Merit Management Group LP v. FTI Consulting, Inc.

The Bankruptcy Code provided bankruptcy trustees with avoiding powers, which permit trustees to invalidate certain property transfers by debtors. Valley View Downs LP (Valley View) and Bedford Downs Management Corporation (Bedford Downs) both sought the last available harness-racing license in Pennsylvania to open a combined racetrack and casino. Eventually, Valley View and Bedford Downs decided to cooperate. Bedford Downs agreed to stop pursuing the license, and Valley View agreed to purchase all Bedford Down’s stock after obtaining the license. Valley View received the license and paid the purchase price for Bedford Downs. Merit Management Group LP (Merit) (defendant), a stockholder of Bedford Downs, received about $16.5 million from the sale. The $16.5 million transfer went through two intermediaries, Credit Suisse and Citizens Bank of Pennsylvania. Unfortunately, Valley View never received a gaming license, so it never commenced operations. Ultimately, Valley View filed for Chapter 11 bankruptcy. The bankruptcy court appointed FTI Consulting, Incorporated (FTI) (plaintiff) as bankruptcy trustee. FTI sued Merit in the district court. FTI sought to avoid the $16.5 million transfer to Merit for the stock sale, alleging that the transfer was a constructively fraudulent transaction because Valley View was insolvent at the time of purchase and significantly overpaid for the stock. Merit claimed that the securities safe-harbor provision barred FTI from avoiding the transfer and filed a motion to dismiss. Merit argued that the securities safe-harbor provision applied because the transfer constituted a settlement payment made by or to a covered financial institution (that is, Credit Suisse and Citizens Bank). The district court granted Merit’s motion to dismiss. The court of appeals reversed, holding that the safe-harbor provision did not apply to transfers in which the covered financial institution served as merely a conduit in the transfer. Merit petitioned for a writ of certiorari.