Opinion ID: 219830
Heading Depth: 2
Heading Rank: 1

Heading: Judicial Interpretation of the Safe Harbor

Text: Congress enacted § 546(e)'s safe harbor in 1982 as a means of minimiz[ing] the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries. Kaiser Steel Corp. v. Charles Schwab & Co., Inc., 913 F.2d 846, 849 (10th Cir.1990) (quoting H.R. Rep. 97-420, at 2 (1982), reprinted in 1982 U.S.C.C.A.N. 583, 583). If 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. The safe harbor limits this risk by prohibiting the avoidance of settlement payments made by, to, or on behalf of a number of participants in the financial markets. By restricting a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, the safe harbor stands at the intersection of two important national legislative policies on a collision course-the policies of bankruptcy and securities law. In re Resorts Int'l, Inc., 181 F.3d 505, 515 (3rd Cir.1999) (internal quotation marks omitted). Section 741(8), which § 546(e) incorporates, defines settlement payment rather circularly as 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. The parties, following our sister circuits, agree that courts should interpret the definition, in the context of the securities industry, as the transfer of cash or securities made to complete [a] securities transaction. Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 985 (8th Cir.2009) (quoting In re Resorts Int'l, Inc., 181 F.3d at 515). Although our circuit has not yet addressed the scope of § 741(8)'s definition, other circuits have held it to be extremely broad. In re QSI Holdings, Inc., 571 F.3d 545, 549 (6th Cir.2009) (quoting Contemporary Indus. Corp., 564 F.3d at 985). Several circuits, for example, have rejected limitations on the definition that would exclude transactions in privately held securities or transactions that do not involve financial intermediaries that take title to the securities during the course of the transaction. See, e.g., In re Plassein Int'l Corp., 590 F.3d 252, 258-59 (3rd Cir.2009); In re QSI Holdings, Inc., 571 F.3d at 549-50; Contemporary Indus. Corp., 564 F.3d at 986. No circuit has yet addressed the safe harbor's application to an issuer's early redemption of commercial paper. Alfa and ING argue that Enron's redemption payments are settlement payments within the meaning of § 741(8) because they completed a transaction involving the exchange of money for securities. The SEC and the Securities Industry and Financial Markets Association, a trade group representing the interests of securities firms, banks, and asset managers, have filed amicus briefs in support of Alfa and ING's interpretation of the statute. Enron proposes three limitations on the definition of settlement payment in § 741(8), each of which, it argues, would exclude the redemption payments. First, it contends that the final phrase of § 741(8)  commonly used in the securities trade  excludes all payments that are not common in the securities industry, including, Enron argues, Enron's redemption. Second, Enron argues that the definition includes only transactions in which title to the securities changes hands. Because, Enron argues, the redemption payments here were made to retire debt and not to acquire title to the commercial paper, they are not settlement payments within the meaning of § 741(8). Finally, Enron argues that the redemption payments are not settlement payments because they did not involve a financial intermediary that took title to the transacted securities and thus did not implicate the risks that prompted Congress to enact the safe harbor. Because we find nothing in the Bankruptcy Code or the relevant caselaw that supports Enron's proposed limitations on the definition of settlement payment in § 741(8), we reject them. We hold that Enron's redemption payments fall within the plain language of § 741(8) and are thus protected from avoidance under § 546(e).