1. USA
Elizabethan England
to the 2010 global recession
A
s the US and world markets Yet in many chapter 11 cases, based on the Statute of Elizabeth
continue to struggle, committees of unsecured creditors dating to 1571, relating to transfers
businesses have continued continue to be formed and are of assets to avoid creditors’ claims,
to fail and asset values across the active, as advocates for the interests which is the historical basis for
board have generally fallen of unsecured creditors. There is an modern “fraudulent conveyance”
substantially. These circumstances inherent tension between the statutes. Section 548 of the US
are acerbated by credit markets that lenders, who are attempting to Bankruptcy Code allows debtor
have yet to normalise. Lenders are minimise its loss, and unsecured estates to attack transfers of assets
increasingly facing collateral creditors, who are attempting to including leveraged asset sales
liquidation values insufficient to recover payment for goods and (LBO’s or leveraged buy-outs) as
cover the obligations owed. services provided to the debtor. fraudulent conveyances. In
Moreover “going concern” Given these circumstances, addition, trustees in bankruptcy are
collateral valuations aren’t much creditors (or chapter 11 debtors on entitled to assert state law based
DAVID H. CONAWAY better, discouraging lenders from behalf of creditors) are increasingly claims as well, including state law
Shumaker, Loop & Kendrick,
LLP (USA) funding chapter 11 proceedings to pursuing claims against various fraudulent conveyance statutes,
achieve a successful reorganisation third parties in an effort to recover specifically the Uniform Fraudulent
or liquidation plan. If anything, cash for a creditor dividend. These Transfer Act (UFTA) or the
lenders are willing to fund only a claims include claims for breaches Uniform Fraudulent Conveyance
“bare-bones” chapter 11 budget to of fiduciary duties against the Act (UFCA). Most US states have
achieve a quick sale liquidation, debtor’s officers and directors, adopted either the UFTA or the
usually only the transaction costs claims for aiding and abetting such UFCA which often have statutes of
directly associated with a Section breaches of fiduciary duties against limitation of 3 or 4 years, compared
363 sale. There is little appetite to lenders and advisors, the to the 2 year statute of limitation of
fund other administrative claims recharacterisation of secured or Section 548 of the Bankruptcy
(such as costs associated with an insider debt to equity, and claims of Code. At the outset, it is important
active creditors’ committee or equitable subordination of claims to note that proof of actual fraud is
administrative claims for recently against officers, directors and not a requirement for recovery
delivered goods), much less any lenders. under any of Section 548, the
dividend for unsecured creditors. Another avenue of recovery is UFTA or the UFCA.
34 Autumn 2010

2. USA
“The Crown Stock
for $3.7 million in bankruptcy. The
Court further concluded that as a
result of Newco’s purchase and the
attendant debt obligations, Newco Distribution case
had unreasonably small remaining
assets in relation to the business and stands as evidence
that Newco was on “life-support that unsecured
from the get-go”. Accordingly, the
Bankruptcy Court concluded that creditors are using
the debtor did not receive old and new legal
“reasonably equivalent value” in
exchange for its transfer of assets. theories to assert
On appeal, the United States claims against
7th Circuit Court of Appeals
collapsed the transactions relating to various third parties
”
the sale and concluded that despite
being an “asset sale”, the
shareholders had in essence sold the
business enterprise to the buyer and
received all the benefit from the
sale, in the form of the $3.1 million
cash payment, a $2.9 million note
and a $600,000 dividend from the
debtor’s cash. Moreover, the
Appeals Court agreed with the
Bankruptcy Court that as a result of
the transaction, the debtor had too
much debt and too little assets to
avoid a “likely … plunge … into
bankruptcy”.
The Court ruled that the
trustee was entitled to a judgment
for the $3.1 million cash payment,
In Boyer v. Crown Stock of assets, the debtor also transferred any payments made on the $2.9
Distribution, Inc., the United States approximately $600,000 of million note and for the $600,000
Seventh Circuit Court of Appeals operating cash to a non-corporate dividend payment, which amounts
recently applied fraudulent account to fund an additional could be recovered from the
conveyance statutes to a debtor’s dividend to shareholders. shareholders. Interestingly, the
pre-bankruptcy sale of all of its Newco was not successful, the trustee did not pursue claims
assets. In Crown Stock, several years company defaulted on the notes against the lender who made the
prior to the bankruptcy filing, the and it ultimately filed for $3.1 million loan to Newco that was
debtor and its shareholders agreed bankruptcy. All of Newco’s assets the source of the cash for the
to sell all of the debtor’s assets for were sold in a Chapter 11 Section payment to shareholders. Since the
$6 million to “newco”, formed by 363 sale for $3.7 million. The sale lender loaned $3.1 million in
the buyer to purchase the assets of proceeds were used largely to pay exchange for a pledge of assets as
the debtor. Of the purchase price, off the secured debt associated with security, there likely was no
$3.1 million was paid in cash and the pre-bankruptcy sale transaction. sustainable claim that there was a
$2.9 million was paid in the form of The chapter 7 trustee then attacked transfer of assets to the lender for
a promissory note from the buyer to the pre-bankruptcy sale transaction less than “reasonably equivalent
the debtor. The $3.1 million in cash as a fraudulent conveyance under value” or “fair consideration”, as
was immediately distributed to the Indiana’s version of the UFTA, required to prevail on claims under
debtor’s shareholders. Moreover, which had a 4 year statute of Section 548, or under the UFTA or
the cash was generated in the first limitations. The Trustee could not UFCA.
instance by a bank loan to “newco” assert a claim under Section 548 of The Crown Stock Distribution
for $3.1 million, in exchange for a the Bankruptcy Code since its two- case stands as evidence that
pledge of all of the company’s year statute of limitation had unsecured creditors are using old
assets. The $2.9 million promissory passed. The Bankruptcy Court and new legal theories to assert
note owed by the buyer to the determined that Newco, in the pre- claims against various third parties
debtor was also secured by all of the bankruptcy sale transaction, had in an effort to create value for
company’s assets, although become obligated for $6 million, claims, and that courts will order
subordinate to the bank’s security but received assets worth no more recoveries in appropriate cases.
interest on the $3.1 million debt. than $4 million, presumably based
Contemporaneously with this sale on the fact that the assets were sold
Autumn 2010 35