Lassman v. Fisher (In re Sunglasses and Then Some, Inc.), Case No. 07-1180, 2009 WL 2058564 (Bankr. D. Mass. July 6, 2009)

 The bankruptcy court in Lassman granted summary judgment on fraudulent transfer and preference claims against the principals of the debtor, a retailer of sunglasses on Martha’s Vineyard.  Prior to the bankruptcy and after the debtor experienced a decrease in sales, the defendants, who were the debtor’s principals, made several loans to the debtor to facilitate its continued operations.  In May 2005, the defendants began receiving weekly repayments of their loans averaging $500.  Around this time, the defendants had also formed a second corporation, Sunglasses and Then Some Westport Incorporated (Westport, Inc.), to which the debtor sometimes transferred inventory and funds.  

 The trustee sued the debtor’s principals seeking to avoid the transfers (i) to the debtor’s principals as preferential transfers under Bankruptcy Code section 547 and (ii)  to Westport, Inc. as fraudulent transfers under Bankruptcy Code section 548.  Section 547(b) of the Bankruptcy Code permits a trustee or debtor to avoid certain transfers of a debtor’s property made within 90 days before the bankruptcy filing.  The period is extended to one year when the transfer was made to an “insider” of the debtor.  Section 548 of the Bankruptcy Code permits a trustee or debtor to avoid fraudulent transfers of a debtor’s property that were made within 2 years before the date of the filing of its bankruptcy petition.

 The defendants moved for summary judgment on both counts.  In support of summary judgment on the fraudulent transfer claims under section 548 of the Bankruptcy Code, the defendants asserted that the debtor’s affiliate, Westport, Inc., was the actual “transferee,” as that term is defined in the Bankruptcy Code, and that the defendants, therefore, did not receive a fraudulent transfer.  

 Additionally, in support of summary judgment on the preferential transfer claims, the defendants contended that the loan repayments fell under the “contemporaneous exchange for new value” exception in section 547(c)(1)(A), because the defendants continued to operate the debtor’s stores in exchange for the payments they received.   Under section 547(c)(1)(A) of the Bankruptcy Code, a pre-petition transfer by a debtor that would otherwise be preferential cannot be recovered if it was “(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange.”

 With respect to the fraudulent transfer claim under section 548 of the Bankruptcy Code, the bankruptcy court agreed that the defendants were improper parties to the fraudulent transfer action.  Under the Bankruptcy Code, a debtor is empowered to recover avoided funds from “the initial transferee.”  The Bankruptcy Code does not define the term “transferee,” but the bankruptcy court reasoned that it is widely accepted that a transferee is one who has “dominion over the money or other asset, the right to put the money to one’s own purpose,” and that “the mere power of a principal to direct the allocation of corporate resources does not amount to legal dominion and control.”  Although the defendants controlled the debtor’s operations, the transfers at issue were made directly to  Westport Inc. or other parties, not the defendants.

 The bankruptcy court also granted judgment in the defendants’ favor on the preference claim, finding that the loan repayments were contemporaneously exchanges for new value, as set forth in section 547(c)(1)(A) of the Bankruptcy Code.  The bankruptcy court found that by working without salary, the defendants eliminated the debtor’s payroll expenses and reduced the debtor’s outstanding debt, all with the specific intent that the loan repayments would be exchanged for doing so.  The “contemporaneous new value” defense was therefore applicable and the transfers were not avoidable.

 Commentary: The Lassman case illustrates that a close examination of the facts can determine the outcome of avoidance actions.  Although there was no dispute that transfers were made, the defendants put forth explanations, such as that they did not actually receive certain transfers and that others that they did actually receive were made for value.  These arguments convinced the bankruptcy court to rule that the trustee could not recover funds they received.  The case also illustrates that plaintiffs must be careful to name the proper defendants in avoidance actions.