Supreme Court rules in bankruptcy case

Supreme Court rules in bankruptcy case

[JURIST] The US Supreme Court [official website] ruled [opinion, PDF] unanimously Tuesday in Merit Management Group v. FTI Consulting [SCOTUSblog materials], a case concerning bankruptcy courts’ power to recover fraudulent property transfers.

The matter originated with Merit Management Group’s 30percent stake in a company called Bedford Downs Management Corporation, a company that attempted to obtain a harness-racing license in Pennsylvania in 2003. Valley View Downs, LP filed a competing application against Bedford shortly thereafter. Bedford and Valley subsequently reached an agreement that, if Valley secured the license, they would purchase all of Bedford’s stock for $55 million. Valley obtained the license in 2007 and completed the purchase of Bedford. The purchase took place through Citizens Bank of Pennsylvania, who was made the escrow agent, Valley secured loans from multiple lenders to pay for the shares.

Shortly thereafter, Valley filed for bankruptcy and the court appointed FTI Consulting, Inc. as trustee of the litigation trust. FTI then brought this suit against Merit in an attempt to “avoid” or invalidate Merit’s portion of the purchase under a certain provision of the Bankruptcy Code that provides “safe harbor” for transfers “made by or to” financial institutions such as Citizens Bank of Pennsylvania. Merit responded by asserting that while the sale transaction was technically a transfer “made to” a financial institution, that institution was merely the conduit for a transaction between Merit and Valley.

In siding with Merit, the court stated that it made no difference that the transaction, on paper, was in fact two transactions, one between Valley and Citizens Bank and another between Citizens Bank and Merit. The only relevant transaction, the court stated, was the transaction FTI sought to avoid—the transaction between Valley and Merit. Because the true transaction at issue is that between Valley and Merit and “the parties do not contend that either Valley View of Merit is a ‘financial institution’ or other covered entity, the transfer falls outside of the [safe harbor provisions].”

Prior to the ruling, the Seventh and Eleventh Circuits applied the interpretation ultimately reached by the Supreme Court while the Second, Third, Sixth, Eight and Tenth Circuits interpretations would have considered the transfer from Valley to Citizens Bank an avoidable transaction to a financial institution.