Court: Bankruptcy Appellate Panel of the Tenth Circuit; May 15, 2014; Us Bankruptcy; United States Bankruptcy Court
The Chapter 7 trustee for Adam Aircraft Industries (AAI) appeals a bankruptcy court ruling that denied part of his preference and fraudulent conveyance claims against Joseph Walker, AAI’s former president. AAI, which filed for bankruptcy on February 15, 2008, was led by Walker from approximately 2003/2004 until his unexpected termination on February 1, 2007. Following a board decision to replace him with Duncan Koerbel, Walker was given the option to resign. He submitted his resignation via email that same night, proposing severance terms including $250,000 annually for two years, health insurance, a refund of a $100,000 deposit for a future aircraft purchase, and repurchase of his Series F preferred stock for $100,000. Walker also agreed to support AAI and refrain from working for competitors. His resignation was formally accepted by the Board on February 5, 2007, and the financial terms of his severance were documented in a Memorandum of Understanding (MOU) and a Separation Agreement executed on February 13, 2007, which stated that his employment ended on March 1, 2007. The agreements, prepared in part by Koerbel, included provisions that allowed AAI to refund Walker's deposit and repurchase his stock, despite a credit agreement with Morgan Stanley that initially prohibited such actions. The Morgan Stanley deal closed in May 2007, providing AAI with approximately $80 million in funding.
Walker and AAI entered into a Separation Agreement, referred to as the "May Agreement," which was similar to prior Severance Agreements but changed the terminology from "Separation Date" to "Change of Position Date." The May Agreement stated that Walker's employment as President ended on March 1, 2007, and that he would hold the title of "field sales liaison," a role he never fulfilled, nor was it intended for him to do so. Walker had resigned as President and Director of AAI on February 2, 2007, a resignation accepted by the Board on February 5, effective the same date. The purpose of the May Agreement's separation date is unclear, and no explanations were provided by either party regarding its changes.
Subsequently, AAI made several payments to Walker within a year before the Petition Date, including a plane deposit refund, stock repurchase, and severance salary payments. Notably, $62,500.02 of the severance payments was made within the 90 days before the Petition Date. The Trustee initiated an adversary proceeding against Walker to recover the payments under 11 U.S.C. § 547(b)(4) and § 548(a)(1)(B). The bankruptcy court ruled in favor of the Trustee for the $62,500.02 payment within the 90-day window but denied the remaining claims.
The Trustee appealed the decision, while Walker did not. The appellate court has jurisdiction over the appeal, as neither party chose to have it heard by the District Court. The key issues for review include whether the bankruptcy court correctly denied the Trustee's preference claim regarding payments made within the year prior to the Petition Date based on Walker's non-insider status, and whether it properly denied claims of fraudulent transfer. The appellate review of the bankruptcy court’s findings regarding insider status and equivalent value adheres to a "clearly erroneous" standard.
The trustee argues that the bankruptcy court incorrectly determined that Walker was not an "insider" of AAI after February 1, 2007, for the purposes of § 547(b)(4)(B). Section 547(b) allows the bankruptcy trustee to avoid certain transfers made by the debtor prior to bankruptcy if they meet specific criteria, including being made to a creditor for an antecedent debt while the debtor was insolvent. Generally, the avoidance period is 90 days before the petition date, but extends to one year if the creditor is an insider.
Insiders are classified into two categories: statutory or "per se" insiders and non-statutory insiders. Statutory insiders include directors, officers, and certain relatives, all of whom are presumed to receive preferential treatment. Walker was considered a statutory insider until his resignation. The bankruptcy court found that he ceased to hold this status after February 1, 2007. The trustee contends that Walker remained an officer and director because his resignation was contingent upon AAI accepting his severance terms. However, the bankruptcy court disagreed, citing Walker's "clean break" from AAI on February 1, 2007. Evidence supporting this includes Walker's resignation email, which indicated he had removed his personal belongings and would not participate in AAI’s operations or governance thereafter. Following his resignation, AAI appointed a new president and held a meeting to introduce new leadership, further indicating Walker's departure from the company.
