Bankruptcy ‘Safe Harbor’ Protection to Get Supreme Court Review
The U.S. Supreme Court has agreed to hear a case that could make it easier for creditors to claw back cash that was paid out by a company before it went bankrupt, Bloomberg reported yesterday. Bankruptcy law offers a “safe harbor” to financial institutions that perform securities transactions. The provision was intended to protect trades from creditor claims, to promote stability in financial markets in the face of complicated corporate reorganizations. The justices are being asked to consider whether the shield should apply when a financial institution merely acted as a conduit for a transaction. FTI Consulting Inc., the trustee of Valley View Downs LP, contends that creditors are entitled to recover money paid for shares in rival Bedford Downs in 2007. Merit Management Group received $16.5 million in the transaction, which was carried out through Citizens Bank of Pennsylvania and Credit Suisse. The trustee sued Merit, saying that Valley View should get the money back because the company did not get equivalent value in exchange and was insolvent at the time of the deal. A district judge, invoking safe harbor, ruled that Merit could keep the money, but an appeals court reversed, saying the financial institutions involved in the trade were just conduits for the deal. Two federal appeals courts have reached the same conclusion, while five have gone the other way. The case is Merit Management Group v. FTI Consulting Inc., 16-784.
ABI Editor-at-large Bill Rochelle offered a detailed analysis of yesterday’s ruling.
