The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. Presenting a live 90-minute webinar with interactive Q&A Bankruptcy 546(e) Safe Harbor Exemptions for Swaps, Securitized Loan Payments, LBO Shareholder Payments and More Latest Developments in the Application of 546(e) to Financial Transactions and Securities Contracts Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, MARCH 1, 2016 Mark D. Sherrill, Partner, Sutherland Asbill & Brennan, Washington, D.C. Jason T. Rodriguez, Shareholder, Higier Allen & Lautin, Dallas
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have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Presenting a live 90-minute webinar with interactive Q&A
Bankruptcy 546(e) Safe Harbor Exemptions
for Swaps, Securitized Loan Payments,
LBO Shareholder Payments and More Latest Developments in the Application of 546(e) to Financial Transactions and Securities Contracts
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BANKRUPTCY 546(e) SAFE HARBOR
EXCEPTIONS
Al Rights Reserved. This presentation is for general informational purposes. This is not to be considered legal advise, a recommendation of legal action, nor a offer for legal representation. This should not be relied upon for legal guidance. Each legal issue is different. Obtaining legal counsel is advised if you believe you have a legal claim. No engagement or representation should be presumed by this presentation.
Federal Fraudulent Transfers for Constructive Fraud
11 U.S.C.. § 548(a)(1)(B)
State Fraudulent Transfers for Actual Fraud
11 U.S.C.. § 544(b) / State law
State Fraudulent Transfers for Constructive Fraud
11 U.S.C.. § 544(b) / State law
Preferences
11 U.S.C. § 547 / State law
7
Limitations on Avoidance 8
11 U.S.C.. § 546 sets limits on avoidance by
bankruptcy trustee
11 U.S.C.. § 546(e) provides a “Safe Harbor” for
certain transfers
Text of the statute 9 (e) Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title,
the trustee may not avoid a transfer that is a margin payment, as defined in section
101, 741, or 761 of this title, or settlement payment, as defined in section 101 or
741 of this title, made by or to (or for the benefit of) a commodity broker, forward
contract merchant, stockbroker, financial institution, financial participant, or
securities clearing agency, or that is a transfer made by or to (or for the benefit of)
a commodity broker, forward contract merchant, stockbroker, financial institution,
financial participant, or securities clearing agency, in connection with a securities
contract, as defined in section 741(7), commodity contract, as defined in section
761(4), or forward contract, that is made before the commencement of the case,
except under section 548(a)(1)(A) of this title.
11 U.S.C. § 546(e)
Summery Overview 10
Only deals with preferences and constructive fraud
Actual fraud is not subject to the safe harbor provisions
If a pre-petition transfer was received by a
qualified recipient or was from a qualified
recipient, it cannot be recovered by a bankruptcy
trustee if was on account of the one of the types of
agreements.
Two Parts to the Statute (1) 11
The trustee may not avoid a transfer that is a
margin payment or settlement payment made by or
to (or for the benefit of) a commodity broker,
forward contract merchant, stockbroker, financial
institution, financial participant, or securities clearing
agency,
[that is made before commencement of the
bankruptcy case]
Two Parts to the Statute (2) 12
the trustee may not avoid a transfer that is a
transfer made by or to (or for the benefit of) a
commodity broker, forward contract merchant,
stockbroker, financial institution, financial
participant, or securities clearing agency, in
connection with a securities contract, commodity
contract, or forward contract, that is made before
the commencement of the case,
A Broad Statute for a Policy Purpose 13
Legislative history: “Congress’s purpose was to
minimize the displacement caused in the
commodities and securities markets in the event of a
major bankruptcy affecting those industries.” H.R.
Rep. No. 420, 97th Cong., 2d Sess. (1982).
Types of Qualified Recipients 14
Commodity broker
Forward contract merchant
Stockbroker
Financial institution
Financial participant
Securities clearing agency
These would all be the potential defendants
Commodity Broker 15
An entity which is a futures commission merchant,
clearing organization, leverage transaction
merchant or commodity operation dealer
11 U.S.C. § 101(6)
Forward Contract Merchant 16
A bank or entity which enters into forward contracts
for commodities or similar goods, articles, services,
rights or interests
11 U.S.C. § 101(26)
Stockbroker 17
Person who trades stocks as a profession (ie, for a
client)
11 U.S.C. § 101(53A)
Financial Institution 18
Basically any type of lending institution or a
receiver for such entity as well as an registered
investment company.
