Paloian v. LaSalle Bank, N.A.

Paolian v. LaSalle Bank, N.A., --- F.3d ---, Nos. 09-2011, 09-2012, 09-2013 & 09-2026 (7th Cir. Aug. 27, 2010)
Reversing the decisions below and in a matter of first impression at the federal appellate level, the Court held that a trustee for a securitized investment pool is an "initial transferee" for the purposes of Code section 550(a)(1). The Court also reversed the rulings of the Courts below that determined that the debtor was insolvent at the time certain allegedly fraudulent transfers occurred. The Court found error not only in the application of a reduction to the debtor's asset value on the dates of the transfers due to contingent liabilities without a corresponding offset for contingent assets, but also in the use of a solvency analysis that applied an illiquidity discount and a tax-effect discount to the asset side of the debtor's balance sheet. The Court also held that a transfer of accounts to an entity related to the debtor would not comprise a true sale to a "bankruptcy-remote vehicle" where the transferee did not operate independently from the debtor and in fact operated as a department of the debtor, did not prepare financial statements or file tax returns, and did not have other indicia of observance of corporpate formalities. The Court noted that either proof that the entity purchased accounts transferred to it by the debtor as part of a bona fide sale or a viable argument that the trustee, in his status as hypothetical lien creditor, must be charged with knowledge about that entity's relationship to the debtor, might overcome this conclusion.
Procedural context:
Appeal from District Court for the Northern District of Illinois affirming decisions by the Bankruptcy Court for the Northern District of Illinois after trial ruling in favor of bankruptcy trustee on adversary complaint to avoid and recover allegedly fraudulent transfers.
Bankruptcy trustee sought to avoid certain transfers of accounts receivable and payments of rental amounts to affiliates of debtor as fraudulent transfers under Code sections 544, 548, 550 and the Illinois Fraudulent Transfer Act. In complex proceedings below, Defendant, in its capacity as a trustee for a securitized investment pool, argued that it was not a transferee for avoidance purposes because it was not the real recipient of the funds. The Trustee also asserted that the debtor was insolvent at the time certain of the transfers occurred based upon a discounted-cash-flow analysis and the debit of certain post-transfer liabilities from that analysis, while the Defendant countered that this analysis failed to take into account certain assets and guaranties that would net out those liabilities. The Defendant further questioned an applied reduction in its deemed asset value in the Trustee's solvency analysis based upon the illiquidity of the debtor's shares and potential tax consequences for any purchaser of the debtor's assets. Finally, other Defendants asserted that certain transfers could not be recovered as they had been made by a "bankruptcy-remote" entity affiliated with the debtor and not the debtor itself.
Easterbrook, Rovner, Tinder

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