Bay Plastics, Inc. v. BT Commercial Corp. (In Re Bay Plastics, Inc.)

AMENDED MEMORANDUM OF DECISION ON SUMMARY JUDGMENT MOTION

I. INTRODUCTION

The debtor has brought this adversary proceeding against the selling shareholders of a leveraged buyout (“LBO”) to recover the funds that they received in the buyout transaction. While the action was also brought against the bank that financed the transaction, the bank has settled. The Court grants summary judgment to the debtor on the undisputed facts.

The Court holds that the transaction may be avoided as a constructive fraudulent transfer under the California version of the Uniform Fraudulent Transfer Act (“UFTA”), on which the debtor relies pursuant to Bankruptcy Code § 544(b), 1 and that in consequence the debtor is entitled to recover against the selling shareholders. The Court finds that the transaction rendered the debt- or insolvent, and that the sellers did not act in good faith.

II. FACTS

The Court finds that the following facts are undisputed. Defendants Bob Younger, Abner Smith and Paul Dodson (“the selling shareholders”) formed debtor Bay Plastics, Inc. (“Bay Plastics”) in 1979 to manufacture polyvinyl chloride (“PVC”) plastic pipe for water well casings and turf irrigation. Bay Plastics filed this bankruptcy case on January 25, 1990.

A. The Buyout

Because they were nearing retirement, on October 31, 1988 (fifteen months before this bankruptcy filing) the selling shareholders sold their Bay Plastics stock to Milhous Corporation (“Milhous”) for $3.5 million in cash plus $1.8 million in deferred payments. 2 Mil-hous did not acquire the Bay Plastics stock directly. Instead, it caused its subsidiary Nicole Plasties to form its own subsidiary, BPI Acquisition Corp. (“BPI”), to take ownership of the Bay Plastics stock. Formally, the parties to the stock sale transaction were ultimately BPI and the selling shareholders.

The sale was unexceptional. The difficulty lay in the financing of the purchase. Milhous put no money of its own, or even any money that it borrowed, into this transaction. Instead, it caused Bay Plastics to borrow approximately $3.95 million from defendant BT Commercial Corp. 3 (“BT”) (a subsidiary of Bankers Trust), and then caused Bay Plastics to direct that $3.5 million of the loan be disbursed to BPI. BPI in turn directed that the $3.5 million be paid directly to the selling shareholders in substantial payment for their stock. Thus, at the closing, $3.5 million of the funds paid into escrow by BT went directly to the selling shareholders.

As security for its $3.95 million loan, BT received a first priority security interest in essentially all of the assets of Bay Plastics. In consequence, BT has received all of the proceeds of debtor’s assets in this bankruptcy case, and nothing is left for unsecured or even for administrative creditors.

The financing also provided a revolving credit facility for working capital, in addition to the payment for the LBO, up to a total loan of $7 million. 4 A total of just over $4 million was owing to BT at the time of the bankruptcy filing, according to the debtor’s *321 schedules. Thus most of the debt (all but approximately $500,000) owing to BT at the time of the filing resulted from the LBO.

The selling shareholders were not in the dark about the financing. On October 25, 1988 they and their attorney met with Mil-hous representatives in Los Angeles to finalize the deal. While the Milhous representatives provided rather little information about the Milhous finances, they did disclose the details of the BT secured loan to Bay Plastics to finance the stock purchase. In addition, the selling shareholders received a projected post-transaction balance sheet, which showed a balance of $250,000 in equity only because of the addition to the asset side of the ledger the sum of $2,259,270 in goodwill. Both the selling shareholders and their attorney were experienced in LBOs, and the selling shareholders discussed this feature of the transaction, and their exposure on a fraudulent transfer claim, with their attorney on that date. With this information in hand, Younger, Smith and Dodson approved the terms of the sale.

In contrast to the selling shareholders, the industry did not know about the LBO character of the transaction until a number of months later. Shintech Corp., a creditor at the time of the transaction (and continuously thereafter), did not learn of it until ten months later, in August, 1989.

