The United States Bankruptcy Court for the Northern District of Illinois, in a case of first impression, recently held that transfers made by a debtor in a commercial mortgage loan securitization were not avoidable as preferences or constructively fraudulent transfers because the transfers were made in connection with a “securities contract” and thus protected from being avoided under the safe harbor provisions of Section 546(e) of the United States Bankruptcy Code, 11 U.S.C. §§ 101 et seq., as amended (the “Bankruptcy Code”). Krol v. Key Bank National Association, et al. (In re MCK Millennium Centre Parking, LLC), Adv. No. 14-392 (Bankr. C.D. Ill. Apr. 30, 2015) (“Krol”).
In this case, a commercial mortgage loan in the amount of $11,200,000 (the “Loan”) under which MCK Millennium Centre Retail, LLC (“Retail”) was the obligor was placed into a commercial mortgage loan securitization (the “CMBS”). The CMBS, referred to as Merrill Lynch Mortgage Trust 2005-MKB2 Commercial Mortgage Pass-Through Certificates, Series 2005-MKB2, involved a trust (the “Trust”) that was created to acquire and own the Loan and several other commercial mortgage loans. The commercial mortgage loans, including the Loan, were transferred to the Trust under a Pooling and Servicing Agreement dated March 1, 2005 (the “PSA”) among Merrill Lynch Mortgage Investors, Inc., as the depositor of the loans into the Trust, Wells Fargo Bank, N.A., as trustee of the Trust (the “Trustee”), and Key Bank National Association, as the master servicer of the loans in the Trust (the “Servicer”). As is typical in a CMBS transaction, the Trust issued certificates to the depositor pursuant to the PSA in exchange for the commercial mortgage loans transferred by the depositor into the Trust. The depositor contemporaneously sold the certificates to third-party investors and used funds acquired from such investors to purchase the commercial mortgage loans. The certificates issued by the Trust represented interests in the pool of commercial mortgage loans owned by the Trust and were held by third-party investors. The PSA generally governed the CMBS transaction, including the creation of the Trust, the acquisition of mortgage loans, the appointment of the Trustee to act on behalf of holders of the certificates and the transfer of payments by borrowers on the mortgage loans through the Trust to holders of the certificates. Pursuant to the PSA, the Trustee engaged the Servicer to receive and administer payments on the mortgage loans, including the Loan, on behalf of the Trustee and holders of the certificates.
The equity owners of Retail also owned MCK Millennium Centre Parking, LLC (the “Debtor”), which was a sister corporation and an insider of Retail. Although Retail was the obligor on the Loan, the Debtor made payments on the Loan over several years in excess of $5,000,000 (the “Transfers”). The Debtor was not an obligor on the Loan. The Transfers by the Debtor were made to the Servicer, which held the payments for a period of time and then transferred the funds to the Trust pursuant to the PSA.
The Debtor subsequently filed Chapter 11 bankruptcy. After the bankruptcy case was converted to a case under Chapter 7, a bankruptcy trustee was appointed in the Debtor’s bankruptcy case. The bankruptcy trustee filed a complaint against the Servicer and the Trustee to recover the Transfers made by the Debtor on the Loan. The bankruptcy trustee alleged that the Transfers were avoidable under Section 548 of the Bankruptcy Code and applicable state law as constructively fraudulent transfers (on the theory that the Debtor was insolvent and received no value in exchange for the Transfers) and as transfers made with the actual intent to defraud creditors of the Debtor. The bankruptcy trustee further alleged that Transfers made by the Debtor to the Servicer within the 90-day period preceding bankruptcy were avoidable as preferential transfers under Section 547 of the Bankruptcy Code.
In response to arguments by the Servicer and the Trustee, the bankruptcy court determined that the bankruptcy trustee’s claims to avoid the Transfers as constructively fraudulent transfers and as preferential transfers should be dismissed. The court concluded that the Transfers by the Debtor on the Loan were integrated with a CMBS transaction and constituted transfers made “in connection with a securities contract” for purposes of the Bankruptcy Code. Thus, the court determined that the safe harbor provisions of Section 546(e) of the Bankruptcy Code protected the Transfers from being avoided as constructively fraudulent transfers or preferential transfers of the Debtor.
