Merit Management Group, LP v. FTI Consulting, Inc.
The Supreme Court ruled that a bankruptcy trustee can try to undo a $16.5 million stock-sale payment even though banks briefly held and passed along the money, because the securities safe-harbor law protects only the actual transfer the trustee is trying to unwind — not the banking steps used to route it.
The unanimous decision narrows a legal shield that companies and investors had used to fend off bankruptcy clawback lawsuits whenever a bank touched the money along the way, resolving a long-running split among federal appeals courts.
How it got here: The trial court ruled the safe harbor protected the payment; the Seventh Circuit reversed, and the Supreme Court took the case to resolve a circuit split.
The Case in Depth
What happened
Two Pennsylvania harness-racing companies settled a licensing dispute by having Valley View buy all of Bedford Downs' stock for $55 million, with Credit Suisse and Citizens Bank moving the money through escrow. Valley View later went bankrupt, and the trustee overseeing its litigation trust sued a Bedford Downs shareholder, Merit Management, to recover the $16.5 million Merit received, claiming the sale was a fraudulent transfer.
The question before the Court
When a company sells stock using banks as go-betweens to move the money, can a bankruptcy trustee still undo that sale as fraudulent, or does a special banking safe harbor protect it?
Why it matters
Businesses and investors who receive payments funneled through banks or escrow agents can no longer assume the securities safe harbor automatically protects them if the deal itself wasn't made directly with a bank. Bankruptcy trustees gain a clearer path to claw back money from stock sales and buyouts that used financial institutions merely as pass-throughs.
What changes now
The case is sent back to the lower courts, which will now consider on the merits whether the $16.5 million stock payment to Merit was actually a fraudulent transfer under the bankruptcy code, since the safe-harbor defense no longer blocks the trustee's suit. This is a final ruling on the legal question of which transfer counts for safe-harbor purposes, though the underlying fraud claim remains to be litigated.
What this does not decide
The Court did not decide whether the payment to Merit was actually a fraudulent transfer, nor whether it qualified as a "settlement payment" or was made "in connection with a securities contract" — those questions remain for the lower courts on remand.
How the Court got there
The legal reasoning, step by step
- The Court read the safe harbor's 'notwithstanding' clause, which lists the trustee's avoidance powers, as showing that the law's starting point is the specific transfer the trustee is trying to undo — not any smaller step used to carry it out.
- The closing exception for intentionally fraudulent transfers similarly refers back to the transfer the trustee could otherwise avoid, reinforcing that the safe harbor and the avoidance power are talking about the same transfer.
- The Court noted the bankruptcy code sets up avoidance powers and this safe harbor as two sides of the same coin, so once a trustee properly identifies which transfer it is trying to void, courts don't need to separately examine the banking mechanics used to execute it.
- The Court rejected the argument that a 2006 addition of the phrase 'or for the benefit of' was meant to overrule a prior appeals court ruling protecting only end-point transfers; instead, it found the phrase simply matched wording already used elsewhere in the bankruptcy code to align the safe harbor with the avoidance powers.
- Applying this framework, because the trustee sought to undo the overarching Valley View-to-Merit stock purchase, and neither Valley View nor Merit was itself a bank or similar covered institution, the safe harbor did not apply to shield the payment from being clawed back.
Doctrinal impact
Cases affected by this decision
Distinguishes In re Munford, Inc. (98 F. 3d 604)
The Court rejected Merit's claim that a 2006 amendment overruled this Eleventh Circuit case protecting only end-point transfers.