“Safe Harbor” in the Bankruptcy Storm: The Unavoidability of Securities Transactions Utilizing Financial Intermediaries

Client Advisory

September 4, 2013

The Second Circuit recently issued a decision addressing the reach of 11 U.S.C. § 546(e), the Bankruptcy Code’s “safe harbor” from avoidance of preferential or fraudulent transfers.[1] Aligning itself with three of the four other Courts of Appeal that have considered the issue,[2] the Second Circuit held that Section 546(e) prohibits the avoidance of transfers to a financial intermediary made in connection with a securities contract even if those transfers are conduit payments, i.e., payments that merely flow through the intermediary en route to the ultimate recipients. This decision expands upon the Second Circuit’s 2011 decision in In reEnron Creditors Recovery Corp.[3] – holding that payments made to redeem commercial paper were “settlement payments” within the meaning of Section 546(e) – and provides further comfort to market participants that securities transactions will not be avoided in the event of a counter-party’s bankruptcy filing.


In 2000, Quebecor World Capital Corp. (“QWCC”) raised $371 million though a private placement of notes (the “Notes”) pursuant to two Note Purchase Agreements (the “NPAs”) guaranteed by Quebecor World (USA) Inc. (“QWUSA”). The NPAs prohibited any affiliate of the issuer from repurchasing the Notes except in compliance with the prepayment provisions of the NPAs. In October 2007, QWUSA purchased the Notes by transferring $376 million (the “Purchase Price”), which included the principal amount outstanding, accrued interest and the prepayment premium required by the NPAs, to CIBC Mellon Trust Co. (“CIBC Mellon”) as trustee for the Noteholders in exchange for the surrender of the Notes which QWUSA then surrendered to QWCC for redemption. CIBC Mellon then distributed the Purchase Price to the Noteholders.

Less than 90 days later, QWUSA filed for bankruptcy. The Unsecured Creditors’ Committee (the “Committee”) sought to avoid and recover the Purchase Price from the Noteholders. The Noteholders argued that the transfer could not be avoided because it fell within safe harbor provided by Section 546(e). The bankruptcy court and district court ruled in favor of the Noteholders finding the transfer was protected from avoidance as a transfer in connection with a securities transaction.[4] The Committee appealed.


The Bankruptcy Code allows debtors to “avoid”, i.e. unwind and recover, certain transfers made within 90 days of the filing of the bankruptcy petition that have the effect of preferring certain creditors over others with the same legal entitlements.[5] Section 546(e) provides a “safe harbor” by shielding certain transfers from avoidance, including transfers made to or for the benefit of a financial intermediary made in connection with a securities contract.[6]


As there was little question that the NPAs were “securities contracts,” because they provided for the purchase and repurchase of the Notes, and that CIBC Mellon was a financial intermediary, the court focused on whether a payment to a financial institution only as a conduit to the ultimate recipient was sufficient to garner protection under Section 546(e).   The Committee argued that Section 546(e) applied only where the parties with the beneficial interests in the transaction – in this case the Noteholders – were financial institutions. The Second Circuit rejected this argument.[7]

In holding that the safe harbor provision applies to conduit payments, the Second Circuit relied on the language of Section 546(e) itself, which protects transfers made “to” as well as transfers made “for the benefit of” financial institutions. Thus, it was sufficient that the transfer was made “to” CIBC Mellon even if CIBC Mellon did not take title to, or have a beneficial interest in, the transfer.[8] The court also found that this broader interpretation furthered the legislative intent behind the statute in ensuring minimal disruption of the securities market and was consistent with the majority of circuit courts that had addressed this issue.[9] Accordingly, the Second Circuit held that the transfer fell within Section 546(e)’s safe harbor and was thus unavoidable.[10]


In Enron Creditors Recovery, the Second Circuit held that Section 546(e)’s safe harbor protects redemptions of commercial paper.[11] With its decision in Quebecor, the Second Circuit has aligned itself with the other Courts of Appeals that apply Section 546(e) to those securities transactions in which the payment flows through a financial intermediary and held that such transactions will not be avoided in the event of a bankruptcy filing.

Despite the protections afforded to parties via the Quebecor decision, merely characterizing or structuring a transfer as a “securities transaction” may not be sufficient to preclude avoidance.[12] Moreover, the safe harbor does not protect transactions that are avoidable as actual fraudulent transfers. 

For more information concerning the matters discussed in this publication, please contact the author, Leonardo Trivigno (212-238-8724,, or James Gadsden (212-238-8607,, Aaron R. Cahn (212-238-8629,, or your regular CL&M attorney.


[1]Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Insurance Company (In re Quebecor) (hereafter “Quebecor”). This decision can be accessed by visiting the Second Circuit’s website at

[2] See QSI Holdings, Inc. v. Alford (In re QSI Holdings, Inc.), 571 F.3d 545, (6th Cir. 2009); Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009); Lowenschuss v. Resorts Int’l, Inc., (In re Resorts Int’l, Inc.), 181 F.3d 505 (3d Cir. 1999). Only the Eleventh Circuit – the first circuit court to consider the issue – has held that Section 546(e) is applicable only if the financial institution had a beneficial interest in the transaction. See Munford v. Valuation Research Corp. (In re Munford, Inc.), 98 F.3d 604, 610 (11th Cir. 1996). Every circuit court to consider the issue after Munford has held that Section 546(e) prohibits the avoidance of conduit payments. 

[3] In re Enron Creditors Recovery Corp. v. Alfa, S.A.B., 651 F.3d 329 (2011).

[4]The bankruptcy court and district court also held that the transfer was protected from avoidance as a “settlement payment”, another safe harbor in Section 546(e).   The Second Circuit’s opinion did not address this argument. 

[5]See 11 U.S.C. § 547 (2013). 

[6]The Bankruptcy Code defines a securities contact as any “contract for the purchase, sale, or loan of a security . . . including any repurchase or reverse repurchase transaction of such security.” 11 U.S.C. § 741(6) (2013).

[7]Quebecor, pp. 14-17.

[8]Id. at pp. 14-15.

[9]Id. at 15-16.

[10]Id. at 17.

[11]Enron Creditors Recovery, 651 F.3d at 336-38.

[12]Quebecor, p. 16, n. 4. 

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