Second Circuit OKs Asset Sales Despite Significant Present and Future Liabilities

Second Circuit OKs Asset Sales Despite Significant Present and Future Liabilities

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A company confronting significant future liabilities—whether they be mass tort, environmental, securities or a host of others—faces myriad dilemmas, one of the most significant being whether it can restructure, divest assets or even pay regular dividends without running afoul of the prohibition against fraudulent conveyances. Likewise, a company considering acquiring assets from another entity that is facing significant future liabilities must determine whether it can do so without being found a fraudulent transferee of the assets, or otherwise becoming the unwilling successor to the seller's liabilities.

A recent decision by the U.S. Court of Appeals for the Second Circuit sheds valuable light on these questions and demonstrates that a company facing such liabilities can divest, and a third party can purchase, assets without running afoul of fraudulent conveyance laws. Surprisingly, this is true even if the transaction is between related companies and even if one of the purposes of the transaction is to shield the assets being transferred from liabilities. In Lippe v. Bairnco Corp., the Second Circuit confirmed that it is possible to navigate this minefield. Lippe v. Bairnco Corp., 249 F. Supp.2d 357 (S.D.N.Y. 2003), aff'd., 2004 WL 1109846 (May 17, 2004).

The Second Circuit in Lippe affirmed the dismissal of fraudulent conveyance claims brought by the Keene Creditors Trust, which represented asbestos creditors of the now-bankrupt Keene Corp. against three former sister companies of Keene and Keene's former CEO. Both the district court and the Second Circuit held that the claims were properly dismissed because Keene was paid fair value in cash for all of the assets sold, and therefore the Trust could not show that any of the challenged transactions actually reduced Keene's assets or otherwise harmed Keene's creditors. The court also found that Keene was not "insolvent" at the time of any of the challenged transactions or dividends, even though it was facing tens of thousands of asbestos claims, and the Trust's expert opined that Keene could reasonably expect tens of thousands more claims in the future.

The decision represents not only a victory for the former parent and sister companies of Keene that the Trust had tried to saddle with Keene's massive asbestos liabilities, but it also provides much-needed encouragement to companies trying to conduct "business as usual" under the shadow of mass tort or other substantial liabilities or debts.

Facts Leading to the Lawsuit

As the successor to a long line of asbestos insulation manufacturers and a manufacturer of such products in its own right, Keene was a "first tier" asbestos defendant that saw its first asbestos case in the mid-1970s. Ultimately, in December 1993, facing nearly 100,000 asbestos lawsuits and with its assets and insurance coverage nearly depleted, Keene filed for bankruptcy.

While battling an ever-growing number of asbestos claims, Keene underwent a complex corporate restructuring. In 1981, Keene created a subsidiary named Bairnco Corp. In a one-for-one stock transfer, Keene (a publicly traded company) and Bairnco "flipped," with Keene becoming the subsidiary of Bairnco. Thereafter, between 1981 and 1989, Keene and Bairnco each purchased and sold various businesses. In five of those transactions, Keene sold businesses to other Bairnco subsidiaries for cash. Of those five, two businesses later were spun off to Bairnco's shareholders. In 1991, Keene itself was spun off from Bairnco. Between 1981 and 1991, Keene also paid regular dividends to Bairnco totaling approximately $45 million.

All of the transactions, save for the dividends, were sales of assets in exchange for cash. Once the sale price was set in each transaction, it was reviewed by an independent investment banking firm, which opined that the buyer was paying "fair value" for the assets. In total, Keene received $273.6 million in cash in exchange for the business assets it transferred. This cash was used by Keene to run its businesses, acquire several new businesses and pay its debts.

Copious documentation generated at the time of the various transactions confirmed that the "flip" and the subsequent sales of some of Keene's businesses were motivated by the legitimate business purpose of improving Keene's lagging P/E ratio. There also was evidence that some or all of the transactions were motivated or structured at least in part by a desire to minimize the effect of Keene's asbestos liabilities on its and Bairnco's active businesses, as well as to shield some existing, and all newly acquired, businesses from those liabilities.

