In Re: Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., et al.

09-5122-bk(L) In Re: Enron Creditors Recovery Corp. v. Alfa, SAB de CV 1 2 3 4 5 6 7 8 9 10 09-5122-bk(L) In re: Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 In Re: ENRON CREDITORS RECOVERY CORP., UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term 2010 (Argued: November 3, 2010 Decided: June 28, 2011) Docket No. 09-5122-bk(L)09-5142-bk (Con) -----------------------------------------------------x Appellant, -- v. -ALFA, S.A.B. DE C.V., ING VP BALANCED PORTFOLIO, INC., ING VP BOND PORTFOLIO, INC., Appellees. -----------------------------------------------------x B e f o r e : 26 WALKER, CABRANES, Circuit Judges, and KOELTL, District Judge.* Appeal from a judgment of the United States District Court 27 for the Southern District of New York (Colleen McMahon, Judge) 28 reversing an order of the United States Bankruptcy Court for the 29 Southern District of New York (Arthur J. Gonzalez, Bankruptcy 30 Judge) and remanding with instructions to enter summary judgment 31 in favor of Appellees Alfa, S.A.B. de C.V., ING VP Balanced 32 Portfolio, Inc., and ING VP Bond Portfolio, Inc. 33 Creditors Recovery Corp. challenges the district court’s 1 2 3 * Appellant Enron The Honorable John G. Koeltl, of the United States District Court for the Southern District of New York, sitting by designation. 1 1 conclusion that 11 U.S.C. § 546(e) protects from avoidance pre- 2 petition payments Enron Corp. made to redeem, prior to maturity, 3 commercial paper it had issued. 4 payments did not constitute “settlement payments” within the 5 meaning of § 546(e)’s safe harbor both because they were 6 repayments of debt and because they were not common in the 7 securities industry. 8 “settlement payments” and thus were protected from avoidance 9 under § 546(e). 10 11 It argues that Enron Corp.’s We hold that Enron Corp.’s payments were We therefore AFFIRM the judgment of the district court. Judge KOELTL dissents in a separate opinion. 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 MICHAEL SCHATZOW (Robert L. Wilkins, Mitchell Y. Mirviss, Colleen M. Mallon, Richard L. Wasserman, on the brief), Venable LLP, Baltimore, MD, for Appellant Enron Creditors Recover Corp. MICHAEL L. COOK (Brian C. Tong, on the brief), Schulte Roth & Zabel LLP, New York, NY, for Appellee Alfa, S.A.B. de C.V. SABIN WILLETT (Mark M. Elliott, Eric Heining, on the brief), Bingham McCutchen LLP, Boston, MA, for Appellees ING VP Balanced Portfolio, Inc., and ING VP Bond Portfolio, Inc. Mark D. Cahn, Deputy General Counsel (Morgan Bradylyons, Attorney, Jacob H. Stillman, Solicitor, Katharine B. Gresham, Assistant General Counsel), on the brief, Securities and Exchange Commission, Washington DC, for amicus curiae Securities and Exchange Commission. Joshua D. Cohn (Christopher J. Houpt), on the brief, Mayer Brown LLP, New York, NY, for amicus curiae Securities Industry and Financial Markets Association. JOHN M. WALKER, JR., Circuit Judge: This appeal raises an issue of first impression in the 40 courts of appeals: whether 11 U.S.C. § 546(e), which shields 41 “settlement payments” from avoidance actions in bankruptcy, 42 extends to an issuer’s payments to redeem its commercial paper 3 Enron Creditors Recovery Corp. (“Enron”)1 1 prior to maturity. 2 seeks to avoid and recover payments Enron made to redeem its 3 commercial paper prior to maturity from Appellees Alfa, S.A.B. de 4 C.V. (“Alfa”), ING VP Balanced Portfolio, Inc., and ING VP Bond 5 Portfolio, Inc. (collectively, “ING”), whose notes were redeemed 6 by Enron. 7 payments from avoidance. 8 9 Alfa and ING argue that § 546(e) protects these The Bankruptcy Court for the Southern District of New York (Arthur J. Gonzalez, Bankruptcy Judge) concluded that § 546(e)’s 10 safe harbor does not protect Enron’s payments from avoidance 11 because they were made to retire debt, not to purchase 12 securities, and because they were extraordinary. 13 Court for the Southern District of New York (Colleen McMahon, 14 Judge) held that Enron’s payments do fall within the safe harbor, 15 reversed the Bankruptcy Court’s decision, and remanded with 16 instructions to enter summary judgment in favor of Alfa and ING. 17 On appeal, Enron challenges the district court’s conclusion The District 18 that the safe harbor protects Enron’s redemption payments whether 19 or not they were made to retire debt or were unusual. 20 agree with the district court that Enron’s proposed exclusions 21 from the reach of § 546(e) have no basis in the Bankruptcy Code, 22 we AFFIRM its decision and order. 1 2 1 Because we This opinion will refer to Enron Corp. and the reorganized entity, Enron Creditors Recovery Corp., collectively as “Enron.” 4 1 2 3 BACKGROUND After a series of events in the latter half of 2001, 4 including the resignation of its CEO, Jeffery Skilling, its 5 announcement of $600 million in third-quarter losses, the 6 commencement of an SEC investigation into its practices, and the 7 correction of four years’ worth of financial statements, Enron, a 8 Houston-based energy company, collapsed. 9 Hilzenrath, Early Warnings of Trouble at Enron, Wash. Post, Dec. 10 11 See, e.g., David S. 30, 2001, at A10. On December 2, 2001, Enron petitioned for Chapter 11 12 bankruptcy. 13 and recover pre-petition payments it made to redeem, prior to 14 maturity, commercial paper it had issued. 15 I. Facts 16 This appeal arises out of Enron’s attempt to avoid Between October 25, 2001 and November 6, 2001, Enron drew 17 down on its $3 billion revolving lines of credit and paid out 18 more than $1.1 billion to retire certain of its unsecured and 19 uncertificated commercial paper prior to the paper’s maturity. 20 Enron redeemed the commercial paper at the accrued par value, 21 calculated as the price originally paid plus accrued interest. 22 This price was considerably higher than the paper’s market value. 23 24 The offering memoranda that accompanied the issuance of the commercial paper provided that the “Notes are not redeemable or 5 1 subject to voluntary prepayment by the Company prior to 2 maturity.” 3 not force investors to surrender the notes and the investors 4 could not require Enron to prepay them. 5 This provision prohibited calls and puts: Enron could The Depository Trust Company (the “DTC”), a clearing agency, 6 maintained bookkeeping entries that tracked ownership of Enron’s 7 commercial paper. 8 industry. 9 paying agent (“IPA”) within the DTC to issue commercial paper and 10 11 This is the customary tracking method in the Every issuer of commercial paper has an issuing and to pay at maturity or at an early redemption. Three broker-dealers, J.P. Morgan, Goldman, Sachs & Co., and 12 Lehman Brothers Commercial Paper, Inc., participated in Enron’s 13 redemption. 14 individual noteholders and paid them the redemption price. 15 mechanics of these transfers were as follows. 16 the redemption price from each broker-dealer’s account and 17 credited it to the noteholder’s DTC account. 18 then transferred the notes to the DTC account of Enron’s issuing 19 and paying agent, Chase IPA, 20 through the DTC. 21 payment, the commercial paper Enron redeemed was extinguished in 22 the DTC system. 23 them as securities trades, termed them “purchases” from the 24 holders, and referenced a “trade date” and “settlement date.” They received the commercial paper from the The The DTC debited The broker-dealers and received payment from Enron Immediately after the broker-dealer received Confirmations of these transactions referred to 6 1 Prior to these transactions, ING and Alfa owned Enron 2 commercial paper in the amount, respectively, of $48,200,000 and 3 $5,667,255. 4 to broker-dealer J.P. Morgan in exchange for the redemption 5 price. 6 They both agreed to transfer their commercial paper The parties dispute the circumstances and motives 7 surrounding Enron’s redemption. Enron argues that it made the 8 redemption payments under pressure from noteholders seeking to 9 recover on their investments amidst rumors of Enron’s imminent 10 implosion. 