Source: http://docs.justia.com/cases/federal/district-courts/new-york/nysdce/1:2011cv07530/386523/28/
Timestamp: 2013-05-25 12:05:25
Document Index: 487536018

Matched Legal Cases: ['§ 547', '§ 546', '§ 741', '§ 546', '§ 741', '§ 101', '§8', '§ 8', '§ 8', '§ 10', '§ 546', '§ 546', '§ 741', '§ 546', '§ 546', '§ 101', '§ 101', '§ 741', '§ 546', '§ 546', '§ 546', '§ 741', '§ 741', '§ 8', '§ 546']

In Re: Quebecor World (USA) Inc. Document 28 - :: Justia Docs
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Share | OPINION AND ORDER: For the reasons discussed within, the order of the Bankruptcy Court is AFFIRMED. The Clerk of Court is directed to close this case. (Signed by Judge Jesse M. Furman on 9/28/2012) (ab)	Download PDF
In re: QUEBECOR WORLD (USA) INC.,
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11 Civ. 7530 (JMF)
In October 2007, shortly before it filed for bankruptcy, Quebecor World (USA) Inc.
("Q WUSA") paid more than $3 76 million to purchase and redeem a series of private placement
notes that an affiliated company had issued years earlier. The question in this case is whether
those payments can be "avoided" - that is, recaptured as part of the bankruptcy estate -
ground that they were "preferential" transfers, or whether they are protected from avoidance as
either "settlement payments" or transfers "in connection with a securities contract." Appellant
Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. ("Appellant")
appeals from an order of the United States Bankruptcy Court for the Southern District of New
York (James M. Peck, B.J. ), entered on August 17, 2011, granting Appellees' motion for
summary judgment. See Official Comm. of Unsecured Creditors ofQuebecor World (USA) Inc.
v. Am. United Life Ins. Co. (In re Quebecor World (USA) Inc.), 453 B.R. 201 (Bankr. S.D.N.Y.
2011) ("Quebecor"). Relying on the Second Circuit's decision in In re Enron Creditors
Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) (â��Enronâ��), the Bankruptcy
Court held that the payments at issue were protected as both settlement payments and transfers in
connection with a securities contract. Quebecor, 453 B.R. at 215-19. For the reasons stated
below, this Court agrees and, accordingly, the Bankruptcy Courtâ��s order is AFFIRMED.
As noted, this case concerns the authority of a bankruptcy trustee to avoid and thus
recapture â��preferentialâ�� transfers. To the extent relevant here, Section 547(b) of the Bankruptcy
Code provides that a trustee may recover money or property transferred by an insolvent debtor
on account of an antecedent debt in the ninety days preceding bankruptcy. See 11 U.S.C.
Â§ 547(b). This â��avoidanceâ�� authority serves two important functions. First, it deters creditors
from racing to the courthouse and hastily forcing troubled businesses into bankruptcy. See, e.g.,
Union Bank v. Wolas, 502 U.S. 151, 160-61 (1991); In re Roblin, 78 F.3d 30, 40 (2d Cir. 1996).
Second, it promotes equitable treatment of creditors by allowing a trustee to recapture for the
benefit of all creditors preferential payments or transfers made in the months leading up to the
bankruptcy. See Wolas, 502 U.S. at 160-61.
Section 546(e) of the Bankruptcy Code carves out limited exceptions to this avoidance
authority, two of which are relevant to this case. First, a trustee â��may not avoid a transfer that is
a . . . settlement payment . . . made by or to (or for the benefit of) a . . . financial institution.â�� 11
U.S.C. Â§ 546(e). Section 741 of the Code, in turn, defines a settlement payment as â��a
preliminary settlement payment, a partial settlement payment, an interim settlement payment, a
settlement payment on account, a final settlement payment, or any other similar payment
commonly used in the securities trade.â�� Id. Â§ 741(8). 1 Second, a trustee â��may not avoid . . . a
transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a
securities contract.â�� Id. Â§ 546(e). To the extent relevant here, Section 741 defines â��securities
contractâ�� to mean â��a contract for the purchase, sale, or loan of a security, . . . including any
repurchase . . . transaction on any such security.â�� Id. Â§ 741(7)(A)(i).
Congress enacted the Section 564(e) safe harbors â��to minimize the displacement caused
in the commodities and securities markets in the event of a major bankruptcy affecting those
industries.â�� H.R. Rep. No. 420, 97th Cong., 2d Sess. 2 (1982), reprinted in 1982 U.S. Code
Cong. & Admin. News 583, 583. As the Court explained in Enron, â��[i]f a firm is 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.â�� 651 F.3d at 334. â��By restricting a bankruptcy
trusteeâ��s power to recover payments that are otherwise avoidable under the Bankruptcy Code, the
safe harbor stands â��at the intersection of two important national legislative policies on a collision
course-the policies of bankruptcy and securities law.â��â�� Id. (quoting In re Resorts Intâ��l, Inc., 181
F.3d 505, 515 (3rd Cir. 1999)).
