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VOLUME 128 NUMBER 8 SEPTEMBER 2011
HEADNOTE: LESSONS LEARNED
Steven A. Meyerowitz 673
A LOOK BACK ON TWO YEARS OF FDIC-ASSISTED PRIVATE EQUITY DEALS: THE TOP 10 LESSONS
Paul L. Lee, Satish M. Kini, Gregory J. Lyons, David A. Luigs, and Pratin Vallabhaneni 675
FRAUDULENT CONVEYANCES AND THE BANKRUPTCY CODE’S BLACK BOX: HOW CAN LENDERS ESTABLISH “VALUE” UNDER SECTION 548?
Thomas J. Hall and Keith Levenberg 689
DEATH OF THE AMERICAN DREAM: FOCUS ON QRM
Richard J. Andreano, Jr. 714
ENFORCEABILITY OF CLASS ACTION WAIVER PROVISIONS IN COMMERCIAL CONTRACTS
John K. Gisleson 726
WHAT’S IN A NAME? PROPOSED AMENDMENTS TO ARTICLE 9 OF THE UNIFORM COMMERCIAL CODE
Roshelle A. Nagar and Suhan Shim 733
CALIFORNIA’S APPELLATE COURTS ISSUE FURTHER DECISIONS REGARDING COLLECTING AND USE OF CONSUMERS’ ZIP CODES AND OTHER INFORMATION
Carter W. Ott and Alec Cierny 740
TURNING A “BLIND EYE” EXPOSES LENDER TO HUGE DAMAGE AWARD
Mark Pfeiffer 746
WHEN A PRINCIPLE BECOMES LAW: WHY THE RECENT PPI JUDGMENT SHOULD BE HEEDED BY ALL REGULATED ENTITIES AND NOT JUST THE BANKS
Peter Gray and George Belcher 750
OCC MOVES TO IMPLEMENT DODD-FRANK ACT PREEMPTION PROVISIONS
James A. Huizinga, David E. Teitelbaum, and John Van de Weert, Jr. 755 OCC RELEASES PROPOSED RULES REGARDING RETAIL FOREX
TRANSACTIONS
Mark D. Young, William J. Sweet, Jr., Heather Cruz, Brian D. Christiansen, and
Steven A. Meyerowitz President, Meyerowitz Communications Inc.
BOARD OF EDITORS Paul Barron
Professor of Law
Tulane Univ. School of Law
George Brandon
Partner, Squire, Sanders & Dempsey LLP
Barkley Clark
Partner, Stinson Morrison Hecker LLP
John F. Dolan Professor of Law
Wayne State Univ. Law School
Stephanie E. Kalahurka Hunton & Williams, LLP
Thomas J. Hall
Partner, Chadbourne & Parke LLP
Michael Hogan
Ashelford Management Serv. Ltd.
Mark Alan Kantor Washington, D.C.
Satish M. Kini
Partner, Debevoise & Plimpton LLP
Douglas Landy
Partner, Allen & Overy LLP
Paul L. Lee
Partner, Debevoise & Plimpton LLP
Jonathan R. Macey Professor of Law Yale Law School
Martin Mayer The Brookings Institution
Julia B. Strickland
Partner, Stroock & Stroock & Lavan LLP
Heath P. Tarbert
Senior Counsel, Weil, Gotshal & Manges LLP
Marshall E. Tracht Professor of Law New York Law School
Stephen B. Weissman Partner, Rivkin Radler LLP
Elizabeth C. Yen Partner, Hudson Cook, LLP
Bankruptcy for Bankers Howard Seife
Partner, Chadbourne & Parke LLP
Regional Banking Outlook James F. Bauerle
Keevican Weiss Bauerle & Hirsch LLC
Recapitalizations Christopher J. Zinski Partner, Schiff Hardin LLP
Banking Briefs Donald R. Cassling Partner, Quarles & Brady LLP
Intellectual Property Stephen T. Schreiner Partner, Goodwin Procter LLP
The Banking Law JournaL (ISSN 0005 5506) (USPS 003-160) is published ten times a year by A.S. Pratt & Sons,
805 Fifteenth Street, NW., Third Floor, Washington, DC 20005-2207. Periodicals Postage Paid at Washington, D.C., and at additional mailing offices. Copyright © 2011 THOMPSON MEDIA GROUP LLC. All rights reserved. No part of this journal may be reproduced in any form — by microfilm, xerography, or otherwise — or incorporated into any information retrieval system without the written permission of the copyright owner. Requests to repro-duce material contained in this publication should be addressed to A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC 20005-2207, fax: 703-528-1736. For subscription information and customer service, call 1-800-572-2797. Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, smeyerow@optonline. net, 631.331.3908 (phone) / 631.331.3664 (fax). Material for publication is welcomed — articles, decisions, or other items of interest to bankers, officers of financial institutions, and their attorneys. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher.
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THOMAS J. HALL AND KEITH LEVENBERG
The authors discuss a definitional gap in the Bankruptcy Code that can result in a court’s failure to cognize a wide array of economic benefits that would other-wise protect a transaction from avoidance as a fraudulent conveyance, and the ways in which case law has evolved to afford robust defenses to lenders forced to
litigate claims in which lending transactions are vulnerable to such attacks.
O
scar Wilde famously defined a cynic as “[a] man who knows the price of everything and the value of nothing.”1 The U.S.Bank-ruptcy Code punishes that sort of cynicism by providing for the avoidance of transfers made or obligations incurred by an insolvent or un-dercapitalized entity if it can be shown to have received “less than reasonably equivalent value” in exchange — a so-called constructive fraudulent convey-ance.2 To avoid the risk of an obligation being later set aside if the entity
winds up in bankruptcy, the obligee must satisfy itself that the entity is in sound financial condition at the time of the transaction or will receive ben-efits “reasonably equivalent [in] value” to the obligations it undertakes.
A lending institution’s due diligence typically focuses on the former com-ponent, since lenders presume (quite understandably) that the money they provide to the obligor is, by definition, reasonably equivalent in value to the
Thomas J. Hall is a litigation partner and Keith Levenberg is a litigation associate with the New York office of Chadbourne & Parke LLP. The authors can be reached at [email protected] and [email protected], respectively.
obligation to repay that money. There are a number of scenarios, however, in which lenders may be unable to rely on the value of loan proceeds themselves to establish reasonably equivalent value. These scenarios impose a risk on lenders that a bankruptcy court acting with the luxury of hindsight will set aside bona fide repayment obligations upon finding that the value of a financ-ing to a debtor fell unacceptably short of its price. That risk is exacerbated by a definitional gap in the Bankruptcy Code which can lead a court to construe the term “value” in a highly restrictive manner that fails to cognize a wide array of economic benefits that a lender would otherwise point to in putting forth evidence of reasonably equivalent value.3
This article discusses the doctrines that have evolved under Bankruptcy Code case law in two directions — on the one hand, empowering courts to set aside a wider variety of transactions for lack of reasonably equivalent value, but on the other hand, affording lenders increasingly robust defenses with which to oppose such claims.
