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Recent Developments in the Application of Fraudulent Transfer Laws to Leveraged Buyout and Restructuring Transactions

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Norton Journal of Bankruptcy Law and Practice, January 2011

Recent Developments in the Application of Fraudulent Transfer Laws to Leveraged Buyout and Restructuring Transactions

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Steven A. Beckelman and Daniel P. D'Alessandro [FNa1]

Fraudulent transfer avoidance actions by debtors, trustees, and creditors against former equity holders, lenders, and parties that received fees for services arising from failed leveraged buyouts (LBOs) are prevalent in today's economic environment, and more can be expected in the future. These actions involve a variety of complex legal, financial, and intent issues. Similar issues arise in cases concerning attempts to restructure ownership of corporate assets and liabilities to isolate substantial liabilities such as environmental or product liability claims.

There are several major pending and recently determined LBO and restructuring cases in which fraudulent transfer claims have been asserted. For instance, a pending adversary proceeding--filed in 2009 and recently amended--in the Chapter 11 case of In re Lyondell Chemical Company, [FN1] involves a $22 billion LBO, and named defendants include lenders, principals, and a class of former Lyondell Chemical Company public shareholders. In the Chapter 11 case of In re Tribune Co. [FN2] unsecured creditors of the Tribune Company have sought leave to file an adversary complaint seeking to avoid transfers in connection with its LBO, and an examiner's report evaluating these claims has been issued. Additionally, two major recent restructuring cases involving issues similar to those found in LBO cases are In re Tronox Inc. [FN3] and In re Old CarCo, LLC. [FN4]

Future cases involving LBO and restructuring fraudulent transfer claims are inevitable. While the rate of defaults by private equity-backed companies-- which represent a substantial percentage of LBOs--has fallen from the levels experienced in 2008 to 2009, there will be a large volume of maturing financing arrangements over the next few years that may, depending on the state of the credit markets, result in defaults. [FN5]

This article focuses on recent developments involving three common issues in LBO and restructuring fraudulent transfer cases: (i) the standard for "collapsing" transactions; (ii) the scope of "unreasonably small capital" determinations; and (iii) the "good faith" defense under 11 U.S.C.A. § 548(c) or equivalent state fraudulent transfer laws.

LBOs and Restructurings

In general, an LBO or functionally similar transaction involves substituting debt for equity. Most commonly, loan proceeds are obtained by the acquiring entity, secured by the target entity's assets, and used by the acquiring entity to buy-out the existing equity holder(s) of the target entity. In the context of an LBO transaction, the potential for fraudulent transfer liability most frequently arises where the debtor failed to receive adequate consideration for the transfer and the debtor at the time of or as a result of the transfer was balance sheet insolvent, equitably insolvent, or left with unreasonably small capital. [FN6]

As direct evidence of fraudulent intent is often difficult to obtain, most fraudulent transfer claims involving LBO transactions are for constructive fraud. Under appropriate circumstances, however, fraudulent transfer claimants may assert intentional fraudulent transfer claims in the LBO context. [FN7] Such claims generally only require proof of the debtor's intent to hinder, delay, or defraud creditors in connection with a transfer. [FN8] LBOs may involve borrowers, guarantors, lenders, recipients of payments in exchange for equity, and other categories of participants. LBOs may also involve multiple transactions, each of which may not include all of the participants in the overall LBO. For example, the equity payment recipients do not participate in the financing portion of the transaction, and the lenders do not participate in the acquisition of the equity.

Restructurings involve transfers of assets and liabilities for purposes of creating a viable survivor entity. Often, the purpose of the restructuring is to isolate large, intractable liabilities such as environmental cleanup obligations or product liability exposure in one or more entities in a corporate group. [FN9] Restructurings often occur in a series of transactions over time, not all of which include every participant in the overall process. Trustees and creditors' committees generally attack restructurings based on the inadequacy of consideration for transfers of assets and the resultant financial condition of participants.

