Jalbert v. Wessel

United States Court of Appeals
for the Fifth Circuit

No. 19-31009

In the Matter of: Louisiana Pellets, Inc.; German
Pellets Louisiana, L.L.C.,

Debtors,

Craig Jalbert,

Appellant,

versus

Wessel G M B H,

Appellee.

Appeal from the United States District Court
for the Western District of Louisiana
USDC No. 6:19-CV-870

Before Higginbotham, Elrod, and Haynes, Circuit Judges.
Per Curiam:*
This adversarial bankruptcy action involves contracts to construct a
wood-pellet manufacturing plant in Louisiana. The Trustee for debtor

*
Pursuant to 5th Circuit Rule 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in 5th Circuit Rule 47.5.4.
United States Court of Appeals
Fifth Circuit
FILED
December 4, 2020

Lyle W. Cayce
Clerk
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German Pellets Louisiana LLC (GPLA), the entity that was constructing and
operating the plant, appeals the denial of his request to avoid transactions
entered into by GPLA with Wessel GmbH Fordertechnik und
Pelletierenlagen. We AFFIRM the denial.
I. Facts & Procedural History
Many of the underlying facts are undisputed. Louisiana Pellets Inc.
owned property in Urania, Louisiana, intended for a solid-waste disposal and
wood-pellet manufacturing facility. Louisiana Pellets engaged GPLA to
oversee the construction and eventually operate the completed facility. The
facility’s construction was divided into Phase I (or Line A) and Phase II (or
Line B). Before construction began, GPLA contracted Wessel to construct
conveying and cooling equipment and to provide related services for both
phases.
In February 2014, after GPLA encountered financial difficulties,
GPLA and Wessel agreed to modify the contract through a First Change
Order. This change order removed Phase II from the contract, limiting
construction to Phase I only. It also relieved GPLA of its obligation to pay
Wessel for equipment or services related to Line B and reduced the total
contract price by nearly half. Nonetheless, Wessel continued to perform
design and manufacturing work at the direction of GPLA’s technical
department with the understanding that it was a matter of when, not if, the
second stage of construction would resume. Wessel sent GPLA two invoices
that reflected this type of work, one on September 26, 2014 for €200,000 and
another on December 9, 2014 for €400,000. In December 2014, for services
indicated on the first invoice, Wessel received a payment of €200,000 from
GPLA—the first of five disputed payments.
After Wessel completed its work for Phase I, the parties agreed to a
Second Change Order in April 2015. The Second Change Order provided
that a portion of the original Phase II would be reinstated, work that was
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renamed Line B1. This order also implemented a payment milestone
schedule, which scheduled delivery of the Line B1 equipment after roughly
90% of the €3,600,000 total had been paid. Shortly after executing the
Second Change Order, GPLA’s parent company paid Wessel €400,000 for
services indicated on the second invoice—the second disputed payment.
1

The parent company issued three additional payments of €200,000 each
between August and September 2015.
GPLA never obtained a completed Line B1, nor Phase II, because both
GPLA and Louisiana Pellets filed for Chapter 11 bankruptcy in February
2016. Craig Jalbert was appointed Liquidating Trustee for GPLA, and he
brought the adversary proceeding underlying this case in the U.S.
Bankruptcy Court for the Western District of Louisiana in 2018. The
Trustee in part sought to avoid and recover the five disputed payments in
accordance with provisions in the Bankruptcy Code and the Louisiana Civil
Code. In his complaint, he argued that the five payments were fraudulent
transfers within the meaning of 11 U.S.C. § 548. Before trial, the Trustee
conceded that the payments were not actual fraud but continued to argue that
they were constructive fraud. The parties jointly stipulated that the court
should also determine whether the Second Change Order was itself a
constructive fraudulent transaction. The Trustee further brought a
revocatory action under Louisiana Civil Code article 2036 via 11 U.S.C.

