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Second Circuit Expected to Clarify Scope of Limitation On Trustee’s Avoiding Powers in Bankruptcy: Section 546 Safe Harbors for Transfers Under Swap Agreements and Securities Contracts

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Coleman Ken
Ken Coleman

Partner

New York

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Guyder Daniel
Daniel Guyder

Partner

New York

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Badtke-Berkow Joseph
Joseph Badtke-Berkow

Associate

New York

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01 June 2014

Two appeals pending before the United States Court of Appeals for the Second Circuit could soon clarify the scope of the statutory limitation on the avoiding powers of the debtor or trustee in bankruptcy under section 546 of the U.S. Bankruptcy Code (the Code) where individual creditors pursue state-law avoidance actions against recipients of pre-bankruptcy transfers of property of the debtor, including transfers made in connection with swap agreements and securities contracts. 

Recent cases demonstrate the efforts by creditor-plaintiffs to bring actions directly against defendants in order to escape the limitations on the trustee’s avoiding powers that should apply to prohibit avoidance actions against parties to swap agreements and other protected financial contracts, absent actual fraud.  Defendants in these state-law avoidance actions have been steadfast in their defense on the basis that permitting individual creditors to bring actions that would be prohibited if pursued by bankruptcy estate representatives undermines the safe harbor protections under section 546 that Congress intended to provide for swap participants and parties to protected financial contracts.

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