Collapsing Transactions

A threshold inquiry in certain LBO and restructuring fraudulent transfer actions is whether the particular transaction(s) sought to be avoided can be considered in isolation or should be considered as part of an integrated transaction. Treating the entire series of LBO or restructuring transactions as a whole is commonly referred to as "collapsing" the transaction. [FN10] Generally, fraudulent transfer plaintiffs seek collapsing. Under certain circumstances, however, fraudulent transfer defendants may seek collapsing, particularly when the complaint isolates a specific component of a series of transactions in an attempt to avoid consideration of benefits the debtor received from the entire transaction.

U.S. v. Tabor Court Realty Corp. [FN11] represents, perhaps, the first instance of an appellate court's review of the concept of collapsing to an LBO transaction sought to be avoided as a fraudulent transfer. The facts at issue in Tabor Court Realty Corp. are extreme and distinguish it from cases in which the target company was solvent and not in financial distress before the transaction. In summary, as a result of regulatory restrictions and a depressed coal market, Raymond Colliery Co. (Raymond) and its affiliates had substantial tax and other obligations. The president of Raymond negotiated an option to acquire Raymond and assigned it to a shell corporation. The Raymond entities borrowed against their assets and made a loan to the shell used to purchase the equity in Raymond. Subsequently, Raymond's condition deteriorated, and it defaulted on its obligations. The U.S. seeking to collect certain tax debts, later commenced actions challenging the validity of the mortgages and other transactions on fraudulent conveyance grounds. The district court found that the mortgages were fraudulent transfers.

The mortgagee challenged the district court's collapsing of the related transactions. The Third Circuit agreed with the district court, noting that the secured loan proceeds effectively "passed through" to the shell corporation, that the secured lender was aware of the intention of Raymond to give the shell corporation the unsecured loan, and all of the parties participated in negotiation of the terms. [FN12] The Third Circuit, however, indicated that in the absence of a defendant's knowledge of the entire transaction, the result might have been different. [FN13]

At present, courts typically consider three factors in determining whether to collapse transactions in the LBO fraudulent transfer context: (i) whether all of the parties had knowledge of the multiple transactions; (ii) whether each transaction would have occurred on its own; and (iii) whether each transaction was dependent or conditioned on the other transaction. [FN14]

In re Mervyn's Holdings, LLC (Mervyn's I) involved a transaction whereby Target sold the stock of Mervyn's department stores to Mervyn's Holdings, LLC (MH), an entity created by private equity groups, which obtained financing for the majority of the purchase price, secured by the real estate assets of Mervyn's which were transferred to MDS Companies. [FN15] Certain leases could not be transferred and MH was required to make certain "notional rent" payments in connection with those leases that contributed to its demise. Bank of America served as a trustee for a trust that issued certificates in connection with the financing and held accounts that received the notional rent payments. The court concluded that the fraudulent transfer complaint failed to state a claim as to Bank of America because, among other things, it was not a party to the original transaction and the complaint failed to adequately allege Bank of America's knowledge of the entirety of the transaction. However, see In re Mervyn's Holdings, LLC (Mervyn's II), which reaches the opposite conclusion on collapsing as to fraudulent transfer allegations against Target based on the same factors identified in Mervyn's I. [FN16]

The applicability of collapsing is most likely to be challenged in the context of a multi-step transaction occurring over a period of time and involving different participants. [FN17] Successfully contesting application of collapsing can defeat claims against fraudulent transfer defendants in some circumstances. In other cases, though, treating the transaction as unitary can benefit defendants because, viewed as a whole, the transaction may have resulted in direct benefits or certain recognized indirect benefits, such as synergies in operation or the availability of credit, that defeat the lack of a reasonably equivalent value element. [FN18] In re Old CarCo LLC represents an example of a case where collapsing defeated fraudulent transfer claims. [FN19]

Unreasonably Small Capital

In general, a constructive fraudulent transfer occurs where a debtor makes a transfer and receives less than reasonably equivalent value, and at the time of such transfer the debtor: (i) was insolvent, (ii) was or was about to engage in a transaction for which property remaining with the debtor would constitute unreasonably small capital, or (iii) intended to incur or believed that it would incur debts beyond the ability to pay as such debts matured. [FN20]

The condition of unreasonably small capital can exist even if the debtor is not insolvent on the date of transfer, thereby expanding the range of transactions subject to fraudulent transfer claims. Trustees and creditors' committees often allege unreasonably small capital for that very reason. Proof of unreasonably small capital, however, may be more complex than the proof necessary to establish insolvency. LBOs often provide evidence in the form of projections made at the time of the transaction as to expected performance that the trustee or committee can attempt to undermine by questioning the reasonableness or thoroughness of the projections.

