United States: Financial Institution Payments: When Is A Preference Not A Preference?

Last Updated: October 10 2013
Article by Vicki Harding

Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Ins. Co. (In re Quebecor World (USA) Inc.), 719 F.3d 94 (2d Cir. 2013) –

Shortly before filing bankruptcy, the debtor made a ~$376 million payment to a financial institution in its capacity as trustee for a group of noteholders in order to repurchase the notes.  Normally the payment could have been avoided as a preference.  The question for the 2dnd Circuit was whether the payment came within one of the safe harbors in Section 546(e) of the Bankruptcy Code.

As a general matter, a payment (1) to or for the benefit of a creditor (2) on account of an antecedent debt (3) made while the debtor was insolvent and (4) within 90 days before the bankruptcy is filed that (5) allows the creditor to receive more than it would receive in a chapter 7 liquidation can be avoided as a preference under Section 547 of the Bankruptcy Code (subject to certain defenses – for example, transfers for new value or in the ordinary course of business).

However, Section 546 of the Bankruptcy Code includes limitations on bankruptcy avoiding powers, including preference actions.  Among other things, Section 546(e) provides (emphasis added):

[T]he trustee may not avoid a transfer that is a margin payment... or settlement payment... made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract... commodity contract,... or forward contract, that is made before the commencement of the case, except [transfers made with actual intent to hinder, delay or defraud a creditor].

In this case a sister company (QWCC) raised $371 million for a group of companies that included the debtor (QWUSA) and their parent (QWI) through a private placement of notes.  Under the note purchase agreement (1) QWCC had a right to prepay the notes as long as it paid principal, interest and a "Make Whole Amount," (2) affiliates were prohibited from buying the notes unless they complied with the prepayment provisions, and (3) once the notes were paid in full, they were to be surrendered to QWCC for cancellation.

After the companies ran into financial difficulties, the parent company offered to purchase a portion of the notes in exchange for modifying one of the financial covenants in order to avoid triggering a default and a cross default under a separate revolving credit facility.  The noteholders refused, but agreed not to sell their notes to anyone but an existing noteholder.

A couple of months later, QWCC gave notice that it intended to redeem all of the notes.  However, it then realized this would have led to severe tax consequences under Canadian law.  So the offer was restructured as a two-step transaction, with QWUSA first purchasing the notes from the noteholders for cash, followed by a QWCC redemption of the notes from QWUSA in exchange for forgiveness of inter-company debt.  Accordingly, QWUSA transferred ~$376 million to CIBC Mellon Trust Co. (CIBC Mellon), as trustee for the noteholders.  CIBC Mellon in turn distributed the funds to the noteholders, who surrendered the notes to QWI in Canada.

QWUSA filed bankruptcy less than 90 days later.  Its creditors' committee sought to avoid the payment and recover the cash as a preference under Section 547.  In response, the noteholders argued that the payments were exempt from avoidance under Section 546(e), both as settlement payments and as payments in connection with securities contracts.

The bankruptcy court held that the payments constituted exempt settlement payments.  It also found that they qualified as transfers made in connection with a securities contract, regardless of whether QWUSA was redeeming or purchasing the notes.  The district court affirmed on the basis that the payments were a settlement payment.  It did not agree that a transfer to redeem qualified, but concluded that the QWUSA payment was in fact a purchase.

The 2nd Circuit focused on the safe harbor for a transfer made to a financial institution in connection with a securities contract.  It noted a split of authority, with three circuits (6th Circuit, 8th Circuit and 3rd Circuit) deciding that any transfer to a financial institution qualifies, even if it is only serving as a conduit or intermediary.  Only the 11th Circuit has held that the financial institution must have some interest in the funds for a payment to qualify for the safe harbor.  The 2nd Circuit reached the same conclusion as the majority.

The parties agreed that CIBC Mellon was a financial institution, and the note purchase agreement was a securities contract – for  both the original purchase and the repurchase of the notes.  The 2nd Circuit determined that this qualified as a transfer made to a financial institution in connection with a securities contract, and thus affirmed the lower courts in finding that the QWUSA cash payment was exempt from avoidance as a preference.

It based its decision on the plain language of the statute:  In its view, the reference to transfers made "by or to (or for the benefit of)" a financial institution meant that a payment to, but not for the benefit of, an institution was covered.  It also found support for its decision in the public policy of minimizing the effect on the commodities and securities markets of a bankruptcy affecting those industries.  "A transaction involving one of these financial intermediaries, even as a conduit, necessarily touches upon these at-risk markets."  Recognizing the safe harbor promotes stability of the markets.

The limitations in Section 546, particularly subsection (e), have been interpreted by courts as having a very broad reach.  (See, for example, Protecting Utilities: Would You Believe a Bill Payment is a Settlement Payment Under a Forward Contract?)  Although it might be risky to rely on the safe harbor ahead of time, once you are faced with avoidance claims in a bankruptcy, anyone who can shoehorn themselves into one of the listed classes of financial intermediaries should definitely consider Section 546(e) as a possible defense.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Vicki Harding
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions