Client Alerts

Mapping the Harbor: Additional Interpretation of the Bankruptcy Safe Harbor

Client Alerts | March 24, 2021 | Creditors’ Rights and Bankruptcy Litigation

A series of decisions (and a recent brief) have highlighted some of the new issues that are arising in Safe Harbor litigation. In particular, they show how the courts are wrestling with questions concerning:

  • Which entity in a complex transaction is considered the “initial transferee” for Safe Harbor purposes?
  • How are courts interpreting the Safe Harbor’s Qualifying Entity requirement for Qualifying Entities such as Financial Institutions and Financial Participants?
  • Are courts adopting the decision of the Second Circuit in Tribune, that the Qualifying Entity requirement was satisfied where a Financial Institution had served as agent or custodian of the customer-transferor?
  • How much protection does the Safe Harbor provide for transactions with foreign entities?

For more background on the elements of the Safe Harbor and its leading decisions, please see the Kleinberg Kaplan Safe Harbor Resource Center.

Who is the Transferee?

In In re SunEdison, Inc., a New York bankruptcy court was tasked with applying the ruling of the Supreme Court in Merit Management — that “the relevant transfer for purposes of the §546(e) safe harbor inquiry is the overarching transfer that the trustee seeks to avoid” — in a fact situation that was the converse of the one considered by the Court.

SunEdison concerned the consequences of a transaction in which debtor SunEdison Holdings acquired certain subsidiaries (“First Wind”) and provided consideration to the sellers by providing them with exchangeable notes issued by a newly formed special purpose entity (“Seller Note”), which notes were secured by equity interests in certain SunEdison entities that were contributed to Seller Note and pledged to Wilmington Trust as collateral agent and indenture trustee. Following defaults, SunEdison and Seller Note entered into a workout pursuant to which the sellers received stock in a publicly traded SunEdison affiliate, the collateral assets were returned to SunEdison and the exchangeable notes were canceled.

After SunEdison filed a chapter 11 petition, a litigation trustee filed a complaint seeking recoveries from the First Wind sellers. The complaint characterized the transfer of collateral from SunEdison to Seller Note as the avoidable initial transfer. It sought to recover from the First Wind seller-defendants as subsequent transferees from Seller Note.

The plaintiff argued that that the Safe Harbor did not shield the transfer because Seller Note, the alleged initial transferee, was not a Qualifying Entity. The plaintiff also argued that under SIPC v. Bernard L. Madoff Inv. Secs. LLC, 594 B.R. 167 (Bankr. S.D.N.Y. 2018), the Safe Harbor does not protect subsequent transferees if neither the transferor nor the initial transferee was a Qualifying Entity, even where the subsequent transferee was a Qualifying Entity.

The court rejected the plaintiff’s characterization of the transaction. It determined that both the transfer of the collateral to Seller Note and the effectuation of that transfer through the pledge to Wilmington Trust were steps in a single integrated transaction, and noted that both steps had been detailed in the initial Purchase and Sale Agreement. It concluded that the transfer of the collateral had been to Wilmington Trust through Seller Note — rather than simply to Seller Note — such that Wilmington Trust was the initial transferee. Because Wilmington Trust itself was a Qualifying Entity, the court found that the Safe Harbor applied. And because the Safe Harbor protected the initial transfer, the First Wind sellers were also protected as subsequent transferees of a protected initial transferee.


The plaintiff’s theory of the case, as set forth in the filed complaint, can be understood as an attempt to plead around the expected Safe Harbor defense. The plaintiff likely anticipated that the transfer of collateral to Wilmington Trust could not be avoided because Wilmington Trust was a Qualifying Entity. An attempt to sue the First Wind sellers as initial transferees would also likely have been blocked by the Safe Harbor, because Wilmington Trust had served as collateral agent for the First Wind sellers, and hence, under Tribune, the First Wind sellers would be deemed to be Financial Institutions. Accordingly, the plaintiff was left with the theory — rejected by the court — that the transfer went to Seller Note as initial transferee.

