February 28, 2018
Kleinberg Kaplan Bankruptcy partner Matthew Gold was quoted in Law360 article, “Justices Hone Creditors’ Ability To Ax Pre-Bankruptcy Deals,” about a U.S. Supreme Court decision that could allow trustees to claw back more funds in bankruptcy, by rejecting the notion that a securities transaction can be insulated from avoidance actions as long as it involved a financial institution, even as just a conduit in a deal.
On Tuesday, February 27th, the high court came to a unanimous decision resolving a circuit split over the scope of the Bankruptcy Code’s “safe harbor” provision exempting certain transactions from clawbacks, concluding that the safe harbor does not apply if funds simply move through a financial institution without benefiting it.
Through this ruling, the Supreme Court has given trustees and estate representatives a clearer path to bring creditor claims and claw back funds used to facilitate a merger, acquisition or other transaction. “Obviously this is good news for trustees and anyone else who’s acting as a plaintiff in clawback actions and bad news for defendants,” said Kleinberg Kaplan Wolff & Cohen PC attorney Matthew Gold. “The threat of litigation will be more of a cloud that people will at least have to consider.”
The case was a dispute over whether the Seventh Circuit correctly interpreted Section 546(e) of the Bankruptcy Code to allow the Chapter 11 trustee of a bankrupt gambling company to claw back $16.5 million from Merit Management Group LP for what it received in the $55 million transaction.
While Merit had argued that the safe harbor rule applies to transfers where financial institutions serve as intermediaries, not just in cases where the institution directly benefits from the transfer, the Supreme Court shut down Merit’s challenge, ruling that the safe harbor provision can’t be used to protect transfers that were made through a bank but didn’t involve the bank as a direct party.
With the Supreme Court’s decision now on the books, more parties will have to defend cases on the merits rather than relying on a defense that was getting them off the hook. It will have a major impact of recoveries and might prompt plaintiffs to be that much more aggressive with respect to potential claims. Certain legal academics believe that the ruling ultimately checks the growing use of safe harbors that were weakening fraudulent conveyance actions.