[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
U.S. COURT OF APPEALS
___________________ ELEVENTH CIRCUIT
February10, 2005
No. 04-12207 THOMAS K. KAHN
CLERK
___________________
D. C. Docket No. 02-61584-CIV-JIC
BKCY No. 98-25090-BKC-RBR
INTERNATIONAL MANAGEMENT ASSOC.,
Debtor.
------------------------------------------------------------
WILLIAM B. REILY,
Plaintiff-Appellant,
versus
SONEET R. KAPILA, Trustee for
International Management Associates, Inc.,
Defendant-Appellee.
_________________________
Appeal from the United States District Court
for the Southern District of Florida
_________________________
(February 10, 2005)
Before BIRCH, KRAVITCH and CUDAHY*, Circuit Judges.
CUDAHY, Circuit Judge:
Plato once said that “[w]hen a Benefit is wrongly conferred, the author of
the Benefit may often be said to injure.” The bankruptcy claim presented here,
brought by a Chapter 7 bankruptcy trustee, seeks avoidance of a $100,000
payment to a shareholder in the debtor corporations pursuant to 11 U.S.C. § 548.
The potential recovery of that payment under 11 U.S.C. § 550(a)(1) requires us to
assess whether providing the unquantifiable key to a larger transaction can qualify
a party as an “entity for whose benefit” a putatively voidable transfer is made. 11
U.S.C. § 550(a)(1) (2004). We believe that, under the circumstances presented
here, “benefit” has been too broadly defined to meet the requirements of 11 U.S.C.
§ 550(a)(1).
I.
Although the briefs submitted here are not very informative about either the
relevant facts or the precise issues, we think that the facts can be usefully
summarized. The instant bankruptcy involves a number of interlocking
corporations that provided and managed assisted living facilities in southern
*
Honorable Richard D. Cudahy, United States Circuit Judge for the Seventh Circuit,
sitting by designation.
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Florida. Four of these corporations operated assisted living facilities, and the fifth,
International Management Associates (IMA), was formed to provide a
management vehicle for the operating companies and to permit those companies to
share overhead expenses. The assets of the four operating companies were subject
to a security interest in favor of a corporate lender, Health Care REIT.
IMA was formed by Dr. Gadi Gichon and the late Gavriel Shade in 1995 to
manage the operations of the original assisted living facility. Dr. Gichon and
Shade entered into an amalgamation agreement with William B. Reily later that
same year, whereby the three became equal shareholders in IMA and other
associated corporations. At that time, Gichon apparently loaned the original
assisted living facility corporation $590,000, and that company executed a
promissory note payable to him. In 1996, the amalgamation agreement was
amended after three additional assisted living facilities were purchased and
financed through Health Care REIT. It was not long before the living facility
venture encountered financial difficulties, and in early 1997 Reily was removed
from management and was replaced by another individual. Financial problems
continued to mount, however, prompting Dr. Gichon and Shade to once again
approach Reily seeking help in June of 1997, when the three began to discuss the
possibility of selling the assisted living facilities. Thereafter, Reily approached
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Health Care REIT, which agreed to purchase the facilities and lease them back to
Reily on the dual conditions that Reily acquire the corporate interests of Dr.
Gichon and Shade and that Dr. Gichon guarantee the new financial arrangement.
Dr. Gichon and Shade agreed to these terms in November of 1997, and in
December, Reily formed a corporation, Premier. Throughout its existence, Reily
was Premier’s sole shareholder and officer. Premier entered into an agreement
with Health Care REIT restructuring into a new financial arrangement its
mortgage loans secured by the living facilities. Under this agreement, Health Care
REIT took title to the facilities and granted Premier a lease for them and a working
capital loan of approximately $2.248 million to acquire certain shareholder
interests, to pay Dr. Gichon the balance on his outstanding loans and to pay off
other creditors. It was a condition of Heath Care REIT’s performance under the
agreement that Reily hold the sole shareholder interest in the debtor corporations.
