By Dan T. Moss, Daniel J. Merrett, and Ben Rosenblum (Jones Day)
Section 546(e) of the Bankruptcy Code’s “safe harbor” provision (which shields transactions from avoidance claims in bankruptcy of certain securities, commodity, or forward-contract payments) has long been a magnet for controversy. Several noteworthy court rulings have been issued in bankruptcy cases addressing the scope of the provision, including its limitation to transactions involving “financial institutions” as transferors or transferees, its preemption of avoidance litigation that could have been commenced by or on behalf of creditors under applicable non-bankruptcy law, and its application to non-public transactions. The U.S. Court of Appeals for the Second Circuit contributed one of the latest chapters in the continuing debate concerning the breadth of the safe harbor in In re Boston Generating, LLC, 2024 WL 4234886 (2nd Cir. Sept. 19, 2024). In an unpublished decision, the court of appeals affirmed lower court rulings that payments made as part of a pre-bankruptcy recapitalization transaction were shielded from avoidance under the safe harbor because they were made through an agent bank that qualified as a “financial institution,” meaning that its customers, including the debtor-transferee, were also financial institutions.
With Boston Generating and its previous rulings in the Tribune Company and Nine West chapter 11 cases, the Second Circuit has now tripled down on its broad construction of the Bankruptcy Code’s safe harbor protecting payments made as part of securities contract transactions from avoidance as constructively fraudulent transfers. Consistent with the Supreme Court’s 2018 decision in Merit Mgmt. Grp., LP v. FTI Consulting, Inc., such transactions qualify for the safe harbor provided, among other things, they were made by or with the assistance of a “financial institution” acting as the agent of its transferee-customer in the context of larger, overarching transactions. Going forward, parties should carefully document the sequencing (i.e., clearly stating what the transfers are doing and how such transfers work in context) and structuring (e.g., rely on a bank as agent) of the interim transfers such that each individual transfer tracks out to the overarching transfer. In the absence of any circuit split on this important issue, the Supreme Court is unlikely to resolve any lingering disputes among the courts any time soon.
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