Merit Management Group v. FTI Consulting

LII note: The U.S. Supreme Court has now decided Merit Management Group v. FTI Consulting.


Are transactions conducted through entities named in 11 U.S.C. § 546(e) protected from avoidance in bankruptcy?

Oral argument: 
November 6, 2017

The Supreme Court will decide whether transactions conducted through entities named in 11 U.S.C. § 546(e) are protected from avoidance in bankruptcy. Petitioner Merit Management Group, LP (“Merit”) claims that Respondent FTI Consulting, Inc. (“FTI”) may not avoid the transfer because the transfers to and from Citizens Bank are protected under the safe harbor provision of § 546(e), which precludes avoidance involving certain financial institutions and markets. Respondent FTI says that Merit is wrongly applying § 546(e) to the component transfers, and that the only relevant transfer is the overall transfer, which is not protected by the safe harbor provision. If the Supreme Court allows protections that would enable creditors to undo payouts, the resulting uncertainties may lead to market destabilization; conversely, the removal of such protections may enable the exploitation of intermediaries as a channel for prohibited transactions.

Questions as Framed for the Court by the Parties 

Whether the safe harbor of 11 U.S.C. § 546(e) prohibits avoidance of a transfer made by or to a financial institution, without regard to whether the institution has beneficial interest in the property transferred, consistent with decisions from the Second, Third, Sixth, Eighth, and Tenth Circuits, but contrary to decisions from the Eleventh Circuit and now the Seventh Circuit.


Valley View Downs, LP (“Valley View”) sought to develop a “racino,” which would offer horse racing and casino entertainment in Pennsylvania. To operate a racino, Valley View required a Pennsylvania-issued racing license and a gaming license. As early as 2002, Valley View was in competition with Bedford Downs for the final harness-racing license that Pennsylvania was offering.

In order to increase the likelihood of securing the harness-racing license, Valley View decided to buy out the competition and purchased Bedford Downs in a $55 million cash-for-stock settlement agreement on August 14, 2007. Petitioner Merit Management Group (“Merit”) was a 30% owner of Bedford Downs and received payments totaling $16.5 million in cash for its stock. The payment took place over the course of three individual transactions. The first transaction was from Credit Suisse, Valley View’s financier, to Citizens Bank, which held the money in escrow until the close of the sale. Citizens Bank then transferred the money to Merit in two installments.

After completing the acquisition, Valley View was granted its harness-racing license. However, Valley View then failed to secure a gaming license, the second license necessary for Valley View to open its racino. Unable to operate a racino, Valley View filed for bankruptcy on October 28, 2009. Centaur, LLC (“Centaur”), the parent company of Valley View, filed its own bankruptcy petition on March 6, 2010. Valley View’s bankruptcy proceedings were jointly administered alongside Centaur’s, and a plan of reorganization was later approved on February 18, 2011. Respondent FTI Consulting, Inc. (“FTI”) was appointed as trustee of the “Centaur, LLC Litigation Trust.”

In its role as Trustee, FTI sought to avoid the $16.5 million transfer to Merit, claiming that the money should be returned to Valley View’s bankruptcy estate and the Litigation Trust. Defending the transfer, Merit claimed that the transfer was immune from avoidance under 11 U.S.C. § 546(e) of the Bankruptcy Code, which says that “the trustee may not avoid a transfer that is a . . . settlement payment . . . made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract . . . .” Merit’s argument was that the safe harbor provision applies because the transaction FTI seeks to avoid was actually three transfers, one from Credit Suisse to Citizens Bank and two from Citizens Bank to Merit, all of which were “by or to” a “financial institution.”

The District Court for the Northern District of Illinois first considered Merit’s application of § 546(e) following a motion for judgment on the pleadings. The District Court sided with Merit’s “plain language reading of § 546(e)” over FTI’s “legislative history arguments” and held that the transfer was protected from avoidance. FTI appealed to the Seventh Circuit, which read § 546(e) to “not provide a safe harbor against avoidance of transfers between non-named entities where a named entity acts as a conduit.” The Seventh Circuit determined that Credit Suisse and Citizens Bank, the named entities, were mere conduits, and reversed the District Court’s decision. The United States Supreme Court granted certiorari on May 01, 2017.



Petitioner Merit Management, LP (“Merit”), argues that the language of 11 U.S.C. § 546(e) is plain, and therefore should be straightforwardly enforced by precluding avoidance of the component transfers. Examining the language of the statute, Merit emphasizes the use of the disjunctive “or” as indicating that the requirement that a transfer is “made by or to (or for the benefit of)” introduces three independent avenues to safe harbor protection. Merit thus criticizes the potential application of a “beneficial interest requirement” for the financial institution before the transfer is eligible for protection under § 546(e). Merit also submits a broad interpretation of “transfer” in § 546(e), using the definition from 11 U.S.C. § 101(54), claiming that the component transfers from Credit Suisse to Citizens Bank and from Citizens Bank to Merit fit this definition. Merit further contends it would be illogical to read § 546(e) to not apply to conduits of financial transactions, since the section explicitly applies to a transfer with a “securities clearing agency.” As Merit points out, the Securities Exchange Act defines a “clearing agency” as “any person who acts as an intermediary in making payments or deliveries . . . or who provides facilities for comparison of data.” Merit responds that applying § 546(e) to the overall transfer is dishonest since there was no discrete transfer, and therefore FTI seeks to apply the rule to a legal fiction.

