Bankruptcy trustees have tested the limits of the § 546(e) safe harbor since its enactment. In case after case, the courts, with few exceptions, have expanded those limits — that is, perhaps, until now. On Monday, Nov. 6, 2017, the U.S. Supreme Court heard argument in the case of Merit Management Group LP v. FTI Consulting Inc. to resolve the 5-2 circuit split concerning the proper scope of the § 546(e) safe harbor.

Section 546(e) acts as an exception to a trustee’s chapter 5 avoidance powers by protecting certain transfers from avoidance. Whether a transfer is protected from avoidance turns on the answers to two questions. First, was the transfer at issue a settlement payment or a transfer made in connection with a securities contract? If yes, as was undisputed in Merit, the second question must be answered: Was the transfer made “by or to (or for the benefit of)” a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant or securities clearing agency?

This second question lies at the heart of the dispute in Merit and the 5-2 circuit split. Five circuit courts of appeals have taken a mechanistic view of the statutory language “by or to” and have held that where an entity listed in the statute, like a bank, is involved in the transfer, even when only acting as a conduit, the transfer falls within the safe harbor.

Section 101(54) defines “transfer” to mean “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with[] (i) property; or (ii) an interest in property.” But is a deposit or wire transfer into a debtor’s bank account a “transfer” within the meaning of § 101(54)? The legislative history behind § 101(54) suggests that the answer is “Yes.” In passing the Bankruptcy Code, Congress sought to make the definition of transfer “as broad as possible,” even going so far as to state that “[a] deposit in a bank account or similar account is a transfer.” However, as illustrated by two recent decisions from the Fourth and Ninth Circuits, respectively, the answer remains unclear.

In January, the Fourth Circuit in Ivey v. First Citizens Bank & Trust Company (In re Whitley) held that a Ponzi scheme operator’s deposits into his own bank account were not “transfers” within the meaning of § 101(54). The debtor (who had already been convicted of wire fraud and money laundering) used a personal checking account “to deposit funds, receive wire transfers, and write checks as part of his fraudulent scheme.” The chapter 7 trustee sued First Citizens Bank, seeking to avoid certain deposits and wire transfers into the debtor’s account. Both the bankruptcy court and district court concluded that although the transactions were “transfers” under the Bankruptcy Code, the trustee’s claims failed because the transfers did not diminish the bankruptcy estate or place the funds beyond the creditors’ reach.