MEMORANDUM

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
TO: Amy Chesterton, Lead Associate; Nathaniel Bower, Responsible Partner
FROM: Nathan Ikeda, Working Associate
DATE: December 1, 2022
RE: Preference and Fraudulent Transfer Exposure Analysis — Thalassa Americas Inc.
MATTER NO.: 1044-00003
CLIENT: Thalassa Shipping & Logistics Société Anonyme / Thalassa Americas Inc.
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I. Executive Summary
This memorandum analyzes the potential exposure of Thalassa Americas Inc. ("TAI") to avoidance actions under Sections 547 and 548 of Title 11 of the United States Code (the "Bankruptcy Code") in the event that TAI commences a voluntary case under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (Houston Division). The analysis has been prepared at the request of the Responsible Partner in connection with the dual-track restructuring advisory engagement for Thalassa Shipping & Logistics SA ("TSL") and its subsidiary TAI, and is intended to inform the broader Chapter 11 Contingency Playbook and restructuring support agreement ("RSA") negotiation strategy currently under development.
The scope of this memorandum covers three principal categories of potential avoidance action exposure: (a) prepetition payments by TAI to third-party creditors during the applicable preference lookback period, including trade vendors, professional service providers, and lenders under the Senior Secured Credit Facility; (b) intercompany transfers between TAI and its parent, TSL, including payments of interest on the $76.4 million subordinated intercompany promissory note, cash pooling and treasury sweep arrangements, and management fee or shared services allocations; and (c) insider transactions involving KFO Holdings SA ("KFO"), the Kostandinos family holding company, and members of the Kostandinos family, including Dimitrios Kostandinos (Chairman of TSL and 62% equity holder through KFO) and Elena Kostandinos-Pavlou (Vice Chairwoman of TSL and 18% equity holder through KFO), who together control approximately 80% of the indirect equity in TAI through KFO's ownership position in TSL.
The key findings of this analysis may be summarized as follows:
Preference Exposure (Section 547). TAI faces moderate preference exposure with respect to payments to third-party trade creditors during the 90-day lookback period, estimated at approximately $4–7 million in the aggregate. This exposure is substantially defensible under the ordinary course of business, contemporaneous exchange, and subsequent new value defenses provided by Section 547(c). More significantly, the insider preference lookback period extends to one year rather than 90 days for transfers to TSL, KFO, and members of the Kostandinos family, creating an expanded window of potential exposure estimated at $5–12 million, consisting primarily of intercompany note interest payments and cash pool transfers.
Fraudulent Transfer Exposure (Section 548). Significant constructive fraudulent transfer risk attaches to certain intercompany fund flows between TAI and TSL during the two-year lookback period under Section 548, and potentially the four-year lookback period under the Texas Uniform Voidable Transactions Act ("Texas UVTA") as applied through the trustee's strong-arm power under Section 544(b). Preliminary estimates place this exposure in the range of $8–15 million in potentially avoidable intercompany transfers, subject to further factual development. Additionally, the $76.4 million subordinated intercompany note itself presents recharacterization and equitable subordination risk that could eliminate TSL's claim as a creditor of TAI in its entirety.
Co-Borrower Fraudulent Conveyance. TAI's status as co-borrower on the $85 million U.S. Tranche (Term Loan B) of the Senior Secured Credit Facility presents a low-to-moderate risk of a constructive fraudulent transfer challenge, mitigated by the fact that TAI was likely solvent at the time of the original incurrence in June 2019 and received indirect benefit from the credit facility.
This analysis assumes a hypothetical petition date of approximately January 15, 2023, aligned with the Chapter 11 contingency playbook timeline and the expiration of the Forbearance Agreement executed on October 10, 2022 (as extended by one week from its original January 8, 2023 termination to account for administrative lead time). All financial data referenced herein is as of September 30, 2022, unless otherwise noted, and the analysis accounts for known transactions through the date of this memorandum based on information provided to date by the TAI finance team and the company's financial advisors at Kensington Veltrian Partners LLC.
II. Background and Factual Context
A. Corporate Structure and Ownership
TSL. Thalassa Shipping & Logistics Société Anonyme ("TSL") is a société anonyme organized and existing under the laws of Greece, with its principal executive offices located at 42 Akti Miaouli, Piraeus 18538, Greece. TSL was founded in 1987 by the Kostandinos family and has grown into a diversified international shipping and logistics enterprise. TSL serves as the parent holding company for a global fleet of dry-bulk carriers, tankers, and container feeder vessels, as well as terminal operations and freight brokerage activities in multiple jurisdictions.
TAI. Thalassa Americas Inc. ("TAI") is a wholly-owned Delaware C-Corporation subsidiary of TSL. TAI was incorporated in the State of Delaware on March 12, 2015, and is identified by Employer Identification Number 84-3291057. TAI's registered agent in Delaware is Capitol Registered Agents LLC, located at 1209 Orange Street, Wilmington, Delaware 19801. TAI maintains its principal office at 1400 McKinney Street, Suite 2200, Houston, Texas 77010, from which it conducts the U.S.-side operations of the TSL enterprise.
TAI's business encompasses three primary operational segments: (i) Houston terminal operations, including the management and operation of the TSL-leased berths and cargo handling facilities at the Houston Ship Channel; (ii) Jones Act-exempt foreign-flag vessel scheduling, through which TAI coordinates the deployment of TSL-controlled foreign-flag vessels in U.S. and international trade lanes; and (iii) domestic freight brokerage, through which TAI arranges transportation services for cargo owners moving goods within the United States and between U.S. ports and international destinations. For fiscal year 2021 ("FY2021"), TAI reported revenue of approximately $312 million. Estimated revenue for fiscal year 2022 ("FY2022") has declined substantially to approximately $198 million, reflecting the severe downturn in the dry-bulk shipping market and the broader macroeconomic headwinds affecting the global logistics industry.
TAI's current officers are as follows: Marcus Hale serves as President with primary responsibility for U.S. operations; Diana Restrepo serves as Vice President, Finance, overseeing TAI's financial reporting, treasury management, and accounting functions; and Jonathan Kurtz serves as Vice President, Operations, managing the Houston terminal and vessel scheduling activities.
