## Facts

- Roco Corporation operated a hardware supply business; Edward Consove co-founded it and later became its sole shareholder after the corporation redeemed the other founder’s shares in 1978.
- On November 1, 1979, Consove caused Roco to redeem all of his shares in exchange for a $300,000 promissory note (10% interest, $600 weekly payments, initial interest-only structure).
- Roco granted Consove a security interest in substantially all corporate personal property (including inventory, receivables, and equipment) to secure the $300,000 note, and a financing statement was filed.
- Roco also executed a separate secured note to Consove for about $29,558, reflecting an earlier loan.
- The same day, Consove’s son Gerald became sole shareholder (buying one share for $3,000) and sole officer/director; Consove resigned and relocated to Florida while continuing to receive the $600 weekly payments.
- Roco’s financial condition worsened in 1980; the bankruptcy court relied on a November 30, 1979 unaudited balance sheet and evidence that receivables and inventory were likely overstated, and assigned no value to goodwill.
- An involuntary Chapter 7 petition was filed September 23, 1980.
- Within the year before bankruptcy, Roco paid Consove $26,158.95 on account of prior loans.
- The trustee sought to avoid (1) the stock redemption note/security interest as a constructively fraudulent transfer and (2) the loan repayments as insider preferences; the bankruptcy court and BAP ruled for the trustee, and Consove appealed.

## Issues

1. Whether Roco’s issuance of a $300,000 secured note to redeem Consove’s stock was avoidable as a constructively fraudulent transfer under 11 U.S.C. § 548(a)(2) because Roco did not receive reasonably equivalent value and was insolvent (or rendered insolvent).
2. Whether Roco’s $26,158.95 in payments to Consove on antecedent loans within one year of bankruptcy were avoidable as insider preferences under 11 U.S.C. § 547(b).

## Decision

- The First Circuit affirmed the bankruptcy court (as affirmed by the BAP).
- The court held the stock redemption transaction (the $300,000 note and blanket security interest) was a constructively fraudulent transfer under § 548(a)(2).
- The court held the $26,158.95 in loan repayments were avoidable preferential transfers to an insider under § 547(b).
- The court upheld the bankruptcy court’s valuation and insolvency findings under the clearly erroneous standard.

## Legal Principles

- A corporation’s redemption of its own stock, funded by corporate obligations and secured by corporate assets, can be treated as a transfer of the debtor’s property subject to avoidance in bankruptcy.
- Under § 548(a)(2), a transfer is constructively fraudulent if the debtor received less than reasonably equivalent value and was insolvent (or rendered insolvent) at the time of the transfer.
- In assessing “reasonably equivalent value” in a stock redemption, the debtor’s receipt of its own equity may provide little or no value to creditors when the enterprise is insolvent or financially weak.
- Insolvency may be shown through a balance-sheet analysis using unaudited statements and testimony; courts may adjust overstated receivables and inventory and may decline to credit speculative goodwill.
- Under § 547(b), payments to an insider on account of antecedent debt made while the debtor is insolvent and within one year of bankruptcy are avoidable if they allow the insider to receive more than in a Chapter 7 liquidation absent the transfer.
- The transferee bears the burden of establishing any applicable § 547(c) defenses; failure to prove a defense leaves the payments avoidable.

## Conclusion

The First Circuit sustained avoidance of an insider-driven stock redemption that converted equity into a large secured claim without reasonably equivalent value while the company was insolvent, and it also sustained avoidance of insider loan repayments made within the one-year preference period that improved the insider’s position over other creditors.


In re Roco Corp., 701 F.2d 978 (1st Cir. 1983)