Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Insurance (In re Quebecor World (USA) Inc.)Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Insurance (In re Quebecor World (USA) Inc.)
OPINION AND ORDER
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”&emdash;that is, recaptured as part of the bankruptcy estate&emdash;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 Ap-pellees’ 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.),
BACKGROUND
A. The Statutory Scheme
As noted, this case concerns the authority of a bankruptcy trustee to avoid and thus recapture “preferential” transfеrs. 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,
Section 546(e) of the Bankruрtcy 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, plаcing other market participants and the securities markets themselves at risk.”
B. Facts
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,
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 рrincipal owed, accrued interest, and a “make-whole” premium designed to compensate the Note-holders 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 seriеs 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 Nоteholders.' (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 Note-holders. (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 tо “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 QWU-SA purchasing thе 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 Note-holder 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 thе 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 Note-holders 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 evidentia-ry 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,
In a thorough opinion dated July 27, 2011, Judge Peck granted the Nоteholders’ motion for summary judgment. See Quebecor,
This appeal followed.
DISCUSSION
A. Jurisdiction and Standard of Review
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,
B. The Safe Harbor for Settlement Payments
The first question on appeal is whether the payments at issue qualify as settle
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,
Significantly, in reaching that conclusion, the majority rejected three limitаtions 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
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.,
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&emdash;a settlement payment, quite simply, is a ‘transfer of cash [to a financial institution] ... made to complete [a] securities transaction.’ ” Quebecor,
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 cоntends 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
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 fоr 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,
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,
C. The Safe Harbor for Payments in Connection with a Securities Contract
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 or to (or for the benefit of) a ... financial institution ... in connection with a securities contract.” Quebecor,
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&emdash; that is, Section 546(e) itself&emdash;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,
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.,
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.
Notes
. Another provision of the Code defines settlement payment in the context of forward con
. In addition to their briefs, the parties have submitted a Joint Appendix, comprised of forty-seven documents. "JA-[NUMBER]” refers the relevant document in this Appendix.
. The Second Circuit denied the Enron Creditors Committee’s petition for rehearing or for rehearing en banc on December 2, 2011. (See Annex to Appellees’ Br.)
. Nor does Appellant dispute that some of the Noteholders would qualify as financial institutions in their own right.
. Even if Section 546(e) could be limited to payments that, if avoided, might trigger systemic risks to the marketplace, the payments in this case might well qualify. As the Bankruptcy Court explained, the Noteholders are large financial institutions that "customarfily] participate] in the secondary market for private placements notes,” a market in which “holdings routinely are traded from one institution to another.” Quebecor,
. Moreover, the "securities contract” prong of Section 546(e) was only added to the slat-
. Strictly speaking, although the amended notices stated that QWUSA was purchasing the Notes pursuant to Section 8.2 of the NPA, that provision governs redemptions by QWI. Section 8.6 allowed QWI or an affiliate such as QWUSA to purchase the Notes "(a) upon the payment or prepayment of ... the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to an offer to purchase made ... pro rata to the holders of all Notes at the time outstanding at the same time and upon the same terms and conditions.” (JA-23 Exs. Al, A2 § 8.6). The fact that the amended notice cited Section 8.2 rather than Section 8.6, however, does not change the essential fact that the deal was ultimately structured as a purchase. Nor does the fact&emdash;emphasized by Appellants (Appellant’s Br. at 23)&emdash;that some Noteholders treated the transaction as a redemption rather than a purchase, by, for example, stamping "PAID IN FULL” on the Notes returned to QWI.
. It could be argued that the transfers qualify for the safe harbor whether or not they were redemption or purchase payments because, either way, they were made in connection with the NPA and the NPA qualifies as a