Second Circuit Upholds Protection Of The Section 546(e) Bankruptcy Safe Harbor For Payments Made By A Debtor To Redeem Its Commercial Paper

June 30, 2011

On June 28, 2011, the Court of Appeals for the Second Circuit upheld the Southern District of New York’s determination that the safe harbor provision in § 546(e) of the Bankruptcy Code protects from the bankruptcy trustee’s powers to avoid transfers made by the Debtor, Enron Corp., to redeem commercial paper prior to maturity. The issue before the Court was whether the payments made during the preference period constitute “settlement payments” within the meaning of § 546(e)’s safe harbor. The decision is particularly noteworthy because this is the first instance the Second Circuit has addressed the breadth of this section of the Bankruptcy Code. The Second Circuit adopted a broad reading of §546(e) which was consistent with the intent of the safe harbor and resisted placing any limitations on its plain meaning. This case is therefore important, not only for cases involving the “settlement payment” safe harbor, but also potentially for litigation involving all of the Code’s safe harbors for financial contracts.