In re Enron Creditors Recovery Corp..

• Decision Date: 28 June 2011
• Docket Number: 09–5142–bk (Con).,Docket Nos. 09–5122–bk (L)
• Citation: 65 Collier Bankr.Cas.2d 1833,651 F.3d 329,55 Bankr.Ct.Dec. 12
• Parties: In re ENRON CREDITORS RECOVERY CORP., Appellant,v.ALFA, S.A.B. DE C.V., ING VP Balanced Portfolio, Inc., ING VP Bond Portfolio, Inc., Appellees.
• Court: U.S. Court of Appeals — Second Circuit

651 F.3d 329

65 Collier Bankr.Cas.2d 1833

55 Bankr.Ct.Dec. 12

In re ENRON CREDITORS RECOVERY CORP., Appellant,

v.ALFA, S.A.B. DE C.

v., ING VP Balanced Portfolio, Inc., ING VP Bond Portfolio, Inc., Appellees.

Docket Nos. 09–5122–bk (L)

09–5142–bk (Con).

United States Court of Appeals, Second Circuit.

Argued: Nov. 3, 2010.Decided: June 28, 2011.

Michael Schatzow (Robert L. Wilkins, Mitchell Y. Mirviss, Colleen M. Mallon, Richard L. Wasserman, on the brief), Venable LLP, Baltimore, MD, for Appellant Enron Creditors Recovery Corp.Michael L. Cook (Brian C. Tong, on the brief), Schulte Roth & Zabel LLP, New York, NY, for Appellee Alfa, S.A.B. de C.V.Sabin Willett (Mark M. Elliott, Eric Heining, on the brief), Bingham McCutchen LLP, Boston, MA, for Appellees ING VP Balanced Portfolio, Inc., and ING VP Bond Portfolio, Inc.Mark D. Cahn, Deputy General Counsel (Morgan Bradylyons, Attorney, Jacob H. Stillman, Solicitor, Katharine B. Gresham, Assistant General Counsel), on the brief, Securities and Exchange Commission, Washington DC, for amicus curiae Securities and Exchange Commission.Joshua D. Cohn (Christopher J. Houpt), on the brief, Mayer Brown LLP, New York, NY, for amicus curiae Securities Industry and Financial Markets Association.Before: JOHN M. WALKER, JR., CABRANES, Circuit Judges, and KOELTL, District Judge.^*Judge KOELTL dissents in a separate opinion.JOHN M. WALKER, JR., Circuit Judge:

This appeal raises an issue of first impression in the courts of appeals: whether 11 U.S.C. § 546(e), which shields “settlement payments” from avoidance actions in bankruptcy, extends to an issuer's payments to redeem its commercial paper prior to maturity. Enron Creditors Recovery Corp. (“Enron”) ¹ seeks to avoid and recover payments Enron made to redeem its commercial paper prior to maturity from Appellees Alfa, S.A.B. de C.V. (“Alfa”), ING VP Balanced Portfolio, Inc., and ING VP Bond Portfolio, Inc. (collectively, “ING”), whose notes were redeemed by Enron. Alfa and ING argue that § 546(e) protects these payments from avoidance.

The Bankruptcy Court for the Southern District of New York (Arthur J. Gonzalez, Bankruptcy Judge ) concluded that § 546(e)'s safe harbor does not protect Enron's payments from avoidance because they were made to retire debt, not to purchase securities, and because they were extraordinary. The District Court for the Southern District of New York (Colleen McMahon, Judge ) held that Enron's payments do fall within the safe harbor, reversed the Bankruptcy Court's decision, and remanded with instructions to enter summary judgment in favor of Alfa and ING.

On appeal, Enron challenges the district court's conclusion that the safe harbor protects Enron's redemption payments whether or not they were made to retire debt or were unusual. Because we agree with the district court that Enron's proposed exclusions from the reach of § 546(e) have no basis in the Bankruptcy Code, we AFFIRM its decision and order.

BACKGROUND

After a series of events in the latter half of 2001, including the resignation of its CEO, Jeffery Skilling, its announcement of $600 million in third-quarter losses, the commencement of an SEC investigation into its practices, and the correction of four years' worth of financial statements, Enron, a Houston-based energy company, collapsed. See, e.g., David S. Hilzenrath, Early Warnings of Trouble at Enron, Wash. Post, Dec. 30, 2001, at A10.

On December 2, 2001, Enron petitioned for Chapter 11 bankruptcy. This appeal arises out of Enron's attempt to avoid and recover pre-petition payments it made to redeem, prior to maturity, commercial paper it had issued.

I. Facts

Between October 25, 2001 and November 6, 2001, Enron drew down on its $3 billion revolving lines of credit and paid out more than $1.1 billion to retire certain of its unsecured and uncertificated commercial paper prior to the paper's maturity. Enron redeemed the commercial paper at the accrued par value, calculated as the price originally paid plus accrued interest. This price was considerably higher than the paper's market value.

