Supreme Court Limits Securities Safe Harbor in Bankruptcy Clawbacks
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Reprinted with permission from Bench and Bar of Minnesota magazine, July 2018
Section 546(e) of the Bankruptcy Code shelters a “settlement payment” that is made “by or to (or for the benefit of)” a securities market intermediary, such as a financial institution, from avoidance in bankruptcy except in cases of actual fraud. The safe harbor was originally enacted in 1982 to protect financial markets from the instability caused by the unwinding of settled securities transactions. Congress believed that, in the absence of protection, there would be an inordinate amount of risk that the insolvency of one counterparty could trigger a chain reaction of insolvencies in the settlement and clearing industry and thereby undermine the integrity of financial markets.
The United States Supreme Court, in Merit Management Group, LP v. FTI Consulting, Inc., resolved a circuit split over the scope of the Bankruptcy Code’s securities safe-harbor provision, concluding that a transfer can be undone in bankruptcy even if the financial institution served as a mere conduit. The unanimous Court rejected the rule previously followed by most federal appellate courts, which immunized transfers when the financial institution acted solely as an intermediary (e.g., escrow or disbursing agent) in the transaction and did not have a beneficial interest in the property transferred. The Court held that the only relevant transfer for purposes of the securities safe harbor is the transfer that the trustee actually seeks to avoid. Read More.
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