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Home New Cases Fragile Financial Conditions Under § 548 Must Be Satisfied

Fragile Financial Conditions Under § 548 Must Be Satisfied

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September 7, 2021, Northern District of Texas – As part of a refinancing transaction in 2014, Debtors Stone Panels, Inc. (“SPI”) and Stone Panels Holding Corp. (“Holding”) jointly borrowed roughly $14 million that was immediately transferred to Defendant Thompson Street Capital Partners III, L.P. (“Thompson Street”) to partially satisfy a debt for which only Holding was obligated.

Robert Yaquinto, as Chapter 7 Trustee brought an action to avoid the transfer from SPI to Thompson Street. The Trustee argued that the transfer was a constructively fraudulent transfer under 11 U.S.C.S. § 548(a)(1)(B) and Tex. Bus. & Com. Code Ann. §§ 24.005(a)(2), 24.006(a). According to the Trustee, SPI was not obligated to pay the debt as only Holding received the benefit of the paydown of a Thompson Street note. Thompson Street argued that SPI received other benefits that constituted reasonably equivalent value, such as access to Thompson Street’s banking and capital markets relationships and access to a new $4,000,000 revolving line of credit. While the Court agreed that indirect benefits could be included in a calculation of reasonably equivalent value, there was no evidence from which to determine the actual value of the claimed indirect benefits in this case. The Court also found that there was also no evidence that SPI’s access to a new revolving line of credit could not have been achieved without the alleged transaction. The Court concluded it was fairly clear that whatever the value of any benefits may have been, it was not reasonably equivalent to the value of the jointly borrowed proceeds transferred to Thompson Street.

Despite being able to show that the transaction was a transfer of an interest of SPI in property for which SPI did not receive reasonably equivalent value, the Court found that the requirements of fragile financial conditions had not been met because the Trustee was not able to show that :

(1) SPI was insolvent on the date that such transfer was made or became insolvent as a result of such transfer,
(2) SPI was engaged in business or a transaction or was about to engage in business or a transaction, for which any property remaining with SPI was an unreasonably small capital, or
(3) SPI intended to incur, or believed that it would incur, debts that would be beyond SPI’s ability to pay as such debts matured.

The Court held that the Trustee did not meet his burden of proof in meeting the elements of a fraudulent transfer under section 548(a)(1)(B) of the Bankruptcy Code. The Court granted judgment in favor of Defendant.

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