The Bottom Line:

Nothing like a prompt follow up to a recent blog post.  In the case of In re Quebecor World (USA) Inc., 08-10152 JMP, 2011 WL 3157292 (Bankr. S.D.N.Y. July 27, 2011), a bankruptcy court in the Southern District of New York issued one of the first opinions applying the Second Circuit’s recent holding in Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 09-5122-BK L, 2011 WL 2536101 (2d Cir. June 28, 2011), which broadly construed the definition of “settlement payment” under the safe harbor provision of section 546(e) of the Bankruptcy Code.  This post-Enron decision holds that payments received by noteholders under a prepetition redemption of an unsecured private placement note during the preference period were protected settlement payments. 

What Happened

Quebecor World was the second largest commercial printer in North America.  One of its subsidiaries raised $371 million in a private placement unsecured note issuance in July 2000.  Other Quebecor subsidiaries were also borrowers under a $1 billion revolving credit facility.  As Quebecor’s business suffered over time, it was in danger of violating certain covenants under its notes.  On October 29, 2007, in order to avoid a covenant default on the notes, which would have triggered a cross-default in its revolving credit facility, Quebecor (via its subsidiary QWUSA) redeemed the notes with a $376 million redemption payment pursuant to its original note purchase agreement (the “Transfer”). 

Just a few days before the 90-day preferential transfer period expired, Quebecor’s Canadian entities filed for bankruptcy protection in Montreal, Canada and the U.S. entities filed in the Southern District of New York on January 20th and 21st, 2008 respectively.  On February 10, 2009, the official committee of unsecured creditors of Quebecor initiated an adversary proceeding to recover the $376 million redemption payment as a preferential transfer under section 547(b) of the Bankruptcy Code.  The noteholders argued that the Transfer was a “settlement payment,” protected from avoidance as a preferential transfer, pursuant to the safe harbor provisions of section 546(e).

The bankruptcy court noted that the Second Circuit’s definition of the term “settlement payment” in Enron is “both uncomplicated and crystal clear—a settlement payment, quite simply, is a ‘transfer of cash ... made to complete [a] securities transaction.’” (quotations omitted). Id. at *11.  Applying Enron to the facts in Quebecor, the court found that the Transfer qualified as exempt from avoidance under the safe harbor provisions of section 546(e) because “[t]he transaction in question involves three elements that together support this conclusion—(i) the transfer by QWUSA of cash (ii) to a financial institution that was acting as agent for the Noteholders (iii) made to repurchase and cancel securities, i.e., to complete a securities transaction.”  Id. at *12.   Based on Enron’s broad definition of settlement payments, the definition of a “settlement payment” “does not depend upon an examination and interpretation of the legislative history, does not restrict application of this safe harbor provision to purchases and sales of securities and does not require a formal settlement process.” Id. at *11.  The bankruptcy court therefore granted the noteholders’ summary judgment motion against Quebecor’s creditor’s committee.

In reaching its decision, the bankruptcy court discussed the principle that “[t]he pursuit of preference litigation is an established mechanism to add value to the estate and to equalize recoveries among similarly-situated creditors by redistributing the recovered payments to creditors within the same class.”  In re Quebecor World (USA) Inc. at *2.  Noting the disparity between the noteholders and other unsecured creditors’ recoveries, the bankruptcy court observed that: “Similarly situated creditors represented by the Committee . . . have been relegated to percentage distributions from Quebecor under a confirmed plan of reorganization amounting to only a fraction of their allowed claims while the Noteholders have reaped the benefits of an unimpaired total return.” Id. at *3.  Nevertheless, the Second Circuit’s recent, controlling decision in Enron left no doubt that the Transfer was a protected “settlement payment.”

Why the Case is Interesting:

The decision applies Enron’s recent ruling that protects redemption payments from avoidance.  As such, bankruptcy courts, at least in the Second Circuit, need not consider the circumstances surrounding payments made by a debtor in settlement of securities transactions in the 90 days before bankruptcy as long as the payment was made through a financial institution and it was made to repurchase or cancel securities (“i.e., to complete a securities transaction”).  The bankruptcy court held that “nuanced exceptions” to the redemption process are no longer relevant factors.  Here, the repayments were made on the same day directly to the holders and not through a more “traditional” or formal DTC settlement process.  Applying the broad formula of Enron, these have become distinctions without a difference.