Fraudulent Conveyance and the Case of In re TransVantage Solutions Inc.

TransVantage Solutions Inc., a New Jersey-based corporation founded in 1964, provided freight audit and payment services to its customers. Its core business involved three parties and actions: A shipper or common carrier issued an invoice to a customer; the customer advanced money to TransVantage; and TransVantage reviewed the freight charges for accuracy and, when everything was in order, paid the carrier or shipper with the funds that had been entrusted to it.

In May 2013, TransVantage sought chapter 11 protection, and it soon became apparent what brought this event to pass: It is alleged that from as far back as the 1990s, TransVantage used funds advanced by one customer to pay another customer’s freight bills. Additionally, the president and sole director of TransVantage and her spouse occasionally transferred money out of TransVantage’s operating account and used the transferred funds to pay the expenses of corporate affiliates and to purchase personal items. Perhaps predictably, over time the new funds advanced by customers became insufficient to pay the outstanding freight bills of other customers, and the discovery of the shortfall quickly spiraled into TransVantage seeking the protection of the bankruptcy court. Within a matter of weeks, the court-appointed trustee sought to convert the case into a chapter 7 liquidation, alleging that TransVantage had no funds with which it could continue business and that there was no reorganization for him to propose. At the date of filing in May 2013, there was an approximate shortfall of $40 million.

Now, almost two years following that bankruptcy petition, and just within the timeframe set by the statute of limitations, the chapter 7 trustee, Alfred T. Giuliano, has commenced hundreds of adversary proceedings against two groups of defendants: customers of TransVantage, and freight carriers and logistics companies. The trustee is seeking to recover transfers made to both groups of defendants, claiming that the transfers were fraudulent under state law and §§ 544, 548 and 550 of the Bankruptcy Code.

All is not lost for the unlucky defendants, however. Section 548(c) of the Bankruptcy Code provides a defense for certain claims of fraudulent conveyances. It provides a transferee that “takes for value and in good faith” with a lien, or retained interest in transferred funds, to the extent that s/he gave value to the debtor in exchange for the transfer.

Good faith is a notoriously difficult concept to define in commercial law. It is not defined in the Bankruptcy Code; indeed, the legislative history scarcely addresses good faith. Despite this lack of a universal definition, courts decline to find good faith present where a plaintiff had knowledge or notice that would have put a prudent person on inquiry that the transferor intended to defraud his creditors.[1] In other words, the standard is what the transferee “knew, or should have known,” rather than his actual knowledge. The test is most commonly phrased as whether “diligent inquiry would have discovered the fraudulent purpose” of the transfer.[2] The transferee bears the burden of establishing its good faith under § 548(c) as an affirmative defense that “may be raised and proved by the transferee at trial.”[3]

In the TransVantage case, the chapter 7 trustee’s actions against the defendants are still in their infancy, having been filed only in April 2015. While it is unclear how the TransVantage case will ultimately be resolved, the case is a useful reminder of the manner in which a bankruptcy trustee can seek to recover transfers for the benefit of the debtor’s estate by alleging that the conveyances were fraudulent.

Nonetheless, a creditor can assert the very real affirmative defense that the disputed transfer was received in good faith for value. Where the defense is asserted successfully, it operates to allow the transferee to retain the full amount received.