## Facts

- Metro Communications, Inc. operated a television and radio sports syndication business.
- Metro’s shareholders sold all Metro stock to Total Communications, Inc. (TCI), a newly created acquisition entity owned by Total Communication Systems Co. (TCS), in a leveraged buyout.
- Mellon Bank financed the transaction by lending approximately $1.85 million to TCI to purchase Metro’s stock.
- Metro guaranteed the acquisition loan and granted Mellon a security interest in substantially all of Metro’s assets.
- Mellon also extended Metro a $2.3 million line of credit and issued about $2.25 million in letters of credit, likewise secured by a lien on substantially all Metro assets.
- Metro later changed the location of its headquarters; the bankruptcy court found Mellon failed to timely refile UCC financing statements after the move, causing a lapse in perfection under state law.
- Mellon refiled within 90 days before Metro filed a Chapter 11 petition; Metro operated as debtor-in-possession.
- The bankruptcy court (affirmed by the district court) held (i) Mellon’s secured status was a voidable preference due to the 90-day refiling and (ii) Metro’s guaranty and related lien for the acquisition loan were constructive fraudulent transfers.

## Issues

1. Whether Mellon’s refiling of financing statements within 90 days of the bankruptcy filing, after an asserted lapse in perfection due to Metro’s relocation, constituted an avoidable preferential transfer under 11 U.S.C. § 547(b).
2. Whether Metro’s guaranty of the acquisition loan and related security interest were avoidable as constructive fraudulent transfers under 11 U.S.C. § 548(a)(2) because Metro allegedly received less than reasonably equivalent value and was insolvent or left with unreasonably small capital.

## Decision

- The Third Circuit reversed the district court and bankruptcy court.
- The court held Mellon’s security interest was not avoidable as a preference under § 547(b) based on the refiling after Metro’s relocation.
- The court held Metro’s guaranty of the acquisition loan and related security interest were not avoidable as constructive fraudulent transfers under § 548(a)(2).

## Legal Principles

- Preference avoidance under 11 U.S.C. § 547(b) focuses on whether a transfer within the preference period improved a creditor’s position relative to other creditors; a filing step viewed as preservative of an existing secured position does not necessarily constitute an avoidable preference.
- For constructive fraudulent transfer claims under 11 U.S.C. § 548(a)(2), “reasonably equivalent value” may include indirect economic benefits to the debtor, not only direct receipt of loan proceeds.
- In an LBO setting, a target company’s guaranty of acquisition debt is not per se a constructive fraudulent transfer; the analysis requires a fact-based assessment of (i) value received (including indirect benefits) and (ii) insolvency or unreasonably small capital at the time of the transfer.

## Conclusion

The Third Circuit reinstated Mellon’s secured position and Metro’s LBO-related guaranty, holding that the challenged refiling did not create an avoidable preference and that indirect benefits from the buyout could constitute reasonably equivalent value absent proof of insolvency or inadequate capitalization at the time of the transaction.


Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635 (3d Cir. 1991)