BASIC TWO-PARTY LENDING AGREEMENTS
In the basic situation where a lender extends financing to a single ob-ligor for general working capital, the lender usually has a strong argument that the loan proceeds themselves are reasonably equivalent in value to the repayment obligation incurred. Even though the total value of the latter will include interest due on the loan and perhaps the reimbursement of the lender’s expenses, the law is clear that “the concept of ‘reasonably equivalent value’ does not demand a precise dollar-for-dollar exchange.”4 Since “[t]he
‘essential examination’” in measuring value “is a comparison of ‘what went out’ with ‘what was received,’”5 a lender in that situation can simply point to
the loan proceeds as “what was received” in making its showing of reasonably equivalent value from the loan transaction. Relatedly, it is a well-established principle that the mere access to credit qualifies as value because the “the abil-ity to borrow money has considerable value in the commercial world.”6 If the
ability to borrow money, standing alone, has considerable value, it stands to
reason that loan proceeds actually received have a value at least as concrete. More complex lending transactions may have features that make the ap-plication of such arguments in the value analysis problematic. Below we
discuss several common configurations in which a more complex value argu-ment becomes necessary, and address the legal doctrines that afford a reason-ably equivalent value defense to lenders forced to litigate claims arising from those situations.
LOANS SUPPORTED BY INTERCORPORATE GUARANTIES
Upstream guaranties and downstream guaranties are common features of modern financing transactions. In the former situation, the lender ex-tends credit to a parent corporation whose principal assets are the equity in its subsidiaries (perhaps worthless in the event of a bankruptcy), and which consequently must rely on guaranties and/or collateral pledges by the subsid-iaries to secure the repayment obligations. Downstream guaranties work in the other direction, with the parent corporation guaranteeing the obligations of its subsidiaries.
In general,7 upstream guaranties can be the most vulnerable to
fraudu-lent conveyance attack because the pertinent conveyance — the subsidiary’s guaranty obligation, often secured by the subsidiary’s pledge of its collateral as security — is made by an entity that is not itself a direct recipient of the loan proceeds. Lenders therefore may not be able to demonstrate a direct benefit to the subsidiaries arising from such a transaction, insofar as “value” arises from a borrower’s receipt of loan proceeds. Yet courts recognize that intercorporate guaranties are a reality of “contemporary financing practices, which recognize that cross-guarantees are often needed because of the un-equal abilities of interrelated corporate entities to collateralize loans.”8 To
reconcile these positions, the doctrine of “indirect benefits” has evolved to give the courts a mechanism for estimating the value received in exchange for the guaranty of a parent or affiliate’s debt.
The concept of indirect benefits originated in the 1981 case of Rubin v.
Manufacturers Hanover Trust Co.,9 in which the Second Circuit Court of
Ap-peals acknowledged that “[t]hree-sided transactions such as [the upstream guar-anties] at issue here present special difficulties under the [Bankruptcy Act’s] definition of fair consideration,” the predecessor Act’s analogue to “reasonably equivalent value” under the current Code.10 The court acknowledged the
‘fair’ consideration,” but pointed out that a “transaction’s benefit to the debtor need not be direct; it may come indirectly through benefit to a third person.”11
The classic example of such an indirect benefit is where “the consideration given to the third person has ultimately landed in the debtor’s hands, or if the giving of the consideration to the third person otherwise confers an economic benefit upon the debtor.”12 In such cases, “the debtor’s net worth has been preserved,”
and the requirement of fair consideration “has been satisfied — provided, of course, that the value of the benefit received by the debtor approximates the value of the property or obligation he has given up.”13
This rule saw further refinement in the 1982 case of Garrett v. Falkner (In
re Royal Crown Bottlers of North Alabama, Inc.),14 which established “identity of
interests” as the criterion for determining when a benefit to one party indirectly benefits another. In that case, the bankruptcy trustee brought a fraudulent conveyance claim under Section 548 arising from a transaction in which the debtor, a wholly owned subsidiary of Royal Crown Bottling Co. of Boaz, Inc. (the latter referred to in the opinion as “R-C Boaz”), paid $35,000 in satis-faction of an obligation of its parent.15 The trustee maintained “that all the
consideration from the defendant in this transaction passed to R-C Boaz, none passed to the debtor, and, therefore, the transfer of the $35,000 by the debtor to the defendant could not have been for a ‘reasonably equivalent value,’ received by the debtor.”16 The bankruptcy court rejected that argument, reasoning that
“[t]his conclusion omits any consideration of the fact that to some extent these two corporations shared an ‘identity of interests.’”17 Citing Rubin, the court
acknowledged the “general rule” that “an insolvent debtor receives ‘less than a reasonably equivalent value’ where it transfers its property in exchange for a consideration which passes to a third party,” but stated:
A clear distinction from this rule exists, however, if the debtor and the third party are so related or situated that they share an “identity of inter-ests,” because what benefits one will, in such case, benefit the other to some degree. The ultimate question then becomes one of determining the value of this vicarious benefit and testing it by the measure of “reason-ably equivalent” for the property transferred by the insolvent debtor.18
Royal Crown did, however, introduce a significant obstacle to any party
in arguing that the subsidiary receives value in the form of indirect benefits from satisfying (or guaranteeing) its parent’s debt. The court stated:
When the consideration for a transfer passes to the parent corporation of a debtor-subsidiary making the transfer, as in the case here, the benefit to the debtor may be presumed to be nominal, in the absence of proof of a specific benefit to it. On the other hand, the passing to a subsidiary of the consideration for a transfer by a debtor-parent may be presumed to be substantial, because the subsidiary corporation is an asset of the par-ent corporation, and what benefits the asset will ordinarily accrue to the benefit of its owner.
In other words, the court presumed that reasonably equivalent value aris-ing from an “identity of interests” would be easy to prove with respect to
downstream guarantees, but more difficult to establish in a case involving up-stream guaranties.19
This difficulty seems to arise from an overly literal interpretation of the Bankruptcy Code’s definition of “value,” which subsequent cases have gone a long way towards correcting. Section 548 defines value to mean “property, or satisfaction or securing of a present or antecedent debt of the debtor.”20 Since
the debt of a third party (even one’s own corporate parent) is not a debt “of the debtor,” an indirect benefit must fall under the other category — “prop-erty” — to qualify as “value” within the meaning of Section 548. But the term “property” is not a defined term in the Bankruptcy Code.21 It functions
rather like a black box: A court could import a broad definition of “property” that “extend[s] to every species of valuable right and interest”22 — indeed,
“anything of value”23 — or a narrow definition that covers only things which
are “the subject of ownership” and “guaranteed and protected by the govern-ment.”24
In a Cardozo Law Review article, Professor Jack F. Williams discussed the case of Hall v. Arthur Young & Co. (In re Computer Universe, Inc.),25 as an
example of a court’s relying on such a narrow construction of Section 548(d) (2)(A).26 In that case, debtor Computer Universe had transferred $38,000
worth of computer equipment to Arthur Young to satisfy a debt of its cor-porate parent, Industrial America Corporation.27 The court held that “the
debtor did not receive property in exchange for the transfer” because “im-mediately prior to the transfer the debtor was insolvent and had $39,000 worth of computer equipment; immediately after the transfer the debtor was still insolvent and had $38,000 less equipment.”28 The court opined that
“in order for a satisfaction or security to constitute ‘value,’ it must enhance the financial position of the debtor,” by which it presumably meant that it must be reflected as some kind of an asset on the debtor’s balance sheet.29 (In
a similarly reasoned case, a bankruptcy court found that a series of claimed indirect benefits were not cognizable as value for fraudulent-transfer purpos-es because they did not “rpurpos-esult[] in value received for the debtors’ balance sheets as assets to reasonably offset the…guaranty liability.”30) Prof. Williams
criticized these “literal[]” readings of Section 548(d)(2)(A) and commented: “This analysis is brittle, having been chipped away or entirely discarded in re-cent cases.”31 “The weight of recent authority,” Prof. Williams proceeded to
note, “acknowledges that indirect benefits received by a debtor for guarantee-ing the payment of a third party’s debt may constitute a reasonably equivalent value.”32 Two important precedents responsible for this trend are Telefest, Inc.
