The U.S. Supreme Court has unanimously adopted a narrow interpretation of the “safe harbor” provision of the Bankruptcy Code relating to securities transactions, when a financial institution handles the funds. The safe harbor provision states that the Bankruptcy Trustee (or the Chapter 11 Debtor-in-Possession) cannot avoid a transfer of a “settlement payment” which is “made by or to (or for the benefit of)” the involved financial institution, or “is a transfer made by or to (or for the benefit of)” that financial institution.

The issue before the Supreme Court was how broadly to construe the safe harbor provision. The case involved a securities transaction (the sale of stock in a business), structured to take advantage of a prevailing liberal interpretation of the safe harbor provision. By having the purchase funds paid through a financial institution, the parties sought to take advantage of the safe harbor, such that a later Bankruptcy Trustee (if one was ever appointed) could not avoid the transfer as constructively fraudulent. The financial institution never had any beneficial interest in the funds – it was solely an intermediary handling the money for a fee as an escrow agent.

The Supreme Court looked to the actual language of the safe harbor provision, and focused on the “by or to (or for the benefit of)” language. It noted that transfers “through” a financial institution are not mentioned in the provision. When the financial institution has no monetary interest in the transferred funds, it acts as an intermediary only and the safe harbor provision does not apply.

The Supreme Court’s decision takes away transaction structuring opportunities from practitioners who previously used a bank or other financial institution as an intermediary, to bring a stock sale transaction within the safe harbor exception to the Trustee’s avoidance powers. The attorneys at Saxon Gilmore & Carraway, P.A. have considerable experience in providing counsel to buyers and sellers in transactional planning, and would be pleased to assist you in structuring your transaction in an advantageous manner to protect against attacks by creditors or bankruptcy trustees. Please contact us if you plan on buying or selling a business and wish to structure the transaction in a way to maximize creditor and bankruptcy protections available under the law.

Merit Management Group, LP v. FTI Consulting, Inc., Case No. 16-784. (Feb. 27, 2018)


© 2018 Saxon Gilmore. Saxon Gilmore publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Saxon Gilmore. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact form via the link below. This site may contain hypertext links to information created and maintained by other entities. Saxon Gilmore does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.