1. 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 Reserved.

2. April 18, 2015Copyright © 2005-09 Randal C. Picker2 548 n Fraudulent transfers and obligations u (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—

3. 548 (cont.) w (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 April 18, 2015Copyright © 2005-09 Randal C. Picker3

4. April 18, 2015Copyright © 2005-09 Randal C. Picker4 548 (cont.) n Fraudulent transfers and obligations (cont.) u (a)(1) (cont.) w (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;

5. April 18, 2015Copyright © 2005-09 Randal C. Picker5 548 (cont.) (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

6. April 18, 2015Copyright © 2005-09 Randal C. Picker6 548 (cont.) n Fraudulent transfers and obligations (cont.) u (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— w (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 w (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.

7. April 18, 2015Copyright © 2005-09 Randal C. Picker7 548 (cont.) n Fraudulent transfers and obligations (cont.) u (d)(2) In this section-- w (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;

8. April 18, 2015Copyright © 2005-09 Randal C. Picker8 Sealed Air n March, 1998 u Sealed Air—the BubbleWrap people—buy the Cryovac packing business from W.R. Grace u Seeming an arm’s-length transaction n April 2, 2001 u Grace files under Chapter 11 “in response to a sharply increasing number of asbestos claims”

9. April 18, 2015Copyright © 2005-09 Randal C. Picker9 Challenge to Transaction n Unsecured Creditors Committee u Acts on behalf of unsecured creditors n Possible Challenges u 11 USC 548: Federal Fraudulent Transfer Statute w One year statute of limitation u 11 USC 544: Incorporated State Law w If actual creditor could challenge, debtor can do so

10. April 18, 2015Copyright © 2005-09 Randal C. Picker10 State Fraudulent Transfer Law n Choice of Law u Unimportant here as possible choices all have same version of Uniform Fraudulent Transfer Act n UFTA u Sec. 4: Transfers Fraudulent as to Present and Future Creditors u Sec. 5: Transfers Fraudulent as to Present Creditors

11. April 18, 2015Copyright © 2005-09 Randal C. Picker11 State Fraudulent Transfer Law n Sec. 4: Transfers Fraudulent as to Present and Future Creditors u Sec. 4(a)(1): Actual Fraud u Sec. 4(a)(2): Constructive Fraud w Less than reasonably equivalent value and (i) unreasonably small assets or (2) incur debts beyond ability to pay

12. April 18, 2015Copyright © 2005-09 Randal C. Picker12 State Fraudulent Transfer Law n Sec. 5: Transfers Fraudulent as to Present Creditors u Another constructive fraud w Less than reasonably equivalent value and insolvency w Sec. 2 sets out balance sheet test of insolvency

13. April 18, 2015Copyright © 2005-09 Randal C. Picker13 UFTA Sec. 4(a)(1) n Sec. 4(a)(1): Actual Fraud u 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: w (1) With actual intent to hinder, delay or defraud any creditor of the debtor

14. April 18, 2015Copyright © 2005-09 Randal C. Picker14 UFTA Sec. 4(a)(2) n Sec. 4(a)(2): Constructive Fraud w (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.

15. April 18, 2015Copyright © 2005-09 Randal C. Picker15 UFTA Sec. 5 n Sec. 5: Constructive Fraud u (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.

16. April 18, 2015Copyright © 2005-09 Randal C. Picker16 Evaluating Insolvency In Sec. 5 n Questions u Measured as of what date? u Using what information? u Using what standard? n Possibilities u Statute addresses standard and date u Open question is info: that known at time of deal or at time of challenge

17. April 18, 2015Copyright © 2005-09 Randal C. Picker17 Answers n Date? u Insolvency is measured as of date of transfer n Standard? u 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” u Debt?: Sec. 1(5): “liability on a claim”

18. April 18, 2015Copyright © 2005-09 Randal C. Picker18 Answers u 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” n Information? u ???

19. April 18, 2015Copyright © 2005-09 Randal C. Picker19 Remedy n UFTA Sec. 7 u Avoidance of the transfer u Means pursue assets into purchasers hands

20. April 18, 2015Copyright © 2005-09 Randal C. Picker20 Making Dull Exciting n Hypo u Dull has 100 outstanding shares of common stock u Dull owes Bank $100 u Dull’s sole asset is project A u The project has one of two outcomes w 50% of the time the project results in cash of $100 w 50% of the time the project yields $120.

21. April 18, 2015Copyright © 2005-09 Randal C. Picker21 Making Dull Exciting u Dull is considering a project swap with Exciting u Exciting has project B w 50% of the time the project results in cash of $60 w 50% of the time the project throws off $160

22. April 18, 2015Copyright © 2005-09 Randal C. Picker22 Issues n Questions u Is Dull solvent when it has project A? u If it swaps project A for project B? u How will the shareholders of Dull evaluate undertaking project A? u Swapping for project B? u Does an “unreasonably small capital” analysis reach different answers?

23. April 18, 2015Copyright © 2005-09 Randal C. Picker23 Issues u How will Bank do so? u What are Bank’s legal options if it is concerned about the potential project swap?

24. UFCA 4 n 4. Conveyances by insolvent. u 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. April 18, 2015Copyright © 2005-09 Randal C. Picker24

25. UFCA 5 n 5. Fraudulent conveyance by person in business. u 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. April 18, 2015Copyright © 2005-09 Randal C. Picker25

26. Moody v. Security Pacific n LBOs and FCs u We should start with footnote 3 April 18, 2015Copyright © 2005-09 Randal C. Picker26