Firm Obtains Important Ruling Against Application of Bankruptcy Code § 546(e) Exemption to Payment on Letter of Credit Supporting Debtor’s Bonds

Bankruptcy Code § 546(e) provides an exemption from preference and fraudulent transfer avoidance for securities “settlement payments” and payments on “securities contracts.” In an important ruling in this developing area, Bankruptcy Judge Mary F. Walrath held that the section 546(e) exemption did not apply to a $33 million payment by The Firm’s client Qimonda Richmond, LLC to cover its reimbursement obligation under a letter of credit issued by Citibank to the indenture trustee for Qimonda industrial revenue bonds that were subsequently repaid by a draw on the letter of credit. Accepting the Firm’s analysis, the Court determined that (1) Qimonda’s payment was not a securities “settlement payment” because it related to Qimonda’s reimbursement obligation under the letter of credit, not the revenue bonds, in that the bonds would have been repaid with or without the Qimonda payment given Citibank’s independent obligation to pay under the letter of credit; and (2) Qimonda’s payment was not a payment on a “securities contract” because, although the letter of credit was a credit enhancement of the bonds, the bonds themselves were “securities” not “securities contracts” under the relevant Bankruptcy Code definitions. In dismissing Citibank’s motion to dismiss, the Court further ruled that the complaint properly alleged that Citibank was not fully secured at the time of the Qimonda payment. (In re Qimonda Richmond, LLC, et al., Case No. 09-10589 (MFW), Adv. Pro. 11-50603 (MFW) (Bankr. D. Dela., decided March 26, 2012)).

A copy of the decision is available below.