Corporate Transfer Is Fraudulent If Corporation Does Not Receive "Reasonably Equivalent Value"
BOYER v. CROWN STOCK DISTRIBUTION, INC. (November 18, 2009)
Crown Unlimited Machine, Inc. ("Crown"), which designed and built custom machinery, was owned by the Stroup family. In 1999, the Stroups sold the company to Kevin Smith for $6 million. The $6 million consisted of $3.1 million that Smith borrowed, a $2.9 million note and only $500 directly from Smith. The Stroups split almost $600,000 in cash withdrawn from the company pre-closing as well as the $3.1 million in cash received at closing. Within about three years, the new Crown declared bankruptcy. The assets brought out $3.7 million. Most of the money was used to pay off the secured debt -- little was left to address over $1.5 million in unsecured debt. The Trustee in bankruptcy brought an action against the Stroups and the company, alleging a fraudulent conveyance. The bankruptcy court awarded over $3 million to the trustee. The district court affirmed. The Stroups appeal -- the Trustee cross-appeals, seeking the $600,000 pre-closing distribution.
In their opinion, Judges Posner, Rovner and Williams affirmed in part and reversed in part. Under the Uniform Fraudulent Transfer Act, a transfer is fraudulent if the corporation did not receive "reasonably equivalent value" and was therefore left with insufficient funds to be able to survive. Fraudulent conveyance law looks to substance rather than form -- the Court concluded that the form of the transaction was not important. Here, new Crown made payments and incurred obligations that threatened its ability to survive. It failed to receive "reasonably equivalent value" -- the bankruptcy court did not err in so finding. The Court disagreed with the bankruptcy court, however, with respect to the almost $600,000 dividend pre-closing. The evidence supported the conclusion that the dividend was part of the fraudulent conveyance rather than a normal distribution of profits. The Court reversed the bankruptcy court to the extent it denied recovery to the Trustee of the dividend.
For Your Ease Only ("FYEO") sells jewelry boxes on the Home Shopping Network (“HSN”). Several years ago, FYEO obtained a default judgment in excess of $2 million against Mark Schneider and his wholly owned company Product Concepts Company ("PCC"). At the time of the judgment, PCC's principal assets were a relationship with and the right to payments from the HSN. In order to collect the judgment, FYEO began searching for assets. Schneider had since moved to Costa Rica. It noticed the deposition of Doug Fournier, Schneider’s brother-in-law. The subpoena advised Fournier of the lawsuit and the judgment. When Fournier got the subpoena, he met Schneider in Costa Rica. There, Schneider transferred his company's rights under the HSN agreement to a company that Fournier would create when he returned to the United States (Anewco). FYEO served HSN with a third-party citation prohibiting them from transferring any property or money to the judgment debtors. Notwithstanding the citation, HSN paid almost $400,000 to Anewco. FYEO requested an order for the turnover of all payments made by HSN. The district court denied the request, concluding that Fournier had acted in good faith and the transfer was not voidable under the Uniform Fraudulent Transfer Act (UFTA). FYEO appeals.