The Supreme Court of the United States is poised to hear a bankruptcy case in Merit Management Group LP v. FTI Consulting Inc. This case has the potential to resolve a current circuit split about a section in the Bankruptcy code that protects certain types of payments made to a financial institution. In accordance with this law, individuals are unable to avoid payments made in connection with a securities contract, settlement payments, or other payments that are made to commodity brokers, financial institutions, financial participants, forward contract merchants, or securities clearing agencies. The way in which this case is decided has the potential to clarify the parties that a person who declares bankruptcy is obligated to pay.

History Leading up to the Case

Prior to the Merit Management case, the Eleventh Circuit was the only circuit court to hold that a financial institution must be more than an intermediary for a person who declares bankruptcy to be forced to pay. Five other courts including the Second Circuit, the Third Circuit, the Sixth Circuit, the Eighth Circuit, and the Tenth Circuit have held that a person who declares bankruptcy must pay financial institutions that are intermediaries. The Merit Management case was heard by the Seventh Circuit prior to certiorari being granted by the Supreme Court.

Details about the Case of Merit Management

The defendant in this case is Merit Management who is a 30% shareholders of a racetrack company called Bedford Downs. Bedford Downs entered into a settlement agreement with the Valley View Downs company through which Valley View acquired all of Bedford’s stocks. Valley View paid Bedford through the lending company, Credit Suisse. Credit Suisse distributes these funds to Citizen’s Bank of Pennsylvania, which then paid Bedford. Bedford then distributed these payments to its shareholders including Merit Management. Valley View later filed for bankruptcy under Chapter 11 of the Bankruptcy Code. FTI Consulting on behalf of Valley View initiate a legal action against Miert Management on the basis that the deal between Valley View and Bedford was made for less than a reasonable value and that Valley View should not be required to pay Merit. In response to Valley View, Merit Management responded that  because payments by Valley View were made through a financial institution Valley View was unable to successfully raise the defense that payments should not be made.

Lower courts that heard this case held that a payment qualifies for this type of financial institute protection even if the financial institution in question has acted as an intermediary and has no direct interest in the transfer. In reviewing the lower court’s opinion, the Seventh Circuit court ultimately found that the financial institution involved in a transaction must be more than an intermediary for this defense to arise. In reaching this holding, the Seventh Circuit relied on the Eleventh Circuit’s opinion and rejected the holdings of the five other Circuit Courts that have reviewed this area of bankruptcy law.

Obtain the Services of a Skilled Oklahoma Bankruptcy Attorney

Although it remains uncertain how this case will be decided, if the Supreme Court affirms the Seventh Circuit, this ruling will eliminate the defense that has protected individuals who declare bankruptcy from paying financial institutions. If you are going through the bankruptcy process and live in Oklahoma, do not hesitate to contact attorney Jim A. Lyon. Attorney Lyon has an intricate understanding of the bankruptcy code and has helped many individuals navigate the bankruptcy process.