Type: Articles Published, Client Alerts
How secure is the Bankruptcy Code safe harbor that provides a defense to fraudulent transfer claims? The answer may depend on where a bankruptcy case is filed. A statutory “safe harbor” is intended to give shelter from the application of certain of the statute’s debtor-friendly remedies. With such a purpose in mind, Congress amended the Bankruptcy Code in 1982 to create a safe harbor to protect the commodities and securities markets from disruption in the event of a major bankruptcy affecting those industries. But, the safe harbor that Congress added in Bankruptcy Code section 546(e) – which essentially provides a defense to the clawback claims of debtors and trustees, where the underlying transaction is a commodity contract, forward contract, repurchase agreement, security contract, swap or master netting agreement – makes no reference either to these financial markets or to market disruptions. The language of the statute makes the defense against fraudulent transfer claims applicable to a wide range of transactions across industries. Over the past several years, several circuit courts have struggled to reconcile the broad statutory language with its core purpose without undermining the specific avoidance powers in chapter 5 of the Bankruptcy Code. A pair of recent decisions in July 2016, one from the Seventh Circuit and the other from a bankruptcy court in the Second Circuit, illustrate how irreconcilable interpretations deprive financial markets of the certitude that motivated Congress.
Calm Waters in the Second Circuit The United States Bankruptcy Court for the Southern District of New York, presiding over an adversary proceeding in the Lyondell bankruptcy case, held that In re Tribune Co. Fraudulent Conveyance Litig., 818 F.3d 98 (2d Cir. 2016) (“Tribune”) required it to rule that section 546(e) bars state law fraudulent transfer claims. Weisfelner v. Fund 1 (In re Lyondell Chemical Company), No. 09-10023, 2016 Bankr. LEXIS 2734 (Bankr. S.D.N.Y. July 20, 2016).