Image Worldwide, Ltd., In re

• Decision Date: 16 April 1998
• Docket Number: No. 97-2540,97-2540
• Citation: 139 F.3d 574
• Parties: In re IMAGE WORLDWIDE, LTD., Debtor. David P. LEIBOWITZ, Chapter 7 Trustee, Plaintiff-Appellee, v. PARKWAY BANK & TRUST CO., Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 574

139 F.3d 574

32 Bankr.Ct.Dec. 394

In re IMAGE WORLDWIDE, LTD., Debtor David P. LEIBOWITZ, Chapter 7 Trustee, Plaintiff-Appellee, v. PARKWAY BANK & TRUST CO., Defendant-Appellant.

No. 97-2540.

United States Court of Appeals Seventh Circuit.

Argued Dec. 16, 1997.

Decided March 19, 1998.

Rehearing and Suggestion for Rehearing En Banc Denied April 16, 1998.

Leon C. Wexler (argued), Chicago, IL, for Defendant-Appellant.

David P. Leibowitz, Daniel S. Follis (argued), Freeborn & Peters, Chicago, IL, for Plaintiff-Appellee.

Edward A. Berman, Chicago, IL, for Debtor.

Before ESCHBACH, FLAUM and EVANS, Circuit Judges.

ESCHBACH, Circuit Judge.

Image Worldwide, Ltd. guaranteed loans paid to an affiliate corporation, Image Marketing, Ltd. Both corporations were owned by the same person, but only Image Marketing received funds from the loan. The Image Worldwide's bankruptcy trustee filed suit to avoid the guarantees as a fraudulent transfer, alleging that the guarantees made Image Worldwide insolvent, and that Image Worldwide did not receive reasonably equivalent value in exchange for its guarantees. The bankruptcy and district courts found in favor of the trustee. This bankruptcy appeal presents the issue of when a corporation receives reasonably equivalent value for its guarantee of an affiliates' debts. The bankruptcy court held that a guarantor must receive direct economic benefits in exchange for its guarantee in order to have received reasonably equivalent value for its guarantee. While the bankruptcy court applied an overly narrow interpretation of what may constitute reasonably equivalent value for a guarantee, the bankruptcy court did not clearly err in finding that Image Worldwide did not receive reasonably equivalent value for its guarantees. We affirm.

I. Facts

Richard Steinberg was the sole shareholder, sole officer, and sole director of Image Marketing, Ltd. (IM), an Illinois corporation incorporated in June 1991. IM was in the commercial printing business, primarily dealing in wholesale sales of music and sports merchandise. IM leased space from FCL Graphics, a printing company that did all of the printing for IM.

In 1992, IM obtained a line of credit from Parkway Bank secured by a first lien against substantially all of IM's assets (IM loan). The line of credit allowed IM to borrow against up to 70% of its eligible accounts receivable, and required IM to reduce its indebtedness to 70% of its accounts receivable in the event that its eligible accounts receivable declined. By June 1993, IM had borrowed $300,000 on its line of credit.

At the end of 1993, IM was several hundred thousand dollars in debt to trade creditors. So in December 1993, Steinberg incorporated a new Illinois corporation, Image Worldwide, Ltd. (IW). Steinberg was the sole shareholder, officer, and director of IW as well. IW leased the same space from FCL as IM, used the same suppliers, and had many of the same customers. In early 1994, Steinberg liquidated IM. Parkway knew of and cooperated in the liquidation of IM. Instead of demanding that IM pay off its loan under the terms of the agreement, however, Parkway allowed Steinberg to use the money obtained from the liquidation of IM to pay down IM's trade debts. Parkway never required IM to pay off its loan, even when its accounts receivable declined to zero in 1994.

Instead, Parkway demanded that IW guarantee IM's $300,000 debt. IW executed the guarantee on May 27, 1994. The guarantee was secured by a first lien on substantially all of IW's assets. IW never borrowed any money from Parkway on its own. Parkway's consideration for the guarantee was its allowing IW to stay in business. Between May 27, 1994 and when IW was forced into bankruptcy, IW paid principal and interest on the loan as it became due.

Even after IM was wound down, IM still owed $200,000 to FCL Graphics. Parkway lent $200,000 to Steinberg to pay this debt (Steinberg loan). The bank paid the proceeds from this loan directly to FCL. ¹ The loan was secured by all of IW's accounts receivable. As of the date of its bankruptcy, IW had paid down $72,076.49 in principal and $26,863.45 in interest on the loan.

IW was no more successful than IM. At trial, Parkway stipulated that the guarantees made IW insolvent. In August 1995, FCL stopped doing work for IW, and filed an involuntary chapter 7 petition for bankruptcy against IW. David Leibowitz was appointed as the trustee of IW's bankruptcy estate. Over the trustee's objection, Parkway obtained relief from the automatic stay, and collected IW's accounts receivable to pay down the debts guaranteed by IW. All told, Parkway collected $444,507.55 from IW, including the amounts paid prior to the bankruptcy.

