## Facts

- Le Café Creme, Ltd. operated a café/restaurant and was financed primarily through loans from its owner-insiders, with no meaningful equity capitalization.
- The debtor’s shareholders, officers, and directors initially included two couples: Xavier and Danielle Le Roux and Denis and Celestine Peron.
- In February 1994, the Le Rouxs exited the business through a stock repurchase transaction in which the debtor agreed to pay the Le Rouxs and issued debt instruments connected to the buyout.
- The buyout arrangements included payments to the Le Rouxs and the granting of a security interest in the debtor’s assets to secure obligations associated with the repurchase.
- The debtor experienced persistent financial distress for years, including an ongoing inability to meet liabilities as they came due and balance-sheet insolvency during much of the relevant period.
- In 1997, the debtor filed a voluntary Chapter 11 case; the bankruptcy court later approved a sale of the restaurant business.
- After the sale, the debtor-in-possession brought an adversary proceeding against the Le Rouxs (and a related party, William R. Horner) challenging the buyout payments, liens, and the asserted priority of the Le Rouxs’ claim.

## Issues

1. Whether payments to the Le Rouxs tied to the 1994 stock repurchase were avoidable as preferential transfers under 11 U.S.C. § 547.
2. Whether the stock repurchase payments and the granting of security interests were avoidable as actual or constructive fraudulent transfers under New York Debtor and Creditor Law and Bankruptcy Code avoidance provisions (including 11 U.S.C. §§ 544(b), 548, 550, and 551).
3. Whether the Le Rouxs’ claim, including any secured component, should be equitably subordinated under 11 U.S.C. § 510(c) due to insider conduct and resulting harm to other creditors.
4. Whether the repurchase implicated New York corporate law limits on stock repurchases when a corporation is insolvent or rendered insolvent.
5. Whether the Le Rouxs retained a valid security interest in collateral implicated by the transaction, including interests tied to shares held by Horner.

## Decision

- The court denied the debtor’s preference claim under 11 U.S.C. § 547, concluding the challenged payments were not avoidable as preferences based on the timing and structure of the transfers.
- The court avoided the stock repurchase-related transfers, including the lien component, as fraudulent conveyances under New York law (invoked through 11 U.S.C. § 544(b)) and related Bankruptcy Code remedies.
- The court equitably subordinated the Le Rouxs’ remaining claim under 11 U.S.C. § 510(c), placing it behind general unsecured claims based on inequitable insider conduct and creditor harm.
- As a practical result, the Le Rouxs’ asserted secured priority was defeated to the extent necessary to protect the creditor body and align distributions with bankruptcy priorities.

## Legal Principles

- A transfer may fall outside § 547 preference avoidance even where it benefits an insider, if statutory timing and transfer elements are not satisfied.
- Under New York fraudulent conveyance law applied through § 544(b), a plaintiff generally must show the debtor did not receive fair consideration (and, for constructive fraud, that the debtor was insolvent or rendered insolvent, or left with unreasonably small capital).
- Insider transactions receive heightened scrutiny; converting an insider’s equity position into secured debt, or extracting value through a stock repurchase when the debtor is insolvent or undercapitalized, may support findings of lack of fair consideration and fraudulent transfer avoidance.
- Equitable subordination under § 510(c) requires (i) inequitable conduct, (ii) resulting injury to creditors or an unfair advantage, and (iii) consistency with the Bankruptcy Code; insider status supports closer review of conduct and effect.
- Using corporate resources to repurchase stock when the corporation is insolvent or would be rendered insolvent is inconsistent with creditor-protection principles and may reinforce fraudulent transfer and subordination remedies in bankruptcy.

## Conclusion

The bankruptcy court rejected preference avoidance but granted avoidance and priority-shifting relief: the insider stock-buyout payments and related lien were avoidable as fraudulent transfers under New York law applied in bankruptcy, and the insiders’ remaining claim was equitably subordinated to protect general unsecured creditors.


In re Le Café Creme, Ltd., 244 B.R. 221 (Bankr. S.D.N.Y. 2000)