Settlement Payments Doctrine Exempts from Avoidance Commercial Paper Redemptions Made Through DTC — Rule of the Last Antecedent

From Alfa, S.A.B. de C.V. v. Enron Creditors Recovery Corp., 2009 U.S. Dist. LEXIS 123259 (S.D.N.Y. Nov. 20, 2009):

The instant appeal is limited to a single question — whether the § 546(e) "safe harbor," which bars avoidance of transfers that constitute "settlement payments" made in connection with transactions in securities, extends to transactions in which commercial paper is redeemed by the issuer prior to maturity, using the customary mechanism of the Depository Trust Company (the "DTC") for trading in commercial paper (the "Redemption"), without regard to extrinsic facts about the nature of the Redemption, the motive behind the Redemption, or the circumstances under which the payments were made. Defendants, supported by the Securities and Exchange Commission (the "SEC"), take the position that the prepayment (redemption) of debt evidenced by commercial paper (which no one seriously disputes is a "security" as that term is used in the Bankruptcy Code), using the mechanism of the DTC, is a "transaction in securities." They further argue that every payment made to close out such a transaction qualifies as a "settlement payment" as long as it is effected by a broker or financial institution, without regard to whether the underlying transaction was out of the ordinary from a commercial point of view. Enron takes the opposite position: that the prepayment of debt is not a "transaction in securities" because there was no "purchase or sale" of securities. For that reason, Enron argues, the payment used to effect the redemption and retirement of the debt securities does not qualify as a "settlement payment," no matter the role of the DTC or any broker or financial institution.

Judge Gonzalez accepted Enron's argument.

For the reasons explained below, the decision of the bankruptcy court is reversed. ***

Relevant Statutory Language

Section 546 of the Bankruptcy Code (Title 11 of the United States Code), entitled "Limitation on avoiding powers," sets out the limitations on a trustee's or debtor-in-possession's right to avoid certain pre-petition transfers, including those made within ninety days of the filing of a petition (preferences), or one year if the transfer was made to an insider. See 11 U.S.C. § 546(e); 547(b)(4) (trustee's avoidance powers). Section 546(e) of the Bankruptcy Code provides a "safe harbor" by exempting from that avoidance certain types of payments that are commonly employed in connection with transactions in securities markets. In relevant part, the "safe harbor" provides that a trustee or debtor-in-possession may not avoid a

settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency.

11 U.S.C. § 546(e).

Section 741(8) of the Bankruptcy Code, to which Section 546(e) specifically refers, defines the term "settlement payment" tautologically, as "a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade." Id. § 741(8). ***

B. The Rule of the Last Antecedent

Conventions of statutory construction support reading section 546(e) as not limited to ordinary course transactions. As this Court explained in J.P. Morgan Chase Bank N.A. v. Baupost Group, LLC, 380 B.R. 307 (S.D.N.Y. 2008), where, as here, no contrary intention appears, the "rule of the last antecedent" provides that a limiting clause or phrase should ordinarily be read as modifying only the noun or phrase that it immediately follows. Id. at 319. The Supreme Court has stated that it is "quite sensible as a matter of grammar" to construe statutes in conformity with the rule of the last antecedent. See Nobelman v. Am. Savings Bank, 508 U.S. 324, 330, 113 S. Ct. 2106, 124 L. Ed. 2d 228(1993).

In Barnhart v. Thomas, 540 U.S. 20, 124 S. Ct. 376, 157 L. Ed. 2d 333 (2003), Justice Scalia explained the rule of the last antecedent by analogy:

Consider, for example, the case of parents who, before leaving their teenage son alone in the house for the weekend, warn him, "You will be punished if you throw a party or engage in any other activity that damages the house." If the son nevertheless throws a party and is caught, he should hardly be able to avoid punishment by arguing that the house was not damaged. The parents proscribed (1) a party, and (2) any other activity that damages the house. As far as appears from what they said, their reasons for prohibiting the home-alone party may have had nothing to do with damage to the house — for instance, the risk that underage drinking or sexual activity would occur. And even if their only concern was to prevent damage, it does not follow from the fact that the same interest underlay both the specific and the general prohibition that proof of impairment of that interest is required for both. The parents, foreseeing that assessment of whether an activity had in fact "damaged" the house could be disputed by their son, might have wished to preclude all argument by specifically and categorically prohibiting the one activity — hosting a party — that was most likely to cause damage and most likely to occur.

Id. at 27-28.

Applying this grammatical precept to the statutory language at issue in this case, the limiting phrase — "commonly used in the securities trade" — cannot be read to modify anything other than the last antecedent that precedes it —"other similar payment." See 11 U.S.C. § 741(8). Thus, "settlement payment" as that phrase is defined in section 741(8), is not limited to "payments commonly used in the securities trade." See id. Rather, the phrase "settlement payment," as used in section 546(e), includes any payment in settlement of a securities transaction.

Interpreting the language of the Bankruptcy Code according to the rule of the last antecedent also preserves the intent of the statute's drafters. In 1982, Congress broadened the scope of the safe harbor, in part to capture transactions "beyond the ordinary course of business." Kaiser I, 913 F.2d 846, 849 (10th Cir. 1990) (emphasis added, footnote omitted). There is no compelling reason to torture grammar in this case in order to reach a result that appears to undermine the intent of Congress.

For the above reasons, this court reverses the holding of the Bankruptcy Court insofar as it limited the definition of settlement payment — and restricted the availability of Section 546(e)'s safe harbor from avoidance — to payments "commonly made" in the securities trade (i.e., made in connection with ordinary course securities transactions).

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