Robert Dremluk Published in The Bankruptcy Strategist
"How Safe Is The Harbor?"

Robert Dremluk's article, "How Safe Is The Harbor?" was published in the May 2010 issue of The Bankruptcy Strategist. In his article, Bob discusses whether or not Bankruptcy Code safe-harbor provisions have some unintended consequences and can adequately address systemic risk in an environment of ever-changing complex financial transactions. He notes, "When the Bankruptcy Code was enacted in 1978, it only provided for special treatment for transactions involving securities and commodities markets. However, in 1982, the Bankruptcy Code was amended technically to clarify and substantively to modify the statute 'to minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries.'" Bob also summarizes the evolution of safe harbor protections for financial transactions under the Bankruptcy Code and briefly reviews case law developments involving sections 559 and 560 of the Bankruptcy Code identifying some key unresolved issues.

According to Bob, "The safe harbors contained in the Bankruptcy Code certainly are not perfect, and indeed may even be too pervasive so as to have unintended consequences. The process to reconcile these issues is ongoing. However, as this process unfolds less sophisticated and smaller counterparties who become subject to safe-harbor statutes designed to protect against systemic risk also need to be protected in a different way." He further notes that there can be "unintended consequences of causing the failure of a smaller financial player who, but for the modification of the stay authorized under safe harbor provisions, could have survived and reorganized." Bob points out the need to "weigh and balance the potential consequences of systemic risk against the fundamental purpose of allowing debtors to reorganize under the Bankruptcy Code." He concludes that tweaking of the statute seems to be required to create this balance and "despite such a modification and as reasonably anticipated other clarifying amendments, the ever-changing complexity of financial transactions suggests that these safe harbors may never be completely safe."