In late February, the Supreme Court handed down Merit Management Group LP v. FTI Consulting Inc., 138 S. Ct. 883, 200 L. Ed. 2d 183, 86 U.S.L.W. 4088 (Sup. Ct. Feb. 27, 2018), ruling that the so-called safe harbor under Section 546(e) only applies to “the transfer that the trustee seeks to avoid.”
Functionally speaking, Merit Management meant that using a bank as an escrow agent would not immunize the entire transaction from attack as a fraudulent transfer. That was among the issues in a certiorari petition pending simultaneously in the Supreme Court, Deutsche Bank Trust Co. Americas v. Robert R. McCormick Foundation, 16-317 (Sup. Ct.). Indeed, the Deutsche Bank certiorari petition had been filed two months before the petition in Merit Management.
In view of Merit Management, observers assumed that the Supreme Court would quickly grant certiorari in Deutsche Bank, vacate the decision in the Second Circuit, and remand for further consideration. But that’s not what happened.
Instead of quickly acting, the justices reset the Deutsche Bank petition for consideration at four successive conferences from March 2 to March 29. The delay puzzled everyone.
Then yesterday, Justices Anthony M. Kennedy and Clarence Thomas entered a “Statement” on the Deutsche Bank docket. In its entirety, the statement said:
The parties are advised that consideration of the petition for certiorari will be deferred for an additional period of time. This will allow the Court of Appeals or the District Court to consider whether to recall the mandate, entertain a Federal Rule of Civil Procedure 60(b) motion to vacate the earlier judgment, or provide any other available relief in light of this Court’s decision in Merit Management Group, LP v. FTI Consulting, Inc., 583 U.S. ___ (2018). The petition for certiorari in this case was pending when the Court decided Merit Management. The Court of Appeals or the District Court could decide whether relief from judgment is appropriate given the possibility that there might not be a quorum in this Court. See 28 U.S.C. § 2109.
Now we know why the Court has not acted on Deutsche Bank. At least four justices have recused themselves, leaving the Court without a quorum of six justices.
However, the reference to Section 2109 implies that some of the recusals may evaporate in the coming months. When “the case cannot be heard and determined at the next ensuing term,” the section provides that “the court shall enter its order affirming the judgment of the court from which the case was brought for review with the same effect as upon affirmance by an equally divided court.”
If the grounds for recusal were permanent, the justices presumably would have acted already by affirming the Second Circuit under Section 2109, which would mean that the high court’s disposition would have no precedential effect. But that’s not what they did.
Acting under Section 2109 would have left dismissal of Tribune intact. In view ofMerit Management, perhaps that’s not what the justices wanted, since the Second Circuit followed an erroneous interpretation of the safe harbor. Although they could not themselves vacate and remand, the Court will accomplish the same result by suggesting that the Second Circuit recall the mandate and reconsider.
Traditionally, justices do not disclose reasons why they recuse themselves. The financial institutions involved in the Deutsche Bank case may explain why; perhaps one or more of the institutions manages money for the justices.
The statement by the two justices gives hope there will be a quorum sometime in the next year. In the meantime, don’t hold your breath for action in the Supreme Court. It’s more likely that the Second Circuit will take up the case once again.
Presumably, the Second Circuit will accept the Supreme Court’s invitation and reconsider Deutsche Bank in view of Merit Management. In the Second Circuit, the case was known as Note Holders v. Large Private Beneficial Owners (In re Tribune Co.), 818 F.3d 98 (2d Cir. 2016).
The Second Circuit found several theories to justify application of the safe harbor and dismiss a fraudulent transfer suit against selling shareholders in a leveraged buyout, where a financial institution was in the chain of payments. Indeed, the Second Circuit went so far as to rule that the safe harbor in the Bankruptcy Code impliedly preempted state law and thereby bars suits by creditors under state law to recover payments made in securities transactions.
Before the statement by the two justices, theories abounded to explain why the Court had not acted on the Deutsche Bank petition. Were one or more justices writing a dissent from the disposition of the petition? Conjecture on that subject now ends. Conjecture now begins on when, if ever, the Court will be able to reach the merits of the Deutsche Bank petition and, in particular, decide whether the Section 546(e) safe harbor impliedly preempts state fraudulent transfer law.
To read ABI’s discussion of the Second Circuit’s decision in Tribune, a/k/aDeutsche Bank, click here. For ABI’s report on the Merit Managementdecision, click here.