KFO Holdings SA. KFO Holdings SA ("KFO") is a Greek société anonyme and family holding company, registered at the same address as TSL at 42 Akti Miaouli, Piraeus 18538, Greece. KFO serves as the primary vehicle through which the Kostandinos family holds its equity interests in TSL. Dimitrios Kostandinos holds 62% of the outstanding equity of TSL through KFO, and Elena Kostandinos-Pavlou holds 18% of the outstanding equity of TSL through KFO. Their combined 80% indirect equity interest in TSL translates to an equivalent 80% indirect equity interest in TAI, given TSL's 100% ownership of TAI. The remaining 20% of TSL equity is held by minority shareholders who are not relevant to this analysis.
B. Debt Structure
TAI's debt obligations, both direct and indirect through its co-borrower and subsidiary status, are described in detail below. As of September 30, 2022, TAI's consolidated parent TSL carried total debt of approximately $847.3 million at the enterprise level. The allocation of this indebtedness among the various entities within the TSL corporate structure, and the nature and extent of TAI's direct and contingent liability for each tranche, is critical to the avoidance action analysis.
Senior Secured Credit Facility. TSL, TAI, and certain vessel-owning special purpose vehicle ("SPV") subsidiaries are parties to a senior secured credit facility (the "Credit Facility") with an aggregate total commitment of $685 million. The Credit Facility was originated on June 15, 2019, and is administered by Nordbank International AG, which serves as both Administrative Agent and Collateral Agent. The Credit Facility consists of three tranches: (i) a Term Loan A ("TLA") in the original amount of $300 million, of which $270 million remains outstanding as of September 30, 2022, following scheduled amortization payments; (ii) a revolving credit facility (the "Revolver") with a commitment of $300 million, of which $185 million was drawn as of September 30, 2022; and (iii) a Term Loan B ("TLB") in the amount of $85 million, structured as a non-amortizing bullet maturity loan for which TAI serves as a direct co-borrower alongside TSL. The aggregate outstanding balance under the Credit Facility as of September 30, 2022, was $540 million. Interest on the Credit Facility accrues at a rate of SOFR plus 375 basis points, with a default rate of an additional 200 basis points applicable upon the occurrence and continuation of an Event of Default. The Credit Facility is secured by first-priority liens on substantially all of the enterprise's assets, including the fleet of vessels, TAI's Houston terminal lease, accounts receivable, the equity interests in TAI, and the equity interests in 14 vessel-owning SPVs.
TAI's specific role as co-borrower on the TLB is of particular significance to this analysis. Although the $85 million TLB represents the "U.S. Tranche" nominally associated with TAI's operations, TAI's liability as co-borrower is joint and several with TSL, and potential cross-default provisions in the Credit Agreement may expose TAI to liability for the full $540 million outstanding under the Credit Facility, depending on the interpretation of the co-borrower provisions and the scope of TAI's obligations. The co-borrower structure is addressed in greater detail in Part IV.C below, in connection with the fraudulent transfer analysis.
Mezzanine Notes. TSL issued mezzanine notes (the "Mezzanine Notes") in the original principal amount of $100 million, which have grown to $112.3 million outstanding as of September 30, 2022, reflecting the capitalization of $12.3 million in payment-in-kind ("PIK") interest. The Mezzanine Notes are held by Dralvecen Mezzanine Capital LLC and bear interest at a rate of 11.5% per annum on a PIK toggle basis. Since the second quarter of 2022, all interest on the Mezzanine Notes has been paid in PIK form rather than cash, reflecting the enterprise's deteriorating liquidity position. The Mezzanine Notes are secured by second-priority liens on the same collateral pool that secures the Credit Facility and mature on December 15, 2024.
Unsecured Notes. TSL issued $50 million in unsecured notes (the "Unsecured Notes") bearing interest at 8.25% per annum, payable semi-annually in cash. The indenture trustee is Garrison Trust Company. As of the date of this memorandum, TAI and TSL have missed the December 1, 2022 coupon payment of $2,062,500 on the Unsecured Notes. This missed payment will constitute an Event of Default under the indenture governing the Unsecured Notes following the expiration of any applicable grace period, and may trigger cross-default provisions under the Credit Facility and Mezzanine Notes, potentially complicating the existing Forbearance Agreement.
Intercompany Note. TAI, as maker, has issued a subordinated intercompany promissory note (the "Intercompany Note") to TSL, as holder, in the outstanding principal amount of $76.4 million. The Intercompany Note bears interest at a rate of 5.0% per annum and is subordinated to all of TAI's external debt obligations. The terms, history, and characterization risk associated with the Intercompany Note are discussed at length in Parts IV.B and V of this memorandum.
Other Liabilities. In addition to the foregoing funded indebtedness, the enterprise carried $38.7 million in trade payables and $29.9 million in other liabilities as of September 30, 2022 at the consolidated level. TAI's share of these trade payables and other liabilities must be determined through a review of entity-level accounting records that has not yet been completed.
Total Debt Summary. Total consolidated enterprise debt as of September 30, 2022, was approximately $847.3 million, consisting of:
C. The Liquidity Crisis
The shipping industry has experienced a severe and rapid contraction during 2022. The Baltic Dry Index ("BDI"), a widely followed benchmark for the cost of shipping raw materials by sea, declined approximately 58% between January 2022 and September 2022. This dramatic decline in freight rates has had a devastating impact on TSL's revenue and profitability. TSL's average daily time charter equivalent ("TCE") rate, a key measure of vessel earnings, fell from $24,800 per day in FY2021 to $11,200 per day in the third quarter of 2022 — a decline of approximately 55%.
The liquidity crisis materialized through a series of covenant breaches and financial deterioration events:
Minimum Liquidity Covenant Breach (September 15, 2022). TSL breached the Minimum Liquidity Covenant under the Credit Facility on September 15, 2022, when its unrestricted cash and cash equivalents fell to $27.3 million against a minimum required balance of $40 million, representing a shortfall of $12.7 million. This breach constituted an Event of Default under the Credit Agreement.
