Navigating the most recent leg in the Quebecor regatta, the Second Circuit affirmed the judgment of the district court and ruled that prepetition transfers made in connection with a securities contract may qualify for safe harbor from avoidance actions under section 546(e) of the Bankruptcy Code—even if the transferee is a mere “conduit” or “intermediary” financial institution. In re Quebecor World (USA) Inc. (Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Insurance Co.), No. 12-4270-bk (2d Cir. June 10, 2013). A copy of the decision is available [HERE].
All at sea, with illusions that it was the stand-on vessel, Quebecor sought to bail out its bilge by avoiding and recovering prepetition payments made to noteholders in exchange for private placement notes issued by one of its affiliates, in part because the payment was made via the noteholders’ trustee and not directly to the holders themselves. As entered earlier in the Basis Points deck log (bankruptcy court blog post and district court blog post), the bankruptcy court originally ruled, and the district court affirmed, that Quebecor’s prepetition payment to institutional noteholders was exempt from avoidance as a “settlement payment” under 546(e). While affirming the judgment of the district court, the Second Circuit was not required to decide whether such payment constituted a “settlement payment” because the Court found that it qualified for safe harbor under the securities contract exemption as “a transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract.” So the noteholders were underway close-hauled on a starboard tack and the debtor aboard the burdened vessel.
In its 2011 Enron decision (also the subject of a Basis Points blog post), the Second Circuit held that “the absence of a financial intermediary that takes title to the transacted securities during the course of the transaction is [not] a proper basis on which to deny safe-harbor protection.” While the holding implies that a financial institution serving as an intermediary transferee would also qualify for the safe harbor under section 546(e), there is a split in authority among the circuits as to the role such institution must play in transfers to qualify. The Third, Sixth and Eighth Circuits have concluded that the plain language of the Bankruptcy Code includes a transfer of funds or securities to any financial institution, even conduits and intermediaries. Only the piratic Eleventh Circuit (the Code is more like ‘guidelines’ than actual rules) has held that the financial institution must acquire a beneficial interest in the transferred funds or securities for the safe harbor to apply. The Second Circuit now clearly joins the majority in holding that a transfer may qualify for section 546(e) safe harbor even if the financial institution is merely a conduit, the debtor was hard up, and bankruptcy was in the offing.