One could argue that Merit Management’s statement that “the relevant transfer for purposes of the §546(e) safe harbor inquiry is the overarching transfer that the trustee seeks to avoid” means that the inquiry must be of the transfer as stated in the complaint, but the SunEdison court refused to be bound by the plaintiff’s characterization of the transaction. Instead SunEdison, following In re Boston Generating LLC, 617 B.R. 442 (Bankr. S.D.N.Y. 2020), determined that the critical part of the Merit Management ruling was the direction that a court should consider the overarching transfer, such that the court should make an independent review of the underlying facts and not be bound by the plaintiff’s characterizations. Accordingly, SunEdison considered the entire transaction laid out in the Purchase and Sale Agreement as an integrated transaction and rejected the plaintiff’s attempt to focus on a single step.

It is ironic that in SunEdison the plaintiff was seeking to focus on a single step in a transaction while the defendants urged a broader view that would collapse the transaction. It is generally more common for collapse-the-transaction arguments to be made by fraudulent conveyance plaintiffs than fraudulent conveyance defendants. Indeed, in Merit Management it was defendants who argued that it was proper to break up the transaction into several component steps, while the plaintiff who successfully argued that all the steps should be considered as a single transfer.

These debates concerning the proper characterization of a complex series of transactions underscore that the determination of which entity is the initial transferee can be debatable, and that any transaction is subject to some litigation risk that it may be subsequently characterized in a way not intended by its architects. SunEdison thus highlights the importance of reviewing prospective transactions through the lens of the twists and turns of Safe Harbor caselaw.

The holding in Madoff has not been critically reviewed in other cases. The Madoff holding may be challenged someday as it arguably conflicts with the policies of the Safe Harbor in that it could permit a Qualifying Entity to be vulnerable to a clawback action based on a transaction in which it is a subsequent transferee rather than the initial transferee.

Custodian as Financial Institution

A Minnesota district court has provided additional support for defendants using the Safe Harbor against fraudulent conveyance actions and implicitly undercut a contrary ruling on the Financial Institution prong of the defense. The decision, Kelley v. Safe Harbor Managed Account 101, Ltd., adds to the growing list of courts that generally interpret the Safe Harbor broadly to protect defendants, and specifically adopt the Second Circuit’s Tribune decision.

Kelley was a case brought by a liquidating trust established in the bankruptcy proceedings arising from the Tom Petters Ponzi scheme. Defendant Safe Harbor Managed Account (“SHMA”) had, in 2002, indirectly invested $6 million in Metro 1, LLC, a Petters entity. Specifically, SHMA had wired the funds to a Wells Fargo escrow account established by Arrowhead Capital II, LP, a Petters feeder fund, which then used the funds to purchase notes from Metro. In 2003, SHMA redeemed its investment in Arrowhead. Petters’ scheme was exposed in 2008, more than four years after SHMA was paid out, and the Petters entities became debtors that year.

The trustee filed separate adversary proceedings against Arrowhead and SHMA. A default judgment was entered against Arrowhead, avoiding under Minnesota fraudulent conveyance law approximately $1 billion in transfers to Arrowhead, including the $6.8 million paid with regard to the SHMA redemption. The trustee sought to recover from SHMA as a subsequent transferee of a subset of the transfers to Arrowhead.

The court granted defendants’ summary judgment motion based on the Safe Harbor, adopting the Tribune ruling. The court found that in Kelley the Qualifying Entity requirement was satisfied because Wells Fargo, a Financial Institution, had served as custodian of the customer-transferee.

In this respect the Kelley district court implicitly disagreed with the decision of the Greektown bankruptcy court, which was issued less than two weeks after Kelley was handed down. Both cases interpreted the reference to “custodian” in Bankruptcy Code section 101(22), which includes as a Financial Institution a customer when the Financial Institution “is acting as agent or custodian for [such] customer….” Kelley found that Wells Fargo had served as a custodian for Arrowhead, with little discussion; Greektown instead adopted an extremely narrow definition of “custodian.”