Many bankruptcy courts follow the analysis, and the reasonableness of projections standard, adopted in Moody v. Security Pacific Business Credit, Inc. [FN21] In Moody, the Coca Cola Bottling Company of New York had purchased Jeanette, a manufacturer of houseware products in 1978 for $39.6 million and thereafter made capital expenditures and repairs of $11 million, but then decided to sell the company. A group of LBO investors agreed to purchase Jeanette for $12.1 million in July 1981, funded by a loan from Security Pacific. Security Pacific made the acquisition loan and then entered into a credit agreement secured by all of Jeanette's assets with an availability of $15.5 million used to retire the initial loan and provide cash for operations. Security Pacific had the benefit of the borrower's projections and its own separate set of projections. Jeanette's sales declined, its trade payables increased and it terminated certain operations. An involuntary bankruptcy petition was filed in October 1982. While the trustee brought a fraudulent transfer action under Pennsylvania's Uniform Fraudulent Conveyance Act (UFCA) and 11 U.S.C.A. §§ 544 and 548, the Court analyzed the issues under the UFCA. The district court found that the projections were reasonable and prudent when made, and relied on the availability of the line of credit for the proposition that Jeanette did not have unreasonably small capital at the time or as a result of the transaction. Applying a going concern--instead of a liquidation--valuation to the property, plant, and equipment, the district court found that Jeanette was solvent at the time of the transfer, was not left with unreasonably small capital, and that its failure was primarily the result of market and general economic conditions. [FN22] The Third Circuit affirmed the use of the going concern value for the assets because bankruptcy was not imminent.

The Third Circuit concluded that unreasonably small capital "denotes a financial condition short of equitable insolvency." [FN23] The Third Circuit's conclusion is generally accepted. It generates uncertainty because unreasonably small capital is not statutorily defined. The Third Circuit agreed with the district court's focus on the reasonable projections and the availability of the line of credit. The Third Circuit found that the test was whether failure--implicitly due to inadequate cash flow--was reasonably foreseeable at the time of the transaction. Projections must be reasonable when evaluated on an objective basis anchored in the company's past performance, but also considering and accounting for potential future difficulties. The Third Circuit also considered the subsequent performance of Jeanette and the causes of its demise in evaluating the projections. [FN24]

Projections, however, are not the only evidence considered in this context. Courts typically also look to various financial measures such as how the debtor's debt to capital ratios compare with the industry in assessing unreasonably small capital. [FN25] Where public equity or debt are involved, some courts also consider the prices of securities as of the time of the transaction as indicative of unreasonably small capital. [FN26] The probative value of market price of public debt or securities depends, however, on the existence of an efficient market and the absence of undisclosed information. [FN27]

In Boyer v. Crown Stock Distribution, Inc. (Crown), the Seventh Circuit, while noting the "fuzzy" nature of unreasonably small capital and warning against the temptation to view a transaction in hindsight, found a fraudulent transfer because the company was so undercapitalized that it was doomed as it started life encumbered by the trade debt of its predecessor, with all of its assets subject to security interests and unable to borrow on favorable terms or otherwise meet its obligations. [FN28] The transaction considered in Crown was an asset purchase funded by a first-position secured bank loan and a subordinated secured note. The debtor continued to operate under the old name and its creditors were not informed of the sale. The owner of "New Crown" contributed no equity. "New Crown" survived for about three and one-half years. The Seventh Circuit agreed with the district court that the transaction should be treated like an LBO and the separate transactions collapsed. Under the circumstances, the Court dispensed with consideration of calculation of insolvency and considered only unreasonably small capital. Crown's significance for LBO fraudulent transfer plaintiffs lies in its disagreement with cases that consider the temporal length of survival the basis for a presumption against a finding of unreasonably small capital, and its rejection of considering post-transaction management errors as an alternative reason for a debtor's demise.

Good Faith Defense

Avoidance occurs under 11 U.S.C.A. § 548 or under state fraudulent transfer law to the extent available under 11 U.S.C.A. § 544. Recovery of the property transferred or the value of the property occurs under 11 U.S.C.A. § 550, which sets different standards for recovery from initial and subsequent transferees.

