Footnote 5 in Supreme Court’s Merit Management Opinion: “Settlement Payment” Under a “Securities Contract”

Safe harbor (photo by Marilyn Swanson)

By: Donald L. Swanson

Whenever a court goes out of its way to say in an opinion, “We aren’t deciding issues X and Y,” it’s time to take notice. The omitted issues must be significant, in some way, to what’s being decided; otherwise, there’s no reason to mention them.

And when the opinion is from the Supreme Court of the United States of America, we’d better give the undecided issues a hard look.

Supreme Court’s Omitted Bankruptcy Issues

On February 27, 2018, the U.S. Supreme Court issues its ruling on the § 546(e) safe harbor defense in Merit Management Group, LP v. FTI Consulting, Case No. 16-784.

In footnotes 2 and 5 of this opinion, the Supreme Court identifies critical issues that were not raised by the parties and that are not addressed in the opinion.

–Footnote 2 deals with the statutory definition of “financial institution.” A prior article (linked here) discusses that issue and Justice Breyer’s comments, at oral argument, on the “customer” portion of that definition.

Footnote 5 Issue – Settlement Payment On Securities Contract

Footnote 5 in the Merit Management opinion reads:

“5 The parties do not ask this Court to determine whether the transaction at issue in this case qualifies as a transfer that is a ‘settlement payment’ or made in connection with a ‘securities contract’ as those terms are used in §546(e), nor is that determination necessary for resolution of the question presented.”

2011 Case Illustrating the Footnote 5 Issue

We are left to speculate on what, exactly, the Justices believe the “settlement payment” and “securities contract” issue might be. But a 2011 opinion suggests that the issue (upon which a circuit split exists) is this:

–Does a transfer of privately traded stock qualify as a “settlement payment . . . in connection with a securities contract” under the § 546(e) safe harbor defense?

The opinion is Geltzer v. Mooney (In re MacMenamin’s Grill Ltd.), 450 B.R. 414 (Bankry. S.D.N.Y. 2011).

The Complaint

The chapter 11 Trustee in MacMenamin files a Complaint to avoid the following transfers as constructively fraudulent:

(i) Debtor’s cash payments to purchase its own privately-traded stock from its three shareholders, and

(ii) the loan the Debtor took to fund the stock purchase and the related security interest it granted in substantially all of Debtor’s assets.

The § 546(e) Defense

The shareholder defendants raise a § 546(e) defense, and summary judgment motions are filed on whether the § 546(e) defense applies to them.

The operative language of § 546(e) for the MacMenamin case is (italics added for emphasis):

“the trustee may not avoid a transfer that is a . . . settlement payment as defined in section . . . 741 of this title, made by or to . . . a . . . financial institution, . . . or that is a transfer made by or to . . . financial institution . . . in connection with a securities contract, as defined in section 741(7).”

A Primary Issue

A primary MacMenamin issue is whether the § 564(e) terms “settlement payment” and “securities contract” apply to what happened. The Bankruptcy Court explains as follows:

Some courts hold that private stock transfers do not qualify for the § 546(e) defense, despite the “apparent plain meaning” of the phrase “settlement payment . . . in connection with a securities contract,” reasoning that “Congress’ stated purpose” for § 546(e) does not apply to them: such purpose is to reduce “systemic risk to the financial markets” and prevent the “ripple effect” created by “the insolvency of one commodity or security firm” from “spreading to other firms and possibly threatening the collapse of the affected industry” (see, e.g., Kipperman v. Circle Trust F.B.O. (In re Grafton Partners, L.P.), 321 B.R. 527, 538-41 (9th Cir. BAP 2005)); but

Other courts hold, based on the statute’s “plain meaning,” that § 546(e) does apply to “privately traded securities in LBOs, including to insiders” (see, e.g., In re QSI Holdings, Inc., 571 F.3d 545, 550-51 (6th Cir. 2009); Brandt v. B.A. Capital Co., LP (In re Plassein Int’l Corp.), 590 F.3d 252, 258-59 (3d Cir. 2009); Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 987-88 (8th Cir.2009)).

The MacMenamin Analysis

In MacMenamin, the Bankruptcy Court provides an independent analysis of the issue as follows.


The term “settlement payment” is defined (at § 741(8)) in a “frustratingly self-referential” manner: “essentially stating” that a “settlement payment” is a “settlement payment.”

§ 741(8) reads:

“(8) ‘settlement payment’ means a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade.”


It is “clear” from “the context” (even before turning to legislative history) that § 546(e) “is in fact tied to the securities markets”:

One context is the “catchall phrase” at the end of the § 741(8) definition of “settlement payment”: i.e., “or any other similar payment commonly used in the securities trade”;

§ 741 “is a key definitional cross reference within § 546(e),” which also appears in Subchapter III of chapter 7 of the Bankruptcy Code governing stockbroker liquidations; and

§ 761 is also “a key definitional reference within § 546(e), which also appears in Subchapter IV of chapter 7 governing commodity broker liquidations.

Absurd Result

Courts excluding private transactions from § 546(e) “generally make” this additional argument:

–exempting private transactions from avoidance “is so far removed” from the “professed intent” of Congress (i.e., “to protect the financial markets”) that applying § 546(e) to private transactions “would be absurd.”

The operative rule of statutory construction supporting this argument is:

–the “plain meaning of legislation should be conclusive,” except in “rare cases” where “the literal application of a statute” produces an “absurd” result that is “demonstrably at odds with the intention of its drafters.”


Some courts applying “plain language” of § 546(e) to include private transactions also tie the facts at issue, in some way, to a securities market context. The Sixth Circuit’s QSI Holdings case, for example, involves a “large private LBO” ($208 million purchase price and hundreds of selling shareholders) with “at least some of the sales” occurring “through a financial intermediary . . . involved in the securities markets.”

Other courts in the Southern District of New York look beyond the “apparently plain language” of § 546(e) to achieve Congressional intent “on a nuanced basis.” One such court, for example, identifies “five factors” to consider regarding the nature of the transaction and its potential impact on markets.

Legislative History

In light of § 546(e)’s “textual context,” including “circular” and “ambiguous” definitions, a “reference to the legislative history is warranted.”

“Clear” and “consistent” legislative history demonstrates that § 546(e) is intended to address market-level risks that are absent from private transactions. So, a result contrary to Congressional intent should not be imposed.


The § 546(e) safe harbor defense is the subject of debate and disagreement these days. The U.S. Supreme Court resolved a narrow issue for us in its Merit Management opinion. But many more issues remain, including those referenced in footnotes 2 and 5 of the Merit Management opinion.

Based upon the wording of those two footnotes, and upon comments in oral arguments, it appears that the winner and loser in Merit Management might have been different, if the footnote 2 issue had been raised by the parties.  But the result, apparently, would not have been affected, even if the footnote 5 issue had been raised.

It will be interesting to see how all this plays out in litigation to come.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.


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