The plaintiff bar is hoping for Tribune to be rejected by another circuit court such that the Supreme Court might grant a writ of certiorari to resolve what would then be a circuit split. The conflicting decisions in Kelley and Greektown are of particular interest because those courts are outside of the Second Circuit and hence were not bound by Tribune. It remains to be seen if and when either case will be considered by an appellate court (Kelley has been appealed) or if Tribune will be considered in another case by another circuit court.

The transfers challenged in Kelley were made more than two years before the petition date, so the only statutory basis for the trustee to bring a fraudulent conveyance claim was state law, which provides a longer reach-back period than federal law. The transfers were outside of the reach-back period for Bankruptcy Code section 548(a)(1)(A), the federal “actual intent” fraudulent conveyance statute, which is excepted from the section 546(e) Safe Harbor. As section 546(e) blocks all state law fraudulent conveyance actions, even those based on an actual intent theory, SHMA had a complete defense.

It appears to be nothing more than an amusing coincidence that the defendant was named “Safe Harbor.”

Definition of Financial Participant

In In re Samson Resources Corp. a Delaware bankruptcy court grappled with questions regarding the interpretation of the definition in Bankruptcy Code section 101(22A) of “Financial Participant,” one of the Qualifying Entities listed in the statute.

Samson arose from a 2011 LBO in which a family-owned oil and gas company was sold to a group of investors led by Kohlberg Kravis Roberts. The company filed a bankruptcy petition in 2015, and a litigation trustee brought a fraudulent conveyance action under state law. The defendants filed a Safe Harbor summary judgment motion, arguing that the debtor-transferor was a Qualifying Entity because at the time it was party to a sufficient number of energy contracts to meet the definition of a Financial Participant.

The trustee objected, arguing that the definition of Financial Participant necessarily excludes a debtor. The statute ambiguously provides that a Financial Participant is “an entity that … has one or more [of certain specified] agreements or transactions with the debtor or any other entity (other than an affiliate).” The trustee argued that the inclusion of “with the debtor” necessarily excludes debtors from the definition, while the defendants argued that “or any other entity” is broad enough to include debtors. Samson concluded that a debtor can be a Financial Participant after reviewing two antithetical earlier cases, In re Tribune Co. Fraudulent Conveyance Litig., 2019 Westlaw 1771786, *9 (S.D.N.Y. Apr. 23, 2019) (appeal pending) (debtor excluded from definition), and Luria v. Hicks (In re Taylor Bean & Whitaker Mtg. Corp.), 2017 Westlaw 4736682, *6 (Bankr. M.D. Fla. Mar. 14, 2017) (debtor included in definition). It is expected that this issue will continue to be the subject of litigation until it is resolved by a higher court.

Safe Harbor for Off-Shore Transactions

A New York bankruptcy court has highlighted some of the questions that arise when the Safe Harbor is invoked with regard to international transactions. The decision, In re Fairfield Sentry Ltd., shows that uncertainties regarding the scope of the Safe Harbor are a feature of cross-border transactions.


This case arose from the British Virgin Island liquidation proceedings of several Fairfield Sentry funds, which served as Madoff feeder funds. The liquidators filed a petition in the Southern District of New York seeking relief under chapter 15, which governs cases commended outside of the United States that are based on the law of the foreign main jurisdiction, rather than U.S. federal or state law. The liquidators then filed a complaint in the chapter 15 case that sought clawbacks under three BVI law theories: (1) “unfair preferences,” (2) “undervalue transactions” and (3) constructive trust. The defendants moved to dismiss based on the Safe Harbor.