11 U.S.C.A. § 548(c) provides that a transferee that takes for value and in good faith has a lien on or may retain any interest transferred, to the extent that the transferee gave value to the debtor in exchange for such transfer. [FN29] Under 11 U.S.C.A. § 550, a subsequent or "immediate" transferee from the initial transferee has a defense to recovery of a fraudulent transfer determined under section 548--but not, by its terms, claims under section 544--if such transferee takes for value, including satisfaction or securing a present or antecedent debt, in good

faith and without knowledge of the voidability of the transfer avoided. [FN30] Where the initial transferee is a "mere conduit" without the right to use or dispose of the property, the conduit's transferee may be treated as the initial transferee. [FN31]

A transferee may have a partial defense under section 548(c) to the extent value was given to the debtor. [FN32] The good faith credit may come into play in the LBO context though it is not discussed in many LBO fraudulent transfer opinions. [FN33] The standard for good faith may be very different if the case is proceeding only under state fraudulent transfer law. [FN34]

There is no statutory definition of "good faith" for purposes of section 548(c), and judicial definitions vary. [FN35] In re Bayou Group, LLC, represents the most recent extensive discussion of the good faith defense. [FN36] There, the district court reversed summary judgment in favor of the debtors by the bankruptcy court based on finding error in certain of the bankruptcy court's conclusions on good faith. While Bayou involved a Ponzi scheme, a number of its conclusions regarding good faith may have significance in the LBO and restructuring context. The bankruptcy court granted summary judgment for the debtors finding lack of good faith as a matter of law where transferees were on inquiry notice of "some potential infirmity in the investment" or "some potential infirmity in Bayou or the integrity of its management." [FN37] The district court found this erroneously over-broad. [FN38] The correct standard, according to the district court, is whether the transferee is on inquiry notice that the debtor is insolvent or "possibly insolvent" or that the transfer is made with a fraudulent purpose. The fraudulent purpose, according to the district court must relate to the transfer rather than other transactions the debtor may have been engaged in. [FN39] The bankruptcy court also erred in concluding that it does not matter whether, upon notice of facts suggesting fraud or insolvency, a diligent inquiry would have discovered such conditions. [FN40]


The law applicable to LBO and restructuring fraudulent transfer claims continues to evolve, and the rules may vary depending on whether claims are asserted under federal or state law. While reasonably equivalent value is often the primary contested issue, initial consideration should be given to whether the transaction is subject to collapsing as to each transferee, the effect of collapsing, and whether or not any recipients are conduits. Fraudulent transfer plaintiffs uncertain of whether insolvency at the time of transfer can be established should consider asserting a claim of unreasonably small capital, and fraudulent transfer defendants faced with such a claim must marshal and assess the various types of evidence accepted in support of adequacy of capitalization. Moreover, fraudulent transfer defendants should evaluate the availability of a good faith defense.

[FN1]. In re Lyondell Chemical Company, Case No. 09-10023 (REG) (Bankr. S.D.N.Y.) (Official Committee of Unsecured Creditors v. Citibank, N.A. London Branch, Adv. Pro. 09-1375 (REG) (Bankr. S.D.N.Y.)).

[FN2]. In re Tribune Co. Case No. 08-13141 (KJC) (Bankr. Del.).

[FN3]. In re Tronox Inc. 429 B.R. 73 (Bankr. S.D. N.Y. 2010).

[FN4]. In re Old CarCo LLC, 435 B.R. 169 (Bankr. S.D. N.Y. 2010).

[FN5]. See, e.g. Jason M. Thomas, The Credit Performance of Private Equity-Backed Companies in the ‘Great Recession' of 2008-2009, Private Equity Council (March 2010) (observing that "[c]ompanies targeted by private equity investors are often underperforming and tend to be more highly leveraged than peers after acquisition," but also observing that changes introduced by private equity investors have a tendency to reduce the incidence of defaults).

[FN6]. A finding of unreasonably small capital may exist even in the absence of allegations or a finding of balance sheet or equitable insolvency, thereby broadening the scope of cases in which LBO fraudulent transfer claims may be asserted.

