The Bankruptcy Safe Harbors Are Not Necessarily Safe for Financial Institution Customers

April 2021
The Banking Law Journal

The United States Bankruptcy Court for the Eastern District of Michigan (the “Bankruptcy Court”) has expressed reservations about the Second Circuit’s decision in In re Tribune Co. Fraudulent Conveyance Litigation, 946 F.3d 66 (2d Cir. 2019) (“In re Tribune Co.”) regarding when transfers to financial institutions’ customers that are (i) settlement payments or (ii) made in connection with securities contracts are entitled to protection from avoidance actions under the bankruptcy safe harbors. The Bankruptcy Court heard the matter on remand from the Sixth Circuit due to the Supreme Court’s recent decision in Merit Management Grp. LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018) (“Merit”), which abrogated relevant Sixth Circuit precedent. The Bankruptcy Court’s determination is important because In re Tribune Co. interpreted the protections of 11 U.S.C. § 546(e) broadly to protect most transfers of settlement payments or payments made otherwise in connection with securities contracts to financial institutions’ customers from avoidance actions initiated under chapter 5 of the United States Bankruptcy Code (the “Bankruptcy Code”). The Bankruptcy Court, however, applied a more rigorous analysis that limits the scope of 11 U.S.C. § 546(e).

This article was originally published by Chapman and Cutler LLP on December 21, 2020, and was republished by The Banking Law Journal in its April 2021 issue. The full republished article is posted with permission.

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