Mellon Bank v. Official Committee of Unsecured Creditors (In re R.M.L., Inc.)

In 1991, Intershoe, Inc. (Intershoe) (debtor) sought to recapitalize and refinance its operations. In March, Three Cities Research (TCR) made a nonbinding proposal to invest $15 million in Intershoe. In June, Mellon Bank (defendant) made a proposal to extend Intershoe a $53 million line of credit contingent on TCR’s $15 million investment. In August, Mellon sent a second proposal similar to the first but added terms including that Intershoe would need to pay various fees and expenses and send Mellon a $125,000 good-faith deposit. Intershoe sent Mellon the requested deposit. In October, Mellon requested another $125,000 good-faith deposit from Intershoe, which Intershoe paid. On November 7, Mellon issued a formal commitment letter requesting another $265,000 in fees from Intershoe. The letter contained numerous financing conditions, including that Intershoe needed to demonstrate net worth of at least $6.5 million. Intershoe accepted Mellon’s commitment, remitted the fee, and sent Mellon a draft financial statement confirming Intershoe’s net worth. However, on November 17, TCR decided not to invest the $15 million, and the deal with Mellon collapsed. An auditor subsequently sent Intershoe a revised financial statement adjusting Intershoe’s net worth downward and indicating that Intershoe’s liabilities exceeded its assets by $4 million. Intershoe’s financial troubles continued, and Intershoe filed for Chapter 11 bankruptcy in February 1992. Intershoe’s unsecured creditors’ committee (the committee) (plaintiff) brought an adversary proceeding against Mellon to recover Intershoe’s fees and good-faith deposits. The committee contended that the payments were constructive fraudulent transfers that could be avoided under 11 U.S.C. § 548, which required showing, among other things, that Intershoe was insolvent at the time of the transfers and that Intershoe had received less than a reasonably equivalent value in exchange for the transfers. The bankruptcy court found that Intershoe had not received reasonably equivalent value in exchange for the $390,000 in commitment fees because Mellon’s loan commitment had been too conditional to succeed. The bankruptcy court also analyzed Intershoe’s assets and liabilities and found that Intershoe had been insolvent because its net worth was negative $4 million by August 31, 1991, and negative $8 million on November 15, 1991. The bankruptcy court therefore ordered Mellon to remit the fees, less Mellon’s expenses, to the bankruptcy estate. The district court affirmed, and Mellon appealed.