FTI, focusing on the relevant transfer for application of § 546(e), concedes that the component transfers are likely protected under the safe harbor because they involve a settlement payment made by or to a financial institution. However, FTI maintains that the relevant transfer is the transfer from Valley View to Merit, and that it is improper to deconstruct this transfer into component transfers to find a safe harbor. FTI argues that the first phrase of § 546(e), “notwithstanding [the other avoidance provisions],” indicates that the subsection is intended only to limit a broader power to avoid transfers. FTI contends that an exception to the power to avoid a transfer cannot be applied to a transfer that is not subject to that power in the first place. The component transfers are not avoidable because they do not involve the debtor, and thus the FTI argues that Merit cannot claim a safe harbor around transfers that were never exposed. According to FTI, this argument is supported by the principle of interpretation that “identical words . . . are generally presumed to have the same meaning,” so a “transfer” that is protected from avoidance must be the same “transfer” that is otherwise subject to avoidance.


Merit also relies on the structure and purpose of the Bankruptcy Code and § 546(e), noting that three other provisions of the section, §§ 546(f), 546(g), and 546(j), also create safe harbors from the general power of the debtor to avoid transactions. Merit contends that the provisions not only create safe harbors, but they reflect, together with § 546(e), a Congressional determination to protect markets and parties in securities transactions. Merit argues this determination should not be disturbed by a narrow reading of § 546(e).However, Merit asserts that it would be inappropriate to rely on 11 U.S.C. § 550 in defining a transfer because § 550 merely defines who must repay an avoided transfer, but avoidance and repayment are different concerns. Merit argues that sections such as § 550 are concerned with protecting parties subject to recovery, or the “who”; however, sections such as § 546 are concerned with protecting the transfer itself, or the “what.” Thus, Merit suggests that it was inappropriate for the Seventh Circuit to conflate the concept of a “transfer” in § 546(e) and an “initial transferee” in § 550(a)(1). Merit notes that while § 550 requires a “transferee,” § 546(e) could apply more broadly to transfers “for the benefit of” a financial institution. Merit contends that Congress intentionally chose to protect transfers involving financial institutions from avoidance, instead of protecting financial institutions from recovery.

FTI disagrees, asserting that § 550 has value when interpreting § 546(e). FTI explains that the “transferee” in § 550 is “an entity that has ‘dominion’ or ‘control’ over the transferred property, and not merely a ‘financial intermediary’ or conduit.” FTI argues that the parties involved in the component transfers are financial intermediaries, so the § 550 meaning of what a transferee is informs the understanding of who can be a party to a transfer. FTI concludes that, if Credit Suisse and Citizens Bank are not transferees under § 550, they cannot be part of a transfer under § 546(e). Furthermore, FTI contends that § 546(e)’s statutory context in the Bankruptcy Code proves that application to the component transfers is inappropriate. The avoidance provisions, FTI argues, are only applicable to transfers by the debtor and to certain entities, and the analysis does not allow for decomposition of transfers into component transfers. FTI poses a hypothetical under a different statute in which a transfer of a donation to charity may not be avoided under § 548(a)(2)(B); yet, as FTI claims, if decomposition of transfers is permitted from donator to bank and then from bank to charity, the charitable donation exception would not be needed.


Turning to the legislative history of § 546(e), Merit emphasizes that the provision has been amended several times since its enactment in 1982. According to Merit, the Seventh Circuit, in finding that safe harbors were not intended to protect intermediaries, relied on the fact that the safe harbor was created “to prevent the insolvency of one commodity or security firm from spreading to other firms and possibly threatening the collapse of the affected market.” However, Merit contends that the language of the statute covers transactions of any size, including those too small to threaten financial markets, and notes that Congress commonly passes statutes broader than the problem that called for action. Merit therefore counters any concerns that a broad interpretation of § 546(e) could lead to safe harbor protection of nearly any modern transaction by arguing that this fear does not justify a narrow interpretation, removing all protections that Congress intended. Merit argues that reasonable limits still exist for § 546(e) since the intermediaries in this case played “active and meaningful roles in the transaction,” and that the Court could have established some lower level of involvement by intermediaries as insufficient. Merit also argues that it is illogical to believe that Congress’s repeated amendments to § 546(e), each time expanding its scope, did not intend to expand the intent behind the statute as well.