Financial Ratio Covenant Breaches (September 30, 2022). At the close of the third quarter of 2022, TSL breached two additional financial maintenance covenants. The leverage ratio (Net Debt to LTM EBITDA) stood at 7.82x, calculated as Net Debt of $770.9 million divided by LTM EBITDA of $98.6 million, well in excess of the covenant maximum of 5.50x. The interest coverage ratio (LTM EBITDA to LTM Interest Expense) stood at 1.74x, calculated as LTM EBITDA of $98.6 million divided by LTM Interest Expense of $56.7 million, below the covenant minimum of 2.50x.
Forbearance Agreement (October 10, 2022). Following the covenant breaches, TSL, TAI, the Required Lenders under the Credit Facility, and Nordbank International AG as Administrative Agent entered into a Forbearance Agreement dated October 10, 2022. Under the Forbearance Agreement, the lenders agreed to a 90-day standstill period through January 8, 2023, during which they would forbear from exercising remedies in respect of the identified Events of Default. The Forbearance Agreement imposed a series of conditions on the Debtors, including milestones for the delivery of a restructuring proposal and restrictions on certain cash expenditures. Since the execution of the Forbearance Agreement, no interest payments have been made on the TLB or other tranches of the Credit Facility.
Fleet Valuation Decline. Drakos Maritime Valuations Ltd. completed a fleet appraisal dated November 1, 2022, which valued the TSL fleet at $623 million. This represents a decline of $268 million, or 30.1%, from the $891 million fleet valuation conducted in January 2022. The decline in fleet value has materially impaired the collateral coverage ratios under the Credit Facility and Mezzanine Notes.
Enterprise Value Estimate. Kensington Veltrian Partners LLC, the enterprise's retained financial advisor, has estimated the total enterprise value of TSL (including TAI) at $580 million to $640 million, with a midpoint estimate of $610 million. This enterprise value range suggests that the senior secured lenders are significantly impaired, the mezzanine holder is likely out of the money, and unsecured creditors would receive little or no recovery in a hypothetical Chapter 7 liquidation.
D. Insiders Identified
For purposes of the avoidance action analysis under Sections 547 and 548 of the Bankruptcy Code, the following persons and entities have been identified as statutory insiders of TAI within the meaning of Section 101(31) of the Bankruptcy Code:
TSL. As the 100% parent and sole shareholder of TAI, TSL is a statutory insider under Section 101(31)(B)(iii) of the Bankruptcy Code, which defines as an insider any "entity that directly or indirectly controls the debtor." TSL's control over TAI is direct and total, exercised through its ownership of 100% of TAI's outstanding equity.
KFO Holdings SA. As the controlling entity of TSL, and thus the indirect controlling entity of TAI, KFO qualifies as an insider of TAI under Section 101(31)(B)(iii). KFO's control is exercised indirectly through its 80% equity ownership of TSL (held by Dimitrios Kostandinos at 62% and Elena Kostandinos-Pavlou at 18%).
Dimitrios Kostandinos. As Chairman of TSL's board of directors and the holder of 62% of TSL's equity through KFO, Dimitrios Kostandinos is an insider of TAI as a person in control of an entity that controls the debtor. Mr. Kostandinos's dominant role in the governance and strategic direction of the TSL enterprise reinforces his insider status.
Elena Kostandinos-Pavlou. As Vice Chairwoman of TSL's board of directors and the holder of 18% of TSL's equity through KFO, Elena Kostandinos-Pavlou qualifies as an insider of TAI on the same basis as Mr. Kostandinos.
Georgios Andreadis. As Chief Executive Officer of TSL, Mr. Andreadis is an insider of TAI as an officer of an entity that directly controls the debtor. Mr. Andreadis participates in the management and oversight of the TSL enterprise, including decisions affecting TAI's operations and financial affairs.
Marcus Hale. As President of TAI, Mr. Hale is a statutory insider under Section 101(31)(B)(i) as a director or officer of the debtor. Mr. Hale has principal management responsibility for TAI's U.S. operations and participates in decisions regarding TAI's financial and commercial affairs.
Diana Restrepo. As Vice President, Finance of TAI, Ms. Restrepo is a potential insider of TAI as an officer of the debtor. Although the Bankruptcy Code's definition of insider includes "officers," courts have varied in the degree of authority and responsibility required for a corporate officer to qualify as an insider. Given Ms. Restrepo's significant role in managing TAI's financial affairs, treasury operations, and intercompany transactions, she should be treated as an insider for purposes of this analysis.
Jonathan Kurtz. As Vice President, Operations of TAI, Mr. Kurtz is similarly a potential insider. Mr. Kurtz manages TAI's Houston terminal and vessel scheduling activities. The same analytical considerations applicable to Ms. Restrepo apply to Mr. Kurtz, and he should be treated as an insider for conservative purposes.
The identification of these individuals and entities as insiders has two principal consequences for the avoidance action analysis. First, under Section 547(b)(4)(B), the preference lookback period for transfers to or for the benefit of these insiders extends from 90 days to one full year before the petition date. Second, transfers to insiders are subject to heightened scrutiny in the fraudulent transfer context, and the presence of insider relationships is a recognized "badge of fraud" under both federal and state fraudulent transfer law.
III. Preferential Transfer Analysis (11 U.S.C. § 547)
A. Statutory Framework
Section 547(b) of the Bankruptcy Code authorizes a trustee (or debtor in possession exercising the trustee's powers under Section 1107) to avoid certain prepetition transfers as preferences. To establish a preference under Section 547(b), the trustee must prove each of the following elements by a preponderance of the evidence:
(1) Transfer of an interest in property of the debtor. The transfer must involve an interest of the debtor in property, broadly defined to include any mode of disposing of or parting with property or an interest in property. 11 U.S.C. § 101(54). This element is typically satisfied by any payment of money or transfer of assets by the debtor.
(2) To or for the benefit of a creditor. The transfer must have been made to or for the benefit of a person who held a claim against the debtor at the time of the transfer or who subsequently acquired a claim. The "for the benefit of" language captures indirect transfers, such as payments to a creditor's designee.
(3) For or on account of an antecedent debt. The transfer must have been made on account of a debt owed by the debtor that arose before the date of the transfer. This element distinguishes preference-eligible transfers from contemporaneous exchanges.
