JESSE M. FURMAN, District Judge.
In October 2007, shortly before it filed for bankruptcy, Quebecor World (USA) Inc. ("QWUSA") paid more than $376 million to purchase and redeem a series of private placement notes that an affiliated company had issued years earlier. The question in this case is whether those payments can be "avoided" — that is, recaptured as part of the bankruptcy estate — on the ground that they were "preferential" transfers, or whether they are protected from avoidance as either "settlement payments" or transfers "in connection with a securities contract." Appellant Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. ("Appellant") appeals from an order of the United States Bankruptcy Court for the Southern District of New York (James M. Peck, B.J.), entered on August 17, 2011, granting Appellees' motion for summary judgment. See Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. Am. United Life Ins. Co. (In re Quebecor World (USA) Inc.), 453 B.R. 201 (Bankr. S.D.N.Y.2011) ("Quebecor"). Relying on the Second Circuit's decision in In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir.2011) ("Enron"), the Bankruptcy Court held that the payments at issue were protected as both settlement payments and transfers in connection with a securities contract. Quebecor, 453 B.R. at 215-19. For the reasons stated below, this Court agrees and, accordingly, the Bankruptcy Court's order is AFFIRMED.
As noted, this case concerns the authority of a bankruptcy trustee to avoid and thus recapture "preferential" transfers. To the extent relevant here, Section 547(b) of the Bankruptcy Code provides that a trustee may recover money or property transferred by an insolvent debtor on account of an antecedent debt in the ninety days preceding bankruptcy. See 11 U.S.C. § 547(b). This "avoidance" authority serves two important functions. First, it deters creditors from racing to the courthouse and hastily forcing troubled businesses into bankruptcy. See, e.g., Union Bank v. Wolas, 502 U.S. 151, 160-61, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991); In re Roblin, 78 F.3d 30, 40 (2d Cir.1996). Second, it promotes equitable treatment of creditors by allowing a trustee to recapture for the benefit of all creditors preferential payments or transfers made in the months leading up to the bankruptcy. See Wolas, 502 U.S. at 160-61, 112 S.Ct. 527.
Section 546(e) of the Bankruptcy Code carves out limited exceptions to this avoidance authority, two of which are relevant to this case. First, a trustee "may not avoid a transfer that is a ... settlement payment ... made by or to (or for the benefit of) a ... financial institution." 11 U.S.C. § 546(e). Section 741 of the Code, in turn, defines a settlement payment as "a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade." Id. § 741(8).
Congress enacted the Section 546(e) safe harbors "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. 2 (1982), reprinted in 1982 U.S.Code Cong. & Admin. News 583, 583. As the Court explained in Enron, "[i]f a firm is required to repay amounts received in settled securities transactions, it could have insufficient capital or liquidity to meet its current securities trading obligations, placing other market participants and the securities markets themselves at risk." 651 F.3d at 334. "By restricting a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, the safe harbor stands `at the intersection of two important national legislative policies on a collision course-the policies of bankruptcy and securities law.'" Id. (quoting In re Resorts Int'l, Inc., 181 F.3d 505, 515 (3rd Cir.1999)).
The facts relevant to this case are undisputed. Quebecor World Inc. ("QWI") is a Canadian corporation that used to be the second largest commercial printer in the world. See Quebecor, 453 B.R. at 206. In July 2000, an entity in the Quebecor corporate family, Quebecor World Capital Corp. ("QWCC"), raised $250 million by issuing a series of private placement notes to a small group of lenders (the "Noteholders") pursuant to a Note Purchase Agreement. (JA-23 Ex. Al).
