In Holliday v. Credit Suisse Securities USA LLC, United States District Court for the Southern District of New York ("SDNY") Judge George B. Daniels affirmed the dismissal of state law transfer avoidance claims related to a leveraged securities buyout transaction. His decision was based on a broad reading of the Bankruptcy Code "safe harbor" protections afforded non-defaulting parties to certain derivative and financial contracts ("QFCs"), including securities contracts (e.g., purchase and sale of securities).

Upholding a comprehensive Bankruptcy Court decision (Grossman, J.), the SDNY, among other things, (i) agreed that a customer of a financial institution acting as agent or custodian for the customer is, itself, a financial institution and a safe harbor-protected party; (ii) rebuffed attempts to truncate a complex, multiparty transaction; and (iii) endorsed a broad safe harbor preemption of state law avoidance claims, including intentional fraudulent transfer claims (although stating that Bankruptcy Code actual fraudulent transfer claims are not safe harbor-protected).

The Bankruptcy Code provides broad protections to specified parties under QFCs, including non-avoidance of related transfers such as margin and settlement payments. See, e.g., 11 U.S.C. 546(e) (transfers related to securities contracts). Financial institutions and financial participants that conduct certain high-value transactions are among the protected parties. The safe harbor provisions are broadly worded, with the goal of protecting financial and securities markets from turmoil. Issues include which parties are protected in complex, multiparty transactions and whether avoidance actions under state law are permitted.

Over three years ago, in Merit Management Group, LP v. FTI Consulting, Inc., the Supreme Court unanimously held that (i) avoidance action protections do not extend to transfers in which banks or other financial institutions serve as intermediaries or "mere conduits" in multi-step securities transactions that are ultimately between two non-financial institutions and (ii) the relevant transfer in a multistep transaction is the overarching transfer and not any component.

But the impact of Merit, thought by some commentators to narrow safe harbor protections, has been constrained, in part, because the justices declined to address a substantial gap in its analysis - could non-financial institutions qualify for safe harbor protections if they were customers of financial institutions?

The Second Circuit Court of Appeals marched through that gap. In its amended In re: Tribune Company decision, the Circuit Court held that customers of financial institutions are safe harbor-protected parties and that state law constructive fraud claims are preempted by the Bankruptcy Code's safe harbor provisions.

In response, plaintiffs have (i) truncated multistep transactions, seeking only to avoid a component of complex leveraged buyouts, and (ii) pursued state law intentional fraudulent transfer claims. Such strategies have thus far been unavailing, at least in the Second Circuit governed by the Tribune decision. Following the Tribune decision and Merit's direction to focus on the overarching transfer, not its component parts, Bankruptcy Court Judge Grossman held, and SDNY Judge Daniels affirmed, that financial institutions include their customers and that state law intentional fraud claims are preempted.


Case law examining the scope of safe harbor protections is not extensive. The statutory language is broad and generally construed in accordance with its plain meaning. QFCs in the influential Second Circuit enjoy the wide and deep safe harbor protections afforded by Tribune and its progeny. The Supreme Court may not soon revisit these issues, as earlier this year it denied review of the Tribune decision.