Opinion analysis: Justices reject limits on bankruptcy recovery of fraudulently transferred assets

Today’s decision in Merit Management Team v. FTI Consulting brought several surprises to observers acquainted with the argument.  As I stated in my publish about the argument, the justices in November showed broad skepticism about the notion that a Individual bankruptcy Code provision guarding “securities payments” should really offer a broad shield from physical exercise of the bankruptcy court’s electrical power to get better fraudulent conveyances. So the prompt and unanimous viewpoint of Justice Sonia Sotomayor (only the next decision from the November argument session) was just what you should really have anticipated.

As I stated in additional detail in my preview, the situation consists of the “avoidance” powers of the bankruptcy court docket, which generally permit the court docket to get better (“avoid”) dubious payments that bankrupts make ahead of their bankruptcy filings. The provisions have numerous in depth exceptions which includes one that bars recovery of any “settlement payment” designed below a “securities contract” if it is “by or to” a economic institution. The challenge in this situation is no matter if that provision protects the transaction if the economic institution is concerned only as a conduit. The U.S. Court docket of Appeals for the 2nd Circuit and pretty much all of the other courts of appeals have held for many decades that the statute protects those people conduit payments: In the terms of the statute, that reading insulates the transactions from scrutiny because the last leg of those people transactions (ordinarily) is a payment designed “by” a protected intermediary. The Supreme Court docket below embraced the U.S. Court docket of Appeals for the 7th Circuit’s rejection of that watch: Individual bankruptcy courts can steer clear of fraudulent transfers even if those people transfers are effected by transfers of resources or belongings by the intermediaries that run our securities and payments networks.

The viewpoint deploys a contextual manner of textual interpretation, instead explicitly deciding upon in between two different readings of the statute dependent on the Supreme Court’s feeling about which reading would in good shape additional comfortably within the broader construction of the pertinent portion of the Individual bankruptcy Code – looking both equally to “the language by itself [and] the unique context in which that language is employed.” So, the court docket starts off by noting that the debate in the decrease courts and, for the most portion, the briefs of the events consists of the issue no matter if it is honest to characterize a transfer as one designed “by” a economic institution when the institution is a “mere” conduit without an lively purpose in directing the transaction.

The Supreme Court’s viewpoint features no immediate explication of the language guarding transfers “by” intermediaries, detailing that commencing from “those inquiries place[s] the proverbial cart ahead of the horse.” Correctly directed, a court docket can not “determine no matter if a transfer was designed by or to or for the profit of a lined entity” unless it can “first discover the pertinent transfer to examination in that inquiry.” In its concerted analysis of context, the court docket starts off with the introductory clause of the securities exception in Segment 546(e), which defines a group of securities payments that are protected from avoidance “notwithstanding” the trustee’s many avoidance powers. For the court docket, the “notwithstanding” clause “already commences to answer the issue,” because “[i]t suggests that §546(e) operates as an exception to the keeping away from powers afforded to the trustee below the substantive avoidance provisions.” So, the court docket good reasons, “the textual content can make apparent that the commencing issue … is the substantive keeping away from electrical power … and, therefore, the transfer that the trustee seeks to steer clear of as an physical exercise of those people powers.”

The viewpoint carries on with many in the same way contextual factors, presented additional summarily. For illustration, the past clause of Segment 546(e) supplies an exception to the securities exception, defined by reference to a unique avoidance electrical power, “signal[ing] that the exception applies to the overarching transfer that the trustee seeks to steer clear of, not any component portion of that transfer.” Again, the section heading (“Limitations on keeping away from powers”), whilst admittedly of minimal relevance, “demonstrates the near relationship in between the transfer that the trustee seeks to steer clear of and the transfer that is exempted from that keeping away from electrical power pursuant to the secure harbor.” In the same way, the viewpoint notes the obvious parallelism in between the exceptions assertion that “the trustee may possibly not avoid” specified transfers and the verbal style and design of the avoidance powers, all of which offer that the “trustee may possibly avoid” specified transfers.

Continuing in the similar vein, that section closes with Sotomayor’s most notable rhetorical prosper:

The transfer that “the trustee may possibly not avoid” is specified to be “a transfer that is” either a “settlement payment” or designed “in relationship with a securities deal.” Not a transfer that consists of. Not a transfer that contains. But a transfer that is a securities transaction lined below §546(e).

