Source: https://www.staffordlaw.com/blog/appellate-practice/u-s-supreme-court-decides-bankruptcy-case-in-favor-of-trustees-avoidance-p/
Timestamp: 2020-02-24 18:09:50
Document Index: 346795367

Matched Legal Cases: ['§ 546', '§ 546', '§ 546', '§ 546', '§ 546', '§ 546', '§ 548', '§ 546', '§ 546']

U.S. Supreme Court Decides Bankruptcy Case in Favor of Trustees' Avoidance Powers | Wisconsin Attorneys | Madison & Milwaukee WI
U.S. Supreme Court Decides Bankruptcy Case in Favor of Trustees’ Avoidance Powers
The Supreme Court unanimously decided a bankruptcy issue that had the circuit courts across the country split. The Court weighed in favor of trustees’ ability to avoid debtors’ pre-petition transfers. Merit Mgmt. Grp., LP v. FTI Consulting, Inc. (Feb. 27 2018). Specifically, the Court analyzed an exception to trustees’ avoidance powers carved out in the bankruptcy code for transfers made by or to entities such as financial institutions in connection with a securities contract. The Court’s interpretation is favorable to bankruptcy trustees because it limits the ability of transferees to invoke the “safe harbor” provision in 11 U.S.C. § 546(e).
In 2003, Valley View Downs LP and Bedford Downs Management Corporation both sought licenses to operate a horse racetrack in Pennsylvania. The state had only one racetrack license left. Bedford Downs agreed to withdraw its license application if Valley View purchased Bedford Downs for $55 million. Valley View agreed. Upon attaining the license in 2007, Valley View obtained loans to fund the purchase from a variety of financial institutions, including Credit Suisse. Credit Suisse wired funds to Citizens Bank of Pennsylvania, the escrow agent. Citizens Bank then wired the appropriate share of the purchase price to each of the Bedford Downs’ shareholders, including Merit Management Group (which had a 30% interest).
Although Valley View secured the racetrack license, it was unable to obtain a gaming license to operate slot machines. Valley View soon thereafter filed for Chapter 11 bankruptcy protection. During the course of the bankruptcy, the bankruptcy trustee sued Merit Management, seeking to avoid the transfer of funds it had received for Bedford Downs’ shares prior to the bankruptcy filing—that is, the trustee sought to force Merit Management to return its share of the purchase price. Merit Management argued that the safe harbor provision in § 546(e) applied and prevented the trustee from avoiding the transfer.
Section 546(e) prohibits trustees from avoiding “settlement” payments “made by or to” a “financial institution” in connection with a securities contract.As a result, Merit Management argued that the § 546(e) “safe harbor” applied because the payments for the purchase of securities were not made directly from Valley to it, but rather including intervening payments made by or to two separate financial institutions: Credit Suisse and Citizens Bank. In contrast, the trustee argued that the § 546(e) “safe harbor” did not apply because the relevant transfer was the payment made in conjunction with the overarching transaction between Valley View and Merit Management.
The Supreme Court unanimously rejected Merit Management’s argument. Relying on the plain text of § 546(e), the Court explained that the pertinent transfer for purposes of the safe harbor in § 546(e) was the same transfer that the trustee sought to avoid (undo). Here, the trustee sought to reverse the Valley View–to–Merit Management transfer because it was constructively fraudulent. Under bankruptcy law, a transaction is constructively fraudulent if the transferor (1) receives less than reasonably equivalent value in exchange for the transfer, and (2) is insolvent on the date of the transfer. 11 U.S.C. § 548(a)(1)(B). The Court held that the component parts of the transfer—Credit Suisse’s and Citizens Bank’s involvement—were “simply irrelevant to the analysis under § 546(e),” and that “[t]he focus must remain on the transfer the trustee sought to avoid.”
This decision limits the applicability of § 546(e) because transferees may invoke it only with respect to the overarching transfer the trustee seeks to avoid. The Merit case means that intermittent transfers made by financial institutions who are “mere conduits” are no more than a component part of the overarching transfer and therefore do not provide a “safe harbor” in defense of a trustee’s avoidance action in connection with securities, commodities, and forward contracts.