11 paper to “calm the irrational markets” and leave a favorable 12 impression that would allow it to reenter the commercial paper 13 market once “bad publicity” about the company’s stability “had 14 blown over.” 15 rational move that allowed Enron to refinance its existing 16 commercial paper debt with debt at a lower interest rate. 17 II. Procedural History 18 Alfa and ING argue that Enron redeemed its commercial They argue that the redemption was an economically In November 2003, two years after Enron filed for 19 bankruptcy, the reorganized entity brought adversary proceedings 20 against approximately two hundred financial institutions, 21 including appellees Alfa and ING, seeking to avoid and recover 22 the redemption payments. 23 recoverable as (1) preferential transfers under 11 U.S.C. § 24 547(b), because they were made on account of an antecedent debt It alleged that the payments were 7 1 within ninety days prior to bankruptcy, and (2) constructively 2 fraudulent transfers under 11 U.S.C. § 548(a)(1)(B), because the 3 redemption price exceeded the commercial paper’s fair market 4 value. 5 In 2004, the defendants in the adversary proceedings moved 6 to dismiss Enron’s complaint for failure to state a claim. 7 argued that the redemption payments were “settlement payments” 8 protected from avoidance under 11 U.S.C. § 546(e)’s safe harbor. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 They Section 546(e) provides, in relevant part, that [n]otwithstanding sections . . . 547 [and] 548(a)(1)(B) . . . of this title, [which empower the trustee to avoid preferential and constructively fraudulent transfers,] the trustee may not avoid a transfer that is a . . . settlement payment, as defined in section . . . 741 of this title, made by or to (or for the benefit of) a . . . stockbroker, financial institution, financial participant, or securities clearing agency . . . that is made before the commencement of the case, except under section 548(a)(1)(A) of this title[, which empowers the trustee to avoid transfers made with actual intent to hinder, delay, or defraud creditors]. Section 741(8) of Title 11, in turn, defines a “settlement 25 payment” as “a preliminary settlement payment, a partial 26 settlement payment, an interim settlement payment, a settlement 27 payment on account, a final settlement payment, or any other 28 similar payment commonly used in the securities trade.” 29 The bankruptcy court denied the motion to dismiss. It held 30 that the phrase “commonly used in the securities trade” in 31 § 741(8) modifies all the terms in the section’s definition and 32 thereby limits protected “settlement payments” to those that are 8 1 common in the industry. In re Enron Corp., 325 B.R. 671, 685-86 2 & n.7 (Bankr. S.D.N.Y. 2005)(“Enron I”). 3 held that evidence was necessary to determine whether the 4 redemption payments were commonly used, rather than, as Enron 5 alleged, extraordinary because they resulted from coercion by 6 holders of the commercial paper. 7 a factual issue existed over whether Enron’s redemption payments 8 were made to retire debt or to purchase the commercial paper, and 9 that this distinction could affect whether the payments The bankruptcy court Id. at 686. 10 constituted settlement payments. 11 settled with Enron after Judge Gonzalez denied their motions to 12 dismiss. 13 Id. It also held that Most of the defendants Following discovery, Alfa and ING, relying on § 546(e)’s 14 safe harbor, moved for summary judgment. The bankruptcy court 15 denied the motions. 16 B.R. 17, 45 (Bankr. S.D.N.Y. 2009)(“Enron II”). 17 “the transfer of ‘ownership’ of a security is an integral element 18 in the securities settlement process,” it held that “settlement 19 payments” include only payments made to buy or sell securities 20 and not payments made to retire debt. 21 court relied on our decision in SEC v. Sterling Precision Corp., 22 393 F.2d 214 (2d Cir. 1968), in which we held that “a maker's 23 paying a note prior to maturity in accordance with its terms 24 would not be regarded as a ‘purchase’” under the Investment In re Enron Creditors Recovery Corp., 407 9 Id. 37-41. Concluding that The bankruptcy 1 Company Act of 1940. Enron II, 407 B.R. at 38 (quoting Sterling 2 Precision, 393 F.2d at 217). 3 Alfa and ING had not demonstrated that Enron’s payments were 4 settlement payments as defined in § 741(8), because they had 5 failed to establish that the payments were made to acquire title 6 to the commercial paper rather than to retire debt. 7 41. 8 buttress its denial of summary judgment, emphasized facts (most 9 of which are disputed) regarding the allegedly unusual nature of The bankruptcy court concluded that Id. at 37- At several points in its opinion, the bankruptcy court, to 10 Enron’s redemption. 11 paid, the alleged insistence of the broker-dealers to act as 12 intermediaries instead of principals, and the supposed rarity of 13 commercial paper prepayments in general. 14 38. 15 These include the above-market price Enron See, e.g., id. at 37- Alfa and ING sought, and were granted by the district 16 court, interlocutory review of the bankruptcy court’s decision 17 denying summary judgment. 18 Corp., No. 01-16034, 2009 WL 3349471 (S.D.N.Y. Oct. 16, 2009) 19 (“Enron III”). 20 the question whether the § 546(e) safe harbor applies to an 21 issuer’s redemption of commercial paper prior to maturity, 22 effected through the customary mechanism of transacting in 23 commercial paper through the Depository Trust Company, without 24 regard to extrinsic facts, such as the motives and circumstances See In re Enron Creditors Recovery The district court limited the scope of review to 10 1 of the redemption. 2 B.R. 423, 424 (S.D.N.Y. 2009) (“Enron IV”). 3 See In re Enron Creditors Recovery Corp., 422 The district court reversed the bankruptcy court. It 4 concluded that § 546(e)’s safe harbor protects Enron’s redemption 5 payments, and directed entry of summary judgment in favor of Alfa 6 and ING. 7 § 741(8)’s definition of “settlement payment” is not limited to 8 payments that are “commonly used,” and, therefore, that the 9 circumstances of a particular payment do not bear on whether that Id. at 442. The district court held (1) that 10 payment fits within the definition, id. at 429-34; (2) that a 11 “settlement payment is any transfer that concludes or consummates 12 a securities transaction,” id. at 436; and (3) that Enron’s 13 redemption constitutes a securities transaction regardless of 14 whether Enron acquired title to the commercial paper, because the 15 redemption involved “the delivery and receipt of funds and 16 securities,” id. at 435-42. 17 18 19 Enron appealed to this court. DISCUSSION On appeal, Enron argues that the bankruptcy court’s 20 decision was correct and that the district court erred by holding 21 that settlement payments under § 741(8) are not limited to those 22 that are commonly used in the securities trade and that involve 23 the transfer of title to a security. 24 “A district court's order in a bankruptcy case is subject to 11 1 plenary review, meaning that this Court undertakes an independent 2 examination of the factual findings and legal conclusions of the 3 bankruptcy court.” 4 Cir. 2000). 5 agreed to hear on appeal: In re Duplan Corp., 212 F.3d 144, 151 (2d Here, we review only the issue the district court 6 7 8 9 10 11 12 13 14 15 whether the § 546(e) ‘safe harbor’ . . . extends to transactions in which commercial paper is redeemed by the issuer prior to maturity, using the customary mechanism of the Depository Trust Company . . . for trading in commercial paper . . . , without regard to extrinsic facts about the nature of the [transactions], the motive behind the [transactions], or the circumstances under which the payments were made. Enron IV, 422 B.R at 424. 16 held, the meaning of “settlement payment” under § 741(8) is a 17 matter of statutory construction and thus a question of law we 18 review de novo. 19 (9th Cir. 1992)(citing In re Kaiser Steel Corp., 952 F.2d 1230 20 (10th Cir. 1991); Kaiser Steel Corp. v. Charles Schwab & Co., 913 21 F.2d 846 (10th Cir. 1990); Bevill, Bresler, & Schulman Asset 22 Mgmt. Corp. v. Spencer Sav. & Loan Ass'n, 878 F.2d 742, 745 (3d 23 Cir. 1989)). 24 I. As several of our sister circuits have See, e.g., In re Comark, 971 F.2d 322, 324-25 Judicial Interpretation of the Safe Harbor 25 Congress enacted § 546(e)’s safe harbor in 1982 as a means 26 of “minimiz[ing] the displacement caused in the commodities and 27 securities markets in the event of a major bankruptcy affecting 28 those industries.” 