On September 10, 2015, in light of new evidence brought to its attention, the US Bankruptcy Court for the Northern District of Illinois vacated its landmark April 24, 2015 decision in Krol v. Key Bank National Association (In re MCK Millennium Centre Parking LLC), which effectively safe harbored payments on securitized loans under section 546(e) of the Bankruptcy Code. (No.14-00392 (Bankr. N.D. Ill. Sept. 11, 2015)).

On April 24, 2015, in In re MCK Millennium Centre Parking, LLC, the court held that repayments made by a debtor to a commercial bank on a loan, where the promissory note evidencing the loan was held by a commercial mortgage-backed security (CMBS) real estate mortgage conduit (REMIC) trust, were not avoidable because the repayments were found to be made "in connection with" a "securities contract" and therefore protected by the safe harbor under section 546(e) of the Bankruptcy Code.

The court held the transfer was protected even though the defendant transferee lacked beneficial interest in the transferred funds and the payments to the REIMC were made through a master servicer. The court found that the payments qualified for the safe harbor so long as they are made by a "financial institution" (see Legal Update, In re MCK Millennium Centre Parking: Payments on Securitized CMBS Loan Protected by 546(e) "Securities Contract" Safe Harbor).

This decision heavily relied on whether or not the defendant was a "financial institution" within the meaning of the safe harbor provision. The court held that safe harbor was proper because the defendant, Key Bank National Association (which represented to having received payments as a master servicer and held them for a period before transferring them to the REMIC trust) was a "financial institution" and therefore such payments were properly "in connection with" a "securities contract."

The September 10, 2015 order is in direct response to new information which undermines the above reasoning of the court in its original decision. Defendants have recently disclosed information that the master servicer of the trust was not Key Bank National Harbor, but rather its related party KeyCorp Real Estate Capital Markets, Inc. which they allege is not a "financial institution.” The court has granted the plaintiff leave to file an amended complaint and a status hearing is scheduled for November 10, 2015.

The April 24, 2015 decision was a landmark in the continued expansion of judicial reading of the Bankruptcy Code safe harbors for financial contracts, effectively protecting most payments made in connection with a securitization transaction under the securities contract safe harbor. However, that holding is now in flux.

For an in-depth discussion of the April 24, 2015 decision, see Legal Update, In re MCK Millennium Centre Parking: Payments on Securitized CMBS Loan Protected by 546(e) "Securities Contract" Safe Harbor.