1
Wessel argues that the transfers “cannot be avoided because the payments were
made by a non-debtor foreign entity”—the parent company—and were therefore not paid
with GPLA’s assets. However, because both entities were controlled by the same person
and the parent’s funds were available to pay GPLA’s creditors, these were assets of
GPLA’s estate. See In re IFS Fin. Corp., 669 F.3d 255, 263 (5th Cir. 2012) (holding that
“control is decisive,” not legal title); In re Southmark, 49 F.3d 1111, 1116–17 (5th Cir. 1995)
(“[T]he primary consideration in determining if funds are property of the debtor’s estate
is whether the payment of those funds diminished the resources from which the debtor’s
creditors could have sought payment.”).
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§ 544(b), arguing that the five payments were avoidable because they
increased GPLA’s insolvency.
After trial, the bankruptcy court issued a judgment in favor of Wessel.
In re La. Pellets, Inc., No. 16-80162, 2019 WL 2565670, at *2–4 (Bankr. W.D.
La. June 20, 2019). On the issue of constructive fraud, the court concluded
that a binding contract existed between the parties, that the five disputed
payments made by GPLA to Wessel were for reasonably equivalent value
because they were made to satisfy antecedent debt retroactively sanctioned
by the Second Change Order, and that GPLA also obtained reasonably
equivalent value from Wessel “in the form of the expected future benefit of
Phase II . . . .” Id. at *4. It further held that the payments did not increase
GPLA’s insolvency under Louisiana law because they were payments on
antecedent debt. Id. The court did not specifically address the Second
Change Order as a separate transaction. See id. The Trustee appealed to the
district court, which—sitting as an appellate court—affirmed from the bench
the bankruptcy court’s decision for the reasons stated therein. The Trustee
then timely appealed to this court.
II. Standard of Review
“In reviewing the rulings of the bankruptcy court on direct appeal and
the district court sitting in bankruptcy, we review findings of fact for clear
error and conclusions of law de novo. We review mixed questions of law and
fact de novo.” In re TMT Procurement Corp., 764 F.3d 512, 519 (5th Cir. 2014)
(per curiam) (footnote omitted). Relevant here, whether a debtor received
value at all is a question of law, but “[a] bankruptcy court’s finding of
reasonably equivalent value is a factual determination subject to a ʻclearly
erroneous’ standard of review.” See In re TransTexas Gas Corp., 597 F.3d
298, 306 & n.2 (5th Cir. 2010); see also In re Dunham, 110 F.3d 286, 288–89
(5th Cir. 1997) (abrogating a line of prior cases that had reviewed reasonable-
equivalency determinations de novo). Because the district court adopted the
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reasoning of the bankruptcy court, we discuss only the bankruptcy court’s
opinion and judgment.
III. Discussion
Both 11 U.S.C. § 548(a)(1)(B) and Louisiana Civil Code article 2036
permit a bankruptcy trustee to avoid certain recent transfers made by a
debtor. Section 548(a)(1)(B) addresses constructively fraudulent transfers,
which are exchanges in which the debtor did not receive “reasonably
equivalent value.” In re Gulf Fleet Holdings, Inc., 491 B.R. 747, 762, 766
(Bankr. W.D. La. 2013) (quoting 11 U.S.C. § 548(a)(1)(B)). The Louisiana
statute is broader, allowing a trustee to “annul an act of the obligor, . . . made
or effected after the right of the obligee arose, that causes or increases the
obligor’s insolvency.” La. Civ. Code Ann.
art. 2036. This is referred
to as a revocatory action. See generally id. ch. 12, sec. 1. The Bankruptcy
Code permits a trustee to avoid transfers by the debtor that are “voidable
under applicable law,” 11 U.S.C. § 544(b), which includes article 2036, Hays
v. Jimmy Swagart Ministries, 263 B.R. 203, 213 (M.D. La. 1999).
A. Constructive Fraud
Under § 548(a)(1)(B), a bankruptcy trustee may avoid certain
transfers made within two years of the bankruptcy filing if the debtor did not
“receive reasonably equivalent value”:
The trustee may avoid any transfer . . . of an interest of
the debtor in property, or any obligation . . . incurred by the
debtor, that was made or incurred on or within 2 years before
the date of the filing of the petition, if the debtor voluntarily or
involuntarily . . . received less than a reasonably equivalent
value in exchange for such transfer or obligation; and . . . was
insolvent on the date that such transfer was made or such
obligation was incurred, or became insolvent as a result of such
transfer or obligation[.]
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Put simply, this section allows a trustee to nullify certain inflated
transactions “to conserve the debtor’s estate for the benefit of creditors.” In
re Minn. Util. Contracting, Inc., 110 B.R. 414, 420 (Bankr. D. Minn. 1990).
“Any significant disparity between the value received and the obligation
assumed will have significantly harmed the innocent creditors of the debtor.”
Id. Unlike the provisions on actual fraud, the constructive fraud provision is
not concerned with the debtor’s intent, but rather the value the debtor
received. See 11 U.S.C. § 548(a)(1).
Because the disputed payments occurred less than two years before
the bankruptcy filing and the parties stipulated that GPLA was insolvent at
all relevant times, the only question is whether GPLA received reasonably
equivalent value in its transactions with Wessel. See id. § 548(a)(1)(B). The
bankruptcy court concluded that all five payments “were made to satisfy an
antecedent debt” and that GPLA “received ʻreasonably equivalent value’ in
the form of the expected future benefit of Phase II.” La. Pellets, 2019 WL
2565670, at *4.
Whether a debtor received reasonably equivalent value is a two-part
inquiry: (1) whether the debtor received value, and (2) whether that value
was reasonably equivalent. In re Fruehauf Trailer Corp., 444 F.3d 203, 212–
13 (3d Cir. 2006). Although value is defined in the Bankruptcy Code,
reasonably equivalent value is not. See 11 U.S.C. § 548(d)(2)(A) (providing
that “ʻvalue’ means property, or satisfaction or securing of a present or
antecedent debt of the debtor, but does not include an unperformed promise
to furnish support to the debtor or to a relative of the debtor”). Instead, the
determination of reasonable equivalency is left to courts, which “judge the
consideration given for a transfer from the standpoint of creditors.”
TransTexas, 597 F.3d at 306. “The proper focus,” we have said, “is on the
net effect of the transfers on the debtor’s estate, the funds available to the
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unsecured creditors.” In re Hinsley, 201 F.3d 638, 644 (5th Cir. 2000)
(quotation omitted).
“Value is determined as of the date of transfer.” Id. (citing In re
Viscount Air Servs., 232 B.R. 416, 437 (Bankr. D. Ariz. 1998) (“The value of
the transferred assets is established as of the date that the transfers put the