Once it became apparent that Keene's previously deep pocket soon would be empty, Keene's asbestos creditors challenged the five sales to related companies and the payment of dividends as fraudulent conveyances. The Trust's fraudulent-conveyance claims rested on several theories, the primary one being that the transfers were made with an actual intent to hinder, delay or defraud Keene's creditors. Underlying this theory was the notion that Keene knew or should have known in the early 1980s that its asbestos liabilities eventually (more than 10 years later) would overwhelm it. With this knowledge, the Trust argued, the Keene and Bairnco principals engaged in a massive conspiracy to divest Keene of its valuable assets for less than they were worth in order to keep those assets from the asbestos plaintiffs.

The Trust also argued that the transactions were constructively fraudulent under various theories. Underlying the constructive fraud claims was the theory that Keene was insolvent at the time of the transactions. Since Keene did not file for bankruptcy until 12 years after the creation of Bairnco, 10 years after the first challenged transaction and four years after the last challenged transaction, this theory did not depend on proving that Keene was unable to satisfy its obligations currently payable at the time of each transaction. Rather, the Trust argued that Keene was insolvent because its future asbestos liabilities constituted current "debts" for purposes of determining Keene's solvency.

The Court Rulings

After nearly a decade of procedural wrangling, discovery and numerous motions, in March 2003 the district court granted summary judgment in favor of all defendants on several bases. 249 F.Supp.2d 357. Of primary interest, all of the transaction-based claims, both actual and constructive fraud, were dismissed because the Trust presented no proof that any of Keene's creditors has been harmed by the transactions. Id. at 375-76, 377-78. The Trust's sole theory of harm to Keene's creditors was that Keene had received far less than the fair value of its businesses when it sold them to its sister companies. As a practical matter, this was the only possible theory of harm to creditors, since Keene received cash in the sales and used that cash for its ordinary business operations. Id. at 378. When the district court struck the Trust's valuation experts on Daubert grounds, Lippe v. Bairnco Corp., 288 B.R. 678 (S.D.N.Y. 2003), it left the Trust with no means to prove lack of fair value and no way to prove harm to creditors. 249 F.Supp.2d at 377-78.

In a complete repudiation of the Trust's theory of the case, the district court also concluded that the Trust had failed to present any evidence from which a reasonable jury could conclude the transactions or dividends were motivated by an actual intent to defraud Keene's asbestos creditors. Id. at 360-61, 381-84. In no small part, this conclusion was based on the district court's acknowledgement that "Keene could not predict the future, and it had no reason to know, at the time of the transfers, that years later it would be rendered insolvent by a flood of asbestos filings." Id. at 360 (emphasis added).

Finally, the district court dismissed the Trust's constructive fraudulent conveyance claims, in part because of the Trust's failure to prove "injury," but more importantly because the Trust had failed to prove Keene was "insolvent" at the time of any of the transactions. Id. at 378-81. Under the various constructive fraudulent-conveyance provisions of the New York Debtor and Creditor Law (NYDCL) §§271 and 273, a plaintiff must prove that the debtor was "insolvent" at the time of the transaction or was rendered "insolvent" thereby. Under the NYDCL, a debtor is "insolvent" when "the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured." NYDCL §271. Focusing on the phrase "probable liability," the district court ruled that a reasonable jury could only conclude that "Keene had, or believed it had, more than sufficient assets to cover its probable liabilities at the time of the transactions." 249 F.Supp.2d at 279.

The Second Circuit affirmed the district court's ruling by Summary Order dated April 9, 2004 (2004 WL 765061), and then with an Amended Summary Order on May 17, 2004. 2004 WL 1109846. The Second Circuit confirmed the well-established rule that no actual or constructive fraudulent conveyance occurs unless creditors are harmed by the transfer of assets. 2004 WL 1109846 at *5. The demise of the Trust's valuation experts left it with no way to prove that Keene received less than fair value and, therefore, no way to prove harm to the creditors. Id. If anything, the Second Circuit noted, Keene's transactions benefited creditors because, "[r]ather than converting its assets into a form unreachable by its creditors, Keene transformed them into a medium arguably more accessible: cash." Id. Moreover, Keene did not allow the cash it received from the transfers to "languish or dissipate." Id. at *6. Instead, Keene used the cash to acquire several more businesses—a step the Second Circuit found to be fundamentally inconsistent with the Trust's actual fraud theory. Id. at *5-6.

