financial instruments - latham & watkins

ArticleReprintWithourcompliments

Reprinted from

Collier Bankruptcy Practice Guide

2008

Safe Harbors related to Close Out of Complex Financial InstrumentsBy Mark A. Broude and Skanthan Vivekananda

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Thisarticlewillappearinthesecondchapterofthe2008updateoftheCollier Bankruptcy Practice Guide.Copyright©2008

[1]—Introduction

“Derivatives,”suchasswaps,options,orfutures,arerisk-shiftingagreementsthatderivetheirvaluefromthevalueofanunderlyingasset.Theunderlyingassetcouldbeaphysicalcommodity,aninterestrate,acompany’sstock,astockindex,acurrency,orvirtuallyanyothertradableinstrumentuponwhichtwopartiescanagree.1

Borrowersandlendersinfinancingstructuresareincreasinglyutilizingsuchfinancialinstrumentsforavarietyofpurposesrelatingtoafinancing.Forexample,theborrowerinafloatingratecreditfacilitymayseparatelyenterintoaninterestrateswapagreementwiththelenderorathirdpartytohedgeitsexposuretointerestratefluctuations.Alternatively,iftheborrowerisborrowingmoneyinonecurrencybutconductsitsoperationsinanothercurrency,itmayenterintoacurrencyswaptohedgeitsexposuretocurrencyfluctuations.Borrowerssuchasprivateinvestmentfundsalsofrequentlyusederivativesasamethodofleveragingtheirinvestmentsandthuspotentiallyincreasingtheirreturns(ormagnifying

theirlosses).Lendersholdingthedebtofcertainobligorsfrequentlypurchasecreditprotectionwithrespecttosuchobligorsbyenteringintocreditdefaultswapagreements.

TheBankruptcyCodetreatstheseagreementssimilarlytoother,moretraditional,transactions,suchastransactionsrelatingtothepurchaseorsaleofsecuritiesorcommodities.

Inparticular,theBankruptcyCodecontainsanumberofinter-relatedprovisionsthatprovidespecialrightsandsafeharborstonon-debtorcounterpartiestocertaincategoriesoffinancialtransactions.ThissectionwillreviewthesafeharborsintheBankruptcyCoderelatingtothecloseout,liquidation,acceleration,termination,nettingandsetoffofobligationsandtheuseofcollateraltosatisfyobligations,ineachcase,withrespecttosuchfinancialcontractsundertheBankruptcyCode.Thesecontractsincludecommoditycontracts,securitiescontracts,forwardcontracts,repurchaseagreements,swapagreementsandmasternettingagreements.

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[2]—Statutory History

Partiestofinancialtransactionsfrequentlyrelyuponacomplexchainofguaranteesandaccountsinvolvingseverallayersoffinancialintermediation.Atsomepointinthischain,twointermediaries“clear”theirrespectiveobligationsthroughacentralclearingorganization.Forexample,inthecontextofasecuritiestransactionbetweenabuyingbrokerandasellingbroker,bothpartiesmayarrangefortheircounterpartytobeacentralclearingorganization.Afterthetradeisexecuted,theclearingagencywouldberesponsibleforthetransferofthesecuritiesandfunds,andgenerallyguaranteesettlement.Toguaranteesettlement,theclearingagencywouldinterposeitselfbetweenthecounterpartiesandbecomethebuyertothesellingbrokerandthesellertothebuyingbroker.2Inthiscontext,“[e]achparticipantinthechainguaranteesthatheorshewillmakegoodonhisorherobligation.Thebuyingbrokerguaranteesthatheorshewilldeliverfundsinexchangeforthesecurities.Thesellingbrokerguaranteeshewilldeliverthesecurityinexchangeforfunds.Becausethecomparisonandsettlementprocessisnotinstantaneous,however,theclearingagencymustguaranteetothesellerthatitwilldeliverthefunds,anditmustalsoguaranteetothebuyerthatitwilldeliverthesecurities.Intheeventofadefaultbyanypartyinthechain,theclearingagencymuststillmakegoodonitsguarantee,whichitcandobycallingonabackupclearingfundprovidedbyitsmembers.Brokersandotherintermediariesrequirecollateralizationoftheirrespectiverisksbymeansofvarioustypesofmarginpayments.Thissystemdependsupontheavailabilityoftherespectiveguaranteestotheclearingagency;withoutthem,thepotentialexposureistremendous.”3

Becauseoftheinterdependentnatureofthissystem,ifafinancialinstitutionthatispartytoalarge

volumeofcommoditiesorsecuritiestransactionsfilesforbankruptcyanditscounterpartiesweresubjecttotheautomaticstay,theavoidancepowersofthetrusteeandcertainotherlimitationstowhichacreditorwouldotherwisebesubjectundertheBankruptcyCode,thebankruptcyofthefinancialinstitutioncouldthreatenthesolvencyofitscounterpartiesaswellasanycentralclearingorganizationstandinginthemiddleofthesetrades.This,inturn,couldaffectthestabilityoftherelevantmarketasawhole.Therefore,whenCongressinitiallyenactedtheBankruptcyCodein1978,itprovidedcertainprotectionstopartiesengagedincommoditiestransactionstopreventtheinsolvencyofonecommodityfirmfromspreadingtootherfinancialinstitutionsorclearingagenciesandpossiblythreateningthecollapseoftherelevantmarket.4

In1982,duetoconcernsaboutthescopeofthesesafeharborsinthecontextofsecuritiesandforwardtransactions,similarprotectionsforthosetypesoftransactionswereaddedsothatthepromptclosingoutandliquidationofsecuritiescontractsandforwardcontractswouldminimizethepotentialforchainreactionstooccurinthesecuritiesmarket.5In1984,theBankruptcyCodewasfurtherrevisedtoaddcertainprotectionstocounterpartiestorepurchaseagreements.6

Thedevelopmentandwidespreaduseof“derivatives”wasarguablythemostsignificanteventinfinanceinthe1990s.7FinancialinstitutionsincreasinglylargeexposuresinconnectionwiththesefinancialinstrumentspromptedfurtherreformoftheBankruptcyCode.Inordertoensurethatthefinancialmarketsforswapagreementsandforwardcontractswerenotdestabilizedbyuncertaintiesregardingthetreatmentofthosefinancialinstruments,theBankruptcyCodewasrevisedin1990toaddsimilarprotectionsforcounterpartiestoswapagreementsandtorevisecertaindefinitionspertinenttoforwardcontracts.8

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ThisstatutoryframeworkwasfurtherrevisedandexpandedbytheBankruptcyAbusePreventionandConsumerProtectionActof2005(theBAPCPA).ThefinancialcontractprovisionsinthatstatutewereimplementedbyCongresspartiallyinresponsetotheRussianfinancialcrisisandthenearcollapseofthehedgefundLong-TermCapitalManagement,L.P.(LTCM)in1998.ThePresident’sWorkingGrouponFinancialMarketsfoundthattheabilitytoenforcecontractualprovisionspermittingtheterminationofcertainfinancialcontractsandthenettingoftheamountsdueupontheinsolvencyofacounterpartyallowedLTCM’scounterpartiestoreducetheirindividualcreditandmarketriskbyimmediatelyclosingouttheirpositionswithLTCM.9ThePresident’sWorkingGroupconcludedthattheavailabilityofsuchclose-outnettingenhancesmarketstabilitybylimitinglossestosolventcounterparties,byreducingprecipitousterminationsofcontracts,andbypreservingliquidityforthesolventcounterparties.10Inaseparatereport,ThePresident’sWorkingGroupnoteditssupportforthenpendingproposalsinCongressthatwouldimprovethenettingregimeundertheBankruptcyCodebyexpandingandclarifyingdefinitionsofthefinancialcontractseligiblefornettingandbyexplicitlyallowingeligiblecounterpartiestonetacrossdifferenttypesofcontracts,suchasswaps,securitycontracts,repurchaseagreementsandforwardcontracts.11ThoseproposalswereeventuallyincorporatedintotheBAPCPA.

In2006,infurtherresponsetothefindingsofThePresidentsWorkingGroup,thefinancialcontractsprovisionswereagainrevisedbytheFinancialNettingImprovementsActof2006(theFNIA).TheFNIAmadefurthertechnicalchangestotheBAPCPAbystrengtheningandclarifyingtheenforceabilityofearlyterminationandclose-outnettingprovisionsandrelatedcollateralarrangementsinUSinsolvencyproceedings,12aswellasproviding

enhancedprotectionsfromcertainavoidancepowers.

[�]—General

ThefinancialcontractprovisionsoftheBankruptcyCodearegenerallyintendedtopermitnon-debtorpartiestotakeactionthatisotherwiseprohibitedbytheBankruptcyCode.Inparticular,anon-debtorpartycanusethecommencementofabankruptcycaseasabasisforterminatingtheprotectedcontractandacceleratingobligationsthereunder(notwithstandingtheprohibitionon ipso factodefaultsinsection365(e)oftheBankruptcyCode)andanon-debtorpartymayapplyanycollateralpledgedtoitbythedebtortosatisfythedebtor’sobligationstothenon-debtorpartyundertheprotectedcontract(notwithstandingtheautomaticstayofsection362(a)oftheBankruptcyCode).Furthermore,certainprovisionsoftheBankruptcyCode,asexpandedbytheprovisionsoftheFNIA,areintendedtoinsulatecertainpre-petitiontransfersfrompost-petitionavoidance.

However,thefinancialcontractprovisionsoftheBankruptcyCodeareonlyavailabletocertainclassesofprotected counterpartiesexercisingcertainprotected rightsundercertaintypesofprotected transactions(thoughcertainofthesafeharborsdonotincludeallthreeofthesecriteria).Anycreditorseekingthebenefitofthefinancialcontractprovisionsshouldcarefullyreviewtherelevantsafeharborsandensurethatitfallsunderthedefinitionofaprotectedcounterparty,thattherightsitintendstoexerciseareprotected rightsandthattherelevantagreementfallsunderthedefinitionofaprotected transaction.SeeTable1belowforasummaryofprotectedcounterparties,protectedrightsandprotectedtransactionsunderthevarioussafeharbors.

Non-debtorpartiesseekingthebenefitofthesesafeharborsshouldalsobekeenlyawareoftherelevantversionsof

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theapplicablesafeharborordefinitionofaprotectedtransactionorprotectedcounterparty.Furthermore,non-debtorpartiesshouldconfirmtheapplicableversionoftheBankruptcyCodesafeharborsthatwillapply.TherevisionstotheBankruptcyCodeenactedbytheBAPCPAareonlyeffectiveincasescommencedonorafterOctober17,2005.TherevisionstotheBankruptcyCodeenactedbytheFNIAareonlyeffectiveincasescommencedonorafterDecember12,2006.

