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Defending the Preference and Fraudulent Transfer Safe Harbor

By Michael L. Cook

Last month, we discussed the fact that the The Bankruptcy Code (“Code”) has at least nine so-called “safe harbor” (i.e., bankruptcy insulating) provisions for financial contracts. As we showed in Part One, 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. We continued by discussing the legislative history of the safe harbor.

In discussing the history of Enron, we pointed out that District Judge Colleen McMahon succinctly summarized the relevant legislative history, noting that it had first been “enacted in 1978 in response to a” decision holding that a bankruptcy trustee was not barred “from recovering [on fraudulent transfer grounds] a margin payment made to a commodities clearinghouse.” Seligson v. New York Produce Exchange, 394 F. Supp. 125, 128-36 (S.D.N.Y. 1975). Enron III, at *5. By 1982, explained the court, ” 546(e) “broadened the safe harbor by extending its scope to include the securities markets 'c 'ebeyond the ordinary course of business to include margin and settlement payments to and from brokers, clearing organizations, and financial institutions'f.” Enron III, at *5-6, quoting Kaiser Steel Corp. v. Charles Schwab & Co., (10th Cir. 1990) (“Kaiser I“), at 849, and citing H.R. Rep. 97-420, at *2 (1982). “This broad protection was designed to ensure settlement finality, and therefore market stability.” Enron III, at *6. The discussion concludes herein.

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