A Safe Harbor For Trustees And Bondholders: Using Section 546(E) To Protect Trustees And Bondholders From Avoidance Actions

Section 546(e) of the Bankruptcy Code offers a strong defense for holders of bonds, notes and other securities to preference and fraudulent transfer actions brought in bankruptcy proceedings. Essentially, any payment made to settle or complete a securities transaction, including repurchases and redemptions of bonds, notes and debentures, is protected from avoidance under the Bankruptcy Code. For many years, however, this powerful defense was rarely used. When the defense was raised, it was usually in the context of protecting payments made in leveraged buy-outs. Bankruptcy courts were often hostile to the defense and narrowly interpreted the application of the defense to limit its use. Over the last several years, however, the use of the section 546 safe harbors has come to the forefront, as debtors and liquidating trustees have attempted to avoid commercial paper transactions and note redemptions, leveraged buyouts, and transfers made to customers from large brokerage