Source: https://mediatbankry.com/2018/03/01/supreme-court-bankruptcy-opinion-on-%C2%A7-546e-merit-management-v-fti-consulting-and-an-important-footnote-2/
Timestamp: 2019-04-19 02:38:06+00:00

Document:
On February 27, 2018, the U.S. Supreme Court issued an eagerly awaited bankruptcy opinion on the § 546(e) safe harbor defense against trustee avoidance actions. The new opinion is Merit Management Group, LP v. PTI Consulting, Inc., Case No. 16-784.
The opinion, at first read, appears to dramatically narrow the reach and effect of the § 546(e) safe harbor defense. But an issue identified in Footnote 2 of the opinion may change that to an expansive reach and effect.
A bankruptcy Trustee (PTI Consulting) is pursuing a constructively fraudulent transfer claim against Merit Management under § 548(a)(1)(B) of the Bankruptcy Code, and Merit Management is asserting the § 546(e) safe harbor defense.
The Court provides this example of being “executed via one or more transactions”: “a transfer from A → D that was executed via B and C as intermediaries” so that “the component parts of the transfer include A → B → C → D”?
D = Valley View Downs (transferee of Merit Management’s stock interests and payor of the purchase price), now represented by its bankruptcy Trustee, PTI Consulting, Inc.
Merit Management sold its stockholder interests in Bedford Downs to Valley View for a purchase price of $16.5 million. Credit Suisse loaned the purchase price to Valley View. Citizens Bank processed the closing, as escrow agent, by (i) receiving Valley View’s purchase money from Credit Suisse and sending it to Merit Management, and (ii) receiving Merit Management’s stock certificates and sending them to Valley View.
–whether the “covered entity” must have “a beneficial interest in or dominion and control over the transferred property” to qualify for the § 546(e) safe harbor defense.
“On one side, Merit posits that the Court should look not only to” the end-to-end transfers between Merit Management and Valley View, “but also to all its component parts,” which “include transactions by and to financial institutions” (i.e., Credit Suisse and Citizens Bank) so that § 546(e) bars recovery by the Trustee against Merit Management.
–if the plaintiff trustee “properly identifies an avoidable transfer,” the court “has no reason to examine the relevance of component parts” of the transfer under § 546(e).
In the Merit Management case, the Trustee identified the purchase of stock “by Valley View from Merit as the transfer that it sought to avoid.” Accordingly, “the Credit Suisse and Citizens Bank component parts” of the transaction “are simply irrelevant” to the § 546(e) analysis.
And finally, since the parties “do not contend that either Valley View or Merit is a ‘financial institution’ or other covered entity, the transfer falls outside of the §546(e) safe harbor” defense.
Here’s a simplified translation of what I think the Supreme Court is saying in this case.
2. If the defendant proves that one of those two parties is a covered entity, then the § 546(e) defense applies; but, if the defendant can’t, the § 546(e) defense does not apply.
This result provides a “clean” position that should be relatively easy to apply. [Note: a “clean” position is mentioned numerous times at oral argument as a value to be achieved.] The Merit Management result is certainly cleaner than requiring bankruptcy and appellate courts to distinguish between a “mere conduit” and something else.
This result appears, at first read, to narrow the reach and effect of the § 546(e) defense by requiring an avoidance defendant to prove that one of the parties to the overarching transfer qualifies as a covered entity in its own right and not on the basis of an intermediary’s status. However, the issue raised in Footnote 2 (discussed below) seems to change that to an expansive reach and effect.
The Supreme Court’s Merit Management opinion ends up affirming the Seventh Circuit’s ruling. But it does so on grounds slightly different from what the parties and circuit courts had argued.
Prior circuit court opinions, and the parties’ arguments to the Supreme Court, focused on whether any of the component parts of a stock transfer were a covered entity under § 546(e).
–Five circuit courts had declared that, if one entity in the component parts of a transfer is a covered entity under § 546(e), then all parties to the transaction are protected by § 546(e), even if they aren’t covered entities.
The Supreme Court’s Merit Management opinion departs from all of this, declaring that the role of component-part parties in an overarching transaction is irrelevant under § 546(e), whether they are mere conduits or not.
One of the most interesting parts of the Supreme Court’s Merit Management opinion is what’s left out. Here’s what I mean.
“We therefore do not address what impact, if any, §101(22)(A) would have in the application of the §546(e) safe harbor” (italics added for emphasis).
Here’s some context for Footnote 2.
The ultimate result of the “financial institution” definition issue is, apparently, Footnote 2 in the Supreme Court’s Merit Management opinion.
This is an interesting opinion. The outcome affirming the Seventh Circuit’s decision is not a surprise, but the Supreme Court’s rationale is unexpected. And the rationale is incomplete, until the full effect of the Footnote 2 issue is worked out.
The opinion seems to provide a good approach to the § 546(e) defense. Kudos to them.
And they did it in a unanimous opinion!
A. A similar issue is raised in Footnote 5 of the Supreme Court’s opinion about the definition of “settlement payment” in § 546(e), which Justice Breyer also raised in oral argument.

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