The Code’s Safe Harbor Defense: Still Vital and ‘Extremely Broad’

Appellate courts continue to agree on the vitality and breadth of the safe harbor defense con­tained in Bankruptcy Code (Code) § 546(e). It insulates from the trustee’s fraudulent transfer or preference attack a “settlement payment” or “margin pay­ment” on a “securities contract,” “com­modity contract” or “forward contract” except when the debtor’s payment is made with “actual intent to hinder, de­lay, or defraud” creditors. Despite poli­cy arguments by trustees and creditors, the Courts of Appeals have refused to add requirements to the Code’s plain language. In re Quebecor World (USA) Inc., 2013 WL2460726, *1 (2d Cir. June 10, 2013) (held, payments by debtor to noteholder trustee for noteholders “in exchange for private placement notes … clearly fell within the safe harbor for ‘transfers made … in connection with a securities contract.’”); In re Derivium Capital LLC, 2013 WL2284876, *8 (4th Cir. May 24, 2013)(held, commission payments to stockbroker shielded from recovery by “settlement payment” de­fense; no exception in context of Ponzi scheme); In re MBS Management Ser­vices, Inc., 690 F.3d 352, 355 (5th Cir. 2012) (held, pre-bankruptcy payments to power company for supplying elec­tricity to debtor’s apartment complexes were settlement payments on “forward contract” for purchase of a “commod­ity”; definition of “forward contract” clear on its face). In this article, SRZ business reorganization partner Michael L. Cook discusses how the safe harbor defense is still a good defense to fraudulent transfer and preference claims.