[FN7]. See, e.g. U.S. v. Tabor Court Realty Corp. 803 F.2d 1288, 1304, 2 U.C.C. Rep. Serv. 2d 1140 (3d Cir. 1986); Wieboldt Stores, Inc. v. Schottenstein, 94 B.R. 488, 504, 18 Bankr. Ct. Dec. (CRR) 1134, 20 Collier Bankr. Cas. 2d (MB) 776, Bankr. L. Rep. (CCH) P 72574A, Fed. Sec. L. Rep. (CCH) P 94872 (N.D. Ill. 1988), on reconsideration in part, 1989 WL 18112 (N.D. Ill. 1989).

[FN8]. See 11 U.S.C.A. § 548(a)(1)(A). Because it is often difficult to furnish direct evidence of such intent, courts generally examine the circumstances surrounding a transfer and draw an inference of such intent if certain factors that frequently accompany fraudulent transfers are present. See, e.g. MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Services Co. 910 F. Supp. 913, 935 (S.D. N.Y. 1995). Those factors generally include: (i) a close relationship among the parties to the transaction; (ii) a secret and hasty transfer not in the usual course of business; (iii) inadequacy of consideration; (iv) the transferor's knowledge of the creditor's claim and the transferor's inability to pay it; (v) the use of dummies or fictitious parties; and (vi) retention of control of property by the transferor after the conveyance. See MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Services Co. 910 F. Supp. 913, 935 (S.D. N.Y. 1995).

[FN9]. See, e.g. In re Tronox Inc. 429 B.R. 73 (Bankr. S.D. N.Y. 2010).

[FN10]. See, e.g. In re Old CarCo LLC, 435 B.R. 169 (Bankr. S.D. N.Y. 2010) ("The collapsing concept is usually applied when a series of transactions actually comprise a single integrated transaction, notwithstanding the fact that the ‘formal structure erected and labels attached' make them appear distinct.") (citing and quoting In re Sunbeam Corp. 284 B.R. 355, 370, 40 Bankr. Ct. Dec. (CRR) 101 (Bankr. S.D. N.Y. 2002)).

[FN11]. U.S. v. Tabor Court Realty Corp. 803 F.2d 1288, 2 U.C.C. Rep. Serv. 2d 1140 (3d Cir. 1986).

[FN12]. See Tabor Court Realty Corp. 803 F.2d at 1302-03.

[FN13]. See Tabor Court Realty Corp. 803 F.2d at 1303 n.8.

[FN14]. See In re Mervyn's Holdings, LLC, 426 B.R. 96, 104 (Bankr. D. Del. 2010) (Mervyn's I). The legal standards, however, must be separately evaluated for claims asserted under state fraudulent transfer laws. For example, in New York cases under the New York Debtor-Creditor Law, based on the Uniform Fraudulent Conveyance Act, a different test may apply. In such circumstances, (i) the consideration received from the first transferee must be reconveyed by the debtor for less than fair consideration or with an actual intent to defraud creditors, and (ii) the initial transferee must have actual or constructive knowledge of the scheme that renders the exchange with the debtor fraudulent. See HBE Leasing Corp. v. Frank, 48 F.3d 623, 635, 31 Fed. R. Serv. 3d 1422 (2d Cir. 1995); In re M. Fabrikant & Sons, Inc. 394 B.R. 721, 731, 50 Bankr. Ct. Dec. (CRR) 192 (Bankr. S.D. N.Y. 2008) (stating that while collapsing is often applied to leveraged buyouts, it has a more general application); In re Best Products Co. Inc. 168 B.R. 35, 66-67 (Bankr. S.D. N.Y. 1994). The facts of HBE Leasing Corp. would not have satisfied the three requirements recognized in Mervyn's I.

[FN15]. In re Mervyn's Holdings, LLC, 426 B.R. 96, 104 (Bankr. D. Del. 2010).

[FN16]. In re Mervyn's Holdings, LLC, 426 B.R. 488 (Bankr. D. Del. 2010).

[FN17]. See In re Tribune Co. Case No. 08-13141(KJC) (Bankr. Del.), Report of Kenneth N. Klee as Examiner, Volume One, at 16 (concluding that Step One and Step Two are unlikely to be collapsed together).

