APPLICABILITY OF US BANKRUPTCY CODE’S SAFE HARBOUR FOR SECURITIES CONTRACT TRANSACTIONS
The complexities of corporate transactions continue to produce interesting decisions when those transactions are followed by an insolvency or bankruptcy.
Some of the most cutting-edge insolvency litigation involves the complex safe harbour provisions in the US bankruptcy code. Recently, the US court of appeals for the second circuit issued a summary order in in re Boston Generating, LLC, that affirmed dismissal of fraudulent transfer claims brought by a liquidating trustee because the transaction at issue qualified for the code’s safe harbour protections for securities contracts. On 24 February 2025, the US Supreme Court denied the certiorari petition filed by the liquidating trustee. Accordingly, the dismissal of the fraudulent transfer claims is now final.
While the order is not precedential, it provides insight into how the second circuit analyses whether the code’s safe harbour provisions apply to a securities transaction and, consequently, how those provisions can defeat fraudulent transfer claims brought against a transfer recipient.
Background and prior decisions
The bankruptcy code provides trustees in bankruptcy cases ‘avoidance’ powers that allow them to negate or nullify some of a debtor’s pre-bankruptcy transactions. Section 546(e) of the code, however, limits those avoidance powers in certain respects.
Notably, it limits a trustee’s power to avoid a pre-bankruptcy transfer that is a “settlement payment”, a payment made in connection with a “securities contract”, or another specified type of transfer if “made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency”.
Apr-Jun 2025 issue
King & Spalding LLP