Section 546(e) of the Bankruptcy Code shields certain transfers involving settlement payments and other payments in connection with securities contracts (for example, payment for stock) made to certain financial intermediaries, such as banks, from avoidance as a fraudulent conveyance or preferential transfer. In recent years, several circuit courts interpreted 546(e) as applying to a transfer that flows through a financial intermediary, even if the ultimate recipient of the transfer would not qualify for the protection of 546(e).
On February 6, 2018, the District Court for the District of Montana refused a debtor’s request to change the venue of a post-petition “related to” police/regulatory action commenced by a federal agency in district court. The decision will have important implications on how “related to” litigation is treated for venue purposes—especially in the context of police and regulatory actions.
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.
The securities safe harbor protection of Bankruptcy Code (“Code”) § 546(e) does not protect allegedly fraudulent “transfers in which financial institutions served as mere conduits,” held the U.S. Supreme Court on Feb. 27, 2018. Merit Management Group LP v. FTI Consulting Inc., 2018 WL 1054879, *7 (2018). Affirming the Seventh Circuit’s reinstatement of the bankruptcy trustee’s complaint alleging the insolvent debtor’s overpayment for a stock interest, the Court found the payment not covered by §546(e) and thus recoverable. The district court had dismissed the trustee’s claim.
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.
On February 27, 2018, the United States Supreme Court in a significant ruling held in Merit Management Group, LP v. FTI Consulting, Inc. that transfers of property of a debtor in which financial institutions are mere conduits or intermediaries may be avoidable. The Court ruled that the safe harbor provisions of section 546(e) of the Bankruptcy Code do not protect such transfers from avoidance.
The Bankruptcy Code allows trustees, as well as debtors-in-possession and in some circumstances creditors’ committees, to set aside and recover certain transfers for the benefit of the bankruptcy estate. The purpose of the avoidance powers is to maximize funds available for creditors and to ensure equality of distribution among creditors’ claims. The avoidance powers are not without bounds, however, as the Code sets forth a number of exceptions — most notably, the so-called “securities contract safe harbor” under Section 546(e) of the Bankruptcy Code.
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.
Jet Midwest Group, LLC, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Case No. 18-10395). The petition estimates the debtor’s assets and its liabilities to be between $10–$50 million. A claims and noticing agent has not yet been proposed.