In evaluating a constructively fraudulent transfer claim, the Third Circuit held that a debtor’s subjective belief is pivotal in deciding whether the debtor had sufficient capital.
The appeal arose in the aftermath of the confirmation of SemGroup LLP’s chapter 11 plan. A creditors’ trust established by the plan sued for the recovery of distributions to shareholders made within two years of bankruptcy. Upheld in district court, the bankruptcy court conducted a trial and found that the creditors’ trustee did not prove that SemGroup had inadequate capital at the time of the distributions.
The Third Circuit affirmed in a non-precedential opinion on April 28 written by Circuit Judge Thomas I. Vanaskie.
The trustee conceded that the company had adequate capital if it could borrow under the bank credit agreement. To overcome the fact that the company in fact borrowed after the distributions were made, the trustee argued that SemGroup would have been unable to borrow had the banks known about the company’s “allegedly improper trading strategy.”
The bankruptcy and district courts declined to speculate about what the banks might have done had they known about the trading. Agreeing, Judge Vanaskie said, “Absent the bias of hindsight, it simply cannot be said that SemGroup was likely to be denied access to a credit facility,” given the banks’ alternatives such as restructuring the loan or requiring the sale of assets. On the facts shown at trial, it was significant, Judge Vanaskie said, that the trading strategy was not cited by the banks when they declared a default later.
The opinion is perhaps most important for its focus on the borrower’s subjective belief. The opinion said that the trustee did not “show that SemGroup could reasonably foresee either that its trading strategy would fail or that the bank group would declare a default based upon that trading strategy.”
The opinion mentions several times that the outcome might have been different were there fraud or deception. “The trustee presented no evidence that SemGroup tried to disguise its trading strategy from the bank group or acted deceptively,” the opinion says.