On June 28th, the Second Circuit held that payments made by Enron to redeem its commercial paper prior to maturity were not avoidable under the Bankruptcy Code. In doing so, the Court answers in the affirmative an issue of first impression among the appellate courts: whether the Bankruptcy Code's safe harbor, 11 U.S.C. Sec. 546(e), which shields settlement payments from avoidance in bankruptcy, extends to an issuer's payments to redeem its commercial paper prior to maturity.
The US Court of Appeals for the Second Circuit recently held that redemptions of commercial paper made through the Depositary Trust Company (DTC) are entitled to the “safe harbor” protections afforded to settlement payments under Bankruptcy Code Section 546(e), and are, therefore, not preferential transfers, even though such payments were made prior to maturity.1 The Second Circuit is the first Circuit Court of Appeal to address the issue, which arises out of the Enron bankruptcy case.
Legal Framework
The Bottom Line:
DBSD Case Upholds Designation of Votes Cast By a Claims Purchaser
The Second Circuit Court of Appeals Protects Payments Made by Enron to Redeem Commercial Paper Prior to Maturity as “Settlement Payments" Under the Bankruptcy Code's Safe Harbor Provisions.
On June 28, 2011, in In re Enron Creditors Recovery Corp. v. Alfa,1 the Second Circuit Court of Appeals held that Enron’s redemption of its commercial paper prior to maturity fell within the definition of a “settlement payment” and was protected from avoidance under § 546(e)’s safe harbor provision in Title 11 of the United States Code.2
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The Second Circuit Court of Appeals has now weighed in on the Bankruptcy Code’s safe harbor provisions. In Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., Docket Nos. 09–5122, 09–5142, 2011 WL 2536101 (2d Cir. June 28, 2011), the Second Circuit Court of Appeals faced an issue of first impression—whether Section 546(e) of the Bankruptcy Code, which shields certain payments from avoidance actions in bankruptcy, extends to an issuer’s payment to redeem its commercial paper made before maturity.
To file bankruptcy in the U.S., a debtor must reside in, have a domicile or a place of business in, or have property in the United States. 11 U.S.C. § 109(a). In cross border chapter 15 cases, courts have considered whether a representative of a foreign debtor must satisfy that jurisdictional test.