Opinion ID: 219830
Heading Depth: 2
Heading Rank: 3

Heading: Redemption of Debt Securities

Text: Enron next argues that the redemption payments are not settlement payments because they involved the retirement of debt, not the acquisition of title to the commercial paper. We find no basis in the Bankruptcy Code or the relevant caselaw to interpret § 741(8) as excluding the redemption of debt securities. Because Enron's redemption payments completed a transaction in securities, we hold that they are settlement payments within the meaning of § 741(8). The bankruptcy court agreed with Enron's position, relying in large part on our decision in SEC v. Sterling Precision Corp., 393 F.2d 214 (2d Cir.1968). See Enron II, 407 B.R. at 37-40. In Sterling Precision Corp., we held that an issuer's redemption of bonds and preferred stock was not a purchase within the meaning of the Investment Company Act of 1940. 393 F.2d at 217. We based this conclusion, in part, on the fact that the issuer did not acquire title to its Debentures or Preferred Stock; it discharged them. 393 F.2d at 216-18. Drawing on this conclusion, the bankruptcy court held that Enron's redemption payments do not constitute settlement payments under § 741(8) because Enron did not acquire title to the commercial paper it redeemed. Enron II, 407 B.R. at 38-40. Alfa and ING argue that Sterling Precision Corp. is not relevant to this case because it interpreted the Investment Company Act, not the Bankruptcy Code. Setting aside this argument, reliance on Sterling Precision Corp.'s interpretation of the term purchase still makes sense only if we read a purchase or sale requirement into § 741(8). For the following reasons, we decline to do so. Nothing in the text of § 741(8) or in any other provision of the Bankruptcy Code supports a purchase or sale requirement. Enron argues that a settlement payment must involve a transaction in securities, which, in turn, must involve a purchase or sale. While we, like our sister circuits, agree that in the context of the securities industry a `settlement' refers to `the completion of a securities transaction,' Contemporary Indus. Corp., 564 F.3d at 985 (quoting Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.2d 846, 849 (10th Cir.1990)), we find little support for the contention that a securities transaction necessarily involves a purchase or sale. Several of the industry definitions of settlement payment on which other courts of appeals have relied define the term as an exchange of money or securities that completes a securities transaction; these definitions make no mention of a requirement that title to the securities changes hands. See, e.g., Kaiser Steel Corp., 913 F.2d at 849 (citing, inter alia, D. Brownstone & I. Franck, The VNR Investor's Dictionary 279 (1981) (defining settlement as finishing up of a transaction or group of transactions); Group of Thirty, Clearance and Settlement Systems in the World's Securities Markets 86 (1989) (defining settlement as [t]he completion of a transaction, wherein securities and corresponding funds are delivered and credited to the appropriate accounts); A. Pessin & J. Ross, Words of Wall Street: 2000 Investment Terms Defined 227 (1983) (defining settlement as the completion of a securities transaction)). While, as the dissent notes, see Dissent at 342, Kaiser Steel Corp. also cites industry definitions that reference a purchase or sale of securities, 913 F.2d at 849, the range of definitions that the decision cites suggests that the securities industry does not universally consider a purchase or sale of securities to be a necessary element of a settlement payment. Enron argues, and the dissent agrees, see Dissent at 347, that applying the safe harbor to Enron's commercial paper redemption would contradict uniform case law spanning two decades that allows avoidance of debt-related payments. The cases on which Enron relies, however, involve non-tradeable bank loans, not widely issued debt securities. See, e.g., Union Bank v. Wolas, 502 U.S. 151, 152-53, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991); Ray v. City Bank & Trust Co., 899 F.2d 1490, 1491-93 (6th Cir.1990); Breeden v. L.I. Bridge Fund, LLC, 220 B.R. 739, 740 (2d Cir. BAP 1998); CEPA Consulting, Ltd. v. N.Y. Nat'l Bank, 187 B.R. 105, 106-07 (S.D.N.Y.1995). Concluding 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 settlement payment in the context of the securities industry will exclude from the safe harbor payments made on ordinary loans. Indeed, it is not clear that a purchase or sale requirement would necessarily exclude all payments made on ordinary loans. For example, what if parties structured the early repayment of a loan evidenced by a promissory note as a repurchase of that promissory note? The note's terms could prohibit voluntary early redemption. If the borrower were to buy back the promissory note at a negotiated price, it would be difficult to characterize this transaction as a redemption rather than a repurchase in order to exclude it from the safe harbor. The payments at issue in this case demonstrate the difficulty with and the absence of a statutory foundation for a purchase or sale requirement. Assume, for example, that the terms of Enron's commercial paper-like the terms of the hypothetical promissory note discussed above-prohibited early redemption. Enron could reacquire the paper only by agreeing with the paper holders on a particular reacquisition price. This transaction would appear to be a repurchase, [2] cf. Sterling Precision Corp., 393 F.2d at 217 ([A] maker's paying a note prior to maturity in accordance with its terms would not be regarded as a `purchase.' (emphasis added)), and would thus trigger safe-harbor protection under the rule Enron and the dissent espouse. It is difficult to see, however, why this transaction should warrant safe harbor protection while a transaction identical in every respect, except that the commercial paper's terms did not prohibit early redemption, should not. Avoidance of the transactions in either scenario would present the same threat of systemic risk in the marketplace, and limiting safe-harbor protection to transactions in the first scenario would not prevent an issuer from making payments to reacquire commercial paper during the preference period. Contrary to the dissent's contention, see Dissent at 346, a purchase or sale requirement would thus not prevent Enron from favoring commercial-paper holders over other creditors. Because we find no basis in the Bankruptcy Code or the caselaw for a purchase or sale requirement, and because we do not think such a requirement is necessary to exclude from the safe harbor repayment of ordinary loans, we decline to impose a purchase or sale requirement on § 741(8).