The Second Circuit also agreed with the district court that the trustees' constructive fraud claims were properly dismissed because Keene was not "insolvent" at the time of the transfers. Id. Like the district court, the Second Circuit concluded that Keene was not obligated to predict the future in attempting to assess its solvency at the time of any of the transfers. Unlike the district court, however, the Second Circuit focused on the term "existing debts" rather than the term "probable liability" in NYDCL §271(1). Id. at *6-7. "[T]he hypothetical existence of an unaccrued tort claim does not give rise to a debtor-creditor relationship. There is no 'existing debt.'" Id. at *7. The Second Circuit went on to consider the accrual dates for toxic-tort claims both before and after New York adopted a "discovery rule" in 1986. Id. Under either scenario, the court found, the Trust's expert overestimated Keene's asbestos liability by including in his analysis future unaccrued tort claims, which were not "existing debts" at the time of the transactions. Id. at *7-8.

"Insolvency": In the Eye of the Beholder?

Both the district court's and the Second Circuit's analysis of whether Keene was "insolvent" were extremely favorable to debtors, especially those facing potential mass-tort liabilities. It is interesting to note, however, that the two courts reached their conclusions by very different routes. Recall that a debtor is considered "insolvent" under NYDCL §271 if "the present salable value of its assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured." The district court looked at whether Keene had a subjectively reasonable belief that it would be able to pay its future liabilities as they became due. 249 F.Supp.2d at 379-81. On the other hand, the Second Circuit, without even a nod to the district court analysis, looked instead at the objective question of when tort claims accrue so as to constitute "existing debts." 2004 WL 1109846 at *7. While the Second Circuit's analysis clearly controls, its silence on the district court's analysis suggests that the latter may be legitimate as well.

As if the interfamilial differences between the courts in Lippe were not enough to generate confusion over when a debtor facing contingent liabilities is "insolvent," both of the Lippe courts' analyses are directly at odds with Official Committee of Asbestos Personal Injury Claimants v. Sealed Air Corp. (In re W.R. Grace & Co.), 281 B.R. 852 (D. Del. 2002),2 which held that unknown, unaccrued and currently unquantified future liabilities must be taken into account when assessing solvency.

In Sealed Air, W.R. Grace conveyed one of its divisions that was facing extensive asbestos liability to Sealed Air Corp. 281 B.R. at 855. When the conveyance occurred, W.R. Grace knew that it had extensive asbestos liabilities, but it miscalculated the extent of its liabilities. Id. at 856-57. W.R. Grace claimed that it should be liable for its reasonable estimate of future asbestos claims at the time of the conveyance in 1998, as many of the post-1998 asbestos claims pending against W.R. Grace were not formally asserted until after the conveyance occurred. Id. The court determined that the post-1998 claims should have been included in the solvency analysis. Id. at 869. It found that all liability-causing events had occurred as of the date of the transaction, as the claimants were already exposed and injured by asbestos. Id. at 862. No additional extrinsic events were necessary to trigger the company's liability for asbestos injuries. Id. The court further noted that the burden of an incorrect solvency estimate is on the debtor. Id. at 867-68.

Unlike the Second Circuit, the Sealed Air court concluded that potential asbestos claimants, once they have been exposed to asbestos, have a right to payment such that their claims are "debts" for solvency purposes—even if neither the debtor nor the claimants themselves are aware of their claims at the time. 281 B.R. at 862. The statute at issue defines "debt" as a "liability on a claim" Uniform Fraudulent Transfers Act (UFTA) §1(5). "Claim" is defined very broadly to include "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." UFTA §1(3). The court interpreted this section to include all rights to payments that may be unknown or unasserted at the time of the conveyance. 281 B.R. at 862. Thus, according to the Sealed Air decision, neither a subjectively reasonable belief nor an objectively reasonable analysis of potential future liabilities dictates whether a debtor was insolvent at the time of a transaction. In essence, if a mass tort defendant ever finds itself unable to pay its liabilities, the Sealed Air court would find it "insolvent" as of the day its first claimant was first exposed to the toxic substance at issue.