Section 546(e) of the Bankruptcy Code provides:
Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer that is … a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract, as defined in section 741(7), … that is made before the commencement of this case, except under section 548(a)(1)(A) of this title.
11 U.S.C. § 546(e).
The bankruptcy court reviewed each element of Section 546(e) of the Bankruptcy Code and determined that the Transfers satisfied each element. The court held that the Transfers to Key Bank as Servicer were transfers to a “financial institution” under Section 546(e). The court rejected the Debtor’s arguments that the Trust in the CMBS transaction should be considered the actual transferee, because the Servicer was only a conduit or intermediary and had no beneficial interest in the Transfers, and that the Trust was not a “financial institution.” After noting a split of authority on the role a financial institution must play in a transaction for Section 546(e) to apply to a transfer to such institution, the court declined “to read into the statute the additional requirement that the financial institution receive some benefit or acquire the funds for its own use.” Krol at 14.
The court also considered the Loan in the context of a CMBS securitization, rather than viewing the Loan in isolation. When viewed in the context of a CMBS securitization, the court determined that the Transfers by the Debtor on the Loan were made in connection with a securities contract within the meaning of Section 546(e) of the Bankruptcy Code. The court noted that a securities contract includes contracts for the purchase and sale of securities and the term “securities contract” should be viewed “expansively.” Id. at 18. “Here,” the court held, “the CMBS transaction involved the transfer of the Retail Loan into the Trust and the subsequent issuance of certificates representing investors’ interests in the bundled loans.” Id. Thus, the court reasoned that the PSA constituted a securities contract under the Bankruptcy Code and that the Transfers by the Debtor were made in connection with the PSA for purposes of the Section 546(e) safe harbor.
In holding that the Transfers by the Debtor were within the scope of Section 546(e) of the Bankruptcy Code, the court also declined to require the securities contract or the CMBS transaction at issue to be a contract or a transaction of the Debtor as transferor, as Retail and not the Debtor was the obligor on the Loan in the CMBS transaction. The Debtor was in effect one step removed from the Loan and the CMBS transaction at issue. However, the holding of Krol would arguably support the conclusion that payments made by a borrower under a loan in a CMBS transaction should similarly be protected from avoidance as constructively fraudulent transfers or preferential transfers.
The court further held that the bankruptcy trustee’s claim to avoid the Transfers as fraudulent transfers on the basis of an actual intent to defraud creditors should also be dismissed. Although a claim that a transfer is avoidable on the basis of actual intent to defraud is not protected by Section 546(e), the court determined that the bankruptcy trustee’s claim on this issue lacked the specificity required to support an allegation of actual fraud.
Because the court determined that it may not have jurisdiction to enter a final order on certain claims, many of the foregoing holdings were made in the form of a report and recommendation to the applicable district court.
Given the number and generally common structure of CMBS transactions, the holding in Krol, if accepted by the district court, may have a broad application. In addition, not all servicers in CMBS transactions are entities similar to Key Bank. The parties in Krol did not dispute that Key Bank qualified as a “financial institution” for purposes of Section 546(e). However, if transfers are made to a servicer in a CMBS transaction that does not qualify as a “financial institution,” then the court in such a case may need to determine whether the trust in a CMBS transaction constitutes the transferee and qualifies as a “financial institution” for purposes of the Section 546(e) safe harbor.
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 The court also noted that the Servicer may have received the Transfers for its own benefit as transferee because it was allowed by the PSA to invest the funds received for its own benefit.
 In Stern v. Marshall, 131 S. Ct. 2594 (2011), the United States Supreme Court has, to date, imposed certain constitutional limitations on the ability of a bankruptcy court to enter final orders on certain issues.