The Bankruptcy Code enables a trustee to set aside certain transfers made by debtors before bankruptcy. See 11 U.S.C. §§ 544, 547, 548. These avoidance powers are subject to certain limitations, including a safe harbor in section 546(e) exempting certain transfers. Among other things, section 546(e) bars avoidance of a “settlement payment . . . made by or to (or for the benefit of) . . . a financial institution [or] a transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract.” The Bankruptcy Code in turn defines a “financial institution” to include not only financial institutions as conventionally understood, such as “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,” but also a customer of such institutions when such institutions are “acting as agent or custodian for [such] customer . . . in connection with a securities contract.” 11 U.S.C. § 101(22)(A). Because a transfer to a “financial institution” in connection with a securities contract is shielded by section 546(e) from avoidance, the question of which “customers” of financial institutions qualify as financial institutions under this definition has become highly litigated. On October 22, the United States Bankruptcy Court for the Eastern District of Michigan issued a new decision on this question, ruling that the recipients of an alleged fraudulent transfer did not qualify as “financial institutions” under the Bankruptcy Code because the bank that transmitted the payments was not acting as an “agent or custodian” for the recipients.
The adversary proceeding arose from a series of transactions involving Greektown Casino, LLC (“Greektown Casino”), which owned and operated a casino in Detroit. Dimitrios Papas, Viola Papas, Ted Gatzaros, and Maria Gatzaros (“Defendants”) indirectly owned 50% of the membership interests in Greektown Casino. In 2000, they arranged to sell their membership interests in exchange for installment payments. In 2005, another series of agreements provided for payment of the balance due to Defendants. As part of this transaction (the “2005 Transaction”), Greektown Holdings, LLC (“Holdings”) was incorporated and acquired all the interests in Greektown Casino. Holdings then issued $182 million in senior notes, which were sold to Merrill Lynch. Merrill Lynch then sold the notes to various institutional investors. Holdings used the proceeds of the notes to make wire payments to Defendants, also using Merrill Lynch for the wire payments. In...
