Merit Management Group v. FTI Consulting

DOES THE PLAIN LANGUAGE OF 11 U.S.C. § 546(e) SUPPORT PROTECTION OF THE TRANSFER?

Petitioner Merit Management, LP (“Merit”), argues that the language of 11 U.S.C. § 546(e) is plain, and therefore should be straightforwardly enforced by precluding avoidance of the component transfers. Examining the language of the statute, Merit emphasizes the use of the disjunctive “or” as indicating that the requirement that a transfer is “made by or to (or for the benefit of)” introduces three independent avenues to safe harbor protection. Merit thus criticizes the potential application of a “beneficial interest requirement” for the financial institution before the transfer is eligible for protection under § 546(e). Merit also submits a broad interpretation of “transfer” in § 546(e), using the definition from 11 U.S.C. § 101(54), claiming that the component transfers from Credit Suisse to Citizens Bank and from Citizens Bank to Merit fit this definition. Merit further contends it would be illogical to read § 546(e) to not apply to conduits of financial transactions, since the section explicitly applies to a transfer with a “securities clearing agency.” As Merit points out, the Securities Exchange Act defines a “clearing agency” as “any person who acts as an intermediary in making payments or deliveries . . . or who provides facilities for comparison of data.” Merit responds that applying § 546(e) to the overall transfer is dishonest since there was no discrete transfer, and therefore FTI seeks to apply the rule to a legal fiction.

FTI, focusing on the relevant transfer for application of § 546(e), concedes that the component transfers are likely protected under the safe harbor because they involve a settlement payment made by or to a financial institution. However, FTI maintains that the relevant transfer is the transfer from Valley View to Merit, and that it is improper to deconstruct this transfer into component transfers to find a safe harbor. FTI argues that the first phrase of § 546(e), “notwithstanding [the other avoidance provisions],” indicates that the subsection is intended only to limit a broader power to avoid transfers. FTI contends that an exception to the power to avoid a transfer cannot be applied to a transfer that is not subject to that power in the first place. The component transfers are not avoidable because they do not involve the debtor, and thus the FTI argues that Merit cannot claim a safe harbor around transfers that were never exposed. According to FTI, this argument is supported by the principle of interpretation that “identical words . . . are generally presumed to have the same meaning,” so a “transfer” that is protected from avoidance must be the same “transfer” that is otherwise subject to avoidance.

DOES THE STRUCTURE AND PURPOSE OF 11 U.S.C. § 546(e) SUPPORT PROTECTION OF THE TRANSFER?

Merit also relies on the structure and purpose of the Bankruptcy Code and § 546(e), noting that three other provisions of the section, §§ 546(f), 546(g), and 546(j), also create safe harbors from the general power of the debtor to avoid transactions. Merit contends that the provisions not only create safe harbors, but they reflect, together with § 546(e), a Congressional determination to protect markets and parties in securities transactions. Merit argues this determination should not be disturbed by a narrow reading of § 546(e).However, Merit asserts that it would be inappropriate to rely on 11 U.S.C. § 550 in defining a transfer because § 550 merely defines who must repay an avoided transfer, but avoidance and repayment are different concerns. Merit argues that sections such as § 550 are concerned with protecting parties subject to recovery, or the “who”; however, sections such as § 546 are concerned with protecting the transfer itself, or the “what.” Thus, Merit suggests that it was inappropriate for the Seventh Circuit to conflate the concept of a “transfer” in § 546(e) and an “initial transferee” in § 550(a)(1). Merit notes that while § 550 requires a “transferee,” § 546(e) could apply more broadly to transfers “for the benefit of” a financial institution. Merit contends that Congress intentionally chose to protect transfers involving financial institutions from avoidance, instead of protecting financial institutions from recovery.

FTI disagrees, asserting that § 550 has value when interpreting § 546(e). FTI explains that the “transferee” in § 550 is “an entity that has ‘dominion’ or ‘control’ over the transferred property, and not merely a ‘financial intermediary’ or conduit.” FTI argues that the parties involved in the component transfers are financial intermediaries, so the § 550 meaning of what a transferee is informs the understanding of who can be a party to a transfer. FTI concludes that, if Credit Suisse and Citizens Bank are not transferees under § 550, they cannot be part of a transfer under § 546(e). Furthermore, FTI contends that § 546(e)’s statutory context in the Bankruptcy Code proves that application to the component transfers is inappropriate. The avoidance provisions, FTI argues, are only applicable to transfers by the debtor and to certain entities, and the analysis does not allow for decomposition of transfers into component transfers. FTI poses a hypothetical under a different statute in which a transfer of a donation to charity may not be avoided under § 548(a)(2)(B); yet, as FTI claims, if decomposition of transfers is permitted from donator to bank and then from bank to charity, the charitable donation exception would not be needed.

DOES THE LEGISLATIVE INTENT AND HISTORY OF § 546(e) SUPPORT PROTECTION OF THE TRANSFER?

Turning to the legislative history of § 546(e), Merit emphasizes that the provision has been amended several times since its enactment in 1982. According to Merit, the Seventh Circuit, in finding that safe harbors were not intended to protect intermediaries, relied on the fact that the safe harbor was created “to prevent the insolvency of one commodity or security firm from spreading to other firms and possibly threatening the collapse of the affected market.” However, Merit contends that the language of the statute covers transactions of any size, including those too small to threaten financial markets, and notes that Congress commonly passes statutes broader than the problem that called for action. Merit therefore counters any concerns that a broad interpretation of § 546(e) could lead to safe harbor protection of nearly any modern transaction by arguing that this fear does not justify a narrow interpretation, removing all protections that Congress intended. Merit argues that reasonable limits still exist for § 546(e) since the intermediaries in this case played “active and meaningful roles in the transaction,” and that the Court could have established some lower level of involvement by intermediaries as insufficient. Merit also argues that it is illogical to believe that Congress’s repeated amendments to § 546(e), each time expanding its scope, did not intend to expand the intent behind the statute as well.

The purpose and legislative history of § 546(e), according to FTI, frustrates any attempt to apply the provision to component transfers. Although the subsection was amended several times, FTI argues that Congress made these amendments with the central idea of limiting the bankrupt entity. According to FTI, the House Report from 1982 explained that the exception was necessary “to prevent the insolvency of one commodity or security firm from spreading to other firms and possibl[y] threatening the collapse of the affected market.” FTI notes that in 2005 the House Report reiterated that § 546(e) was “designed to reduce systemic risk in the financial market place,” but argues that there is no systemic risk to financial institutions or any other participants in the securities markets. Considering intent, FTI also applies the statutory interpretation principles that “seek to construe a statute so that it protects litigants who fall within the statutory zone of interests.” FTI maintains that the text and history of § 546(e) demonstrate that the “zone of interest” covers transfers involving certain financial institutions and not transfers between racinos. FTI contends that a narrow reading is appropriate under the principle of interpretation, which states that “exceptions should be read narrowly in order to preserve the primary operation of the provision.” A narrow interpretation is necessary to reduce the potential that the exception will vitiate the rule.