Fraudulent Transfer Claims and Unreasonably Small Capital

Long after the bankruptcy is filed and the debtor's business is sold or reorganized, stakeholders investigate the causes of the failure and whether transactions that caused the bankruptcy or took place after the company was insolvent should be avoided for the benefit of the estate and creditors.

Intentional fraudulent transfers or transfers of property for lack of reasonably equivalent value during insolvency are prosecuted all the time. A less common but interesting area of fraudulent transfer law concerns situations where there is no fraud and the company is not insolvent or even rendered insolvent at the time of the transfer. This basis to avoid transfers—where the result of the transaction is not that the debtor was rendered insolvent, but left with "unreasonably small capital"—was recently addressed in an appeal to the U.S. District Court for the District of Delaware of a decision of U.S. Bankruptcy Judge Kevin J. Carey of the District of Delaware. In Whyte v. Ritchie SG Holdings LLC (In re SemCrude), Civ. No. 13-1375-SLR (Sept. 30, 2014), the district court affirmed the bankruptcy court's decision granting summary judgment dismissing a claim that distributions made for the benefit of insider affiliates of a solvent company should be avoided because they left the company with unreasonably small capital.