Second Circuit OKs Asset Sales Despite Significant Present and Future Liabilities

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Dec/Jan 2004

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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.

<h4>Facts Leading to the Lawsuit</h4>

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.

<h4>The Court Rulings</h4>

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.

<h4>"Insolvency": In the Eye of the Beholder?</h4>

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),<a href="#2" name="2a">2</a> 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))<a href="#3" name="3a">3</a> 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.<a href="#4" name="4a">4</a> 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.

<h4>Compare: In re Babcock & Wilcox</h4>

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.

<h4>Lessons Learned from Lippe v. Bairnco</h4>

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).<a href="#5" name="5a">5</a>

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.<a href="#6" name="6a">6</a>

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:

<ul>
<li>The transactions were conducted openly and were
disclosed in public filings;

</li><li>Contemporaneous documents showed a legitimate
business purpose (such as the consolidation of similar business lines in
order to combat increased competition) for each transaction;

</li><li>Keene received a fairness opinion on the price
of each asset sale from an independent investment banker;

</li><li>Other contemporaneous evidence showed that the
parties intended that fair value be paid for the assets;

</li><li>Keene received cash for the transferred assets;

</li><li>Keene retained and used the cash for the
ordinary operation of its businesses;

</li><li>Keene retained no control over the transferred
assets;

</li><li>Keene continued to operate as a going concern
after the transfers;

</li><li>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;

</li><li>In each year when a transaction was made, Keene
had received a clean opinion from its outside auditors; and

</li><li>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.
</li></ul>

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."<a href="#7" name="7a">7</a>

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.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> 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. <a href="#1a">Return to article</a>

<a name="2">2</a> 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. <a href="#2a">Return to article</a>

<a name="3">3</a> Forty-two
states have adopted some form of the UFTA, as opposed to only three states
that have adopted a version of the UFCA. <a href="#3a">Return to article</a>

<a name="4">4</a> 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. <a href="#4a">Return to article</a>

<a name="5">5</a> 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"). <a href="#5a">Return to article</a>

<a name="6">6</a> 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. <a href="#6a">Return to article</a>

<a name="7">7</a> 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. <a href="#7a">Return to article</a>

Journal Authors

Journal Date

Wednesday, December 1, 2004 - 12:00

Bankruptcy Rule

2004