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.
Avoidance of Lease Terminations as Fraudulent Transfers
Robert E. Goodman, Jr., 43(3): 807–32 (May 1988)
Cases permitting the avoidance of lease terminations as fraudulent transfers raise troubling issues for title companies and purchasers, lessors, and mortgagees of real property. This Article analyzes the pertinent decisions and suggests means to minimize the risks of avoidance.
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.
Proving Solvency: Defending Preference and Fraudulent Transfer Litigation
Robert J. Stearn, Jr., 62(2): 359-396 (February 2007)
Litigating solvency can be a complicated endeavor. This article provides a general road map for proving solvency in the defense of preference and fraudulent transfer litigation. The three common measures of solvency are discussed: The "balance sheet" test; the "unreasonably small capital" test; and the "ability to pay debts" test. The article also provides practical suggestions for defense counsel.
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.