Supreme Court Resolves Circuit Split Regarding the Scope of the Safe Harbor Provision of Section 546(e) of the Bankruptcy Code

On February 27, 2018, the United States Supreme Court held that the “safe harbor” of Section 546(e) of the Bankruptcy Code does not protect the transfer of funds when the funds merely move through a financial institution but do not involve the institution as a direct party.  The Supreme Court found that the “plain meaning of §546(e)” allows the avoidance or clawback of transfers made through a financial institution where the financial institution does not have a beneficial interest in the transfer.  Justice Sotomayor’s unanimous opinion resolves a circuit split and is consistent with decisions from the U.S. Courts of Appeals for the 7th and 11th Circuits, but contrary to decisions from the U.S. Courts of Appeals for the 2nd, 3rd, 6th, 8th, and 10th Circuits.

Section 546(e) of the Bankruptcy Code prohibits the avoidance of a payment if the payment is “made by or to (or for the benefit of)” a financial institution.  In this case, the trustee attempted to avoid a payment by the bankrupt company, Valley View Downs, to another entity, Merit Management. The U.S. Court of Appeals for the Seventh Circuit held, “that the safe harbor does not apply when a financial institution ‘is neither the debtor nor the transferee but only the conduit.’”   The Supreme Court affirmed the judgment of the Seventh Circuit, “the parties do not contend that either Valley view or Merit is a ‘financial institution’ or other covered entity, the transfer falls outside of the §546(e) safe harbor.”  The Supreme Court’s decision may have significant economic implications in the administration of a Chapter 11 bankruptcy.

A copy of the Supreme Court’s opinion can be found here.