The Supreme Court granted certiorari today to resolve a split of circuits and decide whether the “safe harbor” for securities transactions applies under Section 546(e) when a financial institution acts only as a “mere conduit” with no beneficial interest in the stock being sold in a leveraged buyout.
The Court will review the Seventh Circuit’s decision in FTI Consulting Inc. v. Merit Management Group LP, 830 F.3d 690 (7th Cir. July 28, 2016), where “mere conduit” is the only issue.
The justices are yet to act on the certiorari petition in Deutsche Bank Trust Co. Americas v. Robert R. McCormick Foundation, 16-317 (Sup. Ct.), which raises the “mere conduit” question along with several others under Section 546(e). Indeed, the Second Circuit gave the broadest possible interpretation of the safe harbor by holding that it supersedes state law and precludes creditors from bringing fraudulent transfer claims of their own against third parties when the selling corporation goes bankrupt.
Chief Circuit Judge Diane P. Wood wrote the decision for the Seventh Circuit in July 2016. Her opinion stands for the proposition that routing consideration for an LBO of a non-public company through a financial institution cannot preclude a fraudulent transfer attack if the seller was rendered insolvent. How her decision would apply to a leveraged buyout of a public company is not clear.
Judge Wood’s decision was in the minority. Only the Eleventh Circuit has similarly held that using a financial institution as a conduit does not invoke the “safe harbor.” The Second, Third, Sixth, Eighth and Tenth Circuits take the contrary view and apply the safe harbor when a financial institution is nothing more than a conduit.
The Seventh Circuit employed a powerful bench to decide the safe harbor question. With her on the panel were Circuit Judges Richard A. Posner and Ilana D. Rovner. The appeals court denied rehearing en banc.
With today’s grant of certiorari, the Supreme Court already has two bankruptcy cases on the calendar for the term to begin in October 2017. In late March, the justices agreed to hear U.S. Bank NA v. The Village at Lakeridge LLC, 15-1509 (Sup. Ct.), and decide whether the purchaser of a claim automatically takes on the seller’s insider status.
To read ABI’s discussion of Judge Wood’s decision, click here.