For its past affirmative issue, the Supreme Court docket turns to the “statutory structure” – marked out as a separate subpart of the viewpoint, seemingly to underscore the justices’ watch that statutory “structure” is unique from the statutory “context” I have been speaking about in the past three paragraphs. The court docket features a laudatory quotation from the 7th Circuit’s viewpoint to aid the argument that the construction “reinforces” the court’s “reading” of the statute: “As the Seventh Circuit aptly place it, the Code ‘creates both equally a program for keeping away from transfers and a secure harbor from avoidance—logically these are two sides of the similar coin.’”

Implementing that reasoning, the disposition of the situation is easy: The trustee recognized a acquire of inventory as a fraudulent transfer (because the inventory did not offer honest value for the transferred acquire value) the use of securities intermediaries to finalize the transfers of the inventory and resources does not justify exempting the transaction from the ordinary software of the avoidance powers of the bankruptcy court docket.

With the affirmative rationalization of its reasoning complete, the Supreme Court docket closes with a quick rebuttal of the principal arguments highly developed to aid the broad reading of the securities exception that has prevailed in the decrease courts. Very first, the court docket addresses the probability that the present language of the exception (recently expanded so that it reaches transfers designed “for the profit of” the stated intermediaries) was adopted to overrule a decrease-court docket decision that had supplied a slender reading to a prior version of the exception. On that issue, the court docket features two responses. For one thing, the argument founders on the utter absence of any legislative historical past suggesting an intention to overrule the decision in issue. More generally, the court docket suggests that the addition of the language can make feeling because it parallels language in the avoidance powers that reaches to transactions that are designed “for the profit of” a individual creditor.

2nd, the court docket rejects the argument that its reading renders superfluous the inclusion of “securities intermediaries” as protected events – because those people entities usually act as “intermediaries.” On that issue, the court docket thoughts the factual premise of the argument, pointing to at the very least one very well-recognised decrease court docket situation in which events plausibly had contended that securities intermediaries acted with “a valuable curiosity in a challenged transfer.” In those people situations, the court docket points out, because the challenged transfer would be “made ‘by’ or ‘to’ a securities clearing agency, [the statute] will bar avoidance,” giving result to the statute’s inclusion of those people entities in the exemption.

3rd and last but not least, the Supreme Court docket firmly resists the suggestion that “Congress’ function in enacting the secure harbor” reflected a “prophylactic” instead than a “surgical” curiosity in broad security of the finality of transactions. Whatsoever the court docket may possibly have considered about the plan arguments, the viewpoint suggests that the textual content Congress selected is basically far too unique to give weight to this sort of a typical worry:

In point, [the] perceived function is really contradicted by the plain language of the secure harbor. Mainly because, of study course, below we do have a excellent reason to believe that that Congress was worried about transfers “by an field hub” precisely: The secure harbor saves from avoidance certain securities transactions “made by or to (or for the profit of)” lined entities. … Transfers “through” a lined entity, conversely, appear nowhere in the statute.

At base, then, for the Supreme Court docket, the plan argument “is nothing at all additional than an attack on the textual content of the statute.”

It stays to be observed how important this decision will be on the ground. It is, to be positive, a broad and firm rejection of the consensus comprehending of the courts of appeals, which has the apparent function of generating it easier to problem overpriced leveraged-buyout transactions that conclusion up in the bankruptcy courts (a class that features many of the premier situations of the past many decades).

Possessing claimed that, it is at the very least doable that the exception even now may possibly be read to protect many if not most of these transactions. The most apparent probability is that near ties in between the events to the averted transfer and the economic establishments that they use as intermediaries may possibly enable the exception to utilize on the idea that the events to the transfer are them selves protected establishments. The defendants in this situation did not quick that issue (owning conceded it in the decrease courts), but Justice Stephen Breyer went out of his way at oral argument to suggest it as an alternate justification for guarding these transfers. The court docket notes in a quick footnote that the issue was waived in this situation, but certainly it will be raised promptly as a justification for restricting the result of this decision. So in the conclusion the one group most most likely to profit from the decision is the competing teams of litigators that will carry on to problem, and defend, these transactions.

Click on for vote alignment by ideology.

Posted in Merit Management Team, LP v. FTI Consulting, Highlighted, Deserves Cases

Suggested Citation:
Ronald Mann,
Viewpoint analysis: Justices reject boundaries on bankruptcy recovery of fraudulently transferred belongings,
SCOTUSblog (Feb. 27, 2018, 5:27 PM),

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