Under Section 8.2 of the NPA, QWCC was entitled to redeem or prepay all or part of the Notes at any time and for any reason. (JA-23 Exs. Al, A2 § 8.2). Upon prepayment, the Noteholders would receive the aggregate principal owed, accrued interest, and a "make-whole" premium designed to compensate the Noteholders for the early payment of the Notes. (Id.). Section 8.5 of the NPA specified that "[a]ny Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note." (JA-23 Exs. Al, A2 § 8.5). Section 8.6 of the NPA further provided that QWI and any controlled affiliates were prohibited from purchasing, redeeming, prepaying or otherwise acquiring the Notes except "(a) upon the payment or prepayment of each series of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to an offer to purchase" made by QWI or a controlled affiliate "pro rata to the holders of all Notes at the time outstanding at
The NPA also included a limitation on QWI's debt-to-capitalization ratio, which provided that if that ratio exceeded 55% on the last day of any fiscal quarter ending after December 31, 2000, all outstanding Notes would be immediately due to the Noteholders, including principal owed, accrued interest, and the make-whole premium. (JA-23 Exs. Al, A2 §§ 10.1, 13.1(a), (c)). By May of 2007, QWI and its subsidiaries were in financial distress and at risk of breaching this covenant. (Appellant's Br. at 8; Appellees' Br. at 8-9). To avoid the potentially catastrophic consequences of such a breach, QWI attempted to modify the covenant through a partial tender offer to just over half of the Noteholders in exchange for their support in raising the debt-to-capitalization ratio to 65%. (Appellant's Br. at 9; Appellees' Br. at 9). The Noteholders, however, unanimously rejected the tender offer and instead signed a Noteholder Cooperation Agreement and Right of First Refusal Agreement, pursuant to which they agreed not to sell the Notes outside the then-existing group of Noteholders. (Appellant's Br. at 10; Appellees' Br. at 9). It appears that these agreements were intended to prevent QWI from dividing the Noteholders with a partial tender offer, thereby forcing an early prepayment of the Notes — including the make-whole premium — to all Noteholders. (Appellant's Br. at 10).
In September 2007, the QWI Board of Directors approved prepayment of all the Notes to avoid breaching the debt-to-capitalization ratio covenant, using cash raised from a separate bank credit facility. (JA-23 Exs. B1-B4 at 53). On September 28, 2007, QWCC sent each Noteholder a "Notice of Redemption" stating that, on October 29, 2007, it intended to "redeem" in full all outstanding Notes under Section 8.2 of the NPA. (E.g., JA-23 Exs. B5-11 at 16). The notice directed each Noteholder to "surrender" the Notes "for cancellation, pursuant to Section 8.5 of the [NPA]." (E.g., id. at 17). Several weeks later, however, QWI realized that QWCC's redemption of the Notes would result in unwanted tax liabilities under Canadian law. At the last minute, therefore, QWI restructured the transaction as a purchase of the Notes by QWUSA, which would then surrender the Notes to QWCC for redemption. (Appellant's Br. at 11). On October 25, 2007, QWUSA provided a second notice to the Noteholders that it would pay the "Redemption Price" set forth in the Notice of Redemption, which would "result in QWUSA purchasing the Notes." (E.g., JA-23 Exs. B12-18 at 1).
On October 29, 2007, QWUSA instructed Bank of America to wire transfer $376,298,061.81 — the sum of the principal, accrued interest, and the make-whole premium — from its main operating account to the trustee for the Noteholders, CIBC Mellon ("CIBC"). (JA-23 Exs. B12-18 at 53). CIBC then transferred to each Noteholder its portion of the prepayment; it did not, however, take title to the securities or utilize any type of clearing mechanism to complete the transaction. (JA-23 Exs. D1-D7 at 9). Regardless, according to the Noteholders, the payment from QWUSA to them was part of a securities transaction that "settled." (JA-6-22 ¶ 9 & Exs. C.). Moreover, at least some contemporaneous documents describe the transfer as "settle[d]," occurring on a "settlement date," or the like. (E.g., JA-6-22 Ex. C; JA-30 Ex. C, JA-31 Ex. C; JA-39 Exs. 27-36 at 25). Following the prepayment, the Noteholders returned the Notes by mailing them directly to QWI in Montreal — a process that dragged on for some months. (Appellees' Br. at 11). When returned, two of the fifteen Notes were stamped "PAID IN FULL." (Appellant's
On January 21, 2008, QWUSA filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York. Voluntary Petition (Chapter 11), In re Quebecor World (USA), No. 08-bk-10152 (JMP) (Bankr. S.D.N.Y. Jan. 21, 2008) (Docket No. 1). On September 19, 2008, Appellant commenced this adversary proceeding seeking to avoid the $376 million prepayment of the notes on the ground that it was a "preferential" transfer within the meaning of Section 547(b). Complaint, Official Comm. of Unsecured Creditors of Quebecor World (USA), Inc. v. Am. United Life Ins. Co. (In re Quebecor World (USA) Inc.), No. 08-ap-1417 (JMP) (Bankr. S.D.N.Y. Sept. 19, 2008) (Docket No. 1). On October 29, 2010, the Noteholders moved for summary judgment, contending that the payment fell within the safe harbor of Section 546(e). (08-ap-1417 (JMP), Docket No. 32). The Bankruptcy Court heard oral argument on January 19, 2011, and held a limited evidentiary hearing on May 4 and 5, 2011. (08-ap-1417 (JMP), Docket Nos. 70, 73-74). Shortly thereafter, the Court of Appeals issued its decision in Enron and the Bankruptcy Court ordered supplemental briefing on the case. See Quebecor, 453 B.R. at 211.
