Like so many others at the time, Giorgio Medici was involved in a variety of real estate ventures when the 2008 tsunami wiped out that market. Sued numerous times, by November of 2010, Medici owed in excess of $10 million in judgments and had lost his home to foreclosure. To clear these debts, Medici filed a Chapter 7 petition on July 6, 2012, and listed assets of $153,800 against total liabilities in excess of $36 million.
This is a story repeated tens-of-thousands of times in the last few years, and Medici's case would be unremarkable except for a curious side story that catches our attention, just as it did the Trustee assigned to Medici's case.
About the time that Medici's financial fortunes took their final spiral dive into the Sea of Insolvency, Medici started gambling as a regular at the Venetian casino. In 2010, Medici wire-transferred $397,167 of his remaining funds to the Venetian to buy into poker tournaments and to buy chips for general gambling. The Venetian did not, of course, inquire into the source of Medici's funds or about Medici's financial health -- so long as the wire cleared the bank, the Venetian was quite happy to offer all that it could in the way of hospitality.
The Venetian moved to dismiss, resulting in the Opinion that I am about to relate.
After disposing of routine procedural issues, the Court did what most courts do when faced with a fraudulent transfer claim: Blindly regurgitate the Badges of Fraud.
Let me digress: The real test of an "actual fraudulent transfer" case is whether there is substantial evidence after looking at the totality of the pertinent circumstances that the debtor had the intent to defeat the collection rights of his creditors when he made the transfers. The Badges of Fraud are, and have been ever since Twyne's Case was decided in 1601, nothing more or less than suggestions of things that a judge might look at if they can't figure out the larger question of intent without further guidance. In other words, the Badges of Fraud represent a legal version of "Fraudulent Transfers for Dummies".
Here, it was easy to establish that Medici could have had the requisite intent to defeat his creditors, since he was $36 million in debt against a couple of hundred thousand in assets, and he was probably going to lose the latter anyhow -- so, what they hey, might as well blow it in Vegas. The Venetian's Motion to Dismiss was therefore denied on the "actual fraudulent transfer" claim.
This brings us to the Trustee's second claim, for "constructive fraudulent transfer". Suffice it to say that the name "constructive fraudulent transfer" is an terribly misleading term for what really goes on, which is a solvency test having but two easy elements: (1) Whether the debtor received "reasonably equivalent value", as measured from the viewpoint of his creditors, for what he transferred, and (2) at the time of the transfer, whether the was debtor insolvent, or rendered insolvent by the transfer.
Medici was so deep in the financial hole that he couldn't see daylight with the Hubble telescope, so the insolvency element was easy. But what about "reasonably equivalent value"?
Certainly, the Venetian gave up something (the chance of Medici winning) that was almost dollar-for-dollar equivalent for what Medici transferred to the Venetian. But that's not the whole test, since the test contemplates that Medici should have gotten back something of value to him from the viewpoint of his creditors? From the viewpoint of Medici's creditors, what did Medici get back? Zippo.
Thus, the Court denied the Venetian's Motion to Dismiss.
ANALYSIS
This case illustrates the shockingly grave dangers that businesses face in dealing with folks who are underwater.
Presumably, at trial the Venetian will next try to establish the "transferee's good faith defense", which has two elements: (1) the transferee was in good faith, i.e., didn't know the debtor was doing anything to harm creditors, and (2) the transferee gave "reasonably equivalent value" back to the debtor.
The problem is that the definition of "reasonably equivalent value" is the same here as elsewhere within the fraudulent transfer laws, meaning that it is measured from the perspective of creditors, not the debtor or the transferee. This rule is found in the Official Comments Section 3 of the Uniform Voidable Transactions Act (a/k/a the Uniform Fraudulent Transfers Act as revised in 2014), which provides:
"Value" is to be determined in light of the purpose of the Act to protect a debtor's estate from being depleted to the prejudice of the debtor's unsecured creditors. Consideration having no utility from a creditor's viewpoint does not satisfy the statutory definition.
With merchants selling goods, this isn't a problem. If the debtor goes into Mega Lawn and Garden and plunks $2,000 for a riding lawnmower, the debtor gets a riding lawnmower worth $2,000 which presumably creditors could immediately levy upon and sell for close to that price, i.e., reasonably equivalent value (which does not have to be exact dollar-for-dollar).
But in the service and leisure industries, it may be difficult for even a good faith transferee to assert that the debtor received value that is valuable from the creditor's standpoint. It is in these cases where Section 8(d) of the UVTA facially appears to provide a safe harbor for such a transferee:
(d) Notwithstanding voidability of a transfer or an obligation under this [Act], a good-faith transferee or obligee is entitled, to the extent of the value given the debtor for the transfer or obligation, to: * * * (3) a reduction in the amount of the liability on the judgment.
Unfortunately, the reference to "value" in Section 8(d) throws us back to the definition of "value" under Section 3, and, as we have previously seen, that is measured solely from the viewpoint of creditors -- not the debtor or transferee. So, this safe harbor turns out to be just more rocky shoals.
Thus, for service and leisure industries, there may be a potentially harsh consequence to taking the money of a debtor: The transferee will have to give back the money, and will not receive a credit for whatever the debtor received.
The case here is a good example: Medici gave money to the Venetian for gaming entertainment, and apparently received that in copious quantities, but such entertainment is of no utility to Medici's creditors, and thus the Venetian will very likely get to return Medici's money to his creditors.
Because of this, service and leisure industries must be on guard about taking a debtor's money. It would have cost the Venetian a pittance to perform a slight investigation on Medici's background before letting him play there, but not having done so means that it will likely be Medici's creditors who will be hitting the jackpot.
CITE AS
In re Medici, 524 B.R. 902 (Bk.N.D.Ga., Dec. 31, 2014).
This article at http://onforb.es/1EkO7Il and http://goo.gl/01juhW
