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The Bankruptcy StrategistFeaturesBankruptcyLitigationUnited States Supreme Court

What Has Merit Management Changed?

By Matthew Gold

It has been nearly two years since the Supreme Court upended the world of the Bankruptcy Code securities safe harbor with its decision in Merit Management Group, LP v. FTI Consulting, Inc., 583 U. S. ____, 138 S.Ct. 883, 200 L.Ed. 2d 183 (2018). For all of the speculation regarding its consequences, there have been few subsequent lower court decisions applying Merit Management, and the courts of appeal have yet to make rulings in the pending cases dealing with some of the major safe harbor issues. However, those cases provide valuable guidance to practitioners facing safe harbor litigation as well as transactional lawyers looking to take advantage of safe harbor protections.

The Securities Safe Harbor

The securities safe harbor has become increasingly important as a defense to avoidance actions. It consists of several related provisions that generally tend to insulate certain securities transactions from the effects of bankruptcies. For the safe harbor to apply, there must be a qualifying transaction, such as a margin payment, a settlement payment, or a payment in connection with a securities contract, a forward contract, a commodity contract, a repurchase agreement or a swap agreement. The transaction must also be made by, made to, or be made for the benefit of, a qualifying institution, such as a commodity broker, a forward contract merchant, a stockbroker, a securities clearing agency, or a Financial Institution, or a Financial Participant. (The scope of these last two defined terms is discussed further below.)

Among the benefits of the safe harbor are that it: 1) allows protected securities positions to be closed out, notwithstanding the automatic stay; 2) overrides bankruptcy ipso facto provisions, which otherwise would negate contractual termination clauses that are triggered by a counterparty's bankruptcy; and 3) shields protected transactions from being unwound in subsequent avoidance actions.

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