The facts relevant to this case are undisputed. Quebecor World Inc. (â��QWIâ��) is a
Canadian corporation that used to be the second largest commercial printer in the world. See
Quebecor, 453 B.R. at 206. In July 2000, an entity in the Quebecor corporate family, Quebecor
World Capital Corp. (â��QWCCâ��), raised $250 million by issuing a series of private placement
Another provision of the Code defines settlement payment in the context of forward
contract trades, see 11 U.S.C. Â§ 101, but that definition is irrelevant to this case.
notes to a small group of lenders (the â��Noteholdersâ��) pursuant to a Note Purchase Agreement.
(JA-23 Ex. A1). 2 In September 2000, QWCC issued another $121 million in private placement
notes (together with the July 2000 notes, the â��Notesâ��) pursuant to a nearly identical Note
Purchase Agreement (together with the July 2000 Note Purchase Agreement, the â��NPAâ��). (JA23 Ex. A2). The Notes were guaranteed by QWI and its primary subsidiary in the United States,
QWUSA. (JA-23 Ex. C2 Â¶ 94).
Under Section 8.2 of the NPA, QWCC was entitled to redeem or prepay all or part of the
Notes at any time and for any reason. (JA-23 Exs. A1, A2 Â§8.2). Upon prepayment, the
Noteholders would receive the aggregate principal owed, accrued interest, and a â��make-wholeâ��
premium designed to compensate the Noteholders for the early payment of the Notes. (Id.).
Section 8.5 of the NPA specified that â��[a]ny Note paid or prepaid in full shall be surrendered to
the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any
prepaid principal amount of any Note.â�� (JA-23 Exs. A1, A2 Â§ 8.5). Section 8.6 of the NPA
further provided that QWI and any controlled affiliates were prohibited from purchasing,
redeeming, prepaying or otherwise acquiring the Notes except â��(a) upon the payment or
prepayment of each series of the Notes in accordance with the terms of this Agreement and the
Notes or (b) pursuant to an offer to purchaseâ�� made by QWI or a controlled affiliate â��pro rata to
the holders of all Notes at the time outstanding at the same time and upon the same terms and
conditions.â�� (JA-23 Exs. A1, A2 Â§ 8.6).
The NPA also included a limitation on QWIâ��s debt-to-capitalization ratio, which
provided that if that ratio exceeded 55% on the last day of any fiscal quarter ending after
In addition to their briefs, the parties have submitted a Joint Appendix, comprised of
forty-seven documents. â��JA-[NUMBER]â�� refers the relevant document in this Appendix.
December 31, 2000, all outstanding Notes would be immediately due to the Noteholders,
including principal owed, accrued interest, and the make-whole premium. (JA-23 Exs. A1, A2
Â§Â§ 10.1, 13.1(a), (c)). By May of 2007, QWI and its subsidiaries were in financial distress and at
risk of breaching this covenant. (Appellantâ��s Br. at 8; Appelleesâ�� Br. at 8-9). To avoid the
potentially catastrophic consequences of such a breach, QWI attempted to modify the covenant
through a partial tender offer to just over half of the Noteholders in exchange for their support in
raising the debt-to-capitalization ratio to 65%. (Appellantâ��s Br. at 9; Appelleesâ�� Br. at 9). The
Noteholders, however, unanimously rejected the tender offer and instead signed a Noteholder
Cooperation Agreement and Right of First Refusal Agreement, pursuant to which they agreed
not to sell the Notes outside the then-existing group of Noteholders. (Appellantâ��s Br. at 10;
Appelleesâ�� Br. at 9). It appears that these agreements were intended to prevent QWI from
dividing the Noteholders with a partial tender offer, thereby forcing an early prepayment of the
Notes â�� including the make-whole premium â�� to all Noteholders. (Appellantâ��s Br. at 10).
In September 2007, the QWI Board of Directors approved prepayment of all the Notes to
avoid breaching the debt-to-capitalization ratio covenant, using cash raised from a separate bank
credit facility. (JA-23 Exs. B1-B4 at 53). On September 28, 2007, QWCC sent each Noteholder
a â��Notice of Redemptionâ�� stating that, on October 29, 2007, it intended to â��redeemâ�� in full all
outstanding Notes under Section 8.2 of the NPA. (E.g., JA-23 Exs. B5-11 at 16). The notice
directed each Noteholder to â��surrenderâ�� the Notes â��for cancellation, pursuant to Section 8.5 of
the [NPA].â�� (E.g., id. at 17). Several weeks later, however, QWI realized that QWCCâ��s
redemption of the Notes would result in unwanted tax liabilities under Canadian law. At the last
minute, therefore, QWI restructured the transaction as a purchase of the Notes by QWUSA,
which would then surrender the Notes to QWCC for redemption. (Appellantâ��s Br. at 11). On
October 25, 2007, QWUSA provided a second notice to the Noteholders that it would pay the
â��Redemption Priceâ�� set forth in the Notice of Redemption, which would â��result in QWUSA
purchasing the Notes.â�� (E.g., JA-23 Exs. B12-18 at 1).