B. The Shintech Debt

Some three months before the LBO, on July 22, 1988, Bay Plasties entered into a requirements contract with Shintech to supply PVC resin. Shintech agreed under the contract to supply up to 2.6 million pounds of PVC resin per month on payment terms of 30 days after shipment. To induce Shintech to enter into this contract, Bay Plastics granted Shintech a security interest in all its assets, and the shareholders gave personal guaranties. This arrangement stood in the way of the BT transaction.

In consequence, the selling shareholders, their attorney, and Milhous representatives met with Shintech in late October, 1988 (after Milhous had disclosed to the selling shareholders the terms of the LBO), to arrange a new deal with Shintech. The parties to the LBO persuaded Shintech of Milhous’ good credit, and induced Shintech to release both its security interest and the guaranties. 5 However, they did not disclose the LBO character of the transaction, and Shintech did not learn of this until ten months later.

The impact of this transaction on the balance sheet of Bay Plastics was dramatic. Immediately after the transaction, its balance sheet showed tangible assets of approximately $7 million, and liabilities of approximately $9 million. Only the addition of almost $2.26 million in goodwill, which had not appeared on prior balance sheets, and for which no explanation has been provided, permitted the balance sheet to show a modest shareholder equity of $250,000. But for the newly discovered goodwill, there would have been a net deficiency of some $2 million. In contrast, immediately before the transaction Bay Plastics had assets of $6.7 million and liabilities of $5.6 million, and a net equity of $1.1 million.

Bay Plastics was unable to service this overload of debt, and filed its bankruptcy petition fifteen months later. According to the debtor’s schedules, at the time of filing its two principal creditors were BT and Shin-tech: it owed approximately $4 million in secured debt to BT, and $3.5 million in unsecured debt to Shintech. No other creditor was owed more than $20,000.

III. DISCUSSION

The Bankruptcy Code gives a trustee the power to avoid a variety of kinds of prepetition transactions. Such transactions include preferential payments to creditors (§ 547), fraudulent transfers (§ 548), the fixing of statutory hens (§ 545), and setoffs (§ 553). A debtor in possession in a chapter 11 case has all of the rights (except the right to compensation) and the powers of a trustee under chapter 11. This includes the right to *322 exercise the avoiding powers. Bankruptcy Code § 1107(a). 6

However, the debtor is unable to use the fraudulent transfer provision of the Bankruptcy Code (§ 548) in this case, because it is only applicable to transfers made or obligations incurred on or within one year before the date of the filing of the petition. 11 U.S.C.A. § 548(a) (West 1993). Where state law provides a similar avoiding power to a creditor, on the other hand, Bankruptcy Code § 544(b) 7 permits a trustee (or a debt- or in possession) to stand in the shoes of the creditor and to assert the same cause of action. Kupetz v. Wolf, 845 F.2d 842, 845 (9th Cir.1988). Trustees and debtors in possession routinely utilize this provision to make fraudulent transfer claims under applicable state law, which typically provides a statute of limitations of four to seven years. See, e.g., Cal.Civ.Code § 3439.09 (West Supp. 1995). Thus the debtor has brought this adversary proceeding under § 544(b) and the UFTA as adopted in California.

A. Fraudulent Transfer Law

The purpose of fraudulent transfer law is to prevent a debtor from transferring away valuable assets in exchange for less than adequate value, if the transfer leaves insufficient assets to compensate honest creditors. See 4 Collier on Bankruptcy ¶ 548.01 at 548-4 through 548-24 (Lawrence P. King ed., 15th ed. 1995); Pajaro Dunes Rental Agency v. Spitters (In re Pajaro Dunes Rental Agency), 174 B.R. 557, 571 (Bankr.N.D.Cal.1994).

Modem fraudulent transfer law traces its origins to a statute of Elizabeth enacted in 1570. See 13 Eliz., ch. 5 (1570). 8 This statute provided that a conveyance made “to the End, Purpose and Intent to delay, hinder or defraud creditors” is voidable. Id., § 1. Courts often relied on circumstantial “badges of fraud” to presume fraudulent intent. See, e.g., Twyne’s Case, 76 Eng.Rep. 809, 810-14 (1601). The English law of fraudulent conveyance passed into the common law in the United States. This law was revised and codified by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) in 1918, when it promulgated the Uniform Fraudulent Conveyance Act (“UFCA”). 7A U.L.A. 427, 428 (1985). The UFCA was adopted by California in 1939, and by a number of other states on various dates.