The offering memoranda that accompanied the issuance of the commercial paper provided that the “Notes are not redeemable or subject to voluntary prepayment by the Company prior to maturity.” This provision prohibited calls and puts: Enron could not force investors to surrender the notes and the investors could not require Enron to prepay them.

The Depository Trust Company (the “DTC”), a clearing agency, maintained bookkeeping entries that tracked ownership of Enron's commercial paper. This is the customary tracking method in the industry. Every issuer of commercial paper has an issuing and paying agent (“IPA”) within the DTC to issue commercial paper and to pay at maturity or at an early redemption.

Three broker-dealers, J.P. Morgan, Goldman, Sachs & Co., and Lehman Brothers Commercial Paper, Inc., participated in Enron's redemption. They received the commercial paper from the individual noteholders and paid them the redemption price. The mechanics of these transfers were as follows. The DTC debited the redemption price from each broker-dealer's account and credited it to the noteholder's DTC account. The broker-dealers then transferred the notes to the DTC account of Enron's issuing and paying agent, Chase IPA, and received payment from Enron through the DTC. Immediately after the broker-dealer received payment, the commercial paper Enron redeemed was extinguished in the DTC system. Confirmations of these transactions referred to them as securities trades, termed them “purchases” from the holders, and referenced a “trade date” and “settlement date.”

Prior to these transactions, ING and Alfa owned Enron commercial paper in the amount, respectively, of $48,200,000 and $5,667,255. They both agreed to transfer their commercial paper to broker-dealer J.P. Morgan in exchange for the redemption price.

The parties dispute the circumstances and motives surrounding Enron's redemption. Enron argues that it made the redemption payments under pressure from noteholders seeking to recover on their investments amidst rumors of Enron's imminent implosion. Alfa and ING argue that Enron redeemed its commercial paper to “calm the irrational markets” and leave a favorable impression that would allow it to reenter the commercial paper market once “bad publicity” about the company's stability “had blown over.” They argue that the redemption was an economically rational move that allowed Enron to refinance its existing commercial paper debt with debt at a lower interest rate.

II. Procedural History

In November 2003, two years after Enron filed for bankruptcy, the reorganized entity brought adversary proceedings against approximately two hundred financial institutions, including appellees Alfa and ING, seeking to avoid and recover the redemption payments. It alleged that the payments were recoverable as (1) preferential transfers under 11 U.S.C. § 547(b), because they were made on account of an antecedent debt within ninety days prior to bankruptcy, and (2) constructively fraudulent transfers under 11 U.S.C. § 548(a)(1)(B), because the redemption price exceeded the commercial paper's fair market value.

In 2004, the defendants in the adversary proceedings moved to dismiss Enron's complaint for failure to state a claim. They argued that the redemption payments were “settlement payments” protected from avoidance under 11 U.S.C. § 546(e)'s safe harbor.

Section 546(e) provides, in relevant part, that

[n]otwithstanding sections ... 547 [and] 548(a)(1)(B) ... of this title, [which empower the trustee to avoid preferential and constructively fraudulent transfers,] the trustee may not avoid a transfer that is a ... settlement payment, as defined in section ... 741 of this title, made by or to (or for the benefit of) a ... stockbroker, financial institution, financial participant, or securities clearing agency ... that is made before the commencement of the case, except under section 548(a)(1)(A) of this title [, which empowers the trustee to avoid transfers made with actual intent to hinder, delay, or defraud creditors].

Section 741(8) of Title 11, 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.”

The bankruptcy court denied the motion to dismiss. It held that the phrase “commonly used in the securities trade” in § 741(8) modifies all the terms in the section's definition and thereby limits protected “settlement payments” to those that are common in the industry. In re Enron Corp., 325 B.R. 671, 685–86 & n. 7 (Bankr.S.D.N.Y.2005) (“ Enron I ”). The bankruptcy court held that evidence was necessary to determine whether the redemption payments were commonly used, rather than, as Enron alleged, extraordinary because they resulted from coercion by holders of the commercial paper. Id. at 686. It also held that a factual issue existed over whether Enron's redemption payments were made to retire debt or to purchase the commercial paper, and that this distinction could affect whether the payments constituted settlement payments. Id. Most of the defendants settled with Enron after Judge Gonzalez denied their motions to dismiss.

Following discovery, Alfa and ING, relying on § 546(e)'s safe harbor, moved for summary judgment. The bankruptcy court denied the motions. In re Enron Creditors Recovery Corp., 407 B.R. 17, 45 (Bankr.S.D.N.Y.2009) (“ Enron II ”). Concluding that “the transfer of ‘ownership’ of a security is an integral element in the securities settlement process,” it held that “settlement payments” include only payments made to buy or sell securities and not payments made to retire debt. Id. 37–41. The bankruptcy court relied on our decision in SEC v. Sterling Precision Corp., 393 F.2d 214 (2d Cir.1968)...