Summary:
Matthew W. Smith, the sole manager of the reorganized debtor BK Racing, LLC, sought recovery of four prepetition transfers totaling $227,000 made to DiSeveria, alleging these were fraudulent transfers under both federal bankruptcy law and North Carolina state law. Smith contended these transfers were either made with actual intent to hinder, delay, or defraud creditors, or were constructively fraudulent because they were made without receiving reasonably equivalent value in exchange.
The court analyzed the case under both theories of actual and constructive fraudulent transfer. Under the actual fraudulent transfer claim, the court considered various "badges of fraud" but ultimately found that the transfers appeared to be repayments for short-term loans made by DiSeveria to BK Racing, rather than transfers made with intent to hinder, delay, or defraud creditors.
Under the constructive fraudulent transfer claim, the court focused on whether BK Racing received reasonably equivalent value for the transfers. The court concluded that the transfers were repayments for actual short-term loans provided by DiSeveria to BK Racing, and therefore BK Racing did receive reasonably equivalent value in exchange for the transfers.
The court also noted that while DiSeveria and Foxboro were, given DiSeveria's officer position within BK Racing, insiders, the transfers were not made to benefit Foxboro Financial Services, LLC, as it received none of the transfers directly.
Ultimately, the court found in favor of the defendants, concluding that the transfers were not fraudulent under either the actual or constructive fraudulent transfer theories based on the evidence suggesting that the transfers were in repayment of legitimate, short-term loans and not made with the intent to defraud creditors or without receiving reasonably equivalent value.
Commentary:
Despite none of the short term loans in this case appear to have been documented (either in writing or contemporaneous emails), secured by collateral, subject to accruing interest and were made by family, friends wholly owned companies or family trusts.
This seems identical to nearly every repayment of a short-term loan by consumers to their friends and family before filing bankruptcy.
As the court concluded, "At best, some of the Transfers may have been 'preferential' in that DiSeveria was repaid while outside creditor checks were bouncing." at p. 37. (Emphasis added.)
This shows that the Trustee's burden in avoiding a transfer under 11 U.S.C. § 548(a)(1)(A) or (B) and N.C.G.S. § 39- 23.4(a)(1) is not a light one. Nor one that Chapter 13 trustees should be allowed to assert and demand under a chimeric Best Interests of the Creditors and Good Faith objection to confirmation without actually litigating those claims.
To read a copy of the transcript, please see:
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