The NCCUSL rewrote the UFCA and promulgated it as the UFTA in 1984. Id., at 639. California adopted its version of the UFTA, which is applicable in this case, in 1986. See Cal.Civ.Code §§ 3439-3439.12 (West Supp.1995) (applicable to transfers made after January 1, 1987). Bankruptcy Code § 548 contains a similar fraudulent transfer provision. 9 See 11 U.S.C.A. § 548 (West 1993).

1. The Species of Fraudulent Transfer

A transfer or conveyance is fraudulent if it is (1) an intentional fraudulent transfer, i.e., a transfer made with the intent to defeat, hinder or delay creditors; or (2) a transfer that is constructively fraudulent because the debtor is in financial distress. There are three kinds of financial distress that make a transaction a fraudulent trans *323 fer: (a) a transfer while a debtor is insolvent or that renders a debtor insolvent; (b) a transfer that leaves a debtor undercapitalized or nearly insolvent (i.e., with insufficient assets to carry on its business); (c) a transfer when the debtor intends to incur debts beyond its ability to pay. See UFTA §§ 4, 5; UFCA § 4; Bankruptcy Code § 548(a). Constructive fraudulent transfer law applies without regard to intent (except the intent to incur debts in the last alternative). See, e.g., Moody v. Security Pacific Business Credit, Inc., 971 F.2d 1056, 1063 (8d Cir.1992) (construing the UFCA).

In this adversary proceeding the debtor relies on the first two varieties of constructive fraudulent transfer, and is entitled to prevail if either cause of action is upheld. The Court addresses only the first (a transfer that renders the debtor insolvent), because it finds that the debtor is entitled to prevail on this cause of action.

2. Fraudulent Transfer Resulting in Insolvency

The UFTA, adopted in California effective for transactions after January 1, 1987, provides in relevant part:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at the time or the debtor became insolvent as a result of the transfer or obligation.

Cal.Civ.Code § 3439.05 (West Supp.1995). 10

3. Application of Fraudulent Transfer Law to LBOs

a. General

The basic structure of an LBO involves a transfer of corporate ownership financed primarily by the assets of the corporation itself. 11 Typically the corporation borrows the funds, secured by the assets of the corporation, and advances them to the purchasers, who use the funds to pay the purchase price to the selling shareholders. Kathryn V. Smyser, Going Private and Going Under: Leveraged Buyouts and the Fraudulent Conveyance Problem, 63 Ind.L.J. 781, 784-85 (1988). LBOs have two essential features:

First, the purchaser acquires the funds necessary for the acquisition through borrowings secured directly or indirectly by the assets of the company being acquired. Second, the lender who provides such funds is looking primarily to the future operating earnings of the acquired company and/or to the proceeds from future sales of assets of the company, rather than to any other assets of the purchasers, to repay the borrowings used to effect the acquisition.

Id., at 785. LBO investors thus generally consider cash flow, the money available for working capital and debt service, as the most important factor in assessing a potential buyout candidate. Id., at 785 n. 12.

The application of fraudulent transfer law to LBOs has generated considerable debate among courts and commentators. 12 LBOs *324 were a popular form of consensual corporate takeover in the 1980’s. They fell into disuse at the end of that decade for economic reasons. However, the use of the LBO as an acquisition device has recently become popular again. See Laura Jereski, ‘Recaps’ Are Secret Fuel for Leveraged Buyouts, Wall St.J., July 25, 1995, at Cl.

