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Ninth Circuit Treats Corporate Insider Fairly in Fraudulent Transfer Case
The U.S. Court of Appeals for the Ninth Circuit, on Aug. 10, 2010, reversed a district court's adverse $6.7 million fraudulent transfer judgment against a corporate insider, a director of the debtor, in a remarkably sensible opinion. Decker v. Tramiel (In re JTS Corp.), 617 F.3d 1102 (9th Cir. 2010). The director had bought eight parcels of the debtor's real estate for $10 million in good faith two years prior to bankruptcy. Holding that the director had “no liability to the [plaintiff bankruptcy] trustee for” a constructive fraudulent transfer, the court found that the director was “a good faith transferee ' entitled to an offset for the value he paid for the property,” and that he was “entitled to [an additional] settlement credit” for “the amount that his codefendants paid in a settlement agreement.” 617 F.3d at 1106, 1120. For corporate insiders ' private equity funds, controlling shareholders, officers and directors ' the case shows that insider status alone is not enough to impose liability, particularly when the insider participates in a good-faith attempt to rehabilitate a financially troubled debtor.
Facts
The director bought eight parcels of income-producing real property from the debtor prior to bankruptcy at the request of the debtor's chief financial officer, at a time when the debtor was insolvent and otherwise unable to borrow. He paid $10 million and gave the debtor an option to repurchase the property for $10 million, entitling him to “keep the greater of $1 million or the rental income generated by the property for a one-year period.” Id. at 1107. The debtor's board, with the director “removed” and abstaining “from all voting during the sales discussion,” believed that the proposed sale “was the quickest way of raising the necessary funds to keep the company running and that the repurchase option would allow a year to regain the real property … .” Id.
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