On October 29, 2007, QWUSA instructed Bank of America to wire transfer
$376,298,061.81 â�� the sum of the principal, accrued interest, and the make-whole premium â��
from its main operating account to the trustee for the Noteholders, CIBC Mellon (â��CIBCâ��). (JA23 Exs. B12-18 at 53). CIBC then transferred to each Noteholder its portion of the prepayment;
it did not, however, take title to the securities or utilize any type of clearing mechanism to
complete the transaction. (JA-23 Exs. D1-D7 at 9). Regardless, according to the Noteholders,
the payment from QWUSA to them was part of a securities transaction that â��settled.â�� (JA-6-22
Â¶ 9 & Exs. C.). Moreover, at least some contemporaneous documents describe the transfer as
â��settle[d],â�� occurring on a â��settlement date,â�� or the like. (E.g., JA6-22 Ex. C; JA-30 Ex. C, JA31 Ex. C; JA-39 Exs. 27-36 at 25). Following the prepayment, the Noteholders returned the
Notes by mailing them directly to QWI in Montreal â�� a process that dragged on for some
months. (Appelleesâ�� Br. at 11). When returned, two of the fifteen Notes were stamped â��PAID
IN FULL.â�� (Appellantâ��s Br. at 12 (citing JA-39 Exs. 64, 81); Appelleesâ�� Br. at 13 (citing JA-69, 11-16, 18-22)).
On January 21, 2008, QWUSA filed for Chapter 11 bankruptcy protection in the United
States Bankruptcy Court for the Southern District of New York. Voluntary Petition (Chapter
11), In re Quebecor World (USA), No. 08-bk-10152 (JMP) (Bankr. S.D.N.Y. Jan. 21, 2008)
(Docket No. 1). On September 19, 2008, Appellant commenced this adversary proceeding
seeking to avoid the $376 million prepayment of the notes on the ground that it was a
â��preferentialâ�� transfer within the meaning of Section 547(b). Complaint, Official Comm. of
Unsecured Creditors of Quebecor World (USA), Inc. v. Am. United Life Ins. Co. (In re Quebecor
World (USA) Inc.), No. 08-ap-1417 (JMP) (Bankr. S.D.N.Y. Sept. 19, 2008) (Docket No. 1). On
October 29, 2010, the Noteholders moved for summary judgment, contending that the payment
fell within the safe harbor of Section 546(e). (08-ap-1417 (JMP), Docket No. 32). The
Bankruptcy Court heard oral argument on January 19, 2011, and held a limited evidentiary
hearing on May 4 and 5, 2011. (08-ap-1417 (JMP), Docket Nos. 70, 73-74). Shortly thereafter,
the Court of Appeals issued its decision in Enron and the Bankruptcy Court ordered
supplemental briefing on the case. See Quebecor, 453 B.R. at 211.
In a thorough opinion dated July 27, 2011, Judge Peck granted the Noteholdersâ�� motion
for summary judgment. See Quebecor, 453 B.R. at 219. Judge Peck held that the transfers at
issue fell within Section 546(e) safe harbor for two independent reasons. First, relying heavily
on Enron, Judge Peck concluded that the payments qualified as settlement payments, defined as
a transfer of cash to a financial institution to complete a securities transaction. See id. at 215.
Second, Judge Peck held â�� albeit in a footnote â�� that the payment qualified â��as a safe-harbored
â��transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a
securities contract, as defined in section 741(7).â��â�� Id. at 212 n.7 (quoting 11 U.S.C. Â§ 546(e)).
Citing the â��comprehensive language used to define the term â��securities contractâ�� in section
741(7) of the Code (i.e., â��a contract for the purchase, sale, or loan of a security . . .â��),â�� Judge
Peck concluded that the NPA is a â��securities contractâ�� and that the disputed transfer â��[p]lainlyâ��
occurred in connection with it. Id. Further, relying on Enron, he rejected Appellantâ��s argument
that the clause did not apply to the redemptions of securities. See id.
This Court has jurisdiction pursuant to Title 28, United States Code, Section 158(a)(1)
and Rule 8001(a) of the Federal Rules of Bankruptcy Procedure. In general, a district court
reviews a bankruptcy courtâ��s findings of fact for clear error and its legal conclusions de novo.
