Payments to Investors in a Securitization Structure Protected from Avoidance

In what appears to be a matter of first impression, the Bankruptcy Court for the Northern District of Illinois recently held that payments made to investors in the two-tiered securitization structures commonly employed in commercial mortgage-backed securitization (CMBS) transactions are largely protected from fraudulent or preferential transfer claims by the securities contract safe harbor set forth in Bankruptcy Code section 546(e). Specifically, in Krol v. Key Bank National Ass'n (In re MCK Millennium Centre Parking, LLC), 2015 WL 1951036 (Bankr. C.D. Ill. April 30, 2015), the court held that payments by a debtor to a commercial bank on account of a loan, where the promissory note evidencing the loan was held by a real estate mortgage conduit (REMIC) trust, could be integrated with the trust's distribution of the loan payments to its investors under a pooling and servicing agreement such that the payments constituted transfers in connection with a securities contract and thus, were unavoidable.