Opinion
No. 78 Civ. 2955
May 14, 1980
Former Bankruptcy Act — Fraudulent Transfer — Fair Consideration — 10% Deficiency
A bankrupt's business associate's repayment of funds was not the fair equivalent of the sum transferred by the bankrupt one year prior to the initiation of bankruptcy, since the amount repaid was deficient by approximately ten percent. Accordingly, the transfer was found to be fraudulent and without "fair consideration" within the meaning of Section 67(d)(1)(e) of the Bankruptcy Act. See Sec. 67(d)(1)(e) at ¶ 2654 and Sec. 548 at ¶ 9540.
[Digest of Opinion]
Under the facts of this case, the bankrupts retained a former business associate as a "distinct entity" after its original corporate purpose failed. They thereby exploited its corporate separateness to obtain otherwise unavailable credit in the conduct of their business, while sharing the same equipment, the same telephone, the same employees, and ultimately, the same suppliers and customers.The former business partners of the bankrupt assert that this association operated as a single entity and should be treated as such in this proceeding. Their argument states that since the two entities were in fact one, there was no fraudulent "transfer" or "conveyance" within the meaning of the applicable federal and state provisions.
Generally, a corporate entity will be disregarded only to prevent fraud or illegality or to achieve equity. However, in the instant case, the creditors "would have had the court disregard the corporate form for the purpose of defeating the rights of creditors." Thus, relying on a prior court decision, the court similarly held, that the virtual identity of the bankrupt association with its subordinate association did not prevent the court from finding a conveyance to the subordinate association to be a "fraudulent transfer" within the meaning of Section 67(d) of the Bankruptcy Act.
Further, the court dismissed a complaint as to a fellow associate's indebtedness, since the bankrupt's indebtedness to him, as acknowledged by the trustee at trial, was greater than the associate's liability. Turning to the trustee's claims against two of the associate's, the trustee established that one year prior to the initiation of the bankruptcy proceeding, a total of $53,295.97 was transferred to the creditor from the bankrupt, while only $48,391.89 was repaid. The court determined that these repayments were not the "fair equivalent" of the sum transferred, and hence these transfers were "without fair consideration" within the meaning of Section 67(d)(1)(e) of the Bankruptcy Act.