Table 1: Protected Counterparties, Protected Transactions and Protected Rights

SafeHarbor

ProtectedCounterparty

ProtectedTransaction

ProtectedRights

555 stockbroker,financialinstitution,financialparticipant,securitiesclearingagency

securitiescontract contractualrighttocauseliquidation,terminationoraccelerationbecauseofaconditionofthekindspecifiedinsection365(e)(1)

556 commoditybroker,financialparticipant,forwardcontractmerchant

commoditycontract,forwardcontract

contractualrighttocauseliquidation,terminationoraccelerationbecauseofaconditionofthekindspecifiedinsection365(e)(1)andtherighttoavariationormaintenancemarginpaymentreceivedfromatrusteewithrespecttoopencommoditycontractsorforwardcontracts

559 repoparticipant,financialparticipant

repurchaseagreement

contractualrighttocauseliquidation,terminationoraccelerationbecauseofaconditionofthekindspecifiedinsection365(e)(1)

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560 swapparticipant,financialparticipant

swapagreement contractualrighttocauseliquidation,terminationoraccelerationbecauseofaconditionofthekindspecifiedinsection365(e)(1)ortooffsetornetoutanyterminationvaluesorpaymentamounts

561 notspecified securitiescontract,commoditycontract,forwardcontract,repurchaseagreement,swapagreement,masternettingagreement

contractualrighttocausetheliquidation,terminationoraccelerationbecauseofaconditionofthekindspecifiedinsection365(e)(1)ortooffsetornetterminationvalues,paymentamounts,orothertransferobligations

362(b)(6) commoditybroker,forwardcontractmerchant,stockbroker,financialinstitution,financialparticipant,securitiesclearingagency

commoditycontract,forwardcontract,securitiescontract

anycontractualrightunderanysecurityagreementorarrangementorothercreditenhancementoranycontractualrighttooffsetornetoutanyterminationvalue,paymentamountorothertransferobligation

362(b)(7) repoparticipant,financialparticipant

repurchaseagreement

362(b)(17) swapparticipant,financialparticipant

swapagreement

362(b)(27) masternettingagreementparticipant

masternettingagreement

546(e) commoditybroker,forwardcontractmerchant,stockbroker,financialinstitution,financialparticipant,securitiesclearingagency

nonespecified transferthatisamarginpaymentorsettlementpayment

securitiescontract,forwardcontract,commoditycontract

transferinconnectionwithasecuritiescontract,commoditycontractorforwardcontract

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545(f) repoparticipant,financialparticipant

repurchaseagreements

transferinconnectionwitharepurchaseagreement

546(g) swapparticipant,financialparticipant

swapagreement transferunderorinconnectionwithanyswapagreement

546(j) masternettingagreementparticipant

masternettingagreement

transferunderorinconnectionwithanymasternettingagreementoranyindividualcontractcoveredthereby

[�]—Protected Transactions and Protected Counterparties

[�][a]—Protected CounterpartiesProtectedcounterpartiesincludecommoditybrokers,13forwardcontractmerchants,14stockbrokers,15securitiesclearingagencies,16repoparticipants,17swapparticipants18andfinancialinstitutions.19TheBAPCPAaddedmasternettingagreementparticipants20asprotectedcounterparties.TheBAPCPAalsoadded“financialparticipants”asaclassofprotectedparties.Creditorsshouldnotethatthedefinitionsofthesetermsdonotnecessarilycorrespondtothetradeusageoftheseterms.Furthermore,dependinguponthetypeofprotectedtransactioninvolved,onlycertainprotectedcounterpartiesmaygetthebenefitoftheBankruptcyCodesafeharborprovisions.

Section101(6)oftheBankruptcyCodestatesthata“commoditybroker”isa“futurescommissionmerchant,foreignfuturescommissionmerchant,clearingorganization,leveragetransactionmerchant,orcommodityoptionsdealer”thathasa“customer.”21“Customers”aredefinedinsection761oftheBankruptcyCodebyreferencetoeachoftheaforementionedtypesofcounterparties.

Section101(26)oftheBankruptcyCodestatesthat“forwardcontractmerchant”is“aFederalreservebank...anentitythebusinessofwhichconsistsinwholeorinpartofenteringintoforwardcontractsasorwithmerchantsinacommodity(asdefinedinsection761)22oranysimilargood,article,service,right,orinterestwhichispresentlyorinthefuturebecomesthesubjectofdealingintheforwardcontracttrade.”

Section101(53A)oftheBankruptcyCodestatesthata“stockbroker”isapersonwho(1)hasa“customer,”asdefinedinsection741oftheBankruptcyCode,and(2)whoisengagedinthebusinessofeffectingtransactionsinsecurities(i)fortheaccountofothersor(ii)withmembersofthegeneralpublic,fromorforsuchperson’sownaccount.

Section101(22)oftheBankruptcyCodedefines“financialinstitution”asaFederalreservebank,oranentitythatisacommercialorsavingsbank,industrialsavingsbank,savingsandloanassociation,trustcompany,federally-insuredcreditunion,orreceiver,liquidatingagent,orconservatorforsuchentityand,whenanysuchFederalreservebank,receiver,liquidatingagent,conservatororentityisactingasagentorcustodianforacustomer(whetherornota“customer,”asdefinedinsection741)inconnectionwitha

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securitiescontract,suchcustomer;or,inconnectionwithasecuritiescontract,aninvestmentcompanyregisteredundertheInvestmentCompanyActof1940.23

Section101(48)oftheBankruptcyCodestatesthata“securitiesclearingagency”isa“personthatisregisteredasaclearingagencyundersection17AoftheSecuritiesExchangeActof1934,orexemptfromsuchregistrationundersuchsectionpursuanttoanorderoftheSecuritiesandExchangeCommissionorwhosebusinessisconfinedtotheperformanceoffunctionsofaclearingagencywithrespecttoexemptedsecurities,asdefinedinsection3(a)(12)ofsuchActforthepurposesofsuchsection17A.”

Section101(38B)oftheBankruptcyCodedefinesa“masternettingagreementparticipant”as“anentitythat,atanytimebeforethedateofthefilingofthepetition,isapartytoanoutstandingmasternettingagreementwiththedebtor.”

Section101(46)oftheBankruptcyCodedefinesa“repoparticipant”as“anentitythat,atanytimebeforethefilingofthepetition,hasanoutstandingrepurchaseagreementwiththedebtor.”

TheBAPCPAaddedfinancialparticipantsasprotectedcounterpartiesinordertolimitthepotentialimpactofinsolvenciesuponmajormarketparticipantsthatdonototherwisefallintothecategoriesabove.24Section101(22A)oftheBankruptcyCodeprovidesthata“financialparticipant”iseitheranentitythatatthetimeitentersinto“asecuritiescontract,commoditycontract,swapagreement,repurchaseagreement,orforwardcontract,oratthetimeofthedateofthefilingofthepetition,hasoneormoreagreementsortransactions(securitiescontracts,asdefinedinsection741(7),commoditycontracts,asdefinedinsection761(4),forwardcontracts,repurchaseagreements,swapagreements,ormasternettingagreements)withthedebtororanyotherentity(otherthananaffiliate)ofatotalgrossdollarvalueof

notlessthan$1,000,000,000innotionaloractualprincipalamountoutstanding(aggregatedacrosscounterparties)atsuchtimeoronanydayduringthe15-monthperiodprecedingthedateofthefilingofthepetition,orhasgrossmark-to-marketpositionsofnotlessthan$100,000,000(aggregatedacrosscounterparties)inoneormoresuchagreementsortransactionswiththedebtororanyotherentity(otherthananaffiliate)atsuchtimeoronanydayduringtheprevious15-monthperiodprecedingthedateofthefilingofthepetition;oraclearingorganizationasdefinedinsection402oftheFederalDepositInsuranceCorporationImprovementActof1991.”Clearingorganizationsareincludedtofurtherthegoalofpromotingtheclearingofderivativesandothertransactionsasawaytoreducesystemicrisk.25

[�][b]—Protected TransactionsProtectedagreementsincludesecuritiescontracts,commoditiescontracts,forwardcontracts,repurchaseagreementsandswapagreements.TheBAPCPAalsoaddedmasternettingagreements.Creditorsshouldnotethatthedefinitionsofthesetermsdonotnecessarilycorrespondtothetradeusageoftheseterms.

[�][b][1]—Securities ContractsPursuanttosection741(7)oftheBankruptcyCode,a“securitiescontract”:

(A)means—

(i)acontractforthepurchase,sale,orloanofasecurity,26acertificateofdeposit,amortgageloan,anyinterestinamortgageloan,agrouporindexofsecurities,certificatesofdeposit,ormortgageloansorintereststherein(includinganinterestthereinorbasedonthevaluethereof),oroptiononanyoftheforegoing,includinganoptiontopurchaseorsellanysuchsecurity,certificateofdeposit,mortgageloan,interest,grouporindex,oroption,andincludingany

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repurchaseorreverserepurchasetransactiononanysuchsecurity,certificateofdeposit,mortgageloan,interest,grouporindex,oroption(whetherornotsuchrepurchaseorreverserepurchasetransactionisa“repurchaseagreement”,asdefinedinsection101);27

(ii)anyoptionenteredintoonanationalsecuritiesexchangerelatingtoforeigncurrencies;

(iii)theguarantee(includingbynovation)byortoanysecuritiesclearingagencyofasettlementofcash,securities,certificatesofdeposit,mortgageloansorintereststherein,grouporindexofsecurities,ormortgageloansorintereststherein(includinganyinterestthereinorbasedonthevaluethereof),oroptiononanyoftheforegoing,includinganoptiontopurchaseorsellanysuchsecurity,certificateofdeposit,mortgageloan,interest,grouporindex,oroption(whetherornotsuchsettlementisinconnectionwithanyagreementortransactionreferredtoinclauses(i)through(xi));

(iv)anymarginloan;28

(v)anyextensionofcreditfortheclearanceorsettlementofsecuritiestransactions;

(vi)anyloantransactioncoupledwithasecuritiescollartransaction,anyprepaidforwardsecuritiestransaction,oranytotalreturnswaptransactioncoupledwithasecuritiessaletransaction;

(vii)anyotheragreementortransactionthatissimilartoanagreementortransactionreferredtointhissubparagraph;

(viii)anycombinationoftheagreementsortransactionsreferredtointhissubparagraph;

(ix)anyoptiontoenterintoanyagreementortransactionreferredtointhissubparagraph;

(x)amasteragreementthatprovidesforanagreementortransactionreferredtoinclause(i),(ii),(iii),(iv),(v),(vi),(vii),(viii),or(ix),togetherwithallsupplementstoanysuchmasteragreement,withoutregardtowhetherthemasteragreementprovidesforanagreementortransactionthatisnotasecuritiescontractunderthissubparagraph,exceptthatsuchmasteragreementshallbeconsideredtobeasecuritiescontractunderthissubparagraphonlywithrespecttoeachagreementortransactionundersuchmasteragreementthatisreferredtoinclause(i),(ii),(iii),(iv),(v),(vi),(vii),(viii)or(ix);or

(xi)anysecurityagreementorarrangementorothercreditenhancementrelatedtoanyagreementortransactionreferredtointhissubparagraph,includinganyguaranteeorreimbursementobligationbyortoastockbroker,securitiesclearingagency,financialinstitution,orfinancialparticipantinconnectionwithanyagreementortransactionreferredtointhissubparagraph,butnottoexceedthedamagesinconnectionwithanysuchagreementortransaction,measuredinaccordancewithsection562;and

(B)doesnotincludeanypurchase,sale,orrepurchaseobligationunderaparticipation29inacommercialmortgageloan[.]30

[�][b][2]—Commodity ContractsSection761(4)oftheBankruptcyCodedefinesa“commoditycontract”as:

(A)withrespecttoafuturescommissionmerchant,contractforthepurchaseorsaleofacommodityforfuturedeliveryon,orsubjecttotherulesof,acontractmarketorboardoftrade;

(B)withrespecttoaforeignfuturescommissionmerchant,foreignfuture;

