Supreme Court Holds Section 546(e) Safe Harbor Does Not Apply to All Transfers Made Through Financial Institutions

Earlier this week, the U.S. Supreme Court issued its unanimous decision in Merit Management Group, LP v. FTI Consulting, Inc., holding that 11 U.S.C § 546(e), which creates a safe harbor against the avoidance of certain transfers made “by or to (or for the benefit of)” financial institutions, does not apply merely because the challenged transfer is completed through a financial institution.

In reaching its conclusion, the Court focused heavily on the text of the statute, instructing courts to focus their analysis on the “end-to-end transfer” the trustee seeks to avoid rather than any individual transaction the transfer comprises.

The decision is the Supreme Court’s first to address the safe harbors under the U.S. Bankruptcy Code. Thus, although the particular holding of Merit may not be directly applicable to the rights of financial counterparties under qualified financial contracts, the Court’s decision is likely to have a significant impact on the application of the safe harbors to avoidance actions and related litigation.

This article was republished by ABA Business Law Today.