29 Inc., 913 F.2d 846, 849 (10th Cir. 1990) (quoting H.R. Rep. 97- Kaiser Steel Corp. v. Charles Schwab & Co., 12 1 420, at 2 (1982), reprinted in 1982 U.S.C.C.A.N. 583, 583). 2 firm is required to repay amounts received in settled securities 3 transactions, it could have insufficient capital or liquidity to 4 meet its current securities trading obligations, placing other 5 market participants and the securities markets themselves at 6 risk.   7 If a The safe harbor limits this risk by prohibiting the 8 avoidance of “settlement payments” made by, to, or on behalf of a 9 number of participants in the financial markets. By restricting 10 a bankruptcy trustee’s power to recover payments that are 11 otherwise avoidable under the Bankruptcy Code, the safe harbor 12 stands “at the intersection of two important national legislative 13 policies on a collision course–the policies of bankruptcy and 14 securities law.” 15 (3rd Cir. 1999) (internal quotation marks omitted). 16 In re Resorts Int’l, Inc., 181 F.3d 505, 515 Section 741(8), which § 546(e) incorporates, defines 17 “settlement payment” rather circularly as “a preliminary 18 settlement payment, a partial settlement payment, an interim 19 settlement payment, a settlement payment on account, a final 20 settlement payment, or any other similar payment commonly used in 21 the securities trade.” 22 circuits, agree that courts should interpret the definition, “in 23 the context of the securities industry,” as “the transfer of cash 24 or securities made to complete [a] securities transaction.” The parties, following our sister 13 1 Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 985 (8th Cir. 2 2009) (quoting In re Resorts Int’l, Inc., 181 F.3d at 515). 3 Although our circuit has not yet addressed the scope of 4 § 741(8)’s definition, other circuits have held it to be 5 “extremely broad.” 6 (6th Cir. 2009) (quoting Contemporary Indus. Corp., 564 F.3d at 7 985). 8 on the definition that would exclude transactions in privately 9 held securities or transactions that do not involve financial In re QSI Holdings, Inc., 571 F.3d 545, 549 Several circuits, for example, have rejected limitations 10 intermediaries that take title to the securities during the 11 course of the transaction. 12 Corp., 590 F.3d 252, 258-59 (3rd Cir. 2009); In re QSI Holdings, 13 Inc., 571 F.3d at 549-50; Contemporary Indus. Corp., 564 F.3d at 14 986. 15 to an issuer’s early redemption of commercial paper. 16 See, e.g., In re Plassein Int’l No circuit has yet addressed the safe harbor’s application Alfa and ING argue that Enron’s redemption payments are 17 settlement payments within the meaning of § 741(8) because they 18 completed a transaction involving the exchange of money for 19 securities. 20 Markets Association, a trade group representing the interests of 21 securities firms, banks, and asset managers, have filed amicus 22 briefs in support of Alfa and ING’s interpretation of the 23 statute. 24 The SEC and the Securities Industry and Financial Enron proposes three limitations on the definition of 14 1 settlement payment in § 741(8), each of which, it argues, would 2 exclude the redemption payments. 3 final phrase of § 741(8)–“commonly used in the securities 4 trade”–excludes all payments that are not common in the 5 securities industry, including, Enron argues, Enron’s redemption. 6 Second, Enron argues that the definition includes only 7 transactions in which title to the securities changes hands. 8 Because, Enron argues, the redemption payments here were made to 9 retire debt and not to acquire title to the commercial paper, First, it contends that the 10 they are not settlement payments within the meaning of § 741(8). 11 Finally, Enron argues that the redemption payments are not 12 settlement payments because they did not involve a financial 13 intermediary that took title to the transacted securities and 14 thus did not implicate the risks that prompted Congress to enact 15 the safe harbor. 16 Because we find nothing in the Bankruptcy Code or the 17 relevant caselaw that supports Enron’s proposed limitations on 18 the definition of settlement payment in § 741(8), we reject them. 19 We hold that Enron’s redemption payments fall within the plain 20 language of § 741(8) and are thus protected from avoidance under 21 § 546(e). 22 II. “Commonly Used in the Securities Trade” 23 24 Section 741(8) defines “settlement payment” as “a preliminary settlement payment, a partial settlement payment, an 15 1 interim settlement payment, a settlement payment on account, a 2 final settlement payment, or any other similar payment commonly 3 used in the securities trade.” 4 “commonly used in the securities trade” modifies all the 5 preceding terms and thereby excludes from the definition all 6 uncommon payments. 7 Enron argues that the phrase We disagree. First, as the district court held, the grammatical structure 8 of the statute strongly suggests that the phrase “commonly used 9 in the securities trade” modifies only the term immediately 10 preceding it: “any other similar payment.” Under the “rule of 11 the last antecedent, . . . a limiting clause or phrase . . . 12 should ordinarily be read as modifying only the noun or phrase 13 that it immediately follows.” 14 26 (2003); see also Stepnowski v. Comm’r, 456 F.3d 320, 324 n.7 15 (3d Cir. 2006) (“Under the last-antecedent rule of construction, 16 . . . the series ‘A or B with respect to C’ contains two items: 17 (1) ‘A’ and (2) ‘B with respect to C.’”). 18 corollary rule of construction under which “a modifier . . . set 19 off from a series of antecedents by a comma . . . should be read 20 to apply to each of those antecedents.” 21 Inc. v. Lark Int’l Ltd., 186 F.3d 210, 215 (2d Cir. 1999), 22 abrogated on other grounds as recognized by Sarhank Grp. v. 23 Oracle Corp., 404 F.3d 657, 660 n.2 (2d Cir. 2005). 24 in the phrase “no person shall be deprived of life, liberty, or Barnhart v. Thomas, 540 U.S. 20, 16 Enron seizes on a Kahn Lucas Lancaster, For example, 1 the pursuit of happiness, without due process of law,” the phrase 2 “without due process of law” modifies all three terms. 3 rule, however, does not apply to the series in § 741(8) because 4 the modifier is not set off from its antecedents by a comma. 5 Because both the modifier and its immediate antecedent are set 6 off from the preceding terms in the series, the last-antecedent 7 rule applies. 8 industry” thus is properly read as modifying only the term “any 9 other similar payment.” This The phrase “commonly used in the securities The phrase is not a limitation on the 10 definition of settlement payment, but rather, as our sister 11 circuits have held, it is “a catchall phrase intended to 12 underscore the breadth of the § 546(e) exemption.” 13 Holdings, Inc., 571 F.3d at 550 (quoting Contemporary Indus. 14 Corp., 564 F.3d at 986 (emphasis in original)). 15 In re QSI Moreover, Enron’s proposed reading would make application of 16 the safe harbor in every case depend on a factual determination 17 regarding the commonness of a given transaction. It is not clear 18 whether that determination would depend on the economic 19 rationality of the transaction, its frequency in the marketplace, 20 signs of an intent to favor certain creditors–as suggested by the 21 facts on which the bankruptcy court relied, such as the alleged 22 coercion by Enron’s commercial paper noteholders, Enron II, 407 23 B.R. at 31–or some other factor. 24 would result in commercial uncertainty and unpredictability at 17 This reading of the statute 1 odds with the safe harbor’s purpose and in an area of law where 2 certainty and predictability are at a premium. 3 Accordingly, we hold that the phrase “commonly used in the 4 securities industry” limits only the phrase immediately preceding 5 it; it does not limit the other transactions that § 741(8) 6 defines as settlement payments. 7 III. 8 9 Redemption of Debt Securities Enron next argues that the redemption payments are not settlement payments because they involved the retirement of debt, 10 not the acquisition of title to the commercial paper. 11 basis in the Bankruptcy Code or the relevant caselaw to interpret 12 § 741(8) as excluding the redemption of debt securities. 13 Enron’s redemption payments completed a transaction in 14 securities, we hold that they are settlement payments within the 15 meaning of § 741(8). 