On September 4, 2015, the US Court of Appeals for the Eleventh Circuit held, in PSN Liquidating Trust v. Intelsat Corp. (In re PSN USA, Inc.), that a debtor received reasonably equivalent value for contract payments that it made on its corporate parent's contract because the debtor indirectly benefitted from the services provided under the contract (No. 14-15352, (11th Cir. Sept. 4, 2015)).

PSN USA, Inc. (Debtor) operated the PSN Channel, a cable television channel that broadcast live and recorded sporting events. PSNI (Parent), a non-operating holding company, wholly-owned the Debtor.

The Parent contracted with Intelsat to provide the satellite services necessary for the Debtor to produce and broadcast the PSN Channel. The Parent paid the Debtor a service fee for operating the channel. The Debtor was not a party to the satellite contracts. However, the Parent's general policy was for the Debtor to pay all production expenses, including the contractual obligations of the Parent when it related to production. Accordingly, the Debtor made payments to Intelsat that were due under the satellite contracts.

In March 2002, the Debtor filed for Chapter 11 protection. Under the Debtor's First Amended Plan of Liquidation, confirmed by the bankruptcy court, the PSN Liquidating Trust (Trust) was created and authorized to prosecute the Debtor's avoidance and recovery actions.

In October 2008, the Trust filed an adversary complaint against Intelsat, alleging that the transfers to Intelsat under the satellite contracts were constructively fraudulent transfers under section 548 of the Bankruptcy Code and the Florida Uniform Fraudulent Transfer Act.

The Trust sought to void the payments the Debtor made to Intelsat on the grounds that the Debtor did not receive "reasonably equivalent value" in exchange for the payments, as required under section 548(a)(1)(B)(i) of the Bankruptcy Code. The Trust argued that the Debtor was not a party to the satellite contracts and therefore did not own, or benefit from, the satellite services.

The bankruptcy court granted summary judgment in favor of Intelsat, concluding that the Debtor received "reasonably equivalent value" for the transfers because:

The district court affirmed. The Trust appealed to the Eleventh Circuit.

The Eleventh Circuit affirmed, rejecting the Trust's argument that the Debtor did not receive reasonably equivalent value because the Debtor did not receive any direct benefit.

The Eleventh Circuit rejected the Trust's argument that the bankruptcy court and district court erred in applying a broad definition of what constitutes the term "value" under section 548. The Eleventh Circuit concluded that a determination of "reasonably equivalent value" is whether the transfer "confers an economic benefit upon the debtor, either directly or indirectly," not whether the Debtor received property rights by virtue of a transfer or whether the Debtor was a party to the contract at issue.

The Eleventh Circuit relied on its decision in General Electric Credit Corp. of Tennessee v. Murphy (In re Rodriguez), which recognized that a holding company received reasonably equivalent value in exchange for payments it made to service the debt of a subsidiary because it indirectly benefitted from the loan payments (see 895 F.2d 725 (11th Cir. 2012)). In In re Rodriguez, the Eleventh Circuit held that a party may receive an "economic benefit" for purposes of determining "reasonably equivalent value" if it "share[s] in the enjoyment of" or "use[s]" a good or service. Here, the Debtor was able to use the satellite services for which it paid, despite the fact that it was not obligated on the satellite contracts, allowing it to earn a service fee from its Parent. Even if the Debtor did not directly benefit from Intelsat, the evidence shows that the Debtor indirectly benefited from the its Parent by using the services it received from Intelsat.

In In re PSN USA, Inc., the Eleventh Circuit directly deals with the definition of "value," an issue which it previously avoided in its 2012 ruling in Official Committee of Unsecured Creditors of TOUSA, Inc. v. Citicorp North America, Inc. (In re TOUSA, Inc.) (see 680 F.3d 1298, 1311 (11th Cir. 2012) and Legal Update, Eleventh Circuit Reinstates Bankruptcy Court's Controversial Fraudulent Transfer Ruling). This case may have significant implications in the Eleventh Circuit, because the Court determined that value need not be given directly to a debtor; rather, the Court found reasonably equivalent value where the debtor merely received an indirect benefit. This issue is more likely to arise given the increasing prevalence of triangular payment relationships between parents, subsidiaries, and other affiliates.

For more information on fraudulent transfers, see Practice Notes, Fraudulent Conveyances in Bankruptcy: Overview and Fraudulent Conveyances: Issues and Strategies for Lenders and Private Equity Sponsors.