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26 Am. Bankr. Inst. L. Rev. 1 (2018)

handle is hein.journals/abilr26 and id is 1 raw text is: 










       A NOTE TO CONGRESS: AMEND SECTION 546(e) OF THE
       BANKRUPTCY CODE TO HARMONIZE THE UNDERLYING
       POLICIES OF FRAUDULENT CONVEYANCE LAW AND
             PROTECTION OF THE FINANCIAL MARKETS

                             PETER  V. MARCHETTI

                                   ABSTRACT

    This Article discusses and analyzes recent developments regarding section 546
of the Bankruptcy Code.  Several important policies underpin the Bankruptcy Code,
including, inter alia: (i) fostering the debtor's reorganization of its financial affairs;
and  (ii) treating similarly situated creditors ratably in accordance with an
established priority scheme. To reach these goals, the Bankruptcy Code  contains
provisions that allow the debtor to claw back transfers referred to as 'referential
transfers and  'fraudulent transfers. These clawback  provisions are aimed  at
preventing certain creditors from: (i) 'icking the debtor  apart within a close
temporal proximity to the date ofits bankruptcy filing; and (ii) receiving either actual
or constructive fraudulent transfers from the debtor.
    Over  the past three decades, however, Congress has amended  the Bankruptcy
Code   to reflect an additional policy protection of the financial markets from
systemic risk. To  accomplish this goal, Congress enacted  and expanded  section
546(e) of the Bankruptcy Code (the Section 546(e) Safe Harbor'9 to insulate various
types of financial transactions from the Bankruptcy Code's clawback  provisions.
Congress's intent underlying the Section 546(e) Safe Harbor is to prevent a ripple
effect offinancial losses to financial institutions and clearinghouses that function as
intermediaries in interconnected financial transactions.
    Several recent cases of apparent first impression have demonstrated that the
precise parameters of the Section 546(e) Safe Harbor are not clear. Indeed, there is
a current split within the federal circuits on several crucial issues involving the
Section 546(e) Safe Harbor.   Several of these cases involve multi-billion dollar
disputes connected  to leverage buyouts (LBO's'9, Ponzi schemes  and derivative
transactions. Several decisions applied the Section 546(e) Safe Harbor more broadly
than Congress  intended. Namely, there is a lack of clarity as to whether the Section
546(e) Safe Harbor:  (i) insulates a settlement payment by a debtor to a holder of
securities issued by  the debtor from  a  constructive fraudulent transfer or  a
preferential transfer simply because a financial institution acted as a conduit (such


  . 0Peter V. Marchetti, 2017. Assistant Professor of Law, Thurgood Marshall School of Law-Texas Southern
University. The views and opinions expressed herein are solely those of the author. I thank Thurgood Marshall
School of Law-Texas Southern University for the Summer Research Stipend that facilitated this Article. I
thank my research assistants Nedialka Gagalieva and Alex W. Chalk for their superb research and editing
assistance for this Article. Likewise, I thank the American Bankruptcy Institute Law Review editors and staff
for their assistance in editing this Article.


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