v. VU-TV, Inc.33 and In re Xonics Photochemical, Inc.34
Telefest involved a security agreement executed by VU-TV, a wholly
owned subsidiary of CATV Products, Inc., in which VU-TV agreed to guar-antee and collateralize a loan to the parent.35 A later-priority creditor argued
that the security agreement was avoidable under New Jersey’s fraudulent-transfer statute (which is construed as substantially the same as Section 548 of the Bankruptcy Code). In finding that VU-TV received fair consideration in exchange for its secured obligations, the court cited Royal Crown’s “iden-tity of interests” principle and found that “a benefit would flow to VU-TV through the loans…ultimately guaranteed by VU-TV.”36 The court endorsed
the general principle that a guarantor can receive value from “‘the guaranty of a loan to a third party…whose continued health and existence is vitally important to the guarantor’” and proceeded to acknowledge some specific benefits flowing to VU-TV.37 For one, the court noted that “[m]onies loaned
to VU-TV’s parent to purchase a cable television system or for other moves directed toward expansion would most probably provide an additional and obviously secure market for VU-TV,” a “specific enough benefit” on which to find that “fair consideration inhered in the conveyance.”38 The court quoted
a journal article citing improvements in “a corporation’s public image” as another type of benefit that gives indirect value to an affiliated guarantor.39
Neither of these benefits is of the sort that would give rise to an asset on the subsidiary’s balance sheet, but Telefest recognized them as value nevertheless and explicitly rejected “the notion that a benefit accrues to a subsidiary only when there is a direct flow of capital to that entity.”40
Next, Judge Posner’s opinion in Xonics involved a cross-stream guarantee in which Xonics Photochemical and other subsidiaries of Xonics, Inc. had guaranteed and pledged security to secure a loan to its sister company, Xonics Medical Systems.41 The value of the guarantees and the collateral was
consid-erably less than the $28 million owed on the loan, so Xonics Medical Systems’ default sent the entire enterprise into bankruptcy.42 Thereafter, Xonics
Pho-tochemical brought an adversary proceeding to recover certain payments it had made to a chemical supplier, Mitsui & Co., as preferential.43 Mitsui’s
de-fense to the claim was that the guaranty obligations and collateral pledges that had rendered Xonics Photochemical insolvent were voidable as fraudulent transfers under Illinois state law and Section 548 of the Bankruptcy Code,44
negating an essential element of the preference claim.45 Citing Telefest, the
court stated that “a guarantee of an affiliate’s debt is enforceable provided that the guarantor derives some benefit, even if indirect, from the guarantee.”46 In
affirming the finding that Xonics Photochemical received such a benefit, the court reasoned: “Although the primary benefit of the loan accrued to the bor-rower, Xonics Medical Systems, that company’s fortunes were entwined with those of Xonics Photochemical because the smaller company used its larger affiliate’s distribution system to distribute its own products.”47
Judge Posner’s resolution of this issue merits particular note because it eliminates a significant obstacle to prevailing on an indirect-benefits defense: Even where indirect benefits such as the opportunity to expand into a new market or improve a corporation’s public image are cognizable as “value” (as in Telefest), a lender may have trouble quantifying the value of such benefits in an amount “reasonably equivalent” to the value of a multi-million-dollar guaranty or collateral pledge. In Xonics, Judge Posner pointed out that a guar-anty is a “contingent liability,” and to value such a liability “it is necessary to discount it by the probability that the contingency will occur and the liability become real.”48 Thus, at the time of the transfer — the moment at which the
inquiry into reasonably equivalent value must be focused — guaranteeing a $28 million loan obligation did not cost Xonics Photochemical $28 million in value, and would not require the lender to prove that Xonics Photochemi-cal got value reasonably equivalent to $28 million in exchange. The court in
Xonics affirmed the finding that Xonics Photochemical received reasonably
equivalent value even though “the benefit may not have been great,” because “neither was the cost. Xonics Photochemical was not paying any interest on the loan; it was just a guarantor, and all concerned assumed that the loan would be duly repaid and no guarantor would be out of pocket.”49 The fact
that Xonics Photochemical eventually did find itself liable under the guaranty is not relevant to determining what the likelihood of that event was at the time of the transfer.50
The important notion at the core of these cases is that the indirect ben-efits they recognize would likely not qualify as “property” under the stricter definitions of the term, if “property” is construed to mean an asset that can appear on a company’s balance-sheet. Indeed, the Eighth Circuit has clarified that indirect benefits are not limited to “legal or equitable rights or ownership interest” and that “value” therefore should not be defined “only in terms of tangible property or marketable financial value.”51 Examples of intangible
indirect benefits abound. One court cited the “increased ability to borrow working capital; the general relationship between affiliates or ‘synergy’ within a corporate group as a whole; and a corporation’s ability to retain an impor-tant source of supply or an imporimpor-tant customer” as “indirect benefits” that may “constitute ‘value’” within the meaning of Section 548.52 This recalls
Telefest’s finding that the opportunity to expand to a new market is a “specific
enough benefit” to constitute value.53 Similarly, a court has held that “a
sub-sidiary which guaranties a parent’s debt may benefit indirectly by securing a future sale, or by improving its public image through consummating a large transaction.”54 The “intangible benefits of maintaining [the] Parent’s
finan-cial strength” are another kind of benefit that has been cited as contributing to the value a subsidiary receives from an upstream guaranty.55 None of these
are assets that appear on a company’s balance sheet, nor are they “property” in the sense of a legal “ownership interest.” Nevertheless, these things are cog-nizable as “value” for purposes of Section 548. As a leading treatise counsels, “[t]he courts have made clear that value also includes other kinds of
intan-gible consideration that economically benefits the debtor without returning a leviable asset to [its] estate.”56
The concept of “economic[] benefits” is the key point that effectively undermines any suggestion that cognizing such indirect benefits as “value” somehow represents a departure from the literal statutory language of Sec-tion 548(d)(2)(A). As noted, the term “property” is undefined in the Code and has a wide range of legal meanings. Yet even if it is construed narrowly to refer to assets, money is the most basic asset of all. Thus, any benefit that has “economic value” to the debtor should qualify, because “economic value” connotes monetary value, even if it is not immediately actualized.57 It is
self-evident that even the prospect of reaping monetary value is itself a thing of monetary value.58 Indeed, a landmark Third Circuit case stands for the
proposition that “potential, intangible benefits” should be deemed to have “conferred value on [the debtor] despite their failure to materialize.”59 In
support of that principle, the Third Circuit cited a Fifth Circuit precedent rejecting the argument that “the only value that can be considered is property actually received” and finding that “[t]he narrow ‘realized property’ approach to value…finds no approbation in the law.”60
It is notable that the most prominent line of cases in which courts have found that the claimed benefits do not qualify as “value” is where the transfer-ee claims such amorphous, non-economic benefits as “spiritual fulfillment,” “love and affection,” or “the preservation of [a] family relationship.”61 In
such cases, the benefits have been held insufficient precisely because they are non-economic in nature, since non-economic benefits to the debtor “are not likely to be of much benefit to creditors.”62 The reasoning of those cases has
accordingly proven impossible to port over to cases involving financial and commercial benefits.63 In commercial cases, the approach consistent with
the statutory language and well-established purpose of the Bankruptcy Code is not to dwell on whether a claimed benefit accords with one or another arbitrarily chosen definition of the word “property,” but merely to inquire whether the benefit — at the time the transaction is consummated — is of a sort that stands to benefit creditors. If so, it is “property” in at least one literal sense of the term (“anything of value”64) and should qualify as “value” under
Section 548(d)(2)(A).
