s suit, arguing that the transfers were settlement payments made in connection with a securities contract and thus protected by section 546(e) of the Bankruptcy Code. The court disagreed with the bank, and denied its motion to dismiss on the grounds, among other things, that the LC repayment was independent from the bondholder repayment.
In 2000, debtor Qimonda’s predecessor borrowed $33.7 million through the issuance of bonds pursuant to an indenture agreement. Citibank issued an LC in the amount of $34.1 million in favor of the Indenture Trustee to secure Qimonda’s payment obligations to bondholders. Qimonda agreed to reimburse Citibank if the LC was drawn, and gave the bank certain liens on assets as security for that obligation.
Upon being notified of the imminent expiration of the LC securing its bonds, the Indenture Trustee sent a redemption notice to bondholders. Shortly thereafter, and in rapid succession: (i) Qimonda deposited funds into its empty Citibank account to satisfy its obligations under the LC issued by Citibank to secure the bonds; (ii) Citibank debited the account; and (iii) Citibank paid $33 million to the Indenture Trustee, which had made a draw request under the LC. Less than a month later, Qimonda filed for relief under chapter 11. The Liquidating Trustee filed a complaint against Citibank seeking to avoid the $33 million transfer to Citibank as a preferential and fraudulent transfer. Citibank filed a motion to dismiss on the grounds that the transfer to Citibank was part and parcel with the debtor’s repayment of its bonds and was, therefore, a "settlement payment" pursuant to section 546(e) and protected from avoidance.
Citibank asserted that the Trustee’s complaint should be dismissed because, among other theories, the transfer to Citibank was within the section 546(e) safe harbor as a settlement payment made in connection with a securities contract.
Citibank relied on a New York bankruptcy decision in which the court held that a series of transactions, including the debtor’s transfer of money into a bank account, the disbursement of those funds to the indenture trustee of the debtor’s notes, and the retirement of those notes when the holders received payment, constituted a "settlement payment" within the 546(e) safe harbor.
Here though, the bankruptcy court distinguished the New York decision, noting that all of the transfers in that matter were made solely to complete a securities transaction, and there was no independent obligation between the debtor and the bank. In the instant case, however, the debtor’s obligation to Citibank under the LC was technically separate from the debtor’s obligation to repay its bondholders, even though the independent transactions went hand-in-hand and the debtor was repaying its bondholders "through" the LC issuer. In any case, the court was not persuaded that the bonds themselves were "securities contracts," and, thus, it was not persuaded that the LC repayment was a credit enhancement in connection with a securities contract sufficient to bring the payment within the 546(e) safe harbor.
In the past several years, courts in several jurisdictions have determined what payments are, and are not, within the section 546(e) safe harbor. This is a dynamic and somewhat unsettled area of the law – in particular where multi-step transactions are at issue. Whether a court will consider a transfer within a series of transfers to be a "settlement payment" depends on the jurisdiction and obligations underlying the transfers.