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(C)withrespecttoaleveragetransactionmerchant,leveragetransaction;

(D)withrespecttoaclearingorganization,contractforthepurchaseorsaleofacommodityforfuturedeliveryon,orsubjecttotherulesof,acontractmarketorboardoftradethatisclearedbysuchclearingorganization,orcommodityoptiontradedon,orsubjecttotherulesof,acontractmarketorboardoftradethatisclearedbysuchclearingorganization;

(E)withrespecttoacommodityoptionsdealer,commodityoption;

(F)anyotheragreementortransactionthatissimilartoanagreementortransactionreferredtointhisparagraph;

(G)anycombinationoftheagreementsortransactionsreferredtointhisparagraph;

(H)anyoptiontoenterintoanagreementortransactionreferredtointhisparagraph;

(I)amasteragreementthatprovidesforanagreementortransactionreferredtoinsubparagraph(A),(B),(C),(D),(E),(F),(G)or(H),togetherwithallsupplementstosuchmasteragreement,withoutregardtowhetherthemasteragreementprovidesforanagreementortransactionthatisnotacommoditycontractunderthisparagraph,exceptthatthemasteragreementshallbeconsideredtobeacommoditycontractunderthisparagraphonlywithrespecttoeachagreementortransactionunderthemasteragreementthatisreferredtoinsubparagraph(A),(B),(C),(D),(E),(F),(G)or(H);or

(J)anysecurityagreementorarrangementorothercreditenhancementrelatedtoanyagreementortransactionreferredtointhisparagraph,includinganyguaranteeorreimbursementobligationbyortoacommodity

brokerorfinancialparticipantinconnectionwithanyagreementortransactionreferredtointhisparagraph,butnottoexceedthedamagesinconnectionwithanysuchagreementortransaction,measuredinaccordancewithsection562[.]31

[�][b][�]—Forward ContractsPursuanttosection101(25)oftheBankruptcyCode:

[t]heterm“forwardcontract”means—

(A)acontract(otherthanacommoditycontract,asdefinedinsection761)forthepurchase,sale,ortransferofacommodity,asdefinedinsection761(8)ofthistitle,oranysimilargood,article,service,right,orinterestwhichispresentlyorinthefuturebecomesthesubjectofdealingintheforwardcontracttrade,orproductorbyproductthereof,withamaturitydatemorethantwodaysafterthedatethecontractisenteredinto,including,butnotlimitedto,arepurchaseorreverserepurchasetransaction(whetherornotsuchrepurchaseorreverserepurchasetransactionisa“repurchaseagreement,”asdefinedinthissection)consignment,lease,swap,hedgetransaction,deposit,loan,option,allocatedtransaction,unallocatedtransactionoranyothersimilaragreement;

(B)anycombinationofagreementsortransactionsreferredtoinsubparagraphs(A)and(C);

(C)anyoptiontoenterintoanagreementortransactionreferredtoinsubparagraph(A)or(B);

(D)amasteragreementthatprovidesforanagreementortransactionreferredtoinsubparagraph(A),(B)or(C),togetherwithallsupplementstoanysuchmasteragreement,withoutregardtowhethersuchmasteragreementprovidesforanagreementortransactionthatisnotaforwardcontractunderthisparagraph,exceptthatsuchmasteragreementshallbeconsideredtobeaforwardcontract

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underthisparagraphonlywithrespecttoeachagreementortransactionundersuchmasteragreementthatisreferredtoinsubparagraph(A),(B)or(C);or

(E)anysecurityagreementorarrangement,orothercreditenhancementrelatedtoanyagreementortransactionreferredtoinsubparagraph(A),(B),(C)or(D),includinganyguaranteeorreimbursementobligationbyortoaforwardcontractmerchantorfinancialparticipantinconnectionwithanyagreementortransactionreferredtoinanysuchsubparagraph,butnottoexceedthedamagesinconnectionwithanysuchagreementortransaction,measuredinaccordancewithsection562.32

[�][b][�]—Repurchase AgreementUnderSection101(47)oftheBankruptcyCode,theterm“repurchaseagreement”(whichdefinitionalsoappliestoareverserepurchaseagreement)

(A)means—

(i)anagreement,includingrelatedterms,33whichprovidesforthetransferofoneormorecertificatesofdeposit,mortgagerelatedsecurities(asdefinedinsection3oftheSecuritiesExchangeActof1934),mortgageloans,interestsinmortgagerelatedsecuritiesormortgageloans,eligiblebankers’acceptances,qualifiedforeigngovernmentsecurities(definedasasecuritythatisadirectobligationof,orthatisfullyguaranteedby,thecentralgovernmentofamemberoftheOrganizationforEconomicCooperationandDevelopment),orsecuritiesthataredirectobligationsof,orthatarefullyguaranteedby,theUnitedStatesoranyagencyoftheUnitedStatesagainstthetransferoffundsbythetransfereeofsuchcertificatesofdeposit,eligiblebankers’acceptances,securities,mortgageloans,orinterests,withasimultaneousagreementbysuchtransfereetotransfertothetransferor

thereofcertificatesofdeposit,eligiblebankers’acceptance,securities,mortgageloans,orinterestsofthekinddescribedinthisclause,atadatecertainnotlaterthan1yearaftersuchtransferorondemand,againstthetransferoffunds;

(ii)anycombinationofagreementsortransactionsreferredtoinclauses(i)and(iii);

(iii)anoptiontoenterintoanagreementortransactionreferredtoinclause(i)or(ii);

(iv)amasteragreementthatprovidesforanagreementortransactionreferredtoinclause(i),(ii)or(iii),togetherwithallsupplementstoanysuchmasteragreement,withoutregardtowhethersuchmasteragreementprovidesforanagreementortransactionthatisnotarepurchaseagreementunderthisparagraph,exceptthatsuchmasteragreementshallbeconsideredtobearepurchaseagreementunderthisparagraphonlywithrespecttoeachagreementortransactionunderthemasteragreementthatisreferredtoinclause(i),(ii)or(iii);or

(v)anysecurityagreementorarrangementorothercreditenhancementrelatedtoanyagreementortransactionreferredtoinclause(i),(ii),(iii)or(iv),includinganyguaranteeorreimbursementobligationbyortoarepoparticipantorfinancialparticipantinconnectionwithanyagreementortransactionreferredtoinanysuchclause,butnottoexceedthedamagesinconnectionwithanysuchagreementortransaction,measuredinaccordancewithsection562ofthistitle;and

(B)doesnotincludearepurchaseobligationunderaparticipation34inacommercialmortgageloan.35

[�][b][�]—Swap AgreementUnderSection101(53B)oftheBankruptcyCode,theterm“swapagreement”—

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(A)means—

(i)anyagreement,includingthetermsandconditionsincorporatedbyreferenceinsuchagreement,whichis—

(I)aninterestrateswap,option,future,orforwardagreement,includingaratefloor,ratecap,ratecollar,cross-currencyrateswapandbasisswap;

(II)aspot,sameday-tomorrow,tomorrow-next,forward,orotherforeignexchange,preciousmetalsorothercommodityagreement;

(III)acurrencyswap,option,futureorforwardagreement;

(IV)anequityindexorequityswap,option,futureorforwardagreement;

(V)adebtindexordebtswap,option,futureorforwardagreement;

(VI)atotalreturn,creditspreadorcreditswap,option,futureorforwardagreement;

(VII)acommodityindexoracommodityswap,option,futureorforwardagreement;

(VIII)aweatherswap,option,futureorforwardagreement;

(IX)anemissionsswap,option,futureorforwardagreement;or

(X)aninflationswap,option,futureorforwardagreement;

(ii)anyagreementortransactionthatissimilartoanyotheragreementortransactionreferredtointhisparagraphandthat—

(I)isofatypethathasbeen,ispresently,orinthefuturebecomes,thesubjectofrecurrentdealingsintheswaporotherderivativesmarkets(includingtermsandconditionsincorporatedbyreferencetherein);and

(II)isaforward,swap,future,option,orspottransactionononeormorerates,currencies,commodities,equitysecurities,orotherequity

instruments,debtsecuritiesorotherdebtinstruments,quantitativemeasuresassociatedwithanoccurrence,extentofanoccurrence,orcontingencyassociatedwithafinancial,commercial,oreconomicconsequence,oreconomicorfinancialindicesormeasuresofeconomicorfinancialriskorvalue;36

(iii)anycombinationofagreementsortransactionsreferredtointhissubparagraph;

(iv)anyoptiontoenterintoanagreementortransactionreferredtointhissubparagraph;

(v)amasteragreementthatprovidesforanagreementortransactionreferredtoinclause(i),(ii),(iii)or(iv),togetherwithallsupplementstoanysuchmasteragreement,andwithoutregardtowhetherthemasteragreementcontainsanagreementortransactionthatisnotaswapagreementunderthisparagraph,exceptthatthemasteragreementshallbeconsideredtobeaswapagreementunderthisparagraphonlywithrespecttoeachagreementortransactionunderthemasteragreementthatisreferredtoinclause(i),(ii),(iii)or(iv);or

(vi)anysecurityagreementorarrangementorothercreditenhancementrelatedtoanyagreementsortransactionsreferredtoinclause(i)through(v),includinganyguaranteeorreimbursementobligationbyortoaswapparticipantorfinancialparticipantinconnectionwithanyagreementortransactionreferredtoinanysuchclause,butnottoexceedthedamagesinconnectionwithanysuchagreementortransaction,measuredinaccordancewithsection562;and

(B)isapplicableforpurposesofthistitleonly,andshallnotbeconstruedorappliedsoastochallengeoraffectthecharacterization,definition,ortreatmentofanyswapagreementunderanyotherstatute,regulation,

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orrule,includingtheGramm-Leach-BlileyAct,theLegalCertaintyforBankProductsActof2000,thesecuritieslaws(assuchtermisdefinedinsection3(a)(47)oftheSecuritiesExchangeActof1934)andtheCommodityExchangeAct.37

[�][b][�]—Master Netting AgreementUnderSection101(38A)oftheBankruptcyCode,theterm“masternettingagreement”—

(A)meansanagreementprovidingfortheexerciseofrights,includingrightsofnetting,setoff,liquidation,termination,acceleration,orcloseout,underorinconnectionwithoneormorecontractsthataredescribedinanyoneormoreofparagraphs(1)through(5)ofsection561(a),oranysecurityagreementorarrangementorothercreditenhancementrelatedtooneormoreoftheforegoing,includinganyguaranteeorreimbursementobligationrelatedto1ormoreoftheforegoing;and

(B)iftheagreementcontainsprovisionsrelatingtoagreementsortransactionsthatarenotcontractsdescribedinparagraphs(1)through(5)ofsection561(a),shallbedeemedtobeamasternettingagreementonlywithrespecttothoseagreementsortransactionsthataredescribedinanyoneormoreofparagraphs(1)through(5)ofsection561(a).38

[�]—Liquidation and Termination; Ipso Facto Clauses

Financialcontractsfrequentlyincludeipso factoclauseswhichprovidethataneventofdefaultshalloccurthereunderifcertainbankruptcyrelatedeventsoccurtothedebtor.Forexample,the2002ISDAMasterAgreementprovidesthataneventofdefaultshalloccurwithrespecttoacounterpartyif,amongotherthings,thecounterpartybecomes

insolvent,makesageneralassignmentforthebenefitofcreditors,institutesbankruptcyproceedingsorhassuchproceedingsinstitutedagainstit.39Suchipso factoclausesareintendedtoallowthenon-defaultingtoterminatetheagreement,acceleratetheindebtednessandtakeremedialactionwithouttheborrower’sacquiescence.Frequently,sucheventsofdefaultaredeemedtoautomaticallyoccurunderthetermsofthecontract,withoutanydeclarationofaneventofdefaultbythenon-defaultingparty.

