Document Type
Research Memorandum
Publication Date
2024
Abstract
(Excerpt)
A bankruptcy trustee may not avoid a margin or settlement payment made by, to, or for the benefit of a financial institution (or another covered entity) when the payment is made in connection with a securities contract as defined in section 741(7) of title 11 of the United States Code (the "Bankruptcy Code"). "A transfer is ‘in connection with' a securities contract if it is 'related to' or 'associated with’ the securities contract.' A bankruptcy trustee may avoid a covered transaction only if it was made with actual intent to hinder, delay, or defraud creditors. The purpose of Section 546(e) of the Bankruptcy Code is to provide a safe harbor for qualified transactions to "protect the nation’s financial markets from the instability caused by the reversal of settled securities transactions."
Section 546(e) does not specify the type of securities it covers. Courts are split about whether Section 546(e) protects transactions involving private securities. On one hand, some courts have taken a narrow view that Section 546(e) only applies to public securities because the goal of this provision was to protect the securities market. On the other hand, courts in the majority view hold that transactions involving private securities fall under Section 546(e) because the statute is unambiguous and does not limit the type of securities it covers.
This memorandum explores (1) whether transactions involving private securities fall within the Section 546(e) safe harbor provision, and (2) whether a financial institution that made or received the transaction must have a financial interest in the transaction.