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Supreme Court Hears Arguments in Merit Management Group vs. FTI Consulting Concerning Split Among Circuit Courts on the Scope of the Safe Harbor in Section 546(e)

November 7, 2017, Illinois – Last month, the Supreme Court heard oral arguments in Merit Management vs. FTI Consulting on the scope of the safe harbor provisions in Sec. 546 (e). The Supreme Court agreed to review the applicability of the safe harbor provisions after differing interpretations of the statute created a split among the circuit courts.

At issue was one of the pertinent dispute in the securities transactions – Whether the safe harbor of Section 546(e) of the Bankruptcy Code prohibits avoidance of a transfer made by or to a financial institution, regardless of whether the institution benefits from the transfer or acts merely as a conduit of the transfer?

Earlier, in 2007, Debtor Valley View Downs, LP, the owner of a Pennsylvania racetrack, agreed to acquire all shares of a competing racetrack, Bedford Downs, in exchange for $55 million. To help finance for a merger, Valley View borrowed money from a financial institution, Credit Suisse and the exchange took place through Citizens Bank of Pennsylvania, the escrow agent.

Defendant Merit Management Group was a 30% shareholder in Bedford Downs and thus received approximately 16.5 million dollars as a result of the merger. Shortly after that, Valley View filed for Chapter 11 bankruptcy. The trustee, FTI Consulting brought a lawsuit against Merit Management to avoid the $16.5 million transfer. The Trustee contended that the payment was a fraudulent transfer under 548(a)(1)(A) because the Debtor did not receive reasonably equivalent value for the Bedford Downs purchase price, and Valley View was insolvent at the time of the purchase.

Merit Management argued that, because its payment was a transfer made by a financial institution in connection with a securities contract, §546(e)’s safe harbor provision applied to them and thus, the alleged transfer was not avoidable. It is undisputed that Credit Suisse and Citizens Bank are financial institutions within the language of the statute, but the issue was whether the language “made by or to” includes institutions that act merely as a conduit for the transfer and do not benefit from it.

The district court agreed with Merit Management and held that the safe harbor provision applied not only to transfers benefiting institutions listed in §546(e) but also for transactions in which §546(e) institutions served as conduits for the transfers.

FTI appealed to the Seventh Circuit Court of Appeals, which reversed the lower court ruling and held that the safe harbor provision did not protect transfers in which §546(e) institutions did not themselves benefit but merely served as conduits. The Eleventh Circuit has interpreted the provision in the same way as the Seventh, while the Second, Third, Sixth, Eighth, and Tenth Circuits have held to the contrary.

Merit Management Group argued that the Seventh and Eleventh Circuit’s interpretations of the safe harbor provisions in the federal bankruptcy code were too narrowly interpreted and that the interpretation of the Second, Third, Sixth, Eighth, and Tenth Circuits was the correct interpretation.

On December 16, 2016, Merit Management Group initiated proceedings in the Supreme Court of the United States in filing a petition for a writ of certiorari to the Seventh Circuit. The U.S. Supreme Court granted Merit Management’s certiorari request on May 1, 2017. The oral arguments in the case took place on November 6, 2017.

The case is currently pending adjudication before the U.S. Supreme Court, and we are yet to see whether the Supreme Court will overturn the Seventh Circuit and agree with the majority of circuits on this issue or not.


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