See, e.g., In re Layo, 460 F.3d 289, 292 (2d Cir. 2006); In re Madoff, 848 F. Supp. 2d 469, 476
(S.D.N.Y. 2012); FED. R. BANKR. P. 8013. As noted, however, the relevant facts in the present
case are undisputed; the partiesâ�� dispute turns instead on the scope and meaning of terms in the
safe harbor provision of the Bankruptcy Code. These are â��matter[s] of statutory construction and
thus . . . question[s] of law [the Court] review[s] de novo.â�� Enron, 651 F.3d at 334.
B. The Safe Harbor for Settlement Payments
The first question on appeal is whether the payments at issue qualify as settlement
payments within the meaning of Section 546(e). As the Bankruptcy Court concluded, to answer
to that question requires analysis of Enron, in which the Court of Appeals considered â��whether
the Â§ 546(e) â��safe harborâ�� . . . extends to transactions in which commercial paper is redeemed by
the issuer prior to maturity, using the customary mechanism of the Depository Trust Company.â��
Enron, 651 F.3d at 334-34 (quoting In re Enron Creditors Recovery Corp., 422 B.R. 423, 424
(S.D.N.Y. 2004)). Shortly before filing for bankruptcy, Enron made the payments at issue â��
totaling more than one billion dollars â�� to holders of the commercial paper through brokerdealers via the Depository Trust Company (the â��DTCâ��), which served as a â��conduit and
recordkeeper rather than a clearing agency that takes title to the securities during the course of
the transaction.â�� Id. at 338. After Enron filed for bankruptcy, a creditors committee initiated an
adversary proceeding to avoid the redemption payments as preferential under Section 547(b) of
the Bankruptcy Code. The Bankruptcy Court held that the payments were subject to avoidance
because they did not fall within the definition of â��settlement paymentsâ�� in Section 546(e), see In
re Enron Creditors Recovery Corp., 407 B.R. 17 (Bankr. S.D.N.Y. 2009), but the District Court
reversed, see In re Enron Creditors Recovery Corp., 422 B.R. 423 (S.D.N.Y. 2009).
Over a dissent by Judge Koeltl (sitting by designation), the Second Circuit affirmed,
holding that the redemption payments did qualify as settlement payments within the meaning of
Section 546(e). The majority acknowledged that Section 741(8) of the Bankruptcy Code, which
Section 546(e) incorporates, â��defines â��settlement paymentâ�� rather circularly.â�� Enron, 651 F.3d at
334. Nevertheless, following other courts of appeals, the majority adopted an â��extremely broadâ��
definition of the term, instructing courts to interpret it, â��in the context of the securities industry,
as the transfer of cash or securities made to complete a securities transaction.â�� Id. at 334
(internal quotation marks and brackets omitted); see also id. at 336-37. Applying that definition,
the majority easily concluded that the redemption at issue fell within the safe harbor of Section
546(e): â��The payments at issue were made to redeem commercial paper, which the Bankruptcy
Code defines as a security. They thus constitute the transfer of cash . . . made to complete a
securities transaction and are settlement payments within the meaning of Â§ 741(8).â�� Id. at 339
(internal quotation marks, brackets, footnote, and citation omitted).
Significantly, in reaching that conclusion, the majority rejected three limitations urged by
the creditors committee. First, the majority rejected the committeeâ��s argument that the final
clause of the Section 741(8)â��s definition, â��commonly used in the securities trade,â�� limits the safe
harbor to those payments that are â��commonly used in the securities trade.â�� See 651 F.3d at 33536. That phrase, the majority concluded, â��is properly read as modifying only the term â��any other
similar payment.â�� The phrase is not a limitation on the definition of settlement payment, but
rather . . . it is a catchall phrase intended to underscore the breadth of the Â§ 546(e) exemption.â��
Id. at 336 (emphasis in original) (internal quotation marks omitted). In addition, the majority
reasoned, the committeeâ��s â��proposed reading would make application of the safe harbor in every
case depend on a factual determination regarding the commonness of a given transaction.â�� Id.
That, in turn, â��would result in commercial uncertainty and unpredictability at odds with the safe
harborâ��s purpose and in an area of law where certainty and predictability are at a premium.â�� Id.
Second, the Court rejected the committeeâ��s argument that in order to qualify for the
â��settlement paymentâ�� safe harbor, there had to be a purchase or sale of securities. See id. at 33638. The majority agreed that â��settlement,â�� in the context of the securities industry, â��refers to the
completion of a securities transaction,â�� but found no support in the Bankruptcy Code for â��a
requirement that title to the securities changes hands.â�� Id. at 337 (internal quotation marks
omitted). The majority was unswayed by Judge Koeltlâ��s argument in dissent that, without a
purchase-or-sale requirement, the safe harbor would apply to â��any payment on account of a debt
evidenced by a writing,â�� thereby â��imperil[ing] decades of cases that allow the avoidance of debtrelated payments.â�� Id. at 347 (Koeltl, J., dissenting). These cases, the majority explained,
â��involve[d] non-tradeable bank loans, not widely issued debt securities.â�� Id. at 337 (majority
opinion) (citing cases). Thus, â��[c]oncluding that the safe harbor protects payments made to
redeem tradeable debt securities does not contradict caselaw permitting avoidance of payments
made on ordinary loans. Interpreting the term â��settlement paymentâ�� in the context of the
securities industry will exclude from the safe harbor payments made on ordinary loans.â�� Id.
