Section 546(e) of the Bankruptcy Code provides a “safe harbor” defense to a bankruptcy trustee's power to avoid pre-bankruptcy (i.e., prepetition) preferential and fraudulent transfers. Under 546(e), a trustee may not avoid a transfer by a debtor that is a settlement payment in connection with a securities contract, a commodities contract, or a forward contract, made by, to, or for the benefit of, one of the following entities: a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency. Each of these terms is defined separately in the Bankruptcy Code.
Addressing an issue of first impression, the Second Circuit Court of Appeals recently held that a chapter 11 debtor's prepetition payments for early redemption of its publicly traded commercial paper were "settlement payments" under section 546(e) of the Bankruptcy Code. Accordingly, the hundreds of millions of dollars paid out by Enron to redeem its short-term commercial paper during the days before its bankruptcy filing were shielded from preference and fraudulent transfer avoidance actions in bankruptcy. In re Enron Creditors Recovery Corp., 651 F.3d 329 (2d Cir. June 28, 2011).