For purposes of a fraudulent transfer, a bankruptcy court's valuation is largely a question of fact, as to which considerable latitude must be allowed to the trier of the facts. However, a court of appeals reviews de novo the methodology employed by the bankruptcy court in assigning values to the property transferred and the consideration received.
Ronald T. Ziegler was the president and sole shareholder of Positive Health Management, Inc., which operated pain management clinics in Texas. In 2005, First National Bank made a refinance loan to a separate corporate entity owned by Ziegler. The loan was secured by a building in Garland, Texas, which Positive Health used for office space from September 2006 to March 2008. Despite having no direct obligations under the loan, Positive Health made a series of payments to First National totaling $367,681.35. The payments, which began in February 2007 and ended in March 2008, were listed on Positive Health's tax returns as rent. When the payments stopped, First National foreclosed on the Garland property.
Could an innocent transferee that received fraudulent transfers, under the affirmative defense in 11 U.S.C.S. § 548(c), retain all the funds it received even though it gave less value to the debtor than it received?
The Court held that where the debtor made a series of payments to the transferee on a loan that was made to another entity and secured by property that the debtor used for office space, the "value" for purposes of § 548(c) was not properly measured by the debtor's potential to generate cash flow from ongoing operations, but instead had to be measured from the transferee's perspective. The transferee did give value in the form of foregone market rent and was therefore entitled to the § 548(c) defense. However, because the amount of the payments to the transferee exceeded the market rent value, § 548(c) required netting.