BANKRUPTCY CORNER
BANKRUPTCY CORNER
The Cause of the Debtor ’ s Unreasonably Small Assets
JASON S . RIGOLI
Litigation to avoid and recover fraudulently transferred property is ubiquitous in bankruptcy cases . In bankruptcy , an action to avoid fraudulently transferred property is typically brought in one of two ways . Under 11 U . S . C . § 548 ( a ), a trustee can avoid a transfer of interest of the debtor in property made within 2 years before the date of filing the petition , this referred to as a “ look back period .” Or , 11 U . S . C . § 544 ( b ) empowers a trustee to succeed to the rights of a “ creditor with an allowable unsecured claim that could have sought avoidance of the transfer in question under [ applicable ] law .” In re Rollaguard Security , LLC , 570 B . R . 859 , 861- 62 ( Bankr . S . D . Fla . 2017 ). Using § 544 ( b ), a trustee gets a longer “ look back period ” depending on the law the trustee may be able to apply based upon the “ triggering ” creditor .
Despite the ubiquity of the fraudulent transfer litigation in bankruptcy , there is substantial nuance in these claims that seeps in and is a trap for the unwary . Under § 548 ( a )( 1 )( B ) and the Uniform Fraudulent Transfer Act , which has been adopted by Florida , Fla . Stat . §§ 726.101- 726.112 (“ FUFTA ”), one basis to avoid a transfer is where the debtor did not receive “ reasonably equivalent value in exchange for the transfer … and [ w ] as engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction .” Fla . Stat . § 726.105 ( 1 )( b )( 1 ). See also 11 U . S . C . § 548 ( a )( 1 )( B )( ii ).
The phrases “ unreasonably small assets ” or “ unreasonably small capital ” are not defined in the Bankruptcy Code , 11 U . S . C . §§ 101 , et seq ., or FUFTA . The determination is made on a case-by-case basis and can generally be described as the debtor remains technically solvent , under a balance sheet test , but is unable to general sufficient profits to sustain operations and is doomed to fail . See Mukamal v . Nat ’ l . Christian Charitable Found . ( In re Palm Beach Finance Partners , L . P .), 598 B . R . 885 , 890 ( Bankr . S . D . Fla . 2019 ).
When seeking to avoid a claim under the “ unreasonably small capital ” theory , a trustee has an added burden of proving causation between the transfer and the “ unreasonably small capital .” There are essentially three types of “ causation ” that courts have considered :
• ( i ) The plaintiff must show that a transfer the plaintiff seeks to avoid resulted in the debtor becoming financially distressed such that there was then an unreasonable risk of the debtor ’ s eventual failure .
• ( ii ) The second approach would require a court to determine , from the point of view of the date of the transfer , whether the circumstances that actually resulted in the debtor ' s insolvency were reasonably foreseeable to the parties to the transfer .
• ( iii ) The third approach requires the court to determine “ whether the transferor would have become insolvent even without the transfer .” The third approach requires the plaintiff to affirmatively prove that the later insolvency of the transferor depended on the specific transfer sought to be avoided .
See Palm Beach Finance Partners , L . P ., 598 B . R . at 895-96 . At least one bankruptcy court in the Southern District of Florida has adopted the first approach to an “ unreasonably small capital ” claim . Id . at 896 .
What flows from this “ causation ” requirement is that the debtor-transferor could not have been in financial distress prior to the transfer , the debtor-transferor must be left with unreasonably small assets as a result of the transfer in question .
One other question , that seems to remain from the review of the case law , is whether the “ causation ” requirement applies to all triggering creditors . The triggering creditor can either be in existence at the
time of the transfer or a “ future creditor ” – a party to whom the debtor became indebted after the transfer in question was made . The Palm Beach Finance opinion is addressing the cause of action available to the “ future creditor ” and does not explicitly state that an existing creditor would have the same “ causation ” requirement if the existing creditor was bringing such a cause of action .
Accordingly , a plaintiff bringing an action to avoid a fraudulent transfer under “ unreasonably small assets ” should be diligent in investigating the causation between the transfer and the unreasonably small assets before pleading such a cause of action .
This article was submitted by Jason S . Rigoli , Esq ., Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
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