Second Circuit Extends Reach of Section 546(e) to Redemption of Commercial Paper



The Bankruptcy Code generally allows trustees and debtors-in possession to seek to avoid and recover fraudulent and preferential transfers made prior to bankruptcy. One of the exceptions to this general rule is found in Section 546(e) of the Bankruptcy Code. That section provides that securities related “settlement payments” made to or from certain parties, including financial institutions, financial participants and stockbrokers, are not subject to avoidance unless those payments were made with actual intent to defraud, hinder or delay creditors. On June 28, 2011 the Second Circuit issued an opinion in Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V.1 in which it read the term “settle-ment payments” to include the redemption of commercial paper by its issuer. In doing so, the Second Circuit refused to read a “purchase or sale” requirement into Section 546(e) and concluded that all that is necessary to constitute a settlement payment is that it be a payment to conclude a transaction involving securities, but that such a transaction need not be a sale in which the buyer takes title to the securities. Because commercial paper is a security under the Bankruptcy Code, and the payments were made to conclude a transaction in commercial paper, the payments were protected under Section 546(e).

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