The Section 546(e) Safe Harbor Provision
The Bankruptcy Code allows trustees (as well as debtors in possession and other estate representatives) to avoid certain fraudulent transfers on behalf of the estate but also contains a number of safe harbor provisions that limit the exercise of avoidance powers. The §546(e) safe harbor provision provides:
Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer that is a . . . settlement payment . . . made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract.
If applicable, this protects transferees from all avoidance claims, other than intentional fraudulent transfer claims under §548(a)(1)(A).
The Supreme Court Limits the Scope of the §546(e) Safe Harbor
In February 2018, the US Supreme Court rendered a decision addressing the scope of the protections of the §546(e) safe harbor provision in Merit Management Group v. FTI Consulting. In Merit, two non-financial institutions engaged in a transfer and had used a financial institution as an intermediary. The Supreme Court overturned Second, Third, Sixth, Eighth and Tenth Circuit decisions, all of which had held that a transfer is protected by the safe harbor provision of §546(e) so long as, in effectuating a transfer, transacting non-financial institution parties had used a financial institution as a conduit.
In its decision, the Supreme Court stated that the issue before it was to "determine how the safe harbor operates in the context of a transfer that was executed via one or more transactions, e.g., a transfer from A → D that was executed via B and C as intermediaries, such that the component parts of the transfer include A → B → C → D." The court noted that the transfer could be scrutinized as a whole (i.e., as a transfer from A → D where neither A nor D is a financial institution) or could be scrutinized taking into account the component parts of the overarching transfer (i.e., a transfer from A → B → C → D where B and C act as intermediary financial institutions between the transacting parties). The Supreme Court concluded that the plain...