Merit Management Group, LP v. FTI Consulting, Inc.

Merit Management Group, LP received approximately $16.5 million from Valley View Downs, LP, a payment sourced from a loan intended to acquire a racetrack. After Valley View Downs and its affiliates filed for bankruptcy, FTI Consulting, acting as trustee for the litigation trust, sought to avoid the transfer as fraudulent. Merit asserted the transfer was shielded by the Section 546(e) safe harbor because the funds passed through financial institutions. The Supreme Court determined whether the safe harbor applies when a financial institution merely acts as a conduit, even though neither the ultimate transferor nor the transferee was a financial institution. The Court unanimously held that the safe harbor does not protect a transfer solely because it was executed through a financial institution; the focus must be on the identities of the immediate transferor and transferee in the avoided transfer. The judgment was reversed and remanded.

The U.S. Supreme Court unanimously reversed the Seventh Circuit, holding that the safe harbor under Section 546(e) applies only if the transferor or transferee in the challenged transfer is a financial institution or covered entity. The mere fact that funds passed through a financial institution as a conduit does not trigger the safe harbor. The case was remanded for further proceedings consistent with the opinion.

Whether the Section 546(e) safe harbor of the Bankruptcy Code protects a transfer from avoidance when a financial institution merely served as an intermediary, or whether the safe harbor requires the ultimate transferor or transferee to be a financial institution or other covered entity.

The ruling narrowed the reach of the bankruptcy safe harbor, preventing parties from shielding otherwise avoidable transfers by simply routing money through a bank. It strengthened the ability of bankruptcy trustees to recover assets for the benefit of creditors and reinforced the principle that the substance of the transfer, not its form, governs safe harbor analysis.