Source: http://mondaq.com/unitedstates/x/683362/Insolvency+Bankruptcy/Narrower+Harbors+Supreme+Court+Holds+That+546E+Securities+Safe+Harbor+Does+Not+Protect+Transfers+In+Which+Financial+Institution+Is+Only+A+Conduit
Timestamp: 2019-04-23 04:05:18+00:00

Document:
The Bankruptcy Code provides bankruptcy trustees, debtors, and creditor committees with "avoidance powers" that allow them to set aside and recover certain transfers that a debtor made before filing for bankruptcy.1 These avoidance powers are, however, limited by a number of exceptions enumerated in the Bankruptcy Code, including the securities safe harbor at § 546(e). Section 546(e) protects from avoidance any transfer "made by or to (or for the benefit of) . . . a financial institution" if the transfer is a "settlement payment" or made "in connection with a securities contract."
The Supreme Court recently held in Merit Management Group, LP v. FTI Consulting, Inc. that § 546(e) does not apply to transfers in which financial institutions are mere intermediaries.2 In doing so, the Supreme Court resolved a circuit split, unanimously rejecting the majority rule in the Second, Third, Sixth, Eighth, and Tenth Circuits that the safe harbor applied to such transfers.3 As such, this decision leaves certain transactions previously thought inviolate vulnerable to later being unwound if one of the parties files for bankruptcy within the relevant statutory period.
1. See, e.g., 11 U.S.C. § 548(a) (providing for avoidance of fraudulent transfers made within the two years prior to a bankruptcy filing).
2. Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883, 897 (2018).
3. The contrary minority position was held by the Seventh and Eleventh Circuits. See id. at 892 n.6 (noting circuit split).
4. See id. (citing In re Quebecor World (USA) Inc., 719 F.3d 94, 99 (2d Cir. 2013) (finding the safe harbor applicable where covered entity was intermediary); QSI Holdings, Inc. v. Alford (In re QSI Holdings, Inc.), 571 F.3d 545, 551 (6th Cir. 2009) (same); Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 987 (8th Cir. 2009) (same); Lowenschuss v. Resorts Int'l, Inc. (In re Resorts Int'l, Inc.), 181 F.3d 505, 516 (3d Cir. 1999) (same); Kaiser Steel Corp. v. Pearl Brewing Co. (In re Kaiser Steel Corp.), 952 F.2d 1230, 1240 (10th Cir. 1991) (same)).
5. Merit Mgmt., 138 S. Ct. at 891, 897.
10. Id. at 891-92 (alteration in original).
11. Merit Mgmt., 138 S. Ct. at 892.
16. Id. at 894 (alteration in original) (internal citations omitted).
17. Merit Mgmt., 138 S. Ct. at 897.
21. 11 U.S.C. § 101(22)(A) (defining "financial institution" as "a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity and, when any such Federal reserve bank, receiver, liquidating agent, conservator or entity is acting as agent or custodian for a customer . . . in connection with a securities contract[,] . . . such customer." (emphasis added)).
22. See, e.g., Merit Mgmt., 138 S. Ct. at 897 ("Because the parties do not contend that either . . . [the purchaser or seller] is a 'financial institution' or other covered entity, the transfer falls outside of the § 546(e) safe harbor.").

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