FTI Consulting, Inc. v. Merit Management Group LP
541 B.R. 850
N.D. Ill.2015Background
- Valley View Downs bought out competitor Bedford Downs under a 2007 Settlement Agreement and Escrow Agreement, resulting in $55 million paid; Merit, a 30.007% shareholder of Bedford, received $16,503,850 (the Transfers) via Credit Suisse and Citizens Bank acting as escrow/intermediaries.
- Valley View obtained a racing license but failed to secure a gaming license and later filed Chapter 11; the Centaur, LLC Litigation Trust (Trustee = FTI) was created under the confirmed plan to pursue avoidance claims.
- The Trustee sued to avoid the Transfers as fraudulent under the Bankruptcy Code and related provisions; Merit moved for judgment on the pleadings under Fed. R. Civ. P. 12(c), arguing § 546(e) bars avoidance.
- Key factual points are undisputed: the Transfers were settlement payments made in connection with securities contracts and moved through Credit Suisse and Citizens Bank, which are financial institutions.
- The primary legal question: whether § 546(e)’s safe-harbor applies when financial institutions participate only as conduits/intermediaries (without beneficial ownership of the funds).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 546(e) bars avoidance of the Transfers | Trustee: §546(e) should not apply because the banks were mere conduits with no beneficial interest; safe-harbor intended only to protect market participants where systemic risk would arise | Merit: §546(e) protects transfers "by or to" financial institutions; banks that transfer/receive settlement funds (even as intermediaries) fall within the text | Court: Held §546(e) applies; plain statutory language covers financial institutions acting as conduits, so Trustee cannot avoid the Transfers |
| Whether legislative history or Chapter 5 purpose permits a narrower reading of §546(e) | Trustee: legislative history and Chapter 5 purpose limit safe-harbor to cases implicating systemic market risk or to listed protected parties as transferees/debtors | Merit: statutory text governs; policy arguments cannot override unambiguous language | Court: Rejected Trustee's legislative-history/policy arguments; applied plain text and Seventh Circuit precedent favoring textual reading |
| Whether the term "transfer" requires beneficial ownership to trigger §546(e) | Trustee: "transfer" implies transferee/transferror with pecuniary interest; banks lacked such interest here | Merit: "transfer" refers to movement of assets; intermediaries moving funds satisfy "by or to" language | Court: Adopted Merit’s verb-based reading of "transfer"; no pecuniary-interest requirement |
| Whether Munford controls or should be followed | Trustee: relies on Munford (Eleventh Circuit) to argue conduits are excluded from safe-harbor | Merit: cites a host of circuits rejecting Munford and applying plain text broadly | Court: Declined Munford; sided with majority of circuits that protect intermediaries under §546(e) |
Key Cases Cited
- Peterson v. Somers Dublin Ltd., 729 F.3d 741 (7th Cir. 2013) (interpreting §546(e) by its plain language and emphasizing finality/stability in securities transactions)
- Grede v. FCStone, LLC, 746 F.3d 244 (7th Cir. 2014) (explaining §546(e) protects market finality and applying textualist approach)
- Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) (safe-harbor applies to intermediaries/conduits; protecting large market transactions)
- In re Quebecor World (USA) Inc., 719 F.3d 94 (2d Cir. 2013) (reinforcing that financial intermediary need not have beneficial interest for §546(e) protection)
- In re Resorts Int'l, Inc., 181 F.3d 505 (3d Cir. 1999) (rejecting Munford; literal reading of §546(e) protects banks/brokers acting as conduits)
- In re Plassein Int'l Corp., 590 F.3d 252 (3d Cir. 2009) (reaffirming Resorts and protecting bank conduits under §546(e))
- In re QSI Holdings, Inc., 571 F.3d 545 (6th Cir. 2009) (holding §546(e) covers banks that did not retain dominion over funds)
- Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8th Cir. 2009) (adopting literal reading; protecting transactions involving financial institutions)
- In re Kaiser Steel Corp., 952 F.2d 1230 (10th Cir. 1991) (interpreting "by or to" broadly; refusing to rewrite unambiguous statutory text)
- Matter of Munford, Inc., 98 F.3d 604 (11th Cir. 1996) (holding a financial institution acting only as conduit lacking beneficial interest is not protected — noted as the minority view)