Leveraged Buyouts and Fraudulent Transfers: Life After Gleneagles
David A. Murdoch, Linda D. Sartin, and Robert A. Zadek, 43(1): 1–26 (Nov. 1987)
As a result of the significant increase in leveraged buyout transactions over the past ten years, both sellers and lenders face a vast array of complex legal and financial questions as they plan their buyout strategy. This Article analyzes the risks of a possible fraudulent conveyance finding by the courts in connection with a leveraged buyout under the Bankruptcy Code, the Uniform Fraudulent Conveyance Act, and the Uniform Fraudulent Transfer Act. It focuses particularly on the Third Circuit's 1986 decision in the Gleneagles case. See United States v. Tabor Realty Corp., 803 F.2d 1288 (3d Cir. 1986), cert. denied sub nom. McClellan Realty Co. v. United States, 483 U.S. 1005 (1987). The Article also provides sellers and lenders with practical guidance in reducing or eliminating risks of voidability of leveraged buyouts as fraudulent conveyances.
Fraudulent Conveyance Concerns in Leveraged Buyout Lending
Matthew T. Kirby, Kathleen G. McGuinness, and Christopher N. Kandel, 43(1): 27–49 (Nov. 1987)
This Article reviews—from a lender's perspective—the applicability of and risks posed by fraudulent conveyance laws to leveraged buyouts. It discusses methods used to minimize those risks and sets in broader context issues raised by the Gleneagles case.
Waiving Subrogation Rights and Conjuring Up Demons in Response to Deprizio
Peter L. Borowitz, 45(4): 2151–68 (Aug. 1990)
In response to the insider guaranty preference risk involved in the Deprizio controversy, many commentators have proposed that lenders require any insider guarantor to waive its subrogation rights against the primary obligor. This Article argues that any such technical device will only exacerbate the substantive problem and create a fraudulent conveyance risk for the lender. The Article also discusses how an overly literal reading of the Deprizio decision has led some commentators to exaggerate its impact on secured financings and letter-of-credit transactions.
Wading "Upstream" in Leveraged Transactions: Traditional Guarantees v. "Net Worth" Guarantees
Brad R. Godshall and Robert A. Klyman, 46(2): 391–403 (Feb. 1991)
This Article addresses the advantages and disadvantages of "net worth" guarantees in leveraged transactions. Net worth guarantees were developed to attempt to avoid the fraudulent conveyance problems associated with traditional upstream guarantees in leveraged financing. However, net worth guarantees present significant, practical collection problems not present with traditional guarantees. Moreover, several recent appellate court opinions will be helpful in defending the general enforceability of traditional guarantees. Therefore, lenders may want to reexamine their use of net worth guarantees and reconsider traditional guarantees as the preferred choice of upstream guarantee.
Solution for Conflict of Laws Governing Fraudulent Transfers: Apply the Law That Was Enacted to Benefit the Creditors
Thomas H. Day, 48(3): 889–913 (May 1993)
This Article analyzes the choice of law for fraudulent transfers in the context of the purposes of fraudulent transfer law. The author concludes that, because fraudulent transfer laws are enacted to protect creditors from the disposition of a debtor's assets when the debtor is insolvent or undercapitalized, the law of the location of the creditors of the debtor should apply.
Don't Sound the Death Knell for Nonrecourse Lending Yet: A Proposal for Determining a Nonrecourse Lender's Standing under the Uniform Fraudulent Conveyance Act
John E. Barnes, 49(2): 669–88 (Feb. 1994)
The Article examines whether, and in what circumstances, a nonrecourse lender should have standing to challenge an insolvent debtor's conveyance of unencumbered assets as fraudulent. In 1992, the U.S. Court of Appeals for the Second Circuit strongly suggested that a nonrecourse lender may indeed be entitled in certain circumstances to enjoin a borrower's conveyance of unencumbered assets (such as cash) under the Uniform Fraudulent Conveyance Act. Not surprisingly, the decision has engendered considerable debate within the business, financial, and legal communities (and genuine alarm on the part of commercial borrowers). Although the subsequent remand decision by the federal district court has assuaged, to some extent, the concerns of borrowers, the Second Circuit's decision has raised issues that will continue to be a source of controversy as nonrecourse lenders seek to maximize their recovery from insolvent debtors. The author, however, believes that the controversy is something of a "tempest in a teapot." In this Article, he argues that a nonrecourse lender's assertion of standing under the UFCA may be analyzed by looking to fundamental legal concepts that should be familiar (and acceptable) to borrowers and lenders alike. In reliance on these concepts, the author proposes a four-part analytical approach for determining whether a nonrecourse lender has standing under the UFCA.
Defining "Unreasonably Small Capital" in Fraudulent Conveyance Cases: Ratio Analysis May Provide an Answer
Garrick A. Hollander, 49(3): 1185–1224 (May 1994)
This Article analyzes how the courts have defined "unreasonably small capital/assets." Thereafter, it discusses how unreasonably small capital/assets should be defined. In conclusion, it provides the reader with a method to determine when a company has unreasonably small capital and/or assets.
Breaking Up Is Hard to Do: Avoiding the Solvency-Related Pitfalls in Spinoff Transactions
Richard M. Cieri, Lyle G. Ganske, and Heather Lennox, 54(2): 533–605 (Feb. 1999)
This Article examines several of the legal traps that may accompany a typical spinoff transaction. Specifically, it discusses the issues surrounding officers' and directors' fiduciary duties and the spinning corporation's solvency, the possibility for a veil-piercing analysis, and the potential unwinding of the transaction as a fraudulent conveyance or illegal dividend. Throughout, the Article offers practical suggestions for the practitioner advising a client in a spinoff situation.
