RK&O Client Alert: "Supreme Court Narrows the Scope of a Bankruptcy 'Safe Harbor' Where Financial Institutions are Mere Intermediaries"

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March 1, 2018

Investors currently relying on certain of the Bankruptcy Code’s safe harbor provisions to save them from clawback claims should consider finding new shelter.  The U.S. Supreme Court in Merit Management Group, LP v. FTI Consulting, Inc., unanimously ruled that one aspect of the safe harbor under Section 546(e) of the Bankruptcy Code does not prohibit a bankruptcy trustee (or creditors’ committee or litigation trust) from seeking to clawback transfers that are constructive fraudulent conveyances and/or preferences where a “financial institution” (or other covered entity such as a clearing agency or stockbroker) was acting as an intermediary.  A significant majority of circuits who had ruled on this issue, including the Second and Third Circuits, had previously ruled that this aspect of the safe harbor insulated a wide range of securities and other transactions from clawback risk because those transactions involved the use of banks or stockbrokers acting as intermediaries.  

In this client alert, RK&O partners Gregory G. Plotko and David W.T. Daniels discuss who benefits from this safe harbor and the key take aways for market participants. 

Click here to read the full client alert.