Payments on Commercial Mortgage-Backed Securities
Loans Cannot be Avoided in Bankruptcy
By: Correy Karbiener and Jonathan Sykes November 2016
The Bankruptcy Code gives a trustee the power to avoid pre-petition fraudulent and preference
transfers made by a debtor, except that a trustee may not avoid a transfer that is “made by or to
(or for the benefit of)” a party enumerated in § 546(e) of the Code “in connection with a securities
contract.”1 Although § 546(e) has been applied in various circumstances, there is little court
guidance on whether § 546(e) protects transfers made to repay commercial mortgage-backed
securities (“CMBS”) loans. One case in particular has applied § 546(e) to dismiss such an avoidance
action: Krol v. Key Bank Nat’l Ass’n (In re MCK Millennium Centre Parking, LLC), 532 B.R. 716
(Bankr. N.D. Ill. 2015).
Section 546(e)
In determining which transfers fall under § 546(e), circuit courts have taken either a broad
approach or a narrow approach.2 A majority of circuit courts have applied a broad approach,
finding that the plain language of the Code does not expressly require a specific type of transfer or
interest obtained by a party enumerated under § 546(e), and that any participation by an
enumerated party is sufficient to protect the transaction. 3 In particular, the Second Circuit has
found that “the language of Section 546(e) covers all transfers by or to financial intermediaries
that are ‘settlement payment[s]’ or ‘in connection with a securities contract.’”4 “Transfers in which
either the transferor or transferee is not such an intermediary are clearly included in the language”
because § 546(e) is meant to protect the transaction and not just the entities involved in the
transaction.5 Therefore, under the broad approach the analysis hinges on whether the transfer
itself is included in the language of § 546(e) rather than focusing on whether the transferor or
transferee is a financial intermediary.6
A minority of courts have taken a more narrow approach, holding that transfers are not protected
under § 546(e) unless a party enumerated in the statute is the “transferee” that acquired a
1 11 U.S.C. §§ 544, 546(e), 547, 548, and 550.
2 See FTI Consulting, Inc. v. Merit Management Group, LP, 830 F.3d 690 (7th Cir. 2016); In re Tribune Co.
Fraudulent Conveyance Litigation, 818 F.3d 98 (2d Cir. 2016); Munford v. Valuation Research Corp. (In re Munford), 98
F.3d 604, 610 (11th Cir. 1996).
3 In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d at 112 (finding that the focus of the analysis should
not be on the status of a party as a financial intermediary but instead on the transaction itself); QSI Holdings, Inc. v.
Alford (In re QSI Holdings, Inc.), 571 F.3d 545, 551 (6th Cir. 2009); Contemporary Indus. Corp. v. Frost, 564 F.3d 981,
986-87 (8th Cir. 2009); Lowenschuss v. Resorts Int'l, Inc. (In re Resorts Int'l, Inc.), 181 F.3d 505, 516 (3d Cir. 1999);
Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser Steel Corp.), 952 F.2d 1230, 1240 (10th Cir. 1991).
4 In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d at 112.
5 Id. at 121.
6 Id.
