
On February 21, 2024, the U.S. Bankruptcy Appellate Panel of the Tenth Circuit held that a debtor who receives several direct benefits from a loan to an operating company has received “reasonably equivalent value” in exchange for the guaranty securing such loan despite the fact that the loan was made to a third party. A transfer by the debtor is voidable as constructively fraudulent when the debtor received less than “reasonably equivalent value” in exchange. Over several months, Lynn Wardley advanced over $850,000 to Theodore White as an investment in White’s business of marketing and selling discount medical cards. In exchange for the loan, White agreed to form a new entity for the business, ABC Club, LLC, which housed the loan proceeds. White agreed to be personally liable for $750,000 of the loan proceeds and, to secure the loan, White executed a partial assignment of his interest in a $15 million civil judgement in his favor. White and Wardley entered into an employment agreement stating that White’s salary was to be paid with the proceeds from Wardley’s loans. Over the relevant nine-month period, Wardley loaned $868,000 to the ABC Club under the facility that was secured by White’s guaranty. All of these funds went to ABC Club’s account. White’s $235,000 salary was funded entirely with these proceeds.
After White filed for chapter 7 bankruptcy, the trustee sought to avoid White’s guaranty obligation, arguing none of these benefits constituted reasonably equivalent value to make White’s guaranty a fair trade because the ABC Club, and not White, was the direct beneficiary of the loans. The trustee focused on the fact that White guaranteed a “third-party debt” of ABC Club and therefore did not receive adequate, direct benefits in exchange for guaranteeing the loans. Neither the bankruptcy court nor the appellate panel agreed with the trustee’s argument that White did not receive a direct benefit in exchange for his guaranty of the loan. White’s salary was funded solely with the loans. White did not have a personal bank account and used ABC Club’s account for operating expenses for his business. White had sole authority over the use of the loan proceeds and White had an equity interest in ABC Club. The court noted that it was irrelevant that the money was placed into ABC Club’s account rather than a personal account for White because “[t]he money had to be placed somewhere, and the ABC bank account was the only place White had to put it.”
The case is Bird v. Wardley (In re White), No. 22-8 (B.A.P. 10th Cir. Feb. 21, 2024). The trustee is represented by Richard Brandt Miller Nelson. Wardley is represented by Snell & Wilmer L.L.P. The opinion is available here.