United States: Supreme Court Bankruptcy Thoughts: Scope Of Safe Harbor And Appellate Review

The Supreme Court recently addressed two bankruptcy issues. In its Merit Management opinion, the Court resolved a circuit split regarding the breadth of the safe harbor provision which protects certain transfers by financial institutions in connection with a securities contract. In Village at Lakeridge, the Court weighed in on the scope of appellate review and whether a bankruptcy court's factual determination should be reviewed for clear error or de novo. These decisions are notable because they provide guidance on previously murky issues of bankruptcy law.

Merit Management Group, LP v. FTI Consulting, Inc.

In Merit Management, the Supreme Court held that Section 546(e) of the Bankruptcy Code does not protect transfers by financial institutions in connection with a securities contract if the financial institution is only a conduit for the transfer.

Merit Management concerned a Chapter 11 bankruptcy case filed by Valley View Downs, LP ("Valley View"). Prior to filing, Valley View agreed to purchase the stock of Bedford Downs Management Corp. ("Bedford"), a company it had competed against for the last available harness-racing license in Pennsylvania. The exchange took place through an escrow agent, and Valley View borrowed money from another bank and other lenders to pay for the shares. Valley View filed for bankruptcy when it failed to secure the requisite gaming license.

After plan confirmation, the trustee sued Merit Management Group, LP ("Merit"), a former shareholder of Bedford, seeking to recover $16.5 million that Merit received in exchange for its shares as a constructive fraudulent transfer. Merit sought dismissal, arguing that the transfers were made by or to the type of financial institutions covered by the safe harbor provision of Section 546(e). The safe harbor provision provides an exception to the bankruptcy trustee's power to avoid certain transfers, specifically those made "by or to (or for the benefit of)" certain entities, including financial institutions "in connection with a securities contract." While it is undisputed that the escrow agent and bank were enumerated entities within this provision, the Court analyzed whether the language "made by or to" pertained to institutions that act as "mere conduits" in a transaction, such as here.

In making its determination, the Court considered approaches taken by the different circuits. The Seventh and Eleventh Circuits have interpreted the safe harbor provision to not provide protection to transfers that pass through a covered entity, where the entity only acts as a conduit and has no beneficial interest in the property transferred. The Second, Third, Sixth, Eighth, and Tenth Circuits have historically held to the contrary.

The Court analyzed the specific language of the safe harbor exception, as well as the entire statutory structure. It concluded that the relevant transfer for purposes of the safe harbor is the same transfer that the trustee seeks to avoid. In this case, the trustee sought to avoid the transfer between Valley View and Merit, not the transfers of the escrow agent and bank. Because neither Valley View nor Merit were covered by the safe harbor provision, the provision did not apply to the transfer. Therefore, the safe harbor provision does not apply when an entity covered by the exception is only a "conduit" for the transfer at issue.

This holding resolves a circuit split by favoring a narrow view of the safe harbor provision.

U.S. Bank, N.A. v. Village at Lakeridge, LLC

In Village at Lakeridge, the Supreme Court addressed whether a bankruptcy court's determination that a set of facts demonstrated an arms-length transaction should be reviewed for clear error or de novo.

In 2011, The Village at Lakeridge, LLC ("Lakeridge") attempted to reorganize under Chapter 11 of the Bankruptcy Code. Lakeridge's proposed plan of reorganization purported to impair the interests of two of its substantial creditors: U.S. Bank, N.A. ("U.S. Bank") and MBP Equity Partners ("MBP"), which owned Lakeridge. U.S. Bank refused the proposal, which consequently blocked Lakeridge's option to reorganize through a fully consensual plan. See 11 U.S.C. § 1129(a)(8).

Lakeridge then opted to use a "cramdown" plan, which impairs the interests of a non-consenting class of creditors. For the court to approve a "cramdown" plan, another impaired class of creditors must consent to the plan. However, if a creditor is an "insider" of the debtor, the Bankruptcy Code does not factor that creditor's consent in this determination. While the Bankruptcy Code defines "insider" as any director, officer, or "person in control" of the entity, courts (including the Ninth Circuit) have devised tests to identify "non-statutory" insiders. The crux of these tests is whether an individual's transaction with the debtor was at arm's length.

Because of its "insider" status, MBP could not provide the consent required for a cramdown plan. It instead sold its claim for $5,000 to a retired surgeon who was romantically involved with an MBP board member/Lakeridge officer. Thereafter, the surgeon consented to Lakeridge's proposed reorganization. U.S. Bank objected, arguing that the surgeon was a "non-statutory" insider because the transaction was not at arm's length. Based on the facts provided, the Bankruptcy Court rejected U.S. Bank's argument and found that the transaction was conducted at arm's length. The Ninth Circuit affirmed, holding that the finding was entitled to clear-error review.

The Supreme Court affirmed the Ninth Circuit's holding. It stated that at the case involved a "mixed question" of law and fact. When a case requires appellate courts to expound on the law, the case should be reviewed de novo. However, when a case immerses the courts in case-specific factual issues, the case should be reviewed with deference. In this case, the Court boiled the mixed question down, asking: Given all the basic facts found, was the surgeon's purchase of MBP's claim conducted as if the two were strangers to each other? The Court stated that "this is as factual sounding as any mixed question gets" and reasoned that the Bankruptcy Court had presided over presentation of evidence, heard all the witnesses, and had the deepest understanding of the record. It further stated that very little legal work was required to apply the arm's-length test. For these reasons, the Court determined that the issue primarily rests with the Bankruptcy Court, subject only to appellate review for clear error.

Village at Lakeridge clarifies the correct standard of review – clearly erroneous – in the narrow circumstances it addresses. However, in reaching this decision, the Court expressly declined to review questions related to "insider" status and whether the Ninth Circuit test is appropriate to make this determination.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions