Section 548(c) of the Bankruptcy Code provides a defense to a party found to have received a fraudulent transfer: If the transfer is received for value and in good faith, the transferee may retain the property to the extent value was given in exchange.[1]
Although seemingly straightforward, § 548(c) presents a number of questions, including: What happens when a transferee gives value to the debtor that is less than what the transferee received? Is the transferee entitled to a complete defense, so that it retains everything it received so long as it gave “reasonably equivalent” value? Or is the transferee’s defense limited, so that it remains liable for the excess of what it received over the value that it gave to the debtor? The majority view among bankruptcy courts has been that giving reasonably equivalent value provides a complete defense. However, in Williams v. Fed. Dep. Ins. Corp. (In re Positive Health Management),[2] the Fifth Circuit embraced the minority view and held that the defense is limited to the value given to the debtor.
In Williams, the debtor had offices in a building owned by an affiliate that shared common ownership with the debtor. First National Bank held the mortgage on the property. The debtor made payments totaling $367,681.35 to First National. The payments were listed on the debtor’s tax returns as rent, even though it had no direct obligation to the bank. When the payments stopped, First National foreclosed and the debtor filed for chapter 7. The trustee brought a claim to avoid the payments as fraudulent transfers.
Lower Court Decisions
The trustee’s action under § 548(a) alleged theories of both constructive fraudulent transfer (i.e., that the debtor was insolvent and had received less than reasonably equivalent value in return) and actual fraudulent transfer (that the debtor had the actual intent to hinder, delay or defraud its creditors when it made the payments). The bankruptcy court dismissed the constructive fraud claim, concluding that the debtor had received reasonably equivalent value, but on the actual fraud claim, it concluded that the payments were made with the actual intent to hinder, delay or defraud, based on the debtor’s deteriorating financial condition and the fact that it faced lawsuits and judgments around the time of the transfers.[3]
Because it found that a prima facie case of an actual fraudulent transfer had been established, the bankruptcy court then considered whether the bank had established the § 548(c) defense, and held that § 548(c) only requires the transferee to give reasonably equivalent value.[4] Since the court had already concluded in the § 548(a) analysis that the bank had given reasonably equivalent value, and further found that the bank had acted in good faith, the bankruptcy court concluded that the bank was entitled to a complete defense.[5] The district court adopted the bankruptcy court’s rulings.[6]
Fifth Circuit Decision
On appeal, the Fifth Circuit affirmed in part and reversed in part.[7] First, it upheld the lower courts’ finding that First National gave value when it refrained from foreclosing, based on rentals that First National could have earned had it foreclosed and then rented the property at market rates. The Fifth Circuit court held that this finding of value was proper because it focused on the value of what the transferee gave up in exchange for the transfers in question.[8]
That left the final question – and the main legal issue presented by the appeal. First National contended that the finding of reasonable equivalence provided it with a complete defense. The trustee argued that the court should instead limit the defense by netting the amount that First National gave against what it received, because § 548(c) provides that a party that has received a transfer in good faith and for value may keep the transfer only “to the extent” that it has given value and does not mention “reasonably equivalent value” at all. The Fifth Circuit agreed with the trustee.
The circuit court contrasted bankruptcy courts that read “value” in § 548(c) to mean “reasonably equivalent value,” as that term is used in § 548(a),[9] with other courts that,[10] along with Collier’s,[11] give “value” and “reasonably equivalent value” different meanings. The Fifth Circuit further noted that § 548(c) is worded differently from § 8(a) of the Uniform Fraudulent Transfer Act, which provides a complete defense to a transferee that has acted in good faith and has given reasonably equivalent value.[12]
After weighing both lines of authority, the Fifth Circuit concluded that “value” and “reasonably equivalent value” should be treated as distinct concepts, such that § 548(c) provides a defense only in the amount of value given by the transferee.[13] The court provided several reasons for its conclusion.
First, the court held it was unlikely that Congress intended “value” to be synonymous with “reasonably equivalent value” when the latter term is explicitly used in another subsection of the same statute, and the fact that different language was used strongly suggested that different meanings were intended.[14] Second, the court held that the language of § 548(c) itself compels the same result: “The last clause of the statute, beginning with ‘to the extent,’ makes clear that a transferee is entitled to keep only the amount of a fraudulent transfer that equals the amount it gave up in exchange.”[15] Requiring only reasonably equivalent value reads “to the extent” out of §548(c).[16]
Accordingly, the court adopted the following rule: “A good faith transferee is entitled to the protections of section 548(c) when it gives any value in return, but only to the extent of that value. When a transferee receives a fraudulent transfer the value of which exceeds the consideration it gave up in return, section 548(c) requires netting.”[17] Because the lower courts’ decisions established that First National had received $367,681.35 and given $253,333.33 in value in return, the Fifth Circuit netted the two figures and entered judgment in favor of the trustee for the $114,348.02 difference.
While the Fifth Circuit’s ruling better comports with the statutory language than the majority bankruptcy court cases it disagreed with, the ruling serves to narrow the defense that may be asserted by fraudulent transfer defendants. It also highlights the importance of bringing claims under both § 548 and state law, as permitted by § 544(b), because at least in this respect, the defense under state law will be broader than that under § 548(c).
[1] “Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or 547 of this title, a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.” 11 U.S.C. § 541(c).
[2] 769 F.3d 899 (5th Cir. 2014).
[3] Id. at 902-3.
[4] Id.
[5] Id.
[6] Id.
[7] Although the bank purported to appeal the finding that the debtor made the transfers with the actual intent to hinder, delay or defraud its creditors, the Fifth Circuit held that this issue was waived by the bank’s failure to adequately develop the argument. Id. at 902, n. 1.
[8] 769 F.3d at 905-6. Value is measured from the debtor’s perspective only when determining reasonably equivalent value under § 548(a). Id. at 905, n. 4.
[9] Id. at 906 (citing Dobin v. Hill (In re Hill), 342 B.R. 183, 203 (Bankr. D.N.J. 2006); Satriale v. Key Bank USA (In re Burry), 309 B.R. 130, 136 (Bankr. E.D. Pa. 2004); Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortg. Inv. Corp.), 256 B.R. 664, 677 (Bankr. S.D.N.Y. 2000), aff'd sub nom., Balaber-Strauss v. Lawrence, 264 B.R. 303 (S.D.N.Y. 2001)).
[10] Id. (citing Leonard v. Coolidge (In re Nat'l Audit Def. Network), 367 B.R. 207, 223 (Bankr. D. Nev. 2007), and Salven v. Munday (In re Kemmer), 265 B.R. 224, 234-35 (Bankr. E.D. Cal. 2001)).
[11] 769 F.3d at 907 (citing 5 Collier on Bankruptcy ¶ 548.09[5] (16th ed. 2014)).
[12] 769 F.3d at 907.
[13] Id.
[14] Id.
[15] Id.
[16] Id. at 907-8.
[17] Id. at 908-9.