A recent Supreme Court case addressed the extent of the safe harbor of Section 546(e) of the Bankruptcy Code.
- Trustee’s Avoiding Powers: The Bankruptcy Code allows bankruptcy trustees to “set aside” (avoid) certain transfers and recover funds for the benefit of the bankruptcy estate and the creditors, including fraudulent transfers “of an interest of the debtor in property.” 11 U.S.C. § 548.
- Limits of Trustee’s Avoiding Powers: The Bankruptcy Code also sets out specific limits on the trustee’s exercise of these avoiding powers. The securities safe harbor of section § 546(e) is one of these limits. Under the Code, the trustee “may not avoid a transfer that is a … settlement payment … made by or to (or for the benefit of) a … financial institution … or that is a transfer made by or to (or for the benefit of) a … financial institution … in connection with a securities contract.” 11 U.S.C. § 546(e).
In the case at bar, Merit Management Group, LP v. FTI Consulting, Inc. asked the Court “to determine how the safe harbor operates in the context of a transfer that was executed via one or more transactions.” 583 U.S. ___, 1 (2018). Essentially, when determining whether the securities safe harbor saves the transfer from the trustee’s reach, should court look to the transfer the trustee seeks to avoid or should the court look to the component parts of the overarching transfer?
Supreme Court Holding
In a unanimous ruling, the Supreme Court held that “the plain meaning of §546(e) dictates that the only relevant transfer for purposes of the safe harbor is the transfer that the trustee seeks to avoid.” Id. 2.
Facts of the Case
Valley View Downs, LP, the owner of a Pennsylvania racetrack, bought all shares of a competing racetrack, Bedford Downs, for $55 million. Valley View borrowed money from Credit Suisse and other lenders to pay for the shares of Bedford Downs. The exchange took place through Citizens Bank of Pennsylvania and the escrow agent. Id. 7.
Shortly thereafter Valley View filed for Chapter 11 bankruptcy. FTI Consulting, Inc. was appointed Trustee of the litigation that includes Valley View as one of the debtors. The Trustee brought suit seeking to avoid Bedford Downs’ $16.5 Million transfer to Valley View under the securities safe harbor provisions of the Bankruptcy Code for transfers “made by or to” certain financial entities. Id.
Credit Suisse and Citizens Bank are financial institutions within the language of 11 U.S.C. § 546(e). The question is whether the language “made by or to” includes institutions that act merely as a conduit for the transfer, but do not benefit from the transfer. The Court agreed with the Trustee’s argument that the safe harbor has no application in this case because the transfer was not made by, to, or for the benefit of the financial institution. Id. 10.
“The language of §546(e), the specific context in which that language is used, and the broader statutory structure all support the conclusion that the relevant transfer for purposes of the §546(e) safe harbor inquiry is the overarching transfer that the trustee seeks to avoid under one of the substantive avoidance provisions.” Id.
In Merit, neither Valley View or Merit is a “financial institution” under the safe harbor of Section 546(e). Therefore, the transfer falls outside the scope of the safe harbor and the trustee may avoid the transfer.
The Takeaway
The securities safe harbor is no longer a broad safe harbor for recipients of transactions that pass through financial institutions. However, financial institutions remain protected under Section 546(e) whether the institution acts as a principal to a transaction, or merely as an intermediary.
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