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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Third Circuit Orders Unwinding of Transaction Involving Transfers Which Passed Through Multiple Related Parties

By Francis J. Lawall and Heather P. Smillie
October 01, 2024

Although not always straightforward or consistent, federal and state laws regarding the recovery of fraudulent conveyances are well developed. However, when the transaction flows through several transferees, the analysis can quickly become complicated. In a recent decision, the U.S. Court of Appeals for the Third Circuit employed such an analysis and ordered the unwinding of a transaction involving transfers which passed through multiple related parties. See, Kartzman v. Latoc (In re the Mall at the Galaxy), Case No. 23-1906 (3rd Cir. Aug. 7, 2024). This nonprecedential decision presents interesting facts arising from a loan essentially among "friends" and their businesses. The appeal itself arose out of a bankruptcy court decision involving the Mall at the Galaxy, Inc. The mall had incurred liabilities related to a $2 million loan made by a real estate company (Latoc) to a group of rubber recycling companies (the "PermaLife" entities). Despite its insolvency at the time, the mall repaid Latoc $592,875.03 before entering bankruptcy.

The trustee of the mall's Chapter 7 estate filed a complaint seeking to avoid these loan payments as a fraudulent transfer under 11 U.S.C. Sections 548(a)(1)(B) and 544(b)(1). The Bankruptcy Court and the district court both found that the mall did not receive reasonably equivalent value in exchange for the $2 million loan from Latoc, and that the transfers among Latoc, the mall, and PermaLife should be collapsed and construed as a single, integrated transaction. The Third Circuit ultimately affirmed the lower court decision.

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