Supreme Court's opinion


The Bankruptcy Code provides bankruptcy trustees, debtors and creditors committees with avoidance powers that allow them to set aside and recover certain transfers made by a debtor before filing for bankruptcy.(1) However, these avoidance powers are limited by a number of exceptions enumerated in the Bankruptcy Code, including the securities safe harbour under Section 546(e). Section 546(e) protects from avoidance any transfer "made by or to (or for the benefit of)… a financial institution" if the transfer is a settlement payment or made "in connection with a securities contract".

The Supreme Court recently held in Merit Management Group, LP v FTI Consulting, Inc that Section 546(e) does not apply to transfers in which financial institutions are mere intermediaries.(2) In doing so, the Supreme Court resolved a circuit split, unanimously rejecting the majority rule in the Second, Third, Sixth, Eighth and Tenth Circuits that the safe harbour applied to such transfers.(3) As such, this decision leaves certain transactions previously thought to be inviolate vulnerable to later being unwound if one of the parties files for bankruptcy within the relevant statutory period.


For years, almost every circuit court to consider the above question held that the safe harbour under Section 546(e) protected transfers subject to it, even if a financial institution was involved only as a conduit for payment to another entity.(4) Such a transfer was at issue in Merit Management, where two companies, which neither party contended were financial institutions, effected a stock purchase agreement by using financial institutions as intermediaries.(5) More specifically, the purchaser transferred money to a bank, which then transferred it to a second bank. That bank in turn disbursed the purchase money to the seller-shareholders in exchange for their shares, which ultimately wound their way back up the chain to the purchaser.(6) One of these shareholders was the petitioner, Merit Management Group, LP.(7)

Not long after this transaction, the purchaser and its parent company filed for bankruptcy.(8) The respondent, FTI Consulting, Inc, was appointed as a trustee of the parent company's litigation trust and in that role sued Merit in federal district court to avoid the stock purchase from becoming a fraudulent transfer.(9) Merit defended itself by arguing that because the transfer included a "settlement payment… made by or to" two different financial institutions, the transfer was protected under Section 546(e).(10)

The US District Court for the Northern District of Illinois agreed with Merit, but the Seventh Circuit reversed and held, contrary to the majority view, that the safe harbour did not apply to transactions in which financial institutions served only as mere conduits.(11)

Supreme Court's opinion

In affirming the Seventh Circuit's decision, the court began by framing the issue before it. The court noted that the parties and lower courts had "dedicate[d] much of their attention" to whether and when a transfer to or by a financial institution might qualify for protection under Section 546(e).(12) However, the court found that this "put the proverbial cart before the horse": "Before a court can determine whether a transfer [fits into that inquiry]… the court must first identify the relevant transfer to test in that inquiry."(13)

On that issue, FTI had argued that the relevant transfer was the overarching transaction that it sought to avoid: a stock purchase between two non-financial institution parties.(14) Merit, on the other hand, argued the majority view that:

  • each of the component parts of the transaction were relevant; and
  • if any of those component parts of the transfer fit into the securities safe harbour, the entire transfer was protected.(15)

The court rejected the majority rule and agreed with FTI that the relevant transfer is the one that the trustee seeks to avoid:

"The transfer that… 'the trustee may not avoid' is specified to be 'a transfer that is' either a 'settlement payment' or made 'in connection with a securities contract.' Not a transfer that involves. Not a transfer that comprises. But a transfer that is a securities transaction covered under § 546(e)." (Emphasis added.)(16)

The court found that applying "that understanding of the safe-harbor provision to this case yields a straightforward result".(17) FTI sought to avoid the stock purchase and not any of the individual "component transactions by which that overarching transfer was executed".(18) Thus, "the Court must look to the overarching transfer… to evaluate whether it meets the safe-harbor criteria".(19) As no one argued that the purchaser or seller in that overarching transaction was a financial institution, "the transfer falls outside of the § 546(e) safe harbor".(20)


This decision plainly rejects what was, in many judicial circuits, a long-held interpretation of Section 546(e). Whether it will have significant long-term effects hinges in part on whether parties that use financial institutions as intermediaries can in effect bypass the court's ruling by arguing that they are financial institutions. Indeed, the Bankruptcy Code provides that customers of financial institutions are, under certain circumstances, financial institutions.(21) Although highlighted by the court, this issue was not argued by the parties in Merit Management and thus was not ruled on.(22)

For further information on this topic please contact Kevin Maclay or Todd Phillips at Caplin & Drysdale, Chartered by telephone (+1 202 862 5000) or email ([email protected] or [email protected]). The Caplin & Drysdale website can be accessed at


(1) See, for example, 11 USC § 548(a) (providing for avoidance of fraudulent transfers made within the two years before a bankruptcy filing).

(2) Merit Mgmt Grp, LP v FTI Consulting, Inc, 138 S Ct 883, 897 (2018).

(3) The contrary minority position was held by the Seventh and Eleventh Circuits. See id at 892 n6 (noting circuit split).

(4) See id (citing In re Quebecor World (USA) Inc, 719 F3d 94, 99 (2d Cir 2013) (finding the safe harbour applicable where covered entity was intermediary); QSI Holdings, Inc v Alford (In re QSI Holdings, Inc), 571 F3d 545, 551 (6th Cir 2009) (same); Contemporary Indus Corp v Frost, 564 F3d 981, 987 (8th Cir 2009) (same); Lowenschuss v Resorts Int'l, Inc (In re Resorts Int'l, Inc), 181 F3d 505, 516 (3d Cir 1999) (same); Kaiser Steel Corp v Pearl Brewing Co (In re Kaiser Steel Corp), 952 F2d 1230, 1240 (10th Cir 1991) (same)).

(5) Merit Mgmt, 138 S Ct at 891, 897.

(6) Id at 891.

(7) Id.

(8) Id at 891.

(9) Id at 891.

(10) Id at 891-92 (alteration in original).

(11) Merit Mgmt, 138 S Ct at 892.

(12) Id.

(13) Id.

(14) Id.

(15) Id.

(16) Id at 894 (alteration in original) (internal citations omitted).

(17) Merit Mgmt, 138 S Ct at 897.

(18) Id.

(19) Id.

(20) Id at 897.

(21) 11 USC § 101(22)(A), defining 'financial institution' as:

"a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity and, when any such Federal reserve bank, receiver, liquidating agent, conservator or entity is acting as agent or custodian for a customer... in connection with a securities contract... such customer." (Emphasis added).

(22) See, eg, Merit Mgmt, 138 S Ct at 897 ("Because the parties do not contend that either… [the purchaser or seller] is a 'financial institution' or other covered entity, the transfer falls outside of the § 546(e) safe harbor").