The differences between the Second Circuit's analysis and the Sealed Air analysis arise, in part, from differences in the applicable law. Sealed Air interpreted UFTA as adopted by New Jersey, which differs substantively from the NYDCL (which is based on the Uniform Fraudulent Conveyances Act (UFCA))3 that governed in Lippe. The UFTA defines "insolvency" in two ways. First, insolvency occurs when "the sum of the debtor's debts is greater than all of the debtor's assets, at a fair valuation." UFTA §2(A). There is no reference to "probable liability" or "existing debts" as there are in the UFCA definition of insolvency.4 Under this balance-sheet approach, a debtor is insolvent if the liabilities exceed the assets based on a fair valuation. In re Bay Plastics Inc. v. BT Commercial Corp., 187 B.R. 315, 330 (Bankr. C.D. Cal. 1995). This definition is similar to the definition in the Bankruptcy Code. See Prudential Ins. Co. of Amer. v. Science Park LP, 667 N.E.2d 437, 442 (Ohio App. 1995) (to determine insolvency, the court used the balance-sheet approach as interpreted under the Bankruptcy Code: "Under the balance sheet approach, a debtor is insolvent if its liabilities exceed its assets, excluding the value of preferences, fraudulent conveyances and exemptions").

The second definition of insolvency creates a rebuttable presumption that a debtor is insolvent if it is unable to pay its debts as they become due. UFTA §2(b); In re Tri-Star Technologies Co. Inc., 260 B.R. 319, 324-25 (Bankr. D. Mass. 2001). "Actual insolvency is not required under the UFTA. The test is whether the conveyance directly tended to or did impair the rights of existing creditors." In re McHugh, 2003
WL 21018601 (Bankr. N.D. Ill. 2003). Insolvency must be determined by reviewing the company's financial position at the time of the alleged fraudulent conveyance. Prairie Lakes Health Care System v. Wookey, 583 N.W.2d 406, 414 (S.D. 1998).

Whether the distinctions between the definitions of insolvency are meaningful from the perspective of the Second Circuit's analysis in Lippe will be for a future court to decide; the Second Circuit did not discuss or even cite to Sealed Air. However, even under the UFTA, the Second Circuit could still have found that Keene was solvent at the time of the transfers. Utilizing the balance-sheet approach, Keene's assets outweighed its debts at the time of the lighting transaction, and therefore Keene was a solvent company according to its financial statements. Keene's net worth actually increased in 1984, the year in which the lighting transaction took place. Although the number of asbestos-liability cases was increasing in mid-1984, Keene had approximately $350 million in insurance coverage, plus an additional $19 million reserve, plus a positive net worth of approximately $116 million with which to pay claims. In addition, Keene was clearly able to pay its debts as they came due in 1984. If a snapshot had been taken of Keene at the time of the lighting transaction, it would have revealed a company that was weathering significant asbestos liabilities with substantial resources and well-founded optimism about its future. Keene did not go bankrupt until 1993. Therefore, under both UFTA definitions of insolvency, Keene was a solvent entity at the time of the lighting transactions.

Compare: In re Babcock & Wilcox

Falling somewhere between the draconian result of Sealed Air and the more favorable result of Lippe is the decision in In re Babcock & Wilcox, 274 B.R. 230 (Bankr. E.D. La. 2002), aff'd., 2002 U.S. Dist. LEXIS 15742 (E.D. La. 2002). In Babcock & Wilcox (B&W), plaintiffs petitioned the court to revoke defendants' corporate restructuring, which plaintiffs claimed occurred when asbestos liabilities had already made B&W insolvent. 274 B.R. at 234. Indeed, B&W was aware of the existence of its asbestos liabilities and had created a settlement program to keep transaction costs low. Id. at 234-36. Under the settlement strategy, B&W negotiated settlement agreements with plaintiffs' lawyers in exchange for not being named in asbestos lawsuits. Id. B&W followed this strategy until the asbestos liabilities became too burdensome, and it filed for bankruptcy. Id. at 237.