In a thorough opinion dated July 27, 2011, Judge Peck granted the Noteholders' motion for summary judgment. See Quebecor, 453 B.R. at 219. Judge Peck held that the transfers at issue fell within Section 546(e) safe harbor for two independent reasons. First, relying heavily on Enron, Judge Peck concluded that the payments qualified as settlement payments, defined as a transfer of cash to a financial institution to complete a securities transaction. See id. at 215. Second, Judge Peck held — albeit in a footnote — that the payment qualified "as a safe-harbored `transfer made by or to (or for the benefit of) a ... financial institution ... in connection with a securities contract, as defined in section 741(7).'" Id. at 212 n. 7 (quoting 11 U.S.C. § 546(e)). Citing the "comprehensive language used to define the term `securities contract' in section 741(7) of the Code (i.e., `a contract for the purchase, sale, or loan of a security ...')," Judge Peck concluded that the NPA is a "securities contract" and that the disputed transfer "[p]lainly" occurred in connection with it. Id. Further, relying on Enron, he rejected Appellant's argument that the clause did not apply to the redemptions of securities. See id.
This appeal followed.
This Court has jurisdiction pursuant to Title 28, United States Code, Section 158(a)(1) and Rule 8001(a) of the Federal Rules of Bankruptcy Procedure. In general, a district court reviews a bankruptcy court's findings of fact for clear error and its legal conclusions de novo. See, e.g., In re Layo, 460 F.3d 289, 292 (2d Cir.2006); In re Madoff, 848 F.Supp.2d 469, 476 (S.D.N.Y.2012); FED. R. BANKR. P. 8013. As noted, however, the relevant facts in the present case are undisputed; the parties' dispute turns instead on the scope and meaning of terms in the safe harbor provision of the Bankruptcy Code. These are "matter[s] of statutory construction and thus ... question[s] of law [the Court] review[s] de novo." Enron, 651 F.3d at 334.
The first question on appeal is whether the payments at issue qualify as settlement
Over a dissent by Judge Koeltl (sitting by designation), the Second Circuit affirmed, holding that the redemption payments did qualify as settlement payments within the meaning of Section 546(e). The majority acknowledged that Section 741(8) of the Bankruptcy Code, which Section 546(e) incorporates, "defines `settlement payment' rather circularly." Enron, 651 F.3d at 334. Nevertheless, following other courts of appeals, the majority adopted an "extremely broad" definition of the term, instructing courts to interpret it, "in the context of the securities industry, as the transfer of cash or securities made to complete a securities transaction." Id. at 334 (internal quotation marks and brackets omitted); see also id. at 336-37. Applying that definition, the majority easily concluded that the redemption at issue fell within the safe harbor of Section 546(e): "The payments at issue were made to redeem commercial paper, which the Bankruptcy Code defines as a security. They thus constitute the transfer of cash ... made to complete a securities transaction and are settlement payments within the meaning of § 741(8)." Id. at 339 (internal quotation marks, brackets, footnote, and citation omitted).
Significantly, in reaching that conclusion, the majority rejected three limitations urged by the creditors committee. First, the majority rejected the committee's argument that the final clause of the Section 741(8)'s definition, "commonly used in the securities trade," limits the safe harbor to those payments that are "commonly used in the securities trade." See 651 F.3d at 335-36. That phrase, the majority concluded, "is properly read as modifying only the term `any other similar payment.' The phrase is not a limitation on the definition of settlement payment, but rather ... it is a catchall phrase intended to underscore the breadth of the § 546(e) exemption." Id. at 336 (emphasis in original) (internal quotation marks omitted). In addition, the majority reasoned, the committee's "proposed reading would make application of the safe harbor in every case depend on a factual determination regarding the commonness of a given transaction." Id. That, in turn, "would result in commercial uncertainty and unpredictability at odds with the safe harbor's purpose and in an area of law where certainty and predictability are at a premium." Id.
