Merit Management Group v. FTI Consulting (Decision February 27, 2018)

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The Supreme Court ended Merit Management's hopes of keeping $16.5 million out of a bankruptcy trust.

Valley View Downs and Bedford Downs, both racetracks in Pennsylvania, decided to merge instead of fighting over the one remaining harness-racing license in the state. They both wanted to build a "racino" (a racetrack plus casino).

Valley View acquired Bedford, but then was unable to secure the gambling license. It filed for bankruptcy.

Merit Management v FTI Consulting Decision

Merit Management's $16.5 million

Before the acquisition, Merit Management owned 30% of Bedford Downs. When Valley View purchased Bedford, Merit Management sold its 30% to Valley View for $16.5 million. But the transaction was very close to Valley View's bankruptcy filing.

Bankruptcy law says the trust can sue to get the money put back into the trust

Bankruptcy is about fairly distributing assets among creditors. It can't have insiders making shady transactions to avoid the legal distribution plan. So there's a legal provision that allows the trust to "avoid" a suspicious transaction. 

FTI Consulting is the trust. FTI sued Merit to get the $16.5 million back.

The exception

Bankruptcy law allows certain transfers to escape being put back into the trust. Those are transfers "made by or to (or for the benefit of)" a securities intermediary.

Does that phrasing cover any transaction that goes through a securities intermediary (like a broker or a bank)? Or does the transfer actually have to benefit the intermediary (consider, for example, a broker fee for helping to close a deal).

Merit Management argued for the first interpretation. The $16.5 million to Merit did go through two banks. But the $16.5 million did not benefit the banks - the banks weren't the essence of the transaction. This contrasts with the broker-fee example in which the broker is actually the beneficiary.

The ruling

The Supreme Court said Merit's argument does not work. Merit was trying to get the Court to view the "transfer" as three component transfers, by breaking the transfer into segments each time it went through a bank (aka a securities intermediary). We analyzed the components of the transfer in our earlier infographic on this case.

But the Court said the "transfer" should be viewed as a whole. The transfer was a transfer by Valley View to Merit Management. It happened to go through some banks, but that was not the essence of the transfer. So the transfer to Merit Management does not qualify for the exception (the "safe harbor" provision).


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