TheBankruptcyCodegenerallypreventstheenforcementofsuchipsofactoclausesbythenon-defaultingpartybecausesuchprovisions“hamperrehabilitationeffortsbydeprivingthechapter11estateofvaluablepropertyinterestsattheverytimethedebtorandestateneedthemmost.”40Section365(e)(1)oftheBankruptcyCodeprovidesthatnotwithstandingaprovisioninanexecutorycontractorunexpiredlease,suchagreementsofthedebtormaynotbeterminatedormodifiedatanytimeafterthecommencementofthecasesolelybecauseofaprovisioninsuchagreementsthatisconditionedon(A)theinsolvencyorfinancialconditionofthedebtoratanytimebeforetheclosingofthecase,(B)thecommencementofacaseundertheBankruptcyCodeor(C)theappointmentofortakingpossessionbyatrusteeinacaseundertheBankruptcyCodeoracustodianbeforesuchcommencement.

However,“becausefinancialmarketscanchangesignificantlyinamannerofdays,orevenhours,anon-bankruptpartytoongoingsecuritiestransactionsandotherfinancialtransactionscouldfaceheavylossesunlessthetransactionsareresolvedpromptlyandwithfinality.”41Forexample,upontheterminationofannaturalgasswapcontract,thepartiescalculateterminationpaymentsowedbaseduponprevailingnaturalgascostsandthelossofthebenefitsofthecontract.

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Sinceenergypricesfluctuateonadaytodaybasis,adelayinterminationcouldchangethesizeofterminationpaymentspayablebyonepartytotheotherpartyand,incertaincircumstances,couldevenaffectthepartyrequiredtomakeaterminationpayment.42

Accordingly,topromotethepromptresolutionofprotectedtransactions,sections555,556,559,560and561oftheBankruptcyCodeprovidecertainexceptionstosection365(e)(1).Eachoftheprovisionsappliestooneormoreprotectedtransactions,butcollectivelytheyalloweveryprotectedcounterpartytosuchprotectedtransactionstoexerciseitscontractualrightsundertherelevantprotectedtransactionsbasedupontheipsofactodefault.Forexample,section555providesthattheexerciseofacontractualrightofastockbroker,financialinstitution,financialparticipant,orsecuritiesclearingagencytocausetheliquidation,termination,oraccelerationofasecuritiescontractbecauseofaconditionofthekindspecifiedinsection365(e)(1)oftheBankruptcyCodeshallnotbestayed,avoided,orotherwiselimitedbyoperationofanyprovisionoftheBankruptcyCodeorbyorderofacourtoradministrativeagencyinanyproceedingundertheBankruptcyCodeunlesssuchorderisauthorizedundertheprovisionsoftheSIPAoranystatuteadministeredbytheSEC.43

Section556oftheBankruptcyCodeprovidessimilarprotectionstocommoditybrokers,financialparticipantsorforwardcontractmerchantsexercisingsuchcontractualrightsundercommoditycontractsorforwardcontracts.44Section559oftheBankruptcyCodeprovidessimilarprotectionstorepoparticipantsorfinancialparticipantsexercisingsuchcontractualrightsunderrepurchaseagreements.45Section560oftheBankruptcyCodeincludesimilarprovisionsforswapparticipantsandfinancialparticipantsexercisingsimilarrightsunderswapagreements.46

Section561,addressingmasternettingagreements,isdiscussedfurtherbelow.

Athresholdconcernforthenon-defaultingpartyinthiscontextiswhethertheprotectedcontractatissueincludesanysuchipsofactoclauseswhichprovideacontractualrighttoliquidate,terminateoraccelerate.Sections555,556,559,560and561merelyprotectanypre-existingcontractualright.Itshouldbenotedthatthedefinitionofcontractualrightincludesrightsthatariseoutsideofthefourcornersofthecontract.Forexample,inthecontextofsection555,contractualrightisdefinedbroadlytoincludearightsetforthinaruleorbylawofaderivativesclearingorganization,amultilateralclearingorganization,anationalsecuritiesexchange,anationalsecuritiesassociation,asecuritiesclearingagency,acontractmarketdesignatedundertheCommodityExchangeAct,aderivativestransactionexecutionfacilityregisteredundertheCommodityExchangeAct,oraboardoftrade(asdefinedintheCommodityExchangeAct),orinaresolutionofthegoverningboardthereof,andaright,whetherornotinwriting,arisingundercommonlaw,underlawmerchant,orbyreasonofnormalbusinesspractice.47

Thenon-defaultingpartyshouldalsoconfirmwhetheranysuchipsofactoclausesprovidethattherighttoliquidate,terminateoraccelerateappliesbecause of a condition of the kind specified under section 365(e)(1).Arighttoterminatebecauseofapaymentdefaultoranyotherconditionsoutsideofsuchscopewillnotbeprotected.Furthermore,non-defaultingpartiesshouldbemindfulthatcourtshavelookedtowhetherthenon-defaultingpartyexercisedthecontractualrighttoterminatebecauseofaconditionofthekindspecifiedinsection365(e)(1)orbecauseofsomeotherreason.48

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[�][a]—Master Netting Agreements and Cross-Product Netting

Section561oftheBankruptcyCodewasaddedbytheBAPCPA.Likesections555,556,559and560,section561providesthattheexerciseofanycontractualrighttocausethetermination,liquidationoraccelerationofcertainprotectedcontractsbecauseofaconditionofthekindspecifiedinsection365(e)(1)shallnotbestayed,avoidedorotherwiselimitedbyoperationofanyprovisionoftheBankruptcyCodeorbyorderofacourtoradministrativeagencyinanyproceedingundertheBankruptcyCode.However,thisprovisionisnotlimitedtocertainprotectedcounterparties.Furthermore,theenumeratedprotectedcontractsincludebothmasternettingagreementsandalloftheprotectedcontractsinthepredecessorprovisions(securitiescontracts,commoditycontracts,forwardcontracts,repurchaseagreementsandswapagreements).Unlikethepredecessorprovisions,section561explicitlyprotectstheexerciseofanycontractualrighttooffsetornetterminationvalues,paymentamountsorothertransferobligationsarisingunderorinconnectionwithoneormoreprotectedcontracts.

Thisprovisionclearlyprotectstheexerciseofanycontractualrightarisingunderamasternettingagreementtoliquidate,terminateoracceleratesuchagreementoranyofsuchotherprotectedcontractscoveredbysuchmasternettingagreement.However,since“contractualright”isnotdefinedbyreferencetothefourcornersofanyofthespecifiedprotectedcontracts,andnoprotectedcounterpartiesarespecified,apartythatisnotnecessarilya“masternettingagreementparticipant”mayseekthebenefitsofthissafeharborsolongastheyhaveacontractualrighttodoso,includingacontractualrightarisingunderrulesorbylawsofderivativesclearingorganizations,

multilateralclearingorganizations,nationalsecuritiesexchanges,rightsarisingundercommonlaw,underlawmerchant,byreasonofnormalbusinesspractice,etc.49

However,section561(b)clarifiesthatapartymayonlyexercisethecontractualrighttotheextentthatsuchcouldpartyexercisesuchrightundersections555,556,559or560foreachindividualcontractcoveredbythemasternettingagreementinissue.Accordingly,contractsthatarenotprotectedcontractscannotbeliquidated,terminatedoracceleratedsimplybecausetheyarecoveredbyamasternettingagreement.Furthermore,thepartyexercisingsuchrightsshouldotherwisebecategorizedasaprotectedcounterpartyunderthosesections.Totheextentthecontractualrighttoliquidate,terminateoraccelerateasecuritiescontractorrepurchaseagreementisstayedbyorderundertheprovisionsoftheSecuritiesInvestorProtectionActof1970oranystatuteadministeredbytheSEC,suchagreementscouldnotbeterminatedunderamasternettingagreementpursuanttosection561.

Section561alsoincludescertainlimitationstotheexerciseofnettingrightswherethedebtorisacommoditybrokersubjecttoliquidationunderSubchapterIVofChapter7oftheBankruptcyCode.Undersection561(b)(2)(A),apartymaynotnetoroffsetobligationstothedebtorarisingunder,orinconnectionwith,commoditycontractstradedonorsubjecttotherulesofacontractmarketdesignatedundertheCommodityExchangeActoraderivativestransactionexecutionfacilityregisteredundertheCommodityExchangeActexcepttotheextentthatthepartyhaspositivenetequityinthecommodityaccountsatthedebtor.Undersection561(b)(2)(B),ifthedebtorisalsoacustomerofanothercommoditybrokerandthecommoditycontractsareofthekindspecifiedabove,theothercommoditybrokermaynotnetoutoroffsetobligationstothedebtorarisingunder,orinconnectionwith,

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suchcommoditycontracts.However,theseprovisionswillnotpreventanyoffsetsofclaimsandobligationsarisingundercross-marginingagreementsapprovedbytheCommoditiesFuturesTradingCommissionoranyothernettingagreementsbetweenclearingorganizationsandotherentitiesapprovedbytheCommoditiesFuturesTradingAssociation.50

[�][b]—Chapter 1� proceedingsTheBAPCPAaddednewsection561(d),whichprovidesthattheprovisionsoftheBankruptcyCoderelatingtoprotectedcontractsalsoapplyinforeignproceedingsunderchapter15.TheenforcementofcontractualprovisionsofsuchcontractsandagreementsinaccordancewiththeirtermswillnotbestayedorotherwiselimitedbyoperationofanyprovisionoftheBankruptcyCodeorbyorderofacourtinanycaseundertheBankruptcyCode.AvoidancepowerswillapplytothesameextentasinaproceedingunderChapter7orChapter11andsuchenforcementshallnotbelimitedbasedonthepresenceorabsenceofassetsofthedebtorintheUnitedStates.

[�]—Setoff, Application of Collateral and Netting: Exceptions from the Automatic Stay

Section553oftheBankruptcyCodepreservesacreditor’spre-existingrighttosetoffmutualdebtsandclaims.51However,asdiscussedinfurtherdetailin¶3.02infra,thefilingofanypetitionforreliefundertheBankruptcyCodeautomaticallystaysvirtuallyallcreditoractionsagainstthedebtor,includingthesetoffofanydebtowingtothedebtorthatarosebeforethecommencementofthecaseagainstanyclaimagainstthedebtor.52Nonetheless,sections362(b)(6),(b)(7),(b)(17)and(b)(27)oftheBankruptcyCodesetforthcertainexceptionsthatallowcertainprotected

counterpartiestosetoffsuchpre-petitiondebtstothedebtoragainstclaimsagainstthedebtornotwithstandingtheautomaticstay.

