Merit Management Group, LP v. FTI Consulting, Inc.
Headline: Court limits securities safe harbor to the specific transfer a bankruptcy trustee seeks to avoid, allowing trustees to recover payments when banks only served as intermediaries and affecting creditors and investors.
Holding:
- Allows trustees to recover payments when banks only acted as intermediaries.
- Intermediary bank wires will not automatically shield transfers from undoing in bankruptcy.
- Focuses creditors, investors, and trustees on the specific transfer at issue.
Summary
Background
An investment buyer (Valley View) agreed to buy a competing racetrack company’s stock from its shareholders for $55 million after winning a state license. Credit Suisse wired the money to Citizens Bank, which held funds in escrow and later paid shareholders. One shareholder, Merit Management, received about $16.5 million. When Valley View later went bankrupt, the bankruptcy trustee (FTI) sued to undo and recover the $16.5 million payment as a fraudulent transfer under the bankruptcy code.
Reasoning
The key question was whether courts should treat each bank wire or escrow payment as the “transfer” protected by the securities safe harbor, or whether they should look only to the overall payment the trustee tries to undo. The Court read the statute’s language and structure and concluded the safe harbor applies only to the specific transfer the trustee seeks to avoid. The opinion explained that the statute’s “notwithstanding” and “except” clauses and its heading focus the inquiry on the avoidable transfer itself. The Court rejected the argument that Congress’ addition of “or for the benefit of” meant intermediaries are automatically protected.
Real world impact
Applied here, because neither Valley View nor Merit was a covered financial entity, the safe harbor did not block the trustee’s claim and the Seventh Circuit’s judgment was affirmed. The decision lets bankruptcy trustees pursue recovery of payments even when banks or clearing agents only relayed funds. It clarifies that courts must evaluate the particular transfer the trustee challenges, not every intermediary step in a chain of payments.
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