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'Triggering Event Test'

By Aram Ordubegian and M. Douglas Flahaut
November 30, 2014

In the preference avoidance context, the insolvency of the debtor is an element of the prima facie case that is not commonly litigated. When it is litigated, however, the scope of a debtor's liabilities can make or break the case. This is because under established case law, if a liability is determined to be “contingent,” then courts are required to discount the face value of that liability by the estimated probability of the contingency occurring and the contingent liability becoming an actual liability. If the liability is deemed to be “non-contingent,” then the entire amount of the judgment can be added to the liability side of the balance sheet to usually make the debtor insolvent, thereby satisfying the insolvency element.

In August 2014, the Bankruptcy Appellate Panel for the Ninth Circuit (the Panel) issued a decision upholding a published decision by Judge Julia W. Brand in the Central District of California that left no doubt that the so-called “triggering event test” was the appropriate test to determine whether a liability is contingent or not for the purpose of showing insolvency under 11 U.S.C ' 547. The decisions are notable because prior to the bankruptcy court's decision, no court in the Ninth Circuit had provided clear guidance as to what constitutes a contingent liability in the specific context of an insolvency analysis under 11 U.S.C. ' 547. Applying the “triggering event test” to the facts at hand, the Panel held that a state court judgment is a non-contingent liability in its full amount for purposes of determining the insolvency of the debtor, even though on the date in question the judgment was not final under state law and the debtor had expressed optimism that the judgment would likely be overturned on appeal.

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