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Holding: The Ninth Circuit held that a bankruptcy "court has the authority to determine whether a transaction creates a debt or an equity interest for purposes of § 548, and that a transaction creates a debt if it creates a 'right to payment' under state law." The case was remanded because the district court held that it did not have the right to determine whether a transaction creates a debt or an equity interest. In so holding, the Ninth Circuit expressly overruled In re Pacific Express, 69 B.R. 112, 115 (B.A.P. 9th Cir. 1986), "which held that the Code did not authorize courts to characterize claims as equity or debt, but limited courts to the statutory remedy of equitable subordination under 11 U.S.C. § 510."
iii. Official Committee of Unsecured Creditors of TOUSA, Inc. v. Citicorp N. Am., Inc. (In re TOUSA, Inc.), 680 F.3d 1298 (11th Cir. 2012)
Issue: 1) Whether the bankruptcy court clearly erred when it found that the Conveying Subsidiaries did not receive reasonably equivalent value in exchange for the liens to secure loans used to pay a debt owed only by TOUSA, 11 U.S.C. § 548; and 2) whether the Transeastern Lenders were entities "for whose benefit" the Conveying Subsidiaries transferred the liens, 11 U.S.C. § 550(a)(1).
Holding: The court reversed the decision of the district court, finding that the bankruptcy court's findings and conclusions were not clearly erroneous. The court first found that the bankruptcy court had not erred in its determination that the Conveying Subsidiaries had not received reasonably equivalent value. The court refused to adopt either the bankruptcy court's or the district court's definition of reasonably equivalent value. Rather, the court found that the bankruptcy court had not erred in making its alternative ruling that "even if all the purported benefits of the transaction were legally cognizable, they did not confer reasonably equivalent value." The court noted that "reasonably equivalent value" is largely a question of fact, and thus the trier of fact should be given considerable latitude. The court rejected the idea that the possibility of avoiding bankruptcy provided value to the Debtor, stating "[a] corporation is not a biological entity for which it can be presumed that any act which extends its existence is beneficial to it." The court noted that "[t]he bankruptcy court found that the benefits to the Conveying Subsidiaries were not close to being reasonably equivalent in value to the $403 million of obligations that they incurred. The Transeastern Lenders and New Lenders attack this finding as 'hindsight reasoning ... at its most extreme,' but the bankruptcy court based its extensive findings on a thorough review of public knowledge available before July 31, 2007; expert analysis of data available before July 31, 2007; and statements by TOUSA insiders made before July 31, 2007." In short, the court found no clear error in the bankruptcy court's findings with respect to reasonably equivalent value. Next, the court found that the bankruptcy court had not erred in ruling that the Committee could recover from the Transeastern Lenders under section 550(a)(1). The court, rejecting the Transeastern Lenders' argument that they were not covered by section 550 because they were merely subsequent transferees rather than entities that benefitted from the initial lien transfer, found that, under Eleventh Circuit precedent (In re Air Conditioning, Inc. of Stuart), 845 F.2d 293 (11th Cir. 1988)), the Transeastern Lenders were "entities for whose benefit the Conveying Subsidiaries transferred their liens." The court rejected
©2014 William L. Norton III
