Second Circuit Denies Enron’s Petition for Rehearing on Commercial Paper Settlement Payment Decision

The U.S. Court of Appeals for the Second Circuit, on Dec. 2, 2011, ruled in favor of SRZ client Alfa, S.A.B. de C.V., denying Enron’s petition for rehearing in Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011). The court had previously ruled against Enron more than five months ago, holding that its redemptions of commercial paper were “settlement payments” and thus not voidable as preferential or fraudulent transfers under Bankruptcy Code § 546(e), one of the code’s so-called “safe harbor” provisions. Id. (Payments “made to redeem commercial paper, which the code defines as a security . . . constitute the ‘transfer of cash . . . made to complete [a] securities transaction’ and are settlement payments” under the code). An SRZ Alert , published June 29, 2011, summarized the opinion.

Lower courts have subsequently relied on Enron to insulate pre-bankruptcy transfers. See, e.g., In re Quebecor World (USA) Inc., 543 B.R. 201 (Bankr. S.D.N.Y. July 27, 2011) (pre-bankruptcy repurchase of $376 million in private notes not voidable because of § 546(e)); Picard v. Katz, 2011 U.S. Dist. LEXIS 109595 (S.D.N.Y. Sept. 27, 2011) (held, trustee’s fraudulent transfer and preference claims dismissed under § 546(e) because “settlement payment” to defendants was made by a stockbroker on a “securities contract.”).

Practitioners have also noted the purported “immediate and enormous direct financial impact” of the Enron decision. See, e.g., David A. Pisciotta & Oscar N. Pinkas, To Go Boldly Where No Court Has Gone Before: Enron and the Application of § 546(e), 28 Am. Bankr. Inst. L. Rev 28, (Oct. 2011). But the Second Circuit’s Enron ruling merely affirmed a two-year-old District Court decision handed down in November, 2009. In re Enron Creditors Recovery Corp., 422 B.R. 423, 442 (S.D.N.Y. Nov. 20, 2009) (reversing bankruptcy court). Indeed, one bankruptcy judge put the District Court’s Enron decision in its proper perspective: Enron’s transactions “involved a financial intermediary and a broker/financial institution and thus qualified as ‘settlement payments.’ Noting the SEC’s argument that ‘reversing the $1.1 billion in actual transfers of funds could be acutely disruptive to the affected market,’ [the District Court] applied the exemption.” In re MacMenamin’s Grill Ltd., 450 B.R. 414, 424 (Bankr. S.D.N.Y. Apr. 21, 2011).

Authored by Michael L. Cook.

If you have any questions concerning this Alert, please contact your attorney at Schulte Roth & Zabel or the author.

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