7th Circ. Limits Section 546(e) Safe Harbor

In FTI Consulting Inc. v. Merit Management Group LP, the Seventh Circuit recently held that transfers are not protected under the safe harbor of Section 546(e) of the U.S. Bankruptcy Code from fraudulent transfer and other avoidance actions in bankruptcy when a financial institution or other statutorily protected entity merely acts as a conduit for the transfers and is not either the debtor (as the entity actually making the transfer), or the real party in interest that ultimately received the payment from the financial institution conduit.

The decision revives a long-standing circuit split on the issue, siding with the minority view espoused by the Eleventh Circuit some 20 years ago in Munford v. Valuation Research Corp. and disagreeing with decisions since then by the Second, Third, Sixth, Eighth and Tenth Circuits, representing every circuit-level decision on the issue between Munford and Merit. As discussed below, the decision has important implications for various counterparties in securities transactions, most notably selling stockholders in leveraged buyouts or “LBO” transactions, where years later a trustee or other estate fiduciary in bankruptcy may claim the buyout rendered the company insolvent and thus the transaction amounted to a constructive fraudulent transfer.

Read "7th Circ. Limits Section 546(e) Safe Harbor."