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Defending the Preference and Fraudulent Transfer Safe Harbor

Part Two of a Two-Part Article

April 1, 2010
The Bankruptcy Strategist

The Bankruptcy Code (“Code”) has at least nine so-called “safe harbor” (i.e. bankruptcy insulating) provisions for financial contracts. As we showed in the first part of this article, some lower courts have inconsistently enforced those safe harbor provisions in the preference and fraudulent transfer context, generating costly litigation for the asserted cause of creditor recovery. We continued by discussing the legislative history of the safe harbor. 

U.S. District Judge Colleen McMahon recently summarized the relevant legislative history behind the fraudulent transfer/preference safe harbor for securities contract settlement payments, noting that it had first been “enacted in 1978 in response to a” decision holding that a bankruptcy trustee was not barred “from recovering [on fraudulent transfer grounds] a margin payment made to a commodities clearinghouse.” Alfa, S.A.B. de C.V. v. Enron Creditors Recovery Corp. (In re Enron Creditors Recovery Corp.), 422 B.R. 423, 429 (S.D.N.Y. 2009), citing Seligson v. New York Produce Exchange, 394 F. Supp.  125, 128-36 (S.D.N.Y. 1975).  Id.  By 1982, explained the court, § 546(e) “broadened the safe harbor by extending its scope to include the securities markets . . . 'beyond the ordinary course of business to include margin and settlement payments to and from brokers, clearing organizations, and financial institutions’.” Id. quoting Kaiser Steel Corp. v. Charles Schwab & Co., (10th Cir. 1990) (“Kaiser I”), at 849, and citing H.R. Rep. 97-420, at *2 (1982). “This broad protection was designed to ensure settlement finality, and therefore market stability.” Id. We conclude our discussion here.