Merit v. FTI and the Missing Silver Bullet Argument?

On November 6, the Supreme Court will hear arguments in a case only a lawyer--and probably only a commercial or bankruptcy lawyer--could love, Merit Management Group v. FTI Consulting. Simplifying quite a bit, the issue is whether a payment by wire transfer (or presumably a check) is "made by" the bank who implements the funds transfer, or the customer who initiates the transfer. The issue arises from the safe harbor for securities contract-related settlement payments, insulating such transfers from avoidance (clawback) by a bankruptcy trustee, and the question whether a money transfer made by wire from the buyer of stock to the purchaser(s) was "made by or to ... a financial institution." 11 USC § 546(e). Several circuit courts have held the safe harbor applies even if the bank-transferor is a simple conduit, performing nothing more than the ministerial task of moving the money (so to speak) from buyer's account to seller's bank. The 7th Circuit held to the contrary in this case, noting that a letter might be said to be "sent by" either the sender or the Postal Service, but the former interpretation is more sensible and consonant with likely congressional intent in this context (again, vastly simplifying to prevent boring readers to death). 

Ordinarily I would leave it to those smarter than I to blog about these kinds of big-money cases, but after I was asked to write a little squib for the ABA about it, the extremely perceptive Henry Kevane of the famous insolvency firm Pachulski Stang in San Francisco saw my little piece and called me to ask about an argument relevant to the case. Did anyone point out, Henry asked me, that the definition of "financial institution" in section 101(22)(A) includes the bank's customer within the ambit of "financial institution" in cases where the bank is "acting as agent or custodian for a customer ... in connection with a securities contract"? Well, no, no one appears to have made this seemingly dispositive observation! A transferor bank implementing a wire transfer would certainly be acting as the customer's (account holder's) agent, and the whole point of the case is that the payment was made "in connection with a securities contract" (the same language in section 546(e)). If the Bankruptcy Code oddly defines the customer and the bank as both being a "financial institution" in this context, then regardless of who made the payment, it was made "by" and "to" a financial institution, since the same logic would apply on the recipient side, too. Hmmmmmmmm.

Surprising as it may be that such a hidden-gem argument might have escaped all of the able lawyers on the case (and similar cases), another counter-argument not made surprised me even more. FTI's brief is very aggressive in disparaging the position accepted by the several other circuit courts and made by Merit here. One of FTI's more bellicose "aha!" arguments is a repeated and emphatic assertion that the avoidance statutes all refer to transfers made, quote, “by the debtor.” The problem is ... the statutes do not say this. The very provision on which FTI sued Merit, 11 U.S.C. § 548(a)(1)(B), provides for avoidance of a “transfer … of an interest of the debtor in property.” The identity of the transferor is concealed here and also later in the statute by the use of the passive voice, as it refers to a transfer “that was made or incurred on or within 2 years before the date of the filing of the petition.” The debtor is identified as the transferor only in the actual fraud portion of the statute, not implicated here, and in the insider-preference constructive fraud part, also not implicated here. Neither is any mention made of a transfer, quote, “by the debtor” in the other section on which FTI based its suit against Merit, 11 U.S.C. § 544(b), allowing recovery of a “transfer of an interest of the debtor in property” if state law criteria are met (though the state laws that this statute incorporates generally do refer to a transfer by the debtor). The language "by the debtor" doesn't appear at all in the preference statute, which again allows recovery of a “transfer of an interest of the debtor in property.” 11 U.S.C. § 547(b). Merit doesn't take FTI to task for this rather obviously unsupported--or at least overextended--argument. A pox on both of their houses, methinks, but an interesting illustration of the power of definitional provisions. Three cheers for section 101!