The trustee instituted this adversarial proceeding in July 1996 to recover the amounts transferred to Parkway. Pursuant to 11 U.S.C. § 544(b), the trustee charged that the transfers to Parkway were fraudulent transfers in violation of the Uniform Fraudulent Transfer Act (UFTA), 740 ILCS 160/5, because IW never received reasonably equivalent value for its guarantees to Parkway. The bankruptcy court found in favor of the trustee, and ordered Parkway to disgorge the amounts it received from IW. The district court affirmed. See Leibowitz v. Parkway Bank & Trust Co., 210 B.R. 298 (N.D.Ill.1997). Parkway now appeals to this court, arguing that IW did receive reasonably equivalent value, and that the trustee did not meet all of the requirements of 740 ILCS 160/5.

II. Standard of Review

A bankruptcy court's findings of fact are reviewed for clear error. Fed. R. Bankr.P. 8013. Both the district court's and the bankruptcy court's legal interpretations are reviewed de novo. In re Birkenstock, 87 F.3d 947, 951 (7th Cir.1996). Whether "reasonably equivalent value" was received in a transaction is a question of fact. ² Heritage Bank Tinley Park v. Steinberg (In re Grabill), 121 B.R. 983, 994 (Bankr.N.D.Ill.1990); cf. In re Xonics Photochem., Inc., 841 F.2d 198, 202 (7th Cir.1988) (whether or not a corporation received a benefit from a guarantee is a question of fact).

III. Analysis

The federal fraudulent transfer statute, 11 U.S.C. § 548, contains a one year statute of limitations that barred the trustee from using that section to avoid the transfer. However, under the strong-arm provision of the Bankruptcy Code, 11 U.S.C. § 544(b), the trustee can avoid any transaction of the debtor that would be voidable by any actual unsecured creditor under state law. See In re Leonard, 125 F.3d 543, 544 (7th Cir.1997). The trustee need not identify the creditor, so long as the unsecured creditor exists. Id. Thus, the trustee proceeded against Parkway under the constructive fraud provision of the UFTA, which states:

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

...

(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

(A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(B) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they become due.

740 ILCS 160/5(a). Because Parkway has stipulated that the transaction rendered IW insolvent, the key issue in this case is whether IW, as guarantor, received reasonably equivalent value for its guarantee when the direct benefits of the transaction were received by a third party, IM. Parkway argues that its allowing IW to stay in business constituted reasonably equivalent value for IW's guarantee of IM's debt. Parkway also attempts to argue that IM and IW were the same entity.

A.

Because the UFTA is a state law, we must predict how the Illinois courts would handle Parkway's claims. The Illinois courts have not yet elaborated on what "reasonably equivalent value" is for purposes of § 160/5. One Illinois Appellate Court has stated that this is no reasonably equivalent value when there is "no or inadequate consideration," Regan v. Ivanelli, 246 Ill.App.3d 798, 187 Ill.Dec. 351, 617 N.E.2d 808, 814 (1993), but no Illinois court has defined the phrase in the context of a guarantee where the principal benefits are received by a third party. However, as its title indicates, the UFTA is a uniform act, and it derived the phrase "reasonably equivalent value" from 11 U.S.C. § 548(a)(2). See Bowers-Siemon Chems. Co. v. H.L. Blachford, Ltd. (In re Bowers-Siemon Chems. Co.), 139 B.R. 436, 445 (Bankr.N.D.Ill.1992) (UFTA parallels § 548); see also Phillip I. Blumberg, Intragroup (Upstream, Cross-Stream, and Downstream) Guarantees Under the Uniform Fraudulent Transfer Act, 9 Cardozo L.Rev. 685, 695-696 (1987) (UFTA was an effort to harmonize state law with the Bankruptcy Code). Thus, we can look to interpretations of "reasonably equivalent value" from § 548 cases, as well as cases from courts interpreting other states' versions of the UFTA for assistance in predicting what an Illinois court would do.

B.

The bankruptcy court determined as a matter of law that "a conveyance by a corporation for the benefit of an affiliate is not regarded as given [sic] fair consideration to the creditors of the conveying corporations," citing Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 (2d Cir.1981). This determination is an overly narrow statement of law, and misreads the holding of Rubin. Nevertheless, under the appropriate law, the bankruptcy court did not clearly err in ruling that the guarantees were fraudulent transfers.

1.

The transactions in question are known in corporate law lingo as an "intercorporate guarantee." These fall into three types: "upstream," "downstream," and "cross-stream." An...