[�][a]—Application of Collateral: Sections ��2(b)(�), ��2(b)(�) and ��2(b)(1�)Underthepre-BAPCPAversionofsection362(b)(6),apetitioninbankruptcywouldnotstaytherightofcertainprotectedcounterpartiestosetoffanymutualdebtandclaimunderorinconnectionwithaprotectedtransactionthatconstitutessetoffofaclaimagainstthedebtorforamarginpaymentorsettlementpaymentarisingoutofsuchagreementsagainstcash,securities,orotherpropertyheldbyorduefromsuchprotectedpartytomargin,guarantee,secureorsettlesuchtransactions.53Whilethereisscantlegalprecedentinterpretingthispriorprovision,itisclear,forexample,thatitprotectstherightofastockbrokertoliquidatesecuritiesinadebtor’smarginaccountinordertosatisfymargincallswithoutanyneedtoseekrelieffromtheautomaticstay.54ThisisbecauseCongressfoundit“essentialthatstockbrokers...beprotectedfromtheissuanceofacourtoradministrativeagencyorderwhichwouldstaythepromptliquidationofaninsolvent’spositions,becausemarketfluctuationsinthesecuritiesmarketcreateaninordinateriskthattheinsolvencyofonepartycouldtriggerachainreactionofinsolvenciesoftheotherswhocarryaccountsforthatpartyandunderminetheintegrityofthosemarkets.”55Thepre-BAPCPAversionsofsections362(b)(7)and362(b)(17)includedsimilarprotectionsforsetoffsofdebtsarisingoutofrepurchaseagreementsandswapagreements.

Overtime,therightsofprotectedcounterpartiestotakeandapplycollateraltosatisfyobligationsunderprotectedtransactionshavebeenexpanded.Section362(b)(6),asrevisedbytheBAPCPAandtheFNIA,nowprovidesthatapetitioninbankruptcy“shallnotstaytheexercisebya

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commoditybroker,forwardcontractmerchant,stockbroker,financialinstitution,financialparticipantorsecuritiesclearingagencyofanycontractualrightunderanysecurityagreementorarrangementorothercreditenhancementformingapartoforrelatedtoanycommoditycontract,forwardcontractorsecuritiescontract,orofanycontractualrighttooffsetornetoutanyterminationvalue,paymentamountorothertransferobligationarisingunderorinconnectionwith1ormoresuchcontracts,includinganymasteragreementforsuchcontracts.”Sections362(b)(7)56and362(b)(17),57asrevisedbytheBAPCPAandtheFNIA,includesimilarprovisionsforrepurchaseagreementsandswapagreements.

Thenewsafeharborsnowexplicitlystatethattheexerciseofcertain“contractualrights,”whicharedefinedbyreferencetosections555,556,559and560,asapplicable,areprotected.Asdiscussinfrain¶[5]above,sections555,556,559and560providethatsuchcontractualrightsneednotariseunderthefourcornersofthecontractsthemselvesbutcanariseunderrulesorbylawsoftradeassociations,clearingorganizationsandthelike.Furthermore,assections362(b)(6),(7)and(17)alsomakeclear,theoffsetandnettingrightsmayarisefromanymasteragreementforsuchcontracts.Thefirstclauseoftheprovisionalsostatesthatcontractualrightsarisingunderanysecurityagreementorarrangementorothercreditenhancementformingapartoforrelatedtoaprotectedtransactionarealsoprotected.

Thenewsafeharbors’referenceto“anycontractualrightsunderanysecurityagreement….”andtotheabilityto“offsetornetoutanyterminationvalue,paymentamountorothertransferobligation”arepresumablybroaderthantheirrespectivepredecessors,whichonlyreferredtosetoffofmarginandsettlementpayments.58Congresshasstatedthatitintendedthenewsafeharbortoexemptfromtheautomaticstay“self-helpforeclosure-on-collateral

rights,setoffrightsandnettingrights(includingforeclosureon,andsetoffagainst,cashandsecuritiesheldtomarginorsecureclaimsformarginpaymentsandsettlementpayments,titletransferarrangementsandtherighttooffsetobligationsowedagainstcollateralpledgedtothedebtor).”59

[�][b]—Master Netting Agreements: Section ��2(b)(2�) Masternettingagreementsareagreementsthatprovideforexerciseofrights,includingnetting,setoff,liquidation,termination,acceleration,orcloseout,underorinconnectionwithsecuritiescontracts,commoditiescontracts,forwardcontracts,repurchaseagreementsorswapagreements.Suchagreementspermittwopartieswhohaveenteredintomultipleagreementstooffsetornetouttheirobligationstoeachotheracrosssuchagreements.Sincesections362(b)(6),(7)and(17)onlypermit“singleproduct”netting,iftwopartiestoamasternettingagreementoweobligationsofthekindotherwisepermittedtobeoffsetandnetoutunderthosesafeharborsbuteachowessuchobligationtotheotherunderaseparateagreement,thosesafeharborswouldnotpreventthestayofanyoffsetornetoutofthosetwoseparateobligationsthroughamasternettingagreement.60However,ifsuchcross-productnettingissubjecttothestay,theinsolvencyofthedebtorcouldpresumablyhavethesamerippleeffectthatthesafeharborsweredesignedtoprevent.Newsection362(b)(27)oftheBankruptcyCodewasenactedtofurtherthepolicyofincreasinglegalcertaintyandreducingsystemicrisksinthecaseofaninsolvencyofalargefinancialparticipantbyextendingthesafeharborstocross-productnetting.61

Pursuanttosection362(b)(27),asrevisedbytheBAPCPAandtheFNIA,62apetitioninbankruptcyshallnotstaytheexercisebyamasternettingagreementparticipantofanycontractualrightunderanysecurityagreementorarrangementorother

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creditenhancementformingapartoforrelatedtoanymasternettingagreement,orofanycontractualrighttooffsetornetoutanyterminationvalue,paymentamountorothertransferobligationarisingunderorinconnectionwith1ormoresuchmasternettingagreementstotheextentthatsuchparticipantiseligibletoexercisesuchrightsundersections362(b)(6),(7)or(17).“Contractualright”isdefinedinclusivelybyreferencetoeachofsections555,556,559or560.

Itshouldbenotedthatifthemasternettingagreementcontainsprovisionsrelatingtoagreementsortransactionsthatarenotsecuritiescontracts,commoditiescontracts,forwardcontracts,repurchaseagreementsorswapagreements,thebenefitsofsection362(b)(27)shallonlyapplywithrespecttosuchprotectedtransactions.Forexample,ifamasternettingagreementalsoallowsfornettingandsetoffwithrespecttoobligationsunderacreditagreement,amasternettingagreementparticipant’snettingandsetoffofobligationsthereunderagainstobligationsarisingunderaprotectedtransactionwillnotbeexemptfromtheautomaticstay.

[�][c]—Setoff: Section ��(a), ��(b) and ��2(o)Whilesection553(a)oftheBankruptcyCodegenerallyprotectsacreditor’srighttooffsetamutualdebtofthedebtortothecreditoragainstaclaimofsuchcreditoragainstthedebtor,sections553(a)(2)and(3)includecertainexceptionsfortheperiodafter90daysbeforethecommencementofthecasewhilethedebtorwasinsolvent.63Section553(a)(2)preventssetofftotheextenttheclaimofsuchcreditoristransferredbyanentityotherthanthedebtortosuchcreditor.Therefore,forexample,ifanaffiliateofthecreditortransferredaclaimagainstthedebtortothecreditor,anysetoffsinrespectofsuchclaimwouldnotbeprotectedbysection553(a).However,theBAPCPAhasrevisedsection553(a)(2)toallowsuch

setoffstotheextenttheyareofthekinddescribedinsections32(b)(6),362(b)(7),362(b)(17),362(b)(27),555,556,559,560or561.

Section553(a)(3)alsoprovidesthatsection553(a)’sgeneralprotectiondoesnotapplytotheextentthedebtowedtothedebtorbysuchcreditorwasincurredbysuchcreditorforthepurposeofobtainingarightofsetoffagainstthedebtor.However,theBAPCPAhasrevisedsection553(a)(3)toclarifythattotheextentthedebtwasincurredforpurposesofobtainingarightofsetoffofthekinddescribedinsections362(b)(6),362(b)(7),362(b)(17),362(b)(27),555,559,560or561,section553(a)’sgeneralprotectionswillapply.Therefore,ifacreditorentersintoaprotectedcontract(suchasamasternettingagreement)withthedebtorforpurposesofacquiringcertainsetoffrights,suchsetoffrightswillbepreservedbysection553(a).

Undersection553(b)oftheBankruptcyCode,totheextentacreditoroffsetsamutualdebtowingtothedebtoragainstaclaimagainstthedebtoronorwithin90daysbeforethedateoffilingofthepetition,thetrusteehasthepowertorecoverfromthecreditoracertainamountofsuchoffset.64PriortotheBAPCPA,setoffsofthekinddescribedinsections362(b)(6)and362(b)(7)couldnotberecoveredundersection553(b).AsrevisedbytheBAPCPA,setoffsofthekinddescribedinsections362(b)(17),362(b)(27),555,556,559,560and561arealsoprotectedfromrecovery.

Whilemostoftheprotectionsforsetoffsinsection362applytotheautomaticstay,theBAPCPAfurtherexpandedtheprotectionstomakeclearthatsuchsetoffswouldnotbesubjecttoanystay,includingstaysimposedusingtheequitablepowersofacourt.Section362(o)oftheBankruptcyCodeprovidesthattheexerciseofrightsnotsubjecttothestayarisingundersection362(a)pursuanttosections362(b)(6),(7),(17)or(27)shallnotbestayedbyanyorderofacourtoradministrativeagencyinanyproceedingundertheBankruptcyCode.

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[�]—Preferences, Fraudulent Transfers and Limitations of Trustee’s Avoidance Powers

Sections544,545,547and548oftheBankruptcyCodegivethetrusteecertainblanketavoidancepowersinconnectionwithpre-petitiontransfersofpropertybythedebtor,includingwithrespecttopreferentialtransfers,statutoryliensandfraudulenttransfers.Theseavoidancespoweraregenerallyintendedtopreventfraudandensuretheequalityofdistributiontocreditorsholdingclaimsofequalpriority.65However,becauseofCongress’sconcernthatthebankruptcyofaprotectedcounterpartycouldcausearippleeffectinthefinancialmarkets,section546(b)(e),(f),(g)and(j)oftheBankruptcyCodelimittheTrustee’savoidancepowerinthecontextofcertainprotectedtransactions.

[�][a]—§ ��(e)Section546(e),whichisoftenreferredtoasthestockholder’sdefense,providesthatnotwithstandingthetrustee’savoidancepowersundersections544,545,547,548(a)(1)(B)and548(b),thetrusteemaynotavoidatransferthatisamarginpaymentorsettlementpaymentmadebyortoorforthebenefitofacommoditybroker,forwardcontractmerchant,stockbroker,financialinstitution,financialparticipantorsecuritiesclearingagencyorthatisatransfermadebyortoorforthebenefitofacommoditybroker,forwardcontractmerchant,stockbroker,financialinstitution,financialparticipantorsecuritiesclearingagencyinconnectionwithasecuritiescontract,commoditycontractorforwardcontract,thatismadebeforethecommencementofthecase,exceptundersection548(a)(1)(A)oftheBankruptcyCode,whichistheavoidancepowerrelatedtointentionalfraud.66

[�][a][1] Settlement PaymentsSection741(8)oftheBankruptcyCode,whichappliesinstockbrokerliquidationcases,definesasettlementpaymentasapreliminarysettlementpayment,apartialsettlementpayment,aninterimsettlementpayment,asettlementpaymentonaccount,afinalsettlementpayment,oranyothersimilarpaymentcommonlyusedinthesecuritiestrade.Section101(51A)oftheBankruptcyCodeincludesasimilarbutnotidenticaldefinitionforpurposesoftheforwardcontractprovisionsoftheBankruptcyCode.

