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Genuine Issue of Material Fact Precluded Judgment in Favor of Trustee

Madden v. Morelli (In re Energy Conversion Devices, Inc.), Nos. 12-43166, 13-4958, 2016 Bankr. LEXIS 1713 (U.S. Bankr. E.D. Mich. Apr. 15, 2016)

Defendant Mark Morelli was the President and CEO of Debtor Energy Conservation Devices (ECD) until May 6, 2011 when the Debtor’s Board of Directors terminated him. Pursuant to a separation agreement, the Defendant was to receive an amount totaling $1,977,885.00 from the Debtor after termination. ECD paid the Defendant $583,270.00 about three weeks after the parties signed the separation agreement (May 2011 Transfer). ECD still owed to the Defendant about $1,394,615.00, which it failed to pay. Instead, a restructuring firm hired by ECD renegotiated ECD’s obligations to the Defendant under the separation agreement and the parties agreed that ECD would pay the Defendant a one-time payment of $703,800.00, in lieu of any payments otherwise due under the agreement. Furtherance to this, the second transfer of $703,800.00 was made to the Defendant on or about December 9, 2011 (December 2011 Transfer).

The Debtor filed for bankruptcy and the Trustee sought to avoid these two transfers – the May 2011 Transfer and the December 2011 Transfer as preferential transfers under 11 U.S.C. § 547; as constructively fraudulent transfers, under 11 U.S.C. § 548.

The Defendant argued that the May 2011 Transfer was not avoidable as a preference because the transfer was made more than 90 days before the bankruptcy petition date, and Defendant was not an “insider” at the time of the transfer. The Court found that the Defendant clearly was not an “insider” of ECD when the transfer was made on May 26, 2011. After his termination on May 6, 2011, Defendant was no longer an officer, director, or employee of ECD and after May 6, 2011, the Defendant had no control whatsoever over ECD. The transfer was made more than 8 months before the February 14, 2012 petition date – well outside the 90 day preference period, hence it was not avoidable under § 547 as a preference.

The Defendant next argued that neither the May 2011 Transfer nor the December 2011 Transfer was avoidable as a constructive fraudulent transfer. The Court agreed and concluded that ECD did receive reasonably equivalent value in the form of satisfaction of a debt that it owed to the Defendant at the time of both transfers under a separation agreement. The value received was not just “reasonably equivalent value” – it was value exactly equal to the amount of the respective transfers. For these reasons, the Court held that both the transfers cannot be avoided as a fraudulent transfer under § 548(a)(1)(B).