633 B.R. 663
Bankr. D. Del.2021Background
- F-Squared converted from a C-Corp to an LLC in 2010 after shareholders were told the LLC would make "tax distributions" to cover members’ pass-through tax liabilities; the conversion required shareholder approval.
- The LLC Operating Agreement included Section 5.1(a) promising tax distributions: prefatory "shall be entitled" language plus a "will use reasonable efforts" timing clause and Management Board discretion on quarterly timing and good-faith determination of amounts.
- From 2013–2014 F-Squared made periodic Tax Distributions to the defendants (unit holders) to cover estimated passed-through tax liabilities; Trustee later sued to avoid those payments as fraudulent conveyances.
- Defendants moved for partial summary judgment, arguing the Tax Distributions were for reasonably equivalent value because they were the bargained-for exchange for the conversion (and/or payment of an antecedent obligation under the Operating Agreement), and creditors were no worse off because the company avoided corporate-level tax.
- Trustee opposed but submitted no evidentiary material and did not invoke Rule 56(d); he argued the distributions were discretionary under the "reasonable efforts" language and could not be reasonably equivalent value (citing SGK and similar authority).
- The court granted defendants’ motions: on the undisputed record it concluded the Tax Distributions were for reasonably equivalent value because they were part of the shareholder-approved conversion bargain and the Operating Agreement imposed an obligation to make them.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were the Tax Distributions "reasonably equivalent value" under fraudulent transfer law? | Trustee: No — distributions were discretionary and provided no value to the debtor; creditors are worse off. | Defs: Yes — distributions were the bargained-for consideration for shareholder approval of the LLC conversion that avoided corporate tax (net zero effect on estate). | Held: Yes — under the totality of circumstances the shareholders’ vote/consent conferred reasonably equivalent value; creditors were no worse off. |
| Does "will use reasonable efforts" render the distribution obligation discretionary (no mandatory duty)? | Trustee: "Reasonable efforts" is permissive; no mandatory obligation existed. | Defs: Prefatory "shall be entitled" + clause context create an affirmative obligation; "reasonable efforts" governs timing, not entitlement. | Held: "Reasonable efforts" imposes an affirmative obligation in context; the Operating Agreement obligated distributions where company was not liquidating. |
| Can tax distributions be treated as payment of an antecedent debt/claim under the Code? | Trustee: Even if mandatory, tax distributions are equivalent to dividends and not antecedent obligations for value purposes (relying on SGK). | Defs: LLC agreement created a contractual claim; entitlement to distribution is a claim/debt under the Code and Delaware law. | Held: Court did not need to adopt a categorical rule but found, in context, the shareholder bargain supplied reasonably equivalent value; antecedent-debt theory parallels Kenrob/Northlake. |
| Procedural: Was summary judgment appropriate when Trustee offered no evidence? | Trustee: Contended facts were disputed and that evidence (e.g., depositions) were needed. | Defs: Trustee failed to create a genuine factual dispute and did not invoke Rule 56(d); they are entitled to judgment as a matter of law. | Held: Summary judgment granted — Trustee produced no competent evidence, did not invoke Rule 56(d), and could not defeat the motion. |
Key Cases Cited
- VFB LLC v. Campbell Soup Co., 482 F.3d 624 (3d Cir. 2007) (defines "reasonably equivalent value" as receiving roughly the value given; creditors "no worse off" test)
- In re Fruehauf Trailer Corp., 444 F.3d 203 (3d Cir. 2006) (fraudulent transfer principles cited in Third Circuit precedent on value inquiry)
- Northlake Foods, Inc. v. Crumpton (In re Northlake Foods, Inc.), 715 F.3d 1251 (11th Cir. 2013) (S-corp election plus shareholder agreement to reimburse taxes upheld as reasonably equivalent value)
- Kenrob Info. Tech. Sols., Inc., 474 B.R. 799 (Bankr. E.D. Va. 2012) (tax reimbursements validated where corporation benefited from pass-through election and shareholder agreement created ongoing obligation)
- Williams Companies, Inc. v. Energy Transfer Equity, L.P., 159 A.3d 264 (Del. 2017) (Delaware Supreme Court on interpretation of efforts clauses; "reasonable efforts" imposes affirmative obligations)
- In re SGK Ventures, LLC, 521 B.R. 842 (Bankr. N.D. Ill. 2014) (contrasting authority holding tax distributions equivalent to dividends; court here found SGK unpersuasive in conversion/contract context)