Second Circuit’s Quebecor bankruptcy decision offers comfort to capital markets participants that certain transactions will qualify for the Section 546(e) safe harbor.

In its recent decision in the Quebecor World (USA) case,1 the Second Circuit Court of Appeals held that Section 546(e) of the Bankruptcy Code prohibits an estate representative from avoiding pre-bankruptcy transfers that had been made to (or for the benefit of) financial institutions in connection with securities contracts, even where the financial institution served only as a conduit for the transfer of funds. In doing so, the Second Circuit expanded its 2011 Enron decision and expressly followed three other Circuit Courts which held that pre-bankruptcy transfers may qualify for the Section 546(e) safe harbor even if financial institutions do not take title to the transferred funds or to the affected securities.

Background: The Bankruptcy Code Safe Harbor

The Bankruptcy Code authorizes a debtor or trustee to avoid certain pre-bankruptcy transfers. For example, Section 547 of the Bankruptcy Code enables a bankruptcy trustee or other estate representative to avoid as preferential certain payments that the debtor made to creditors within 90 days2 before the bankruptcy filing. Moreover, Section 548(a)(1)(B) of the Bankruptcy Code permits the avoidance (as constructive fraudulent transfers) of transfers that a debtor made within two years before the bankruptcy filing, if the debtor met one of the tests of financial distress and received less than a reasonably equivalent value in exchange for the transfer.

However, to minimize displacements in the commodities and securities markets in the event of a major bankruptcy affecting those industries,3 Congress enacted Section 546(e) of the Bankruptcy Code to create a “safe harbor” that exempts certain types of transfers from avoidance as either preferences or constructive fraudulent transfers. Section 546(e) provides, in relevant part:

“… the trustee may not avoid a transfer that is a margin payment…or settlement payment…made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract…that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.” (emphasis added).

Enron: For the First Time A Court of Appeals Applies the Section 546(e) Safe Harbor to Redemption of Commercial Paper

Following Enron Corp.’s collapse and bankruptcy, the Second Circuit faced an issue of first impression — namely, whether Section 546(e) of the Bankruptcy Code extends to an “issuer’s payments to redeem its commercial paper prior to maturity.” In its 2011 Enron decision,4 the Second Circuit became the first court of appeals to hold that Section 546(e) did so extend.

In Enron, the debtor argued that its pre-bankruptcy payment to redeem more than $1 billion in commercial paper prior to maturity constituted an avoidable preference and constructively fraudulent transfer. As such, the debtor contended that such redemption payment did not qualify as a settlement payment — and thus fell outside the scope of the Section 546(e) safe harbor —- because (a) the redemption payment was not “a payment commonly used in the securities trade,” (b) its redemption payment was made with the purpose of retiring debt and not for the purpose of acquiring title to the commercial paper and (c) the financial intermediary that received the debtor’s redemption payment was merely a conduit that did not take title to the payment or to the redeemed commercial paper, and thus did not implicate the risks that Section 546(e) was designed to mitigate.

The Second Circuit rejected all of the debtor’s arguments, holding that the redemption payment was a “settlement payment” protected by Section 546(e).

  • First, the Second Circuit held that the grammatical structure of Section 741(8) of the Bankruptcy Code did not require that all payments be “commonly used in the securities trade.” Rather, Section 741(8) lists specific types of payments that are “settlement payments,” and included an additional general catch-all provision that covered “any other similar payment commonly used in the securities trade.” The Second Circuit ruled that only payments covered by the catch-all needed to be commonly used in the securities trade.
  • Second, the Second Circuit held that the debtor’s redemption payment completed a transaction in securities, which is sufficient for the payment to be a “settlement payment.” In particular, the Second Circuit rejected the debtor’s argument that the safe harbor applies only when title to a security changes hands.
  • Third, the Court held that the financial institution that facilitated the redemption transaction was not required to take title to the securities as part of the transaction. Rather, the safe harbor still applied even though the financial institution was merely a conduit, because a contrary result would have a “substantial and...negative effect on the financial markets.”

