Merit Management Group, Lp. v. Fti Consulting, Inc.

138 S.Ct. 883 (2018)


The Bankruptcy Code gives a trustee the power to invalidate a limited category of transfers by the debtor or transfers of an interest of the debtor in property. These powers are called “avoiding powers.” The Code sets out a number of exceptions to these avoiding powers. Valley View Downs, LP, and Bedford Downs Management Corporation were in competition for the last harness-racing license in Pennsylvania. Both wanted to open a race track and a casino. The Pennsylvania State Harness Racing Commission denied both applications. Both were allowed to reapply. Valley View and Bedford Downs entered into an agreement where Valley View was to purchase all of Bedford Downs’ stock for $55 million after Valley View obtained the license. The Pennsylvania Harness Racing Commission awarded Valley View the last harness-racing license. Valley View arranged for the Cayman Islands branch of Credit Suisse to finance the $55 million purchase of Bedford. Credit Suisse wired the $55 million to Citizens Bank of Pennsylvania, which had agreed to serve as the third-party escrow agent for the transaction. The Bedford Downs shareholders, including Merit Management Group, LP, (D) deposited their stock certificates into escrow as well. Valley View received the Bedford Downs stock certificates, and Citizens Bank disbursed $47.5 million to the Bedford Downs shareholders, with $7.5 million remaining in escrow at Citizens Bank under the multiyear indemnification holdback period provided for in the parties’ agreement. Citizens Bank disbursed that $7.5 million installment to the Bedford Downs shareholders in October 2010, after the holdback period ended. D received $16.5 million from the sale of its Bedford Downs stock to Valley View. Valley View was unable to secure a separate gaming license for the operation of the slot machines in the time set out in its financing package. Valley View and its parent company, Centaur, LLC, filed for Chapter 11 bankruptcy. The Bankruptcy Court confirmed a reorganization plan and appointed respondent FTI Consulting, Inc (P)., to serve as trustee of the Centaur litigation trust. P sued D seeking to avoid the $16.5 million transfer. P alleged that the transfer was constructively fraudulent under §548(a)(1)(B) of the Code because Valley View was insolvent when it purchased Bedford Downs and “significantly overpaid” for the Bedford Downs stock. D contended that the §546(e) safe harbor barred P from avoiding the transfer because the safe harbor applied in that the transfer was a “settlement payment. The District Court granted D's Rule 12(c) motion, reasoning that the §546(e) safe harbor applied because the financial institutions transferred or received funds in connection with a “settlement payment” or “securities contract.” The Court of Appeals for the Seventh Circuit reversed, holding that the §546(e) safe harbor did not protect transfers in which financial institutions served as mere conduits. D appealed.