TransTexas Gas Corporation was engaged in [the] exploration, production, and transmission of oil and natural gas. In April 1999, TransTexas fi led for Chapter 11 bankruptcy protection. The reorganization plan provided that the company would enter a three-year Employment Agreement with John Stanley, Sr., the company’s founder.

Stanley would serve as Chief Executive Offi cer and be one of the fi ve directors * * * .

The Employment Agreement provided that Stanley could be terminated beginning two years after its execution * * * [and] would be entitled to severance pay. If he were dismissed for reasons other than cause, he would receive three million dollars. If he were terminated for cause, his payment would be one and a half million dollars. If he voluntarily resigned, he would be paid no severance.

* * * In February 2001, a law fi rm retained by the Board to investigate allegations of Stanley’s wrongdoing found that he could validly be dismissed for cause.

* * * *

Between January and March 2002, Stanley remained CEO and a member of the Board as he negotiated the terms of his departure. In March, Stanley and TransTexas agreed that he would resign. On March 14, 2002, the Board executed a “Separation Agreement.” It explicitly superseded

[replaced] his Employment Agreement. He was to be paid three million dollars in installments.

Stanley received $2,270,794.90 before the payments ceased.

* * * *

As a result of its fi nancial deterioration, TransTexas in November 2002 fi led a second Chapter 11 proceeding in the bankruptcy court for the Southern District of Texas.

* * * Under the plan, a liquidating trust was established with U.S. Bank as the liquidating trustee.

U.S. Bank fi led an adversary proceeding against Stanley, seeking to avoid the severance payments.

* * * The bankruptcy court held that the severance payments constituted both unlawful preferences under Section 547

(b) and fraudulent transfers pursuant to Section 548

* * * .

On appeal, the district court agreed in most respects. * * * [The court held] that Stanley’s severance payments were avoidable as fraudulent transfers pursuant to Section 548 * * * , but not as preferential transfers under Section 547(b).

On appeal now, * * * U.S.

Bank seeks reversal of the district court’s holding that the transfers were not preferential under Section 547(b). Stanley argues for reversal of the holding that the severance payments were fraudulent transfers under Section 548 * * *.

* * * *

An avoidable fraudulent transfer requires

(a) an obligation

(b) incurred by the debtor for the benefi t of an insider

(c) made or incurred within two years before the date of petition where the debtor either

(d) incurred such obligation with actual intent to hinder, delay or defraud a creditor, or

(e) received less than reasonably equivalent value in exchange for such obligation while the debtor was insolvent or made for the benefi t of an insider under an employment contract and not in the ordinary course of business. [Emphasis added.]

Two elements are clearly satisfi ed. The severance payments made to Stanley after his dismissal were obligations incurred by TransTexas within two years of its petition date.

Superfi cially, it would appear that the third element of Stanley’s being an insider is beyond question. That element is challenged, though, on the basis that at the time of the actual payments, Stanley had left the company and was no longer an insider.

* * * *

Under Section 548, it is enough that Stanley was an insider either at the time of the transfer of the funds or at the time the company incurred such obligation. The language of the statute makes that evident. A “trustee may avoid any transfer (including any transfer to or for the benefi t of an insider under an employment contract),” if the debtor “(A) made such transfer or incurred such obligation”

with the requisite intent, “or

(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation” (emphases added [by the court]).

* * * *

Stanley was indisputably an insider at the time he entered into the relevant obligation. That is enough for Section 548.

* * * *

The bankruptcy court found there was no value to the 2002 agreement to pay three million dollars. The district court assigned some value to the exchange, such as Stanley’s release and covenant not to sue. Stanley suggests that by agreeing to “go quietly,” he provided benefi t to the company.

* * * *

TransTexas did not receive reasonably equivalent value for providing Stanley greater compensation than required by the terms of the Employment Agreement. The district court agreed that even under the most favorable circumstances, Stanley could only have been entitled to

$1.5 million under the Employment Agreement, basing that on the conclusion that there was good cause for terminating him. There is simply too much disparity [difference] between TransTexas’s payments and any concessions Stanley may have made for his expedient [convenient] exit from the company.

* * * *

[As to the insolvency of TransTexas,] the language in Section 548 regarding fraudulent transfers

[makes it] clear that there are different ways in which such transfers can occur. One alternative is that a transfer has been made when the debtor was insolvent. Another alternative is

[that] the transfer be made “to or for the benefi t of an insider, or incurred such obligation to or for the benefi t of an insider, under an employment contract and not in the ordinary course of business.” That latter provision applies. As we have discussed, Stanley was an insider at the time the obligation was incurred.

* * * *

* * * [We] AFFIRM the district court on the basis that TransTexas’s payments to Stanley were avoidable fraudulent transfers under Section 548.

Questions:-

1. What might Stanley have meant when he said that by agreeing to “go quietly,” he provided a benefi t to the company?

2. Stanley argued that he was not an insider because he was no longer employed by the company when the severance payments were made. How did the court respond to this argument?