Thereisgeneralagreementthattheterm“settlementpayment”isintendedtorefertoapaymentortransferofcashandsecuritiesmadeuponcompletionofasecuritiestransaction.67However,becausethetermisdefinedcircularlybyreferencetouseofsuchtermsintheforwardcontracttradeandsecuritiestrade,thescopeofsuchtermhasbeenthesubjectofsomedispute.

Courtgenerallyinterpretthetermbroadly.68Courtshaveheldthatthepaymentsincludealltransfersthatoccurduringthesettlementprocess.69However,thetermisnotboundless70and,indeterminingthescopeoftheterm,courtshavelookedtothewhetherthepaymentcanbecharacterizedasapayment“commonlyusedinthesecuritiestrade”or“commonlyusedintheforwardcontracttrade.”71Onelineofcasesrestrictsthetermtopaymentsinvolvingthepublicsecuritiesmarketsbecausetransactionsnotinvolvingthepublicsecuritiesmarketscannotbecharacterizedas“paymentscommonlyusedinthesecuritiestrade.”72Accordingly,somecourtshaveheldthatpaymentsinconnectionwithnonpublicsecuritiesarenotsettlementpayments.73Thereremainconflictingviewsonwhetherornottransfersmadebetweenpartiesthatarenotclearedthroughaclearingagencyshouldbeconsideredsettlementpayments.Somecourtshavefoundthatthetermisbroadenoughtoincludetransfersofcashandstockinconnectionwithleveragedbuyouts.74

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Othercourtshavearguedthatsincesuchpaymentsdonotaffectthechainofguaranteesinthesecuritiesmarket,thepaymentsarenotprotectedsettlementpayments.75

Somecourtshavealsoheldthatwherethepaymentitselfisotherwiseillegal,itcouldnotproperlybecharacterizedasapaymentcommonlyusedinthesecuritiestrade,andtherefore,shouldnotbecharacterizedasasettlementpayment.76

[�][a][2]—Margin PaymentsSection741(5)ontheBankruptcyCode,whichappliesinstockbrokerliquidationcases,providesthatamarginpaymentmeanspaymentordepositofcash,asecurityorotherproperty,thatiscommonlyknowntothesecuritiestradeasoriginalmargin,initialmargin,maintenancemargin,orvariationmargin,orasamark-to-marketpayment,orthatsecuresanobligationofaparticipantinasecuritiesclearingagency.Section101(38)oftheBankruptcyCodeincludesasimilarbutnotidenticaldefinitionforpurposesoftheforwardcontractprovisionsoftheBankruptcyCode.Section761(15)oftheBankruptcyCodeincludesasimilarbutnotidenticalprovisionforpurposesofcommoditybrokerliquidations.Likesettlementpayments,thetermisinterpretedbroadlyandhasbeeninterpretedtoincludeanypaymentbythedebtorwhichwasusedtoreduceadeficiencyinamarginaccount.78

[�][a][�]—Expansion by the FNIA TheFNIAhasexpandedthescopeofthesafeharbortoalsopreventfromavoidance“transfersmadebyortoorforthebenefitofacommoditybroker,forwardcontractmerchant,stockbroker,financialinstitution,financialparticipantorsecuritiesclearingagencyinconnectionwithasecuritiescontract,commoditycontractorforwardcontract.”Accordingly,certaintransfersinconnectionwithsuchcontractsthatwerepreviouslyavoidablebecausethey

couldnotbecharacterizedasmarginpaymentsorsettlementpaymentsmaynownolongerbeavoidable.

[�][b]—§ ��(f) and ��(g)Section546(f)oftheBankruptcyCodeprovidesthatnotwithstandingthetrustee’savoidancepowersundersections544,545,547,548(a)(1)(B)and548(b),thetrusteemaynotavoidatransfermadebyortoorforthebenefitofarepoparticipantorfinancialparticipant,inconnectionwitharepurchaseagreementandthatismadebeforethecommencementofthecase,exceptundersection548(a)(1)(A)(i.e.,whereintentionalfraudwasinvolved).79

Itshouldbenotedthat,unlikesection546(e),thisprovisionexemptsfromavoidancealltransfersmadebyortoorforthebenefitofaprotectedcounterparty.PriortotheenactmentoftheFNIA,thisprovisiononlypreventedavoidanceofatransferthatisamarginpaymentorsettlementpayment.Congressintendedthisrevisioninordertoconformtheprovisiontothebroadersafeharborforswapagreementsinsection546(g).80

Thatsectionprovidesthatnotwithstandingthetrustee’savoidancepowersundersections544,545,547,548(a)(1)(B)and548(b),thetrusteemaynotavoidatransfermadebyortoorforthebenefitofaswapparticipantorfinancialparticipant,underorinconnectionwithanyswapagreementandthatismadebeforethecommencementofthecase,exceptundersection548(a)(1)(A)(i.e.,whereintentionalfraudwasinvolved).81

[�][c]—§ ��(j) Master Netting AgreementsAsdiscussedabovein¶[6][b],masternettingagreementsallowthepartiestheretotosetoffandnetouttheirrespectiveobligationsunderanyagreementscoveredthereby.Suchanagreementmightprovideforthedeterminationofanetamountpayablebyoneofthepartiestheretototheother

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partytheretoandrequireapaymentofsuchnetamount.However,sections546(e),(f)and(g)willnotexemptfromavoidanceanysuchtransfersincethetransferwouldnototherwisequalifyasanexempttransferunderasecuritiescontract,commoditycontract,forwardcontract,repurchaseagreementorswapagreement.

Therefore,theFNIAaddednewsection546(j)82oftheBankruptcyCodewhichprovidesthatnotwithstandingthetrustee’savoidancepowersundersections544,545,547,548(a)(1)(B)and548(b),thetrusteemaynotavoidatransfermadebyorto(orforthebenefitof)amasternettingagreementparticipantunderorinconnectionwithanymasternettingagreementoranyindividualcontractcoveredtherebythatismadebeforethecommencementofthecase,exceptundersection548(a)(1)(A)andexcepttotheextentthatthetrusteecouldotherwiseavoidsuchatransfermadeunderanindividualcontractcoveredbysuchmasternettingagreement.

Asnotedinthefinalexceptiontothissafeharbor,ifalloraportionofthetransferatissueunderthemasternettingagreementweremadeunderanindividualcontractcoveredbytheagreementandsuchindividualcontractwasnototherwiseprotectedbyasafeharborpreventingavoidance,thensection546(g)willnotpreventthetrusteefromavoidingsuchtransferortherelevantportionofsuchtransfer.

[8]—§ ��2 Timing of Damage Measurement for Protected Contracts

Newsection562oftheBankruptcyCodewasaddedbytheBAPCPA.Undersection365oftheBankruptcyCode,thetrusteehasthepowertoassumeorrejectexecutorycontractsofthedebtor.Totheextentthetrusteerejectsaswapagreement,securitiescontract,forwardcontract,commoditycontract,

repurchaseagreementormasternettingagreement,orifcertaincounterpartiesexercisetheirrightstoliquidate,terminateoracceleratesuchcontractsoragreements,section562providesthatdamagesshallbemeasuredasoftheearlierofthedateofsuchrejectionorthedateofsuchliquidation,terminationoracceleration.

Totheextentthereareno“commerciallyreasonabledeterminantsofvalue”asoftherelevantdate,damagesshallbemeasuredasoftheearliestsubsequentdateordatesonwhichtherearecommerciallyreasonabledeterminantsofvalue.83Congresshasnotedalthoughitisexpectedthatinmostcircumstancesdamageswouldbemeasuredasofthedateordatesofeitherrejectionorliquidation,terminationoracceleration,incertainunusualcircumstances,suchasdysfunctionalmarketsorliquidationofverylargeportfolios,theremaybenocommerciallyreasonabledeterminantsofvalueforliquidatinganysuchagreementsorcontractsorforliquidatingallsuchagreementsandcontractsinalargeportfolioonasingleday.84

Totheextentdamagesaredeterminedonsuchasubsequentdateandoneofthepartiestothecontractoragreementobjecttothetimingofthemeasurementofdamages,theotherpartyhastheburdenofprovingthattherewerenocommerciallyreasonabledeterminantsofvalueasofsuchdate.85

Endnotes1 See(2008)http://www.isda.org.2 SeeReportofthePresident’sWorkingGroup

onFinancialMarkets,Hedge Funds, Leverage and the Lessons of Long Term Capital Management,atB-12(April28,1999),http://www.ustreas.gov/press/releases/reports/hedgfund.pdf.

3 Wieboldt Stores, Inc. v. Schottenstein,131B.R.655,664n.10(N.D.Ill.1991),(citingNeilM.Garfinkel,Note,No Way Out: Section 546(e) Is No Escape for the Public Shareholder of a Failed LBO,1991COLUM.BUS.L.REV.51,64-65(1991)(referringtoBankruptcy of Commodity and Securities Brokers: Hearings Before the Subcomm. on Monopolies and

21


Commercial Law of the House Comm. on the Judiciary,97thCong.,1stSess.203(1981)).

4 SeeH.R.REP.NO.97-420,at2(1982),reprinted in1982U.S.C.C.A.N.583,583-84;TheBankruptcyAbusePreventionandConsumerProtectionActof2005,Pub.L.No.109-8,119Stat.23(2005),effectiveincasescommencedonorafterOctober17,2005.

5 SeeH.R.REP.NO.97-420,at2(1982),reprinted in1982U.S.C.C.A.N.583;BankruptcyActAmendments,Pub.L.No.97-222,96Stat235(1982).

6 SeeBankruptcyAmendmentsandFederalJudgeshipActof1984,Pub.L.No.98-353,98Stat.333(1984).

7 SeeAlanGreenspan,Financial Derivatives—Remarks Before the Futures Industry Association,TheFederalReserveBoard(March19,1999),http://www.federalreserve.gov/boarddocs/speeches/1999/19990319.htm.

8 SeeH.R.REP.NO.101-484,at1,1990U.S.C.C.A.N.233,233-34(1990);Bankruptcy:SwapAgreementsandForwardContracts,Pub.L.101-311,104Stat.267(1990).

9 SeeReportofthePresident’sWorkingGrouponFinancialMarkets,Hedge Funds, Leverage and the Lessons of Long Term Capital Management,atE-1(April28,1999),http://www.ustreas.gov/press/releases/reports/hedgfund.pdf.

10Id.11SeeReportofthePresident’sWorkingGroup

onFinancialMarkets,Over-the-Counter Derivatives Markets and the Commodity Exchange Act,at34(November9,1999),http://www.ustreas.gov/press/releases/reports/otcact.pdf.

12SeeFinancialNettingImprovementsActof2006,P.L.109-390,H.R.REP.NO.648,109thCong.,2ndSess.(2006).

13See11U.S.C.§101(6)andrelateddefinitionsunder11U.S.C.§761.

14See11U.S.C.§101(26).15See11U.S.C.§101(53A)andrelated

definitionof“customer”under11U.S.C.§741.

16See11U.S.C.§101(48).17See11U.S.C.§101(46).18See11U.S.C.§101(53C).19See11U.S.C.§101(22).20See11U.S.C.§101(38B).2111U.S.C.§761appliestocommoditybroker

liquidationsofsubchapter§§761etseq.

oftitle11oftheUnitedStatesCode(theBankruptcyCode).

