This past fall we provided an in-depth blog article addressing the notable discrepancy that had developed in the Circuit Courts concerning the important issue as to the breadth of the “safe harbor” provision of Section 546(e) of the Bankruptcy Code. In particular, Section 546(e) limits the power of a debtor or a trustee to avoid and recoup the financial benefits of certain pre-bankruptcy transfers made to such financial market participants as commodities brokers, stockbrokers, financial participants, forward contract merchants, and securities clearing agencies. We noted that the majority view (as espoused by, for instance, the Second, Third, Eighth and Tenth Circuits) generally applied a broad interpretation of the extent of the parties covered by the safe harbor language of Section 546(e). While, at the same time, the Courts in the Seventh and Eleventh Circuits HAD applied a more narrow interpretation. This split, as we mentioned, resulted in the United States Supreme Court agreeing to hear the issue as then most recently addressed by the Seventh Circuit in the case of FTI Consulting, Inc. v. Merit Mgmt. Grp. LP., 830 F.3d 690 (7th Cir. 2016).
Earlier this year the Supreme Court issued its decision in Merit Management Group, LP v. FTI Consulting, Inc., Case No. 16-784. In doing so the Supreme Court ruled that the “securities safe harbor” under Section 546(e) does not shield transferees from preference liability simply because a particular transaction was routed through a financial intermediary, i.e., a “conduit transaction.” In short, the Supreme Court favored the more narrow interpretation of the Seventh Circuit and thereby rejected the broader majority application of Section 546(e) of, among others, the Second and Third Circuits. By doing so, the Supreme Court ruled that recipients of preferential or fraudulent transfers cannot seek to evade their liability simply because the transfers at issue were routed through a financial intermediary institution. In short, the ultimate beneficiary of an avoidable transfer will not be immune from the debtor’s or trustee’s recoupment of the transferred funds simply because they used a financial intermediary to obtain those funds.
At the same time, the Supreme Court carefully noted that its holding is not to be interpreted as relinquishing the safe harbor provisions of Section 546(e) as they apply to shielding financial institutions in their role as intermediaries in the transfer process. For example, as the Court’s opinion points out “[i]f the transfer that [is sought to be avoided] was made “by” or “to” a securities clearing agency….then [Section] 546(e) will bar avoidance, and it will do so without regard to whether the entity acted only as an intermediary.” Meaning, the Supreme Court’s ruling should not result in increased risk for financial institutions (such as securities clearinghouses, escrow agents, and similar “financial participants”) acting simply as conduits or intermediaries for financial transactions.
Should you have any questions regarding these rulings or with respect to other bankruptcy-related issues, please contact Eric W. Sleeper.