16 We find no Because The bankruptcy court agreed with Enron’s position, relying 17 in large part on our decision in SEC v. Sterling Precision Corp., 18 393 F.2d 214 (2d Cir. 1968). 19 Sterling Precision Corp., we held that an issuer’s redemption of 20 bonds and preferred stock was not a “purchase” within the meaning 21 of the Investment Company Act of 1940. 22 based this conclusion, in part, on the fact that the issuer “did 23 not acquire title to its Debentures or Preferred Stock; it 24 discharged them.” See Enron II, 407 B.R. at 37-40. In 393 F.2d at 216-18. 18 393 F.2d at 217. Drawing on this We 1 conclusion, the bankruptcy court held that Enron’s redemption 2 payments do not constitute settlement payments under § 741(8) 3 because Enron did not acquire title to the commercial paper it 4 redeemed. 5 Enron II, 407 B.R. at 38-40. Alfa and ING argue that Sterling Precision Corp. is not 6 relevant to this case because it interpreted the Investment 7 Company Act, not the Bankruptcy Code. 8 argument, reliance on Sterling Precision Corp.’s interpretation 9 of the term “purchase” still makes sense only if we read a Setting aside this 10 purchase or sale requirement into § 741(8). 11 reasons, we decline to do so. 12 For the following Nothing in the text of § 741(8) or in any other provision of 13 the Bankruptcy Code supports a purchase or sale requirement. 14 Enron argues that a “settlement payment” must involve a 15 transaction in securities, which, in turn, must involve a 16 purchase or sale. 17 in the context of the securities industry a “‘settlement’ refers 18 to ‘the completion of a securities transaction,’” Contemporary 19 Indus. Corp., 564 F.3d at 985 (quoting Kaiser Steel Corp. v. 20 Charles Schwab & Co., 913 F.2d 846, 849 (10th Cir. 1990)), we 21 find little support for the contention that a securities 22 transaction necessarily involves a purchase or sale. 23 the industry definitions of “settlement payment” on which other 24 courts of appeals have relied define the term as an exchange of While we, like our sister circuits, agree that 19 Several of 1 money or securities that completes a securities transaction; 2 these definitions make no mention of a requirement that title to 3 the securities changes hands. 4 F.2d at 849 (citing, inter alia, D. Brownstone & I. Franck, The 5 VNR Investor’s Dictionary 279 (1981) (defining “settlement” as 6 “finishing up of a transaction or group of transactions”); Group 7 of Thirty, Clearance and Settlement Systems in the World's 8 Securities Markets 86 (1989) (defining “settlement” as “[t]he 9 completion of a transaction, wherein securities and corresponding See, e.g., Kaiser Steel Corp., 913 10 funds are delivered and credited to the appropriate accounts”); 11 A. Pessin & J. Ross, Words of Wall Street: 2000 Investment Terms 12 Defined 227 (1983) (defining “settlement” as “the completion of a 13 securities transaction”)). 14 Dissent at 8-9, Kaiser Steel Corp. also cites industry 15 definitions that reference a purchase or sale of securities, 913 16 F. 2d at 849, the range of definitions that the decision cites 17 suggests that the securities industry does not universally 18 consider a purchase or sale of securities to be a necessary 19 element of a settlement payment. 20 While, as the dissent notes, see Enron argues, and the dissent agrees, see Dissent at 11, 19- 21 20, that applying the safe harbor to Enron’s commercial paper 22 redemption would contradict “uniform case law spanning two 23 decades” that allows “avoidance of debt-related payments.” 24 cases on which Enron relies, however, involve non-tradeable bank 20 The 1 loans, not widely issued debt securities. See, e.g., Union Bank 2 v. Wolas, 502 U.S. 151, 152-53 (1991); Ray v. City Bank & Trust 3 Co., 899 F.2d 1490, 1491-93 (6th Cir. 1990); Breeden v. L.I. 4 Bridge Fund, LLC, 220 B.R. 739, 740 (B.A.P. 2d Cir. 1998); CEPA 5 Consulting, Ltd. v. N.Y. Nat’l Bank, 187 B.R. 105, 106-07 6 (S.D.N.Y. 1995). 7 payments made to redeem tradeable debt securities does not 8 contradict caselaw permitting avoidance of payments made on 9 ordinary loans. Concluding that the safe harbor protects Interpreting the term “settlement payment” in 10 the context of the securities industry will exclude from the safe 11 harbor payments made on ordinary loans. 12 Indeed, it is not clear that a purchase or sale requirement 13 would necessarily exclude all payments made on ordinary loans. 14 For example, what if parties structured the early repayment of a 15 loan evidenced by a promissory note as a repurchase of that 16 promissory note? 17 redemption. 18 at a negotiated price, it would be difficult to characterize this 19 transaction as a redemption rather than a repurchase in order to 20 exclude it from the safe harbor. 21 The note’s terms could prohibit voluntary early If the borrower were to buy back the promissory note The payments at issue in this case demonstrate the 22 difficulty with and the absence of a statutory foundation for a 23 purchase or sale requirement. 24 terms of Enron’s commercial paper–like the terms of the Assume, for example, that the 21 1 hypothetical promissory note discussed above–prohibited early 2 redemption. 3 with the paper holders on a particular reacquisition price. 4 transaction would appear to be a repurchase,2 cf. Sterling 5 Precision Corp., 393 F.2d at 217 (“[A] maker's paying a note 6 prior to maturity in accordance with its terms would not be 7 regarded as a ‘purchase.’” (emphasis added)), and would thus 8 trigger safe-harbor protection under the rule Enron and the 9 dissent espouse. Enron could reacquire the paper only by agreeing This It is difficult to see, however, why this 10 transaction should warrant safe harbor protection while a 11 transaction identical in every respect, except that the 12 commercial paper’s terms did not prohibit early redemption, 13 should not. 14 would present the same threat of systemic risk in the 15 marketplace, and limiting safe-harbor protection to transactions 16 in the first scenario would not prevent an issuer from making 17 payments to reacquire commercial paper during the preference 18 period. 19 19, a purchase or sale requirement would thus not prevent Enron 1 2 3 4 5 6 7 8 Avoidance of the transactions in either scenario Contrary to the dissent’s contention, see Dissent at 18- 2 Whether the reacquisition of commercial paper at issue in this appeal is properly characterized as a redemption or a repurchase remains an open issue. See Enron II, 407 B.R. at 45. Because the district court addressed on appeal only whether the safe harbor protects an issuer’s premature redemption of commercial paper, we do not have occasion to address the distinction between a premature redemption and an issuer’s repurchase of commercial paper. 22 1 from favoring commercial-paper holders over other creditors. 2 Because we find no basis in the Bankruptcy Code or the 3 caselaw for a purchase or sale requirement, and because we do not 4 think such a requirement is necessary to exclude from the safe 5 harbor repayment of ordinary loans, we decline to impose a 6 purchase or sale requirement on § 741(8). 7 IV. Involvement of a Financial Intermediary 8 Enron also argues that the redemption of debt does not 9 constitute a protected settlement payment because it did not 10 involve a financial intermediary that took a beneficial interest 11 in the securities during the course of the transaction. 12 argues that the redemption thus did not implicate the systemic 13 risks that motivated Congress’s enactment of the safe harbor. 14 Although the role of the broker-dealers that participated in 15 Enron’s redemption is a disputed issue of fact, see Enron IV, 422 16 B.R. at 426, Enron is correct that the DTC acted as a conduit and 17 recordkeeper rather than a clearing agency that takes title to 18 the securities during the course of the transaction. Enron 19 Nevertheless, we do not think the absence of a financial 20 intermediary that takes title to the transacted securities during 21 the course of the transaction is a proper basis on which to deny 22 safe-harbor protection. 23 rejected similar arguments in affirming application of the safe 24 harbor to leveraged buyouts of private companies that involved The Third, Sixth, and Eighth Circuits 23 1 financial intermediaries who served only as conduits. See In re 2 Plassein Int’l Corp., 590 F.3d at 257-59; In re QSI Holdings, 3 Inc., 571 F.3d at 549-50; Contemporary Indus. Corp., 564 F.3d at 4 986. 