assets beyond the reach of creditors.”)). For any such value to be reasonably
equivalent, the debtor must receive “value that is substantially comparable
to the worth of the transferred property.” BFP v. Resolution Tr. Corp., 511
U.S. 531, 548 (1994). “[T]he inquiry . . . is the same for all transfers.” Id.
Fair market value is usually a relevant measure for market transactions, but
it is not always the most prudent one. See id. at 545 (holding that reasonably
equivalent value will “ordinarily [bear] a meaning similar to fair market
value” but that a property’s foreclosure sale price was the appropriate
measure of value). Because value is determined at the time of transfer,
“[n]either subsequent depreciation in nor appreciation in value of the
consideration affects the question whether reasonable equivalent value was
given.” In re Chomakos, 69 F.3d 769, 771 (6th Cir. 1995) (quoting Collier on
Bankruptcy § 548.09 at p. 116 (15th ed. 1984)) (holding that a debtor who
placed a bet received reasonably equivalent value in the form of a contractual
right to payment if successful).
“Although the minimum quantum necessary to constitute reasonably
equivalent is undecided, it is clear that the debtor need not collect a dollar-
for-dollar equivalent to receive reasonably equivalent value.” In re Fairchild
Aircraft Corp., 6 F.3d 1119, 1125–26 (5th Cir. 1993), abrogated in part on other
grounds by Dunham, 110 F.3d at 288–89. When a debtor makes a monetary
investment, we “consider the circumstances that existed at the time and
determine if ʻthere was any chance that the investment would generate a
positive return.’” Hays, 263 B.R. at 211 (quoting In re R.M.L., Inc., 92 F.3d
139, 152 (3d Cir. 1996)). “[W]e cannot use hindsight to recalibrate the risk—
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or the potential reward—of [the debtor’s] investment.” Fairchild Aircraft, 6
F.3d at 1126. This approach “appropriately balances a creditor’s interest in
estate preservation against a debtor’s legitimate, pre-bankruptcy efforts to
take risks that, if successful, could generate significant value and, possibly,
avoid the need for protection under the [Bankruptcy] Code altogether.”
R.M.L., 92 F.3d at 152.
When a debtor makes a payment on antecedent debt and receives a
dollar-for-dollar reduction of that debt, however, the question is easy because
the debtor by definition receives reasonably equivalent value—indeed, exactly
equivalent value, assuming, of course that the debt itself was based upon
value. See Gulf Fleet Holdings, 491 B.R. at 766 (collecting cases); see also 11
U.S.C. § 548(d)(2)(A) (defining “value” to include “satisfaction . . . of a
present or antecedent debt”).
1. The Second Change Order
As an initial matter, the Trustee argues that the bankruptcy court
failed to determine whether the Second Change Order was itself constructive
fraud. We conclude that the bankruptcy court implicitly held that the Second
Change Order was not a constructive fraudulent transaction. This is because
if the Second Change Order were fraudulent, it could not have been the
source of the antecedent debt on which, as the court held, the disputed
payments were made. See La. Pellets, 2019 WL 2565670, at *2–4; see also
TransTexas, 597 F.3d at 307–08 (holding that there was no antecedent debt
because the contract did not create an obligation to pay).
We also hold that it was not clear error to find that the Second Change
Order was an exchange for reasonably equivalent value. The parties
stipulated that it was an arm’s-length transaction, which is relevant, though
not dispositive. See Barber v. Golden Seed Co., 129 F.3d 382, 387 (7th Cir.
1997). GPLA clearly received value in the form of Wessel’s promise to
perform work for Line B1, and the Trustee has not shown that GPLA’s
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obligation to pay was not commensurate with Wessel’s promise. See id.
(noting that the burden of proof for showing lack of reasonable equivalency
lies with the bankruptcy trustee). Paying €3,600,000 for Line B1 compared
to the original €4,940,000 for the full Phase II is not clearly unreasonable.
Although GPLA was insolvent at the time, the Trustee has not shown that
the agreement under the Second Change Order was almost certain to fall
through—indeed, Phase I had just been completed successfully—so we will
not second-guess the potential risk and reward of entering into it. See
Fairchild Aircraft, 6 F.3d at 1126 (“[W]e cannot use hindsight to recalibrate
the risk—or the potential reward—of [the debtor’s] investment.”); cf. Hays,
263 B.R. at 211 (finding no reasonable equivalency because “there was no
chance” that the deal would have gone through). True, the contract
eventually failed, but we do not consider the later failure or depreciation of
an obligation in our examination of reasonable equivalency. See In re Treasure
Valley Opportunities, Inc., 166 B.R. 701, 704–05 (Bankr. D. Idaho 1994).
Therefore, we AFFIRM the bankruptcy court’s ruling that the Second
Change Order was not a constructive fraudulent transaction.
2. The Disputed Payments
We now address the bankruptcy court’s holding that all five disputed
payments were made in exchange for reasonably equivalent value because
they satisfied an antecedent debt. See La. Pellets, 2019 WL 2565670, at *2–4.
The first two payments were invoiced before the Second Change Order was
executed, and the latter three were invoiced afterward. However, when
Wessel invoiced GPLA is not dispositive. For instance, GPLA received the
second invoice for €400,000 in December 2014 but then waited until April
2015, after the second change order formally revived work on part of Phase
II, to make this payment. This lends credence to the bankruptcy court’s
conclusion that the second payment was in fact tethered to GPLA’s original
obligation in the parties’ 2013 contract that GPLA reassumed in the second
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change order. See In re Hinsley, 201 F.3d at 644 (“[V]alue is determined as
of the date of transfer.”).
Likewise, the parties did not dispute that Wessel performed design
and manufacturing work for Line B1 that was reflected in the first two
invoices. Wessel did most, if not all, of the design and manufacturing work
on Line B1 before the parties formally executed the second change order.
Thus, the first two payments correspond with real, tangible work by Wessel,
even if that work was undertaken before GPLA executed the second change
order formalizing its renewed obligation to pay for such work. The value of
Wessel’s actual design and manufacturing on Line B1 of the plant is in
addition to the somewhat less tangible value that GPLA received for these
payments: keeping the construction project alive and preserving the
expected future value of the completed pellet plant. See In re Treasure Valley
Opportunities, Inc., 166 B.R. at 705 (“In addition to being a tangible asset
capable of being subject to levy by creditors, a wood pellet production plant
would also appear to carry at least the potential of producing income.”).

