On February 27, 2018, the Supreme Court issued a unanimous decision in Merit Management Group, LP v. FTI Consulting, Inc., holding that the “safe harbor” encompassed in Section 546(e) of the Bankruptcy Code does not protect transfers in which a financial institution or other protected entity merely serves as conduit. For purposes of applying Section 546(e), courts are to look at the overarching transfer that the trustee seeks to avoid, rather than its various intermediate subparts. In affirming the Seventh Circuit’s decision, the Supreme Court adopted a more narrow view of the safe harbor, protecting transfers made by or to — not through — one of financial institutions and other intermediate entities. The Supreme Court’s interpretation of the safe harbor provision will, in certain circumstances, broaden bankruptcy trustees’ rights to claw back transfers that were otherwise protected from avoidance based on prior rulings by lower courts.

Background -

The case arose from an agreement executed by Valley View Downs, LP and Bedford Downs Management Corporation, under which Valley View purchased all of Bedford Downs stock for $55 million. Valley View financed the purchase price through Credit Suisse and other lenders. Citizens Bank of Pennsylvania served as escrow agent and ultimately disbursed the proceeds to Bedford Downs’ shareholders on behalf of Valley View. One such shareholder, Merit Management Group, LP (“Merit”) received approximately $16.5 million pursuant to the agreement. Subsequently, Valley View filed a petition for Chapter 11 bankruptcy. Valley View’s confirmed plan created a litigation trust run by FTI Consulting, Inc. (“FTI”), as litigation trustee.