5 explained that undoing long-settled leveraged buyouts would have 6 a substantial impact on the stability of the financial markets, 7 even though only private securities were involved and no 8 financial intermediary took a beneficial interest in the 9 exchanged securities during the course of the transaction.3 In reasoning that provides an analog for us, these courts See 10 In re Plassein Int’l Corp., 590 F.3d at 258; In re QSI Holdings, 11 Inc., 571 F.3d at 550; Contemporary Indus. Corp., 564 F.3d at 12 987. 13 payments, which involved over a billion dollars and approximately 14 two hundred noteholders, would not also have a substantial and 15 similarly negative effect on the financial markets. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 3 We see no reason to think that undoing Enron’s redemption The dissent characterizes these decisions as “stand[ing] for the proposition that, if Section 546(e) applies to a particular type of transaction–namely, purchases of equity securities–an individual transaction does not lose safe-harbor protection simply because it does not involve a central counterparty.” Dissent at 15. We have difficulty understanding the import of this characterization. We rely on these decisions as support for rejecting Enron’s argument that a transaction must involve a central counterparty to receive safe-harbor protection. The dissent argues that Congress enacted the safe harbor out of “concern for the stability of central counterparties that guarantee both sides of a securities transaction.” But the dissent does not appear to dispute our, or the Third, Sixth, and Eighth Circuits’, rejection of a restriction on the safe harbor that would limit it to transactions involving central counterparties. 24 1 Moreover, § 546(e) applies to settlement payments made “by 2 or to (or for the benefit of)” a number of participants in the 3 financial markets. 4 language for courts to limit the safe harbor circuitously by 5 interpreting the definition of “settlement payment” to exclude 6 payments that do not involve a financial intermediary that takes 7 title to the securities during the course of the transaction. 8 9 It would appear inconsistent with this In sum, we decline to adopt Enron’s proposed exclusions from the definition of settlement payment and the safe harbor. The 10 payments at issue were made to redeem commercial paper, which the 11 Bankruptcy Code defines as a security. 12 § 101(49)(A)(i).4 13 . made to complete [a] securities transaction” and are settlement 14 payments within the meaning of § 741(8). 15 Corp., 564 F.3d at 985 (quoting In re Resorts Int’l, Inc., 181 16 F.3d at 515 (3rd Cir. 1999)). 17 by looking to the statute’s plain language, we decline to address 18 Enron’s arguments regarding legislative history, which, in any 19 event, would not lead to a different result. 1 2 3 4 5 6 7 8 11 U.S.C. They thus constitute the “transfer of cash . . See Contemporary Indus. Because we reach this conclusion 4 See Lamie v. U.S. We reject, as the district court did, Enron’s attempt to supplant the Bankruptcy Code’s definition of “security” with the definition in the Securities Exchange Act of 1934, which excludes short-term commercial paper. 15 U.S.C. § 78c(a)(10). This case calls on us to interpret a provision of the Bankruptcy Code. It makes little sense to look to a definition from a different statutory scheme, particularly when that definition contradicts the Bankruptcy Code’s. 25 1 Trustee, 540 U.S. 526, 534 (2004) (“It is well established that 2 when the statute's language is plain, the sole function of the 3 courts-at least where the disposition required by the text is not 4 absurd-is to enforce it according to its terms.” (internal 5 quotation marks omitted)). 6 7 CONCLUSION For the foregoing reasons, we AFFIRM the district court’s 8 decision reversing the decision of the Bankruptcy Court and 9 directing entry of summary judgment in favor of Alfa and ING. 26 1 2 John G. Koeltl, District Judge, dissenting: The Court today concludes that Section 546(e) of the 3 Bankruptcy Code, 11 U.S.C. § 546(e), which exempts a “settlement 4 payment” from a bankruptcy trustee’s avoidance powers, extends 5 to every transaction in which commercial paper is redeemed by an 6 issuer prior to maturity using the customary mechanism of the 7 Depository Trust Company. 8 9 Op. at 26-27. The issue resolved in this case has never been decided previously by any court of appeals. To capture a premature 10 commercial paper redemption within the definition of “settlement 11 payment” in the Bankruptcy Code, the Court broadly defines 12 “settlement payment” to include a payment that “complete[s] a 13 transaction in securities.” 14 turn, broadly defined under the Bankruptcy Code to include 15 various types of debt such as a note, bond, or debenture. 16 U.S.C. § 101(49)(A). 17 opaque definition of “settlement payment” in the Bankruptcy 18 Code, and is inconsistent with the legislative history of that 19 provision. 20 threatens routine avoidance proceedings in bankruptcy courts. 21 The Bankruptcy Court correctly concluded in this case that the 22 definition of “settlement payment” should include a requirement 23 that there be a purchase or sale of a security to trigger a Op. at 19. A “security” is, in 11 The Court’s holding is not required by the Moreover, the breadth of the Court’s definition 1 1 “settlement payment.” 2 407 B.R. 17, 38-40 (Bankr. S.D.N.Y. 2009). 3 commercial paper indisputably is not the purchase or sale of 4 that commercial paper. 5 conclusion eliminating this requirement, I respectfully dissent. See In re Enron Creditors Recovery Corp., The redemption of Because I disagree with the Court’s 6 7 I. 8 9 Section 547(b) of the Bankruptcy Code, 11 U.S.C. § 547(b), 10 provides that the trustee of a bankruptcy estate may recover, 11 among other things, money or property transferred by an 12 insolvent debtor in the 90 days preceding bankruptcy, where the 13 transfer (1) was made to or for the benefit of a creditor; (2) 14 was made for or on account of an antecedent debt owed by the 15 debtor; and (3) enabled the creditor to receive more than it 16 otherwise would have under the provisions of the Bankruptcy 17 Code. 18 11 U.S.C. § 547(b). Section 546(e) of the Bankruptcy Code, 11 U.S.C. § 546(e), 19 carves out a limited exception to the trustee’s avoidance 20 powers, including its power to avoid preferential transfers 21 under Section 547(b). 22 23 24 25 It provides, in relevant part, that: Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer that is a . . . settlement payment, as defined in section . . . 741 of this title, made by or 2 1 2 3 4 5 6 11 U.S.C. § 546(e). 7 payment” in an ambiguous fashion as “a preliminary settlement 8 payment, a partial settlement payment, an interim settlement 9 payment, a settlement payment on account, a final settlement to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency . . . . Section 741 in turn defines “settlement 10 payment, or any other similar payment commonly used in the 11 securities trade.” 12 11 U.S.C. § 741(8). The question the Court confronts today is whether an issuer’s 13 redemption of commercial paper prior to maturity is a 14 “settlement payment” within the meaning of Sections 546(e) and 15 741(8). 16 affirmative, based on what it terms “the plain language of 17 § 741(8).” 18 Section 741(8), however, provides virtually no guidance as to 19 the types of transfers that might qualify as settlement 20 payments. Op. at 12.1 It answers this question in the Op. at 16; see also Op. at 26-27. The text of The Court understates the severity of this problem by 1 As the Bankruptcy Court noted, commercial paper is a note evidencing a debt, “with a corporation borrowing the money in the marketplace instead of from a bank.” Enron, 407 B.R. at 37, 38. Commercial paper with a maturity at the time of issuance of nine months or less is excluded from the definition of a “security” under the Securities Exchange Act of 1934. See 15 U.S.C. § 78c(a)(10). 3 1 describing the definition as “rather circular[].” 2 It is in fact difficult to imagine a more circular, less clear 3 statute than one that defines “settlement payment” by exclusive 4 reference to a variety of types of “settlement payment,” and 5 then concludes with a catch-all that refers back to the 6 undefined “settlement payment,” namely “any other similar 7 payment commonly used in the securities trade.” 