On February 11, 1998, the deal closed, and Gichon and Shade formally turned
over their interests to Reily and Health Care REIT. At closing, Dr. Gichon
received from the corporate debtors slightly over $700,000, of which $100,000
represented payment for his stock in these corporate debtors.1
1
During oral argument, many questions were raised concerning the source of the funds for
the $100,000 transfer. Whatever the answer to this question may be, we do not think it bears
upon our approach to resolution of this case.
4
After the closing, the assisted living facilities were operated and managed
exclusively by Premier under the lease arrangement for approximately one year.
In early 1999, Premier assigned the leases from Health Care REIT to another
entity, Assisted Health Ventures Holdings, Inc. This transaction relieved Gichon
and Shade of their personal guarantees undertaken at the February 1998 closing
and netted Premier over $300,000.
Unfortunately, however, the working capital loan was not sufficient to
extinguish all creditor liabilities, and the debtor corporations, left without assets,
entered bankruptcy only five months after the closing. In July of 1998, the five
debtor corporations filed separate voluntary petitions under Chapter 7, and these
bankruptcy cases were consolidated in In re International Management
Associates. Thereafter, the Trustee in Bankruptcy, Soneet R. Kapila, filed suit
against Premier and against Dr. Gichon and Reily, who were insiders of the
debtors at all times relevant to this proceeding under 11 U.S.C. § 101(31)(B)(I)-
(iii).2 Among other claims, the trustee sought recovery of allegedly fraudulent
and preferential transfers made to Dr. Gichon. In an attempt by the trustee to
pierce Premier’s corporate veil and hold Dr. Gichon and Reily liable for transfers
2
The trustee voluntarily dismissed the claims against Shade, who had passed away in the
interim.
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of debtors’ assets, the complaint also alleged that Premier was a continuation of
the business of the debtors because it was under the control of Reily, who was also
a shareholder and officer of the debtor corporations. Though Dr. Gichon and
Reily filed answers, Premier never filed a responsive pleading. Pursuant to a
default judgment issued against Premier on January 11, 2001, the bankruptcy court
found that Premier was an alter ego of the debtors and held that it was liable for all
claims against and liabilities of the debtors, including any fraudulent or
preferential transfers of the debtors’ assets. At proceedings on January 16 and 17,
2002, the bankruptcy court reasoned that the default judgment was binding on Dr.
Gichon and Reily in all subsequent proceedings since they had known of the
charges against Premier but had not defended against them. The court allowed the
trustee to avoid as fraudulent the $100,000 transfer which had been made to obtain
Dr. Gichon’s stock in the debtors, and further held that the funds could be
recovered from Dr. Gichon and Reily jointly and severally. As explained by the
court, Reily was the “primary beneficiary” of the transfer to Dr. Gichon “as he
wound up with 100% of the stock of Premier, along with the control of all of the
assets of the Debtors within his own closely held corporation,” and so was the
“entity for whose benefit the transfers were made pursuant to 11 U.S.C. § 550.”
(Bankruptcy Op. p. 17).
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On appeal, the district court reversed the bankruptcy court as to the liability
of Dr. Gichon, finding that he was not bound by the default judgment against
Premier because he could not have compelled Premier to defend itself against the
charges and thus could not have contested the default judgment. Trying to follow
in Dr. Gichon’s footsteps, Reily also sought relief from liability on the grounds
that there was no allegation that he had received fraudulent or preferential
transfers. The district court refused to grant Reily relief, however, declining to
view as clearly erroneous the bankruptcy court’s finding that Reily had received
the “benefit” of complete ownership of the stock in the debtor corporations. The
district court further stated that unlike Dr. Gichon, Reily, as sole shareholder and
officer of Premier, had the ability to answer the complaint and defend the suit on
behalf of Premier.
We review the decision of the district court on the same basis that it
reviewed the bankruptcy court–legal determinations de novo and factual findings
for clear error. General Trading, Inc. v. Yale Materials Handling Corp., 119 F.3d
1485, 1494 (11th Cir. 1997).
II.
A.
We must first examine the basis upon which the trustee seeks to avoid this
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transfer. The bankruptcy court determined that the $100,000 transfer to Dr.
Gichon was avoidable as a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B).
(Bankruptcy Op., p. 17). The evidence in the record relevant to that determination
is sparse and there has been little explanation of it by the parties. Reily argues that
there has been no fraudulent transfer but cites no evidence.
