Northern District of Illinois – Focus of Inquiry Regarding Reasonably Equivalent Value Must Be On Specific Transfer That Trustee Seeks to Avoid Rather Than On Analysis of Transaction’s Overall Value To Debtor
May 19, 2021, Northern District of Illinois – Ronald Peterson filed an adversary proceeding as a Trustee of Chapter 7 Debtor Mack Industries, Ltd against Defendant Premier Electric Services, Inc. to avoid over $520,000 in transfers as “fraudulent” or preferential. Premier moved to dismiss the claim in Count 1 of the amended complaint for “fraudulent transfers” based on “constructive fraud.”
According to the complaint, Mack had a contract to manage hundreds of properties owned by American Residential Leasing Company LLC. Mack was supposedly required to lease the properties, maintain them, pay the property taxes, and pay certain rental and other fees to American Residential. The Trustee alleged that Premier is an electrical contractor and that Mack paid Premier for work it performed on properties that Mack did not own. The Trustee contended that the transfers were “fraudulent” because Mack was trying to deplete its assets to prevent one of its creditors from collecting from it. Relying on the court’s previous rulings in Peterson v. TTS Granite, Inc. (In re Mack Industries, Ltd.), 622 B.R. 887 (Bankr. N.D. Ill. 2020), and Peterson v. Ferguson Enterprises Inc. (In re Mack Industries, Ltd.), No. 19-ap-436, 2020 Bankr. LEXIS 3171, 2020 WL 6589040 (Bankr. N.D. Ill. Nov. 10, 2020), Premier argued that the Trustee failed to allege facts to support the element of lack of reasonably equivalent value. In both cases, the court had held that the Trustee failed to state a claim for “constructive fraud” when the only factual basis alleged for lack of reasonably equivalent value was that Mack used the goods and services it procured to improve properties owned by others.
The Court opined that the focus of the inquiry regarding reasonably equivalent value “must be on the specific transaction the trustee seeks to avoid, i.e., the quid pro quo exchange between the debtor and the transferee, rather than an analysis of the transaction’s overall value to a debtor as it relates to the welfare of the debtor’s business. The Court held that similar to TTS Granite and Ferguson, the Trustee failed to allege sufficient facts regarding the lack of reasonably equivalent value to state a claim for constructive fraud in the case at bar. The Court found that Mack got exactly what it paid for – electrical contracting services. The Court added that It makes no difference who owned the properties where Premier performed the work. The Court stated that the Trustee failed to cite a single case in which a court avoided a transfer as “constructively fraudulent” based on what the transferor did with the goods and services it paid for. The Court added that what needs to be ensured is that there is an exchange of property that is a fair equivalent and “not disproportionately small as compared with the value of the property or obligation obtained. In the case at bar, the Court found that the price paid for the services was reasonable as the Trustee had stated in his response that “the Defendant did work at approximately the customary rate.”
The Court denied the Trustee’s claim to avoid transfers as “constructively fraudulent” under 11 U.S.C.S. § 548(a)(1)(B) as the Trustee’s sole factual basis for the lack of reasonably equivalent value was that the Debtor paid the Defendant for work it performed on properties that Debtor did not own.
Peterson v. Premier Elec. Servs. (In re Mack Indus.), Nos. 17 B 09308, 19 A 00148, 2021 Bankr. LEXIS 1373 (Bankr. N.D. Ill. May 19, 2021)