Application of Safe Harbor in Chapter 15 Cases

Bankruptcy Code section 561(d) applies the Safe Harbor to chapter 15 cases, providing that the Safe Harbor applies “to the same extent as in a proceeding under chapter 7 or 11.” The Fairfield Sentry court interpreted section 561(d) to mean that the Safe Harbor blocks foreign law clawback claims that are analogous to the U.S. law causes of action that are blocked by the Safe Harbor. It then reviewed the liquidators’ theories of recovery to determine whether they could be analogized to the relevant U.S. federal and state actions. Incorporating its earlier ruling in In re Fairfield Sentry Ltd., 596 B.R. 275 (Bankr. S.D.N.Y. 2018), it concluded that BVI “unfair preferences” are analogous to U.S. preferences (blocked by the Safe Harbor), and that BVI “undervalue transactions” are analogous to U.S. constructive fraudulent conveyances (blocked by the Safe Harbor).

The court determined that the Qualifying Transaction and Qualifying Entity requirements of the Safe Harbor had been satisfied, as the transfers had been made pursuant to a securities contract (a Qualifying Transaction), and had been made by the funds, which were deemed to be Financial Institutions (a Qualifying Entity). The latter conclusion was based on Tribune, as all of the transfers had been made by the Dublin Branch of Citco Bank, where the funds maintained accounts, so the funds were customers of a Financial Institution (Citco Bank) that acted as agent for the funds.

Accordingly, the court dismissed the “unfair preferences” and “undervalue transactions” counts of the complaint. It did not dismiss the constructive trust count, because the Safe Harbor does not bar U.S. constructive trust actions.

Intentional Fraud Exception as Applied in Chapter 15 Cases

The liquidators sought to save their “undervalue transactions” count by arguing that the complaint alleged actual intent, and that the BVI “undervalue transactions” statute should have been analogized to federal actual intent fraudulent conveyances, which are excepted from the scope of section 546(e). The court disagreed, noting that the liquidators had failed to identify any BVI law that provides for avoidance based on actual intent to hinder, delay or defraud creditors.


The court’s determination that no BVI law provides for avoidance based on actual intent to hinder, delay or defraud creditors kept it from reaching an interesting question. As noted above, the Safe Harbor blocks state law actual intent actions but not federal law actual intent actions. Inasmuch as the federal actual intent fraudulent conveyance statute (carved out from the Safe Harbor) and state actual intent fraudulent conveyance statutes (blocked by the Safe Harbor) are generally substantively the same except for the applicable reach-back period, it is not clear to which a foreign law that provides for avoidance based on actual intent to hinder, delay or defraud creditors would be better analogized to. This issue may well be litigated in future cases concerning laws of jurisdictions other than the British Virgin Islands.

Fairfield Sentry leaves open the question of how the Safe Harbor interacts with the laws of jurisdictions other than the BVI. Persons contemplating investments in off-shore vehicles, as well as those structuring off-shore investment entities, may wish to proactively assess the laws of various jurisdictions to assess how the Safe Harbor may apply.

Solicitor General Brief

The Solicitor General of the United States has recently taken positions regarding the Safe Harbor that could influence future court decisions. The Solicitor General’s brief, filed in a Tribune adversary proceeding, takes positions that could curtail the scope of the Safe Harbor in favor of plaintiffs in future cases even though those positions could benefit defendants in Tribune.

Procedural Context

The brief was filed in a Tribune adversary proceeding,1 in which the Second Circuit Court of Appeals affirmed the dismissal of fraudulent conveyance actions brought against for Tribune shareholders by Tribune creditors. The plaintiffs filed with the Supreme Court a petition for a writ of certiorari, and the Court asked the Solicitor General to take a position on whether the writ should be granted.

There is a second Tribune adversary proceeding, concerning the same contested payments to Tribune shareholders, and also based on fraudulent conveyance theories of recovery, but in which the plaintiff is a bankruptcy trustee. In this adversary proceeding, the district court dismissed the complaint against the shareholders, and the trustee’s appeal is currently before the Second Circuit, where it has been briefed and argued and a decision is pending. 

