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In re Quebecor World (USA) Inc.

September 28, 2012


The opinion of the court was delivered by: Jesse M. Furman, United States District Judge


In October 2007, shortly before it filed for bankruptcy, Quebecor World (USA) Inc. ("QWUSA") paid more than $376 million to purchase and redeem a series of private placement notes that an affiliated company had issued years earlier. The question in this case is whether those payments can be "avoided"--that is, recaptured as part of the bankruptcy estate--on the ground that they were "preferential" transfers, or whether they are protected from avoidance as either "settlement payments" or transfers "in connection with a securities contract." Appellant Official Committee of Unsecured Creditors of Quebecor World (USA) Inc. ("Appellant") appeals fromm an order of the United States Bankruptcy Court for the Southern District of New York (James M. Peck, B.J.), entered on August 17, 2011, granting Appellees' motion for summary judgment. See Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. Am. United Life Ins. Co. (In re Quebecor World (USA) Inc.), 453 B.R. 201 (Bankr. S.D.N.Y. 2011) ("Quebecor"). Relying on the Second Circuit's decision in In re Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) ("Enron"), the Bankruptcy Court held that the payments at issue were protected as both settlement payments and transfers in connection with a securities contract. Quebecor, 453 B.R. at 215-19. For the reasons stated below, this Court agrees and, accordingly, the Bankruptcy Court's order is AFFIRMED.


A.The Statutory Scheme

As noted, this case concerns the authority of a bankruptcy trustee to avoid and thus recapture "preferential" transfers. To the extent relevant here, Section 547(b) of the Bankruptcy Code provides that a trustee may recover money or property transferred by an insolvent debtor on account of an antecedent debt in the ninety days preceding bankruptcy. See 11 U.S.C. § 547(b). This "avoidance" authority serves two important functions. First, it deters creditors from racing to the courthouse and hastily forcing troubled businesses into bankruptcy. See, e.g., Union Bank v. Wolas, 502 U.S. 151, 160-61 (1991); In re Roblin, 78 F.3d 30, 40 (2d Cir. 1996).Second, it promotes equitable treatment of creditors by allowing a trustee to recapture for the benefit of all creditors preferential payments or transfers made in the months leading up to the bankruptcy. See Wolas, 502 U.S. at 160-61.

Section 546(e) of the Bankruptcy Code carves out limited exceptions to this avoidance authority, two of which are relevant to this case. First, a trustee "may not avoid a transfer that is a . . . settlement payment . . . made by or to (or for the benefit of) a . . . financial institution." 11 U.S.C. § 546(e). Section 741 of the Code, in turn, defines a settlement payment as "a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade." Id. § 741(8).*fn1 Second, a trustee "may not avoid . . . a transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract." Id. § 546(e). To the extent relevant here, Section 741 defines "securities contract" to mean "a contract for the purchase, sale, or loan of a security, . . . including any repurchase . . . transaction on any such security." Id. § 741(7)(A)(i).

Congress enacted the Section 564(e) safe harbors "to minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries." H.R. Rep. No. 420, 97th Cong., 2d Sess. 2 (1982), reprinted in 1982 U.S. Code Cong. & Admin. News 583, 583. As the Court explained in Enron, "[i]f a firm is required to repay amounts received in settled securities transactions, it could have insufficient capital or liquidity to meet its current securities trading obligations, placing other market participants and the securities markets themselves at risk." 651 F.3d at 334. "By restricting a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, the safe harbor stands 'at the intersection of two important national legislative policies on a collision course-the policies of bankruptcy and securities law.'" Id. (quoting In re Resorts Int'l, Inc., 181 F.3d 505, 515 (3rd Cir. 1999)).


The facts relevant to this case are undisputed. Quebecor World Inc. ("QWI") is a Canadian corporation that used to be the second largest commercial printer in the world. See Quebecor, 453 B.R. at 206. In July 2000, an entity in the Quebecor corporate family, Quebecor World Capital Corp. ("QWCC"), raised $250 million by issuing a series of private placement notes to a small group of lenders (the "Noteholders") pursuant to a Note Purchase Agreement. (JA-23 Ex. A1).*fn2 In September 2000, QWCC issued another $121 million in private placement notes (together with the July 2000 notes, the "Notes") pursuant to a nearly identical Note Purchase Agreement (together with the July 2000 Note Purchase Agreement, the "NPA"). (JA-23 Ex. A2). The Notes were guaranteed by QWI and its primary subsidiary in the United States, QWUSA. (JA-23 Ex. C2 ¶ 94).

Under Section 8.2 of the NPA, QWCC was entitled to redeem or prepay all or part of the Notes at any time and for any reason. (JA-23 Exs. A1, A2 §8.2). Upon prepayment, the Noteholders would receive the aggregate principal owed, accrued interest, and a "make-whole" premium designed to compensate the Noteholders for the early payment of the Notes. (Id.). Section 8.5 of the NPA specified that "[a]ny Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note." (JA-23 Exs. A1, A2 § 8.5). Section 8.6 of the NPA further provided that QWI and any controlled affiliates were prohibited from purchasing, redeeming, prepaying or otherwise acquiring the Notes except "(a) upon the payment or prepayment of each series of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to an offer to purchase" made by QWI or a controlled affiliate "pro rata to the holders of all Notes at the time outstanding at the same time and upon the same terms and conditions." (JA-23 Exs. A1, A2 § 8.6).

