Document Type
Research Memorandum
Publication Date
2017
Abstract
(Excerpt)
The Bankruptcy Code allows trustees and debtors-in-possession to invoke certain provisions of the United States Bankruptcy Code (“Bankruptcy Code”) to “avoid” particular types of transfers. The types of transfers that a debtor can “avoid” are defined rather broadly. However, one significant exception to this “avoidance power” is section 546(e) and its safe harbor defense. Courts have often wrestled with how to settle the meaning of section 546(e) and how to define the boundaries of the provision’s safe harbor defense. First and foremost, it is important to note that Congress enacted section 546(e) as the safe harbor defense statute in 1982 to be used as a means of “minimizing the displacement caused in the commodities and securities markets in the event of a major bankruptcy within those industries.”
Originally, the safe harbor defense exclusively applied to “margin payments made by commodities clearing organizations.” However, the nature of the financial markets became increasingly complex and the issues that emerged became more difficult to handle; therefore, Congress needed to broaden the safe harbor defense’s scope to encompass the newly emerging complexities. Through the enactment of section 546(e), the safe harbor defense’s scope was broadened to expand its protections “beyond the ordinary course of business transactions to include margin and settlement payments to and from brokers, clearing organizations, and financial institutions.” Ultimately, Congress sought to prevent catastrophic risks to the financial markets and to thwart spiraling effects that may ensue from unwinding certain security transaction.
Regardless of the uncertainties about when to utilize the safe harbor defense and what limitations should be imposed, Congress has been reluctant to clarify the outer limits of the safe harbor defense. Essentially, these issues have become problematic for judges when trying to determine whether permitting a party to assert the safe harbor defense is appropriate.
Section 546(e) has been amended throughout the years, which has enhanced the difficulties that emerge when a party asserts the safe harbor defense. In 2005, the scope of the term “securities contract” was significantly broadened to encompass various types of securities transactions. Further, in 2006, section 546(e) was amended by the Financial Netting Improvements Act to exclude from avoidance “transfers made in connection with a securities contract, commodity contract or forward contract.”
Throughout this memo, I will address what the safe harbor defense is, pursuant to section 546(e), and explain when such a defense may be asserted. In addition, I will discuss the caveat created between the safe harbor defense and 11 U.S.C. § 548(a)(1)(A)13, and I will address the safe harbor defense’s limitations when actual knowledge of fraud can be established.