In re Transtexas Gas Corp., 597 F.3d 298 (5th Cir. 2010)

In re Netbank, Inc., 424 B.R. 568 (Bankr. M.D. Fla. 2010)

In re Transtexas Gas Corp. and In re Netbank, Inc. exemplify a distinction between Bankruptcy Code Sections 547 and 548 with respect to whether a transfer to a former insider is treated as a transfer to an “insider” for purposes of avoiding the transfer.  In In re Transtexas Gas Corp., the Court held that a transfer to a former insider is avoidable under Section 548.  However, in In re Netbank, Inc., the Court held that a transfer to a former insider is not avoidable under Section 547.   

In re Transtexas Gas Corp., 597 F.3d 298 (5th Cir. 2010)

In In re Transtexas Gas Corp.,U.S. National Bank Association, as liquidating trustee for the chapter 11 estate of Transtexas Gas Corp., brought an avoidance action under Section 548 against the Debtor’s former CEO to set aside $2 million in severance payments as fraudulent conveyances.  The severance agreement was signed while the Defendant was an insider, but the payments were made after the Defendant’s resignation.

Under Section 548(a)(1), “a trustee may avoid any transfer … that was made or incurred on or within 2 years before the date of the filing of the petition, if among other things, the debtor –

… made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.”

The Plaintiff argued that the payments were fraudulent transfers under Section 548 because the payments were arranged while the Defendant was an insider of the Debtor.  The Defendant argued that the payments were not fraudulent transfers under Section 548 because the payments were made subsequent to the Defendant’s departure from the company, and, therefore, he was not an “insider” when the payments were made.

The Bankruptcy Court held that the transfers were avoidable because the Defendant was an insider at the time the transfers were arranged.  The Defendant appealed, and the District Court affirmed the Bankruptcy Court’s ruling.  The Defendant appealed again. 

The Court of Appeals for the Fifth Circuit affirmed the District Court and the Bankruptcy Court, and held that the transfers could be avoided under Section 548.  The Court reasoned that Section 548 sets forth that a transfer may be avoidable if the recipient was an insider at the time of the transfer or at the time the obligation was incurred.  Thus, because the Defendant was an insider when the severance agreement was executed, the Court ruled that the transfer was avoidable under Section 548 even though the Defendant was not an insider at the time of the transfer.

In re Netbank, Inc., 424 B.R. 568 (Bankr. M.D. Fla. 2010)

In In re Netbank, Inc., the liquidating supervisor for the estate of Netbank, Inc. brought an avoidance action under Section 547(b) against the Debtor’s former CEO to set aside an alleged $2.9 million preferential transfer.  The transfer occurred one day after the transferee’s resignation as the Debtor’s CEO, which was prior to 90 days but within one year before the petition date.  Therefore, the transfer could only be avoided if the Defendant was an “insider” under Section 547.

Under Section 547(b), a trustee may avoid certain transfers made to a creditor between ninety days and one year before the date of the filing of a bankruptcy petition, if such creditor at the time of such transfer was an insider[.]”

The Plaintiff contended that the pertinent date for determining whether the Defendant was an insider was the date the Debtor agreed to make the transfer, which was when the Defendant was still the Debtor’s CEO.  The Defendant filed a motion to dismiss arguing that the Plaintiff’s complaint failed to state a claim under Section 547 because he was no longer an insider on the date the transfer actually occurred. 

In its analysis, the Court noted that the majority view was that the pertinent date is the date the transfer was actually made.  This is known as the “exact date” approach.  The Court also mentioned that a minority of courts adopt an “arranged transfer” approach, which looks at whether the transferee was an insider on the date the transfer was arranged. 

The Netbank Court followed the majority “exact date” approach and held that because the Defendant was not an “insider” on the date of the transfer, the transfer was not avoidable under Section 547(b), and granted the Defendant’s motion to dismiss.  The Court’s reasoning included: (1) the “arranged transfer” approach is inconsistent with the plain meaning of the statute, which requires that a defendant be an insider at the time of the transfer and (2) the “exact date” approach provides a bright line for determining whether a transfer is avoidable.

Commentary

In re Transtexas Gas Corp. and In re Netbank, Inc. demonstrate that even if a former insider transferee may be insulated from liability under Section 547(b), it may still face exposure to liability under Section 548 if the transfer was arranged while he or she was an insider.  In determining whether a transfer to a former insider is avoidable, practitioners must undertake a 3 step analysis.  First, the practitioner must determine whether the transfer in question was arranged when the transferee was an insider.  Second, the practitioner must analyze whether the transfer in question is being avoided under Section 547 or Section 548.  Finally, the practitioner must be aware of whether courts in the relevant district and circuit apply the “exact date” approach or the “arranged transfer” approach.