This Client Alert relates to the Supreme Court’s decision in Merit Management Group, LP v. FTI Consulting, Inc., No. 16-784, issued on February 27, 2018. The Bankruptcy Code allows the trustee or a debtor-in-possession to avoid and recover certain pre-bankruptcy transfers made by the debtor for the benefit of the bankruptcy estate. One limitation to these avoiding powers is a safe harbor provided by 11 U.S.C. § 546(e).
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Home Perspectives Supreme Court holds that use of financial institutions as conduits will not insulate a transaction from avoidance actions
On February 27, 2018, the Supreme Court of the United States issued a unanimous decision delivered by Justice Sotomayor holding that a party otherwise subject to an avoidance action under the Bankruptcy Code is not shielded from such avoidance by virtue of the safe harbor under 11 U.S.C. § 546(e) simply because one or more financial institutions were conduits for such transfer. The Court explained that, for purposes of applying the § 546(e) safe harbor, the only transfer that is relevant is the overarching end-to-end transfer sought to be avoided and the component parts of such transfer should be ignored. As a result, the fact that a transfer from a debtor to another person was executed using financial institutions as intermediaries does not insulate the transfer from avoidance actions. When the transfers to and from the financial institutions are merely component parts of the ultimate transfer from the debtor to the other party the § 546(e) safe harbor will not apply to such ultimate transfer.