MERIT MANAGEMENT GROUP, LP V. FTI CONSULTING, INC. : CASE SUMMARY
The Supreme Court held in Merit Management Group, LP v. FTI Consulting, Inc. 583 U.S. 366 (2018) that courts must examine the specific transfer that the trustee seeks to avoid, not the component transfers through intermediary financial institutions.
FACTS OF THE CASE
Valley View Downs, LP agreed to acquire all outstanding stock of another company, Bedford Downs Management Corp. To complete the transaction, funds were transferred through financial institutions that acted merely as intermediaries in the payment process. One shareholder, Merit Management Group, LP, received approximately $16.5 million for its shares.
After the transaction, Valley View entered bankruptcy. The litigation trustee, FTI Consulting, Inc., sought to avoid the payment to Merit as a constructively fraudulent transfer under § 548 of the Bankruptcy Code.
Merit argued that the transfer was protected by the safe harbor provision of § 546(e), which shields certain securities-related transactions from avoidance. Because the payment passed through financial institutions, Merit contended that the safe harbor applied.
ISSUE BEFORE THE SUPREME COURT
The principal issue before the Supreme Court was when determining whether the § 546(e) securities-settlement safe harbor applies, should courts focus on the overall transfer that the trustee seeks to avoid; or the component transfers through financial institutions that served merely as intermediaries.
FINDINGS OF THE SUPREME COURT
Justice Sonia Sotomayor delivered the opinion of the Court.The Supreme Court reasoned that Section 546(e) protects certain transfers made by, to, or for the benefit of specified financial market participants. The relevant transfer is the transfer the trustee seeks to avoid. Intermediary banks often act only as conduits in modern financial transactions.
Treating every transfer routed through a bank as protected would vastly expand the safe harbor beyond Congress’s intent. The statutory text directs courts to focus on the overarching transfer, not the intermediate steps used to complete it.
The Court rejected the argument that the presence of financial institutions anywhere in the transfer chain automatically invokes § 546(e).
The Supreme Court reversed the Seventh Circuit and held that the safe harbor did not automatically apply merely because financial institutions acted as intermediaries in the transaction.
SIGNIFICANCE OF THE JUDGMENT
Merit Management is one of the most important Supreme Court decisions interpreting the § 546(e) securities safe harbor. It narrowed the previously expansive interpretation of § 546(e). It increased the ability of trustees to challenge leveraged buyout and securities-related transactions. It clarified the methodology for analyzing safe-harbor defenses. It emphasized statutory text over market-practice arguments.
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Mukesh Suman is a lawyer and legal author based at Delhi, India. He has extensive experience in insolvency and bankruptcy matters. He also provides legal support services to USA based bankruptcy lawyers. Mukesh can be approached at mukesh_suman@outlook.com or +91 9717864570.
