Quebecor World creditors suffered another loss when the U.S. Supreme Court refused to allow an appeal in a lawsuit intended to claw back $376 million for early redemption of bonds three months before bankruptcy in January 2008.
The high court’s action means that astute lawyers can structure transactions to involve securities and thereby confer immunity in most of the U.S. on deals that otherwise could be unraveled in bankruptcy as fraudulent transfers or preferences.
The court let stand a ruling in June from the U.S. Court of Appeals in Manhattan upholding two lower courts that dismissed so-called preference claims under what’s known as the safe harbor for securities transactions.
The Supreme Court’s denial of an appeal on Feb. 24 means there will be no decision this year on an issue dividing federal appeals courts.
The Quebecor official creditors’ committee sued in September 2008 to recover the payment, saying it was a preference because debt was repaid in advance of maturity and within 90 days of bankruptcy. The noteholders responded by contending the suit was barred by the safe harbor in Section 546(e) of the Bankruptcy Code. That section precludes suits to recover payments made in securities transactions that involve a financial institution.
The bankruptcy judge dismissed the suit in July 2011, saying he had no choice because the Second Circuit appeals court in Manhattan had ruled the month before that the safe harbor must be accorded “extremely broad” interpretation.
On a first appeal, the creditors lost again in district court, where the judge said he was likewise obligated to follow the appeals court’s 2-1 opinion in June 2011 in Enron Creditors’ Recovery Trust v. Alfa SAB.
In June, the circuit court upheld the two lower courts, holding that a transaction was within the safe harbor even if a financial institution is merely a conduit or intermediary. The federal appeals court in Atlanta is alone in requiring that a financial institution have a beneficial interest in the securities.
Quebecor creditors wanted the Supreme Court to take the case and rule that the safe harbor doesn’t apply when the financial institution involved in the transaction is a “mere conduit.” The creditors contended that virtually every securities transaction has a financial institution involved in some capacity, even though it doesn’t have its own money involved.
For details on the appeals court’s decision, click here for the June 11 Bloomberg bankruptcy report.
The bankruptcy judge said he was forced to dismiss even though the case involved “behavior that the law generally would seek to discourage.”
In July 2009, Quebecor implemented the bankruptcy reorganization plans approved by judges in both the U.S. and Canada. Then the second-largest commercial printer in the U.S., Quebecor changed its name to World Color Press Inc.
The case in the Supreme Court is Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Insurance Co., 13-455, U.S. Supreme Court (Washington).
The circuit court opinion is Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. v. American United Life Insurance Co. (In re Quebecor World (USA) Inc.), 12-4270, U.S. Court of Appeals for the Second Circuit (Manhattan). The Chapter 11 case in New York is In re Quebecor World (USA) Inc., 08-bk-10152, U.S. Bankruptcy Court, Southern District of New York (Manhattan).