The LBO dates back long before the 1980’s. In earlier years, it was known as a “bootstrap acquisition.” Some of these transactions were invalidated as fraudulent conveyances. See Steph v. Branch, 255 F.Supp. 526 (E.D.Okla.), aff'd, 389 F.2d 233 (10th Cir.1968); In re Process Manz Press, 236 F.Supp. 333 (N.D.Ill.1964), rev’d on juris, grounds 369 F.2d 513 (7th Cir.1966), cert. denied, 386 U.S. 957, 87 S.Ct. 1022, 18 L.Ed.2d 104 (1967); Diller v. Irving Trust Co. (In re College Chemists, Inc.), 62 F.2d 1058 (2d Cir.1933); Smyser, supra note 12, at 788 & n. 21.

b. Ninth Circuit Case Law

The Ninth Circuit has had difficulties with the application of fraudulent transfer law to LB Os. 13 The Ninth Circuit case law is found in two opinions, Lippi v. City Bank, 955 F.2d 599 (9th Cir.1992), which arose under Hawaii common law, and Kupetz v. Wolf, 845 F.2d 842 (9th Cir.1988), which arose under the California version of the UFCA. The applicability of these precedents is complicated by the fact that each was based on a statute different from the California version of the UFTA involved in this case.

i. Lippi

Lippi involved the bankruptcy of Pacific Industrial Distributors, Inc. (“PID”), which originally was owned by three shareholders. At a time when the balance sheet showed that the stockholders’ equity was $195,450, one of the shareholders bought out the other two for $500,000. Half of the financing was unexceptional: (1) the purchasing shareholder personally paid only $12,500 of the purchase price; (2) he, his holding corporation and his family borrowed $137,500 on an unsecured basis; (3) the selling shareholders financed $100,000, secured by a security interest in the stock.

The remaining half of the financing created the problem. In substance the remaining $250,000 of the financing came from a Small Business Administration loan (through City Bank) to PID, which was secured by a security interest in all of PID’s assets. PID upstreamed the funds to the holding company to pay to the selling shareholders.

Although PID was directly liable for only $250,000 of the funds used to buy out the selling shareholders, in fact it paid out $667,-000 in payments to City Bank and in dividends to the holding company to repay the entire purchase price (including the $12,500 paid by the purchasing shareholder). While all of the creditors who had lent money for the buyout had been paid in full, PID was left with unsecured debts of $485,000 at the time that the involuntary bankruptcy case was filed more than three years later.

Subsequent creditors challenged the LBO in Lippi pursuant to the Hawaiian common law of fraudulent conveyance, 14 which permitted subsequent creditors to attack a conveyance (a) that was made with intent to defraud creditors, (b) that was secret or concealed, or *325 (c) that was made with the intent to engage in a new or hazardous business, the risk of which would be placed on subsequent creditors. Lippi, at 607, citing Metzger v. Lalakea, 32 Haw. 706 (1933).

The defendants challenged the standing of the trustee, who represented only post-transaction creditors, to bring the action against them, on the grounds that they had no intent to defraud existing or future creditors of PID. The Ninth Circuit had “no quarrel” with the district court’s limitation of the right of future creditors to challenge an LBO to cases where there was an actual intent to defraud or to conceal the transaction from public scrutiny. Lippi, at 606. The court found this consistent with Hawaii law, even though it omitted the third ground for attacking a fraudulent transfer, that the debtor intended to engage in a new and hazardous business, the risk of which would be placed on subsequent creditors.

The circuit court found that the district court erred, however, in making a defendant-by-defendant analysis of intent. The circuit court held that this determination must be based on the nature of the transaction:

Thus, the issue is whether future creditors were somehow precluded by actual fraud or concealment from discovering the nature of the transaction and the company’s financial status at the time of their advances. Whether every defendant or transferee is in on the fraud or concealment is irrelevant.

Id. at 607 (emphasis in original). Because the trial court had found a triable issue of fact as to the intent of the purchasing shareholder, the circuit court found that summary judgment on standing as to the remaining defendants was improper.

In Lippi the circuit court also reversed the trial court’s finding that the selling shareholders were within the safe harbor of Bankruptcy Code § 550(b)(1), 15 and thus entitled to keep the funds that they had received. Section 550(b)(1) protects third parties who receive transfers from the initial transferee of a fraudulent transfer. 16 The shareholders in Lippi contended that they were “immediate transferees” of the “initial transferee”, the holding company established by the purchasing shareholder, and thus eligible to invoke the protection of the safe harbor provision.

