Justices to Tackle Circuit Split Over Bankruptcy Code

CHICAGO (CN) – The Supreme Court agreed Monday to hear a case stemming from a racetrack’s bankruptcy, to resolve whether certain monetary transfers can be undone by the bankruptcy trustee.

In 2003, Valley View Downs, owner of a Pennsylvania racetrack, acquired Bedford Downs, another racetrack, for $55 million in an effort to consolidate their chances of winning a license to run a combination horse track and casino.

Valley View borrowed money to pay for the acquisition but failed to secure a gambling license, and eventually filed for Chapter 11 bankruptcy.

One of its creditors, FTI Consulting, sued Merit Management Group, a 30 percent shareholder in Bedford Downs, alleging that Bedford’s transfer to Valley View can be voided under the bankruptcy code, and the $55 million is part of Valley View’s bankruptcy estate.

The Seventh Circuit ruled for FTI in July, finding that the bankruptcy code does not provide a safe harbor to prevent the transaction from being undone by the bankruptcy trustee.

“We are not troubled by any potential ripple effect through the financial markets from returning the funds to FTI,” Judge Diane Wood said, writing for a three-judge panel. “Valley View’s bankruptcy will not trigger bankruptcies of any commodity or securities firms… Nor are we persuaded that the repercussions of undoing a deal like this one outweigh the necessity of the Bankruptcy Code’s protections for creditors.”

The Seventh Circuit’s decision conflicts with five other circuit court decisions. Only the 11th Circuit has taken a similar position regarding bankruptcy transfers.

Merit Management noted the circuit split in a petition for a writ of certiorari filed in December.

“Consistency of interpretation is fundamentally important in matters of bankruptcy. Business bankruptcies in particular often involve debtors and creditors from throughout the United States,” the petition states. “Inconsistent interpretations of the Bankruptcy Code in different circuits distort the incentives and expectations of debtors, trustees, creditors, and shareholders. In addition, uncertainty about the application of a safe harbor may alter investment decisions and may cause individuals and companies to refuse to deal with a distressed business because of concerns about potential liability.”

The U.S. Supreme Court granted Merit’s petition on Monday. Per its custom, the high court did not comment on its decision to take up the case, and it is unclear when it will hear arguments.

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