Each year U.S. bankruptcy courts decide hundreds of cases in which debtors, or their trustees, seek to avoid preferential payments. In many of these cases, creditors successfully defend themselves by convincing the court that a statutory safe harbor provision is applicable. The settlement payment defense is one safe harbor provision that—although frequently utilized by creditors—has consistently raised questions about its own scope and applicability. The Second Circuit answered some of these questions, for the first time, in In re Enron Creditors Recovery Corp. In what some believe was an expansive decision, the court held that the settlement payment defense is broad enough to cover the redemption of commercial paper. This memorandum analyzes the history of the settlement payment defense and decides that Enron is really not as expansive as it appears.
Part I of this memorandum identifies the relevant sections of the Bankruptcy Code (“the Code”) and describes the policy concerns behind them. Part II discusses the facts, rules, and rationales of six circuit court decisions that have interpreted the scope of the settlement payment defense. Finally, Part III concludes by comparing Enron to the six decisions discussed in Part II and decides that Enron did not expand the scope of the defense, but merely restated a rule that was already being applied in other circuits.