The circuit court found that the selling shareholders in Lippi were not in substance initial transferees of the funds. It found that the funds were not transferred to the holding company “for the benefit” of these shareholders, as provided in § 550(a), because the funds were not passed on to them immediately. Id. at 611, citing In re Bullion Reserve of North America, 922 F.2d 544, 548-49 (9th Cir.1991). The court also found that the holding company did not act merely as a conduit, because it exercised full dominion and control over the dividends that it received before passing them on.

However, the circuit court found that the Lippi defendants had not shown that they satisfied the “good faith” requirement for the § 550(b)(1) safe harbor, and reversed and remanded on these grounds. The court held that, if the selling shareholders did not receive their transfers in good faith in an “above board” transaction, the transaction *326 may be collapsed and they may be treated as initial transferees ineligible for the safe harbor. Id., at 611-12; accord, United States v. Tabor Court Realty Corp., 803 F.2d 1288, 1302-03 (3d Cir.1986), cert. denied, 483 U.S. 1005, 107 S.Ct. 3229, 97 L.Ed.2d 735 (1987); Wieboldt Stores, Inc. v. Schottenstein, 94 B.R. 488, 500 (N.D.Ill.1988). This inquiry involves a consideration of the knowledge and intent of the selling shareholders, which must be undertaken on a case by case basis. Lippi, at 611-12.

The circuit court in Lippi found no direct evidence that the selling shareholders knew of any intent to defraud the debtor, knew that the buyout was leveraged, knew that the debtor was the borrower on the loan or were aware that they were to be paid from any source other than surplus of the debtor. Id. at 613. However, it found that they knew or should have known that the debtor was un-dercapitalized, that other entities controlled by the purchasing shareholder were in ar-rearage in payments to the debtor, that the debtor could legally only purchase its shares out of surplus, and that there was insufficient surplus to pay the purchase price. Id. It also found that the trial court had given inadequate consideration to what the selling shareholders should have known as corporate directors and officers who owed fiduciary duties to the corporation. Id. 17

The court in Lippi found that it should respect the formal structure of the transaction only where it appeared to be a straight sale, in the eyes of the defendants. Id. at 612. On the other hand, if the selling shareholders either knew or should have known that the transaction would deplete the assets of the company, the court should collapse the interrelated transactions and look to the substance rather than the form. Id., citing Tabor Court Realty, 803 F.2d at 1302-03, and Wieboldt Stores, 94 B.R. at 500.

In Lippi the Ninth Circuit found conflicting evidence on whether the selling shareholders had knowledge of or reason to know of the leveraged character of the transaction. For this reason it reversed the summary judgment in favor of the selling shareholders. Lippi at 613-14. The court let summary judgment stand, however, as to other defendants who undisputedly had no knowledge of or reason to know of the LBO feature of the transaction.

ii. Kuptez

Kupetz was a lawsuit by the trustee against the prior owners of Wolf & Vine, Inc., a corporation whose new shareholder had purchased the stock in an LBO. The purchaser formed a holding company to acquire the stock, partially in cash and partially with payments secured by letters of credit issued by Continental Illinois National Bank. The letters of credit in turn were secured by the assets of Wolf & Vine (as well as other assets). However, the selling shareholders did not know of the LBO character of the sale.

Because there were no pre-sale creditors in the ensuing corporate bankruptcy case, the trustee challenged the transaction as a constructive fraudulent transfer under § 5 of the UFCA, which provides:

Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent.

California Civil Code § 3439.05 (repealed 1986). The trial court was particularly troubled by the application of constructive fraudulent conveyance law to this transaction for several reasons: there were no remaining pre-transaction creditors, the business was prosperous at the time of the sale, the purchaser was wealthy and well-connected with a major financial institution, and the sellers had no knowledge of the LBO feature of the transaction. Kupetz v. Continental Illinois National Bank & Trust Co., 77 B.R. 754, 760 (C.D.Cal.1987), ajfd, 845 F.2d 842 (9th Cir. 1989). In consequence, the trial court held *327 that § 5 could not be extended to the facts of this ease.

The Ninth Circuit affirmed. 18 However, its reasoning is difficult to understand, and has been strongly criticized. See David R. Weinstein, From Kupetz to Lippi and Beyond: LBOs in the Ninth Circuit — Now What?, 21 Cal.Bankr.J. 169 (1998). In Lippi, however, the Ninth Circuit gave its authoritative interpretation of Kupetz, and mostly clarified the analytic difficulties.

