Second Circuit Adopts Broad Interpretation of Bankruptcy Code § 546(e) Safe Harbor for Securities “Settlement Payments,” Ruling that Safe Harbor Applies to Enron’s Redemptions of Its Own Commercial Paper Prior to Maturity

In the months leading up to Enron Corp.’s bankruptcy, Enron drew down on its available credit lines.  It used about $1.1 billion of the loan proceeds to redeem commercial paper that it had issued prior to maturity.  Enron redeemed the paper at face value even though it was trading at a substantial discount.  Enron filed for bankruptcy in December 2001 and emerged as a reorganized entity, Plaintiff Enron Creditors Recovery Corp. (together with Enron Corp., Enron).  In 2003, Enron commenced adversary proceedings against about 200 financial institutions from which it had repurchased commercial paper in 2001.  Enron claimed that those payments could be “avoided” and recovered because they were either preferential payments of antecedent debt made within ninety days prior to bankruptcy or fraudulent transfers because Enron paid more than fair market value for the paper.  The Defendants moved for summary judgment on the ground that Enron’s payments were securities “settlement payments” protected from recovery by a safe harbor in the Bankruptcy Code.  The Bankruptcy Court denied the Defendants’ motion.  The U.S. district court reversed the bankruptcy judge’s decision and dismissed the action.  On appeal, the Second Circuit upheld that dismissal, adopting a broad interpretation of the § 546(e) safe harbor.  We provide a detailed review of the Second Circuit’s legal analysis, and of the decisions below.

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