8 may be true, as the Court notes, that no provision of the 9 Bankruptcy Code clearly indicates that the redemption of Op. at 14. Thus, while it 10 commercial paper is beyond the scope of Section 741(8), see, 11 e.g., Op. at 16, 19, neither does any provision of the 12 Bankruptcy Code clearly indicate that such transactions are 13 within its scope. In other words, the statute is ambiguous. 14 In light of this statutory ambiguity, other courts of 15 appeals have construed “settlement payment” as a “term . . . of 16 art in the securities trade,” which “should be given its 17 established meaning in that industry.” 18 Corp. v. Frost, 564 F.3d 981, 985 (8th Cir. 2009) (citing 19 McDermott Int’l, Inc. v. Wilander, 498 U.S. 337, 342-46 (1991)). 20 “Specifically, ‘settlement’ refers to ‘the completion of a 21 securities transaction,’ and a ‘settlement payment is generally 22 the transfer of cash or securities made to complete [the] 23 securities transaction.’” Contemporary Indus. Id. (quoting Kaiser Steel Corp. v. 4 1 Charles Schwab & Co., 913 F.2d 846, 849 (10th Cir. 1990); In re 2 Resorts, Int’l, Inc., 181 F.3d 505, 515 (3d Cir. 1999) 3 (alteration in original)); see also In re Comark, 971 F.2d 322, 4 325 (9th Cir. 1992). 5 approach the Court should follow in interpreting “settlement 6 payment,” see Op. at 14, but disagree as to whether an issuer’s 7 redemption of its commercial paper is a “securities 8 transaction.” 9 courts of appeals. The parties agree that this is the This question is one of first impression in the 10 11 II. 12 13 Enron argues persuasively that a “securities transaction” 14 is a term of art in the securities industry that requires a 15 purchase or sale of securities. 16 reflected in numerous business dictionaries. 17 Barron’s Financial Guides, Barron’s Dictionary of Finance and 18 Investment Terms 641, 745 (7th ed. 2006) (defining “settlement” 19 as the “conclusion of a securities transaction in which a 20 broker/dealer pays for securities bought . . . or delivers 21 securities sold and receives payment from the buyer’s broker”); 22 Thomas P. Fitch, Barron’s Dictionary of Banking Terms 423-24 23 (5th ed. 2006) (“[t]he delivery of securities by a selling This industry understanding is 5 See, e.g., 1 broker, and payment by a buying broker”); Group of Thirty, 2 Global Clearing and Settlement: A Plan of Action 13 (2003) (“the 3 process by which the ownership interest in securities is 4 transferred from one investor to another, generally in exchange 5 for a corresponding transfer of funds”); New York Stock 6 Exchange, Language of Investing Glossary 30 (1981) 7 (“[c]onclusion of a securities transaction when a customer pays 8 a broker/dealer for securities purchased or delivers securities 9 sold and receives from the broker the proceeds of a sale”); Bank 10 for International Settlements, Committee on Payment and 11 Settlement Systems & Technical Committee of the International 12 Organization of Securities Commissions, Recommendations for 13 Securities Settlement Systems 48 (2001) (“[t]he completion of a 14 transaction through final transfer of securities and funds 15 between the buyer and the seller”). 16 The existence of a purchase or sale requirement also finds 17 support in case law. 18 Schulman Asset Mgmt. Corp., 878 F.2d 742, 751 (3d Cir. 1989) 19 (“[T]he transfer of record ownership of securities is an 20 integral element in the securities settlement process.”). 21 the definitions of “settlement payment” that the Kaiser Steel 22 Court relied on was the definition from the New York Stock 23 Exchange’s Language of Investing Glossary: The “[c]onclusion of See, e.g., In re Bevill, Bresler & 6 Among 1 a securities transaction when a customer pays a broker/dealer 2 for securities purchased or delivers securities sold and 3 receives from the broker the proceeds of a sale.” 4 913 F.2d at 849 (quoting New York Stock Exchange, Language of 5 Investing Glossary 30 (1981)). 6 1(a)(5) (“The term securities-related transaction shall mean a 7 purpose [sic], sale or pledge of investment securities, or a 8 custodial arrangement for investment securities.”). 9 Kaiser Steel, See also 17 C.F.R. 240.17f- There appears to be no dispute that an issuer’s redemption 10 of its commercial paper does not involve the purchase or sale of 11 a security. 12 debt. 13 issuer’s redemption of its bonds and preferred stock is not a 14 “purchase” within the meaning of the Investment Company Act of 15 1940. 16 Cir. 1968) (Friendly, J.). 17 conclusion in the context of the Investment Company Act, the 18 Court’s reasoning was based on, among other factors, the common 19 understanding of an issuer’s repayment of its debt. 20 Friendly explained, “in common speech a maker’s paying a note 21 prior to maturity in accordance with its terms would not be 22 regarded as a ‘purchase.’” 23 continued: “[T]he normal discourse of lawyers sets redemptions Commercial paper is a note evidencing the issuer’s As the Court recognizes, this Court has found that an SEC v. Sterling Precision Corp., 393 F.2d 214, 217 (2d While the Court reached that Id. at 217. 7 As Judge Judge Friendly 1 apart from purchases. 2 corporation statutes, . . . ; by judicial decision, . . . ; and 3 by writers on corporation law.” 4 dispute this conclusion, but argues that it is irrelevant 5 because the Court declines to “read a purchase or sale 6 requirement into § 741(8).” The distinction is recognized in Id. The Court today does not Op. at 20. 7 The Court states that it finds little support for a 8 purchase or sale requirement and explains that cases “make no 9 mention of a requirement that title to the securities changes 10 hands.” 11 citation to definitions of “settlement” that make no reference 12 to a change in title to securities. 13 concerned whether a leveraged buyout transaction was included in 14 the definition of a “settlement payment” in § 741(8). 15 no question that the transaction involved the purchase of 16 securities. 17 specifically cited other source materials that make clear that a 18 change of title is an integral element of the settlement of a 19 securities transaction. 20 (citing New York Stock Exchange, Language of Investing Glossary 21 30 (1981)(quoted above); D. Scott, Wall Street Words 320 (1988) 22 (defining “settlement” as the “[t]ransfer of the security (for 23 the seller) or cash (for the buyer) in order to complete a Op. at 21. The Court cites Kaiser Steel and its However, Kaiser Steel There was Moreover, as the Court notes, Kaiser Steel See Kaiser Steel, 613 F.2d at 849 8 1 security transaction”)). 2 proposition that no purchase or sale is required for a 3 securities transaction when the transaction at issue did include 4 a purchase and when the Court cited to source materials that 5 identified a purchase as an essential element of a settlement 6 payment. 7 Kaiser Steel cannot stand for the The Court today points to no case that holds that there is 8 no purchase or sale requirement for a securities transaction, 9 and provides no source that indicates that there is a common 10 industry understanding that the redemption of commercial paper 11 is the completion of a securities transaction.2 12 2 The Court downplays Enron’s argument that applying the safe harbor to the redemption of commercial paper would undermine uniform case law that allows the avoidance of debt-related payments. Op. at 21-22. But this is not an argument that a purchase or sale requirement is not part of a “securities transaction.” Rather, it is an effort to downplay the significance of the Court’s holding. As explained in Part IV, the Court’s distinction is unpersuasive, and the decision will in fact undo decades of well-established law. It is sufficient at this point to note that the Court’s attempt to distinguish prior case law is not an argument why the Court’s definition of a securities transaction is in fact correct. 9 1 III. 2 3 A. 4 5 The relevant legislative history supports the conclusion 6 that redemptions of commercial paper are not protected by 7 Section 546(e)’s safe harbor. 8 Securities Exchange Act of 1934 (“the 1934 Act” or “the Act”), 9 48 Stat. 881, codified at 15 U.S.C. § 78a et seq., to create a 10 national system for the clearance and settlement of securities 11 transactions. 12 1085, 1091-92 (D.C. Cir. 1978). 