[FN18]. See Mellon Bank, N.A. v. Metro Communications, Inc. 945 F.2d 635, 647, 22 Bankr. Ct. Dec. (CRR) 251, 25 Collier Bankr. Cas. 2d (MB) 1064, Bankr. L. Rep. (CCH) P 74288, 15 U.C.C. Rep. Serv. 2d 1119 (3d Cir. 1991), as amended, (Oct. 28, 1991); see also In re M. Fabrikant & Sons, Inc. 394 B.R. 721, 738, 50 Bankr. Ct. Dec. (CRR) 192 (Bankr. S.D. N.Y. 2008) (stating that "[i]ndirect benefits may include synergy, increased access to capital, safeguarding a source of supply and protecting customer relationships").

[FN19]. In re Old CarCo LLC, 435 B.R. 169 (Bankr. S.D. N.Y. 2010) (observing that the deal documents reflected the intent of an integrated transaction).

[FN20]. See 11 U.S.C.A. § 548(a)(1)(B).

[FN21]. Moody v. Security Pacific Business Credit, Inc. 971 F.2d 1056, 23 Bankr. Ct. Dec. (CRR) 467, Bankr. L. Rep. (CCH) P 74792 (3d Cir. 1992). See, e.g. ASARCO LLC v. Americas Mining Corp. 396 B.R. 278 (S.D. Tex. 2008); In re Plassein Int'l Corp. 2008 Bankr. LEXIS 1473 (Bankr. Del. May 5, 2008); In re Iridium Operating LLC, 373 B.R. 283 (Bankr. S.D. N.Y. 2007).

[FN22]. The facts of Moody are somewhat unusual in that the LBO operator acquired the company at a relatively low price compared to what the seller had paid only a short time earlier, and the property--plant and equipment--was ultimately liquidated for an amount in excess of the value that would have been necessary to find it solvent at the time of the transaction on a balance-sheet basis.

[FN23]. Moody, 971 F.2d at 1064.

[FN24]. In affirming the district court's ruling, the Third Circuit also noted that most of the trade debt in the bankruptcy was incurred in the months immediately preceding the bankruptcy and none prior to the transaction. By contrast, where there is substantial unsecured debt beyond its terms at the time of the transaction that the post-transaction company could not clean up, capital is generally found to be inadequate. See In re CNB Intern. Inc. 393 B.R. 306, 326-27, 50 Bankr. Ct. Dec. (CRR) 157 (Bankr. W.D. N.Y. 2008), aff'd on other grounds, 2010 WL 3749079 (W.D. N.Y. 2010) (vacated and remanded as to the issue of whether Lloyds Bank was an initial transferee and the effect of that conclusion on damages calculations), aff'd in part rev'd in part, 2010 U.S. Dist. LEXIS 98767 (W.D.N.Y. Sept. 20, 2010); see also In re Yellowstone Mountain Club, LLC, 2010 Bankr. LEXIS 2702, *161-62 (Bankr. D. Mont. 2010). The existence of debt at the time of the transfer still outstanding as of the filing is also potentially significant where the transaction occurred more than two years before a filing and the trustee must proceed under state fraudulent transfer law under 11 U.S.C.A. § 544. Absent an existing creditor, insolvency is not a basis for a constructive fraudulent conveyance claim; rather, unreasonably small capital or that the debtor intended or believed that as a result of the transaction it would incur debts beyond its ability to pay as they matured. See Resnick, Finding the Shoes that Fit: How Derivative is the Trustee's Power to Avoid Fraudulent Conveyances Under Section 544(b) of the Bankruptcy Code. 31 Cardozo L. Rev. 205, 210-11 (Sept. 2009). Applicable state law, however, must also be consulted in actions arising under state fraudulent transfer laws. For instance, Georgia law provides that only a pre-transfer creditor may recover for any form of constructive fraudulent transfer. See Kipperman v. Onex Corp. 411 B.R. 805, 830-31 (N.D. Ga. 2009), reconsideration denied in part, 2010 WL 761227 (N.D. Ga. 2010).

[FN25]. See In re TOUSA, Inc. 422 B.R. 783, 830 (Bankr. S.D. Fla. 2009).

