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Circuit Judges Disagree: Can an Investment Be So Risky that It’s a Fraudulent Transfer?

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Michael Feinman

Your second point as food for thought was my first thought. If this situation is a fraudulent transfer, then the sources of capital for any risky venture is gone. While this loan arrangement was fairly one-sided, as many risky loans are, it is not like an LBO situation. Lastly, what did the lender actually gain from this transaction? The lender advanced $900K (not chump change) and got back $750K. Where was the evidence of bad-faith at all?
Tue, 2025-07-29 09:47 Permalink
Thomas Salerno

Bill As always, a fascinating case and analysis. What confuses me here is what "hat" was the recipient of this alleged fraudulent transfer wearing? Was he a "lender" (in which case, repayment on a legitimate debt is always reasonably equivalent value; it may be a preference, but not a fraudulent transfer) or a equity holder (having received the 82% ownership interest in the LLC? The analysis refers to the recipient as a "lender" (which implies a debt), but also states: "The lender made loans to the LLC in return for 82% ownership." So--what hat was the 'lender" wearing: Did he make an equity investment, or a loan? Or did he make both a loan, and as a "sweetener" receive the 82% equity interest? Seems to me this case mixes statuses. If the money advanced was a loan, then repayment can't legally trigger fraudulent transfer issues (possibly preference issues, and the lender here is most certainly an insider by virtue of his equity interests). If conversely the "lender" was simply paid his equity capital back, that could certainly raise fraudulent transfer concerns assuming the debtor were insolvent (having unpaid creditors and using money to pay back an equity holder). Maybe I'm missing something, but this case seems muddled to me. Then again, I'm easily confused.
Tue, 2025-07-29 09:51 Permalink
Richard Squire

By definition, a borrower always receives a reasonably equivalent value when he repays a debt he owes. Value is defined for purposes of constructive fraudulent-transfer law at section 548(d)(2)(A) of the Bankruptcy Code as "property, or satisfaction or securing of a present or antecedent debt of the debtor." I presume the state-law definition is essentially the same. So when you repay a loan, you satisfy an antecedent debt, and value is obtained. Good faith should not be a factor. The loan repayment in the "Observation" section might be a voidable preference, though. Again, good faith would not be a factor. The Tenth Circuit case summarized here is different because the debt was owed by the LLC, not the debtor/guarantor. So a judge following the statute would ask whether he received some kind of property in exchange for his guarantee.
Tue, 2025-07-29 16:09 Permalink