In this interpretation, Kupetz established two propositions. First, subsequent creditors (and a bankruptcy trustee standing in the shoes of subsequent creditors) lack standing to challenge an LBO if it has been widely publicized at the time, absent actual intent to defraud. Lippi, 955 F.2d at 606-07. Second, an LBO transaction should not be collapsed for the benefit of subsequent creditors to deny the selling shareholders the safe harbor of § 550(b)(1) if the following four factors are present: (a) there is no evidence that the selling shareholders intended to defraud creditors; (b) the selling shareholders did not know that the purchaser intended to finance the purchase through an LBO; (c) there were no pre-transaction creditors; (d) the form of the transaction reflects a sale to an entity other than the issuer of the stock. 19 Id., at 612, quoting Kupetz, 845 F.2d at 847-48.

iii. Richmond Produce

There is one reported LBO case in the Ninth Circuit after Lippi, Kendall v. Sorani (In re Richmond Produce Co.), 151 B.R. 1012 (Bankr.N.D.Cal.1993), a decision by Judge Leslie Tchaikowski in the Northern District of California. The trustee prevailed in an attack on the LBO as a fraudulent transfer under Bankruptcy Code § 548, 20 the Bankruptcy Code analogue to UFTA § 4.

In Richmond Produce, Mechanics Bank lent $1.5 million to the debtor corporation, and took a security interest in all of its assets. The debtor used these funds to purchase a certificate of deposit at Bank of California (“BanCal”), which had issued a $1.5 million standby letter of credit as security for a portion of the purchase price of shares bought by the new shareholders. The certificate of deposit was used to secure the letter of credit. When the debtor eventually defaulted in paying property taxes, which was a default under the security agreement for the unpaid purchase price for the shares of stock, the selling shareholders called the letter of credit, and BanCal enforced its security interest in the certificate of deposit. In consequence, the selling shareholders and BanCal were paid. The trustee in Richmond Produce sued BanCal for the proceeds of the certificate of deposit.

In determining solvency, the court held that goodwill must be disregarded, even though it was calculated in a manner consistent with generally accepted accounting principles, because it could not be sold to satisfy creditors’ claims. Id., at 1019. In addition, the court found extremely persuasive the fact that goodwill and organization expenses must be disregarded in a solvency determination for the purpose of determining whether a corporation may make a shareholder distribution. California Corporations Code § 500(b)(1) (West Supp.1995). After this adjustment, the court found that the LBO rendered the debtor insolvent.

The court found that BanCal was a second level transferee (immediate transferee of the initial transferee), and thus could assert a § 550(b)(1) defense. This required that the bank show that it gave value for the transfer, *328 in good faith, and without knowledge of the voidability of the transaction. The court found that BanCal gave value in good faith. However, the court found that BanCal knew sufficient suspicious facts to obligate it to inquire into the source of the funds that were used to purchase the certificate of deposit. This inquiry requirement defeated its § 550(b)(1) defense.

B. Trustee’s Prima Facie Case

After having explored the applicable statutes and governing ease law, the Court is now in position to apply this law to the facts of the instant case.

The Court notes at the outset that this case is not determined by the Ninth Circuit case law as set forth in the Lippi and Kupetz cases. Those cases both involved a fraudulent transfer attack on behalf of subsequent creditors. This case, in contrast, is brought for the principal benefit of a creditor existing at the time of the transaction, which holds more than 99% of the outstanding unsecured debt.

We begin with the elements of the cause of action under the UFTA § 5, as adopted in California, for a constructive fraudulent transfer rendering the debtor insolvent. The elements of a cause of action under this statute are as follows: the debtor (1) made a transfer or incurred an obligation, (2) without receiving a reasonably equivalent value in exchange, 21 (3) which rendered the debtor insolvent (or the debtor was already insolvent), 22 and (4) which is attacked by a pre-transaction creditor.

