Investors who rely on safe harbor provisions in the Bankruptcy Code should begin to consider new methods to obtain some types of shelter. The United States Supreme Court in Merit Management Group LP v. FTI Consulting Incorporated recently ruled in a unanimous decision that one portion of the safe harbor provision under Section 546(e) does not prohibit a bankruptcy trustee from obtaining clawback transfers that are constructive fraudulent conveyances or preferences when a “financial institution” was acting in the role of an intermediary. This case is important to study because it has lasting implications for many people who file for bankruptcy.

What are Clawback Protections?

A clawback provision enables a trustee to look at a financial transaction prior to filing for bankruptcy to determine if he or she improperly transferred or gave away property that should have remained part of the estate. If it is determined that real estate was improperly transferred, a trustee is able to claw back the property by undoing the transaction and bringing that property back into the estate. If the property is not exempt, a trustee can sell the property for the benefit of creditors.

There are two types of transactions that are covered by the clawback provision:

 

  • Fraudulent Transfers. This category includes situations in which a person gives away money or property or even in some situations sells property for much less than it is worth so that creditors will not be able to receive it. In many cases, fraudulent transfers are made to family members on the condition that the person who is filing for bankruptcy will regain the property after the bankruptcy process is complete.

 

  • Preferences. A preference refers to a payment to a creditor before someone files for bankruptcy. A person who pays a business associate, friend, or any type of relative greater than $600 in the year before filing for bankruptcy constitutes a preferences. A second category of preferences includes payments of greater than $600 that are paid in aggregate (or, in sum) to a creditor in the 90 days before the person files for bankruptcy.

Current Decisions on the Topic

The Second Circuit, Third Circuit, and many other circuits who have ruled on this issue have afforded numerous protections from clawback risks. As a result of the Supreme Court’s decision, parties who had taken advantage of these protections might now be exposed to clawback risks.

Obtain the Services of an Experienced Bankruptcy Attorney

This case provides a benefit to bankruptcy trustees, creditors’ committees, and litigation trusts that would have otherwise not been able to bypass clawback protections. The exact impact that this decision will have on clawback protections, however, will be seen over the following months and years.

Bankruptcy is a complicated process that involves a complex body of laws. One of the best steps that a person can take to make sure that his or her bankruptcy resolves in the best possible manner is to obtain the assistance of a seasoned attorney like Jim A. Lyon. Attorney Lyon has several decades of experience. Contact him today for assistance with your bankruptcy case.