Class 9
Bankruptcy, Spring, 2009
Fraudulent Transfers
Randal C. Picker
Leffmann Professor of Commercial Law
The Law School
The University of Chicago
773.702.0864/r-picker@uchicago.edu
Copyright © 2005-09 Randal C. Picker. All Rights
548

Fraudulent transfers and obligations
 (a)(1)
The trustee may avoid any transfer
(including any transfer to or for the benefit of an
insider under an employment contract) of an
interest of the debtor in property, or any obligation
(including any transfer to or for the benefit of an
insider under an employment contract) incurred by
the debtor, that was made or incurred on or within
2 years before the date of the filing of the petition,
if the debtor voluntarily or involuntarily—
March 23, 2016
Copyright © 2005-09 Randal C. Picker
2
548 (cont.)

March 23, 2016
(A) made such transfer or incurred such obligation
with actual intent to hinder, delay, or defraud any
entity to which the debtor was or became, on or
after the date that such transfer was made or such
obligation was incurred, indebted; or
Copyright © 2005-09 Randal C. Picker
3
548 (cont.)

Fraudulent transfers and obligations (cont.)
(a)(1)

(cont.)
(B) (i) received less than a reasonably
equivalent value in exchange for such
transfer or obligation; and
• (ii) (I) was insolvent on the date that such
transfer was made or such obligation was
incurred, or became insolvent as a result of such
transfer or obligation;
March 23, 2016
Copyright © 2005-09 Randal C. Picker
4
548 (cont.)
March 23, 2016
• (II) was engaged in business or a transaction, or
was about to engage in business or a
transaction, for which any property remaining
with the debtor was an unreasonably small
capital;
• (III) intended to incur, or believed that the debtor
would incur, debts that would be beyond the
debtor's ability to pay as such debts matured; or
• (IV) made such transfer to or for the benefit of an
insider, or incurred such obligation to or for the
benefit of an insider, under an employment
contract and not in the ordinary course of
business Copyright © 2005-09 Randal C. Picker
5
548 (cont.)

Fraudulent transfers and obligations (cont.)

(a)(2) A transfer of a charitable contribution to a qualified
religious or charitable entity or organization shall not be
considered to be a transfer covered under paragraph (1)(B) in
any case in which—
 (A) the amount of that contribution does not exceed 15 percent
of the gross annual income of the debtor for the year in which
the transfer of the contribution is made; or
 (B) the contribution made by a debtor exceeded the
percentage amount of gross annual income specified in
subparagraph (A), if the transfer was consistent with the
practices of the debtor in making charitable contributions.
March 23, 2016
Copyright © 2005-09 Randal C. Picker
6
548 (cont.)

Fraudulent transfers and obligations (cont.)
(d)(2)

March 23, 2016
In this section--
(A) "value" means property, or satisfaction
or securing of a present or antecedent debt
of the debtor, but does not include an
unperformed promise to furnish support to
the debtor or to a relative of the debtor;
Copyright © 2005-09 Randal C. Picker
7
Sealed Air

March, 1998
Sealed
Air—the BubbleWrap people—buy
the Cryovac packing business from W.R.
Grace
Seeming an arm’s-length transaction

April 2, 2001
Grace
files under Chapter 11 “in response
to a sharply increasing number of asbestos
claims”
March 23, 2016
Copyright © 2005-09 Randal C. Picker
8
Challenge to Transaction

Unsecured Creditors Committee
Acts

on behalf of unsecured creditors
Possible Challenges
11
USC 548: Federal Fraudulent Transfer
Statute

One year statute of limitation
11

March 23, 2016
USC 544: Incorporated State Law
If actual creditor could challenge, debtor can
do so
Copyright © 2005-09 Randal C. Picker
9
State Fraudulent Transfer
Law

Choice of Law
 Unimportant
here as possible choices all have
same version of Uniform Fraudulent Transfer Act

UFTA
 Sec.
4: Transfers Fraudulent as to Present and
Future Creditors
 Sec. 5: Transfers Fraudulent as to Present
Creditors
March 23, 2016
Copyright © 2005-09 Randal C. Picker
10
State Fraudulent Transfer
Law

Sec. 4: Transfers Fraudulent as to Present
and Future Creditors
Sec.
4(a)(1): Actual Fraud
Sec. 4(a)(2): Constructive Fraud

March 23, 2016
Less than reasonably equivalent value and
(i) unreasonably small assets or (2) incur
debts beyond ability to pay
Copyright © 2005-09 Randal C. Picker
11
State Fraudulent Transfer
Law

