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Both Direct, Indirect Economic Benefits Count In Determining if Miami Beach Debtor Received ‘Value’ for Payments Made, 11th Circuit Rules

MexicanFansAnthemA Chapter 11 debtor received something of “reasonably equivalent value” from a service provider and therefore was not able to recoup the payments it made to the provider, according to a recent 11th Circuit Court of Appeals ruling. The court reached its decision because “value” in this context can include not just property rights but also any type of economic benefit, either direct or indirect, that the debtor obtains from that creditor as a result of payments made by the debtor.

The debtor in the case was PSN USA, Inc., which operated the PSN Channel, a channel that focused on sporting events in Latin America. The debtor acquired broadcast rights and also contracted with various satellite services. One of those services was Intelsat Corp. Despite being undercapitalized and insolvent, PSN paid $3 million on its contractual obligations to Intelsat from August 2000 to January 2002.

In early 2002, PSN filed for Chapter 11 bankruptcy. A trust created to operate on behalf of the debtor filed an action against Intelsat. The channel, the trust claimed, should get its $3 million back because it did not receive “reasonably equivalent value” from Intelsat in return for its payments. The satellite service asked for summary judgment, and the bankruptcy court entered an order in its favor. The channel received and used the services Intelsat provided, so the lack of “reasonably equivalent value” argument was not viable, the court decided.

The trust appealed to the federal district court and later to the 11th Circuit. Both times, it lost. Under the fraudulent transfer provision within the Bankruptcy Code, Section 548, payments like the ones PSN made to Intelsat can be undone and returned to the debtor, if the debtor proves two things:  (1) that it “received less than a reasonably equivalent value in exchange for such transfer,” and (2) that it was insolvent when it made the payments.

While PSN was definitely insolvent at the time it made the disputed payments to Intelsat, it did receive some value for its money. The district court pointed out that, without satellite services like Intelsat’s, PSN would not have had programming to air and would not “have any business to operate.”

The 11th Circuit ultimately rejected the trust’s argument that the lower courts used too broad a definition of value in deciding whether or not the channel received reasonably equivalent value. The trust urged the appeals court to rule in its favor because the channel did not receive “some kind of enforceable entitlement to some tangible or intangible article.” This was not the correct standard, according to the court. Value encompasses more than just the receipt of property rights. It includes any economic benefit the debtor receives, whether that benefit is direct or indirect. Although the debtor in this case was not a party to the satellite contracts, it was able to use the Intelsat services, and the ability to use services clearly was something of “value.”

For up-to-date and in-depth knowledge and skillful advocacy regarding your Chapter 11 bankruptcy issue, let the Florida bankruptcy attorneys at Stok Folk + Kon help. Our experienced attorneys can provide you the assistance you need in dealing with the Chapter 11 process.

Contact us online or by calling (305) 935-4440 to schedule your consultation.

More blog posts:

Federal Appeals Court Approves Florida Debtor’s Chapter 11 Reorganization with Third-Party Releases, Florida Business Lawyers Blog, Nov. 20, 2015

Bank’s Failure to Contest Reorganization Plan’s Broad Release Terms on Time Dooms Claim, Florida Business Lawyers Blog, March 11, 2015

Photo: Mexican soccer fans singing the Mexican National Anthem by Santiago LLobet at Wikimedia Commons.