Supreme Court Limits Safe Harbor Provision of Section 546(e)
The Supreme Court was asked to resolve a split of circuits and decide whether the safe harbor provision of 11 U.S.C. Section 546(e) applies when a financial institution is only a “mere conduit.” The Supreme Court ruled unanimously in Merit Management Group LP v. FTI Consulting Inc. that the safe harbor under Section 546(e) applies only to “the transfer that the trustee seeks to avoid.”
A transfer that is subject to recovery by a trustee as a constructively fraudulent transfer cannot be insulated by using a bank as an escrow agent when the trustee is seeking to recover from the ultimate recipient of the transfer, not from an intermediary bank. In reaching its decision, the Supreme Court held that the only relevant transfer for purposes of the §546(e) safe harbor is the transfer that the trustee seeks to avoid, which is this case was the transfer from the debtor to the shareholder owner of the stock the debtor purchased. notwithstanding there were transfers to intermediary banks in between.
See full opinion here.