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Third Circuit Orders Unwinding of Transaction Involving Transfers Which Passed Through Multiple Related Parties
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 This nonprecedential decision presents interesting facts arising from a loan essentially among "friends" and their businesses.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.
The relationship among the three businesses arose from a friendship among Martin Sergi (the president and treasurer of the mall, and equity holder in PermaLife) and Raffaele and Dibo Attar (also equity holders in PermaLife). In 2007, a fire damaged PermaLife causing its financial decline. At that time, Rafael Attar served as the president of Latoc and director of one of the PermaLife entities. PermaLife initially obtained a secured loan from an unrelated entity, but that loan had strings attached: PermaLife was forbidden from receiving a loan from any "Attar-affiliated entity." Therefore, in an effort to get a loan that was not technically from an Attar-affiliated entity (i.e., Latoc), Sergi and Dibo agreed that Latoc would lend $2 million to the mall, and the mall would repay the loan to Latoc with interest. Once the loan was memorialized, Latoc deposited the $2 million into the mall's bank account, which then transferred the proceeds from the mall to PermaLife. In exchange, the mall allegedly received equity interests in two PermaLife subsidiaries, though nothing was ever memorialized or reduced to writing. During the relevant period (2007-2009), the mall was insolvent.
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