FTI Consulting, Inc. v. Merit Management Group, LP, 830 F.3d 690

Background

Valley View Downs (debtor) agreed to buy Bedford Downs for $55M; Citizens Bank acted as escrow/escrow agent and Credit Suisse provided financing. A payment of $16.5M (30% of the purchase price) ended up with Merit (a Bedford shareholder).
Valley View later filed Chapter 11. FTI (Litigation Trust/Trustee) sued to avoid and recover the $16.5M transfer under Sections 544, 548(a)(1)(B), and 550 as fraudulent/avoidable transfers.
Merit conceded neither it nor Valley View were covered entities under 11 U.S.C. § 546(e) but argued the safe harbor nonetheless applied because Citizens Bank and Credit Suisse (named § 546(e) entities) acted as conduits for the payment.
The district court granted judgment on the pleadings for Merit, holding § 546(e) protected the transfer because the funds passed through financial institutions; FTI appealed.
The Seventh Circuit considered whether § 546(e)’s safe harbor covers transfers merely routed through a covered entity acting as an intermediary (conduit), rather than transfers made by or to the debtor or the transferee who are themselves covered entities.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Does § 546(e) protect transfers that merely pass through a covered entity acting as a conduit?	FTI: Safe harbor should cover only transfers "made by" or "to" the debtor or transferee (i.e., real parties in interest); conduit banks that never receive a beneficial interest should not trigger § 546(e).	Merit: § 546(e) covers transfers "made by or to (or for the benefit of)" covered entities; passage through a covered financial institution is sufficient to invoke the safe harbor.	The safe harbor does not protect transfers where a named § 546(e) entity was only a conduit; reversal of district court.
How should ambiguous "by or to (or for the benefit of)" language be interpreted in context of Chapter 5?	FTI: Read consistent with avoidance provisions (§§ 544, 547, 548) — safe harbor should mirror which transfers are avoidable (i.e., transfers made by the debtor or to creditors).	Merit: Chapter 5 allows avoidance of some indirect/third-party transfers; § 546(e) need not be limited to direct debtor-to-covered-entity transfers.	Court: Read § 546(e) in the Chapter 5 context; safe harbor limited to transfers where covered entities are actual transferees or parties in interest, not mere intermediaries.
Do other Bankruptcy Code provisions (e.g., § 548(d)(2), § 550, § 555) counsel for a broad conduit-based safe harbor?	FTI: Cross‑sectional interpretation supports limiting § 546(e) to economic substance — protections apply where covered entity receives or is party to the obligation.	Merit: Amendments (e.g., adding "for the benefit of") and related provisions indicate Congress intended a broader protection including intermediaries.	Court: Legislative history and related provisions support focusing on economic substance; the 2006 amendment didn’t convert mere conduits into protected transferees.
Would limiting § 546(e) to non-conduit situations risk systemic market disruption?	FTI: Returning funds to the estate is consistent with Code’s creditor-protection purpose; no systemic risk shown here.	Merit: Broad safe harbor is necessary to avoid ripple effects through financial markets when banks are involved.	Court: Rejects systemic-risk argument as insufficient here; safe harbor still protects covered entities that are parties in interest but not every transaction that involves a covered institution as intermediary.

Key Cases Cited

Peterson v. Somers Dublin Ltd., 729 F.3d 741 (7th Cir.) (context on settlement-payment definition)
Buchanan-Moore v. County of Milwaukee, 570 F.3d 824 (7th Cir.) (standard of review for Rule 12(c) judgments)
Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (U.S.) (statutory interpretation in context and scheme)
Davis v. Michigan Dep't of Treasury, 489 U.S. 803 (U.S.) (canon to read statutes in context)
Warsco v. Preferred Technical Group, 258 F.3d 557 (7th Cir.) (on avoidability of indirect transfers generally)
Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890 (7th Cir.) (transferee = entity with dominion over funds; intermediaries not transferees)
Grede v. FCStone, LLC, 746 F.3d 244 (7th Cir.) (purpose of § 546(e) to reduce systemic risk)
In re Quebecor World (USA) Inc., 719 F.3d 94 (2d Cir.) (holding safe harbor can apply where financial institution acted as trustee/intermediary)
Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8th Cir.) (broad reading of § 546(e) in leveraged buyout context)
In re QSI Holdings, Inc., 571 F.3d 545 (6th Cir.) (intermediary bank role sufficient for § 546(e))
In re Resorts Int'l, Inc., 181 F.3d 505 (3d Cir.) (broad application of § 546(e))
In re Kaiser Steel Corp., 952 F.2d 1230 (10th Cir.) (discussion of § 546(e) scope)
Matter of Munford, Inc., 98 F.3d 604 (11th Cir.) (holding § 546(e) inapplicable where banks were mere conduits; court agrees with this view)
Seligson v. New York Produce Exchange, 394 F. Supp. 125 (S.D.N.Y.) (case that prompted Congress to enact § 546(e) safe harbor)