Fraudulent Transfer Claims After Merit Management v. FTI: Implications for Safe Harbor Litigation

Description

The Supreme Court's Merit decision has wide-ranging implications on the finality of securities transactions effected through financial institutions, including tender offers, leveraged buyouts, and other transactions challenged during bankruptcy. It enhances a trustee's ability to recover preferential or constructively fraudulent transfers in a bankruptcy proceeding and is likely to have substantial practical ramifications.

In addition to expanding a trustee's ability to recover fraudulent transfers, the decision also increases the bankruptcy estate's leverage against recipients of pre-petition transfers. Debtors or trustees may strategically frame avoidance actions to limit the scope of the safe harbor and may expose investors, investment funds, and similar entities to fraudulent transfer litigation risks.

But the decision also leaves open several ambiguities. First, the Court left open possible arguments that any "customer" of a "financial institution" is also itself a "financial institution" under §546(e). Second, the Court did not address whether the transaction qualified as a transfer that is a "settlement payment" or made in connection with a "securities contract" under §546(e). Third, the decision raises the question of how the preemption of state law creditor remedies under §546(e) will apply in light of the narrow construction of the safe harbor. These ambiguities will draw the attention of defendants in future fraudulent transfer litigation.

Listen as our authoritative panel of attorneys discusses this case, its effect on other bankruptcy litigation, and the practical implications for bankruptcy practitioners.