# What Constitutes a True Agency Relationship for the Section 546(E) Customer Defense? ▴ Question

**Published:** 2025-07-30
**Categories:** Question

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## Concept

The architecture of financial safe harbors is forged in the crucible of systemic crises. For participants in the capital markets, Section 546(e) of the U.S. Bankruptcy Code represents a critical load-bearing wall, designed to prevent the collapse of a single institution from triggering a cascade of failures by unwinding completed securities transactions. Its purpose is to shield certain prepetition transfers, such as settlement payments, from avoidance actions by a bankruptcy trustee. The system was designed for finality.

However, the 2018 Supreme Court decision in _[Merit Management](https://prime.greeks.live/area/merit-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Group, LP v. FTI Consulting, Inc._ fundamentally altered the blueprint. By clarifying that the relevant transfer for analysis is the overarching, end-to-end transaction, the Court effectively dismantled the widely used “conduit” defense, where the mere involvement of a [financial institution](https://prime.greeks.live/area/financial-institution/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) as an intermediary could shield the entire transfer.

This ruling exposed a significant vulnerability. A transfer from a debtor to an ultimate beneficiary, if that beneficiary was not itself a protected entity, was now potentially subject to clawback, even if it passed through the plumbing of a major bank. In the wake of _Merit_, a different, more nuanced defense has become the focus of intense legal and strategic scrutiny ▴ the “customer” defense. This defense hinges on a specific provision within the Bankruptcy Code’s definition of a “financial institution.” Section 101(22)(A) extends this definition to encompass a “customer” of a traditional financial institution, but only when that institution is “acting as agent or custodian for customer. in connection with a [securities contract](https://prime.greeks.live/area/securities-contract/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).” The entire protective apparatus, therefore, now frequently rests on a single, dispositive question ▴ What constitutes a true [agency relationship](https://prime.greeks.live/area/agency-relationship/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) in the eyes of the court?

> A true agency relationship, for the purposes of the Section 546(e) customer defense, is one where a principal exercises genuine authority and control over a financial institution acting on its behalf, distinguishing it from a mere contractual counterparty.

Answering this question requires moving beyond simplistic labels and examining the fundamental nature of the relationship between the entity making the transfer (the debtor) and the bank facilitating it. It is an inquiry into power, control, and fiduciary responsibility. A court must be convinced that the bank was not merely a passive conduit or, more pointedly, an adverse party in a principal-to-principal transaction. Instead, it must find that the bank was operating as a genuine extension of the customer’s will, a fiduciary bound to act on the customer’s behalf and subject to its control.

The outcome of this analysis determines whether the customer can don the mantle of a “financial institution” and thereby invoke the powerful protection of the Section 546(e) [safe harbor](https://prime.greeks.live/area/safe-harbor/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The distinction is the difference between transactional finality and the profound risk of unwinding a completed deal years after the fact. The _Tribune_ company litigation, in particular, has become the key battleground where the contours of this agency test are being defined, providing a critical, evolving playbook for how transactions must be structured to survive judicial review.

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## Strategy

The strategic imperative for any entity seeking the protection of the Section 546(e) [customer defense](https://prime.greeks.live/area/customer-defense/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is to architect a relationship with its financial institution that is substantively and demonstrably one of agency. This strategy is a direct response to the legal test courts apply, which dissects the relationship to determine whether the financial institution was a true agent or simply an intermediary. The core of this strategy involves embedding the legal elements of agency into the operational and contractual framework of the transaction itself.

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## What Are the Defining Elements of an Agency Relationship?

The central question courts examine is whether the principal (the debtor or transferor) has the right to control the agent (the financial institution). This is the bedrock of agency law. The analysis focuses on several key factors that, taken together, paint a picture of the relationship’s true nature. A successful strategy requires building a compelling case across these domains.

- **Right of Control** ▴ The principal must possess the authority to direct the agent’s actions within the scope of the engagement. This includes the power to give specific instructions regarding the transaction, such as the timing and execution of payments. A financial institution acting on its own initiative or for its own benefit fails this test.

- **[Fiduciary Duty](https://prime.greeks.live/area/fiduciary-duty/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** ▴ A hallmark of agency is the agent’s fiduciary obligation to act in the principal’s best interest. This precludes the financial institution from having interests adverse to the customer in the specific transaction. For instance, if a bank is the purchaser of notes from the debtor, its interests are fundamentally adverse, which would likely defeat an agency claim.

- **Consent and Action** ▴ There must be a mutual agreement that the financial institution will act on the principal’s behalf. This consent can be explicit in contracts but is also demonstrated through the course of conduct, where the institution acts in accordance with the principal’s instructions.