Without more information regarding the parties’ pre-change-order
discussions in the record, it is more difficult to determine whether the parties
had concluded some sort of binding agreement before the second change
order was executed in writing. This does put the first two payments on more
tenuous footing because it leaves the question of a corresponding antecedent
debt in some doubt. However, the record indicates that this was a good-faith
exchange of payment for work, with GPLA receiving reasonably equivalent
value in the form of Wessel’s labor, preparations, and expertise. See id.
(“NRR began performance of the contract in good faith, and there is no
evidence the debtor made the payments in anything other than good faith.”).
GPLA’s decision to make these payments between the first and second
change orders can rationally be viewed as an effort to keep the project alive
and preserve the possibility of future returns that a completed pellet plant
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could provide. For these reasons, we hold that the first two payments were
not constructively fraudulent and AFFIRM the bankruptcy court’s ruling
regarding these payments.
The latter three payments were made in accordance with the
antecedent Second Change Order’s payment schedule and were
memorialized by lien waivers for the respective amounts. The dollar-for-
dollar reduction of GPLA’s obligation to pay Wessel under the Second
Change Order was reasonably equivalent value for those three payments, so
this holding was not clear error. See La. Pellets, 2019 WL 2565670, at *2–4.
Separate from the antecedent debt, it was also not clear error to hold that
GPLA received reasonably equivalent value in another form: These
payments ensured that GPLA did not breach the contract, keeping alive “the
expected future benefit” of Line B1, and potentially Phase II. See id. (citing
Treasure Valley, 166 B.R. at 704 (recognizing “the continued vitality of [a]
contract” as “an asset in a substantial sense”)). We AFFIRM the
bankruptcy court’s ruling that these three payments were not constructive
fraudulent transfers.
B. Louisiana Revocatory Action
The Louisiana revocation statute is broader than § 548, requiring only
that the debtor-obligor do something after a creditor’s rights accrue “that
causes or increases the obligor’s insolvency.” La. Civ. Code Ann.
art.
2036. Reasonable equivalence is not a consideration. See id. Payments on
antecedent debt do not increase a debtor’s insolvency because its balance
sheet remains neutral. See Gulf Fleet, 491 B.R. at 766–77. The bankruptcy
court held that none of the five disputed payments were avoidable under
article 2036. La. Pellets, 2019 WL 2565670, at *4.
For the reasons discussed above in the previous section, all five
disputed payments were on antecedent debt, so they did not increase
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GPLA’s insolvency. We therefore AFFIRM the bankruptcy court’s ruling
that the payments are not avoidable under article 2036.
IV. Conclusion
In sum, we AFFIRM the bankruptcy court’s ruling that the Second
Change Order and the five disputed payments were not constructive
fraudulent transfers, and we AFFIRM the bankruptcy court’s ruling that
those payments are not avoidable under Louisiana law.