11 U.S.C. § 101(22)
Financial Participant 19
An entity with at least one security agreement,
commodity contract, repurchase agreement, swap
agreement or master netting agreement with a non-
affiliate with a total gross dollar value of not less
than $1B outstanding in the prior 15 months or has
gross mark-to-market positions of not less than
$100MM in the same time frame
11 U.S.C. § 101(22A)
Securities Clearing Agency 20
A person who is registered as a clearing agency
under section 17A of the ‘34 act, or an exempt
person who acts solely as a securities clearing
agency
11 U.S.C. § 101(48)
546(e) Further Distilled 21
The trustee may not avoid a transfer that is a margin payment or settlement payment made by or to (or for the benefit of) a Qualified Recipient,
The trustee may not avoid a transfer that is a transfer made by or to (or for the benefit of) a Qualified Recipient, in connection with a securities contract, commodity contract, or forward contract, that is made before the commencement of the case
Except for actual fraud
The Devil is in the Definitions 22
Who falls into each Qualified Recipient is a matter
of statute and court interpretation
Mere conduit?
What types of transfers are also defined and
subject to statute and court review
Types of Qualified Transfers 23
Margin Payment
Settlement Payment
Transfers made “in connection with”:
Securities Contracts
Commodity Contract
Forward Contract
Margin Payment 24
Defined in Three Separate Sections
The term “margin payment” means, for purposes of the forward contract provisions of this title, payment or deposit of cash, a security or other property, that is commonly known in the forward contract trade as original margin, initial margin, maintenance margin, or variation margin, including mark-to-market payments, or variation payments.
11 U.S.C. § 101(38)
“margin payment” means payment or deposit of cash, a security, or other property, that is commonly known to the securities trade as original margin, initial margin, maintenance margin, or variation margin, or as a mark-to-market payment, or that secures an obligation of a participant in a securities clearing agency;
11 U.S.C. § 741(5)
“margin payment” means payment or deposit of cash, a security, or other property, that is commonly known to the commodities trade as original margin, initial margin, maintenance margin, or variation margin, including mark-to-market payments, settlement payments, variation payments, daily settlement payments, and final settlement payments made as adjustments to settlement prices;
11 U.S.C. § 761(15)
Margin Payment 25
“Margin payment is a broadly construed term and
includes any payment by a debtor to pay for the
purchase of securities or to reduce a deficiency in a
margin account.”
In re Stewart Fin. Co., 367 B.R. 909, 917 (Bankr. M.D.
Ga. 2007)
Settlement Payments 26
"A number of courts which have examined the
meaning and legislative history of § 546(e) have
concluded that the definition of settlement payment
defies plain meaning; to the contrary...it is circular
and cryptic. [T]he statutory definition of the term is
as opaque as it is circular. As one court put it, §
546(e) essentially provides that a settlement
payment is a settlement payment....”
In re Adler, Coleman Clearing Corp., 263 B.R. 406, 475
(S.D.N.Y. 2001) (internal cites omitted)
Settlement Payments 27
Defined 11 U.S.C. § 101(51A) or 741
(51A) The term “settlement payment” means, for purposes of the forward contract provisions of this title, a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, a net settlement payment, or any other similar payment commonly used in the forward contract trade.
Section 741 is similar without reference to forward contract provisions
Settlement Payments 28
“…Cases have extended or adapted the term to embrace various forms of payment that further the settlement process in different types of securities transactions.
payment for shares during a leveraged buyout
reverse repurchase agreement between stockbroker and debtor
debtor's return to another party, upon cancellation of the transaction, of government securities serving as additional margin in a repurchase agreement
payments to shareholders for their stock in connection with a leveraged buyout
transfers of federal government securities in connection with repurchase agreements by participant securities dealer to purchasers qualify as settlement payments under § 546(f)”
In re Adler, Coleman Clearing Corp., 263 B.R. 406, 476-77 (S.D.N.Y. 2001)
"a settlement payment, quite simply, is a transfer of cash to a financial institution ... made to complete a securities transaction.”
In re Quebecor World (USA) Inc., 480 B.R. 468, 475 (S.D.N.Y. 2012) (internal citation omitted)
Securities Contract 29
Defined in 11 U.S.C. § 741(A)(7)
“The plain language of section 741(7) is very broad in its application and encompasses virtually any contract for the purchase or sale of securities, any extension of credit for the clearance or settlement of securities transactions, and a wide array of related contracts, including security agreements and guarantee agreements.”
