Doing the Splits Reasonably Equivalent Value to Whom?
Annette W. Jarvis, Greenberg Traurig, LLP Secretary, American College of Bankruptcy
In determining whether a party gives“ reasonably equivalent value” under Section 548 of the Bankruptcy Code or state fraudulent transfer statutes, how does a court determine the value given? Is it an objective standard measured by the market value or is it a subjective standard measured by the value realized by the debtor? This question is complicated by what may be differing answers under federal and state law.
This story starts in the 1980s in Utah in In re Universal Clearing House Co., 60 B. R. 985( D. Utah 1986). A trustee was appointed in this Chapter 11 case, which was quickly identified as a Ponzi scheme. The company’ s stated business purpose was“ to solicit funds from private investors, called‘ undertakers,’ and to use the invested funds to assume the debts and pay the creditors of various client companies.” Id. at 989. Investors were told that accounts would be bought at a discount before they were due and then paid in full by the debtor when due, with the difference funding a return to investors. In fact, no accounts were purchased and existing investors were paid“ interest” from funds solicited from new investors— a classic Ponzi scheme. Id. The trustee brought fraudulent transfer actions against the sales agents who had solicited the
investors to recover their commissions. The bankruptcy court determined, as a matter of law, that the commissions paid to the sales agents could not constitute reasonably equivalent value for the services provided by these sales agents because these payments“ were without legally cognizable value,” given that these services provided no value to the fraudulent enterprise but merely“ deepened the debtor’ s insolvency and furthered a fraudulent scheme.” Id. at 998. On appeal, the District Court compared caselaw under the Bankruptcy Act with the revised definition of“ value” under the Bankruptcy Code, noting that the definition of“ value” included“ satisfaction... of... [ an ] antecedent debt of the debtor ….” Id. The District Court determined that, because the debtor had contracted with the sales agents for the sale of the“ undertaker” contracts and those sales agents had, in fact, sold those contracts, the sales agents“ performed services thereby giving consideration to the debtors under the terms of entire contracts.” Id. at 999. The District Court concluded that“ a determination of whether value was given under section 548 should focus on the value of the goods and services provided rather than on the impact that the goods and services had on the bankruptcy enterprise.” Id. at 1000. Thus, the District Court remanded the case for a determination of the amount of value given in exchange for the transfers.
The Fifth Circuit then weighed in on the issue in In re Fairchild Aircraft Corp., 6 F. 3d
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