Quebecor: The Second Circuit Extends Enron

Quebecor World (USA) Inc. (QWUSA) and Quebecor World Capital Corp. (QWCC) were subsidiaries of Quebecor World, Inc. (QWI), a Canadian printing company. In 2000, QWCC raised approximately $370 million by issuing private placement notes under two note purchase agreements (NPAs). The printing business experienced severe financial difficulties seven years later, which in turn put the QWCC at risk of financial covenant default under those notes. Such a default would have accelerated the notes’ maturity, and would have also caused a cross-default under a separate $1 billion revolving credit facility.

To address this problem, QWI approved a transaction in which QWUSA purchased the QWCC-issued notes back from the noteholders in exchange for cash. The express terms of the NPAs authorized early redemption for cash.5 On October 29, 2007, QWUSA transferred approximately $376 million (the 2007 Payment) to the indenture trustee for the notes (Indenture Trustee). The Indenture Trustee acted as a conduit — never taking title to the cash — which distributed the funds to the noteholders.

Less than 90 days after making the 2007 Payment, QWUSA filed for bankruptcy in the US Bankruptcy Court for the Southern District of New York. The Official Committee of Unsecured Creditors in the bankruptcy case (Committee) later commenced an adversary proceeding in the bankruptcy court against the noteholders, seeking the avoidance and recovery of the 2007 Payment as a preference.

The Lower Courts’ Decisions

The noteholders moved for summary judgment in the Committee’s adversary proceeding, arguing that QWUSA’s payment was exempt from avoidance under the Section 546(e) safe harbor. The Bankruptcy Court granted the noteholders’ motion, holding that the payment qualified as a “settlement payment” in light of the Enron decision. Separately, the Bankruptcy Court held that the payment qualified under the Section 546(e) safe harbor as a “transfer made in connection with a securities contract.”6

On appeal, the US District Court for the Southern District of New York agreed with the Bankruptcy Court’s conclusion that QWUSA’s payment was a “settlement payment.”7 The District Court also held that the transfer qualified for the safe harbor as a “transfer made in connection with a securities contract,” because the notes were technically “purchased” by QWUSA, rather than “redeemed” by QWCC. The District Court observed that a transfer to redeem securities likely would not qualify as a “transfer made in connection with a securities contract” because Section 741(7) of the Bankruptcy Code defines a securities contract as one “for the purchase, sale, or loan of a security.”

The Second Circuit’s Decision

The Second Circuit affirmed the lower courts’ rulings that the Section 546(e) safe harbor protected QWUSA’s payment because it was a “transfer made in connection with a securities contract.” In particular, the court held QWUSA made a payment to the Indenture Trustee (which all parties agreed was a “financial institution” as defined in the Bankruptcy Code) pursuant to the terms and conditions of the NPAs (which the court held were “securities contracts” because they provided for both the original purchase and the repurchase of the notes).

The Second Circuit expressly followed the Third, Sixth and Eighth Circuits8 in holding that the Section 546(e) safe harbor applied even though the Indenture Trustee was a mere conduit which did not take title either to QWUSA’s cash payment or to the repurchased notes. In so holding, the Second Circuit expanded upon its earlier Enron decision (which had applied only to settlement payments) by holding that Section 546(e) also protects transfers made by or to (or for the benefit of) financial institutions that act as conduits in connection with securities contracts. The Second Circuit stated that protecting such transfers where a financial institution is only a conduit promotes the legislative purpose of the statute (e.g., fostering market stability and ensuring that otherwise avoidable transfers are made in the open, which would reduce the risk that transfers are made to defraud creditors).

Because the Second Circuit ruled that the QWUSA payment was made in connection with a securities contract, it declined to decide the separate question of whether the payment was also a “settlement payment.” The Second Circuit also declined to address the question of whether QWUSA’s payment would still have been exempt under the Section 546(e) safe harbor if QWUSA had made the payment to “redeem” its own securities, holding that QWUSA had instead “purchased” the securities of a different entity (QWCC) under the terms of the NPAs.


The Quebecor decision is important for participants in the capital markets because it supports a basis for the section 546(e) safe harbor that differs from the “settlement payment” exemption which was addressed in Enron. As such, Quebecor expands upon Enron and further limits the ability of trustees, creditors’ committees and other parties in the Second Circuit to unravel certain types of pre-bankruptcy capital markets transactions as preferences or constructive fraudulent transfers, even where a financial institution only acted as a conduit in the transaction. However, the Second Circuit did not resolve the question of whether transactions involving the redemption of securities qualify for the safe harbor of “transfers made in connection with a securities contract.”