Finally, the panel majority rejected the committee's argument that a transfer qualifies as a "settlement payment" only if it involved a financial intermediary that took a beneficial interest in the securities during the course of the transaction, thereby implicating the systemic risks that motivated Congress's enactment of the safe harbor. See id. at 338-39. In doing so, the Court relied on the decisions of three other courts of appeals, which had applied Section 546(e) to payments involving "financial intermediaries who served only as conduits." Id. at 338 & n. 3 (citing In re Plassein Int'l Corp., 590 F.3d 252, 257-59 (3d Cir.2009); In re QSI Holdings, Inc., 571 F.3d 545, 549-50 (6th Cir.2009); Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 986 (8th Cir.2009)). Analogizing to those decisions, the Court found "no reason to think that undoing Enron's redemption payments, which involved over a billion dollars and approximately two hundred noteholders, would not" have a "substantial impact on the stability of the financial markets" — merely because the Depository Trust Company "acted as a conduit and recordkeeper rather than a clearing agency that takes title to the securities during the course of the transaction." Id. at 338. Moreover, the Court continued, Section 546(e) applies on its face, and without limitation, to settlement payments made "by or to (or for the benefit of)" various participants in the financial markets. 11 U.S.C. § 546(e). "It would appear inconsistent with this language for courts to limit the safe harbor circuitously by interpreting the definition of `settlement payment' to exclude payments that do not involve a financial intermediary that takes title to the securities during the course of the transaction." Id. at 339.
In light of the Circuit's holding and analysis in Enron, this case is easily decided. As Judge Peck correctly held, the Circuit's test for whether a payment qualifies for the safe harbor "is both uncomplicated and crystal clear — a settlement payment, quite simply, is a `transfer of cash [to a financial institution] ... made to complete [a] securities transaction.'" Quebecor, 453 B.R. at 215 (quoting Enron, 651 F.3d at 334); accord Secs. Investor Prot. Corp. v. Bernard L. Madoff Invest. Secs. LLC, 476 B.R. 715, 721 (S.D.N.Y. 2012). "Under this easy-to-apply formulation,"
Appellant's arguments to the contrary are unavailing. First, noting that the payments in this case did not involve a formal settlement process using broker-dealers and the DTC to effect the immediate exchange of payment and securities, Appellant contends that Enron is distinguishable. (Appellant's Br. at 15-16). Admittedly, this argument finds some support in the way the Enron Court framed the question presented. See 651 F.3d at 333-34 ("Here, we review only the issue the district court agreed to hear on appeal: `whether the § 546(e) "safe harbor"... extends to transactions in which commercial paper is redeemed by the issuer prior to maturity, using the customary mechanism of the Depository Trust Company.'") (quoting In re Enron, 422 B.R. at 424). It finds no support, however, in the Court's ultimate holding that, in the context of the securities industry, a settlement payment means simply "the transfer of cash or securities made to complete a securities transaction." Id. at 334 (internal quotation marks and brackets omitted). Moreover, the Enron Court concluded that Section 546(e) must be interpreted by looking to its plain language, see id. at 335, 339, and nothing in the statute suggests that application of the safe harbor turns on the involvement of broker-dealers, customary mechanisms of settlement such as the DTC, or an immediate exchange of securities. In fact, the Enron Court adopted the reasoning of a line of cases that have "expressly rejected the argument that `settlement payments' must travel through the settlement system." Plassein Int'l Corp., 590 F.3d at 258 (characterizing an early case in that line), cited in Enron, 651 F.3d at 338-39.
Second, Appellant contends that the Bankruptcy Court erred in holding that the payments at issue were made to a "financial institution," as required (in the context of this case) to qualify for the safe harbor. (Appellant's Br. at 24-25). Appellant does not dispute that CIBC, the actual recipient of the transfer, qualifies as a "financial institution" for purposes of the Bankruptcy Code.
Finally, noting that Congress intended for Section 546(e) to protect against systemic threats to the marketplace, Appellant contends that the payments at issue here are not within the ambit of those that Section 546(e) was designed to protect because they did not involve a central counterparty. (Appellant's Br. at 19-21). Relatedly, Appellant contends that if Judge Peck's decision is affirmed, Section 546(e) would apply to "the prepayment of any ordinary loan evidenced by the private note." (Appellant's Br. at 21). In the abstract, these arguments have some force given, among other things, the circularity of the definition of "settlement payment" in Section 741(8); indeed, were this Court writing on a blank slate, it might well conclude that they called for a narrower definition of "settlement payment" that excluded the payments here. See also Quebecor, 453 B.R. at 217 (noting that because the definition given to "settlement payment" in Enron "is so general in its application (as noted by the dissent with reference to the impact on recovering preferential payments of unsecured loans), does not advert to Congressional intent (except to say that to do so would not change the result) and applies to any qualifying transfer, even one with no demonstrated connection to the securities markets," it "may extend protection to transfers that Congress never intended to immunize and may lead to unintended consequences"); Frost, 31 No. 10 BANKR. L. LETTER at 3 ("[T]he net effect of Enron may be allow the parties to insulate most debt held by financial institutions from the reach of the preference laws — a result seemingly far afield from that intended by Congress.").