Under 11 U.S.C. § 548(a)(1)(B) (2004), a trustee in bankruptcy may avoid
any transfer made or incurred one year before the date of filing if the debtor
“received less than a reasonably equivalent value in exchange for such transfer or
obligation,” and if the debtor was either insolvent on the date the transfer was
made, was left undercapitalized by the transfer or intended to incur further debt
beyond its ability to pay. Thus, with respect to a fraudulent transfer, the lynchpin
of voidability here is whether there was less than adequate consideration for the
property transferred. The record and the opinions below tell us little about the
value of the stock, and Reily’s argument would suggest that it had substantial
value. However, since the corporations were in bankruptcy, we may assume that
Dr. Gichon’s stock was worth less than $100,000 and in all probability was
worthless. In any event, no one will be prejudiced by accepting this “worthless”
hypothesis as a working assumption.
B.
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Since the debtor received “less than a reasonably equivalent value in
exchange,” the transfer was fraudulent and voidable, and so recovery can be
sought from Dr. Gichon, the transferee, but can it also be sought from Reily on the
theory that he was a beneficiary of the transfer? The bankruptcy court held that
the trustee was entitled to recover from Reily pursuant to 11 U.S.C. § 550(a)(1)
(2004), which allows a trustee to “recover, for the benefit of the estate, the
property transferred, or, if the court so orders, the value of such property, from–(1)
the initial transferee of such transfer or the entity for whose benefit such transfer
was made . . . .” (emphasis added).
The overarching purpose of the transaction before us was to obtain a loan
from Healthcare REIT to restructure the financing of the assisted living facilities
and to provide capital for continued operations. A condition of that loan was that
Reily be the sole owner of the stock of the debtor corporations. Therefore, the
acquisition of the stock was in the interest of furthering the loan and the
restructuring–goals which fulfilled Reily’s purposes. Hence, Reily was
“benefitted” in a larger sense when he obtained complete control of the debtors’
assets and therefore fulfilled a necessary condition of obtaining the funds from
Health Care REIT. This is the “benefit” that both the trustee and the bankruptcy
court attributed to Reily in order to underpin liability. (R. at 389; Bankr. Op., p.
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17) (stating that Reily “was the primary beneficiary of the transfers to Gichon
because he wound up with 100% of the stock of Premier, along with the control of
all the assets of the Debtors within his own closely held corporation.”). However,
this sort of unquantifiable advantage is not the sort of “benefit” contemplated by
11 U.S.C. § 550(a).
The paradigm case of a benefit under § 550(a) is the benefit to a guarantor
by the payment of the underlying debt of the debtor. See In re Coggin, 30 F.3d
1443, 1453 (11th Cir. 1994) (stating that the phrase “entity for whose benefit such
transfer was made” “typically has been employed when the trustee attempts to
recover from a guarantor of an underlying debt”); 5 Collier on Bankruptcy ¶
550.02 [4] at 550-17 (15th ed. 1984). See also In re Finley, Kumble, et al., 130
F.3d 52, 57 (2nd Cir. 1997) (stating that the phrase “entity for whose benefit such
transfer was made” “references entities that benefit as guarantors of the debtor, or
otherwise, without ever holding the funds.”); In re Bonded Financial Services,
Inc., 285 F.2d 890, 895 (7th Cir. 1988) (stating that “the paradigm ‘entity for
whose benefit such transfer was made’ is a guarantor or debtor.”).
The example of a debt and a guarantor affords some insight into the
intention of Congress in enacting § 550(a). The fact that Reily attained complete
control over the debtors’ assets does not give rise to a quantifiable benefit or one
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bearing the “necessary correspondence to the value of the property transferred or
received.” Mack v. Newton, 737 F.2d 1343, 1359-60 (5th Cir. 1984).3 The
immediate facts here are that debtor corporations paid $100,000 for stock worth
less than $100,000 (and that was probably worth nothing). There is no direct
benefit to Reily in a transaction that reduced the assets under his control by
$100,000 but increased to an unquantifiable extent the concentration of his control
or ownership of that shrunken asset base. The only “benefit” cited by the
bankruptcy court was the winning of 100% control over depleted assets. This is
not a tangible or a quantifiable benefit. See id. (rejecting as too broad the trustee’s
allegation that the principals in a partnership had received an incidental benefit
from auctioning off cattle and using the proceeds to operate their dairy enterprise,
deeming this “an incidental, unquantifiable, and remote benefit bearing no
necessary correspondence to the value of the property transferred or received.”).
