United States District Court, S.D. New York
September 21, 2005.
In re APPLIEDTHEORY CORPORATION, et al. YANN GERON, as Chapter 11 Trustee of the Estate of AppliedTheory Corporation, et al., Appellant,
PALLADIN OVERSEAS FUND, LTD., HALIFAX FUND, L.P., PALLADIN PARTNERS I, L.P., DEAM CONVERTIBLE ARBITRAGE FUND, LTD., LANCER SECURITIES (CAYMAN), LTD., ELLIOTT INTERNATIONAL, L.P., and ELLIOTT ASSOCIATES, L.P., Appellees.
The opinion of the court was delivered by: NAOMI BUCHWALD, District Judge
ORDER AND MEMORANDUM
This appeal arises out of a bankruptcy proceeding concerning
the dispensation of debtor AppliedTheory Corporation's assets.
The appellant debtor claims the Bankruptcy Court erred in holding
that the debtor's pre-filing transfer of a security interest in
its assets to the appellees (the "lenders") in consideration of
an antecedent debt in the form of a $30 million cash loan did not
constitute a fraudulent conveyance. After reviewing the
Bankruptcy Court's conclusions of law,*fn1 we now affirm its decision
to grant summary judgment in favor of the defendant.
We only briefly summarize the facts, which are more fully
recited in the decision appealed from. See In re Applied
Theory Corp., 323 B.R. 838 (Bankr.S.D.N.Y. 2005). On June 5,
2000, the lenders provided a $30 million unsecured cash loan to
the debtor. In exchange, the lenders received $30 million in
convertible debentures set to mature on June 5, 2003. By October
2000, the debtor had defaulted on its obligation to register the
shares issuable upon conversion of the debentures. However,
instead of exercising their rights under the debentures, the
lenders decided to negotiate with the debtor. Two separate rounds
of negotiations resulted in two revisions to the debentures,
altering the change in control protections and conversion
features, which occurred on January 9 and July 10, 2001. During
the second set of negotiations, the lenders also agreed to loan
the debtor up to $6 million under a revolving credit agreement.
In order to secure both the initial loan and this subsequent
loan, the lender received a security interest in all of the
debtor's assets, which at that time were worth approximately $18
million. The debtor ultimately filed for bankruptcy on April 17, 2002, giving rise to this case.
In its appeal, the appellant urges us to reject the per se
rule consistently applied in this District, which provides that a
debtor's grant of a security interest in its assets to a lender
who has previously given the debtor a cash loan may not be
considered a fraudulent conveyance. Instead of applying this
rule, the debtor asks us to employ a fact-based analysis to
determine whether the granting of a security interest to secure
the antecedent debt constituted a fraudulent conveyance*fn2
under section 548(a)(1)(B) of the Bankruptcy Code and sections
273 and 274 of the New York Debtor and Creditor Law.*fn3 We
decline this invitation.
In doing so, we emphasize that the rule we apply here only
pertains to circumstances where the antecedent debt was an actual cash loan. As the Bankruptcy Court stated in its well-reasoned
decision, this case does not require consideration of whether an
"antecedent debt arising from a guaranty . . . would give rise to
a different result." In re AppliedTheory Corp.,
323 B.R. at 844. A transaction where a debtor who has not received any money
from a guarantor decides nonetheless to grant that guarantor a
security interest in the debtor's assets without any additional
consideration is a situation giving rise to a greater suspicion
of fraud and which might warrant a close inspection of the facts.
Here, however, we must only determine whether the prior receipt
of a $30 million cash loan constitutes reasonably equivalent
value for the granting of a security interest in the debtor's
assets.*fn4 Because the Bankruptcy Code explicitly defines
"value" to include the "securing of a present or antecedent debt
of the debtor," see 11 U.S.C. § 548(d)(2)(A), we need only
consider whether the Bankruptcy Court correctly ruled that the
$30 million loan was per se "reasonably equivalent" to the
Although courts in some other circuits have shown a willingness
to engage in a fact-based analysis to determine whether the
debtor actually received reasonably equivalent value even when
there is an actual antecedent debt, we believe the wiser course
is the one already followed by courts in this district. In fact,
this case is remarkably similar to the circumstances before the Court
in M. Silverman Laces, 01 Civ. 6209 (DC), 2002 WL 31412465
(S.D.N.Y. Oct. 24, 2002), where the Court concluded that the
debtor received reasonably equivalent value as a matter of law.
Further, as Judge Chin explained, the lender's decision not to
demand payment, but rather to extend the loans, gave the debtor
"an opportunity to avoid default, to facilitate its
rehabilitation, and to avoid bankruptcy." Id. at *17. While
this "breathing room" may have ultimately proved to be
short-lived, both in M. Silverman Laces and here, that does not
affect the conclusion that it was of reasonably equivalent value
at the time it was given. Id.
For the reasons set forth above, the decision of the Bankruptcy
Court is affirmed.
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