In Krol v. Key Bank National Association, et al. (In re MCK Millennium Centre Parking, LLC), Adv. No.14-00392 (N.D. Ill. Apr. 24, 2015), the U.S. Bankruptcy Court, Northern District of Illinois (the “Court”) issued a decision of particular importance to lenders and securitization servicers facing complications from the bankruptcy of a borrower involved in a commercial mortgage-backed securitization (“CMBS”). The Court clarified the scope of safe harbor protections for loan payments which are “related to” a securities contract, dismissing a chapter 7 trustee’s avoidance claims seeking to claw back over $5 million in pre-petition loan payments made to repay loan obligations owed to a trust. The Court held that the safe harbor under section 546(e) of the Bankruptcy Code protected from avoidance the debtor’s payments to the bank on account of a non-debtor affiliate’s loan. Because the loan was evidenced by a promissory note which was then transferred to a real estate mortgage conduit trust and managed as a CMBS, the payments on the underlying loan “related to” a securities contract – a type of transaction covered by the Bankruptcy Code safe harbors. The Court dismissed the trustee’s preference claim and recommended dismissal of the trustee’s constructive fraudulent transfer claims.
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