“identi-ty of interest” doctrines over three decades, lenders relying on upstream guar-anties may still find themselves wading in uncertain waters. Before its recent reversal on appeal to the district court,65 a decision of the U.S. Bankruptcy
Court for the Southern District of Florida in Official Committee of Unsecured
Creditors of TOUSA, Inc. v. Citigroup North America, Inc. sent shockwaves
through the commercial lending community by voiding hundreds of mil-lions of dollars’ worth of cross-guaranteed loan obligations and lien transfers upon finding that the value of the loans to the borrowers was essentially nil.66
In that case, the subsidiaries of a homebuilding enterprise pledged collateral to secure $500 million in term loans used (i) to settle litigation against their parent company arising from an alleged default under an earlier credit facility on which the subsidiaries were not directly liable and (ii) to acquire the assets of a joint venture in which the parent had invested. Relying on Telefest and like cases, the lenders argued that the intertwined relationship among all the entities in the corporate enterprise resulted in the subsidiaries’ receiving nu-merous indirect benefits from their loan guarantees, such as continued access to centralized services and cash flow and the elimination of a risk of default under their collective bond financing (as discussed in further detail below).67
The bankruptcy court held that none of those benefits were cognizable for purposes of assessing “value,” taking direct aim at the entire body of law concerning indirect benefits:
Section 548 does not refer to “benefits,” whether direct or indirect. It requires reasonably equivalent “value” and includes a precise definition of “value” that encompasses only “property” and “satisfaction or securing of a present or antecedent debt of the debtor.”68
The problem with this analysis, as explained above, is that the purportedly “precise” definition of “value” does not incorporate any definition of its key component term “property.” The absence of a statutory definition of “prop-erty” opened the door for the TOUSA bankruptcy court to endorse a highly restrictive definition of “property” proffered by the plaintiff, based on a
Web-ster’s Dictionary entry, as “something…in which or to which a person has a
right protected by law.”69 Given such a narrow definition of “property,” the
ben-efits in exchange for the value they gave up”70 because the asserted benefits
“are not ‘property.’”71
On appeal, the district court characterized the bankruptcy court’s reli-ance “on the definition of property in Webster’s Dictionary” without citation to any case law as a “compelling legal error.”72 The court observed that both
the legislative history of the Bankruptcy Code and governing case law favored a more inclusive definition:
[I]t is not a dictionary definition that controls. Rather, Congress has left it to the courts to determine the scope and meaning of “reasonably equiv-alent value.” … In addition, the Bankruptcy Court’s narrow dictionary definition of property is contrary to the meaning of the term in the Bank-ruptcy Code. The legislative history for the BankBank-ruptcy Reform Act of 1978 provides that “although ‘property’ is not construed in [Section 102 of the Code], it is used consistently throughout the Code in its broadest
sense, including cash, all interests in property, such as liens, and every kind of consideration….” The Bankruptcy Court’s narrow definition of “value”
also purports to exclude “economic benefits” from being considered…. While Section 548 does not use the word “benefits,” that does not mean that “economic benefits” may not be considered in determining whether the debtor received “value” in a complicated, multiple-party transaction. This conclusion is directly supported by the Eleventh Circuit’s clear pro-nouncement, in In re Duque Rodriguez, that Section 548(a)(2) “does not authorize voiding a transfer which confers an economic benefit upon the
debtor, either directly or indirectly.”73
This analysis is consistent with the case law discussed above identifying “eco-nomic value” as the key factor distinguishing benefits cognizable as value from benefits that do not qualify because they cannot redound to creditors.74
By including within the scope of “value” anything that confers a direct or indirect economic benefit on the debtor, the district court’s resolution of this threshold definitional question resulted in the court’s cognizing as value a number of economic benefits that had been discounted by the bankruptcy court.75 Foremost among those benefits was the elimination of the risk of
would have resulted from any judgment against the company in excess of $10 million. Such defaults would have resulted in the acceleration of over $1 bil-lion in debt for which the subsidiaries were jointly and severally liable (and the enterprise’s probable bankruptcy).76 In holding that the subsidiaries received
value by eliminating that risk, the district court relied on a Southern District of New York precedent holding that the opportunity “to avoid default and bank-ruptcy,” even if “this ‘breathing room’ may have ultimately proved to be short-lived,” can amount to reasonably equivalent value.”77 The court added:
[T]his is exactly the kind of case, as supported by applicable case law, that shows that a debtor’s opportunity to avoid default, to facilitate its rehabilitation, and to improve its prospects of avoiding bankruptcy are precisely the kind of benefits that, by definition, are not susceptible to exact quantification but are nonetheless legally cognizable under Section 548. Inherently, these benefits have immense economic value that ensure the debtor’s net worth has been preserved, and, based on the entirety of this record, were not disproportionate between what was given up and what was received.78
The court also found value in the acquisitions component of the challenged transaction, which resulted in the addition of significant real-estate assets to the enterprise and a consequent $150 million increase in the credit limit of the revolving credit line accessible by all of the subsidiaries.79 The court
deemed the credit-limit increase “especially valuable to the…[s]ubsidiaries because they relied so heavily on the Revolver and could not have obtained independent financing.”80 This reasoning accords with the well-established
principle discussed above that value inheres in the mere access to credit and the ability to borrow money.81
While a pending appeal to the Eleventh Circuit means that the district court is unlikely to have the last word on these issues, its analysis may still serve as an important precedent inasmuch as it appears to be the first instance in which a court explicitly recognizes the definitional gap in the Bankruptcy Code and attempts by reference to case law to deconstruct the workings of the “value” black box.