[FN26]. See Iridium, 373 B.R. at 345.

[FN27]. See In re Global Technovations, Inc. 431 B.R. 739 (Bankr. E.D. Mich. 2010).

[FN28]. Boyer v. Crown Stock Distribution, Inc. 587 F.3d 787, 52 Bankr. Ct. Dec. (CRR) 101, Bankr. L. Rep. (CCH) P 81628 (7th Cir. 2009).

[FN29]. The equivalent Uniform Fraudulent Transfer Act provision, some variation of which is adopted in many states, effectively provides the same See Unif. Fraud. Trans. Act § 8 (1984).

[FN30]. See 11 U.S.C.A. § 550(b).

[FN31]. Recently, the Seventh Circuit held that a trustee for a securitized investment pool is not a mere conduit based on the factors it earlier identified in Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890, 17 Bankr. Ct. Dec. (CRR) 299, 18 Collier Bankr. Cas. 2d (MB) 155 (7th Cir. 1988). See Paloian v. LaSalle Bank, N.A. 2010 U.S. App. LEXIS 17915, *8-11 (7th Cir. Aug. 27, 2010).

[FN32]. Value given to the debtor in the context of the section 548(c) defense is distinct from the overall calculus of reasonably equivalent value in a multi-party LBO transaction, and indirect benefits and other consideration received from sources other than the defendant that might be taken into account in the reasonably equivalent value context may not always be included in the section 548(c) calculation.

[FN33]. See, e.g. Boyer v. Crown Stock Distrib. Inc. 2006 Bankr. LEXIS 4651 (Bankr. N.D. Ind. 2006). In Crown, the Seventh Circuit modified certain of the conclusions of the bankruptcy and district courts. Boyer v. Crown Stock Distribution, Inc. 587 F.3d 787, 52 Bankr. Ct. Dec. (CRR) 101, Bankr. L. Rep. (CCH) P 81628 (7th Cir. 2009). The bankruptcy court found that the transaction would not be "collapsed" and evaluated the transfer from the debtor to Old Crown in exchange for Old Crown's assets and the subsequent transfers to Old Crown's shareholders separately, making section 550(b) potentially applicable to the payments to the shareholders (despite the terms limiting its application to sections 547 and 548). The bankruptcy court found that shareholders other than the controlling shareholder who ran Old Crown and negotiated the sale may have met the good faith standard but did not give value to Old Crown in receiving distributions and were therefore not able to avail themselves of the section 550(b)(1) defense. The Seventh Circuit applied collapsing. The bankruptcy court and the Seventh Circuit were in accord as to the inadequacy of capital with which New Crown commenced operations.

[FN34]. See, e.g. Global Technovations, 431 B.R. at 774 (holding that under Florida law, transferee lacks good faith only if it took the conveyance for the purpose of aiding in the fraud or actively participated in the debtor's fraudulent purpose).

[FN35]. See In re Hannover Corp. 310 F.3d 796, 800, 40 Bankr. Ct. Dec. (CRR) 116, 49 Collier Bankr. Cas. 2d (MB) 1061, Bankr. L. Rep. (CCH) P 78741 (5th Cir. 2002) (recognizing the varying definitions, and suggesting that the varying circumstances in which the defense may apply counsel against overly specific definitions).

[FN36]. In re Bayou Group, LLC, 2010 U.S. Dist. LEXIS 99590 (S.D.N.Y. Sept. 17, 2010).

[FN37]. See Bayou, 2010 U.S. Dist. LEXIS 99590 at *59.

[FN38]. See Bayou, 2010 U.S. Dist. LEXIS 99590 at *80.

[FN39]. See Bayou, 2010 U.S. Dist. LEXIS 99590 at *71.

[FN40]. See Bayou, 2010 U.S. Dist. LEXIS 99590 at *88.

[FNa1]. Steven A. Beckelman is a partner at McCarter & English, LLP, practicing in the areas of bankruptcy, securities litigation, and commercial litigation in federal and state courts. Daniel P. D'Alessandro is an associate at the firm, practicing in the areas of securities and commercial litigation. The authors may be contacted at and ddalessandro, respectively.

20 J. Bankr. L. & Prac. 1 Art. 3

Category: Forex

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