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Defending the Preference and Fraudulent Transfer Safe Harbor

By Michael L. Cook

The Bankruptcy Code (“Code”) has at least nine so-called “safe harbor” (i.e., bankruptcy insulating) provisions for financial contracts. See, e.g., ” 555 (securities contracts); ' 556 (commodities and forward contracts); ' 559 (repurchase agreements); ' 560 (swap agreements); ' 561 (master netting agreements); ' 546(e) (settlement payments); ' 548(d)(2)(b) (fraudulent transfers); and ” 362 and 553 (setoffs). Added incrementally by Congress between 1982 and 2005, with a technical amendment in 2006, these provisions essentially: 1) immunize nondebtor parties from the automatic stay as it applies to the termination of contracts; 2) permit nondebtor parties to enforce ipso facto termination provisions; 3) immunize nondebtor parties from avoidance actions (e.g., preferences, fraudulent transfers); and 4) immunize nondebtor parties from the automatic stay as it applies to the setoff of mutual debts. As shown below, some lower courts have inconsistently enforced those safe harbor provisions in the preference and fraudulent transfer context, generating costly litigation for the asserted cause of creditor recovery.

The Needless Litigation Problem

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