The Court is not writing on a blank slate, however, but is bound to follow the Second Circuit's decision in Enron. See, e.g., United States v. Russotti, 780 F.Supp. 128, 131 (S.D.N.Y.1991) ("[I]t is axiomatic that a district court cannot simply take a position contrary to that of its circuit court and regard the circuit court's interpretation of a given statute as not binding."). And in relying on the plain language of Section 546(e) to adopt an "extremely broad" definition of "settlement payment," the Second Circuit squarely rejected the precise arguments made by Appellant here (most, if not all, of which were made forcefully by Judge Koeltl in his dissent). Enron, 651 F.3d at 334 (internal quotation marks omitted); see id. at 337 (rejecting the dissent's argument that a narrower definition of settlement payment was warranted to avoid its application to prepayment
The Court's conclusion that the payments at issue qualify as "settlement payments" within the meaning of Section 546(e) is sufficient to decide this appeal. Nevertheless, out of an abundance of caution, and because the issue has been fully briefed by the parties (Appellant's Br. at 21-24; Appellees' Br. at 22-24), the Court will address the Bankruptcy Court's alternative basis for granting Appellees' summary judgment — namely, that the transfers in question were "made by to (or for the benefit of) a ... financial institution... in connection with a securities contract." Quebecor, 453 B.R. at 212 n. 7. As noted, citing the "comprehensive language" of the statute — which defines "securities contract" to include "a contract for the purchase, sale, or loan of a security,... including any repurchase ... transaction on any such security," 11 U.S.C. § 741(7)(A)(i) — Judge Peck held in a footnote that the NPA was a securities contract and concluded that the transfers at issue "[p]lainly" occurred "in connection with" them. Quebecor, 453 B.R. at 212 n. 7. Further, in doing so, he rejected Appellant's argument that the definition of "securities contract" should not be read to include a contract for the redemption — as opposed to purchase, sale, or repurchase — of a security. "Enron," Judge Peck reasoned, "makes clear that the safe harbor applies to redemptions and has destroyed that argument." Id.
As Appellant argues on appeal (Appellant's Br. at 22), this reasoning is flawed. Contrary to the Bankruptcy Court's conclusion, the Enron Court did not hold broadly that the safe harbor — that is, Section 546(e) itself — applies to redemptions in all respects. It merely interpreted and applied the meaning of the term "settlement payment" in Section 546(e), holding that, because there is no purchase-or-sale requirement on the face of the statute defining that term, it extends to redemptions of securities. See Enron, 651 F.3d at 336-37. That holding, however, does not extend to the "securities contract" prong of Section 546(e), as "securities contract" is defined separately.
Nevertheless, for different reasons, this Court concludes that the payments at issue do in fact qualify as transfers in connection with a securities contract. See, e.g., Freeman v. Journal Register Co., 452 B.R. 367, 369 (S.D.N.Y.2010) (noting that a district court, on appeal from a bankruptcy court, "may affirm on any ground that finds support in the record, and need not limit its review to the bases raised or relied upon in the decisions below"). That is because, as it was ultimately structured, the transaction at issue was in fact a "purchase" (or "repurchase") of the Notes rather than a "redemption." To be sure, QWCC initially sent a "Notice of Redemption" to the Noteholders stating that, on October 29, 2007, it intended to "redeem" in full all outstanding Notes under Section 8.2 of the NPA. (E.g., JA-23 Exs. B5-11 at 16). Prior to that date, however, QWI decided for tax reasons to restructure the deal as a "purchase" of the Notes by QWUSA, which it was permitted to do pursuant to Section 8.6 of the NPA. (Appellant's Br. at 11-12). Thus, on October 25, 2007, QWUSA provided notice to the Noteholders that it would pay the "Redemption Price" set forth in the earlier Notice of Redemption, which would "result in QWUSA purchasing the Notes." (E.g., JA-23 Exs. B12-18 at 1).
For the reasons discussed above, the order of the Bankruptcy Court is AFFIRMED. The Clerk of Court is directed to close this case.
SO ORDERED.