Relying in part on Louisiana state law, the U.S. Bankruptcy Court for the Eastern District of Louisiana held that future asbestos claims must be taken into account when determining a company's solvency. 274 B.R. at 259-60. Moreover, such future claims must be assessed objectively; the company's subjective belief about the scope of its future liabilities is irrelevant. Id. Although this rule might seem harsh at first glance, the bankruptcy court's application of the rule was tempered by common sense. The bankruptcy court concluded that B&W's internal estimates of its future liabilities, even though they did not turn out to be accurate, were not objectively unreasonable and were made in good faith based on the information known at the time. Id. at 261-62. The fact that the estimates ended up being too conservative was irrelevant because "the court cannot use hindsight and can only determine whether the predictions by [B&W] were reasonable under the circumstances existing at the time they were made." Id. at 262. In effect, Babcock & Wilcox reached the same end result as the Lippe district court, but by a different route. That is, both courts considered the debtor's analysis of its likely future liabilities, but one court considered the debtor's subjective belief on its face and the other considered the objective reasonableness of that belief.

Although there likely is some as-yet unexplored common ground between the three opinions, the differing results in Lippe, Sealed Air and Babcock & Wilcox show that courts have not reached a consensus on whether and to what extent defendants now in bankruptcy should be faulted for not having predicted the future course of the litigation that put them there. These cases underscore the need for a company contemplating an asset sale or restructuring to analyze potential liabilities carefully, based on all of the available information, and to ensure that the transaction is for fair value and in a form that does not diminish the transferor's assets available to creditors.

Lessons Learned from Lippe v. Bairnco

The opinions in Lippe v. Bairnco provide much-needed guidance for companies facing potentially significant liabilities that want to continue doing business as usual, or companies considering purchasing assets from such a company, without risking fraudulent conveyance and related liabilities.

Lesson No. 1: A company facing potentially significant liabilities can transfer assets lawfully, even with the specific purpose of shielding those assets from creditors, as long as the transfer does not harm creditors. This is the most significant lesson that Lippe teaches. When a company faces potentially overwhelming liabilities, it is not condemned for eternity to hold onto all of its assets when legitimate business purposes otherwise would dictate the sale or other disposition of some or all of those assets. Legitimate business purposes can be wholly unrelated to the pending liabilities or actually can stem from the liabilities themselves—such as a desire to free up management's time and energies from the preoccupation of the liabilities and allow them to return to running the business full time. In the words of the district court, "even assuming management's concern over the asbestos cases was a motivating factor, there was nothing inappropriate about a company's management looking for lawful ways to reduce the adverse impact of asbestos litigation." 249 F. Supp. 2d at 383.

The key to lawfully transferring assets in order to keep them away from creditors is that the transaction must not injure creditors. As the Second Circuit found, to sustain a fraudulent conveyance claim under the Uniform Fraudulent Conveyance Act (UFCA), a plaintiff must prove that it was injured as a result of the alleged conveyance. Without injury, no claim for fraudulent conveyance will stand. This fundamental inquiry is also necessary for sustaining fraudulent conveyance claims under UFTA. "A transfer in fraud may be attacked only by one who is injured thereby. Mere intent to delay or defraud is not sufficient; injury to the creditor must be shown affirmatively. In other words, prejudice to the plaintiff is essential. It cannot be said that a creditor has been injured unless the transfer puts beyond [its] reach property [it] otherwise would be able to subject to the payment of [its] debt." Mehrtash v. Mehrtash, 93 Cal. App. 4th 75, 80(2001); see, also, A.P. Properties Inc. v. Goshinsky, 699 N.E.2d 158, 162 (Ill. App. 1998) (finding that one reason that plaintiff failed to state a claim under the UFTA was that it had suffered no injury as a result of the conveyance).5