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Haynes, Circuit Judge, concurring in part, dissenting in part:
I respectfully dissent from the portion of the majority opinion
affirming the bankruptcy court’s ruling on the two disputed payments
invoiced before the parties agreed to the Second Change Order.
1
Even the
majority opinion concedes that the lack of a binding agreement at the time of
the invoices puts these payments on “tenuous footing.” That is actually an
overstatement: those two are not on any footing. The payments do not
correspond to any antecedent debt and were not otherwise for reasonably
equivalent value. I would therefore hold that these two payments were
constructively fraudulent and reverse the bankruptcy court’s ruling
regarding these payments.
The evidence demonstrates that these two payments were not made
on an antecedent debt. GPLA made the payments in connection with
Wessel’s invoices for “Down payment[s]” on Line B1 of Phase II. But, at the
time Wessel sent those invoices, the parties had already agreed to remove
Phase II work from the contract and had not yet executed the Second Change
Order to add Line B1 back in. The payments, in other words, were
untethered to either the contract at the time of the First Change Order or the
contract at the time of the Second Change Order. It appears, as the majority
opinion suggests, that Wessel and GPLA may have been discussing adding
Line B1 back in during that contractual interregnum. Yet there is no evidence
that they actually came to a binding commitment on that front until they
executed the Second Change Order months after the invoices were sent. The
bottom line is that Wessel invoiced GPLA for Line B1 work before Wessel was
entitled to do—or GPLA was required to pay—anything with respect to Line
B1. GPLA’s payments on those invoices therefore cannot relate to any