1. Transfer or Obligation

The selling shareholders do not dispute that, in making the BT loan, the debtor made a transfer or incurred an obligation. In fact, the debtor did both. The debtor undertook the $3.95 million obligation to BT, it transferred a security interest in essentially all of its assets to BT, and it transferred $3.5 million ultimately to the selling shareholders. Thus the first element of the cause of action is satisfied.

2. Lack of Reasonably Equivalent Value

The selling shareholders likewise do not contest whether the debtor received reasonably equivalent value for the BT loan. However, this element is not apparent on its face.

Nominally, BT’s transaction was only with Bay Plasties. It lent the $3.95 million to the debtor, the debtor promised to repay the loan, and the debtor gave a first priority security interest in essentially all of its assets to secure the repayment. If this were the transaction, creditors likely would have no grounds for complaint, and it would not be vulnerable to fraudulent transfer attack.

However, the foregoing structure obscures the reality of the transaction. The selling *329 shareholders’ transaction was formally with Milhous, and eventually with BPI, the new owner of Bay Plastics. BPI purchased their stock, and arranged for their payment with funds that Bay Plastics borrowed from BT. Before Bay Plastics received the funds, it directed that $3.5 million be transferred to its incoming parent, BPI, and BPI in turn directed that the funds be paid out for the stock purchase. Thus in substance $3.5 million of the funds that Bay Plastics borrowed from BT went to pay for the stock of the selling shareholders, rather than to Bay Plasties.

This raises the question whether the Court should collapse the various transactions in this ease into one integrated transaction. Under Lippi this turns on whether, from the perspective of the selling shareholders, the transaction appeared to be a straight sale without an LBO. Lippi 955 F.2d at 612. If, in contrast, there is evidence that the parties knew or should have known that the transaction would deplete the assets of the company, the Court should look beyond the formal structure. Id. In Kupetz the Ninth Circuit found it improper to collapse the transactions where the selling shareholders had no knowledge of the LBO character of the transaction, and there were no pre-transaction creditors.

In this case, in contrast, the selling shareholders had full knowledge that this was an LBO. The Milhous representatives informed them of this at the October 25 meeting before the transaction was finalized, and it was disclosed in the financial projections provided at that time. In addition, the selling shareholders discussed this feature with their legal counsel on October 25, and specifically discussed their exposure to a fraudulent transfer claim. Both the selling shareholders and their legal counsel were familiar with leveraged buyouts, because they had done others previously, and they knew the fraudulent transfer risks.

This knowledge of the selling shareholders distinguishes this case from both Kupetz (where the selling shareholders did not know or have reason to know of the LBO) and from Lippi (where the evidence was disputed). Instead, this case is like Richmond Produce, Wieboldt and Tabor Court Realty, where the transaction was collapsed because of the knowledge of the selling shareholders.

In addition, because Shinteeh qualifies as a pre-transaction creditor, the Court does not need to reach the issue of the knowledge of the LBO feature of the transaction by the selling shareholders: this is material to whether the transaction’s various parts should be collapsed only when challenged by post-transaction creditors.

Thus, in this case the Court finds it appropriate to collapse the various pieces of this transaction into one integral transaction, in which the funds went to the selling shareholders, not to Bay Plastics or to its new parent BPI. The loan obligation, in contrast, was undertaken by Bay Plastics, which also provided the security for the loan.

Bay Plastics received no reasonably equivalent value for the security interest in all of its assets that it gave to BT in exchange for BT’s funding of the stock sale. Under California law, reasonable equivalence must be determined from the standpoint of creditors. Hansen v. Cramer, 39 Cal.2d 321, 245 P.2d 1059, 1061 (1952) (applying rule to “fair consideration” under predecessor statute); Patterson v. Missler, 238 Cal.App.2d 759, 48 Cal.Rptr. 215, 221 (1965) (same). The Ninth Circuit has adopted the same view in interpreting the California version of the UFTA. Roosevelt v. Ray (In re Roosevelt), 176 B.R. 200 (9th Cir. BAP 1994); Maddox v. Robertson (In re Prejean), 994 F.2d 706, 708 (9th Cir.1993); accord, Mellon Bank v. Metro Communications, Inc., 945 F.2d 635, 646 (3d Cir.1991); Nordberg v. Sanchez (In re Chase & Sanborn Corp.),