US Supreme Court restricts bankruptcy safe harbour protection

Author: Amélie Labbé | Published: 9 Mar 2018

The US Supreme Court has dealt a blow to financial institutions’ protection against bankruptcy clawback claims.

Its 27 February unanimous decision is on the whole more favourable to bankruptcy trustees and plaintiffs who try and recover funds. But Gregory Plotko, partner at Richards Kibbe & Orbe, concedes that while it’s potentially detrimental to some defendants, a lot of transaction and payment structuring could nevertheless  avoid liability.

The Court’s decision reverses previous case law on the Bankruptcy Code’s safe harbour provision, limiting its applicability to certain avoidance actions situations (so-called fraudulent conveyances) only. 

Going forward, the defence will only apply to transfers made for the benefit of a protected party (including banks and stockbrokers), not when these acted as mere intermediaries in the transaction. It will also apply to margin payments, settlement payments and other transfers if these were made in the course of a securities...