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Settlement Payments Exempted from Avoidance

By Ali M.M. Mojdehi and Janet Dean Gertz

Under ' 546(e) of the Bankruptcy Code (the so-called “stockbroker defense” to select voidance actions), Congress has exempted from avoidance any “settlement payment” that is made “by or to a commodity broker, forward contract merchant, stockbroker, financial institution, or securities clearing agency, that is made before the commencement of the case,” except where the transfer is fraudulent under ' 548(a)(1)(A) of the Bankruptcy Code. 11 U.S.C. ' 546(e). So what exactly is a “settlement payment”? Prior to the BAP decision in In re Grafton Partners, the answer to this question was surprisingly unclear.

Recently, the Bankruptcy Appellate Panel of the Ninth Circuit in Kipperman v. Circle Trust (In re Grafton Partners, L.P.), 321 B.R. 527 (BAP 9th Cir. 2004), carefully elucidated the proper construction of the term, thereby demonstrating the manner in which the federal securities laws intersect with the Bankruptcy Code. The BAP's conclusion? Payments for illegally unregistered securities are not “settlement payments” as the term is defined for purposes of the securities trade in ' 741(8) of the Bankruptcy Code.

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