## Facts

- Image Marketing, Ltd. (IM) operated a commercial printing-related business and financed operations through a Parkway Bank line of credit secured by substantially all IM assets.
- Richard Steinberg controlled both IM and a newly formed affiliate, Image Worldwide, Ltd. (IW), as sole shareholder, officer, and director.
- By 1993, IM had drawn roughly $300,000 on the line of credit and owed substantial trade debt, including amounts to FCL Graphics (FCL), a key vendor providing printing services.
- In December 1993, Steinberg formed IW, which used the same premises, suppliers, and many of the same customers as IM.
- In early 1994, Steinberg liquidated IM with Parkway’s knowledge and cooperation; Parkway did not immediately demand payoff and permitted liquidation proceeds to pay IM trade creditors.
- As part of a restructuring, Parkway required IW to:
  - guarantee IM’s existing bank debt and secure it with a priority lien on IW’s assets; and
  - guarantee an additional $200,000 loan made to Steinberg to pay IM’s remaining debt to FCL.
- IW, not IM, made payments of principal and interest on both the IM debt and the additional loan.
- After assuming these obligations, IW became insolvent, lost business support from FCL, and an involuntary Chapter 7 petition was filed against IW.
- Parkway obtained relief from the automatic stay and collected from IW accounts receivable; the Chapter 7 trustee sued to avoid IW’s guarantees as fraudulent transfers.

## Issues

1. Whether IW received “reasonably equivalent value” for guaranteeing an affiliate’s debt and a related loan whose proceeds primarily satisfied the affiliate’s creditor.
2. Whether indirect benefits to a guarantor may constitute “reasonably equivalent value” for purposes of fraudulent transfer avoidance.
3. Whether the bankruptcy court’s finding that IW received less than reasonably equivalent value (and was rendered insolvent) was clearly erroneous.

## Decision

- The Seventh Circuit affirmed the district court’s judgment affirming the bankruptcy court.
- The court held that the bankruptcy court’s legal view of value was too narrow to the extent it required only direct economic benefits for a guarantee.
- Even under a broader standard allowing indirect benefits, the record supported the finding that IW received less than reasonably equivalent value for the guarantees.
- The court upheld the finding that the guarantees and related obligations rendered IW insolvent and were avoidable as fraudulent transfers.

## Legal Principles

- A corporate guarantee constitutes an “obligation” that can be avoided as a fraudulent transfer if the debtor received less than reasonably equivalent value and was insolvent or became insolvent as a result.
- “Reasonably equivalent value” is not limited to direct, dollar-for-dollar consideration; indirect benefits may qualify if they are concrete and reasonably quantifiable, rather than speculative or remote.
- Whether reasonably equivalent value was received is a fact-intensive inquiry focused on the net effect of the transaction on the debtor’s estate, including the magnitude of the obligations undertaken and the reality and size of any corresponding benefits.
- Appellate review of the bankruptcy court’s reasonably-equivalent-value determination is deferential as to factual findings; reversal requires clear error.

## Conclusion

The court upheld avoidance of IW’s affiliate-debt guarantees because IW assumed substantial liabilities without a sufficiently concrete, measurable benefit to its own estate, became insolvent as a result, and thus did not receive reasonably equivalent value under fraudulent transfer law.


In re Image Worldwide, Ltd., 139 F.3d 574 (7th Cir. 1998)