13 546(e) was first enacted in 1978, and applied only to 14 commodities markets. 15 Rep. No. 97-420, at 1-3 (1982). 16 that the avoidance provisions of Section 547(b) could be applied 17 to the settlement of securities transactions, and the failure to 18 include securities transactions in the settlement safe harbor 19 lent force to the argument that the clearing agencies were not 20 entitled to protection from preference avoidance when they 21 cleared securities transactions. 22 jeopardized the national settlement system. 23 Commodity and Securities Brokers: Hearings Before the Subcomm. In 1975, Congress amended the Bradford Nat’l Clearing Corp. v. SEC, 590 F.2d The predecessor of Section See Kaiser Steel, 913 F.2d at 848-49; H.R. This left open the possibility 10 This anomaly inadvertently See Bankruptcy of 1 on Monopolies and Commercial Law of the H. Comm. on the 2 Judiciary, 97th Cong. 238-67 (1981) (statement of Bevis 3 Longstreth, Comm’r, SEC). 4 risk because they were “the critical link between the buyer’s 5 broker and the seller’s broker”; they “simultaneously 6 guarantee[d]” the delivery of securities to the buyer and the 7 delivery of the purchase price to the seller. 8 response to this concern, in 1982, Congress adopted 9 substantially the current version of Section 546(e), which more Clearing agencies were exposed to 10 broadly covered settlement payments. 11 Id. at 245.3 In (1982).4 H.R. Rep. No. 97-420, at 2 3 The Court’s reading of the legislative purpose behind Section 546(e) at times appears substantially broader. It writes: “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.” Op. at 13 (emphasis added). However, this concern could likewise be invoked for refusing to apply the Bankruptcy Code’s preference provisions in any context; there is always a risk that the transferee of an avoided transfer will be negatively affected and destabilized by the trustee’s exercise of its avoidance powers. The legislative history indicates that Congress intended to eliminate only a particular subset of claims: those that might jeopardize the stability of clearing agencies. 4 In 2006, Congress adopted amendments to Section 546(e) that were “technical changes” designed to “update the language to reflect current market and regulatory practices” and to “clarify [] the treatment of certain financial products.” H.R. Rep. 10911 1 These concerns were not implicated by the market for 2 commercial paper at the time of Section 546(e)’s enactment, and 3 cannot justify the application of the safe harbor to redemptions 4 of commercial paper today. 5 did not, and does not, apply to commercial paper, which is not a 6 “security” for purposes of the Act. 7 As an initial matter, the 1934 Act See 15 U.S.C. § 78c(a)(10).5 Moreover, Congress’s concern for the stability of central 8 counterparties that guarantee both sides of a securities 9 transaction would not justify sweeping redemptions of commercial 10 paper within Section 546(e)’s safe harbor, because transactions 11 in commercial paper are not cleared through such a central 12 counterparty. 13 rather than a clearing agency that takes title to the securities 14 during the course of the transaction.” 15 National Securities Clearing Corporation (“NSCC”), which clears 16 transactions in equity and debt securities covered by the 1934 17 Act, the DTC does not act as an intermediary for trades by As the Court notes, “the DTC acted as a conduit Op. at 24. Unlike the 648, at 2 (2006). The amendments do not shed any light on whether the premature redemption of commercial paper is covered by the exclusion for a “settlement payment.” 5 The 1934 Act exempts from the definition of security “any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.” 15 U.S.C. § 78c(a)(10). 12 1 undertaking independent obligations to deliver securities to the 2 buyer and payment to the seller. 3 Depository Trust and Clearing Corp., 559 F.3d 772, 776-77 (8th 4 Cir. 2009). 5 DTC serves as an electronic bookkeeper that processes payments; 6 it does not guarantee the performance (and assume the risk of 7 non-performance) of any other party. 8 the DTC “tracks transfers of indirect security entitlement 9 positions among its members, eliminating the need to transfer See Pet Quarters, Inc. v. Rather than act as such a central counterparty, the See id. (explaining that 10 the physical stock certificates,” while “NSCC acts as the 11 intermediary between buyer and seller . . . and assumes the 12 rights and obligations of buyers and sellers to receive, pay 13 for, and deliver securities”). 14 guarantee the obligations of its members, and does not take 15 title to the securities or funds it clears, it is not exposed to 16 any risk on account of a transaction that is challenged by a 17 bankruptcy trustee. 18 Because the DTC does not The Court acknowledges this distinction between the DTC and 19 the NSCC, but rejects it as immaterial on the theory that “the 20 absence of a financial intermediary that takes title to the 21 transacted securities during the course of the transaction is 22 [not] a proper basis on which to deny safe-harbor protection.” 23 Op. at 24-25. In support of this conclusion, it relies on cases 13 1 from other courts of appeals that have applied Section 546(e)’s 2 safe harbor to leveraged buyouts of companies that “involved 3 financial intermediaries who served only as conduits.” 4 25 (citing In re Plassein Int’l Corp., 590 F.3d 252, 257-59 (3d 5 Cir. 2009); In re QSI Holdings, Inc., 571 F.3d 545, 549-50 (6th 6 Cir. 2009); Frost, 564 F.3d at 986). 7 the courts of appeals in those cases, however, does not militate 8 in favor of extending Section 546(e)’s safe harbor to 9 transactions in commercial paper. Op. at Accepting the reasoning of Those cases stand for the 10 proposition that, if Section 546(e) applies to a particular type 11 of transaction – namely, purchases of equity securities – an 12 individual transaction does not lose safe-harbor protection 13 simply because it does not involve a central counterparty, and 14 thus does not directly implicate the concerns that led Congress 15 to enact the section.6 16 the question the Court must answer in the first instance: 17 whether a different type of transaction – a redemption of 18 commercial paper – is covered by Section 546(e).7 The leveraged buyout cases do not resolve 6 As the Court points out, the issue on this appeal concerns only an issuer’s premature redemption of commercial paper. Opinion at 23 n.2. 7 The Court questions any reliance on the fact that Congress enacted the safe harbor out of concern for the stability of central counterparties when various courts of appeals have rejected a restriction on the safe harbor in leveraged buyout 14 1 B. 2 3 The conclusion that redemptions of commercial paper are not 4 covered by Section 546(e) is further supported by subsequent 5 legislative history.8 6 provides that a trustee may not avoid under Section 547 a 7 transfer 8 9 10 11 12 13 14 15 Section 547(c)(2) of the Bankruptcy Code to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was (A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms. transactions that do not involve such counterparties. Op. at 25 n.3. That is not a basis to ignore the legislative history, which reveals that Congress was primarily concerned with upsetting the securities settlement process. That settlement process involves the purchase and sale of securities that are ordinarily cleared through a clearing agency. The fact that some transactions that do not involve a clearing agency – leveraged buyouts – are protected by the safe harbor because they were not carved out by Congress is not a basis for disregarding the legislative history and its focus on transactions involving the purchase and sale of securities. The Court points to nothing in the legislative history of the ambiguous “settlement payment” provision that indicates that it was intended to cover the redemption of commercial paper. 8 Subsequent legislative history is not entitled to the same weight as contemporaneous legislative history, but it may provide “some guidance” as to the legislative intent for a prior congressional act. See Davis v. United Air Lines, Inc., 662 F.2d 120, 123-24 (2d Cir. 1981). 15 1 11 U.S.C. § 547(c)(2). 