Sec. 5: Transfers Fraudulent as to Present
Creditors
Another
constructive fraud
Less than reasonably equivalent value and
insolvency
 Sec. 2 sets out balance sheet test of
insolvency

March 23, 2016
Copyright © 2005-09 Randal C. Picker
12
UFTA Sec. 4(a)(1)

Sec. 4(a)(1): Actual Fraud
A
transfer made or obligation incurred by a
debtor is fraudulent as to a creditor, whether
the creditor's claim arose before or after the
transfer was made or the obligation was
incurred, if the debtor made the transfer or
incurred the obligation:

March 23, 2016
(1) With actual intent to hinder, delay or
defraud any creditor of the debtor
Copyright © 2005-09 Randal C. Picker
13
UFTA Sec. 4(a)(2)

Sec. 4(a)(2): Constructive Fraud

(2) Without receiving a reasonably equivalent value
in exchange for the transfer or obligation, and the
debtor:
• (i) Was engaged or was about to engage in a business or
a transaction for which the remaining assets of the debtor
were unreasonably small in relation to the business or
transaction; or
• (ii) Intended to incur, or believed or reasonably should
have believed that he would incur, debts beyond his ability
to pay as they became due.
March 23, 2016
Copyright © 2005-09 Randal C. Picker
14
UFTA Sec. 5

Sec. 5: Constructive Fraud
 (a)
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 that time or the debtor became insolvent as a
result of the transfer or obligation.
March 23, 2016
Copyright © 2005-09 Randal C. Picker
15
Evaluating Insolvency In
Sec. 5

Questions
Measured
as of what date?
Using what information?
Using what standard?

Possibilities
Statute
addresses standard and date
Open question is info: that known at time of
deal or at time of challenge
March 23, 2016
Copyright © 2005-09 Randal C. Picker
16
Answers

Date?
Insolvency
is measured as of date of
transfer

Standard?
UFTA
Sec. 2(a): (a) “A debtor is insolvent if
the sum of the debtor's debts is greater than
all of the debtor's assets at a fair valuation”
Debt?: Sec. 1(5): “liability on a claim”
March 23, 2016
Copyright © 2005-09 Randal C. Picker
17
Answers
Claim?:
Sec. 1(3): “means a right to
payment, whether or not the right is reduced
to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured or
unsecured”

Information?
???
March 23, 2016
Copyright © 2005-09 Randal C. Picker
18
Remedy

UFTA Sec. 7
Avoidance
of the transfer
Means pursue assets into purchasers
hands
March 23, 2016
Copyright © 2005-09 Randal C. Picker
19
Making Dull Exciting

Hypo
Dull
has 100 outstanding shares of common
stock
Dull owes Bank $100
Dull’s sole asset is project A
The project has one of two outcomes
50% of the time the project results in cash of
$100
 50% of the time the project yields $120.

March 23, 2016
Copyright © 2005-09 Randal C. Picker
20
Making Dull Exciting
Dull
is considering a project swap with
Exciting
Exciting has project B
50% of the time the project results in cash of
$60
 50% of the time the project throws off $160

March 23, 2016
Copyright © 2005-09 Randal C. Picker
21
Issues

Questions
Is
Dull solvent when it has project A?
If it swaps project A for project B?
How will the shareholders of Dull evaluate
undertaking project A?
Swapping for project B?
Does an “unreasonably small capital”
analysis reach different answers?
March 23, 2016
Copyright © 2005-09 Randal C. Picker
22
Issues
How
will Bank do so?
What are Bank’s legal options if it is
concerned about the potential project
swap?
March 23, 2016
Copyright © 2005-09 Randal C. Picker
23
UFCA 4

4. Conveyances by insolvent.
Every
conveyance made and every
obligation incurred by a person who is or
will be thereby rendered insolvent is
fraudulent as to creditors without regard to
his actual intent if the conveyance is made
or the obligation is incurred without a fair
consideration.
March 23, 2016
Copyright © 2005-09 Randal C. Picker
24
UFCA 5

5. Fraudulent conveyance by person in
business.
 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.
March 23, 2016
Copyright © 2005-09 Randal C. Picker
25
Moody v. Security Pacific

LBOs and FCs
We
March 23, 2016
should start with footnote 3
Copyright © 2005-09 Randal C. Picker
26
The LBO in Moody
Where is the fraudulent transfer?
Coke/KNY
1:KNY
owns
Jennette
3: Pays $ to
buy Jennette
stock
4: Jennette borrows $
and grants SI
Jennette
March 23, 2016
Security Pac
6: J Corp
repays
loan
5: Jennette issues
divided
to J Corp
Copyright © 2005-09 Randal C. Picker
2: J Corp
borrows
$12.1 MM
J Corp
27