The Eleventh Circuit Court of Appeals recently clarified the meaning of “reasonably equivalent value” in a complex fraudulent transfer case. Its decision in In re PSN USA, Inc., Case No. 14-15352 (11th Cir. Sept. 4, 2015), provides particular insight on fraudulent transfers in the context of parent-subsidiary and other triangular payment arrangements. The Eleventh Circuit held that even though the debtor, a cable television channel, was not a party to the underlying satellite services contract at issue, payments made from the debtor to the satellite services company pursuant to its parent company’s contracts constituted “reasonably equivalent value” and could not be avoided as constructive fraudulent transfers.
PSN USA, Inc. (the “Debtor”) operated the PSN Channel, a cable television station that broadcasted live and recorded sporting events throughout Latin America. Pan America Sports Network International (“PSNI”) was a holding company that wholly owned the Debtor. PSNI contracted with cable and satellite operators, who, in turn, offered and distributed the PSN Channel to subscribers in South America and the Caribbean. PSNI paid a fee to the Debtor to operate the PSN Channel. Although the Debtor was not a party to these cable and satellite contracts, the network’s policy and practice required the Debtor to cover all production expenses, including paying PSNI’s contractual obligations to cable and satellite operators.
Consistent with this arrangement, PSNI entered into several contracts with Intelsat Corporation and Intelsat International Systems, LLC (collectively, “Intelsat”) to broadcast the PSN Channel. Between 2000 and 2002, the Debtor made a total of $3 million in payments to Intelsat under these contracts. During this period, the Debtor became insolvent and, in March 2002, filed a voluntary bankruptcy petition.
Six years later, the PSN Liquidating Trust (the “Trust”) filed an adversary complaint against Intelsat alleging that the payments from the Debtor were recoverable as constructive fraudulent transfers pursuant to section 548 of the Bankruptcy Code and the Florida Uniform Fraudulent Transfer Act. See 11 U.S.C. § 518(a)(1)(B) & (ii)(I); Fla. Stat. § 726.105(1)(b). The Trust argued that the payments were avoidable fraudulent transfers because the Debtor was not a party to the satellite contracts, did not own the satellite services, and did not benefit from them. Essentially, the Trust took the position that the Debtor received less than reasonably equivalent value in exchange for the transfers at issue. According to the Trust, payment or assumption of a third party’s debt by an insolvent entity is per se a fraudulent transfer because it necessarily lacks adequate consideration.
The Eleventh Circuit Court of Appeals, however, rejected a per se approach and concluded that payments made to fulfill contractual obligations of third parties may not be fraudulent transfers where an economic benefit is directly or indirectly conferred upon the transferor. In this case, although the Debtor was not a party to the satellite contracts of its parent company, the Debtor derived a benefit from those contracts. Specifically, the satellite services permitted the Debtor to operate the PSN Channel, and the Debtor earned a service fee from PSNI from that operation. This indirect benefit to the Debtor through PSNI was sufficient to satisfy the “reasonably equivalent value” requirement, and the Eleventh Circuit affirmed the bankruptcy court’s order that the Trust could not avoid the transfers.
As parent-subsidiary and other affiliate relationships are increasingly common, the shrewd practitioner needs to be aware of the potential virtues and pitfalls of triangular payment relationships, which almost certainly will be called into question as fraudulent transfers in the event of an insolvency.