Participants in leveraged buyouts and similar deals will have less protection from “clawback” suits that seek to return money to a bankrupt company’s coffers, after the U.S. Supreme Court gave a narrow interpretation to a Bankruptcy Code safe-harbor provision designed to protect securities transactions. In Merit Management Group LP v. FTI Consulting Inc., the Court ruled that the safe-harbor provision, 11 U.S.C.A. § 546(e), does not apply to transactions in which a financial institution such as a bank or securities clearinghouse merely acts as an intermediary, rather than being the buyer or seller.
RK&O partner Gregory Plotko discussed this decision with Westlaw Practitioner Insights for Bankruptcy, saying "This is a big bankruptcy decision … which will have implications for both corporate and litigation practices. Many circuits, including courts in the 2nd and 3rd circuits, had previously ruled that [Section 546(e)] insulated a large scope of transactions from avoidance risk because the transfers involved the use of banks as intermediaries.” Mr. Plotko added that parties to those transactions can no longer shield themselves from a clawback suit that seeks to avoid and recover such transfers because a financial institution was involved. “This typically comes up in a leveraged buyout transaction or other transfers of value to shareholders and creditors within two years of a bankruptcy filing,” he said.
Mr. Plotko also told International Financial Review that even though the decision is potentially detrimental for some defendants, "a lot of transaction and payment structuring could nevertheless avoid liability."
"Supreme Court ruling gives shareholders less protection from clawback suits" - Westlaw Practitioner Insights for Bankruptcy
"US Supreme Court Restricts Bankruptcy Safe Harbour Protection" - International Financial Review