An extremely important caveat must be stated here. We are not suggesting, and Lippe does not stand for the proposition, that assets can be transferred lawfully for the purpose of hindering, delaying or defrauding creditors. Such transfers run afoul of the UFCA and UFTA, and nothing in Lippe changes that. Rather, Lippe confirms that transfers designed to keep particular assets away from creditors are not necessarily "for the purpose of hindering, delaying or defrauding the creditors." This is because, with rare exceptions, creditors are not entitled to specific assets, but only to the value of those assets and the ability to reach that value. Thus, if a debtor transfers individual assets or even entire business units, there is no harm to creditors as long as the debtor receives for the transferred assets fair equivalent value in the form of cash or other valuable assets that are and remain as accessible to the creditors as were the transferred assets. If the creditors are not harmed, claims for actual or constructive fraudulent conveyance cannot be maintained.

Lesson No. 2: A purchaser of assets from a company that faces potentially significant liabilities can do so without incurring fraudulent conveyance liability or becoming the successor to the seller's underlying liabilities. As with Lesson No. 1, the key here is to be certain that the transferor's creditors will not be harmed by the transaction. From the perspective of the transferee/purchaser, paying cash and utilizing the services of an independent third party to confirm that the transfer involves fair equivalent value—especially if the transferor and transferee are related entities—are insurance policies well worth the premium paid.6

Lesson No. 3: Precautions can and should be taken at the time of a transaction to repel later claims that the transaction was undertaken with an actual intent to hinder, delay or defraud creditors. Both the district court and the Second Circuit noted several facts in the various Keene transfers that directly contradicted the Trust's assertion that the transactions were motivated by an intent to defraud Keene's creditors. Anyone in the position of transferor or transferee in similar circumstances would be wise to follow this model in whole or substantial part:

  • The transactions were conducted openly and were disclosed in public filings;
  • Contemporaneous documents showed a legitimate business purpose (such as the consolidation of similar business lines in order to combat increased competition) for each transaction;
  • Keene received a fairness opinion on the price of each asset sale from an independent investment banker;
  • Other contemporaneous evidence showed that the parties intended that fair value be paid for the assets;
  • Keene received cash for the transferred assets;
  • Keene retained and used the cash for the ordinary operation of its businesses;
  • Keene retained no control over the transferred assets;
  • Keene continued to operate as a going concern after the transfers;
  • Keene management relied on the advice of its counsel concerning the structure of the transaction and specifically avoided a structure that would have increased its potential liability for fraudulent transfer;
  • In each year when a transaction was made, Keene had received a clean opinion from its outside auditors; and
  • In each year when a transaction was made, Keene management's internal estimates indicated that it had sufficient assets and insurance coverage to pay its current and reasonably forecasted asbestos liabilities.

In contrast to the "badges of fraud" usually used to infer an improper intent, Lippe could be said to provide companies with "badges of legitimacy."7

Lesson No. 4: Which law governs the fraudulent conveyance issue is critical to the outcome. This is hardly a novel concept, but it is brought into sharp focus by the Lippe, Sealed Air and Babcock & Wilcox decisions. Whether the UFCA or the UFTA governs could literally spell the life or death of a company facing the prospect of being named the successor to a bankrupt asbestos defendant's liabilities. Likewise, how the relevant state law defines a "claim" or when a cause of action "accrues" can make a significant difference in the outcome.

Unfortunately, since the parties in Lippe had stipulated to the application of New York law, the Second Circuit offers no guidance on what law applies to these issues, and the Sealed Air and Babcock & Wilcox courts likewise did not address the question. Lippe v. Bairnco offers a ray of hope that companies facing potentially massive liabilities can continue to conduct business as usual, isolate its liabilities and do so without harming creditors or running afoul of the prohibition against fraudulent conveyances.