(4) Made while the debtor was insolvent. The transfer must have been made at a time when the debtor was insolvent within the meaning of Section 101(32) — i.e., when the sum of the debtor's debts exceeded the fair valuation of all of the debtor's property, exclusive of property transferred, concealed, or removed with intent to defraud and property that may be exempted.
(5) Within the applicable lookback period. The transfer must have been made (a) on or within 90 days before the date of the filing of the petition, or (b) between 90 days and one year before the date of the filing of the petition if the creditor at the time of the transfer was an insider.
(6) Enabling the creditor to receive more than in a Chapter 7 liquidation. The transfer must have enabled the creditor to receive more than the creditor would have received if (a) the case were a case under Chapter 7, (b) the transfer had not been made, and (c) the creditor received payment of the debt to the extent provided by the provisions of the Bankruptcy Code.
Section 547(f) establishes a rebuttable presumption that the debtor was insolvent during the 90 days immediately preceding the date of the filing of the petition. This presumption shifts the burden of production (but not the ultimate burden of persuasion) to the defendant to introduce evidence of solvency. For the period beyond 90 days (i.e., between 90 days and one year before the petition date, in the case of insider transfers), no presumption of insolvency applies, and the trustee bears the full burden of proving insolvency at the time of each transfer.
Section 547(b)(4)(B) extends the lookback period from 90 days to one full year for transfers to or for the benefit of insiders. This expanded lookback is of particular importance in this case given the numerous insider relationships identified in Part II.D above.
B. Insolvency Determination
A threshold issue in the preference analysis is whether TAI was insolvent at the relevant times during the preference lookback periods. Insolvency is defined in Section 101(32)(A) of the Bankruptcy Code as a financial condition such that the sum of an entity's debts is greater than all of the entity's property, at a fair valuation, exclusive of property transferred, concealed, or removed with intent to defraud and property that may be exempted.
For the 90-day preference period (approximately October 17, 2022, through the hypothetical January 15, 2023 petition date), the statutory presumption of insolvency under Section 547(f) applies, and the burden shifts to each defendant to introduce evidence of TAI's solvency during this period. Based on the financial data available, it is highly unlikely that any preference defendant could rebut this presumption. TAI's revenue has declined from $312 million in FY2021 to an estimated $198 million in FY2022, the broader enterprise has breached multiple financial covenants, and the fleet collateral has declined in value by over 30%.
For the extended one-year lookback period applicable to insider transfers (approximately January 15, 2022, through the hypothetical January 15, 2023 petition date), the presumption of insolvency does not apply, and the trustee (or debtor in possession, creditors' committee, or party in interest with standing) would bear the burden of proving TAI's insolvency at the time of each challenged transfer. The insolvency analysis for this period requires a balance-sheet assessment of TAI's total assets against its total liabilities on the date of each transfer.
TAI's principal assets include: (i) the Houston terminal lease (a valuable but difficult-to-value asset, depending on remaining lease term, renewal options, and market conditions); (ii) domestic freight brokerage contracts and customer relationships; (iii) accounts receivable; (iv) cash and cash equivalents; and (v) various operational assets, fixtures, and equipment.
TAI's liabilities include, at minimum: (i) the $85 million direct co-borrower obligation on the TLB; (ii) the $76.4 million Intercompany Note payable to TSL; (iii) TAI's share of the $38.7 million in consolidated trade payables; (iv) TAI's share of the $29.9 million in consolidated other liabilities; and (v) potentially, contingent liability as co-borrower under the broader $685 million Credit Facility (or the $540 million currently outstanding), to the extent that the co-borrower provisions impose joint and several liability or cross-default exposure extending beyond the $85 million TLB.
It is important to note that TAI does not hold any intercompany note receivable — TAI is the maker, not the holder, of the $76.4 million Intercompany Note. The Intercompany Note is a liability of TAI, not an asset. This fact significantly worsens TAI's balance-sheet position.
Given the magnitude of TAI's liabilities (at minimum $161.4 million in direct funded debt, before trade payables, other liabilities, and contingent co-borrower exposure) relative to the likely value of its assets (principally the Houston terminal lease, freight brokerage contracts, and receivables), TAI was likely insolvent on a balance-sheet basis at the time of any transfer during the one-year lookback period. The severity of the revenue decline and the enterprise's covenant breaches further support this conclusion. However, a precise determination of TAI's insolvency at specific dates during the January 15, 2022 through October 16, 2022 period (i.e., outside the 90-day presumption window) will require additional financial analysis and, potentially, expert testimony or a solvency opinion.
C. 90-Day Preference Exposure — Third-Party Creditors
The 90-day preference lookback window extends from approximately October 17, 2022, to the hypothetical January 15, 2023 petition date. All transfers of TAI's property made during this period to or for the benefit of non-insider creditors are subject to potential avoidance as preferences under Section 547(b), subject to the defenses discussed in Part III.D below.
Trade Creditor Payments. TAI's share of the $38.7 million in total consolidated trade payables as of September 30, 2022, must be identified at the entity level. Based on preliminary information from the TAI finance team, TAI's trade payables are estimated to represent approximately 30–40% of the consolidated figure, or roughly $11.6 million to $15.5 million. The principal trade creditors of TAI include fuel suppliers (including Olympian Fuel & Supply SA, which is owed $9.2 million at the consolidated level and is the primary supplier of bunker fuel for vessels calling at the Houston terminal), port services providers, stevedoring companies, equipment lessors, and various professional service providers.
Payments made by TAI to trade creditors during the 90-day lookback period are the primary source of third-party preference exposure. To quantify this exposure precisely, we require a complete payment ledger from TAI's treasury function showing all disbursements during the lookback period, broken down by payee, amount, date, and invoice number. This information has been requested from Diana Restrepo and is expected to be available by approximately December 10, 2022.
Of particular focus are any payments made to Olympian Fuel & Supply SA during the lookback period. Olympian is owed $9.2 million at the consolidated level, and the portion attributable to TAI (for Houston bunker fuel deliveries) must be determined. If TAI made substantial payments to Olympian during the preference period while Olympian remained owed a significant balance, these payments would be prime candidates for preference avoidance absent an applicable defense.