Finally, the panel majority rejected the committeeâ��s argument that a transfer qualifies as a
â��settlement paymentâ�� only if it involved a financial intermediary that took a beneficial interest in
the securities during the course of the transaction, thereby implicating the systemic risks that
motivated Congressâ��s enactment of the safe harbor. See id. at 338-39. In doing so, the Court
relied on the decisions of three other courts of appeals, which had applied Section 546(e) to
payments involving â��financial intermediaries who served only as conduits.â�� Id. at 338 & n.3
(citing In re Plassein Intâ��l Corp., 590 F.3d 252, 257-59 (3d Cir. 2009); In re QSI Holdings, Inc.,
571 F.3d 545, 549-50 (6th Cir. 2009); Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 986
(8th Cir. 2009)). Analogizing to those decisions, the Court found â��no reason to think that
undoing Enronâ��s redemption payments, which involved over a billion dollars and approximately
two hundred noteholders, would notâ�� have a â��substantial impact on the stability of the financial
marketsâ�� â�� merely because the Depository Trust Company â��acted as a conduit and recordkeeper
rather than a clearing agency that takes title to the securities during the course of the
transaction.â�� Id. at 338. Moreover, the Court continued, Section 546(e) applies on its face, and
without limitation, to settlement payments made â��by or to (or for the benefit of)â�� various
participants in the financial markets. 11 U.S.C. Â§ 546(e). â��It would appear inconsistent with this
language for courts to limit the safe harbor circuitously by interpreting the definition of
â��settlement paymentâ�� to exclude payments that do not involve a financial intermediary that takes
title to the securities during the course of the transaction.â�� Id. at 339. 3
In light of the Circuitâ��s holding and analysis in Enron, this case is easily decided. As
Judge Peck correctly held, the Circuitâ��s test for whether a payment qualifies for the safe harbor
â��is both uncomplicated and crystal clear â�� a settlement payment, quite simply, is a â��transfer of
cash [to a financial institution] . . . made to complete [a] securities transaction.â��â�� Quebecor, 453
B.R. at 215 (quoting Enron, 651 F.3d at 334); accord Secs. Investor Prot. Corp. v. Bernard L.
The Second Circuit denied the Enron Creditors Committeeâ��s petition for rehearing or for
rehearing en banc on December 2, 2011. (See Annex to Appelleesâ�� Br.)
Madoff Invest. Secs. LLC, â�� B.R. â��, 2012 WL 1505349, at *4 (S.D.N.Y. Apr. 30, 2012).
â��Under this easy-to-apply formulation,â�� the payments at issue in this case plainly fall within the
safe harbor. Quebecor, 453 B.R. at 215. First, QWUSA transferred cash â�� more than $376
million of it â�� to purchase the Notes. Second, QWUSA wired the money from its account at
Bank of America to the trustee for the Noteholders, CIBC, which qualifies as a â��financial
institutionâ�� for purposes of Section 546(e). See 11 U.S.C. Â§ 101(22) (defining â��financial
institutionâ��). Finally, the payment was made to â��completeâ�� a securities transaction, as the Notes
indisputably qualify as â��securitiesâ�� under the Bankruptcy Code. See id. Â§ 101(49)(A)(i)
(defining the â��term â��securityâ��â�� to include a â��noteâ��). Put simply, â��[t]he payments at issue were
made to [purchase] or redeem [notes], which the Bankruptcy Code defines as a security. They
thus constitute the transfer of cash . . . made to complete a securities transaction and are
settlement payments within the meaning of Â§ 741(8).â�� Enron, 651 F.3d at 339 (internal
quotation marks, brackets, footnote, and citation omitted).