1 William F. Taylor Jr. is a partner in the Wilmington, Del., office of McCarter & English LLP and represents debtors, committees and creditors in Delaware's bankruptcy court. Charles Rysavy, a partner in the Newark, N.J., office of McCarter & English LLP, has substantial experience in fraudulent conveyance litigation and was lead counsel for defendant The Genlyte Group Inc. in Lippe v. Bairnco. Alissa Pyrich is an associate in the Newark, N.J., office of McCarter & English LLP and also represented Genlyte Group in Lippe v. Bairnco. Pranita Raghavan is an associate in the Newark, N.J., office of McCarter & English LLP. McCarter & English successfully defended the alleged fraudulent transferee The Genlyte Group Inc. in Lippe v. Bairnco. Return to article

2 On June 8, 2004, Sealed Air Corp. filed a motion to vacate the 2002 opinion. That motion is pending before the court. "The company filed the motion to vacate the opinion based on its belief that the opinion is contrary to established law set forth in other court rulings, both before and after the opinion was issued." "Sealed Air Files Motion to Vacate Court Opinion; Settlement Agreement Stands Unchanged," Business Wire, June 8, 2004. Return to article

3 Forty-two states have adopted some form of the UFTA, as opposed to only three states that have adopted a version of the UFCA. Return to article

4 It is far from certain that the Second Circuit's analysis does not apply to cases arising under the UFTA, assuming that Sealed Air is not strictly followed. The Second Circuit's solvency ruling turned on when a toxic tort claim becomes a "current debt," as that term is used in the UFCA. While the UFTA uses only the term "debts" and not "current debts," it is reasonable to conclude that the two terms have the same meaning. "Debt" under the UFCA includes "any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent." UFCA §1. Under the UFTA, "debt" is a liability on a claim, which includes a broad range of rights, and includes those enumerated under the definition of "debt" in the UFCA. If interpreted as such, the Second Circuit's ruling on how to determine solvency in Lippe may apply as well in UFTA jurisdictions. Return to article

5 For the general legal proposition that a plaintiff must prove injury as a result of the conveyance to sustain a fraudulent conveyance claim, see, generally, Haskins v. Certified Escrow & Mortg. Co., 96 Cal. App. 2d 688, 691 (1950) ("a transfer in fraud of creditors may be attacked only by one who is injured by the transfer"); Rollie v. Bethke, 299 N.W. 303, 304 (N.D. 1941) (finding that a creditor may only attack a conveyance when he can show that he has been injured by the conveyance); McMillan v. McMillan, 254 P. 98, 99 (Idaho 1926) (noting that there must be injury to creditor to set aside a conveyance as fraudulent); Costa v. Neves, 82 P.2d 600, 602 (Cal. 1938) ("The mere intent to delay or defraud is not sufficient, but there must also be an injury to the creditor which must be affirmatively shown"). Return to article

6 Protection from later transferee liability will depend on properly structuring the transaction on the front end, not on a promise of contractual indemnity by the transferor if something goes wrong on the back end. By the time successor liability or fraudulent conveyance claims are raised, the transferor will be insolvent or will have filed for bankruptcy protection. Contractual indemnity rights against the transferor will be all but worthless. Return to article

7 In contrast, for a guide on how to structure a transaction to invite fraudulent conveyance liability, we recommend Schmoll v. Raytech, 703 F.Supp. 868 (D. Ore. 1988), aff'd., 997 F.2d 499 (9th Cir. 1992). Unlike Keene, which received fair value in cash and continued to operate as a going concern after each transaction, the restructuring in Schmoll had left the transferor "with staggering asbestos liabilities, unprofitable operations, unsecured notes and stock which could not be sold in large blocks without a deep discount." Id. at 873. Present and future asbestos tort claimants no longer had access to the assets or the "stream of profits" generated by the assets. Id. at 873. The district court found that the context of the restructuring and defendants' blatant statements showed that defendants entered into the corporate restructuring for the main purpose of escaping liability from asbestos injury suits. Id. at 873. Therefore, based on the evidence, the court found "no reason to respect the integrity of the transactions." Id. at 874. Return to article

Journal Date: 
Wednesday, December 1, 2004