James A. Byrne U.S. Courthouse, which houses the U.S. Court of Appeals for the Third Circuit, and the U.S. District Court for the Eastern District of Pennsylvania, in downtown Philadelphia, PA, on April 3, 2021. Photo: Diego M. Radzinschi/ALM
In what for the creditor community is likely a welcome but not unexpected ruling, a panel of the U.S. Court of Appeals for the Third Circuit recently held, in Speedwell Ventures v. Berley Associates (In re Pazzo Pazzo), No. 21-2344, (3d Cir. Dec. 15, 2022), that a terminated option to repurchase property could not be resurrected by a claim of the option holder’s bankruptcy estate that the termination of the option was a fraudulent transfer. While the decision provides some guidance as to how the prepetition termination or expiration of a purchase option may fare in bankruptcy, the holding is narrow, and leaves open the question of whether the court’s reasoning can be applied in other circumstances to shield prepetition transactions from avoidance claims.
The U.S. Bankruptcy Code enables a bankruptcy trustee or Chapter 11 debtor in possession to avoid or “claw back” certain transfers occurring during prescribed periods prior to the bankruptcy filing. The purpose of these provisions is promote fairness and equality of treatment of creditors by permitting the avoidance of certain transfers that result in preferential treatment of a particular creditor, see 11 U.S.C. Section 547, or that constitute constructive or actual fraudulent transfers. See 11 U.S.C. Section 548. The Bankruptcy Code’s definition of “transfer” is very broad, including “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property; or an interest in property.” Often the issue of whether a transfer has occurred is not in dispute—for example, where a debtor repaid a debt in cash, or conveyed personal property in an attempt to place it beyond the reach of creditors.
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