INTEGRATED TRANSACTIONS AND DESIGNATED-USE LOANS
The typical intercorporate-guarantee case presents risks from a fraudulent-conveyance perspective because the guarantors become liable for repayment of a loan without necessarily receiving direct value as recipients of the loan, and the indirect benefits and identity of interest doctrines seem to have evolved to reconcile those risks to the realities of commercial lending. But even transac-tions where the lender gives value directly to the obligor in the form of the loan proceeds present fraudulent conveyance risks of another type.
Many credit facilities are designated for general working capital and do not contain significant restrictions on the borrowers’ use of the loan pro-ceeds. In such cases, it is easy to establish a borrower’s control over the loan proceeds for purposes of satisfying the “dominion” or “control” tests which determine whether the borrower had a property interest in the funds. These tests focus on whether the borrower had “the right to put the money to one’s own purposes”82 or “the ability to use [the money] as he sees fit.”83 Once the
test is satisfied, it follows automatically — or at least it should84 — that the
borrower received reasonably equivalent value.
In more complex transactions, however, loan proceeds may be contractu-ally designated for a specific purpose, leaving the borrower with little or no discretion after closing as to how the funds are used. In the TOUSA case, as noted, the loan proceeds were designated for financing a settlement and the acquisition of certain assets. The district court in the TOUSA case found that the debtors did not “exercise[] actual control” over the proceeds they borrowed for purposes of the control test because the lending instrument “specif[ied] that proceeds were to be used in satisfying the…[s]ettlement.”85
A more common example arises in the context of leveraged buyouts, where an acquisition target may borrow, secure, or make payments in satisfaction of a loan whose proceeds are designated for payouts to the selling shareholders. In such situations, the loan proceeds might pass through the borrower with-out ever giving the borrower sufficient control over the proceeds for a court to deem them “property” of the borrower under the dominion or control tests. If loan proceeds are never deemed “property” of the borrower, the party defending the transfer must point to something else to establish reasonably equivalent value from the transaction.
The doctrine that permits courts to ignore a borrower’s temporary inter-est in the loan proceeds in such transactions is based on the notion that the multiple steps amount to a “single integrated transaction” rather than a series of individual transactions. Once a court finds that it is appropriate to treat “a series of transactions” as a single integrated transaction, it may “collapse” each step and consider the result as one transaction.86 Thus, the doctrine is often
invoked “for purposes of demonstrating that the insolvent…company did not, in the aggregate, receive fair consideration or reasonably equivalent value for the transfer in question,” even though it might literally have received loan proceeds equivalent in value to the challenged transfer or obligation.87 In
determining whether the circumstances justifying the collapse of multiple transactions into a single integrated transaction are present, courts will con-sider (i) “the knowledge and intent of the parties involved in the transaction,” (ii) “whether there was an overall scheme to defraud creditors,” (iii) “whether all of the defendants were aware of the multiple steps of the transaction,” and (iv) “whether each step would have occurred on its own or, alternatively, whether each step depended upon the occurrence of the additional steps in order to fulfill the parties’ intent.”88 Not every factor need be present in every
case, which is a cause for concern given that the “scheme to defraud” factor is the only one that is not generally an inherent feature of lending transactions that contemplate the use of the proceeds for a particular purpose.
The case of Bay Plastics v. BT Commercial Corp. (In re Bay Plastics)89
pres-ents a straightforward example of the doctrine in operation. That case arose from a failed leveraged buyout pursuant to which BT “lent…$3.95 million to [Bay Plastics], [Bay Plastics] promised to repay the loan, and [Bay Plastics] gave a first priority security interest in essentially all of its assets to secure the repayment.”90 The court commented that if that were the extent of the
trans-action, “creditors likely would have no grounds for complaint, and it would not be vulnerable to fraudulent transfer attack.”91 The court proceeded to
note that “the foregoing structure obscures the reality of the transaction.”92
In fact, there was a second transaction in which Bay Plastics “directed that $3.5 million be transferred to its incoming parent, BPI, and BPI in turn di-rected that the funds be paid out for [a] stock purchase. Thus in substance $3.5 million of the funds that Bay Plastics borrowed from BT went to pay for the stock of the selling shareholders, rather than to Bay Plastics.”93 The
court collapsed the two stages into a single integrated transaction, the effect of which was to find that Bay Plastics received only $450,000 in value from the $3.95 million loan proceeds (i.e., “the $3.95 million loan less the $3.5 million paid to the selling shareholders”), which was “not reasonably equiva-lent to the $3.95 million obligation that it undertook.”94
The single integrated transaction doctrine originated as a remedy for failed leveraged buyouts, and courts have at times articulated reasons why it is inappropriate to deploy in other contexts.95 But in fact its application has not
been limited to leveraged buyouts, and courts have subjected other kinds of transactions to collapsing as well.96 The reversed TOUSA bankruptcy court
opinion, for example, included a finding that the “credit agreements were executed as part of a single integrated transaction.”97
The effect of collapsing transactions is to enable the court to deviate from the rule that value must be measured as of the time of the transfer and to determine that a debtor received less than reasonably equivalent value from a loan — notwithstanding its receipt of the loan proceeds — because of the use to which those loan proceeds subsequently were put. The consequences of this can be dramatic, since it can be said of any company in bankruptcy that its capital could have been more valuably put to other uses. As one bank-ruptcy court pointed out, “As a practical matter, in a bankbank-ruptcy context, we could rarely find that optimum use of borrowed funds had been made.”98
That case, Beemer v. Heller & Co. (In re Holly Hill Medical Center, Inc.), is no-table because even though it did not address an explicit collapsing argument, it supplies what might be the most compelling counterargument.