Appellantâ��s arguments to the contrary are unavailing. First, noting that the payments in
this case did not involve a formal settlement process using broker-dealers and the DTC to effect
the immediate exchange of payment and securities, Appellant contends that Enron is
distinguishable. (Appellantâ��s Br. at 15-16). Admittedly, this argument finds some support in the
way the Enron Court framed the question presented. See 651 F.3d at 333-34 (â��Here, we review
only the issue the district court agreed to hear on appeal: â��whether the Â§ 546(e) â��safe harborâ�� . . .
extends to transactions in which commercial paper is redeemed by the issuer prior to maturity,
using the customary mechanism of the Depository Trust Company.â��â��) (quoting In re Enron, 422
B.R. at 424). It finds no support, however, in the Courtâ��s ultimate holding that, in the context of
the securities industry, a settlement payment means simply â��the transfer of cash or securities
made to complete a securities transaction.â�� Id. at 334 (internal quotation marks and brackets
omitted). Moreover, the Enron Court concluded that Section 546(e) must be interpreted by
looking to its plain language, see id. at 335, 339, and nothing in the statute suggests that
application of the safe harbor turns on the involvement of broker-dealers, customary mechanisms
of settlement such as the DTC, or an immediate exchange of securities. In fact, the Enron Court
adopted the reasoning of a line of cases that have â��expressly rejected the argument that
â��settlement paymentsâ�� must travel through the settlement system.â�� Plassein Intâ��l Corp., 590 F.3d
at 258 (characterizing an early case in that line), cited in Enron, 651 F.3d at 338-39.
Second, Appellant contends that the Bankruptcy Court erred in holding that the payments
at issue were made to a â��financial institution,â�� as required (in the context of this case) to qualify
for the safe harbor. (Appellantâ��s Br. at 24-25). Appellant does not dispute that CIBC, the actual
recipient of the transfer, qualifies as a â��financial institutionâ�� for purposes of the Bankruptcy
Code. 4 Instead, relying on the Eleventh Circuitâ��s decision in In re Munford, 98 F.3d 604, 610
(11th Cir. 1996), it argues that CIBC â��was â��nothing more than [an] intermediary or conduit,â�� and
thus cannot be used to satisfy the requirement under Section 546(e) that the transfer be made by
or to a financial institution.â�� (Appellantâ��s Br. at 24 (quoting Munford, 98 F.3d at 610)). At least
three courts of appeals, however, have expressly rejected Munford, holding that â��the plain
language of Â§ 546(e) simply does not require a â��financial institutionâ�� to have a â��beneficial
interestâ�� in the transferred funds.â�� QSI Holdings, Inc., 571 F.3d at 551; accord Contemporary
Indus. Corp., 564 F.3d at 986-87; In re Resorts Intâ��l, Inc., 181 F.3d 505, 516 (3d Cir. 1999).
And while the Second Circuit did not explicitly discuss Munford in Enron, it followed these
Nor does Appellant dispute that some of the Noteholders would qualify as financial
institutions in their own right.
other courts in holding that Section 546(e) may not be limited â��circuitously by interpreting the
definition of â��settlement paymentâ�� to exclude paymentsâ�� to â��financial intermediaries who served
only as conduits.â�� 651 F.3d at 338 (citing Plassein Intâ��l Corp., 590 F.3d at 257-59; QSI
Holdings, Inc., 571 F.3d at 549-50; Contemporary Indus. Corp., 564 F.3d at 986)). See
generally Christopher W. Frost, The Continued Expansion of Section 564(e): Has the Safe
Harbor Swallowed the Rule?, 31 No. 10 BANKR. L. LETTER 1, 2 (Oct. 2011) (citing Enron as the
latest in a â��large, and growing, number of casesâ�� that â��find a settlement payment anytime a
financial institution serves as an intermediary to conclude a sale and purchase of a securityâ��). In
light of Enron and the plain language of Section 546(e) â�� which requires only that a payment be
made â��by or to (or for the benefit of)â�� a financial institution â�� Appellantâ��s argument fails.
Finally, noting that Congress intended for Section 546(e) to protect against systemic
threats to the marketplace, Appellant contends that the payments at issue here are not within the
ambit of those that Section 546(e) was designed to protect because they did not involve a central
counterparty. (Appellantâ��s Br. at 19-21). Relatedly, Appellant contends that if Judge Peckâ��s
decision is affirmed, Section 546(e) would apply to â��the prepayment of any ordinary loan
evidenced by the private note.â�� (Appellantâ��s Br. at 21). In the abstract, these arguments have
some force given, among other things, the circularity of the definition of â��settlement paymentâ�� in
Section 741(8); indeed, were this Court writing on a blank slate, it might well conclude that they
called for a narrower definition of â��settlement paymentâ�� that excluded the payments here. See
also Quebecor, 453 B.R. at 217 (noting that because the definition given to â��settlement
paymentâ�� in Enron â��is so general in its application (as noted by the dissent with reference to the
impact on recovering preferential payments of unsecured loans), does not advert to
Congressional intent (except to say that to do so would not change the result) and applies to any
qualifying transfer, even one with no demonstrated connection to the securities markets,â�� it â��may
extend protection to transfers that Congress never intended to immunize and may lead to
unintended consequencesâ��); Frost, 31 No. 10 BANKR. L. LETTER at 3 (â��[T]he net effect of Enron
may be allow the parties to insulate most debt held by financial institutions from the reach of the
preference laws â�� a result seemingly far afield from that intended by Congress.â��).
