“Safe Harbor”: Merit Management’s Footnote 2 Is Back! (Deutsche v. McCormick)

Safe harbor (photo by Marilyn Swanson)

By: Donald L Swanson

In its unanimous Merit Management Group, LP v.FTI Consuting, Inc., opinion of February 27, 2018, the U.S. Supreme Court held (in the second-to-last sentence of the opinion):

  • Because the parties do not contend that either Valley View or Merit is a ‘financial institution’ or other covered entity, the transfer falls outside of the §546(e) safe harbor” (emphasis added).

Additionally, the Supreme Court’s opinion contains the following qualification in its footnote 2:

  • “The parties here do not contend that either the debtor or petitioner in this case qualified as a ‘financial institution’ by virtue of its status as a ‘customer’ under §101(22()A). . . . We therefore do not address what impact, if any, §101(22)(A) would have in the application of the §546(e) safe harbor” (emphasis added).  [See also Fn. 1 below.]

Those two items together (the holding and Footnote 2) cast doubt on the precedential value of Merit Management in contexts where the debtor or other party to a transfer qualifies as a “financial institution” under § 101(22)(A).

Merit’s Footnote 2 Is Back!

Merit Management’s Footnote 2 returns to the U.S. Supreme Court by a Petition for writ of certiorari in Deutsche Bank Trust Company Americas v. Roberrt R. McCormick Foundation, Case No. 20-8.

–Question Presented

One of the Questions Presented in that Petition is:

“Whether . . . Section 546(e) does exempt certain fraudulent transfers from avoidance if executed via a bank as a conduit, on the ground, left open in Merit, that the bank’s customer is itself a ‘financial institution.’”

The Second Circuit, in Deutsche Bank v. McCormick, had followed Merit Management’s Footnote 2 and concluded that “the payments at issue remain subject to Section 546(e) following Merit Mgmt.”  That’s because:

  • Tribune retained Computershare to act as “Depositary” in connection with the LBO tender offer;
  • Computershare is a “financial institution” for the purposes of Section 546(e) because it is a trust company and a bank; and
  • Therefore, Tribune was likewise a “financial institution” with respect to the LBO payments because, (i) Tribune was Computershare’s “customer” with respect to the LBO payments, (ii)  Computershare was Tribune’s agent, and (iii) all of the payments at issue were “in connection with a securities contract.”

–Petition Denied

On April 19, 2021, the U.S. Supreme Court denied the Petition for certiorari in Deutsche Bank v. McCormick, which means the Second Circuit’s opinion in that case is still good law.

Significance of Merit’s Footnote 2

To understand the significance of Merit Management’s Footnote 2, we must look back to Justice Breyer’s energetic participation in oral arguments for the Merit Management case.  What follows is a focus on Justice Breyer’s participation (from the transcript of such arguments).

–Fraudulent Transfer Hypothetical

JUSTICE BREYER: . . . I have two shares of company X in . . . an account somewhere . . . So knowing I’m about to go bankrupt, I take my share, and I tell them go transfer it to my wife. Right?


JUSTICE BREYER: Now, you’ll say they can’t attack that as a fraudulent conveyance . . . the paradigm case of a fraudulent conveyance.

ANSWER: Well, actually, Your Honor, that — that very well might be a case that wouldn’t fall within the safe harbor.


ANSWER: Because if you transfer your stock to your wife –¬

JUSTICE BREYER: No, no, no. I told you it’s being held in a — in a bank, and I tell the bank to do it.

ANSWER: It’s being held in the indirect system, and you — you sell it to your wife. Then in — then in that case, there’s safe harbor.

JUSTICE BREYER: It does. So . . . this is going to cover all kinds of things.

–“Financial Institution” is Dispositive

JUSTICE BREYER:  VVD “wants to give $55 million to a group of people that include” Merit. “Neither of them is” a financial institution. But “Credit Suisse which [has] the line of credit, [says] you send it to the Citizens Bank, which is the escrow.”  “And so the argument here is, because they used these two agents, now, suddenly,” it falls into “the bank exception.”

ANSWER: “Correct, right.”

“JUSTICE BREYER: . . . And so why are we hearing this case?”  “[W]hen I look up the definition of financial institution, it says that not only is it Credit Suisse and not only is it Citizens Bank, but it is also the customers of each of those financial institutions in an instance where the bank is acting as agent or custodian for a customer.”

