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Keywords

trustbankruptcychapter 11 bankruptcy
trust

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Merit Management Group, LP v. FTI Consulting, Inc., 583 U.S. —-, 583 U.S. 366, 138 S.Ct. 883, 200 L.Ed.2d 183, 86 USLW 4088, 65 Bankr.Ct.Dec. 92, Bankr. L. Rep. P 83,219, 18 Cal. Daily Op. Serv. 1861, 2018 Daily Journal D.A.R. 1757, 27 Fla. L. Weekly Fed. S 73

Facts

Valley View Downs, LP, and Bedford Downs Management Corp. entered into an agreement for Valley View to purchase Bedford Downs' stock for $55 million after securing a harness-racing license in Pennsylvania. Valley View obtained the license and arranged for Credit Suisse to wire the purchase price to Citizens Bank, which acted as an escrow agent. After the transaction, Valley View filed for Chapter 11 bankruptcy, and the trustee sought to avoid the $16.5 million transfer to Merit, claiming it was constructively fraudulent under the Bankruptcy Code.

Valley View and Bedford Downs needed the harness-racing license to open a “ ‘racino,’ ” which is a clever moniker for racetrack casino, “a racing facility with slot machines.” Both companies were stopped before the finish line, because in 2005 the Pennsylvania State Harness Racing Commission denied both applications. Instead of continuing to compete for the last available harness-racing license, Valley View and Bedford Downs entered into an agreement to resolve their ongoing feud. Under that agreement, Bedford Downs withdrew as a competitor for the harness-racing license, and Valley View was to purchase all of Bedford Downs' stock for $55 million after Valley View obtained the license.

Issue

Whether the transfer from Valley View to Merit implicates the safe-harbor exception under § 546(e) of the Bankruptcy Code, given that the transfer was made through financial institutions acting as conduits.

The question before this Court is 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.” § 546(e).

Rule

The relevant transfer for purposes of the § 546(e) safe harbor is the transfer that the trustee seeks to avoid, not any component parts of that transfer.

The only relevant transfer for purposes of the § 546(e) safe harbor is the transfer that the trustee seeks to avoid.

Analysis

The Court determined that the language and context of § 546(e) indicate that the safe harbor applies only to the transfer the trustee seeks to avoid. The trustee's avoidance action must focus on the overarching transfer, which in this case was the transfer from Valley View to Merit. Since neither Valley View nor Merit is a covered entity under the safe harbor, the transfer does not qualify for protection.

The Court agrees with FTI. The language of § 546(e), the specific context in which that language is used, and the broader statutory structure all support the conclusion that the relevant transfer for purposes of the § 546(e) safe-harbor inquiry is the overarching transfer that the trustee seeks to avoid under one of the substantive avoidance provisions.

Conclusion

The Supreme Court affirmed the Seventh Circuit's reversal of the District Court's decision, concluding that the transfer from Valley View to Merit was not protected by the securities safe harbor.

The Supreme Court affirmed the Seventh Circuit's reversal of the District Court's decision, concluding that the transfer from Valley View to Merit was not protected by the securities safe harbor.

Who won?

FTI Consulting, Inc. prevailed because the Supreme Court found that the transfer in question did not meet the criteria for the securities safe harbor under § 546(e).

FTI Consulting, Inc. prevailed because the Supreme Court found that the transfer in question did not meet the criteria for the securities safe harbor under § 546(e).

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