Supreme Court Clarifies Power to Claw Back Transfers Made Through Financial Institutions

American Bankruptcy Institute, April 27, 2018– A February 27, 2018, decision by the U.S. Supreme Court resolved a split in the circuit courts by clarifying that a bankruptcy trustee, creditor committee, and other bankruptcy estate entity may claw back preferences and constructive fraudulent transfers involving the purchase of securities even though the transaction was effectuated by depositing funds or securities with financial institutions. The Court’s decision in Merit Management Group, LP v. FTI Consulting, Inc., held that Section 546(e)’s safe harbor provision requires courts to look to the transaction being challenged and determine whether the defendant in the avoidance action – the ultimate recipient of the funds – is a “covered” entity under the statute. The analysis does not focus on the constituent components of the transaction that may involve financial institutions.

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