Delaware Bankruptcy Court Applies "Safe Harbor" Protections to Repurchase Agreement; Article 9 Deemed Inapplicable

more+
less-

A standard repurchase agreement, commonly referred to as a “repo,” typically consists of a two-part transaction.[i] The first part involves the transfer of specified securities by one party, the dealer, to another party, the purchaser, in exchange for cash. The second part consists of a contemporaneous agreement by the dealer to repurchase the securities at the original price, plus an agreed-upon additional amount on a specified future date.[ii] Generally, the “safe harbor” provisions of the Bankruptcy Code are designed to permit a nondebtor party to terminate and close out a repo (as well as other derivative contracts) notwithstanding the automatic stay.[iii] Without these special protections, or “safe harbors,” the bankruptcy of a counterparty to a repurchase agreement “would impair the liquidity of the repurchase agreement and possibly lead to the bankruptcy of the non-debtor counterparties.”[iv]

The amendments to the Bankruptcy Code implemented by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “2005 Amendments”), strengthened several of the safe harbor provisions. Notably, the 2005 Amendments significantly expanded the definition of “repurchase agreement” to include a much wider category of securities and derivative agreements, including “mortgage related securities, (as defined in section 3 of the Securities Exchange Act of 1934), mortgage loans, [and] interests in mortgage related securities or mortgage loans.”[v] The 2005 Amendments broadened Section 559 of the Bankruptcy Code (specifically addressing the liquidation of repos) by amending it to include the termination or acceleration of repos, and expanded the definition of “contractual right.” Similarly, the 2005 Amendments amended Section 555 of the

Bankruptcy Code (specifically addressing securities contracts) by broadening it to cover the termination or

acceleration of a securities contract, and expanding the definition of “contractual right”.

See article for more.

LOADING PDF: If there are any problems, click here to download the file.

Published In: Bankruptcy Updates, General Business Updates, Residential Real Estate Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »