Imagine the following situation: The debtor is a corporation formed for the purpose of acquiring all assets of a business and using them to operate a newly formed business. The new business earns materially less than its projected income stream and, within three years, files a petition under Chapter 11 of the Bankruptcy Code. After a trial, it is determined that the debtor paid $100 million for assets worth $80 million at the time of acquisition. It also is determined that the formation transaction was a fraudulent transfer because the asset purchase was for less than fair consideration, and the business was insolvent and inadequately capitalized at the time of formation. Assume also that no party acted with actual intent to defraud any creditor. To what recovery is the plaintiff trustee entitled under 11 U.S.C. §550, which governs the liability of transferees of avoided transfers? The full amount of the fraudulent transfer, $100 million? Or the difference between the amount of consideration paid and received by the debtor, $20 million? Although the majority of decisions support the lower recovery of $20 million, there is case law and legislative history that support either result.
In my experience, trustees typically argue that the transferee’s liability under §550 is the full amount of the transfer, without any offset for value received by the debtor. In my view, the correct result is the lower remedythe difference between the value of the consideration paid and the value of the consideration receivedregardless of whether the claim is under federal or state law and regardless of whether the defendant took in good faith. Such a remedy restores the debtor’s estate to its pre-transfer economic position without awarding a windfall.