2211U.S.C.§761statesthata“commodity”hasthemeaningassignedtoitintheCommodityExchangeAct.

23See¶[4][b][1]infra.24See House Comm. on Judiciary, Bankruptcy

Abuse Prevention and Consumer Protection Act of 2005, Report to Accompany S. 256,H.R.REP.NO.109-31,109thCongress1stSess.131(2005).

25Id.26Thereferencetoa“loan”ofasecurityin

thedefinitionisintendedtoapplytoloansofsecurities,whetherornotfora“permittedpurpose”undermarginregulations.See House Comm. on Judiciary, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Report to Accompany S. 256,H.R.REP.NO.109-31,at119,109thCongress1stSess.131(2005).

27NotethatthescopeofrepurchaseagreementandreverserepurchaseagreementisbroaderthantheBankruptcyCode’sdefinitionofsuchterms.Congresshasnotedthatrepurchaseandreverserepurchasetransactionsonallsecurities(including,forexample,equitysecurities,asset-backedsecurities,corporatebondsandcommercialpaper)areincludedunderthedefinition.See id.at120.

28Congressnotedthatthisterm“isintendedtoencompassonlythoseloanscommonlyknowninthesecuritiesindustryas“marginloans,”suchascreditpermittedinamarginaccountundertheFederalReserveBoard’sRegulationT(whetherornoteffectedinthataccount)orarrangementswhereafinancialintermediary—astockbroker,financialinstitution,financialparticipant,orsecuritiesagency—extendscreditinconnectionwiththepurchase,sale,carrying,ortradingofsecurities.“Marginloans”donotinclude,however,otherloansthathappentobesecuredbysecuritiescollateral.”See House Comm. on Judiciary, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Report to Accompany S. 256,H.R.REP.NO.109-31,at119,109thCongress1stSess.131(2005).

29Whileacontractforthepurchase,saleorrepurchaseofaparticipationmayconstitutea“securitiescontract,”thepurchase,saleorrepurchaseobligationembeddedinaparticipationagreementdoesnotmakethatagreementasecuritiescontract.See House Comm. on Judiciary, Bankruptcy Abuse Prevention and Consumer Protection Act of

22


2005, Report to Accompany S. 256,H.R.REP.NO.109-31,at120,109thCongress1stSess.131(2005).

3011U.S.C.§741(7).3111U.S.C.§761(4).3211U.S.C.§101(25).33But see In re American Home Mortgage,

Inc.,379B.R.503(Bankr.D.Del.2008)(inacontractprovidingforsaleandrepurchaseofmortgageloanswithaseparateandseverableportionofthecontractprovidingforservicingofthemortgageloans,theservicingportionisneitherarepurchaseagreementnorasecuritiescontractundertheBankruptcyCode).

34Repurchaseobligationsembeddedinparticipationsincommercialloans(suchasrecourseobligations)donotconstitutea“repurchaseagreement.”Arepurchaseagreementinvolvingthetransferofparticipationsincommercialmortgageloanswithasimultaneousagreementtorepurchasetheparticipationondemandoratadatecertainoneyearorlessaftersuchtransfer,however,wouldconstitutea“repurchaseagreement.”See House Comm. on Judiciary, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Report to Accompany S. 256,H.R.REP.NO.109-31,at120,109thCongress1stSess.131(2005).

3511U.S.C.§101(47).36Congresshasnotedthatthisprovisionis

intendedtoprovidesufficientflexibilitytoavoidtheneedtoamendthedefinitionasthenatureandusesofswaptransactionsmaturedandthatthephrase“oranysimilaragreement”hasbeenaddedtothedefinitionsof“forwardcontract,”“commoditycontract,”“repurchaseagreement”and“securitiescontract”forthesamereason.See House Comm. on Judiciary, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Report to Accompany S. 256,H.R.REP.NO.109-31,at121,109thCongress1stSess.131(2005).

3711U.S.C.§101(53B).3811U.S.C.§101(38A).39E.g.,2002ISDAMasterAgreement,Section

5(a)(vii).40Summit Inv. & Dev. Corp. v. Leroux,69F.2d

608,610(1stCir.1995).41See In re Enron Corp.,306B.R.465,472

(Bankr.S.D.N.Y.2004).42Id.

43TheexceptionrelatingtoauthorizationsunderSIPAorstatutesadministeredbytheSECisonlyincludedinsections555and559.

44Section556alsoprotectstheexerciseofarighttoavariationormaintenancemarginpaymentreceivedfromatrusteewithrespecttoopencommoditycontractsorforwardcontracts.Asusedtherein,thetermsvariationandmaintenancemarginshouldbeconstruedinconformitywiththeiruseinthedefinitionoftheterm“marginpayment”insection761oftheBankruptcyCode.SeeH.R.REP.NO.97-420,97thCongress,2ndSess.4(1982).

45Section559separatelyclarifiesthatifarepoparticipantorfinancialparticipantliquidatesarepurchaseagreementandliquidatessecuritiesinitspositionsinconnectiontherewithtosatisfyitsobligations,anyexcessofthemarketpricesreceivedonliquidationofsuchassetsoverthesumofthestatedrepurchasepricesandallexpensesinconnectionwiththeliquidationshallbedeemedpropertyoftheestate,subjecttoavailablerightsofsetoff.See also, In re American Home Mortgage, Inc.,379B.R.503(Bankr.D.Del.2008)(inacontractprovidingforthesaleandrepurchaseofmortgageloans,theportionofthecontractrelatingtoservicingofmortgageloansisnotprotectedunderSection555and559oftheBankruptcyCodebecauseitisseverablefromtheportionofthecontractprovidingforthesaleandrepurchaseofmortgageloansandtheservicingportionisneitherarepurchaseagreementnorasecuritiescontract).

46Section560alsoprotectstherightofaswapparticipantorfinancialparticipanttooffsetornetoutanyterminationvaluesorpaymentamountsarisingunderorinconnectionwiththetermination,liquidationoraccelerationofoneormoreswapagreements.

47Inthecontextofsection556,see In re Cordova,77B.R.441(Bankr.D.N.J.1987)(bankruptcyterminationclauseintradingrulesoftradeassociationeffectivelyclosedoutcommoditycontractswithdebtor).

48In re Amcor Funding Corporation,117B.R.549(D.Ariz.1990)(section555doesnotprovideasafeharborforbroker’sproposedliquidationofsecuritiespositionswithdebtorsincebroker’sliquidationwasprecipitatedexclusivelybythebankruptcyofbroker’sparentratherthananyconditionofdebtor);In re Enron Corp.,306B.R.465(Bankr.S.D.N.Y.2004)(section560doesnotexemptfromtheautomaticstayastatecourtactionseekingadeclaratoryjudgmentwithrespecttoterminationofaswapagreement

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becausecounterpartywasnotrequestingthedeclaratoryjudgmentforanyofthereasonssetforthinsection365(e)(1)).But see, In re Mirant Corp.,314B.R.347(Bankr.N.D.Tex.2004)(swapcounterparty’sdelayinterminatingaswapagreementafterdebtor’sfilingofapetitiondidnotwaiveitsprotectionsundersection560becauseswapcounterpartyreliedonaninterimorderstatingthatitwasaprotectedcounterparty).

49See11U.S.C.§561(c)oftheBankruptcyCode.

50See11U.S.C.§561(b)(3)oftheBankruptcyCode.

51See¶3.04infraforafurtherdiscussionofsetoff.

52See11U.S.C.§362(a)(7).53SeePre-BAPCPAsection362(b)(6)ofthe

BankruptcyCodeforfullprovision.ThisprovisionwasrevisedbytheBAPCPAandfurthersubstantiallyrevisedbytheFNIA.

54See In re Weisberg v. Shearson Lehman Bros., Inc.,136F.3d655(9thCir.1998)

55Id.at659(citingthelegislativehistoryofsection362(b)(6),128Cong.Rec.§15981,(dailyed.July13,1982)(remarksofSen.Dole)).

56Section362(b)(7),asrevisedbytheBAPCPAandtheFNIA,providesthatapetitioninbankruptcywillnotstaytheexercisebyarepoparticipantorfinancialparticipantofanycontractualrightunderanysecurityagreementorarrangementorothercreditenhancementformingapartoforrelatedtoanyrepurchaseagreement,oranycontractualrighttooffsetornetoutanyterminationvalue,paymentamount,orothertransferobligationarisingunderorinconnectionwith1ormoresuchagreements,includinganymasteragreementforsuchagreements.Contractualrightsaredefinedbyreferencetosection559oftheBankruptcyCode.

57Section362(b)(17),asrevisedbytheBAPCPAandtheFNIA,providesthattheexercisebyaswapparticipantorfinancialparticipantofanycontractualrightunderanysecurityagreementorarrangementorothercreditenhancementformingapartoforrelatedtoanyswapagreement,orofanycontractualrighttooffsetornetoutanyterminationvalue,paymentamount,orothertransferobligationarisingunderorinconnectionwith1ormoresuchagreements,includinganymasteragreementforsuchagreements.Contractualrightsaredefinedbyreferencetosection560oftheBankruptcyCode.

58Thescopeofthosetermshavebeenthesubjectofsomedispute.See¶[7][a]below.Itshouldalsobenotedthatthepre-FNIAversionofsection362(b)(6)referredonlytothesetoffofmarginpayments.However,thepre-FNIAversionofsection362(b)(17)referredtothesetoff“ofanypaymentorothertransferofproperty.”

59SeeH.R.REP.NO.109-648,at7(2006),109thCong.,2ndSess.(2006).

60See¶[4][b][6].61Subcomm.HearingonH.R.833,PartIIIat21

(statementofHon.JamesA.Leach).62TheBAPCPAcreatedthesafeharborfor

masternettingagreementsanditisnotavailablecasescommencedpriortoOctober17,2005.TheFNIAfurtherbroadenedtheexemption.

63Forfurtherdiscussionofsection553(a)(2)and(3),see¶3.04.

64Forfurtherdiscussionofsection553(b),see¶3.04.

65See¶3.05,3.06and3.07forageneraldiscussionofavoidancepowers.

66ThisprovisionwasmodifiedbytheBAPCPAandtheFNIA.SeeolderBankruptcyCodeforcaseseffectivepriortoOctober17,2005orDecember12,2006,asapplicable.

67In re Comark,971F.2d322(9thCir.1992)(settlementpaymentclearlyincludesatransferofsecuritiesthatcompletesasecuritiestransaction);Kaiser Steel vs. Charles Schwab (Kaiser I),913F.2d846(10thCir.1990)(settlementisthecompletionofasecuritiestransaction);Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser Steel Corp) (Kaiser II),952F.2d1230(10thCir.1991),cert.denied,505U.S.1213,112S.Ct.3015(1992)(same);Lowenschuss v. Resorts Int’l (In re Resorts Int’l, Inc.),181F.3d505,515(3dCir.1999),cert. denied,528U.S.1021(1999)(inthesecuritiesindustry,asettlementpaymentisgenerallythetransferofcashorsecuritiesmadetocompleteasecuritiestransaction);Bevill, Bresler & Schulman Asset Mgmt. Corp. v. Spencer S&L Ass’n,878F.2d,743(3dCir.1989)(settlementpaymentincludesa“depositofcashbythepurchaserorthedepositortransferofthesecuritiesbythedealer,andthatitincludestransferswhicharenormallyregardedaspartofthesettlementprocess”).