–An Application

JUSTICE BREYER: “Now, it seems to me that Citizens Bank is acting for agent or custodian of a customer, namely VVD, and it seems to me that Credit Suisse is acting as . . . an agent or custodian for VVD. So why doesn’t that cover it?”

ANSWER: “I think that is a fair way to look at it, Your Honor.”

–Frustration and Scolding

JUSTICE BREYER: Well, why doesn’t that cover it? Why are we . . . deciding all kinds of things about banks and my wife,” when “this is absolutely dealt with in a statute, . . . under another provision.”  “[N]obody refers us to that provision, and I can’t understand why they didn’t — what’s going on?”

ANSWER: “Your Honor, we did — we did refer to that provision in — in both of our briefs, if I remember correctly.”

JUSTICE BREYER: “You may have put it in your briefs, but, I mean, why in the lower courts wasn’t this just said . . . Judge, this involves a customer of a financial institution, namely VVD, and, therefore, it’s in the exempt area?”  “And I want to know why that didn’t happen.”

ANSWER: “That I don’t —“

JUSTICE BREYER: “It’s your case. You can do it.” Yet, instead, “we’re asked to decide a question that I think is fraught with difficulty.”  “I would like to know the answer.

ANSWER: “I’m afraid I don’t have a good answer for why that did not come up earlier.”

–Other Justices Jump In

JUSTICE ALITO: “Oh, I thought you conceded it. Didn’t both parties . . . concede that . . . Valley View is not a financial institution?”

JUSTICE GINSBURG: “You just did in answer to my [prior] question.”

ANSWER: “No, I’m sorry.”

JUSTICE GINSBURG: “I asked you specifically, do you agree that neither Valley View nor Merit is an entity enumerated under 546(e)?”

ANSWER: “I may have . . . misunderstood the difference between the two questions, Your Honor.”

JUSTICE BREYER: “I think it’s the same.”

ANSWER: “Justice Ginsburg, in response to your question, neither of the parties to this case is a . . . financial institution, as that term is . . . generally understood. In trying to —“

JUSTICE BREYER: “But not as the statute understands it, which uses it to include a customer of a financial institution in circumstances which are present here.”

JUSTICE GINSBURG: “If . . . this was such a standout issue, you must have thought about it, and yet, you relegated it to a footnote in your reply brief.”

ANSWER: “And I — and I don’t know whether it’s a standout issue or not, Your Honor, but that is a quirk in the definition of financial institution, that is true. That is true.”

–Opposition Tries to Pile On

ATTORNEY: “Mr. Chief Justice, and may it please the Court.”  “I think it would be helpful if I could start with the elephant in the room, which is Justice Breyer’s question about the definition of financial institution and then address the question presented.”  “So, Justice Breyer, a couple of points about that. First of all, I think it could not be clearer that that’s never been at issue in this case, and . . . the Petitioner, when they were trying to get this Court to take the case, emphasized the fact that this wasn’t in dispute as a sort of a positive feature of this petition.”

–A Rebuff and a Question

JUSTICE BREYER: “I have no doubt that neither party wanted it resolved on that basis. And so what’s nagging at the back of my head is” this: “can two parties who would just love it, if we could decide an issue that really isn’t at issue before [the Court] and can they stipulate away all of the actual [rules] . . . in order to get us to decide a question?”


It’s abundantly clear that, (i) Justice Breyer views the Footnote 2 issue (i.e., the definition of a “financial institution”) to be dispositive, and (ii) Merit Management might have been decided differently, if the Footnote 2 issue had been raised.  And it appears that Justice Breyer has support from at least one other justice (even in Justice Ginsburg’s absence).

The big question, going forward, is this: how will a majority of Supreme Court justices construe the statutory “financial institution” language that Justice Breyer champions in Merit Management oral arguments? 

The Petition denial in Deutsche Bank v. McCormick suggests that Justice Breyer’s position is the majority view!


Footnote 1.  The footnote 2 in Merit Management also quotes this language from § 101(22)(A): 

“The term ‘financial institution’ is defined as: ‘(A) a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity and, when any such Federal reserve bank, receiver, liquidating agent, conservator or entity is acting as agent or custodian for a customer (whether or not a ‘customer’, as defined in section 741) in connection with a securities contract (as defined in section 741) such customer.”

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