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Seventh Circuit Takes the Road Less Traveled, and Looks to the Substance of ' 546(e)

By Sheryl P. Giugliano
September 01, 2016

In a surprise decision, the U.S. Court of Appeals for the Seventh Circuit declined to follow the “plain meaning” approach adopted by the Second, Third, Sixth, Eight and Tenth Circuits, and rejected an opportunity to expand the safe-harbor protections afforded by Bankruptcy Code section 546(e) to protect “securities transactions” in the private market where the extent of a financial institution's involvement is to serve as an intermediary or conduit. FTI Consulting, Inc. v. Merit Management Group, LP, No. 15-3388, 2016 WL 4036408 *6 (7th Cir. July 28, 2016) (“We will not interpret the safe harbor so expansively that it covers any transaction involving securities that uses a financial institution or other named entity as a conduit for funds.”).

Background

On July 18, 2016, the Seventh Circuit reversed and remanded a decision by the United States District Court for the Northern District of Illinois, which held that “settlement payments” made “in connection with a securities transaction” through a “financial institution” were protected by the safe harbor provisions of Bankruptcy Code section 546(e) based upon the “plain meaning” of the statute. FTI Consulting, Inc., Trustee of the Centaur, LLC Litigation Trust v. Merit Management Group, LP, 541 B.R. 850 (N.D. Ill. 2015) (holding payments made by the debtor in exchange for the shares of another entity, and that entity's transfer of a percentage of the proceeds to one of its shareholders, were protected by Bankruptcy Code section 546(e)'s safe harbor even though the funds merely passed through Citizens Bank and Credit Suisse, as intermediaries or conduits).

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