"Reasonably equivalent value" in § 548 avoidance actions: An analytical framework post-In re TOUSA, Inc.

Avoidance powers in bankruptcy are designed to prevent the debtor from fraudulently siphoning away his property on the verge of bankruptcy. Usually, a trustee in bankruptcy can avoid prepetition transfers of the debtor’s interest in property if the transfer was made when the debtor was insolvent or was made insolvent as a result of the transfer. Additionally, the debtor must have received less than reasonably equivalent value in the transaction. In a recent opinion, In re TOUSA, Inc., the United States District Court for the Southern District of Florida reversed the bankruptcy court on the issue of transfer avoidance in the context of intracorporate guarantees. The bankruptcy court’s decision, which allowed trustee to recover money received by certain lenders of the debtor, caused a vibrant reaction in the legal community. Analysts noted that “[t]he ruling has been greeted by the lending community and commentators with a mixture of shock, dismay, disbelief, and resignation. If upheld on appeal and followed by other courts, the ruling may have a marked impact on lenders and debtors alike.” The district court reversed the bankruptcy court on every point of its analysis, concluding that the transfer in question was not avoidable. One point of disagreement between the two courts was the application of the concept “reasonably equivalent value” as used in § 548 of the Bankruptcy Code in connection with avoidance of constructively fraudulent transfers. One does not need to review years of often conflicting jurisprudence to immediately realize that the term “reasonably equivalent value” is a murky concept subject to a variety of interpretations. As explained in this article, the facts of TOUSA present a great example of how difficult the concept can be when applied by courts attempting to determine whether a given transaction is constructively fraudulent. Although Congress defined “value” in § 548, it failed to provide guidance on how to measure its reasonable equivalence. Perhaps, one reason why no definition was provided by Congress is that the inquiry is inevitably fact-specific. It is impossible to devise a precise formula that will uniformly establish what is and what is not reasonably equivalent, and fair market value, although helpful, is not always the benchmark. However, this Article attempts to propose a clear framework for the analysis of “reasonably equivalent value” as an element of fraudulent conveyance avoidance. The framework incorporates more than thirty years of the most prominent decisions on the issue in the hope of clarifying the issue not only for the courts, but also for legal practitioners and businessmen planning transactions. Part II of this Article provides background information on fraudulent conveyances and the term “reasonably equivalent value.” Part III reviews the recent decision in In re TOUSA, highlighting the interpretation and application of the term “reasonably equivalent value” by both bankruptcy and district courts. Part IV outlines an analytical framework, incorporating within this framework the most significant jurisprudence tackling the issue. The Article in Part V once again evaluates the facts of TOUSA through the prism of the proposed framework. Finally, Part VI offers a brief conclusion.