TLB Interest Payments. TAI's regularly scheduled interest payments on the $85 million TLB at SOFR plus 375 basis points are potentially avoidable as preferences to the extent made during the 90-day lookback period. However, following the execution of the Forbearance Agreement on October 10, 2022, no interest payments have been made on the TLB or any other tranche of the Credit Facility. Accordingly, TLB interest payments during the 90-day lookback period are likely limited to any payment made between approximately October 17, 2022, and October 10, 2022 — which is to say, none fall within the 90-day window. Any interest payments made prior to October 17, 2022, would fall outside the 90-day window for non-insider preference purposes (though they may fall within the one-year insider window to the extent they benefited insiders, which is unlikely for payments to the external lender group).
Accelerated or Unusual Payments. We must identify any accelerated payments, unscheduled payments, or payments made outside the ordinary course of business during the period of financial distress. Such payments present heightened preference risk because the ordinary course defense (discussed below) may not be available. We are not aware of any such payments at this time, but the review of TAI's disbursement records during the 90-day period will confirm or refute this assumption.
Estimated Aggregate 90-Day Preference Exposure. Based on the information available as of the date of this memorandum, we estimate the aggregate 90-day third-party preference exposure at approximately $4 million to $7 million, consisting primarily of trade creditor payments made during the lookback period. This estimate is preliminary and subject to verification with Diana Restrepo and a detailed review of TAI's accounting records and bank statements.
D. Defenses to Preference Claims
Section 547(c) of the Bankruptcy Code provides several affirmative defenses to preference claims. The burden of proving these defenses rests with the defendant (i.e., the creditor receiving the challenged transfer). However, as the party analyzing potential exposure in connection with a restructuring strategy, it is important to assess the likely availability and strength of these defenses as applied to the principal categories of TAI transfers.
Ordinary Course of Business Defense (Section 547(c)(2)). This defense protects transfers made in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, to the extent such transfer was (A) made in the ordinary course of business or financial affairs of the debtor and the transferee, or (B) made according to ordinary business terms. Following the 2005 BAPCPA amendments, the transferee need only satisfy one of these two prongs rather than both.
As applied to TAI's trade creditor payments, this defense is likely to be strong for recurring payments to long-standing vendors made on customary payment terms. If TAI continued to pay its trade creditors according to the same invoicing and payment schedules that prevailed in the months and years prior to the onset of financial distress, those payments would likely qualify for the ordinary course defense. However, the defense may be weakened for any payments that deviated from historical patterns — for example, payments that were made earlier than customary (to retain critical vendor relationships) or later than customary (reflecting liquidity constraints that forced TAI to prioritize among creditors).
The ordinary course defense is one of the most frequently litigated issues in preference law, and its availability is fact-intensive and vendor-specific. We recommend compiling a detailed payment history for each major trade creditor covering a period of at least 12 months prior to the lookback period to establish the "ordinary course" baseline against which preference-period payments can be measured.
Contemporaneous Exchange Defense (Section 547(c)(1)). This defense protects transfers intended by the debtor and the creditor to be a contemporaneous exchange for new value given to the debtor, to the extent such transfer was in fact a substantially contemporaneous exchange. This defense is most commonly applicable to cash-on-delivery ("COD") transactions or other near-simultaneous exchanges of goods or services for payment. To the extent TAI engaged in any COD transactions or prepaid any purchases during the preference period, those payments would be eligible for this defense.
Subsequent New Value Defense (Section 547(c)(4)). This defense protects a preference transfer to the extent that, after the transfer, the creditor gave new value to or for the benefit of the debtor that is not secured by an otherwise unavoidable security interest and on account of which new value the debtor did not make an otherwise unavoidable transfer. In practical terms, this defense applies when a vendor that received a preference payment subsequently provided additional goods or services to the debtor on credit without being repaid for that subsequent delivery. The subsequent new value effectively "nets out" against the earlier preference payment.
This defense is likely to be significant for TAI's active trade vendors, particularly those that continued to supply goods or services to TAI after receiving payments during the preference period. For example, if Olympian Fuel & Supply SA received a payment of $1.5 million during the preference period but subsequently delivered an additional $1.2 million in bunker fuel on credit, the net preference exposure would be reduced to $300,000. A thorough application of this defense requires a complete chronological interleaving of payments and deliveries for each vendor during the preference period.
Enabling Loan Defense (Section 547(c)(3)). This defense protects a security interest in property acquired by the debtor that was given by a creditor to enable the debtor to acquire the property, to the extent the security interest secures new value that was given at or after the signing of the security agreement, the new value was in fact used to acquire the property, and the security interest was perfected within 30 days after the debtor received possession of the property. This defense is potentially applicable to any purchase-money secured transactions entered into by TAI during the preference period, although we are not aware of any such transactions at this time.
Assessment of Defenses by Category. The following summarizes the likely availability of defenses by category of transfer:
Recommendation. We strongly recommend that the TAI finance team compile a detailed payment history for the full 90-day and one-year lookback periods, organized by vendor, including the date of each payment, the invoice or obligation to which each payment was applied, the normal payment terms for each vendor relationship, and a record of any goods or services delivered by each vendor during and after the lookback period. This information will be essential for quantifying the net preference exposure after application of available defenses.
E. One-Year Insider Preference Exposure
Under Section 547(b)(4)(B), the preference lookback period extends from 90 days to one full year for transfers to or for the benefit of insiders. Given the hypothetical petition date of approximately January 15, 2023, the one-year insider preference lookback window extends from approximately January 15, 2022, through January 15, 2023. The following categories of insider transfers are potentially avoidable as preferences:
Interest Payments on the Intercompany Note. The $76.4 million Intercompany Note bears interest at 5.0% per annum, generating annual interest expense of approximately $3.82 million. Based on the terms of the Intercompany Note (which we understand provides for quarterly interest payments, though the specific payment schedule has not been confirmed), TAI would have made up to four quarterly interest payments of approximately $955,000 each during the one-year lookback window. These payments — potentially aggregating up to $3.82 million — are transfers "to or for the benefit of" TSL, a statutory insider, "for or on account of an antecedent debt" (the accrued interest obligation), and were made during the one-year lookback period. If TAI was insolvent at the time of each payment and the payments enabled TSL to receive more than it would in a hypothetical Chapter 7 liquidation (which is likely, given that the Intercompany Note is subordinated to all external debt and would likely receive little or no distribution in a Chapter 7), these payments are avoidable as preferences.