The purpose and legislative history of § 546(e), according to FTI, frustrates any attempt to apply the provision to component transfers. Although the subsection was amended several times, FTI argues that Congress made these amendments with the central idea of limiting the bankrupt entity. According to FTI, the House Report from 1982 explained that the exception was necessary “to prevent the insolvency of one commodity or security firm from spreading to other firms and possibl[y] threatening the collapse of the affected market.” FTI notes that in 2005 the House Report reiterated that § 546(e) was “designed to reduce systemic risk in the financial market place,” but argues that there is no systemic risk to financial institutions or any other participants in the securities markets. Considering intent, FTI also applies the statutory interpretation principles that “seek to construe a statute so that it protects litigants who fall within the statutory zone of interests.” FTI maintains that the text and history of § 546(e) demonstrate that the “zone of interest” covers transfers involving certain financial institutions and not transfers between racinos. FTI contends that a narrow reading is appropriate under the principle of interpretation, which states that “exceptions should be read narrowly in order to preserve the primary operation of the provision.” A narrow interpretation is necessary to reduce the potential that the exception will vitiate the rule.



In support of Merit, Tribune and Lyondell Shareholders (the “Shareholders”) argue that allowing avoidance of transfers through intermediary institutions will destabilize the securities market. The Shareholders explain that permitting avoidance in this case will create uncertainty about which transfers are protected under § 546(e). The Shareholders claim that this unpredictability may increase litigation, simultaneously driving up market prices. Furthermore, the Shareholders suggest that the likelihood of having to defend against a lawsuit will chill investment and reduce liquidity, and potential buyers will be dissuaded from purchasing assets because of the potential loss if a court finds the transfer to be in violation of § 546(e). – Moreover, Merit contends that entities like pension funds and employee stock ownership trusts face the highest risk of damages. Merit argues that these beneficial entities will be removed from safe harbor protection because they may be classified as conduits for individual investors. The Shareholders show that in a situation like the instant case, where an entity attempts to buy back shares, these unprotected investors will be forced to sell their shares at a discounted price because of the devaluation caused by overhanging litigation. –

FTI argues that effects on the securities market will be minimal because existing legislation adequately protects those transfers which would significantly affect the market. FTI suggests that Congress determined the major participants in securities markets and created protections for transfers with those entities. FTI draws attention to Congress’s revision of § 546(e) to include a list of significant participants; this decision, FTI extrapolates, reflects a desire to specifically protect these institutions and not third parties who merely use these institutions as a channel for transactions. Furthermore, Tribune Company Retirees and Noteholders (“Noteholders”) add that Congress carefully formed this narrow exception over several decades to craft a balance between allowing essential avoidance of transfers which violate the interest of creditors and protecting the stability of the securities market. Therefore, Noteholders suggest, interpreting the safe harbor provision as protecting transfers passing through protected entities will upset this balance by extending the provision far beyond those transfers and subsequently threaten the stability of the market.


Merit argues that trustees’ powers cannot extend to transactions like the ones at issue in this case because doing so would allow trustees to act outside of the bounds of the safe harbor provision. Merit states that the transfers between Valley View and Merit were accomplished through a series of steps involving entities protected under the safe harbor. Therefore, Merit argues, the transfers triggered the protections of the provision and a trustee cannot overlook the intermediary transactions to avoid the protections. Additionally, Merit acknowledges that the Bankruptcy Code permits trustees to void fraudulent transfers, such as unequal exchanges, but argues that there was no fraudulent transfer as suggested by FTI. – Merit emphasizes that, based on the structure of the statute, a trustee cannot avoid unequal transfers when, as here, the transfers are “by” or “to” a protected institution. Additionally, Merit argues that allowing trustees to have power over transfers with financial institutions blurs the necessarily clear delineation of those transfers protected by the safe harbor provision. Merit views the decision to extend trustees’ power to cover transfers through conduits as the court adopting Congress’s lawmaking role, rather than as effectuating Congress’s intent.

In contrast, FTI argues that trustees must be allowed to avoid transactions through conduits to effectuate trustees’ mandate of treating creditors equitably. The National Association of Bankruptcy Trustees (“NABT”) argues that the Bankruptcy Code endows trustees with the ability to avoid pre-bankruptcy transfers which deplete debtors’ estates. For example, NABT argues that trustees can void transfers of financial gifts where the debtor receives an inequitable return. –In this case, NABT posits, Valley View’s transfer of $55 billion for an asset later sold at $5.6 million constitutes fraudulent conveyance because of the great disparity in valuation. According to NABT, payment of Valley View’s creditors depends on the trustee recovering Valley View’s share; therefore, injury to similarly situated creditors justifies enforcing the trustee’s power to void transactions through conduits. A group of bankruptcy law professors advances a similar view, suggesting that if conduit intermediaries are protected, entities will be able to avoid restrictions on transfers simply by channeling assets through intermediaries.

Edited by 


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