The Court is not writing on a blank slate, however, but is bound to follow the Second
Circuitâ��s decision in Enron. See, e.g., United States v. Russotti, 780 F. Supp. 128, 131 (S.D.N.Y.
1991) (â��[I]t is axiomatic that a district court cannot simply take a position contrary to that of its
circuit court and regard the circuit courtâ��s interpretation of a given statute as not binding.â��). And
in relying on the plain language of Section 546(e) to adopt an â��extremely broadâ�� definition of
â��settlement payment,â�� the Second Circuit squarely rejected the precise arguments made by
Appellant here (most, if not all, of which were made forcefully by Judge Koeltl in his dissent).
Enron, 651 F.3d at 334 (internal quotation marks omitted); see id. at 337 (rejecting the dissentâ��s
argument that a narrower definition of settlement payment was warranted to avoid its application
to prepayment of ordinary loans); id. at 338-39 & n.3 (rejecting â��a restriction on the safe harbor
that would limit it to transactions involving central counterpartiesâ��); id. at 339 (declining to look
at legislative history in light of the plain language of Section 546(e)); see also Secs. Investor
Prot. Corp., 2012 WL 1505349, at *5 (relying on â��the broad and literal interpretation given
Â§ 546(e) in Enronâ�� to reject an argument that the statute should be read, in light of its purpose, to
exclude fraudulent brokerage firms and transactions). 5 If the broad definition given by the
Even if Section 546(e) could be limited to payments that, if avoided, might trigger
systemic risks to the marketplace, the payments in this case might well qualify. As the
Bankruptcy Court explained, the Noteholders are large financial institutions that â��customar[ily]
participa[te] in the secondary market for private placements notes,â�� a market in which â��holdings
Enron Court to the term â��settlement paymentâ�� is to be narrowed, it must come from the Circuit
itself or from the Supreme Court, not from this Court.
C. The Safe Harbor for Payments in Connection with a Securities Contract
The Courtâ��s conclusion that the payments at issue qualify as â��settlement paymentsâ��
within the meaning of Section 546(e) is sufficient to decide this appeal. Nevertheless, out of an
abundance of caution, and because the issue has been fully briefed by the parties (Appellantâ��s Br.
at 21-24; Appelleesâ�� Br. at 22-24), the Court will address the Bankruptcy Courtâ��s alternative
basis for granting Appelleesâ�� summary judgment â�� namely, that the transfers in question were
â��made by to (or for the benefit of) a . . . financial institution . . . in connection with a securities
contract.â�� Quebecor, 453 B.R. at 212 n.7. As noted, citing the â��comprehensive languageâ�� of the
statute â�� which defines â��securities contractâ�� to include â��a contract for the purchase, sale, or loan
of a security, . . . including any repurchase . . . transaction on any such security,â�� 11 U.S.C.
Â§ 741(7)(A)(i) â�� Judge Peck held in a footnote that the NPA was a securities contract and
concluded that the transfers at issue â��[p]lainlyâ�� occurred â��in connection withâ�� them. Quebecor,
453 B.R. at 212 n.7. Further, in doing so, he rejected Appellantâ��s argument that the definition of
â��securities contractâ�� should not be read to include a contract for the redemption â�� as opposed to
purchase, sale, or repurchase â�� of a security. â��Enron,â�� Judge Peck reasoned, â��makes clear that
the safe harbor applies to redemptions and has destroyed that argument.â�� Id.
routinely are traded from one institution to another.â�� Quebecor, 453 B.R. at 217. Thus, the
prepayment of the Notes â�� totaling approximately $376 million â�� was arguably â��sufficiently
material in amount as to be potentially significant from a systemic point of view, and avoiding a
transaction such as this conceivably could impact the original issue or secondary markets for
private placement indebtedness.â�� Id.
As Appellant argues on appeal (Appellantâ��s Br. at 22), this reasoning is flawed. Contrary
to the Bankruptcy Courtâ��s conclusion, the Enron Court did not hold broadly that the safe harbor
â�� that is, Section 546(e) itself â�� applies to redemptions in all respects. It merely interpreted
and applied the meaning of the term â��settlement paymentâ�� in Section 546(e), holding that,
because there is no purchase-or-sale requirement on the face of the statute defining that term, it
extends to redemptions of securities. See Enron, 651 F.3d at 336-37. That holding, however,
does not extend to the â��securities contractâ�� prong of Section 546(e), as â��securities contractâ�� is
defined separately. 6 In fact, if anything, the Enron decision actually supports Appellantâ��s
argument rather than â��destroy[ing]â�� it, Quebecor, 453 B.R. at 212 n.7, as the case stands for the
proposition that Section 546(e) and the definitional provisions incorporated therein should be
interpreted according to their plain terms. See 651 F.3d at 339 (declining to address legislative
history and bankruptcy policy arguments). That is, to the extent relevant here, Section 741(7)
does include a purchase-or-sale requirement, as it expressly defines â��securities contractâ�� to mean
a contract â��for the purchase, sale, or loanâ�� of a security. 11 U.S.C. Â§ 741(7)(A)(i). â��[L]ooking
to the statuteâ��s plain language,â�� as Enron instructs, 651 F.3d at 339, it follows that the definition
of â��securities contractâ�� is limited to contracts â��for the purchase, sale, or loan of a securityâ�� and
does not extend to contracts for the redemption of a security, as the Bankruptcy Court held.