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## Architecting the Relationship Contractually and Operationally

Parties cannot simply label a relationship as “agency” and expect it to be respected by a court. The strategy must be to embed the indicia of agency into the transaction’s DNA. This involves careful consideration of both the legal agreements and the practical execution of the transaction.

> The post-_Merit_ landscape demands that transaction participants shift their focus from the presence of a bank to the substance of the bank’s role.

The following table contrasts the characteristics of a relationship likely to be deemed a true agency with one that a court would likely view as a mere intermediary or adverse relationship, thereby failing the customer defense test.

### Table 1 ▴ Agency Relationship Analysis

| Factor | True Agency Relationship (Defense Likely Succeeds) | Intermediary or Adverse Relationship (Defense Likely Fails) |
| --- | --- | --- |
| Contractual Language | Agreements explicitly state the financial institution acts as the “agent” for the customer. The scope of authority is clearly defined. | Agreements contain express disclaimers of any agency, trust, or fiduciary relationship. The institution is identified as a principal or independent contractor. |
| Control and Instructions | The customer provides specific, binding instructions for the execution of the transfer (e.g. payment amounts, beneficiary details, timing). The institution has limited discretion. | The financial institution executes the transaction based on its own operational protocols or pursuant to its own interests (e.g. as a purchaser in a note agreement). |
| Economic Interest | The institution is compensated with a service fee, consistent with payment for agency services. | The institution earns a spread or profit from the transaction itself, indicating it is acting as a principal with its own financial stake, adverse to the customer. |
| Role in Transaction | The institution functions as a “business representative” of the customer, empowered to effectuate transactions on the customer’s behalf. | The institution acts as a mere go-between, a message carrier, or a depository with no power to bind the customer or act with discretion on its behalf. |

The decision in _In re Tribune Co. Fraudulent Conveyance Litigation ([Tribune II](https://prime.greeks.live/area/tribune-ii/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite))_ revitalized the customer defense precisely because the court found it plausible that the debtor, Tribune, was a “customer” of a bank that was acting as its “agent or custodian” to manage the [leveraged buyout](https://prime.greeks.live/area/leveraged-buyout/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) payments. This outcome underscores the strategic value of structuring the relationship to align with the “True Agency” column in the table above. The goal is to create a factual record that preemptively answers the court’s inevitable questions about control, duty, and consent.

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## Execution

Executing a transaction with the goal of substantiating a future Section 546(e) customer defense requires a disciplined, evidence-based approach. It is a matter of building a comprehensive factual record that demonstrates, with clarity, the existence of a true agency relationship. This section provides a framework for the operational and analytical steps necessary to achieve this.

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## The Operational Playbook for Establishing Agency

The following steps provide a procedural guide for embedding the indicia of agency into the fabric of a securities transaction. This is not merely a legal exercise; it is an operational discipline that must be maintained throughout the lifecycle of the engagement with the financial institution.

- **Drafting the Engagement Agreement** ▴ The foundational document must be explicit. The agreement should clearly state that the financial institution is being retained to act as the customer’s agent for the specific purpose of executing the securities-related transfers. It should define the scope of the agent’s authority and expressly state that the agent is subject to the principal’s direction and control. Any language that could be interpreted as creating a debtor-creditor or adverse relationship should be meticulously avoided.

- **Establishing a Clear Chain of Command** ▴ The operational workflow must reflect the control structure defined in the agreement. The customer must be the party that originates and approves payment instructions. There should be a clear audit trail ▴ emails, authenticated messages, system logs ▴ showing that the financial institution only acts upon receiving specific directives from the customer. Discretion afforded to the institution should be minimized and clearly circumscribed.

- **Segregating Funds and Duties** ▴ When feasible, funds designated for the transaction should be held in a segregated account that is clearly designated as being for the benefit of the customer or the transaction’s beneficiaries. The institution’s role should be documented as one of a custodian or disbursing agent for these specific funds, reinforcing the notion that it is acting on behalf of the customer with respect to that property.

- **Documenting the Fee Structure** ▴ The compensation model must align with an agency role. The institution should be paid a clear, pre-defined service fee. Fee structures based on a percentage of the transaction value can be acceptable, but any structure that resembles a profit spread or creates a principal risk for the institution can be used by an opposing party to argue that the relationship was commercial and adverse.

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## Quantitative Modeling of Payment Flows

How can the structure of a payment flow itself serve as evidence of agency? The key is demonstrating that the financial institution is merely executing the customer’s will, not acting as a principal. Consider a hypothetical leveraged buyout (LBO) where a company (Debtor Corp) is repurchasing $100 million of its shares from public shareholders.