The bankruptcy court correctly determined that Walker severed ties with AAI on February 1 and was neither an officer nor a director, thus not a statutory insider thereafter. The concept of "non-statutory insider" emerges from a professional relationship with the debtor that provides an undue advantage due to closeness rather than transactional dealings. Courts assess non-statutory insider status by evaluating the relationship's intimacy and the arm's-length nature of their transactions. Following his departure on February 1, Walker lacked proximity to AAI management, did not access sensitive company information, and his prompt refund request for his airplane deposit did not indicate insider status since AAI had already approved it. The Trustee's claims that Walker's severance package negotiations suggested insider status were unconvincing; he negotiated with a Board that had just terminated him, and the agreements were partly crafted by his successor. The circumstances indicated both parties acted in their interests, with AAI seeking a smooth transition and Walker needing financial support amid personal challenges. Walker received less than he initially requested, further supporting the arm's-length nature of the negotiations. Consequently, the bankruptcy court's finding that Walker was not a non-statutory insider post-February 1, 2007, was justified, eliminating the need to address whether insider status was necessary at the time of payment arrangements.
Trustee argues that the bankruptcy court incorrectly analyzed claims under 11 U.S.C. § 548(a)(1)(B)(i) and (ii)(IV), which allow avoidance of transfers to insiders under employment contracts made within two years before a petition if the debtor received less than reasonably equivalent value. The definition of "insider" applies consistently across § 547 and § 548, with the distinction that § 547 evaluates insider status at the time of transfer, while § 548 considers it at both the time of transfer and when the obligation was incurred. Walker was determined not to be an insider after February 1, 2007, as the Severance Agreements and related payments were negotiated and executed afterward. Therefore, Trustee's claim under § 548(a)(1)(B)(ii)(IV) fails due to Walker's non-insider status at the relevant times, leading to the bankruptcy court's proper denial of the claim.
Trustee also contends that even if Walker was not an insider, he should have succeeded under an alternative constructive fraud claim under § 548(a)(1)(B) and (ii)(I). These require proof that AAI transferred property or incurred obligations within two years prior to the petition, received less than reasonably equivalent value, and was insolvent at that time or became insolvent due to the transfer. The bankruptcy court primarily focused on payments made under the Severance Agreements rather than the obligations themselves. Upon reviewing the record, it did not find evidence supporting that AAI was insolvent when obligations under the Severance Agreements were incurred. AAI's balance sheet indicated that its assets exceeded liabilities in early 2007, confirming solvency. Thus, Trustee did not meet the burden of proving insolvency for his claims under § 548(a)(1)(B) and (ii)(I).
For the first quarter of 2007, AAI's balance sheets indicated that its assets surpassed its liabilities by approximately $12.5 million in January, $7.5 million in February, and $3.2 million in March. The Trustee contends that these balance sheets inaccurately reflect AAI's solvency, arguing that the company was "burning cash" and reliant on continual debt or equity infusions. However, the distinction between solvency and cash flow is crucial; insolvency is assessed from the creditor’s viewpoint by evaluating available assets and their realizable value, while cash flow pertains to cash position changes over time. Despite AAI not generating revenue and incurring substantial expenses, the evidence shows it had sufficient assets to cover its debts.
The Trustee also challenges the book values of AAI's assets on the balance sheets, citing a $10 million sale of the business post-bankruptcy as evidence of diminished value. Nonetheless, the relevant valuation for assessing insolvency under § 548(a)(1)(B)(ii)(I) considers the asset values at the time obligations were incurred, not after bankruptcy. The Trustee did not substantiate claims that the balance sheet values were inaccurate, focusing instead on the alleged insider status of Walker, which did not necessitate proving insolvency. The record evidences AAI's solvency when obligations were assumed.
Regarding the Severance Agreements, the Trustee sought to avoid payments made to Walker, asserting they were fraudulent transfers due to AAI's alleged insolvency. To succeed, the Trustee was required to demonstrate that AAI received less than reasonably equivalent value in exchange for these transfers and that it was insolvent at the time of each transfer. Reasonably equivalent value is assessed as of the transfer date, and value under § 548(d)(2)(A) encompasses property or debt satisfaction but excludes unfulfilled promises to provide support. The Trustee's failure to present evidence of insolvency or lack of value means the court need not address the issue of reasonably equivalent value.
