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) . . .

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On February 27, 2018, the United States Supreme Court issued a unanimous opinion in the Merit Management Group, LP v. FTI Consulting, Inc. case, holding that funds that are merely transferred through a financial institution are not afforded the Bankruptcy Code “safe harbor” protections of 11 U.S.C. § 546(e), which precludes the avoidance or “clawback” of certain transfers; rather, whether the safe harbor applies in a given case will depend on the whether the parties to the overarching transfer are listed as protected parties in the statute.

On February 27, 2018, the Supreme Court issued a significant decision that will increase the exposure of debt and equity investors that receive payments from all kinds of highly leveraged transactions, including leveraged buy-outs and dividend recapitalizations. The unanimous opinion in Merit Management Group, LP v.

The Supreme Court’s recent decision in Merit Management Group, LP v.

On February 27, 2018, the Supreme Court of the United States decided Merit Management Group, LP v. FTI Consulting, Inc. The key issue in the case was the scope of Section 546(e) of the bankruptcy code which insulates certain transactions from a bankruptcy trustee’s statutory avoidance powers. A bankruptcy trustee may avoid many types of pre-petition transfers, including preferential payments made to creditors within 90 days of a bankruptcy petition and transfers made for less than reasonably equivalent value completed within two years of a bankruptcy filing.

A bankruptcy trustee or a debtor in possession has powers under the Bankruptcy Code to avoid certain transfers the debtor may have made prior to the petition date, including preferential and fraudulent transfers.

On February 27, 2018, a unanimous Supreme Court held in Merit Management Group, LP v. FTI Consulting, Inc. (link here) that an otherwise-avoidable transfer is not subject to the safe harbor in Section 546(e) (which provides, in relevant part, a trustee may not avoid a transfer that is a “settlement payment . . . made by or to (or for the benefit of) a . . . financial institution” or that “is a transfer made by or to (or for the benefit of) a . . .

The Circuit Courts of Appeal have split on whether a prepetition transfer made by a debtor is avoidable if the transfer was made through a financial intermediary that was a mere conduit. Today, the Supreme Court unanimously resolved the split by deciding that transfers through “mere conduits” are not protected. This is a major (and adverse) decision for lenders, bondholders and noteholders who receive payments through an intermediary such as a disbursing agent.

Delaware District Judge Leonard P. Stark has seemingly split with the Second Circuit and held that the safe harbor in Section 546(e) of the Bankruptcy Code does not bar fraudulent transfer claims brought on behalf of creditors under state law, ratifying a June 2016 opinion from Delaware Bankruptcy Judge Kevin Gross.