## Facts

- Doctors Hospital of Hyde Park, Inc. suffered chronic cash-flow problems and later entered bankruptcy.
- The Hospital’s controller used a financing structure involving MMA Funding, LLC (owned by the controller) to access a $25 million line of credit initially arranged through Daiwa Healthco.
- The structure purported to transfer the Hospital’s accounts receivable to MMA and treat MMA as a “bankruptcy-remote” vehicle insulating receivables and payment streams from the Hospital’s bankruptcy estate.
- In practice, MMA lacked operational separateness: it had no office, kept no independent financial statements or tax returns, did not actually purchase receivables, and the receivables and accounting remained on the Hospital’s books.
- The financing was later securitized; LaSalle Bank, N.A. served as trustee for certificate holders in the securitization.
- The bankruptcy trustee sued to avoid and recover certain payments made during the Hospital’s final years (including debt-service and rent-related payments tied to the securitized structure) as fraudulent transfers and related avoidance claims.

## Issues

1. Whether MMA functioned as a genuinely separate, bankruptcy-remote entity such that the trustee could not reach assets and payments associated with the receivables structure.
2. Whether payments made in connection with the financing and securitization were avoidable as fraudulent transfers under applicable fraudulent-transfer law as applied in bankruptcy.
3. How to measure and limit recovery against LaSalle, acting as trustee for securitization certificate holders, consistent with avoidance remedies and statutory limits.

## Decision

- The Seventh Circuit held that MMA was not meaningfully separate from the Hospital and could be treated as part of the debtor for purposes of analyzing the challenged transactions.
- The court agreed that certain transfers connected to the financing/securitization could be avoided as fraudulent transfers, permitting recovery from LaSalle to the extent it received avoidable transfers.
- The court limited relief to the value of avoidable transfers actually received within the applicable periods, rejecting broader theories that would effectively unwind the entire securitization beyond statutory avoidance limits.
- The court affirmed in part, reversed in part, and remanded for further proceedings, including recalculation and proper tailoring of the recovery.

## Legal Principles

- Courts may disregard a structured-finance entity’s “bankruptcy-remote” label when the entity lacks genuine operational separateness and functions as a component of the debtor.
- Fraudulent-transfer avoidance focuses on whether the debtor was insolvent or undercapitalized and failed to receive reasonably equivalent value for the obligations incurred and payments made.
- Avoidance and recovery are remedial and are limited to the value of the property transferred that meets the statutory criteria and timing requirements; remedies should not be punitive or exceed the amounts properly attributable to avoidable transfers.
- A securitization trustee’s exposure in avoidance litigation is constrained to amounts actually received as a transferee (or for whose benefit a transfer was made), subject to statutory lookback limits and proper valuation.

## Conclusion

The Seventh Circuit treated the purported bankruptcy-remote receivables vehicle as functionally part of the debtor, allowed avoidance of certain securitization-related payments as fraudulent transfers, and confined recovery against the securitization trustee to the value of avoidable transfers actually received within the statutory periods.


Paloian v. LaSalle Bank, N.A., 619 F.3d 688 (7th Cir. 2010)