We note, however, that the actual payment history on the Intercompany Note is not yet confirmed. It is possible that some or all interest payments were deferred, accrued, or paid in kind rather than in cash, which would affect the preference analysis. We have requested this information from Diana Restrepo.
Intercompany Fund Sweeps and Cash Pooling. If TAI participated in a centralized cash pooling or treasury sweep arrangement with TSL — under which excess cash generated by TAI's U.S. operations was periodically swept upstream to TSL's treasury accounts — those sweep transfers would constitute avoidable preferences to the extent they (a) reduced TAI's cash balances, (b) were made while TAI was insolvent, (c) occurred during the one-year insider lookback period, and (d) enabled TSL to receive more than it would in a Chapter 7 liquidation. Cash pooling arrangements are common in multinational corporate groups but present significant avoidance action risk when the subsidiary that contributes cash to the pool enters bankruptcy.
The existence, terms, and frequency of any cash pooling arrangement between TAI and TSL have not yet been confirmed. We have requested documentation of any cash pooling or treasury sweep arrangements from the TAI finance team. Based on the enterprise's historical cash flow patterns and the typical structure of multinational shipping groups, we believe it is probable that some form of intercompany cash management arrangement exists, and that transfers under such an arrangement may constitute a material component of the one-year insider preference exposure.
Management Fees and Shared Services Allocations. If TAI paid management fees, cost allocations, or shared services charges to TSL during the one-year lookback period, those payments constitute transfers to an insider on account of antecedent debts (the obligation to reimburse TSL for management or overhead services) and are potentially avoidable as preferences. The relevant question is whether TAI received reasonably equivalent value in return for these payments — but this inquiry is pertinent to the fraudulent transfer analysis (Section 548) and the defense analysis, not to the prima facie case under Section 547. A management fee that constitutes a transfer for or on account of an antecedent debt to an insider while the debtor was insolvent is a preference regardless of the fairness of the fee, unless a defense under Section 547(c) applies.
Payments to KFO Holdings SA or Kostandinos Family Members. Any dividends, distributions, consulting fees, reimbursements, or other payments made by TAI directly or indirectly (through TSL) to KFO Holdings SA or to members of the Kostandinos family during the one-year lookback period are avoidable as insider preferences. We are not aware of any direct payments from TAI to KFO or the Kostandinos family at this time, but this must be confirmed through review of TAI's disbursement records.
Estimated One-Year Insider Preference Exposure. Based on the information available as of the date of this memorandum, we estimate the aggregate one-year insider preference exposure at approximately $5 million to $12 million. This estimate is composed primarily of the following:
•  Intercompany Note interest payments: up to approximately $3.82 million (four quarterly payments)
•  Intercompany cash pool transfers: estimated at $1 million to $5 million (subject to confirmation of the existence and terms of any cash pooling arrangement)
•  Management fees / shared services: estimated at $0 to $3 million (subject to confirmation)
•  Payments to KFO / Kostandinos family: unknown, potentially $0 (subject to confirmation)
This estimate is preliminary and subject to significant revision upon receipt and review of TAI's complete intercompany ledger, bank records, and cash pooling documentation.
Defenses. The ordinary course of business defense under Section 547(c)(2) is potentially available for insider preference transfers, but courts apply heightened scrutiny to insider transactions. If intercompany payments were made on regular schedules consistent with historical practice, the ordinary course defense may be viable. However, any deviation from historical payment patterns during the period of financial distress — such as accelerated interest payments on the Intercompany Note or irregular cash sweep transfers — would undermine this defense. The contemporaneous exchange and subsequent new value defenses may also be available for specific transfers, depending on the facts.
IV. Fraudulent Transfer Analysis (11 U.S.C. § 548)
A. Statutory Framework
Section 548 of the Bankruptcy Code authorizes a trustee to avoid certain prepetition transfers as fraudulent. The statute recognizes two distinct categories of fraudulent transfer:
Actual Fraud (Section 548(a)(1)(A)). A transfer is actually fraudulent if it was made "with actual intent to hinder, delay, or defraud" any entity to which the debtor was or became indebted. Actual fraud requires proof of the debtor's subjective intent at the time of the transfer. Because direct evidence of fraudulent intent is rarely available, courts employ a "badges of fraud" analysis, evaluating circumstantial factors that tend to indicate fraudulent purpose. The badges of fraud are discussed in greater detail in Part IV.E below.
Constructive Fraud (Section 548(a)(1)(B)). A transfer is constructively fraudulent if the debtor "received less than a reasonably equivalent value in exchange for such transfer" and one of the following conditions is met at the time of the transfer:
(i) the debtor was insolvent on the date the transfer was made or became insolvent as a result of the transfer;
(ii) the debtor was engaged in a business or transaction, or was about to engage in a business or transaction, for which any property remaining with the debtor was an unreasonably small capital; or
(iii) the debtor intended to incur, or believed it would incur, debts that would be beyond the debtor's ability to pay as such debts matured.
Constructive fraud does not require proof of intent; it is an objective test focused on the economic substance of the transaction. The critical inquiry is whether the debtor received "reasonably equivalent value" in exchange for the transfer, and whether the debtor was financially impaired (insolvent, undercapitalized, or unable to pay debts as they come due) at the time of or as a result of the transfer.
Lookback Periods. Under Section 548, the trustee may avoid fraudulent transfers made within two years before the date of the filing of the petition. Additionally, under Section 544(b), the trustee may exercise the rights of an actual unsecured creditor to avoid transfers under applicable state law, which often provides a longer lookback period. In this case, the Texas Uniform Voidable Transactions Act (Texas UVTA), codified at Texas Business & Commerce Code Chapter 24, provides a four-year statute of limitations for both constructive and actual fraud claims. If New York law were deemed applicable (which is less likely given the forum and TAI's principal place of business, but not impossible given the connections of the lender group and certain TAI operations to New York), the New York Debtor and Creditor Law provides a six-year lookback under Sections 273 (constructive fraud) and 276 (actual fraud).
For the purposes of this analysis, we apply the following lookback periods:
The application of the Texas UVTA four-year lookback is particularly significant because it would sweep in the original structuring of the Intercompany Note and the Credit Facility co-borrower arrangements, both of which were established in connection with the June 15, 2019 closing of the Credit Facility.