The bankruptcy court rejected the Trustee's claim to recover transfers to Walker under § 548(a)(1)(B), determining that the Severance Agreements created a claim by Walker against AAI, and each transfer to Walker reduced that claim, thus providing reasonably equivalent value to AAI. The Trustee argued that Walker's claims were based on obligations that could be avoided, which would negate the claim of reasonably equivalent value. However, if the obligations are not avoidable, the transfers are deemed to provide reasonably equivalent value since they reduced Walker’s claim. The court found that AAI's obligations under the Severance Agreements were not avoidable, affirming that the transfers to Walker were for reasonably equivalent value.
Regarding Walker's claim against AAI’s bankruptcy estate, the Trustee contended that the bankruptcy court should have disallowed Walker's claim under § 502(d) instead of conditioning its allowance on payment of an avoided preferential transfer amount. The court stated that under § 502(d), a claim must be disallowed unless the transferee pays the avoided transfer amount, but the statute does not stipulate a payment deadline. It was determined that the Trustee’s interpretation requiring immediate payment was unsupported, as courts have historically allowed creditors a reasonable time post-determination to repay. The court upheld the bankruptcy court's order requiring Walker to repay $62,500 to the Trustee within 30 days to maintain his claim, stating this was appropriate.
In conclusion, the bankruptcy court's denial of the Trustee’s claims under § 547(b)(4)(B) and § 548(a)(1)(B) was affirmed, along with its findings on insider status and reasonably equivalent value. Any error regarding the avoidability of obligations under the Severance Agreements was deemed harmless as the Trustee failed to demonstrate AAI's insolvency at the time of incurring those obligations. The order allowing Walker 30 days to repay the avoided preferential transfer amount was also affirmed.
Mehra and Bierman, board members appointed by Goldman Sachs and The Hunt Group, received severance terms outlined in a Memorandum of Understanding (MOU) dated February 12, 2013. The severance package included a total of $250,000 to be paid in equal monthly installments over one year, with additional payments of $20,833 for up to six months contingent on AAI's order book meeting specific criteria. AAI also committed to future offerings of deposit returns, stock repurchase, and healthcare benefits. The Trustee contended that these transfers could be avoided under 11 U.S.C. § 548(a)(1)(B)(i) for lack of reasonably equivalent value, and either (B)(ii)(I) asserting that AAI was insolvent at the time or (B)(ii)(IV) claiming the transfer was made to an insider. References in the document align with the Bankruptcy Code, specifically Title 11 of the U.S. Code, and relevant case law clarifying the definitions and implications of "statutory insider" and "per se insider." Insider status is determined as a factual question, particularly concerning the timing of the transfer and the degree of control exercised. The statute allows the trustee to avoid any transfers, emphasizing that the analysis must consider the status of the debtor and the nature of the transfer at the time it occurred.
Transfers made between ninety days and one year prior to a bankruptcy petition can be avoided by the trustee if the creditor is classified as an insider, as outlined in 11 U.S.C. § 548(a)(1)(B)(ii). This statute permits avoidance of transfers or obligations to insiders if the debtor was insolvent at the time of the transfer. Case law, including Kaler v. Craig and In re Solomon, supports the trustee's burden of proof under this provision. The balance sheet test is employed to assess insolvency, determining if liabilities exceed assets at fair valuation.
In a relevant case, AAI executed a severance agreement in May 2007, but this did not alter existing obligations to Walker, and the trustee contended that AAI's financial condition post-May 2007 was irrelevant as the obligations were incurred earlier. The bankruptcy court found that while AAI's owner believed the company was solvent in part of 2007, evidence presented by the trustee indicated AAI was insolvent during the latter part of that year, particularly within the 90-day preference period.
The court noted that while AAI's cash burn may suggest insufficient capital, the appeal focused on the bankruptcy court's solvency findings under § 548(a)(1)(B)(ii)(I). The trustee did not challenge other solvency grounds under § 548(a)(1)(B)(ii)(II) or (III) for appeal. An obligation can be avoided if the debtor was insolvent when it was incurred, and the concept of reasonably equivalent value applies when a creditor's claim is reduced accordingly. Walker filed a proof of claim in AAI's bankruptcy for $145,831, indicating ongoing financial disputes related to the debtor's obligations.