Positions on the Merits

The Solicitor General took the position that the Court should decline to take the Tribune appeal, mainly on the basis that no other circuit court of appeals has issued a ruling on the Tribune issues, so there is no circuit split. (The Court is far more likely to take a case if there is a circuit split.) But the Solicitor General added that it believes that the two principal rulings of the Second Circuit in the case at issue were wrongly decided.

One of those rulings was on the Qualifying Entity prong of the Safe Harbor, discussed above regarding SunEdison and Kelley. The Solicitor General opined that the Tribune ruling “would largely negate the precisely crafted limits that Congress placed in [the Safe Harbor,]” and suggested instead an alternative construction of section 101(22A) under which, “in order to qualify as a ‘financial institution,’ a party to the transfer must make a bank (or similar entity) its agent for significant aspects of the overall transaction, rather than obtaining from the bank mere ministerial assistance related to some facets of the transaction.”

The other ruling was that, under the doctrine of implied pre-emption, the Safe Harbor precludes not only fraudulent conveyance actions brought by bankruptcy trustees but also those brought by creditors. The creditors had been employing a strategy described as the Safe Harbor workaround, arguing that the Safe Harbor blocks actions by trustees but not substantively identical actions brought by creditors.3 The Solicitor General opined that pre-emption should more properly be considered as an issue governed by the automatic stay than as a blanket pre-emption under the Safe Harbor.


The positions taken by the Solicitor General will likely favor the defendants in the Tribune cases. It is now more likely that the Supreme Court will decline to take the case before it now that the Solicitor General has taken this position. And the Second Circuit panel considering the appeal in the other Tribune case, which also raises the Qualifying Entity issue decided in the first case, should be bound by the decision of the panel in the first case. The one potential benefit to the trustee-plaintiff in the second case is that should the panel rule in favor of the defendants, and should the trustee-plaintiff seek en banc review of that ruling, the Solicitor General’s brief could be cited in support.

The Solicitor General’s opinions are likely to be cited in Safe Harbor cases pending in other circuits. Should one of those cases result in an opinion that adopts one or both of the Solicitor General’s substantive positions there would be a circuit split that could lead to Supreme Court review of that decision.

The Solicitor General’s arguments are largely based on policy considerations. This is in contrast to recent Supreme Court bankruptcy decisions, which have focused on “plain language” textual readings and arguments based on the structure of the bankruptcy code. It will be interesting to see how influential the Solicitor General’s opinion proves to be.

There is an unarticulated connection between the two prongs of the Solicitor General’s opinion. In discussing the Second Circuit’s implied pre-emption analysis it suggested that the situation that led to the pre-emption issue – the grant by the bankruptcy court of relief from the automatic stay to permit creditors to bring fraudulent conveyance actions – would be relatively rare, and would be based on whether the action interfered with an estate right. However, the history of the Tribune case and the implementation of the attempted Safe Harbor workaround belies that analysis. The Safe Harbor workaround was attempted because the parties in Tribune understand, based on the then-current caselaw, that the Safe Harbor precluded a fraudulent conveyance action against shareholders brought by a trustee. That conclusion was undermined by the Supreme Court in Merit Management, and then reinstated by the Second Circuit’s Tribune decision. If the Solicitor General’s Qualified Entity analysis is adopted by the courts, then Safe Harbor workarounds will be rare indeed, as they will be unnecessary because trustee lawsuits will rarely be impeded by the Safe Harbor. Conversely, the rejection of the Solicitor General’s Qualified Entity analysis, which will have the effect of broadening Safe Harbor protections, will have the likely effect of increasing the attractiveness of Safe Harbor workarounds for creditors.

Kleinberg Kaplan represents certain defendants in the Tribune adversary proceedings.


1 Please see the description of Tribune I on Kleinberg Kaplan’s Safe Harbor Resource Center for further background.

2 Please see the description of Tribune II on Kleinberg Kaplan’s Safe Harbor Resource Center for further background.

3 Please see the descriptions of Tribune I and Tribune III on Kleinberg Kaplan’s Safe Harbor Resource Center for further background.