The determination of which state's law applies under Section 544(b) requires a choice-of-law analysis. In a bankruptcy case filed in the Southern District of Texas, the court would apply Texas choice-of-law principles. Texas generally follows the "most significant relationship" test from the Restatement (Second) of Conflict of Laws. For transfers involving a Delaware corporation with its principal office in Texas, Texas law is likely the governing law for fraudulent transfer purposes. We note, however, that if a specific transfer has a stronger nexus to another jurisdiction — for example, if funds were wired from a New York bank account to a Greek bank account — the court might apply the law of that jurisdiction to that specific transfer. This issue should be monitored as additional factual details emerge.
B. The Intercompany Note — $76.4 Million
The $76.4 million subordinated Intercompany Note from TAI (maker) to TSL (holder) is the central focus of the constructive fraudulent transfer analysis. Depending on the factual circumstances surrounding the creation and build-up of the Intercompany Note balance, this obligation may represent a legitimate debt owed by TAI to TSL, or it may represent a disguised mechanism for extracting value from TAI for the benefit of its parent and ultimate controlling shareholders.
Factual Inquiry. The critical factual question is whether the $76.4 million Intercompany Note reflects genuine arm's-length lending from TSL to TAI — i.e., did TSL actually advance $76.4 million (or discrete tranches aggregating that amount) to TAI for TAI's operational needs — or whether the note reflects, in whole or in part, a recharacterization of upstream value transfers. Several scenarios are possible:
Scenario 1: Legitimate Debt. If TSL advanced cash or other value to TAI to fund TAI's operations, capital expenditures, or working capital needs, and the Intercompany Note was issued to memorialize these advances, the note reflects a genuine debt obligation. In this scenario, the note itself is not a fraudulent transfer (TAI received reasonably equivalent value in the form of the cash or assets advanced by TSL). However, any repayments of principal on the note during the lookback period could constitute preferences (if made to an insider while TAI was insolvent) or could reduce the funds available to external creditors.
Scenario 2: Recharacterized Dividends or Equity Returns. If the Intercompany Note (or portions of it) reflects a situation in which TAI transferred cash or assets upstream to TSL — for example, through dividend distributions, cash sweeps, or management fee overpayments — and those transfers were subsequently repackaged on TSL's books as "loans" from TSL to TAI (creating the fiction that TAI owed TSL money rather than the reverse), then the underlying transfers lacked reasonably equivalent value and may constitute constructive fraudulent transfers. In this scenario, the Intercompany Note is not merely a debt instrument but a tool for extracting value from TAI for the benefit of its parent and controlling shareholders.
Scenario 3: Capital Contributions Recharacterized as Debt. If TSL made capital contributions to TAI (equity investments to fund TAI's formation, growth, or operations) that were documented as loans rather than equity, the Intercompany Note may be subject to recharacterization as equity under the analysis discussed in Part V.A below. This scenario does not involve a fraudulent transfer per se, but it does present a risk that TSL's $76.4 million claim in TAI's bankruptcy would be eliminated.
Tracing Analysis. To resolve this factual question, we must trace the origin of the $76.4 million Intercompany Note balance through TAI's books and records. Specifically, we need to identify:
(a) The date on which the Intercompany Note was originally created, and the initial principal amount;
(b) Each subsequent increase in the principal balance, including the date, amount, and stated basis (cash advance, capitalized interest, other);
(c) For each tranche of the Intercompany Note balance, the source of funds — whether TSL actually wired cash to TAI, or whether the balance increase reflects an intercompany accounting entry without a corresponding cash transfer;
(d) The contemporaneous corporate approvals (board resolutions, written consents, etc.) authorizing each advance or increase; and
(e) The terms of the Intercompany Note itself, including maturity date, amortization schedule (if any), events of default, subordination provisions, and whether TSL has the legal right and practical ability to enforce collection.
Insolvency at Time of Incurrence. Even if the Intercompany Note reflects genuine advances from TSL to TAI, a constructive fraudulent transfer claim could be asserted if TAI was insolvent (or rendered insolvent) at the time any individual tranche of the intercompany indebtedness was incurred. This is because the incurrence of the debt obligation itself — the promise to repay — constitutes a "transfer" of property of the debtor (a reduction in the debtor's estate attributable to the creation of a new liability). If the new liability did not produce reasonably equivalent value for TAI, and TAI was insolvent at the time, the transfer is constructively fraudulent.
Subordination as Partial Mitigation. The fact that the Intercompany Note is contractually subordinated to all of TAI's external debt partially mitigates the harm to creditors, because the Intercompany Note does not compete with external creditors for priority in a distribution scenario. However, subordination does not eliminate fraudulent transfer risk. Even a subordinated claim consumes estate resources through administrative costs, delays, and potential voting rights in a Chapter 11 plan process. Moreover, if the underlying transfers that gave rise to the Intercompany Note stripped value from TAI (as in Scenario 2 above), the existence of the note does not cure the initial harm.
Preliminary Assessment. Pending receipt and review of the tracing documentation, we assess the constructive fraudulent transfer risk associated with the Intercompany Note as moderate to high. The risk is elevated by the following factors: (i) the note is between a parent and its wholly-owned subsidiary, creating an inherent identity of interest; (ii) the note is subordinated, which is atypical for genuine arm's-length lending; (iii) the interest rate of 5.0% is below market for comparable subordinated debt; and (iv) the size of the note ($76.4 million) is substantial relative to TAI's standalone revenue ($198 million estimated for FY2022) and assets.
C. Upstream Guarantees and Co-Borrower Obligations
TAI's status as co-borrower on the $85 million U.S. Tranche (TLB) of the Senior Secured Credit Facility raises an additional category of fraudulent transfer risk. When a subsidiary assumes a guarantee or co-borrower obligation for the benefit of its parent or an affiliated entity, the subsidiary's assumption of that obligation may constitute a constructive fraudulent transfer if the subsidiary did not receive reasonably equivalent value in exchange.
The Analytical Framework. The co-borrower analysis requires an assessment of two elements: (i) whether TAI received reasonably equivalent value in exchange for assuming the co-borrower obligation, and (ii) whether TAI was insolvent (or rendered insolvent or undercapitalized) at the time of the assumption.