Nevertheless, for different reasons, this Court concludes that the payments at issue do in
fact qualify as transfers in connection with a securities contract. See, e.g., Freeman v. Journal
Register Co., 452 B.R. 367, 369 (S.D.N.Y. 2010) (noting that a district court, on appeal from a
Moreover, the â��securities contractâ�� prong of Section 546(e) was only added to the statute
in 2006, five years after Enron filed its Chapter 11 petition. See Financial Netting and
Improvement Act, Pub. L. No. 109-360 (2006).
bankruptcy court, â��may affirm on any ground that finds support in the record, and need not limit
its review to the bases raised or relied upon in the decisions belowâ��). That is because, as it was
ultimately structured, the transaction at issue was in fact a â��purchaseâ�� (or â��repurchaseâ��) of the
Notes rather than a â��redemption.â�� To be sure, QWCC initially sent a â��Notice of Redemptionâ�� to
the Noteholders stating that, on October 29, 2007, it intended to â��redeemâ�� in full all outstanding
Notes under Section 8.2 of the NPA. (E.g., JA-23 Exs. B5-11 at 16). Prior to that date, however,
QWI decided for tax reasons to restructure the deal as a â��purchaseâ�� of the Notes by QWUSA,
which it was permitted to do pursuant to Section 8.6 of the NPA. (Appellantâ��s Br. at 11-12).
Thus, on October 25, 2007, QWUSA provided notice to the Noteholders that it would pay the
â��Redemption Priceâ�� set forth in the earlier Notice of Redemption, which would â��result in
QWUSA purchasing the Notes.â�� (E.g., JA-23 Exs. B12-18 at 1). 7 QWUSAâ��s â��purchaseâ�� was
indisputably made â��in connection withâ�� the NPA â�� specifically, it was made pursuant to
Sections 8.2 and 8.6 of the NPA â�� and the NPA plainly qualifies as a contract. Further, for the
reasons stated above, the transfers at issue were made to a financial institution, namely CIBC.
Strictly speaking, although the amended notices stated that QWUSA was purchasing the
Notes pursuant to Section 8.2 of the NPA, that provision governs redemptions by QWI. Section
8.6 allowed QWI or an affiliate such as QWUSA to purchase the Notes â��(a) upon the payment or
prepayment of . . . the Notes in accordance with the terms of this Agreement and the Notes or (b)
pursuant to an offer to purchase made . . . pro rata to the holders of all Notes at the time
outstanding at the same time and upon the same terms and conditions.â�� (JA-23 Exs. A1, A2
Â§ 8.6). The fact that the amended notice cited Section 8.2 rather than Section 8.6, however, does
not change the essential fact that the deal was ultimately structured as a purchase. Nor does the
fact â�� emphasized by Appellants (Appellantâ��s Br. at 23) â�� that some Noteholders treated the
transaction as a redemption rather than a purchase, by, for example, stamping â��PAID IN FULLâ��
on the Notes returned to QWI.
Thus, the transfer at issue was a "transfer made by to (or for the benefit of) a ... financial
institution ... in connection with a securities contract." 11 U.S.C. Â§ 546(e). 8
For the reasons discussed above, the order of the Bankruptcy Court is AFFIRMED. The
Clerk of Court is directed to close this case.
It could be argued that the transfers qualify for the safe harbor whether or not they were
redemption or purchase payments because, either way, they were made in connection with the
NP A and the NP A qualifies as a "securities contract" because it governed the initial purchase of
the Notes from QWI. After all, on its face, Section 546(e) requires only that the transfer be made
"in connection with a securities contract," defined as a contract that governs the purchase or sale
of a security; it does not require that the transfer be made in connection with the purchase or sale
itself. Moreover, as courts in this district have explained, "[i]t is proper to construe the phrase
'in connection with' broadly to mean 'related to.'" In re Lehman Bros. Holdings Inc., 469 B.R.
415, 442 (Bankr. S.D.N.Y. 2012). In light ofthe conclusion above, however, the Court need not
reach this argument.