Working Paper: Best Practices for Debtors' Attorneys
Task Force on Attorney Discipline Best Practices Working Group, Ad Hoc committee on Bankruptcy Court Structure and the Insolvency Processes, ABA Section of Business Law, 64(1): 79-152 (November 2008)
Campbell, Iridium, and the Future of Valuation Litigation
Michael W. Schwartz and David C. Bryan, 67(4): 939 - 956 (August 2012)
Five years ago, two landmark federal court valuation decisions, Campbell and Iridium, held that market evidence—rather than the testimony of paid litigation experts—should be relied on to value corporations for purposes of litigation. While a number of decisions have followed Campbell and Iridium, their full potential to make business valuation litigation less costly and less susceptible to hindsight bias has yet to be realized.
Market Evidence, Expert Opinion, and the Adjudicated Value of Distressed Businesses
Robert J. Stark, Jack F. Williams, and Anders J. Maxwell, 68(4): 1039-1070 (August 2013)
One year ago, The Business Lawyer published an article arguing that courts, when adjudicating the value of distressed businesses, should predominantly defer to “market” evidence, rather than expert opinion. In Campbell, Iridium, and the Future of Valuation Litigation, authors Michael W. Schwartz and David C. Bryan contended that near-universal judicial deference to market data: (1) is supported by recent developments in the case law; (2) would obviate judicial “hindsight bias”; and (3) would enable a more efficient valuation process. Messrs. Schwartz and Bryan further argued that, to solidify the paradigm change, courts should start imposing a pretrial obligation on any litigant intending to present expert valuation opinion to move specially, under Federal Rule of Evidence 702(a), for allowance to do so. This article offers an opposing viewpoint and argues that Messrs. Schwartz and Bryan interpret applicable case law selectively, outside of a broader jurisprudential context, and in a manner that disregards deeply ingrained legal principles. The authors here further contend that: (a) Messrs. Schwartz and Bryan have not presented a compelling case of widespread judicial “hindsight bias”; (b) they have also failed to make a persuasive showing that their proposal will lead to meaningful process efficiencies; and (c) their thesis fails to appreciate the complexity of market dynamics. This article concludes that market evidence tends to require expert interpretation, especially when used to value troubled businesses.
A Further Comment on the Complexities of Market Evidence in Valuation Litigation
Gregory A. Horowitz, 68(4): 1071-1082 (August 2013)
This comment offers another view in the dialogue concerning the use of market evidence in valuation litigation initiated in these pages one year ago. In Campbell, Iridium, and the Future of Valuation Litigation, Michael Schwartz and David Bryan argued that an understanding of the importance of market evidence, and of costs and vagaries of a battle of valuation experts, should lead courts to adopt a rebuttable presumption against the admissibility of expert valuation testimony. Like Messrs. Stark, Williams, and Maxwell, whose views are forcefully advanced in a separate article here, I find this proposal ill-advised, but for somewhat different reasons. I agree with Messrs. Schwartz and Bryan that market evidence is central to any question of value, but argue that the market never speaks for itself, indeed never speaks with a voice capable of lay interpretation. By way of example, I present a “debt discount test” for determining whether the market deems an enterprise to be insolvent (the question at issue in both Campbell and Iridium) and show that, even while this test substantially simplifies the interpretation of market data, expert opinion is inevitably required in its application. The increasing recognition of the importance of contemporaneous market information will improve valuation litigation and narrow areas of good-faith dispute without the need for radical procedural limitations on the adversarial process.
The Uniform Voidable Transactions Act; or, the 2014 Amendments to the Uniform Fraudulent Transfer Act
Kenneth C. Kettering; 70(3): 777-834 (Summer 2015)
In 2014, the National Conference of Commissioners on Uniform State Laws approved a set of amendments to the Uniform Fraudulent Transfer Act. Among other changes, the amendments renamed the act the Uniform Voidable Transactions Act. In this paper, the reporter for the committee that drafted the amendments describes the amendment project and discusses the changes that were made to the act.
Simple Insolvency Detection for Publicly Traded Firms
J.B. Heaton, 74(3) 723-734 (Summer 2019)
This article addresses current limitations of financial-market-based solvency tests by proposing a simple balance-sheet solvency test for publicly traded firms. This test is derived from an elementary algebraic relation among the inputs to the balance-sheet solvency calculation. The solvency test requires only the assumption that the market value of assets equals the sum of the market value of the firm’s debt plus the market value of the firm’s equity. The solvency test is a generated upper bound on the total amount of debt the firm can have and still be solvent or, alternatively, the minimum amount of stock-market capitalization the firm must have if it is solvent at current debt prices. The virtue of the method—apart from its ease of implementation—is that it makes possible the detection of balance-sheet insolvent firms notwithstanding the possibility that not all of the firm’s liabilities—including hard-to-quantify contingent liabilities—can be identified. As a result, the method allows for the detection of balance-sheet insolvent firms that otherwise might escape detection. The method proposed here can identify insolvent firms that should be retaining assets and not paying them out to shareholders as dividends or repurchases, identify stocks that brokers and investment advisers should treat as out-of-the-money call options that may be unsuitable investments, and can help auditors identify publicly traded firms that are candidates for going-concern qualifications and other disclosures.