[p575] ESCHBACH, Circuit Judge.
Image Worldwide, Ltd. guaranteed loans paid to an affiliate corporation, Image Marketing, Ltd. Both corporations were owned by the same person, but only Image Marketing received funds from the loan. The Image Worldwide's bankruptcy trustee filed suit to avoid the guarantees as a fraudulent transfer, alleging that the guarantees made Image Worldwide insolvent, and that Image Worldwide did not receive reasonably equivalent value in exchange for its guarantees. The bankruptcy and district courts found in favor of the trustee. This bankruptcy appeal presents the issue of when a corporation receives reasonably equivalent value for its guarantee of an affiliates' debts. The bankruptcy court held that a guarantor must receive direct economic benefits in exchange for its guarantee in order to have received reasonably equivalent value for its guarantee. While the bankruptcy court applied an overly narrow interpretation of what may constitute reasonably equivalent value for a guarantee, the bankruptcy court did not clearly err in finding that Image Worldwide did not receive reasonably equivalent value for its guarantees. We affirm.
I. Facts
Richard Steinberg was the sole shareholder, sole officer, and sole director of Image Marketing, Ltd. (IM), an Illinois corporation incorporated in June 1991. IM was in the commercial printing business, primarily dealing in wholesale sales of music and sports merchandise. IM leased space from FCL Graphics, a printing company that did all of the printing for IM.
In 1992, IM obtained a line of credit from Parkway Bank secured by a first lien against substantially all of IM's assets (IM loan). The line of credit allowed IM to borrow against up to 70% of its eligible accounts receivable, and required IM to reduce its indebtedness to 70% of its accounts receivable in the event that its eligible accounts receivable declined. By June 1993, IM had borrowed $ 300,000 on its line of credit.
At the end of 1993, IM was several hundred thousand dollars in debt to trade creditors. So in December 1993, Steinberg incorporated a new Illinois corporation, Image Worldwide, Ltd. (IW). Steinberg was the sole shareholder, officer, and director of IW as well. IW leased the same space from [p576] FCL as IM, used the same suppliers, and had many of the same customers. In early 1994, Steinberg liquidated IM. Parkway knew of and cooperated in the liquidation of IM. Instead of demanding that IM pay off its loan under the terms of the agreement, however, Parkway allowed Steinberg to use the money obtained from the liquidation of IM to pay down IM's trade debts. Parkway never required IM to pay off its loan, even when its accounts receivable declined to zero in 1994.
Instead, Parkway demanded that IW guarantee IM's $ 300,000 debt. IW executed the guarantee on May 27, 1994. The guarantee was secured by a first lien on substantially all of IW's assets. IW never borrowed any money from Parkway on its own. Parkway's consideration for the guarantee was its allowing IW to stay in business. Between May 27, 1994 and when IW was forced into bankruptcy, IW paid principal and interest on the loan as it became due.
Even after IM was wound down, IM still owed $ 200,000 to FCL Graphics. Parkway lent $ 200,000 to Steinberg to pay this debt (Steinberg loan). The bank paid the proceeds from this loan directly to FCL. The loan was secured by all of IW's accounts receivable. As of the date of its bankruptcy, IW had paid down $ 72,076.49 in principal and $ 26,863.45 in interest on the loan.
IW was no more successful than IM. At trial, Parkway stipulated that the guarantees made IW insolvent. In August 1995, FCL stopped doing work for IW, and filed an involuntary chapter 7 petition for bankruptcy against IW. David Leibowitz was appointed as the trustee of IW's bankruptcy estate. Over the trustee's objection, Parkway obtained relief from the automatic stay, and collected IW's accounts receivable to pay down the debts guaranteed by IW. All told, Parkway collected $ 444,507.55 from IW, including the amounts paid prior to the bankruptcy.