On February 27, 2018, in an opinion by Justice Sotomayor, the Supreme Court of the United States unanimously decided Merit Management Group, LP v. FTI Consulting, Inc. No. 16-784, holding that the only relevant transfer for purposes of the 11 U.S.C. § 546(e) securities safe harbor provision is the transfer that the bankruptcy trustee seeks to avoid, and not the component parts of the transfer.
The bankruptcy decision arises out of the competitive harness racing (a form of horse racing) business. In 2007, Valley View Downs, LP (“Valley View”) and Bedford Downs Management Corporation (“Bedford Downs”) resolved a four-year feud for the last harness-racing license in Pennsylvania. Under the stock acquisition agreement, Bedford Downs withdrew as a competitor for the harness-racing license and Valley View agreed to purchase all of Bedford Downs for $55 million after Valley View obtained the license. Valley View was awarded the last harness-racing license. As part of the agreement, Valley View made arrangements with Credit Suisse to finance the transaction. Credit Suisse wired the purchase price to Citizens Bank of Pennsylvania (“Citizens Bank”), which had agreed to serve as the third-party escrow agent for the transaction. Merit Management Group, LP (“Merit”), along with the other Bedford Downs shareholders, deposited their stock certificates into escrow. Citizens Bank distributed the purchase proceeds to the shareholders, including Merit. In total, Merit received $16.5 million from the sale of its Bedford Downs stock to Valley View.
Although Valley View had secured the last harness-racing license, it was unable to secure a separate gaming license for the operation of its slot machines in the time set out in its financing package. Valley View and its parent company, Centaur, LLC, filed for Chapter 11 bankruptcy. The Bankruptcy Court confirmed a reorganization plan and appointed FTI Consulting, Inc. (“FTI”), to serve as trustee of the Centaur litigation trust.
FTI filed a lawsuit against Merit, seeking to avoid the transfer of the $16.5 million in funds (“Transfer”) to Merit as a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B). Merit moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c), asserting that the Section 546(e) safe harbor barred FTI from avoiding the Transfer because the Transfer was a “settlement payment . . . made by or to (or for the benefit of)” a covered “financial institution” – here, Credit Suisse and Citizens Bank. The District Court granted the Rule 12(c) motion, reasoning that the Section 546(e) safe harbor applied even when the covered entity was only a component part of the overall transfer. The United States Court of Appeals for the Seventh Circuit reversed, holding the Section 546(e) safe harbor did not protect transfers in which financial institutions served as mere conduits.
The question before the Supreme Court was whether the “transfer between Valley View and Merit implicates the safe harbor exception because the transfer was ‘made by or to (or for the benefit of) a . . . financial institution.'” Ultimately, after reviewing the specific statutory language and context of the safe harbor provision, the Court concluded that the relevant transfer for purposes of the Section 546(e) safe harbor is the same transfer that the trustee seeks to avoid. If the entity covered by the exception is only a “conduit” or a component part of the overall transfer, then the safe harbor does not apply. Accordingly, since the Transfer was between Valley View and Merit (and was not the component transfer between the financial institutions), the Transfer fell out of the Section 546(e) safe harbor. Thus, the Court affirmed the Seventh Circuit and remanded the case for further proceedings.