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ARTICLE · 02 NOVEMBER 2016

Interest Payments Do Not Qualify As Protected Settlement Payments Under Section 546(e)

Pierson Ferdinand LLP
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The bankruptcy court stated that "while Madoff applies an expansive scope for a protected ‘securities contract,' the current record provides no factual basis to support the defendants' argument."

United StatesInsolvency/Bankruptcy/Re-Structuring
Carl Neff
Carl Neff

In the decision of Motors Liquidation Co. Avoidance Action Trust v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), 552 B.R. 253 (Bankr. S.D.N.Y. 2016), the SDNY bankruptcy court held that prepetition interest payments on a term loan did not qualify as "settlement payments" under Section 546(e) of the Bankruptcy Code. The court also found that the record did not establish whether they qualified as transfers in connection with a securities contract within the meaning of section 546(e).

By way of brief background, the debtor filed preference actions against holders of interests in a term loan, to recover interest payments made within the 90 days before the bankruptcy filing. Defendants moved to dismiss, asserting that the interest payments were shielded from avoidance under section 546(e) as (i) settlement payments, and (ii) transfers in connection with a securities contract.

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