The lending transactions at issue in Holly Hill had at least four stages, but fundamentally they entailed simply substituting one lender for another. Originally, the debtor’s operations were financed by a $750,000 loan taken by an affiliate of the debtor from Heller & Co. (the debtor’s principal sharehold-er was also the principal shareholdsharehold-er of the affiliate).99 It was later determined
that “federal regulations” made this arrangement unfeasible, so transactions were engineered in which the debtor paid its affiliate $750,000 to repay the original Heller loan, and the affiliate took a new loan from a different lender, Atlantic Bank, which it promptly “loaned…back to the debtor.”100 (The
opinion does not explain why this arrangement was any more workable from a regulatory perspective than the previous arrangement, but there is no
sug-gestion of any deceit or corruption.) The debtor also paid Heller “all interest checks due under the terms of the loan.”101 The trustee brought an action
under Section 548 seeking to recover those interest payments, arguing that the debtor did not receive reasonably equivalent value from the transactions because they “put the debtor in the position of having to make double inter-est payments, i.e., to [Heller] and to Atlantic Bank for the same amount of money it had had access to prior to the transactions.”102
In finding against the trustee following trial, the court stated at the outset that “[t]he plaintiff does not suggest that, had the debtor been the borrower and the defendant the sole lender in a simple two-sided transaction, he as trustee would be able to recover any payments as fraudulent transfers — clearly the debtor would be deemed to have received reasonably equivalent value in the form of use of the money loaned it.”103 The question then became “whether
the interposition of the Atlantic Bank into the chain of borrowers and lenders transforms the value given by Heller from equivalent to non-equivalent” — in other words, whether the debtor’s subsequent use of the loan proceeds to repay the loan with interest and take out a new loan can negate the value delivered by the original loan.104 The court rejected this theory, holding that “the reasonably
equivalent value for the continuing interest payments was access to the money for whatever use the borrower chose to make on behalf of the debtor.”105 In so
holding, the court reasoned:
The criterion for whether a debtor received reasonably equivalent value cannot in any instance be whether the debtor used sound judgment in exploiting what it received to the best advantage. As a practical matter, in a bankruptcy context, we could rarely find that optimum use of bor-rowed funds had been made. Far more importantly, that approach is supported by neither logic nor fairness. The debtor received in the first instance $750,000 worth of potential benefit. Whether borrowed money is
used brilliantly or wasted by the recipient does not inflate or reduce its value from the lender’s standpoint….106
The same rationale can be cited whenever an argument alleging lack of reasonably equivalent value focuses on the use to which loan proceeds have been put. If courts begin collapsing transactions whenever they deem
bor-rowed funds to have been designated for improvident uses, the result is a
de facto rule “that only successful investments can confer value on a
debt-or.”107 Courts have gone to great lengths to avoid any such implication as
both unworkable from a policy perspective and unwarranted by the statutory language of the Bankruptcy Code.108 It is also unnecessary because, if loan
proceeds are wasted on an enterprise that fails to deliver reasonably equivalent value to the borrower, creditors can pursue claims for fraudulent conveyance against the ultimate recipient of those funds. There is thus no compelling need to fabricate an additional remedy against the lenders that supplied those funds and in so doing effectively make lenders the insurers of their clients’ business ventures.
That simply is not a role that lenders are historically equipped to fill. It may be reasonable to require lenders to perform due diligence into their borrowers’ solvency, because financial analysis is well within lenders’ business expertise, and they willingly accept the consequences of a potential default if it turns out they lent to an insolvent debtor. On the other hand, whether a particular use of funds is a wise one is a question within the industry-specific expertise of the borrower, not the lender. Imposing on lenders the obliga-tion to insure that the ventures they finance will ultimately deliver value to the borrowers will not result in materially greater protections for unsecured creditors; it will merely chill lending activity and, in any event, is a policy judgment best left to domains other than fraudulent transfer law. Indeed, imposing such an obligation on lenders does nothing to advance the underly-ing rationale for the law against fraudulent conveyances: to prevent a “calcu-lating debtor” from “placing his assets in friendly hands where he can reach them but his creditors cannot.”109
CONCLUSION
It is important for lenders to understand that the inquiry into reasonably equivalent value still leaves some discretion to the courts. As Prof. Williams observed in his Cardozo article, “fraudulent transfer law in the intercorporate guaranty situation has evolved from ‘rules’ to ‘standards’ in assessing wheth-er adequate value exists.”110 He proceeded to note optimistically that “[a]
broader range of beneficial, arm’s length guaranty transactions against fraudu-lent transfer attack.”111 But there are also cases in which lenders will find their
proverbial glass half-empty, as the same wider range of discretion gives the court leeway to void transactions that made perfect sense ex ante merely be-cause they did not deliver the hoped-for results ex post. Ultimately, if a court is determined to void a transaction, it can find a way to discount the benefits of the transaction.
Faced with that prospect, lenders simply must make the best possible case that they gave debtors value both directly (in the form of the loan proceeds with which they infused each borrower) and indirectly (in the form of all the economic benefits expected to flow therefrom, evaluated as of the time the loan was made). Lenders are also uniquely positioned to make appeals to bankruptcy courts in their capacity as courts of equity. A court unwinding a transaction has the discretion to order recovery from any defendant or “any combination” of defendants, “subject to the limitation of a single satisfac-tion.”112 While plaintiffs may consider lenders attractive targets on account
of their presumed deep pockets, a court applying principles of equity may deem the lender that put money into a company a less appropriate source of recovery than another party that took money out. If a court can embrace that principle, it may also find merit in the argument that there is an inher-ent “value” for the debtor in a lending transaction, and that such “value” is cognizable under Bankruptcy Code Section 548.
NOTES
1 Oscar Wilde, Lady Windermere’s Fan, Act 3 (1892).
2 11 U.S.C. § 548(a)(1)(B). State fraudulent-transfer statutes, modeled on either the
Uniform Fraudulent Transfer Act (“UFTA”) or the Uniform Fraudulent Conveyance Act (“UFCA”), provide for substantially the same thing. See, e.g., UFTA § 4(a)(2).
3 See 11 U.S.C. § 548(d)(2)(A) (providing, in pertinent part, that “‘value’ means
property, or satisfaction or securing of a present or antecedent debt of the debtor”).
4 Advanced Telecomm. Network, Inc. v. Allen (In re Advanced Telecomm. Network,
Inc.), 490 F.3d 1325, 1336 (11th Cir. 2007).
5 Menchise v. Clark (In re Dealers Agency Serv., Inc.), 380 B.R. 608, 619 (Bankr.
M.D. Fla. 2007).
see also, e.g., Collegeville/Imagineering, L.P. v. L.J. Liff & Assocs. (In re Collegeville/ Imagineering, L.P.), No. 97-0413 et al., 1999 U.S. Dist. Lexis 23622, *23-24 (D. Del.
Oct. 5, 1999) (debtor received reasonably equivalent value from transaction in which it “received the ability to borrow $12 million” under a line of credit) (citing Mellon
Bank), 945 F.2d at 647; MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Serv. Co., 910 F. Supp. 913, 937 (S.D.N.Y. 1995) (finding that “the availability of
additional credit to the company after the transaction may be consideration” for purposes of state fraudulent transfer statute).
7 But not always. See In re First RepublicBank Corp., Nos. 388-34546, 388-34547,
1990 Bankr. LEXIS 2840 (N.D. Tex. June 19, 1990) (holding that a parent received less than reasonably equivalent value for a downstream guaranty).
8 Telefest, Inc. v. VU-TV, Inc., 591 F. Supp. 1368, 1379 (D.N.J. 1984).
9 661 F.2d 979 (2d Cir. 1981). In a previous article in the Banking Law Journal, we
submitted that another component of Rubin, on the question of when an obligation is incurred for purposes of the fraudulent-conveyance statute, is no longer good law.
See Thomas J. Hall & Keith Levenberg, Revolving Credits as Fraudulent Conveyances: Is Rubin v. Manufacturers Hanover Trust Company Still Good Law?, 126 Banking L.J.
354 (Apr. 2009). But Rubin’s holding on the separate issue of fair consideration remains good law and accounts, as we pointed out, for nearly all the positive citing references Rubin has garnered in subsequent case law. See id. at 358 (noting that “scores of decisions have relied on the Second Circuit’s holding with respect to the separate issue of…fair consideration,” but that “[f ]ew…have chosen to follow Rubin for its more troubling holding that a debtor’s obligation under a line of credit is incurred at the time of the draw”).
10 661 F.2d at 991. 11 Id. 12 Id. 13 Id. at 991-92. 14 23 B.R. 28 (Bankr. N.D. Ala. 1982). 15 Id. at 29. 16 Id. at 30. 17 Id. 18 Id. 19 Id. 20 11 U.S.C. § 548(d)(2)(A).