The NPA also included a limitation on QWI's debt-to-capitalization ratio, which provided that if that ratio exceeded 55% on the last day of any fiscal quarter ending after December 31, 2000, all outstanding Notes would be immediately due to the Noteholders, including principal owed, accrued interest, and the make-whole premium. (JA-23 Exs. A1, A2 §§ 10.1, 13.1(a), (c)). By May of 2007, QWI and its subsidiaries were in financial distress and at risk of breaching this covenant. (Appellant's Br. at 8; Appellees' Br. at 8-9). To avoid the potentially catastrophic consequences of such a breach, QWI attempted to modify the covenant through a partial tender offer to just over half of the Noteholders in exchange for their support in raising the debt-to-capitalization ratio to 65%. (Appellant's Br. at 9; Appellees' Br. at 9). The Noteholders, however, unanimously rejected the tender offer and instead signed a Noteholder Cooperation Agreement and Right of First Refusal Agreement, pursuant to which they agreed not to sell the Notes outside the then-existing group of Noteholders. (Appellant's Br. at 10; Appellees' Br. at 9). It appears that these agreements were intended to prevent QWI from dividing the Noteholders with a partial tender offer, thereby forcing an early prepayment of the Notes - including the make-whole premium - to all Noteholders. (Appellant's Br. at 10).

In September 2007, the QWI Board of Directors approved prepayment of all the Notes to avoid breaching the debt-to-capitalization ratio covenant, using cash raised from a separate bank credit facility. (JA-23 Exs. B1-B4 at 53). On September 28, 2007, QWCC sent each Noteholder a "Notice of Redemption" stating that, on October 29, 2007, it intended to "redeem" in full all outstanding Notes under Section 8.2 of the NPA. (E.g., JA-23 Exs. B5-11 at 16). The notice directed each Noteholder to "surrender" the Notes "for cancellation, pursuant to Section 8.5 of the [NPA]." (E.g., id. at 17). Several weeks later, however, QWI realized that QWCC's redemption of the Notes would result in unwanted tax liabilities under Canadian law. At the last minute, therefore, QWI restructured the transaction as a purchase of the Notes by QWUSA, which would then surrender the Notes to QWCC for redemption. (Appellant's Br. at 11). On October 25, 2007, QWUSA provided a second notice to the Noteholders that it would pay the "Redemption Price" set forth in the Notice of Redemption, which would "result in QWUSA purchasing the Notes." (E.g., JA-23 Exs. B12-18 at 1).

On October 29, 2007, QWUSA instructed Bank of America to wire transfer $376,298,061.81 - the sum of the principal, accrued interest, and the make-whole premium - from its main operating account to the trustee for the Noteholders, CIBC Mellon ("CIBC"). (JA-23 Exs. B12-18 at 53). CIBC then transferred to each Noteholder its portion of the prepayment; it did not, however, take title to the securities or utilize any type of clearing mechanism to complete the transaction. (JA-23 Exs. D1-D7 at 9). Regardless, according to the Noteholders, the payment from QWUSA to them was part of a securities transaction that "settled." (JA-6-22 ¶ 9 & Exs. C.). Moreover, at least some contemporaneous documents describe the transfer as "settle[d]," occurring on a "settlement date," or the like. (E.g., JA6-22 Ex. C; JA-30 Ex. C, JA-31 Ex. C; JA-39 Exs. 27-36 at 25). Following the prepayment, the Noteholders returned the Notes by mailing them directly to QWI in Montreal - a process that dragged on for some months. (Appellees' Br. at 11). When returned, two of the fifteen Notes were stamped "PAID IN FULL." (Appellant's Br. at 12 (citing JA-39 Exs. 64, 81); Appellees' Br. at 13 (citing JA-6-9, 11-16, 18-22)).

On January 21, 2008, QWUSA filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York. Voluntary Petition (Chapter 11), In re Quebecor World (USA), No. 08-bk-10152 (JMP) (Bankr. S.D.N.Y. Jan. 21, 2008) (Docket No. 1). On September 19, 2008, Appellant commenced this adversary proceeding seeking to avoid the $376 million prepayment of the notes on the ground that it was a "preferential" transfer within the meaning of Section 547(b). Complaint, Official Comm. of Unsecured Creditors of Quebecor World (USA), Inc. v. Am. United Life Ins. Co. (In re Quebecor World (USA) Inc.), No. 08-ap-1417 (JMP) (Bankr. S.D.N.Y. Sept. 19, 2008) (Docket No. 1). On October 29, 2010, the Noteholders moved for summary judgment, contending that the payment fell within the safe harbor of Section 546(e). (08-ap-1417 (JMP), Docket No. 32). The Bankruptcy Court heard oral argument on January 19, 2011, and held a limited ...

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