### Table 2 ▴ LBO Payment Flow Analysis

| Step | Weak Structure (Risk of Recharacterization) | Robust Agency Structure (Defense Supported) |
| --- | --- | --- |
| 1. Funding | Debtor Corp transfers $100M to Bank’s general account. | Debtor Corp transfers $100M to a segregated trust account at Bank, explicitly designated “For the Benefit of Debtor Corp Shareholders.” |
| 2. Instruction | Bank proceeds with payments based on a master list provided at closing, with broad authority to manage the process. | Debtor Corp provides a verified, authenticated file of shareholders and payment amounts, with a formal directive instructing Bank, as its agent, to disburse funds precisely as specified. |
| 3. Disbursement | Bank makes payments to shareholders from its own accounts. | Bank disburses funds directly from the segregated account to the shareholders, creating a clear link from the principal’s funds to the ultimate recipients. |
| 4. Reporting | Bank provides a summary report upon completion. | Bank provides real-time or daily reporting to Debtor Corp, confirming execution of instructions and reconciliation of funds, subject to audit by the customer. |

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## How Do Courts Interpret Contractual Disclaimers of Agency?

A particularly critical execution point is the handling of contractual language. In some instances, courts have seized upon boilerplate language that expressly disclaims an agency relationship as powerful evidence against the customer defense. For example, a note purchase agreement that states “the parties agree that their relationship is that of a debtor and creditor and not that of an agent and principal” can be fatal to a subsequent attempt to argue for agency status.

The execution takeaway is absolute ▴ legal and business teams must scrutinize all transaction documents to ensure they do not contain language that contradicts the intended agency relationship. Where such language is unavoidable due to the nature of other parts of the transaction, counsel must carefully weigh the risk and attempt to carve out the specific disbursing functions as being conducted in a clear agency capacity.

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## References

- Marchetti, Peter V. “Section 546(e) Redux ▴ The Proper Framework for the Construction of the Terms Financial Institution and Financial Participant Contained in the Bankruptcy Code After the U.S. Supreme Court’s Holding in Merit.” _Cardozo Law Review_, vol. 41, no. 5, 2020, pp. 1849-1900.

- Skadden, Arps, Slate, Meagher & Flom LLP. “District Court Applies Section 546(e) Safe Harbor to Customer of Financial Institution, Revitalizing Key Defense.” 2019.

- Patterson Belknap Webb & Tyler LLP. “Bankruptcy Court Denies Section 546(e) Safe Harbor Protection in Fraudulent Transfer Action.” 2020.

- Strafford. “Bankruptcy Code 546(e) Safe Harbor ▴ Invoking the Customer Defense in Avoidance Actions After Tribune II.” 2020.

- Jones Day. “Merit Decision Redefines Reach of Bankruptcy Code’s Securities Transaction Safe Harbor.” 2018.

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## Reflection

The evolution of the Section 546(e) safe harbor is a powerful illustration of how legal interpretation reconfigures financial architecture. The shift from a “conduit” model to a substantive “agency” analysis requires more than a change in legal tactics; it demands a deeper integration of legal foresight into the very design of transaction systems. The core challenge is no longer simply to use a financial institution, but to define the precise capacity in which it serves.

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## A System of Intelligence

Consider your own operational framework. How is legal intelligence embedded into your transaction design process? Is the analysis of safe harbor provisions a reactive, post-facto exercise, or is it a foundational parameter in the system’s architecture? The principles that determine the outcome of an agency analysis ▴ control, fiduciary duty, and explicit consent ▴ are not merely legal abstractions.

They are tangible, operational variables that can be engineered, documented, and audited. Viewing your relationship with financial partners through this lens transforms a potential legal vulnerability into a source of structural strength and transactional certainty.

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## Glossary

<a href="https://prime.greeks.live/area/financial-institution/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Financial Institution

Meaning ▴ A Financial Institution is an entity that provides financial services, encompassing functions such as deposit-taking, lending, investment management, and currency exchange. </a><a href="https://prime.greeks.live/area/merit-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Merit Management

Meaning ▴ Merit Management refers to a system for evaluating and compensating individuals or teams based on their performance, contributions, and value delivered. </a><a href="https://prime.greeks.live/area/agency-relationship/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Agency Relationship

Meaning ▴ An Agency Relationship defines a formal arrangement where one entity, the agent, acts on behalf of another, the principal, exercising delegated authority within specified parameters. </a><a href="https://prime.greeks.live/area/securities-contract/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Securities Contract

Meaning ▴ A Securities Contract is a legal agreement governing the terms and conditions of a transaction involving a security, which represents an ownership interest, a debt relationship, or a right to acquire ownership. </a><a href="https://prime.greeks.live/area/safe-harbor/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Safe Harbor

Meaning ▴ A Safe Harbor, in the context of crypto institutional investing and broader financial regulation, designates a specific provision within a law or regulation that protects an entity from legal or regulatory liability under explicit, predefined conditions. </a><a href="https://prime.greeks.live/area/customer-defense/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Customer Defense

