Partner Matthew Gold Quoted in Turnarounds & Workouts’ “No Safe Harbor?” on the Supreme Court’s Ruling Enhancing Trustees’ Ability to Undo Pre-Bankruptcy Deals

March 30, 2018

Kleinberg Kaplan Bankruptcy partner Matthew Gold was quoted in an article 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 the transaction involved a financial institution, even as just a conduit.

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 for the benefit of others.

Through this ruling, the Supreme Court has given trustees and estate representatives more opportunities to bring avoidance claims and claw back funds used to facilitate a merger, acquisition or other transaction. At the highest level, the Supreme Court’s decision is great news for bankruptcy trustees, says Gold. “At a minimum, the decision should significantly decrease the number of clawback defendants that can make use of the safe harbor,” he says. “The Safe Harbor has become increasingly important to clawback action defendants, providing defenses where none might otherwise exist and facilitating the dismissal of cases before trial.”

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 disagreed, ruling that the safe harbor provision can’t be used to protect transfers that involve a bank only as an intermediary or conduit.

Other cases in which complaints haven’t been filed yet will certainly be affected by the Supreme Court’s Merit decision as well. “The court basically held that whether the safe harbor applies depends on how the complaint is structured,” says Gold. “It’s a question of who the plaintiff and defendants are. That suggests plaintiffs—who are mostly bankruptcy trustees—are now going to want to take care who they are naming as defendants when structuring their complaints. They’ll want to get defendants who are not able to make these safe harbor defenses.”

Gold also believe that the decision will change how markets work. “Parties are going to have to assess in advance whether they will be able to get safe harbor protections, structure their transactions with this potential exposure in mind,” he says. “Banks can probably now proceed with transactions with less concern about the safe harbor.”

That said, Gold does note that even banks and large funds will have to take some care. “Banks and large funds often use many different entities to handle different parts of their business. Some of those entities may be protected under the safe harbor, and others may not be. Banks and large funds will have to review how their affairs are conduced to ensure protected entities that are doing transactions.”

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