The Enron decision addressed an issue of first impression within the 2nd Circuit concerning whether the “settlement payment” exception under 11 U.S.C. Section 546(e) applied to payments made in connection with the redemption of commercial paper prior to maturity.
According to the court, during the two-month period prior to the Enron bankruptcy, the company drew down approximately $3 billion from its revolving line of credit and paid out more than $1.1 billion to retire certain commercial paper at par in advance of maturity. The redemption was inconsistent with the underlying offering memorandum, which stated, “Notes are not redeemable or subject to voluntary prepayment by the Company prior to maturity.” Bookkeeping and ownership tracking services were undertaken by the Depository Trust Company. J.P. Morgan, Goldman Sachs & Co., and Lehman Brothers Commercial Papers Inc. each participated as broker-dealers in the commercial paper redemption. The commercial paper was received by the broker-dealers, who in turned paid the redemption price to the noteholders.