Even as a matter of arithmetic, the transfer here depleted and did not augment the
assets of debtors controlled by Reily. The fact that Reily gained exclusive control
of a smaller pool of assets does not, on the facts before us, weigh in the balance.
The very fact that the bankruptcy estate received “less than a reasonably
3
While Mack was decided under the Bankruptcy Act and not the Bankruptcy Code, we
nonetheless find its language appropriate to the facts of this case.
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equivalent value in exchange” for the $100,000 (to qualify the transfer as voidable
under 11 U.S.C. § 550(a) would deprive Reily of any net benefit in the transfer.
Thus, Reily’s loss was $100,000 from the assets subject to his control, while his
only gain was the value of the stock giving him 100% control, which, in order for
the transfer to be voidable, was worth less than $100,000.
This case is immediately distinguishable from In re B.S. Livingston & Co.,
Inc., 186 B.R. 841 (D.N.J. 1995), in which the defendants were benefitted when
they sold the core of the debtor’s business to a third party in exchange for lucrative
positions in the new company. Although Livingston may present a “benefit” that
is on the far edge of qualification under 11 U.S.C. § 550(a), there is no obvious violence
to the language in stating that the benefit of a lucrative position, like the benefit
experienced by a guarantor, may be considered direct, ascertainable and
quantifiable, unlike the “benefit” attributed to Reily.
C.
Although strict equity may not be part of the test under the Bankruptcy
Code, our approach is somewhat strengthened by the apparently inequitable
consequences of unwinding this transfer at the expense of Reily. Under the
bankruptcy court’s apparent disposition, if the transaction is nullified and the
$100,000 is recovered from Reily, Dr. Gichon would presumably recover his stock
12
interest in the debtor and the conditions of Health Care REIT’s loan would not be
met. This would leave Reily out $100,000 with nothing to show for it. There
seems to be no authority under 11 U.S.C. § 550(a)(1) for pursuing an alternative
course of unwinding, such as recovering the $100,000 from Reily and returning
the stock to Dr. Gichon.4 The result of such a reshuffle would be the same as if
Reily had paid Dr. Gichon $100,000 directly for the stock and thereby achieved
100% control. Whether Reily possessed $100,000 available for this purpose is
unknown. But, however one might judge the equity, Reily would have received
something for his $100,000. As it stands, the bankruptcy court’s assessment of
liability against Reily seems to make possible an unbalanced outcome, for Dr.
Gichon may still retain the $100,000, while Reily’s stock interest is unaffected,
although he has contributed $100,000 to the bankruptcy estate.
III.
Since the “benefit” to Reily here is unquantifiable and, in the words of Mack
4
Such authority would not stem from the trustee’s avoidance powers, for avoidance of a
transaction merely nullifies it, meaning that “the transfer is retroactively ineffective and the
transferee legally acquired nothing through it.” In re Pearson Indus., Inc., 178 B.R. 753, 759
(Bankr. C.D. Ill. 1995) (internal references omitted). See also In re Allied Companies, Inc., 155
B.R. 739, 744 (Bankr. S.D. Ind. 1992) (stating that the avoidance of a transfer relates back to
before the bankruptcy was filed, deeming the obligation unpaid as of the petition date). Nor can
we find support for any theory of recovery under which properties exchanged would not be
returned to their original sources. The text of 11 U.S.C. § 550(a)(1) is silent as to whether, if a
transfer is avoided and recovery is ordered, the parties to the transfer get back the property that
they originally possessed, although this result ordinarily follows from a rescission.
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v. Newton, supra, bears “no necessary correspondence to the value of the property
transferred or received,” this is not a “benefit” cognizable under 11 U.S.C. §
550(a)(1). We therefore REVERSE the judgment of the district court and
REMAND this case for further proceedings consistent with this opinion.
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