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Second Circuit Defines Adequate Capitalization
A debtor's pre-bankruptcy repurchase of its stock for $150 million was not a fraudulent transfer because the debtor “could have sold off enough of its assets or alternatively obtained sufficient credit to continue its business for the foreseeable future,” held the U.S. Court of Appeals for the Second Circuit on June 15, 2016. In re Adelphia Communications Corp., 2016 WL3315847, *2 (2d Cir. June 15, 2016). Affirming the lower courts, the Second Circuit stressed that “the issue of adequate capitalization,” the “sole issue presented on appeal ' came down to a battle of experts,” with the “defendants' experts” being “more persuasive.” Id. at *2.
Relevance
The creditors' “Recovery Trust” in Adelphia challenged the debtor's stock repurchase, made three years prior to bankruptcy, under the applicable Pennsylvania version of the Uniform Fraudulent Transfer Act (UFTA) because the transfer was made outside the relevant Bankruptcy Code reachback (Code ' 546 (a)(1)). As the Second Circuit noted, “Recovery Trust brought a claim under [Code] ' 544(b)[,] which allows it to avoid any transfer under applicable state law ' .” Id. at *1. Further, “courts construe [UFTA] consistently with the provisions of the Bankruptcy Code that address constructive fraudulent transfers ' .” For that reason, like the district court and the parties, it also relied on “decisions of other federal courts interpreting relevant provisions of the ' Code.” Id. See, e.g., In re Solomon, 299 B.R. 626, 633 (B.A.P. 10th Cir. 2003) (” ' the ' UFTA and ' 548 are identical and cases construing the elements under ' 548(a) are persuasive interpretations for the UFTA.”).
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