68Kaiser II,952F.2d1230(naturalreadingofthetermsuggeststhetermsettlementpaymentshouldbeinterpretedverybroadly);Williams v. Morgan Stanley Capital Grup (In re Olympic Gas),294F.3d737(5thCir.2002)(citingthesame);In re Enron Corp.,

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323B.R.857,864(Bankr.S.D.N.Y.2005)(notwithstandingthecirculardefinitionoftheterm,termisextremelybroadandincludesanythingwhichmaybeconsideredasettlementpayment);In re Resorts Int’l,181F.3d505(3dCir.1999)(thetermincludesalmostallsecuritiestransactions);Bevill, Bresler,878F.2dat743(Settlementpaymenttermis“extremelybroad.”);Hamilton Taft & Co. v. Howard, Weil, Labouisse, Freidrichs Inc.,114F.3d991(9thCir.1997);Jonas v. Resolution Trust Corp.,971F.2d322,326(9thCir.1992)(“WenowjoinwiththeThirdandTenthCircuitsandbroadlydefinethetermsettlementpayment.”);Official Comm. of Unsecured Creditors of The IT Group, Inc. v. Acres of Diamonds, L.P., (In re The IT Group, Inc.),359B.R.97,101(Bankr.D.Del.2006)(“Theanalysisperformed...inResortsmakesitabundantlyclearthatthetermsettlementpaymentistobeappliedbroadlytoanytransferofstockorcashtopayforstock.”);QSI Holdings, Inc. v. Alford (In re Quality Stores, Inc.),355B.R.629,633(W.D.Mich.2007)(“Thiscourtreluctantlyagrees...andjoinsthosecourtsthathaveadoptedabroaddefinitionof‘settlementpayment.’”);Official Comm. of Unsecured Creditors of Nat’l Forge Co. v. Clark (In re National Forge Co.),344B.R.340(W.D.Pa.2006);BCP Liquidating LLC v. Bridgeline Gas Mktg., LLC (In re Borden Chems. & Plastics Operating Ltd. P’ship),336B.R.214(Bankr.D.Del.2006).

69Comark,971F.2dat322;Bevil, Bressler,878F.2dat742(settlementpaymentincludestransferswhicharenormallyregardedaspartofthesettlementprocess,whethertheyoccuronthetradedate,thescheduledsettlementday,oranyotherdateinthesettlementprocessfortheparticulartypeoftransactionathand).

70Enron Corp.;323B.R.857(Bankr.S.D.N.Y.2005);In re Adler Coleman Clearing Corp.,263B.R.406(S.D.N.Y.2001);Official Comm. Of Unsecured Creditors of Norstan Apparel Shops, Inc. v. Lattman (In re Norstan Apparel Shops, Inc.),367B.R.68,75-76(Bankr.E.D.N.Y.2007).

7111U.S.C.§741(8);Enron Corp.,323B.R.at865;Kipperman v. Circle Trust F.B.O. (In re Grafton Partners, L.P.),321B.R.527,538(9thCir.BAP2005)(“Whateverelseasettlementpaymentmaybe,itisrestrictedtothesecuritiestradeandmustbe‘commonlyused.’”);Official Comm. of Unsecured Creditors v. ASEA Brown Boveri, Inc. (In re Grand Eagle Cos., Inc.),288B.R.484,492

(Bankr.N.D.Ohio2003);Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.),263B.R.406,475(S.D.N.Y.2001)(“...inascertainingthemeaningof‘settlementpayment,’asthetermrelatestoboth§546(e)andcompanionprovisionsin§546(f),Congressmadeclearthattheprovisionsaretobedefinedwithreferencetothecommonunderstanding,practiceandusageinthesecuritiesindustry.”).

72In re Norstan,367B.R.68(Bankr.E.D.N.Y.2007)(inordertobeencompassedinthestatutorydefinitionofsettlementpayment,atransactionmustinvolvethepublicsecuritiesmarkets);Grafton,321B.R.527(9thCir.B.A.P.2005)(commonelementsinfindingthatthereisnotaprotectedsettlementpaymentarethatthesecuritiesinvolvedarenotpubliclytradedandpublicmarketsarenotutilized).

73Norstan,367B.R.68(Bankr.E.D.N.Y.2007)(paymentmadebycloselyheldcorporationtoitsshareholdersinconnectionwithaleveragedbuyoutdidnotfallunderthedefinitionofsettlementpaymentbecauseitdidnotinvolvepubliclytradedsecuritiesorotherwiseimplicatepublicsecuritiesmarkets);Grafton,321B.R.527(9thCir.B.A.P.2005)(limitedliabilitycompany’spaymenttoaninvestorwithdrawingitscapitalinanon-publicnon-markettransactionwasnotasettlementpayment;commonelementsindecisionsfindingthatthereisnotaprotected“settlementpayment”pursuantto§546(e)arethatthesecuritiesinvolvedarenotpubliclytradedandpublicmarketsarenotutilized).

74See KaiserI,913F.2d846(10thCir.1990);Kaiser II,952F.2d1230(10thCir.1991);see also, QSI Holdings, Inc. v. Alford,355B.R.at633(followingtheTenthCircuit’sadoptionofabroaddefinitionof“settlementpayment”toincludetransferofpaymentsinconnectionwithaLBO);Official Comm. of Unsecured Creditors of The IT Group, Inc. v. Acres of Diamonds, L.P.,359B.R.at101;In re Plassein Intern. Corp.,366B.R.318,323(Bankr.D.Del.2007)(PaymentsmadetoshareholdersfortheirstockinprivatelyheldcorporationsaspartofLBO,whichweremadethroughbankviawiretransfers,were“settlementpayments”protectedby§546(e).).

75Zahn v. Yukaipa Capital Fund,218B.R.656(D.R.I.1998)(transfersofnonpublicstocktoapayingandescrowagentinconnectionwithaleveragedbuyoutwasnotasettlementpaymentbecausesystemofintermediariesandguaranteeswasnotused);Jewel Recovery, L.P. v. Gordon,196B.R.348(N.D.Tex.1996)(tenderbyfamilyshareholdersof

2�


closelyheldstocktoatrustcompanyactingasescrowagentwasnotasettlementpaymentbecausenostockbroker,clearingmemberorclearingagencyparticipatedinthetransactionandnoguaranteesweremadebythirdpartiestofacilitatethetransaction);In re Grand Eagle,288B.R.484(Bankr.N.D.Ohio2003)(paymenttopurchaseprivatelyheldstockofcorporationthroughuseofbankfinancingwasnotasettlementpaymentsimplybecausepaymentcamefromafinancialinstitution).But see, In re Munford,98F.3d604(11thCir.1996)(evenifleveragebuyoutpaymentsaresettlementpayments,section546(e)willapplyunlesstransferorsettlementpaymentismadebyortoaprotectedcounterparty;sincebankmerelyactedasanintermediaryorconduitandneverobtainedbeneficialinterestinthefundsorshares,paymentwasnotapaymentbyortoafinancialinstitution).

76Grafton,321B.R.527(9thCir.B.A.P.2005)(thefactthatthetransferwasatransactioninanillegallyunregisteredsecuritycanhardlybedescribedasapaymentcommonlyusedinthesecuritiestrade);Enron,323B.R.857(Bankr.S.D.N.Y.2005)(becausecorporation’srepurchaseofitsshareswasvoidunderapplicablestatecorporatelaw,repurchasecouldnotbeapaymentcommonlyusedinthesecuritiestradeandcouldnotbecharacterizedasasettlementpayment).

77Kaiser I,913F.2d846(10thCir.1990);Biggs v. Smith Barney, Inc.,193B.R.935(Bankr.C.D.Cal.1996)(thetermmarginpaymentalsoisinterpretedverybroadly).

78Kaiser I,913F.2d846(anypaymentbydebtorwhichwasusedtoreduceadeficiencyinhismarginaccountconstitutedeitheramarginorsettlementpaymentforpurposesoftheexceptionunder§546(e)).

7911U.S.C.§548wasamendedbyPub.L.No.109-8(2005),effectiveincasescommencedonorafterOctober17,2005,andfurtherrevisedbytheFNIA.

80H.R.REP.NO.109-648,at8,109thCong.,2ndSess.(2006).

81ThisprovisionwasmodifiedbytheBAPCPAandfurtherrevisedbytheFNIA.SeeolderBankruptcyCodeforcaseseffectivepriortoOctober17,2005orDecember12,2006,asapplicable.

82ThisprovisionwasaddedbytheBAPCPAanddoesnotapplytocasescommencedpriortoOctober17,2005.ThisprovisionwasfurthermodifiedbytheFNIA.SeeolderBankruptcyCodeforcaseseffectivepriortoOctober17,2005orDecember12,2006,asapplicable.

83See11U.S.C.§562(b).84See House Comm. on Judiciary, Bankruptcy

Abuse Prevention and Consumer Protection Act of 2005, Report to Accompany S. 256,H.R.REP.NO.109-31at135,109thCongress1stSess.131(2005).

85See 11U.S.C.§562(c).

Abu DhabiAlKhaznaTowerLevel18,NajdaStreetPOBox106076AbuDhabi,UnitedArabEmirates+971.2.678.7400Phone+971.2.678.7434(Fax)

BarcelonaAvenidaDiagonal477,10ºC08036BarcelonaSpain+34.93.545.5000+34.902.882.228(Fax)

BrusselsBoulevardduRégent,43-441000BrusselsBelgium+32.2.788.6000+32.2.788.6060(Fax)

ChicagoSearsTower233SouthWackerDrive,Suite5800Chicago,Illinois60606-6401+1.312.876.7700+1.312.993.9767(Fax)

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MilanViaFestadelPerdono,1020122MilanoItaly+39.02.3046.2000+39.02.3046.2001(Fax)

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Northern VirginiaTwoFreedomSquare11955FreedomDrive,Suite500Reston,Virginia20190-5651+1.703.456.1000+1.703.456.1001(Fax)

Orange County650TownCenterDrive,20thFloorCostaMesa,California92626-1925+1.714.540.1235+1.714.755.8290(Fax)

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RomeViaPiemonte38,P500187RomeItaly+39.06.98.95.6700Phone+39.06.98.95.6799(Fax)

San Diego600WestBroadway,Suite1800SanDiego,California92101-3375+1.619.236.1234+1.619.696.7419(Fax)

San Francisco505MontgomeryStreet,Suite2000SanFrancisco,California94111-2562+1.415.391.0600+1.415.395.8095(Fax)

Shanghai 4902JinMaoTower88CenturyBoulevardPudong,Shanghai200121People’sRepublicofChina+86.21.6101.6000+86.21.6101.6001(Fax)

Silicon Valley 140ScottDriveMenloPark,CA94025-3656+1.650.328.4600+1.650.463.2600(Fax)

Singapore9RafflesPlace#42-02RepublicPlazaSingapore048619Singapore+65.6536.1161+65.6536.1171(Fax)

TokyoMarunouchiBuilding,32ndFloor2-4-1Marunouchi,Chiyoda-kuTokyo100-6332Japan+81.3.6212.7800+81.3.6212.7801(Fax)

Washington, D.C.555EleventhStreet,N.W.,Suite1000Washington,D.C.20004-1304+1.202.637.2200+1.202.637.2201(Fax)

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