2 “ordinary course” defense was restricted to preference actions 3 involving short-term debts of a duration of 45 days or less. 4 See Fidelity Sav. & Inv. Co. v. New Hope Baptist, 880 F.2d 1172, 5 1175-76 (10th Cir. 1989). 6 of Section 546(e), the “ordinary course” defense was amended to 7 eliminate this restriction. 8 and DeConcini, as part of the debate surrounding passage of the 9 amendment, makes clear that Congress was primarily concerned As originally enacted in 1978, the In 1984, two years after the passage A discussion between Senators Dole 10 with ensuring that “ordinary course” redemptions of commercial 11 paper with longer maturities would come within Section 12 547(c)(2)’s safe harbor. 13 Section 546(e) protects every redemption of commercial paper, 14 “without regard to . . . the motives and circumstances of the 15 redemption,” Op. at 11, then this amendment was unnecessary 16 because any redemption of commercial paper – whether made in the 17 ordinary course of business or not – would be protected by the 18 “settlement payment” exclusion that Congress had adopted two 19 years before. Id. If, as the Court concludes, 20 21 22 16 1 2 3 4 IV. Enron’s reading of Section 546(e) finds further support in 5 the policies reflected in the Bankruptcy Code. 6 Wolas, 502 U.S. 151 (1991), the Supreme Court discussed the 7 congressional priorities that motivated enactment of Section 8 547, and concluded that preference actions under that section 9 are “intended to serve two basic policies”: In Union Bank v. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 502 U.S. at 160-161 (citing H. R. Rep. No. 95-595 177-178 36 (1977)). A preference is a transfer that enables a creditor to receive payment of a greater percentage of his claim against the debtor than he would have received if the transfer had not been made and he had participated in the distribution of the assets of the bankruptcy estate. The purpose of the preference section is twofold. First, by permitting the trustee to avoid prebankruptcy transfers that occur within a short period before bankruptcy, creditors are discouraged from racing to the courthouse to dismember the debtor during his slide into bankruptcy. The protection thus afforded the debtor often enables him to work his way out of a difficult financial situation through cooperation with all of his creditors. Second, and more important, the preference provisions facilitate the prime bankruptcy policy of equality of distribution among creditors of the debtor. Any creditor that received a greater payment than others of his class is required to disgorge so that all may share equally. The operation of the preference section to deter “the race of diligence” of creditors to dismember the debtor before bankruptcy furthers the second goal of the preference section — that of equality of distribution. 17 1 These goals – preventing a “race to the courthouse” and 2 ensuring equality of distribution among creditors – are severely 3 undermined by the interpretation of Section 546(e) adopted by 4 the Court. 5 to the Court’s interpretation of its papers, is instructive: 6 “it made the redemption payment under pressure from noteholders 7 seeking to recover on their investments amidst rumors of Enron’s 8 imminent implosion.” 9 from certain creditors, Enron extinguished its debt by paying to What Enron alleges happened in this case, according Op. at 7. That is, under intense pressure 10 them funds in excess of what they would have received on the 11 open market and, more importantly, far in excess of what they 12 would have received pursuant to the provisions of the Bankruptcy 13 Code. 14 appellees is no less troubling. 15 Court, that “Enron redeemed its commercial paper to ‘calm the 16 irrational markets’ and leave a favorable impression that would 17 allow it to reenter the commercial paper market once ‘bad 18 publicity’ about the company’s stability ‘had blown over.’” 19 at 7. 20 efforts of a debtor shortly before bankruptcy to prefer some 21 creditors over others. 22 creditors of equal priority being treated unequally, and which 23 decrease the liquidity of a corporation attempting to avoid a See 11 U.S.C. § 547(b). The scenario depicted by the They assert, according to the Op. Those voluntary debt payments are no different from other Such transfers, which result in 18 1 slide into bankruptcy, are at the very core of the trustee’s 2 avoidance powers under Section 547. 3 The Court’s holding that a settlement payment requires only 4 the transfer of cash to complete a securities transaction, 5 without any purchase or sale of a security, is indeed 6 extraordinarily broad. 7 settlement payment would seem to bring virtually every 8 transaction involving a debt instrument within the safe harbor 9 of Section 546(e), thus allowing the settlement payment 10 11 In fact, the Court’s definition of a exception to swallow up the Section 547(b) avoidance provision. The Court concludes that its holding poses no threat to the 12 viability of the Bankruptcy Code’s preference provisions on the 13 ground that this case involves “widely issued debt securities,” 14 and not “non-tradeable bank loans.” 15 however, offers no basis for distinguishing between the two 16 types of debts, and under 11 U.S.C. § 101(49)(A), there is none; 17 notes, bonds, and debentures are “securities” under the 18 Bankruptcy Code irrespective of whether they are widely issued 19 or tradeable. 20 payment on account of a debt evidenced by a writing, and does 21 indeed imperil decades of cases that allow the avoidance of 22 debt-related payments. 23 (remanding to determine whether payments of long-term debt were Op. at 22. The Court, The Court’s reasoning thus applies equally to any See, e.g., Wolas, 502 U.S. at 162 19 1 within the ordinary course of business exception to avoidance 2 under Section 547(c)(2)). 3 The Court does not dispute that the payment of any ordinary 4 loan evidenced by a note would fall within its definition of a 5 settlement payment, but the Court finds that “the context of the 6 securities industry will exclude from the safe harbor payments 7 made on ordinary loans.” 8 authority for this proposition, and the terms of its definition 9 would cover such payments. 10 Opinion at 22. The Court cites no The Court’s holding is wholly unnecessary. The issue 11 presented in this case is a narrow one – whether the premature 12 redemption of commercial paper by the issuer falls within the 13 safe harbor of a “settlement payment” under section 546(e). 14 issue is an unusual one, as reflected by the fact that it has 15 never arisen in any prior decision of any court of appeals. 16 However, by eliminating the “purchase or sale” requirement that 17 would exclude such payments, the Court undermines the ability of 18 bankruptcy trustees to avoid preferential payments on account of 19 ordinary debts. 20 sale” requirement would not “necessarily exclude all payments 21 made on ordinary loans.” 22 this is an argument against a “purchase or sale requirement,” 23 which should be required by the common industry understanding The The Court argues that including a “purchase or Opinion at 22. 20 It is not clear why 1 and legislative history of section 546(e). 2 dispute that recognizing such a requirement in fact excludes the 3 premature redemption of commercial paper from the scope of the 4 “settlement payment” safe harbor of section 546(e), and does so 5 without imperiling the regular avoidance powers of bankruptcy 6 trustees for ordinary loans. 7 the “purchase or sale” requirement would not exclude various 8 ways in which an issuer might deal with its commercial paper. 9 The Court hypothesizes that companies could protect their The Court does not The Court appears to object that 10 premature redemptions of commercial paper by turning them into 11 repurchases rather than redemptions, if there is a “purchase or 12 sale” requirement. 13 approach, such repurchases would still be covered by the 14 “settlement payment” safe harbor, and, in addition, the Court’s 15 approach imperils the ordinary repayment of loans. 16 that the “purchase or sale” requirement would not address all of 17 the ways in which a company might deal with its commercial paper 18 is not a reason to find that premature redemptions of commercial 19 paper do not fall within the “settlement payment” safe harbor. Opinion at 22-24. But, under the Court’s The fact 20 21 CONCLUSION 22 23 For the reasons explained above, I respectfully dissent. 21