21 The provision defining terms used in the Code at 11 U.S.C. § 101 does not
include “property.”
22 Black’s Law Dictionary 1216 (6th ed. 1990). 23 Id. at 1217.
24 Id. at 1216.
25 58 B.R. 28 (Bankr. M.D. Fla. 1986).
26 See Jack F. Williams, The Fallacies of Contemporary Fraudulent Transfer Models as
Applied to Intercorporate Guaranties: Fraudulent Transfer Law as a Fuzzy System, 15
Cardozo L. Rev. 1403, 1431-32 (1994).
27 See 58 B.R. at 30. 28 Id. at 30-31. 29 Id. at 31.
30 First RepublicBank, 1990 Bankr. LEXIS 2840, *12. Prof. Williams notes that this
decision “has been severely criticized.” Williams, supra note 26, at 1429.
31 Williams, supra note 26, at 1432. 32 Id.
33 591 F. Supp. 1368 (D.N.J. 1984). 34 841 F.2d 198 (7th Cir. 1988) (Posner, J.). 35 591 F. Supp. at 1369.
36 Id. at 1378; see also Goveart v. Capital Bank (In re Miami Gen’l Hosp.), 124 B.R.
383, 387 (Bankr. S.D. Fla. 1991) (quoting heavily from Telefest in holding that a company received fair consideration for paying off its affiliate’s loan because “these affiliated companies were so closely connected that they should be considered an ‘economic unit’ or possess such ‘identity of interests’” that “there is an adequate indirect benefit to the debtor”).
37 591 F. Supp. at 1379 (quoting Robert J. Rosenberg, Intercorporate Guaranties and
the Law of Fraudulent Conveyances: Lender Beware, 125 u. Pa. L. Rev. 235, 245-46 (1976)).
38 Id.
39 Id. (quoting Note, Upstream Financing and the Use of the Corporate Guarantee, 53
Notre Dame Lawyer 840, 842 (1978)).
40 Id.
41 841 F.2d at 199. 42 See id.
43 Id.
44 The court decided the case exclusively under state law upon finding that Mitsui
lacked standing to assert claims under Section 548. See id. at 202 (stating that “[t]he right to invoke these provisions belongs not to a particular unsecured creditor such as Mitsui but to the trustee (or debtor in possession) as the representative of all the unsecured creditors”). But since Illinois’ fraudulent transfer statute is construed as “nearly identical to § 548 of the Bankruptcy Code,” Baldi v. Samuel Son & Co.
(In re McCook Metals, LLC), No. 05-2990, 2007 U.S. Dist. Lexis 89412, *10 (N.D.
fraudulent transfer law governs. Indeed, in Leibowitz v. Parkway Bank & Trust Co. (In re Image Worldwide), 139 F.3d 574 (7th Cir. 1998), the Seventh Circuit noted that because state fraudulent-transfer law in the form of the Uniform Fraudulent Transfer Act “parallels § 548,” a court construing the UFTA “can look to interpretations of ‘reasonably equivalent value’ from § 548 cases.” Id. at 577. It follows, then, that the same principle holds true vice versa. Notably, in discussing the kind of benefits that can be used to establish reasonably equivalent value, Image Worldwide cited Xonics for the proposition that “even when there has been no direct economic benefit to a guarantor, courts performing a fraudulent transfer analysis have been increasingly willing to look at whether a guarantor received indirect benefits from the guarantee if there has been an indirect benefit.” Id. at 578. Image Worldwide proceeded to endorse the view that “substantial indirect benefits may result from the general relationship between affiliates,” such as in Xonics where “we recognized the ability of a smaller company to use the distribution system of a larger affiliate as an indirect benefit.” Id. at 579 (citing Mellon Bank, 945 F.2d at 648; Xonics, 841 F.2d at 202).
45 See 841 F.2d at 201; 11 U.S.C. § 547(b)(3) (providing for the avoidance of
preferential transfers only if “made while the debtor was insolvent”).
46 841 F.2d at 201 (internal citations omitted). 47 Id. at 202.
48 Id. 200; see also id. at 201 (rejecting “the unsettling impression that contingent
liabilities must for purposes of determining solvency be treated as definite liabilities even though the contingency has not occurred”).
49 Id. at 202.
50 See In re Lifschultz Fast Freight, 132 F.3d 339, 352 (7th Cir. 1997) (cautioning against
“[t]esting by hindsight” and using a business’s “eventual failure” as “retrospective[]” evidence of undercapitalization); Mellon Bank, N.A. v. Official Comm. of Unsecured
Creditors of R.M.L. (In re R.M.L.), 92 F.3d 139, 151, 155 (3d Cir. 1996) (stating that
“viewing the events with the benefit of hindsight…has been soundly rejected” as an “approach to reasonably equivalent value”).
51 United States v. Crystal Evangelical Free Church (In re Young), 82 F.3d 1407, 1415
(8th Cir. 1996).
52 Jumer’s Castle Lodge, Inc. v. Jumer (In re Jumer’s Castle Lodge), 338 B.R. 344, 354
(C.D. Ill. 2006).
53 Telefest, 591 F. Supp. at 1379.
54 Marquis Prods., Inc. v. Conquest Carpet Mills, Inc. (In re Marquis Prods., Inc.), 150
B.R. 487, 491 (Bankr. D. Me. 1993).
55 William H. Coquilette, Guaranty of and Security for the Debt of a Parent Corporation
by a Subsidiary Corporation, 30 Case W. Res. L. Rev. 433, 452 (1980).
57 See, e.g., Jordan v. Kroneberger (In re Jordan), 2008 Bankr. Lexis 3262, *31-*32
n.26 (Bankr. D. Idaho July 1, 2008) (stating that “construing reasonably equivalent value as limited to only ‘tangible goods and services’ is too narrow, and that the test is instead whether the transfer ‘conferred an economic benefit on the debtor’ and can include indirect financial benefits”); Leonard v. Mountainwest Fin. Corp. (In re
Whaley), 229 B.R. 767, 775 (Bankr. D. Minn. 1999) (citing “concrete economic
value” as the factor distinguishing cognizable benefits from non-cognizable benefits).
58 See Allard v. Flamingo Hilton (In re Chomakos), 69 F.3d 769 (6th Cir. 1995)
(holding that gambling losses were not transfers for less than reasonably equivalent value because the debtor received the prospect of getting paid in the event of a winning bet).
59 R.M.L., 92 F.3d at 151 (citing Mellon Bank, 945 F.2d 635) (emphasis in original). 60 Id. at 151-52 (quoting In re Fairchild Aircraft Corp., 6 F.3d 1119, 1126-27 (5th
Cir. 1993)).
61 Dietz v. St. Edward’s Catholic Church (In re Bargfrede), 117 F.3d 1078, 1080 (8th
Cir. 1997) (citing In re Treadwell, 699 F.2d 1050, 1051 (11th Cir. 1983); Zahra
Spiritual Trust v. United States, 910 F.2d 240, 249 (5th Cir. 1990)).
