The Eleventh Circuit waded into the controversy that embroiled the Fifth Circuit and Texas Supreme Court in Janvey v. Golf Channel Inc., 834 F.3d 570 (5th Cir. Aug. 22, 2016).
Unlike its New Orleans-based cousin, the Court of Appeals in Atlanta came down on the side of suppliers by protecting them from fraudulent transfer suits even when the goods or services they supplied did not give subjective value to the debtor.
The precedential value of the Eleventh Circuit’s June 22 decision is questionable because the opinion is not to be published officially. Nonetheless, there is a conflict of circuits on the definition of “value” for a constructively fraudulent transfer.
In the Eleventh Circuit case, a company and its owner together leased a large home for $8,500 a month. The lease allowed using the premises only as a residence. Nonetheless, the business paid about 25% of the rent, with the owner claiming that he used a portion of the master bedroom as a home office. The company had a separate office where it conducted the bulk of its business.
The company went bankrupt, and the chapter 7 trustee sued the landlord for receipt of about $74,000 in constructively fraudulent transfers, representing the portion of the rent paid by the business. Upheld in district court, the bankruptcy court ruled in favor of the trustee, finding that the company did not receive reasonably equivalent “value” under Section 548(d)(2)(A), thereby making the transfers constructively fraudulent under Section 548(a)(1)(B) because the company was insolvent.
In a per curiam opinion, the Eleventh Circuit reversed, saying there was “no evidence” to support the finding of inadequate value. The panel was composed of Circuit Judges Adalberto Jordan, Robin S. Rosenbaum and Jill A. Pryor.
Here’s the circuit split: The Fifth Circuit insists on using a subjective test under Section 548, evaluating subjectively whether the estate realized value, regardless of the objective value of the goods or services in the market generally. The Eleventh Circuit looks only to the objective value of the services, not the value realized by the debtor.
The Eleventh Circuit said the outcome was governed by In re Financial Federated Title & Trust, Inc., 309 F.3d 1325, 1331–33 (11th Cir. 2002), where, according to the panel, “we explicitly answered the question” by holding that “value under Section 548 is measured by the objective value of the property received by the debtor.”
For the Eleventh Circuit, “the question is not whether the debtor subjectively benefitted from the property it received; the operative question is whether the property, goods, or services provided had objective value.”
Because the trustee conceded that the home was worth $8,500 a month in rent, the appeals court reversed the lower courts, saying it was error to focus on the subjective benefit to the estate.
The Fifth Circuit’s Janvey decision was an even more appealing case from the supplier’s perspective. There, the defendant provided television advertising that was concededly worth $5.9 million in the market. Unbeknownst to the supplier, the advertiser-debtor was a Ponzi scheme. In its initial opinion, the Fifth Circuit employed a subjective test and found a fraudulent transfer because creditors of the Ponzi scheme received no benefit from advertising that only sustained the fraud.
On a motion for rehearing, the Fifth Circuit certified a question to the Texas Supreme Court, because the case turned on the Texas Uniform Fraudulent Transfer Act, not Section 548. The Fifth Circuit asked the Texas high court to opine on whether proof of “reasonably equivalent value” is determined from the perspective of creditors, or whether the defendant can defeat a fraudulent transfer claim by showing it provided goods or services at market value.
In sum, the Texas Supreme Court answered by saying that state law looks at “objective value,” among other things. The Fifth Circuit was therefore compelled to set aside its prior opinion and let the supplier off the hook for receipt of a constructively fraudulent transfer.
Nonetheless, the Fifth Circuit served notice that it was not changing its prior interpretation of “value” under the Bankruptcy Code. The New Orleans court said the “primary consideration” is “the degree to which the transferor’s net worth is preserved.” The question, the court said, is not whether the consideration had “objective value,” but whether the exchange “conferred a tangible economic benefit on the debtor.”
To read ABI’s discussion of the Janvey decision, click here.