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Fraudulent Transfers and Equivalent Value

On February 9, 2015 the Bankruptcy Court for the Northern District of Illinois, Eastern Division ruled in the case of Brandt vs. Rohr-Alpha, a case involving fraudulent transfers and whether certain debts can be avoided in Bankruptcy.

What is a “Fraudulent Transfer?”

A pre-petition payment is avoidable as constructively fraudulent according to 548(a)(1)(B) when the Debtor:

  1. Transfers property or an interest in property;
  2. Within the 2 years preceding its bankruptcy;
  3. Got less than reasonably equivalent value; and
  4. Was insolvent or rendered insolvent as a result.

Reasonably Equivalent Value

To determine whether reasonably equivalent value was exchanged the Court must determine:

  1. Whether at time of transfer the Debtor received value; and, if so,
  2. Whether that value was equivalent to what the debtor gave up.

Application to This Case

Plaintiff William Brandt, Plan Administrator for Debtor Equipment Acquisition Resources, Inc. (“EAR”), sought to recover transfers from EAR to car dealer Rohr-Alpha, Inc. (“Rohr-Alpha”) in exchange for 2 vehicles.

Checks were written by EAR to Rohr-Alpha for the purchase of a 2007 Jeep and a 2006 Jeep, which satisfied the first and second prongs of the analysis.

While EAR paid Rohr-Alpha $23,013.66 for the 2007 Jeep and $18,550.45 for the 2006 Jeep, records showed that the vehicles had been sold within months before the filing of the case to the father-in-law and mother-in-law of one of the Debtor’s officers – in other words, to “insiders.” This cast suspicion over the entire set of transactions.

Finally, an expert hired by the Plaintiff determined that EAR was running a type of Ponzi scheme and was therefore considered de facto insolvent. This satisfied fourth and final element of Section 548.

Ruling –Split Decision

Despite the nearly identical facts relating to these vehicles, the Court reached different conclusions:

2007 Jeep: The Court concluded that EAR was never an owner and therefore did not technically receive anything of value; so the transfer was constructively fraudulent and avoidable in bankruptcy.

2006 Jeep: The Court concluded that EAR was the owner, albeit for only two months, at the time of the transfer and therefore the $18,550.45 it received represented reasonable equivalent value.

The Upshot

The EAR case exemplifies the tendency of Courts to adhere stubbornly to established doctrines. It did not matter that both of the transfers in this case were almost identical; or that both went to non-employees of EAR. All that mattered was that one was “owned” by EAR before being sold, making it a fraudulent transfer.

Your Turn

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