Reasonably Equivalent Value. TAI's assumption of co-borrower status on the TLB was part of the broader Credit Facility closing on June 15, 2019. In connection with that closing, TAI received several forms of direct and indirect benefit:
(a) Direct Benefit. The $85 million TLB was designated as the "U.S. Tranche" and was structured to provide funding for TAI's Houston terminal operations and U.S. business activities. To the extent that TLB proceeds were deployed for TAI's direct benefit (capital expenditures, working capital, lease funding), TAI received direct reasonably equivalent value.
(b) Indirect Benefit. Even if TLB proceeds were deployed for the broader enterprise's benefit rather than TAI's specific operations, TAI received indirect benefit from the overall Credit Facility, which provided the liquidity and credit support necessary for the TSL enterprise to operate — including TAI's U.S. operations. Courts have recognized that a subsidiary may receive reasonably equivalent value from a parent's borrowing if the subsidiary derives indirect economic benefit from the parent's improved financial condition and continued operations. See, e.g., Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979 (2d Cir. 1981).
(c) Enterprise Theory. Under an "enterprise theory" or "indirect benefit" analysis, the relevant question is whether the guaranteeing subsidiary received value that, at the time, was reasonably equivalent to the obligations it assumed. If TAI's share of the enterprise benefit from the Credit Facility was roughly proportional to its $85 million co-borrower exposure (out of the total $685 million facility), the value calculus may favor TAI. However, if TAI's co-borrower exposure effectively extends to the full $540 million outstanding (due to joint and several liability or cross-default provisions), the disproportion between the value TAI received and the obligations it assumed would be substantially greater.
Financial Condition at Time of Incurrence. The Credit Facility closed on June 15, 2019. At that time, TAI was likely solvent and adequately capitalized. FY2021 revenue was $312 million (and pre-crisis revenue levels were presumably similar or higher). The shipping market downturn and liquidity crisis did not begin until 2022. Accordingly, at the time TAI assumed its co-borrower obligations, TAI was not insolvent, was not undercapitalized, and did not intend to incur debts beyond its ability to pay. This significantly weakens a constructive fraud claim as to the original incurrence.
Risk Assessment. We assess the fraudulent conveyance risk associated with TAI's co-borrower obligations as low to moderate. The principal mitigating factors are: (i) TAI was solvent at the time of the original incurrence in June 2019; (ii) TAI received direct and indirect benefit from the Credit Facility; and (iii) the TLB was specifically designated as the U.S. Tranche associated with TAI's operations. The risk is elevated to the extent that TAI's co-borrower exposure extends beyond the $85 million TLB to the broader $540 million outstanding under the Credit Facility, and to the extent that TLB proceeds were deployed for the parent's benefit rather than TAI's.
However, we note that if the Texas UVTA four-year lookback period is applied through Section 544(b), the original June 15, 2019 Credit Facility closing falls within the avoidance window (approximately January 15, 2019, to January 15, 2023). While the solvency defense at the time of incurrence is strong, the inclusion of the original co-borrower assumption within the statutory lookback period creates at least theoretical exposure.
D. Intercompany Cash Flows and Dividend Distributions
Beyond the Intercompany Note and co-borrower obligations, the ongoing intercompany cash flows between TAI and TSL during the two-year Section 548 lookback period (and the four-year Texas UVTA lookback period) are subject to constructive fraudulent transfer scrutiny. The relevant categories of intercompany cash flows include:
Dividends and Distributions. Any dividends or other equity distributions from TAI to TSL during the lookback periods are potentially avoidable as constructive fraudulent transfers if made while TAI was insolvent or rendered insolvent by the distribution. A dividend, by definition, does not involve the receipt of reasonably equivalent value by the payor — the distributing entity gives up cash and receives nothing in return other than the satisfaction of its shareholder's expectations. Accordingly, any dividend paid by TAI to TSL while TAI was insolvent is a textbook constructive fraudulent transfer.
We are not yet aware of whether TAI declared or paid dividends to TSL during the lookback periods. This must be confirmed through review of TAI's board minutes, shareholder resolutions, and bank records.
Cash Pooling and Treasury Sweep Arrangements. As discussed in Part III.E above, if TAI participated in a centralized cash pooling arrangement with TSL under which excess TAI cash was periodically swept to TSL's treasury accounts, those sweep transfers are potentially avoidable as constructive fraudulent transfers. The key question is whether TAI received reasonably equivalent value in exchange for each sweep transfer.
In a typical cash pooling arrangement, the subsidiary's contribution to the pool is offset by a corresponding intercompany receivable or reduced intercompany payable. If the intercompany accounting accurately reflects these offsets — and if the subsidiary can draw on the pool when it needs cash — the subsidiary may be deemed to have received reasonably equivalent value in the form of the intercompany receivable and access to the pool. However, if the pool is effectively a one-way mechanism for extracting cash from the subsidiary (i.e., TAI contributes cash but cannot draw it back), or if the intercompany receivable is illusory or uncollectible (because TSL itself is insolvent), the value received by TAI is questionable.
Given that the TSL enterprise as a whole is in severe financial distress, any intercompany receivable held by TAI against TSL is of dubious value. A trustee or creditors' committee would likely argue that TAI received nothing of value in exchange for cash sweep transfers, because the intercompany receivable generated by each sweep transfer is worthless if TSL cannot pay.
Management Fees and Cost Allocations. If TAI paid management fees, cost allocations, or shared services charges to TSL during the lookback periods, the constructive fraudulent transfer analysis turns on whether the fees reflect arm's-length pricing for the services actually provided. If the fees were set at a level that exceeds the fair market value of the services TSL provided to TAI, the excess constitutes a transfer for less than reasonably equivalent value. Conversely, if the fees were at or below fair market value, and TSL actually provided the services in question, the payments constitute transfers for reasonably equivalent value and are not constructively fraudulent.
The determination of arm's-length pricing requires a benchmarking analysis comparing the management fees and cost allocations charged by TSL to TAI against comparable fees charged in arm's-length transactions between unrelated parties for similar services. We are not aware of any existing arm's-length pricing analysis or transfer pricing stud