Fraudulent Transfer: "Reasonably Equivalent Value" Meets The Internal Revenue Code

Crumpton v. Stephens (In re Northlake Foods, Inc.), 715 F.3d 1251 (11th Cir. 2013) –

The trustee of a distribution trust (created under a debtor's confirmed chapter 11 plan of reorganization) sought to recover a dividend paid to a shareholder as a constructive fraudulent transfer.  The bankruptcy court dismissed the case, and the district court affirmed.  On appeal to the 11^th Circuit, the issue was whether the debtor received "reasonably equivalent value" for the shareholder dividend payment obligation.

The debtor (Northlake) owned approximately 150 Waffle House restaurants.  Originally Northlake was a Subchapter C corporation for federal tax purposes – meaning that it paid taxes on income at the corporate level, so that any dividends to shareholders would be subject to double taxation (i.e., at both the corporate and shareholder levels).  In contrast, if a corporation elects to become a Subchapter S corporation, the corporation is treated as a "pass through"