In re Roco Corp.

Edward Consove (plaintiff) cofounded Rhode Island-based Roco Corporation. Consove owned 100 percent of Roco’s stock after acquiring 50 percent of the stock from Roco’s cofounder’s estate for $130,000 in 1978. In November 1979, Consove put his son, Gerald, in charge of Roco by selling his stock to Roco in exchange for a $300,000 note and a related security interest in Roco’s personal property. In July 1980, Consove took back control of Roco after accusing Gerald of mismanaging the company. On September 23, Roco entered involuntary bankruptcy. Between his resumption of control over Roco and the involuntary bankruptcy, Consove caused Roco to issue him approximately $26,000 in checks for loan repayments. Consove filed a complaint in bankruptcy court, seeking to modify the automatic stay imposed by Bankruptcy Code (code) § 362 to allow him to reclaim Roco’s assets in his capacity as a secured creditor. The bankruptcy trustee (defendant) responded by asserting the affirmative defense of fraudulent transfer under code § 548(a)(2). The bankruptcy court ruled that Roco’s redemption of Consove’s stock was a fraudulent transfer because Roco did not receive reasonably equivalent value in return and Roco’s unaudited financial statements showed that Roco was insolvent. Specifically, per its unaudited balance sheet, (1) Roco’s main assets were current assets, which, unlike fixed assets, were relatively unaffected by potential accounting inaccuracies; (2) Roco did not reserve for possible bad debt, potentially overvaluing the company’s accounts receivables; and (3) Roco’s inventory possibly was overvalued. Additionally, the bankruptcy court did not add any value for Roco’s goodwill. The bankruptcy appellate panel affirmed. Consove appealed.