Meaning ▴ Customer defense, within the context of crypto financial systems, refers to the systematic measures and protocols implemented by service providers to safeguard client interests, assets, and data against operational failures, cyber threats, market manipulation, or unfair practices. </a><a href="https://prime.greeks.live/area/fiduciary-duty/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Fiduciary Duty

Meaning ▴ Fiduciary Duty is a legal and ethical obligation requiring an individual or entity, the fiduciary, to act solely in the best interests of another party, the beneficiary, with utmost loyalty and care. </a><a href="https://prime.greeks.live/area/leveraged-buyout/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Leveraged Buyout

Meaning ▴ A corporate acquisition strategy where a company is purchased primarily with borrowed funds, using the assets of the acquired company as collateral for the loans. </a><a href="https://prime.greeks.live/area/tribune-ii/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Tribune Ii

Meaning ▴ The term "Tribune II" is not a universally recognized technical or financial concept within the domains of crypto, crypto investing, RFQ crypto, broader crypto technology, institutional options trading, or smart trading. </a>

**Tags:** [Customer Defense](https://options.greeks.live/area/customer-defense/), [Settlement Payment](https://options.greeks.live/area/settlement-payment/), [Financial Institution](https://options.greeks.live/area/financial-institution/), [Section 546(E)](https://options.greeks.live/area/section-546e/), [Merit Management](https://options.greeks.live/area/merit-management/), [Safe Harbor](https://options.greeks.live/area/safe-harbor/)	

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Front-running illegally exploits client information for profit; legal hedging manages risk to provide clients with better pricing.

- 
### [What Are the Primary Conflicts of Interest a Hedge Fund Board Must Actively Manage and Mitigate?](https://options.greeks.live/question/what-are-the-primary-conflicts-of-interest-a-hedge-fund-board-must-actively-manage-and-mitigate/)
![A precision mechanism, symbolizing an algorithmic trading engine, centrally mounted on a market microstructure surface. Lens-like features represent liquidity pools and an intelligence layer for pre-trade analytics, enabling high-fidelity execution of institutional grade digital asset derivatives via RFQ protocols within a Principal's operational framework.](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-microstructure.jpg)

A hedge fund board's primary role is the active management of inherent structural conflicts to ensure fiduciary alignment and protect investor capital.

- 
### [What Are the Primary Conflicts of Interest That a Best Execution Committee Must Actively Manage and Mitigate?](https://options.greeks.live/question/what-are-the-primary-conflicts-of-interest-that-a-best-execution-committee-must-actively-manage-and-mitigate/)
![A sleek, institutional-grade system processes a dynamic stream of market microstructure data, projecting a high-fidelity execution pathway for digital asset derivatives. This represents a private quotation RFQ protocol, optimizing price discovery and capital efficiency through an intelligence layer.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-rfq-digital-asset-derivatives-execution-microstructure-prime-os.jpg)

A Best Execution Committee's primary function is to architect and enforce an operational framework that neutralizes systemic conflicts of interest.

- 
### [What Are the Primary SEC Concerns regarding Block Trade Pre-Hedging Activities?](https://options.greeks.live/question/what-are-the-primary-sec-concerns-regarding-block-trade-pre-hedging-activities/)
![A central, symmetrical, multi-faceted mechanism with four radiating arms, crafted from polished metallic and translucent blue-green components, represents an institutional-grade RFQ protocol engine. Its intricate design signifies multi-leg spread algorithmic execution for liquidity aggregation, ensuring atomic settlement within crypto derivatives OS market microstructure for prime brokerage clients.](https://options.greeks.live/wp-content/uploads/2025/07/precision-rfq-engine-for-crypto-derivatives-liquidity-aggregation.jpg)

The SEC's primary concern is preventing the use of non-public block trade information for manipulative pre-positioning and front-running.

- 
### [How Does Payment for Order Flow Influence a Committee’s Best Execution Analysis?](https://options.greeks.live/question/how-does-payment-for-order-flow-influence-a-committees-best-execution-analysis/)
![Abstract geometric forms, including overlapping planes and central spherical nodes, visually represent a sophisticated institutional digital asset derivatives trading ecosystem. It depicts complex multi-leg spread execution, dynamic RFQ protocol liquidity aggregation, and high-fidelity algorithmic trading within a Prime RFQ framework, ensuring optimal price discovery and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-liquidity-aggregation-market-microstructure-high-fidelity-execution-alpha-generation-prime-os-capital-efficiency.jpg)

Payment for order flow requires a best execution committee to shift from verifying compliance to forensically investigating potential conflicts.

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---

**Original URL:** https://options.greeks.live/question/what-constitutes-a-true-agency-relationship-for-the-section-546e-customer-defense/
