Source: https://business-finance-restructuring.weil.com/avoidance-actions/how-safe-is-the-section-546e-safe-harbor-part-i-quebecor/
Timestamp: 2019-04-26 04:34:18+00:00

Document:
In Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. Am. United Life Ins. Co., et al. (In re Quebecor World (USA) Inc.), the Second Circuit noted the existence of a split of authority regarding what role a financial institution must play in a transaction for it to qualify for the section 546(e) safe harbor. Holding that “transfer[s] made . . . in connection with a securities contract” may qualify for the safe harbor even if the financial institution at issue is merely a conduit, the Second Circuit reiterated its agreement with the Third Circuit, Sixth Circuit, and Eighth Circuit, as it set forth in Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V. (In re Enron Creditors Recovery Corp.), 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.” This contrasts with the holding of Eleventh Circuit that a financial institution must acquire a beneficial interest in the transferred funds or securities for safe harbor to apply.
In our first entry on the section 546(e) safe harbor, we reported on Geltzer v. Mooney (In re MacMenamin’s Grill, Inc.), where the Southern District of New York bankruptcy court refused to interpret section 546(e) to apply to a private stock transaction.
A few months later, we discussed the Enron decision, which provided Second Circuit courts with fresh guidance for analyzing the section 546(e) safe harbor.
Post-Enron, we looked at Picard v. Katz, where the Southern District of New York district court held that section 546(e) protected payments received by a customer from a stockbroker, except in cases of actual fraud.
Post-Enron, we also looked at AP Services LLP v. Silva, where the Southern District of New York district court held that the section 546(e) safe harbor for settlement payments may apply regardless of whether the unwinding of the transaction in question would have an adverse effect on financial markets. An appeal of the district court’s decision is pending before the Second Circuit.
Finally, we have covered the Quebecor case, from the Southern District of New York bankruptcy court (during which proceedings Enron was decided), through the Southern District of New York district court, and, now, on to the Second Circuit.
Quebecor involved a multi-party transaction among the Canadian printing company Quebecor World, Inc. (“Quebecor World”), its subsidiaries Quebecor World (USA) Inc. (“Quebecor USA”) and Quebecor World Capital Corp. (“Quebecor Capital”), and holders of private placement notes with a face value of $371 million issued by Quebecor Capital.
As Quebecor World’s financial difficulties gave rise to concerns about a potential debt-to-capitalization ratio default under the private placement notes and a consequent cross-default under Quebecor World’s separate $1 billion credit facility, Quebecor World sought to redeem the notes from the noteholders. To avoid adverse Canadian tax consequences, however, Quebecor World structured the transaction so that Quebecor USA would purchase the notes from the noteholders for cash and then Quebecor Capital would redeem the notes from Quebecor USA in exchange for forgiveness of debt that Quebecor USA owed to Quebecor Capital.
Fewer than 90 days before Quebecor USA filed for chapter 11 protection, it transferred approximately $376 million to the noteholders’ trustee, CIBC Mellon Trust Co. CIBC Mellon distributed the funds to the noteholders, and the noteholders eventually surrendered the notes directly to Quebecor World. Debtor Quebecor USA’s creditors’ committee sought to avoid and recover the transfer pursuant to section 547 of the Bankruptcy Code. The noteholders moved for summary judgment, arguing that the transfer was exempt from avoidance under section 546(e).
The bankruptcy court conducted additional briefing and granted the noteholders’ summary judgment motion, holding primarily that Quebecor USA’s payment fit the Enron court’s definition of “settlement payment.” The bankruptcy court held that the payment also qualified as a “transfer made . . . in connection with a securities contract” because Enron had made clear that the section 546(e) safe harbor applied to redemptions of commercial paper.
The court also declined to decide whether the transfer would still be exempt if Quebecor USA had “redeemed” its own securities because the Second Circuit agreed with the district court that Quebecor USA made the transfer to “purchase” the notes, which had been issued by another corporation, Quebecor Capital. While the note purchase agreements gave only Quebecor Capital the right to “pre-pay” or redeem the notes, the agreements gave Quebecor Capital’s affiliates only the right to “purchase” the notes if the affiliates complied with the note purchase agreements’ pre-payment provisions.
The Second Circuit rejected the creditors’ committee’s arguments that the transfer was a redemption and not a purchase. First, the court found that certain noteholders’ subjective understanding at the time of the transaction of its being a redemption was not dispositive because, from the noteholders’ perspective, the note purchase agreements treated redemptions and purchases the same way, and the noteholders received the same “pre-payment” price. Second, the court found that a cooperation agreement entered into among the noteholders both explicitly allowed for sale of the notes to certain Quebecor entities and failed to prohibit the noteholders as a group from selling (or Quebecor USA from purchasing) all of the notes in a single transaction. Moreover, none of the Quebecor entities was a party to the cooperation agreement, so any breach of that agreement would only create liability among the noteholders and not affect the validity of the transaction.
Quoting the Enron court’s analysis of the “settlement payment” prong of the section 546(e) safe harbor, the Second Circuit also noted that its construction furthered the purpose behind the exemption. The Enron court explained that Congress enacted section 546(e) to minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries. If a firm were required to repay amounts received in settled securities transactions, it could have insufficient capital or liquidity to meet its current securities trading obligations, placing other market participants and the securities markets themselves at risk. Thus, the Quebecor court found, a transaction involving one of these financial intermediaries, even as a conduit, necessarily touches upon these at-risk markets.
The Second Circuit also observed that the enumerated intermediaries are typically facilitators of, rather than participants with a beneficial interest in, the underlying transfers: “A clear safe harbor for transactions made through these financial intermediaries promotes stability in their respective markets and ensures that otherwise avoidable transfers are made out in the open, reducing the risk that they were made to defraud creditors.” In a footnote, the court cautioned that the “securities contract” safe harbor is not without limitation and, for example, mere structuring of a transfer as a “securities transaction” may not be sufficient to preclude avoidance, such as in the case of actual fraudulent transfers under section 548(a)(1)(A).
What Are the Potential Limitations on the Section 546(e) Safe Harbor in the Second Circuit?
In our next entry, on the decision of the Western District of New York bankruptcy court in Cyganowski v. Lapides (In re Batavia Nursing Home, LLC), we will explore the potential limitations that Second Circuit courts may be willing to impose on the section 546(e) safe harbor, beyond the express statutory exclusion of actual fraudulent transfers.

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