62 Chomakos, 69 F.3d at 772.
63 See Pummill v. Greensfelder, Hemker & Gale, P.C. (In re Richards & Conover Steel
Co.), 267 B.R. 602, 614 (B.A.P. 8th Cir. 2001) (distinguishing Dietz on the ground
that “[t]his is not a case where value was intangible, indirect, and non-economic”).
64 Black’s Law Dictionary 1217 (6th ed. 1990).
65 3V Capital Master Fund Ltd. v. Official C’tee of Unsecured Creditors of TOUSA, Inc.
(In re TOUSA, Inc.), No. 10-60017 et al., 2011 U.S. Dist. Lexis 14019 (S.D. Fla.
Feb. 11, 2011).
66 No. 08-1435, 2009 Bankr. Lexis 3311 (Bankr. S.D. Fla. Oct. 13, 2009). In
that proceeding, the authors of this article represented the Administrative Agent on TOUSA’s revolver loan and first lien term loan, and certain lenders in those facilities.
67 See No. 08-1435 (Bankr. S.D. Fla.) Dkt. #496 pp. 11-20 (on file with authors and
via Pacer).
68 2009 Bankr. Lexis 3311 at *238.
69 Id. at *240 n.53. The TOUSA case has already yielded some academic commentary,
and those endeavoring to understand the thinking behind one or another aspect of the bankruptcy court’s vacated opinion may find it more explicable in light of the fact (not evident from the opinion itself) that it “is practically a verbatim adoption of the Committee’s Proposed Findings of Fact and Conclusions of Law submitted after the trial…. [O]f the Committee’s 448 proposed findings and conclusions, the Bankruptcy Court adopted 446 in whole or in part, while adopting none of the defendants’ over 1,600 proposed findings.… [N]ot a single case, exhibit or other
piece of evidence cited by them appears in the Opinion unless and to the extent it was also cited by the Committee.” 2011 U.S. Dist. Lexis 14019 at *75-*76.
70 2009 Bankr. Lexis 3311 at *170 (emphasis added).
71 Id. at *239. Ironically, the subsidiaries were co-borrowers of the term loans
at issue, rather than mere guarantors, and recipients of the loan proceeds. The bankruptcy court in fact agreed that the subsidiaries’ status as co-borrowers gave them “a property interest” in the loan proceeds, see id. at *253 (“If funds are lent to co-borrowers (rather than to a single borrower), each of the co-borrowers has a property interest in the funds.”), but for reasons the court declined to articulate, did not follow this premise to its logical conclusion and hold that the subsidiaries’ “property interest” in $500 million in loan proceeds qualified as “property” (and thus “value”) within the meaning of Section 548. The district court remarked on this inconsistency in reversing the bankruptcy court’s opinion. See 2011 U.S. Dist. Lexis 14019 at *95-*96 (“Given the Bankruptcy Court’s express finding that the ‘[debtors] had a property interest in the loan proceeds,’ it was error to conclude that reasonably equivalent value did not exist as a matter of law.”) (citation omitted).
72 2011 U.S. Dist. Lexis 14019 at *109.
73 Id. at *111-16 (emphasis and brackets in original) (citing 124 Cong. Rec. 11,089
(1978), reprinted in 1978 U.S.C.C.A.N. 6439, 6508; GE Credit Corp. of Tenn. v.
Murphy (In re Rodriguez), 895 F.2d 725, 727 (11th Cir. 1990)).
74 See supra notes 57-60 and text accompanying notes. 75 See supra note 71 and text accompanying note.
76 2011 U.S. Dist. Lexis 14019 at *133-36; see also id. at *146-47 (“The most valuable
indirect benefit received by the Conveying Subsidiaries is that their participation in the July 31 Transaction, which financed the settlement of the Transeastern Litigation, prevented a default by the Conveying Subsidiaries on $1.06 billion dollars of bond debt (plus the triggering of their Revolver guarantees) for which a vast majority of the Conveying Subsidiaries were jointly and severally liable. The overwhelming evidence at trial showed that the viability of the entire TOUSA enterprise, including the Conveying Subsidiaries, was threatened by the Transeastern Litigation. The evidence established that a judgment of just $10 million, which no one disputed was imminent in that litigation, would have triggered default on more than $1 billion of TOUSA bond debt (from six different bond offerings) and on hundreds of millions of dollars of secured Revolver debt. The Conveying Subsidiaries were jointly and severally liable to pay the entirety of this debt upon a default.”).
77 Id. at *140 (quoting Gereon v. Palladin Overseas Fund, Ltd. (In re AppliedTheory
Corp.), 330 B.R. 362, 364 (S.D.N.Y. 2005)).
78 Id. at *141. 79 Id. at *138.
80 Id.
81 See supra note 6 and accompanying text.
82 Bonded Fin. Servs. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir. 1988). 83 Universal Serv. Admin. Co. v. Post-Confirmation C’tee of Unsecured Creditors of
Incomnet, Inc. (In re Incomnet, Inc.), 463 F.3d 1064, 1071 (9th Cir. 2006).
84 But see supra note 71.
85 2011 U.S. Dist. Lexis 14019 at *85-88.
86 Official C’tee of Unsecured Creditors v. Clark (In re Nat’l Forge Co.), 344 B.R. 340,
348 (W.D. Pa. 2006).
87 Id. at 347-48. 88 Id. (collecting cases).
89 187 B.R. 315 (Bankr. C.D. Cal. 1995). 90 Id. at 328. 91 Id. 92 Id. 93 Id. at 329. 94 Id. at 330.
95 See, e.g., Official C’tee of Unsecured Creditors of Grand Eagle Cos. v. Asea Brown
Boveri, Inc., 313 B.R. 219, 230 (N.D. Ohio 2004) (“Generally, courts collapse
transactions in leveraged buyouts since the purchaser usually invests only a modest, if any, amount of its own capital as new equity.”).
96 See Official C’tee of Unsecured Creditors of Sunbeam Corp. v. Morgan Stanley &
Co. (In re Sunbeam Corp.), 284 B.R. 355, 370 (Bankr. S.D.N.Y. 2002) (“Although
the concept of ‘collapsing’ a series of transactions and treating them as a single integrated transaction has been applied primarily when analyzing a transfer alleged to be fraudulent in the context of a failed leveraged buy-out (‘LBO’), it has also been utilized in other contexts.”).
97 2009 Bankr. Lexis 3311 at *11.
98 Beemer v. Heller & Co. (In re Holly Hill Medical Center, Inc.), 44 B.R. 253, 256
(Bankr. M.D. Fla. 1984). 99 See id. at 253-54. 100 Id. at 254. 101 Id. 102 Id. 103 Id. at 254-55. 104 Id. at 255. 105 Id. at 256.
106 Id. (emphasis added). The TOUSA district court cited this language in Holly
proceeds], the use of the proceeds is irrelevant under the statute.” 2011 U.S. Dist. Lexis 14019 at *96 (emphasis in original).
107 Mellon Bank, 92 F.3d at 151. 108 See id. at 151-52.
109 Rubin, 661 F.2d at 989.
110 Williams, supra note 26, at 1407. 111 Id.
