Vendors are often confronted with the classic dilemma when a customer becomes financially distressed and falls behind. Do they continue to do business with the customer and attempt to obtain credit support, which may be the better way to get paid—or “cut the cord,” terminate the relationship, and initiate collection? When the decision is to continue the relationship and demand security or other credit support, such agreements and future payments could be scrutinized later if the customer or affiliates who provided guarantees or security file a bankruptcy case. To a vendor, a customer with a number of affiliates may appear as one business to the vendor, but in a bankruptcy case this will be examined, and each will be viewed separately to determine if the pre-bankruptcy agreements and transactions should be avoided as fraudulent transactions. The situation was recently reviewed by Judge Mary F. Walrath of the U.S. Bankruptcy Court for the District of Delaware in Giuliano v. World Fuel Services (In re Evergreen International Aviation), case no. 13-13364 (adv. No. 15-51918) (MFW) (Aug. 22, 2018).

Guarantee and Payment of Debt Fuels Future Litigation

According to the opinion, the debtors were in the business of providing air cargo transportation and aviation support. The defendant, World Fuel Services, Inc. sold fuel to the debtors for over a decade prior to the bankruptcy. One of the debtors, Evergreen International Airlines, Inc. (Airlines), was the primary purchaser, and fell behind in invoice payments prior to 2012. As a result, World Fuel and Airlines, together with Airlines' affiliate, Evergreen Helicopters, Inc., entered into a repayment agreement. A few months later, several affiliates guaranteed the debt, including the corporate parent, Evergreen International Aviation, Inc. (Aviation). The agreement acknowledged the default and $6.9 million debt. In addition to the guarantees, two other Evergreen affiliates granted World Fuel a security interest in collateral valued at $6 million.

In 2013, Aviation sought to enter into an agreement to sell the stock of Helicopters for $190 million. Aviation leased an aircraft from General Electric at the time. GE demanded additional security before it would agree to the sale. The proposed collateral was an aircraft, valued at $4.2 million, that was part of the collateral package already pledged to World Fuel. To address this problem, Aviation, Airlines and World Fuel agreed that Aviation would pay $5.2 million to World Fuel in exchange for World Fuel's release of its security interest in the aircraft.

Within months of the transaction, the debtors filed petitions under Chapter 7 of the Bankruptcy Code. The Chapter 7 trustee filed a complaint against World Fuel (and a nondebtor Evergreen affiliate), which sought to avoid Aviation's guarantee of Airlines' debt and the $5.2 million payment to World Fuel in exchange for the release of its lien against the aircraft. The trustee and World Fuel each filed motions for summary judgment. The issue was whether Aviation received “reasonably equivalent value” for each of the two transfers.

Court Finds Value Was Received

The court began its analysis by describing how “Section 548(a) of the Bankruptcy Code permits a trustee to avoid either a transfer of the debtor's property or an obligation incurred by the debtor if it occurred within two years of the petition date, the debtor was insolvent at the time of the transfer or became insolvent as a result of it, and the debtor received less than reasonably equivalent value in exchange for the property or obligation,” see 11 U.S.C. Section 548. The term “value” means “property, or satisfaction of or securing a present or antecedent debt of the debtor.”