United States: Mind Your Netting: The Fifth Circuit Clarifies The Section 548(c) Good Faith Fraudulent Transfer Defense

Last Updated: January 13 2015
Article by Katherine O'Malley

Section 548(a) of the United States Bankruptcy Code (the "Code") empowers a bankruptcy trustee to recover an actual or constructively fraudulent transfer made within the two-year period prior to the debtor's bankruptcy filing. Even when a fraudulent transfer has been made, however, an innocent transferee is protected from liability by section 548(c) of the Code if the transferee acted in good faith and to the extent the transferee provided value to the debtor. In a recent case, the Fifth Circuit examined the meaning of "value" in section 548(c) of the Code and clarified what should happen if the transferee gives less value than the debtor receives.

In Williams v. Federal Deposit Insurance Corp. (In re Positive Health Management), 769 F.3d 899 (5th Cir. 2014), Positive Health Management, Inc. (the "Debtor") was owned by Ronald Ziegler. In 2005, First National Bank ("First National")1 made a loan to a second corporate entity owned by Ziegler that was secured by a building that the Debtor used for office space. Though the Debtor had no direct obligations under the loan, it made a series of payments to First National totaling $367,681.35 that it listed as rent on its tax returns. The Debtor ultimately stopped paying the loan and First National foreclosed on the office building. After the Debtor filed for bankruptcy, the Chapter 7 trustee brought an adversary proceeding to recover the payments as fraudulent transfers under section 548 of the Code.

The Bankruptcy Court determined that the Debtor received reasonably equivalent value for the transfers to First National on two alternative grounds. First, First National's forbearance from foreclosing on the office property allowed the Debtor to continue running its operations and generate over $4 million of cash flow. Second, the court found that the rent payments enabled the Debtor to continue using the office space and constituted "reasonably equivalent value" as described in section 548(a)(1)(B) of the Code. Relying on its conclusion that the Debtor received reasonably equivalent value, the court determined that First National was able to establish a good faith fraudulent transfer defense under section 548(c), and was therefore entitled to keep the funds that it received. The trustee appealed this ruling.

"Value" for Purposes of Section 548(c) Is Analyzed from the Transferee's Perspective, Not the Transferor's

A transferee provides value when it receives the allegedly voidable transfer in exchange for "property, or satisfaction or securing a present or antecedent debt of the debtor..." 11 U.S.C. § 548(d)(2)(A). The trustee did not contest that First National acted in good faith, but did contest that it provided value. The Fifth Circuit began its analysis by discussing its prior holding that "value" for purposes of section 548(c) must be assessed from the perspective of what the transferee gave up rather than what the debtor received. Jimmy Swaggart Ministries v. Hayes (In re Hannover Corp.), 310 F.3d 796, 799–802 (5th Cir. 2002). The court found that the Bankruptcy Court's first value determination—that First National's forbearance allowed the Debtor to generate $4 million of cash flow—considered value from the Debtor's perspective instead of First National's in contravention of Hannover. The Bankruptcy Court did correctly value the benefit to the Debtor for the use of the office space when it concluded that the value to the Debtor was equal to market rent, or $253,333.33. Because First National provided value and acted in good faith, the court determined that it was entitled to assert the section 548(c) defense.

Valuation under Section 548(a) Versus Section 548(c) of the Code

The Bankruptcy Court cited Hannover as a basis for equating the "reasonably equivalent value" that must be lacking for a transfer to be avoidable under section 548(a)(1) of the Code with the "value" necessary to assert the section 548(c) defense. The Fifth Circuit noted that, though other bankruptcy courts have also cited Hannover for this preposition, the reading is mistaken. Relying on Collier's, the court determined that "value" in section 548(c) was not the same as "reasonably equivalent value" in section 548(a)(1)(B), and to equate the two would read the "to the extent" language out of the statute. As a result, the Code allows a good faith purchaser to assert a lien for any amount provided, even though the value provided was less than the value of the property it received.

Netting is Required if the Transferee Gives Less Than the Debtor Receives

Although First National was entitled to assert the defense, the trustee argued that the language of section 548(c) requires that the court reduce the value of the fraudulent transfers ($367,681.35) by the value of the appraised market rent ($253,333.33) and award the difference to the bankruptcy estate. The trustee based this argument on the plain language of the section, which reads that a transferee who has provided value in good faith "may retain any interest transferred... to the extent that such transferee... gave value to the debtor in exchange for such transfer or obligation." 11 U.S.C. § 548(c) (emphasis added). Though the Bankruptcy Court found that First National was entitled to keep the entirety of the transfers because the rental value was "reasonably equivalent" to the amount of the transfer, the Fifth Circuit held that a netting approach was proper based upon the text of the Code. Therefore, the trustee was entitled to recover the $114,348.02 difference between the fraudulent payments that First National received and the value that it gave in return.

This case clarifies that any good faith transferee that gives any value to a debtor is entitled to the protections of section 548(c) of the Code, but only to the extent of the actual value given. Lenders should be mindful that even if they act in good faith and provide value to the debtor, the Fifth Circuit has read the text of section 548(c) to require that the court apply a netting approach if the transferee received more value than the consideration it gave up in return. The trustee may then claw back any fraudulent payments that exceed the value given by the transferee to the debtor into the bankruptcy estate.


1. After the complaint was filed but prior to the Circuit Court's decision, First National was taken over by the FDIC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Katherine O'Malley
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.