Opinion ID: 76009
Heading Depth: 2
Heading Rank: 3

Heading: For Value and in Good Faith under Section 548(c)

Text: 21 Here the bankruptcy court found, and the district court affirmed, that the transfers from the debtor to Orlick were voidable pursuant to Sections 548(a)(1)(A)(actual fraud) and (a)(1)(B)(constructive fraud). They read: 22 The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily — 23 (A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or 24 (B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and 25 (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; 26 (II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was unreasonably small capital; or 27 (III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured. 28 Section 548(a)(1)(A) and (a)(1)(B). 29 Both courts found as a matter of law that Orlick was not entitled to the affirmative defense set forth in Section 548(c) that she took such transfers for value and in good faith. It reads: 30 ... [A] transferee or obligee of such [an otherwise voidable] transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation. 31 Section 548(c). 32 Both the district court and the bankruptcy court in this case relied upon In re Randy, 189 B.R. 425 (Bankr.N.D.Ill.1995), a summary judgment holding based upon affidavits. Randy held that brokers, paid a commission based upon a percentage of their sales made from soliciting investors in what turned out to be a debtor's Ponzi scheme, were not entitled to the affirmative defense of Section 548(c) as a matter of law whether or not they had any culpable intent. See Randy, 189 B.R. at 438, 442. 33 In Randy, the trustee was seeking to retrieve commissions paid to three defendant brokers for their efforts in coopting new investors into a Ponzi scheme. Id. at 438. These brokers were also paid commissions for inducing persons who had already invested in the scheme to keep their principal investments in place so that the Ponzi scheme would not collapse. Id. 34 Citing an unreported memorandum decision, Wilson v. RHS & Associates (In re Blazo Corp.), 1994 WL 456881 (Bankr.N.D.Ohio 1994), the Randy court held that Section 548(c) was not available as a matter of law to brokers because they assisted in perpetuating the scheme, therefore no value was or could be legally given. Randy, 189 B.R. at 442. It found it unnecessary to reach the question of good faith. 8 Id. 35 In Blazo, however, the agents were asserting a claim for their efforts and expenses in furtherance of an illegal contract... and [t]he defendants worked, by their own admission, assiduously and effectively to advance the debtor's nefarious scheme. Id. (emphasis added). In essence, Randy took Blazo one step further by eliminating the element of culpable intent. 9 36 We disagree with the rationale of Randy. The better reasoned cases germinate from the 1986 case of Merrill v. Allen (In re Universal Clearing House Co.), 60 B.R. 985 (D.Utah 1986), a case never mentioned in the Randy decision. Universal Clearing House involved a Ponzi scheme where 127 sales agents received commission payments for inducing investors to invest in certain clearinghouses. 60 B.R. at 989. The bankruptcy court held as a matter of law that because the [brokers'] services deepened the debtors' insolvency and furthered a fraudulent scheme, the services were `without legally cognizable value.' 60 B.R. at 998. The district court disagreed. In reversing the bankruptcy court, it stated: 37 The fact that the services appellants performed increased the debtors' insolvency does not preclude a determination that the appellants gave value. By definition, a Ponzi scheme is driven further into insolvency with each transaction. Therefore, by the trustee's reasoning, no one who in any way dealt with, worked for, or provided services to the debtors could prevent avoidance of any transfers they received. The debtors' landlord, salaried employees, accountants and attorneys, and utility companies that provided services to the debtors all assisted the debtors in the furtherance of their fraudulent scheme. In spite of this fact, we do not think that the goods and services that these persons and entities provided were without value or that transfers to them could be set aside as fraudulent conveyances. We see no material distinction between such persons or entities and appellants. All were necessary to the success of the debtors' scheme. [60 B.R. at 999, footnotes omitted.] 38