Last week, the unanimous Supreme Court clarified that the “clearing and settlement” exception to a bankruptcy trustee’s avoiding powers covers only payments “to,” not merely through, financial market participants.

The Bankruptcy Code provides trustees with various avoiding powers, including the ability to recoup for the estate actual or fraudulent transfers, under 11 U.S.C. § 548(a) (1). The Code also provides a number of exceptions to the trustee’s avoiding powers, including some designed to protect the integrity of the clearing and settlement processes of the nation’s financial markets. Those provisions protect, among others:

  • Margin payments, § § 101(38), 741(5), 761;
  • Settlement payments, § § 101, 741(8);
  • Securities contracts, § § 741(7);
  • Commodities contracts § § 101(6), 761(4);
  • Forward contracts § § 101(25), 761(4);
  • Repo and reverse contracts , § § 101(46-47), 546(f);
  • Swaps, § § 101(53B), 536(g).

The Code specifically prevents a trustee from using her avoiding powers to undo a transfer that is a margin or settlement payment — or in connection with a securities, commodities or forward contract — “made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency.” 11 U.S.C. § 546(e).

The trustee here sought to avoid the debtor Valley View’s transfer of cash to racetrack shareholders, Merit Management, as part of an unsuccessful plan to combine the licenses and facilities for a “racino” (racetrack with slot machines). Merit defended by arguing that the “settlement payment” safe-harbor prevented avoidance, because the payment transited Credit Suisse and Citizen’s Bank.

The Court quickly rejected Merit’s arguments, saying Courts should “look to the transfer that the trustee seeks to avoid (i.e. A → D) to determine whether that transfer meets the safe-harbor criteria … [and not look] also to any component parts of the overarching transfer (i.e. A →B → C → D).” Slip Op. at 1-2, 10. “The safe harbor saves from avoidance certain securities transactions ‘made by or to (or for the benefit of)’ covered entities. See § 546(e). Transfers ‘through’ a covered entity, conversely, appear nowhere in the statute.” Slip Op. at 18.

Justice Sotomayor delivered the Court’s Opinion and shut down Merit’s “purposivist arguments,” refusing to consider Congress’s statutory purpose. Slip Op. at 18. Indeed, Justice Sotomayor even cited former Justice Scalia’s book (with Bryan Garner) on statutory interpretation. The references come just a week after Justice Sotomayor’s (and Bryer’s) defense of interpretive recourse to Senate Reports in their separate- concurrence debate with Justices Thomas, Alito and Gorsuch in the Dodd-Frank whistleblower decision. See Digital Realty Trust, Inc. v. Somers, No. 16-1276 (U.S. Feb. 21, 2018).

The Court’s opinion is Merit Management Group, LP v. FTI Consulting, Inc., No. 16-784 (U.S. Feb. 27, 2018), here.