1
I concur with the majority opinion in all other respects.
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antecedent debt. See In re Southmark Corp., 88 F.3d 311, 316 (5th Cir. 1996)
(“A debt is antecedent if it is incurred before the transfer.”).
Of course, the payments could still be permissible if GPLA
nonetheless received something of reasonably equivalent value in exchange.
See 11 U.S.C. § 548(a)(1)(B). But GPLA did not receive anything tangible
from Wessel: Wessel did not deliver any equipment or perform any onsite
services related to Line B1, let alone equipment or services reasonably
equivalent to the €600,000 Wessel received in the two payments.
2

Nor did GPLA receive anything else of reasonably equivalent value.
In particular, the majority suggests that the payments are justified by “the
somewhat less tangible value” of “keeping the construction project alive.” I
agree that the intangible (or, at least, hard to estimate) value of keeping a
project afloat can, in rare circumstances, justify a payment. See In re Fairchild
Aircraft Corp., 6 F.3d 1119, 1126 (5th Cir. 1993), abrogated in part on other
grounds by In re Dunham, 110 F.3d 286, 288–89 (5th Cir. 1997). But such
intangible value is not reasonably equivalent, if, as here, there is a low
possibility that the debtor could cash in on the project at all. Cf. id.
(concluding that payments to keep the debtor marketable were reasonably
equivalent in large part because the expected sale price and the likelihood of
sale were “demonstrably high”). The value in keeping the project alive here
was not reasonably equivalent to €600,000 because, even if the two
payments helped the Line B1 project survive, Phase II would only be, in the
language of the Second Change Order, “partly” complete. Whatever the
expected future value of such a partially-completed, likely non-operational
facility, the expected return or the likelihood of sale are not “demonstrably

2
As the majority opinion notes, Wessel appears to have done some design and
manufacturing work on Line B1 prior to the execution of the Second Change Order. But,
even setting aside the fact that GPLA never actually received any of Wessel’s Line B1 work,
there is evidence that Wessel’s work was worth considerably less than €600,000; in
particular, for all of Line B1, Wessel constructed less than €265,000 in items.
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high” on these facts. Id. Notably, the bankruptcy court did not even find any
such facts; it simply treated all five payments the same way, concluding that
they all concerned an antecedent debt and that all the payments would
support the “future benefit of Phase II.” In re La. Pellets, Inc., No. 16-80162,
2019 WL 2565670, at *4 (Bankr. W.D. La. June 20, 2019); see also id. at *3
(“In other words, payments under a contract may constitute ʻreasonably
equivalent value’ based on the expected future benefit, notwithstanding the
fact that the Debtor may go into bankruptcy before that benefit is realized.”).
The court said nothing about the potential value of “keeping the construction
project alive” while negotiating the Second Change Order.
I would, therefore, hold that the bankruptcy court clearly erred in
treating these two payments the same as the other three and concluding that
they were not constructively fraudulent. Accordingly, I respectfully dissent
from Section III.A.2 of the majority opinion with respect to those payments.

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