In re Lehman Bros. Holdings Inc., 469 B.R. 415, 438 (Bankr. S.D.N.Y. 2012)
Securities Contact Exclusion 30
A securities contract “does not include any purchase,
sale, or repurchase obligation under a participation
in a commercial mortgage loan”
11 U.S.C. § 741(7)(B)
Commodity Contract 31
Defined 11 U.S.C. § 761(4)
“The term commodity contract encompasses purchases
and sales of commodities for future delivery on, or
subject to the rules of, a contract market or board of
trade, and leverage transactions.”
In re Olympic Nat. Gas Co., 294 F.3d 737, 741 (5th Cir.
2002) citing 5 Collier on Bankruptcy ¶ 556.02[2], at 556-5
(Lawrence P. King ed., 15th ed. 2002). (Internal quotation
omitted).
Forward Contract 32
Defined in 11 U.S.C. § 101(25)
“Reduced to its essence for purposes of this case, the definition of forward contract is a contract (other than a commodity contract) for the purchase [or] sale ... of a commodity, as defined in section 761(8) ... or any similar good ... or interest which is presently or in the future becomes the subject of dealing in the forward contract trade ... with a maturity date more than two days after the date [of] the contract.”
In re Mirant Corp., 310 B.R. 548, 565 (Bankr. N.D. Tex. 2004) (internal quotation omitted).
Forward Contract 33
"Generally speaking, ‘forward contracts' are contracts for the future purchase or sale of commodities that are not subject to the rules of a contract market or board of trade. Thus, the terms ‘commodity contract’ and ‘forward contract,’ taken together, seamlessly cover the entirety of transactions in the commodity and forward contract markets, whether exchange-traded, regulated, over-the-counter or private.“
In re Borden Chemicals & Plastics Operating Ltd. P'ship, 336 B.R. 214, 218 (Bankr. D. Del. 2006)
"[T]he distinguishing characteristics of a forward contract is that the parties expect to make actual delivery"
Id. citing In re Olympic Nat. Gas Co., 294 F.3d 737, 741 (5th Cir. 2002)
A. Madoff Cases
Recent Case Developments 34
The “546(e) Decision” 35
“Section 546(e) sets a low bar for the required
relationship between the securities contract and the
transfer sought to be avoided.”
In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411 (2d
Cir. 2014) cert. denied sub nom. Sec. Inv'r Prot. Corp. v.
Ida Fishman Revocable Trust, 135 S. Ct. 2858, 192 L.
Ed. 2d 910 (2015) and cert. denied sub nom. Picard v.
Ida Fishman Revocable Trust, 135 S. Ct. 2859, 192 L.
Ed. 2d 910 (2015)
The “546(e) Decision” 36
Transaction Background
Investors Executed Account Documents which authorized BLMIS to trade stocks on Investor’s behalf
Inventors Paid in Funds
BLMIS Never Executed any Stock Transaction
BLMIS simply used other investor funds to pay back investors seeking to exit
The “546(e) Decision” 37
Trustee Argued:
BLMIS never actually performed a securities transaction
It was unclear what, if any securities were to be purchased
The Account Documents didn’t actually purchase securities, only authorized the purchase
The payments to exiting investors did not come from securities trading
*A SIPC argument
The “546(e) Decision” 38
Held:
The repayments sought were covered by the safe
harbor provision as securities contract payments
The repayments sought were covered by the safe
harbor provision as settlement payments
Actual Fraud 39
“If an investor knew that BLMIS was a Ponzi scheme,
he had no reasonable expectation that he was
signing a securities contract with BLMIS for the
purposes of trading securities for his account.”
In re Madoff, 542 B.R. 100 (Bankr. S.D.N.Y. 2015)
Section 548(c) provides a “good faith” defense
Subjective v. objective
Actual Fraud 40
“In the context of the Madoff litigations, Judge Rakoff
has rejected willful blindness as a substitute for actual
knowledge for the purposes of the safe harbor.”
In re Bernard L. Madoff Inv. Sec. LLC, No. 08-99000 (SMB),
2015 WL 4734749 (Bankr. S.D.N.Y. Aug. 11, 2015)
Actual knowledge negates good faith under section
548(c)
Id.
The “Net Equity v 546” Decision 41
In re Bernard L. Madoff Inv. Sec., LLC,, No. 15 CIV. 1151 (PAE), 2016 WL 183492, at *3 (S.D.N.Y. Jan. 14, 2016).
§ 546(e) v. the Net Equity calculation
“There is no legal basis to treat the two-year reach back restriction on avoidance of fraudulent transfers as inhibiting the ability of the Trustee to calculate net equity”
Recent Case Developments 42
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