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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Credible Fraudulent Transfer Advocacy

By Michael L. Cook
October 01, 2024

"Common sense is not so common," said Voltaire in 1764. But our appellate courts continue to use common sense when disposing of constructively fraudulent transfer appeals, as recent decisions show. See, e.g., In re International Supply Co., 2024 WL 2813849 (7th Cir. June 3, 2024); ("[A] balance sheet can convey an unrealistic picture of a firm's finances"; rejected lender's argument that "sole legally permissible approach to defining solvency is the balance-sheet test"); In re Wade Park Land Holdings, LLC, 2024 WL 3024648, *4 (2d Cir. June 17, 2024)("[T]he district court correctly concluded that the values stated … in the appraisals were not plausible when viewed in light of other allegations in the complaint — in particular the conduct of the parties and the inability [of the debtors' principal] to refinance [the debtor's property]."); In re The Mall at the Galaxy, Inc., 2024 WL 3688721 (3d Cir. Aug. 7, 2024) (debtor received no value from insider loan and pre-bankruptcy payment constructively fraudulent; multiple transactions collapsed; pre-judgment interest awarded on pre-bankruptcy loan repayment because defendant "able to use" funds "for over a decade."); and In re White, 2024 WL 689232 (10th Cir. BAP Feb. 21, 2024) ("a true dollar-for-dollar exchange … almost always constitutes reasonably equivalent value").

Relevance

"Constructive fraud", in contrast to actual fraud ("actual intent to hinder, delay or defraud"), is probably the most frequently alleged in the fraudulent transfer context. A plaintiff bankruptcy trustee or creditor in a constructive fraudulent transfer suit need only prove with objective evidence (e.g., documents): a) the debtor's insolvency and b) the debtor's receipt of less than "reasonably equivalent value" in exchange for the debtor's assets. See, e.g., Donnell v. Kowell, 533 F.3d 762, 772 (9th Cir. 2008) (investor in debtor's Ponzi scheme liable for profits over amount of initial outlay; no reasonably equivalent value given in exchange).The recent cases cited above show how counsel on both sides of the litigation have avoided reality, either with weak evidence, with overzealous advocacy, or with transparent pre-bankruptcy transaction structuring.

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