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Fifth Circuit Treats Severance Payments to Insider as Fraudulent Transfers Under 2005 Bankruptcy Code Amendment
March 5, 2010
The U.S. Court of Appeals for the Fifth Circuit held on Feb. 10, 2010, that a corporate debtor’s pre-bankruptcy severance payments to its former chief executive officer (“CEO”) were fraudulent transfers. In re Transtexas Gas Corp., ____ F.3d _____, 2010 BL 28145 (5th Cir. 2/10/10). Because of its holding “that the payments were fraudulent under the Bankruptcy Code,” the court did “not consider other possible violations, including [the Texas Uniform Fraudulent Transfer Act] or [Bankruptcy Code] Section 547(b) [preferences].” Id. at *5. More important, the court relied on a rarely discussed 2005 amendment to Bankruptcy Code (“Code”) § 548 enabling a bankruptcy trustee to avoid a transfer for “less than a reasonably equivalent value . . .to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.” § 548(a)(1)(B)(ii)(IV). In doing so, the court avoided having to deal with the defendant CEO’s challenge to the debtor’s insolvency, thus facilitating the trustee’s recovery from the insider defendant.
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