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Seventh Circuit Reads Bankruptcy Safe Harbor Broadly

By Michael L. Cook

The United States Court of Appeals for the Seventh Circuit, on March 19, 2014, held that a corrupt debtor's pre-bankruptcy cash transfer to a commodity broker was a “settlement payment” made “in connection with a securities contract,” thus falling “within [Bankruptcy Code] ' 546(e)'s safe harbor” and insulating the transfer from the trustee's preference claim. Grede v. FCStone, LLC (In re Sentinel Management Group, Inc.), 2014 WL 1041736, *7 (7th Cir. Mar. 19, 2014).

Reversing the district court's “policy” decision that “Congress could not have intended the safe harbor provisions to apply” to this case, the Court of Appeals stressed that ' 546(e) makes no ” exception for preferential transfers, although it does make an exception for actual fraud,” a claim the bankruptcy trustee never made. Id. at *8. As the court explained, “Congress enacted ' 546(e) to prevent a large bankruptcy from triggering a wave of bankruptcies among securities businesses ' . Those dealing in securities have an interest in knowing that a deal, once completed, is indeed final so that they need not routinely hold reserves to cover the possibility of unwinding the deal if a counter-party files for bankruptcy in the next 90 days. ' [E]ven a short term lack of liquidity can prove fatal to a commodity broker or other securities business.” Id. at *9.

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