Concluding that the recent opinion of the Court of Appeals for the Second Circuit in In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., __F. 3d __, 2011 WL 2536101 (2d Cir. June 28, 2011) (“Enron“) left him no choice, Southern District of New York United States Bankruptcy Judge James M. Peck grants summary judgment to the defendant noteholders against a claim recovery of approximately $376 million received from Quebecor World (USA) Inc. during the preference period. As interpreted in Enron, Judge Beck found that the “settlement payment” protection from avoidance in Bankruptcy Code Section 546(e) protected the transfer of cash made to complete a repurchase and subsequent cancellation of privately-placed notes. Judge Peck makes clear that he did not agree with this result: “Purely from an equitable perspective, the disparity in relative recoveries between the Noteholders and Quebecor’s other creditors almost cries out for a remedy unless the payments fall within an appropriately more favored category of transfers that logically fits the definition of settlement payments under the Code.”
The opinion is significant for Judge Peck’s acknowledgment that Enron has made indistinguishable an informal settlement process of privately placed notes and a “typical trade of public securities that clears through the Depository Trust Company”. In stressing his inability to find any way around Enron, Judge Peck recites his consideration of the arguments of the Plaintiff and why such arguments had been rendered irrelevant by Enron.
As the Committee’s expert witness has explained, settlement risk relating to the exchange of cash for securities was not part of the transaction because each of the Noteholders received its payments directly and simultaneously without attention to the timing of delivery of the Notes that were being repurchased by QWUSA. That explanation, however, is not part of the definition of settlement payment under Enron and has been neutralized as a distinguishing characteristic by that holding.
The transactional differences are worth noting but are only of marginal importance. They are variations in the details of the settlement process that distinguish the note repurchase and cancellation procedures followed in Quebecor from the open market redemption of commercial paper in Enron, but these are distinctions without a real difference in light of the holding of the Enron majority that focuses on the generally applicable statutory language rather than specific procedures that may be involved in a particular securities transaction.
The majority opinion leaves no room for doubt that the payments made to the Noteholders are settlement payments because, consistent with the plain language of the Code, they involve the transfer of cash to complete a securities transaction. The test has become quite simple and all-encompassing and does not lend itself easily to the formulation of nuanced exceptions. In this instance, the transaction was completed by the payment of cash followed by the delivery of securities rather than by means of a simultaneous exchange of cash for securities. That timing difference does not alter the fundamental character of what inescapably is a securities transaction. As explained in more detail in the following sections, the transfers in question are settlement payments protected under section 546(e) and may not be avoided.
Judge Peck also felt constrained to make short shrift of the plaintiffs argument that the payments had not been made to a “financial institution” as required by Section 546(e). The rejection of the plaintiffs attempt to “disregard” the initial transfer to CIBC Mellon as trustee for the Notes was relegated to a footnote:
CIBC Mellon, a “financial institution,” was the immediate recipient of the Disputed Transfer. [ ] The Committee argues that CIBC Mellon was a mere “conduit” for funds, however, and that the Noteholders should be deemed the true recipients for purposes of satisfying the “financial institution” requirement of section 546(e). [ ] The Court rejects this argument because the plain language of section 546(e) only requires payment to a “financial institution” without any qualification as to the capacity of that recipient. [Citations to Record Omitted]
Judge Peck, in an seeming backhanded fashion, acknowledged the “easy-to-apply” analysis mandated by Enron.
The gloss to the meaning provided by the Court of Appeals does not depend upon an examination and interpretation of the legislative history, does not restrict application of this safe harbor provision to purchases and sales of securities and does not require a formal settlement process as advocated by the Committee. The definition in the Code may be self-referential and circular, but the direction given by the Enron majority with respect to that definition is both uncomplicated and crystal clear – a settlement 10 Section 101(49)(B)(vii) excludes from the definition of security “debt or evidence of indebtedness for goods sold and delivered or services rendered.” This means that the decision in Enron has no effect on preference litigation involving trade creditors. payment, quite simply, is a “transfer of cash … made to complete [a] securities transaction.” Enron, 2011 WL 2536101, at *9 (quotations omitted).
Under this easy-to-apply formulation, the Court concludes that the Disputed Transfer qualifies for the exemption under section 546(e). The transaction in question involves three elements that together support this conclusion – (i) the transfer by QWUSA of cash (ii) to a financial institution that was acting as agent for the Noteholders (iii) made to repurchase and cancel securities, i.e., to complete a securities transaction. The first part of the formulation – that the “settlement payment” be a “transfer of cash” – is demonstrated by the wiring of funds from QWUSA to CIBC Mellon. The second required component, consistent with section 546(e), is that the transfer be made to a financial institution. This requirement is satisfied by the involvement of CIBC Mellon, a financial institution, in receiving the Disputed Transfer. The third element is present because the cash was transferred for securities in “completion” of the transaction.