Vol 13 (2016) - Issue 6

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The Second Circuit Reaffirms the Broad Scope of the Safe Harbour under Section 546(e) of the Bankruptcy Code

On 24 March 2016, the United States Court of Appeals for the Second Circuit (the 'Second Circuit') ruled that state law constructive fraudulent transfer claims seeking to avoid payments made to former shareholders of the debtor Tribune Media Company ('Tribune') in a leveraged buyout ('LBO') were barred by the ‘safe harbour’ protection of Bankruptcy Code section 546(e). The decision builds on a growing number of cases in which the safe harbour has been interpreted broadly to protect various types of transfers made in connection with a securities contract from avoidance. This expansive application, however, may not be in line with Congress’ original intent of protecting the securities markets, and may cause an undue shift of value from creditors to recipients of the targeted transfers, especially when such transfers pose no systemic risk to securities markets.

The safe harbour under Bankruptcy Code section 546(e)
The Bankruptcy Code provides special protections, referred to as 'safe harbours', to non-debtor parties of certain financial contracts, including contracts for the purchase or sale of securities. For example, the automatic stay does not prevent a debtor’s counterparty from terminating a qualifying financial contract and offset the parties’ obligations, such contract may be terminated due to the debtor’s bankruptcy or insolvency (something that counterparties to other types of contracts cannot do), and transfers made in connection with such contracts cannot be avoided as a preference or fraudulent transfer.