- FTI Consulting, Inc. v. Merit Mgmt. Group, LP), Case No. 15-3388 (7th Cir. July 28, 2016).
- The safe harbor provision of 11 U.S.C. § 546(e) does not shield a transfer of funds through a financial institution acting only as a conduit between the debtor and the transferee, neither of which were of a type of entity identified in § 546(e), and is recoverable by the trustee.
- Procedural context:
- The District Court for the Northern District of Illinois granted Merit’s motion for judgment on the pleadings finding that a transfer through a financial institution, acting only as a conduit, was protected by the safe harbor provision of § 546(e). On appeal, the 7th Circuit reversed noting that the 2nd, 3rd, 6th, and 10th Circuits hold that § 546(e) protects transfers through conduits and that the 11th Circuit does not. There were no factual disputes and the order granting judgment on the pleadings was reviewed de novo.
- Two racetrack owners, Valley View Downs and Bedford Downs, were competing for the last harness-racing license in Pennsylvania. Both wanted to run “racinos;” combination horse track and casino. Rather than fight, the two agreed that Valley View would acquire all the shares of Bedford for $55 million, borrowed from Credit Suisse and other lenders, with the transfer of the funds flowing through Citizens Bank of Pennsylvania. Valley View obtained the racing license but not the gambling license and filed its chapter 11 bankruptcy. FTI was trustee of a litigation trust which included Valley View and brought suit against Merit under §§ 544, 548, and 550 to recover a transfer of $16.5 million made by Bedford to Valley View and then to Merit, the 30% shareholder in Bedford.
- Wood, Posner, Rovner (Wood)
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