Source: https://voidabletransactions.com/test-anticipatory-insolvency-inadequate-capital-voidable-transactions-and-fraudulent-transfers.html
Timestamp: 2020-06-07 00:10:26
Document Index: 800334253

Matched Legal Cases: ['§ 4', '§ 5', '§ 3', '§ 8', '§ 9', '§ 4', '§ 5', '§ 4', '§ 4', '§ 8', 'art 6', '§ 548', '§ 1', '§ 9', '§ 4', '§ 5', '§ 548']

Test Anticipatory Insolvency Inadequate Capital Voidable Transactions And Fraudulent Transfers
Anticipatory Insolvency Test a/k/a Inadequate Capitalization Test
UVTA § 4(a)(2)(i)
(i) was 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 . . ..
Reporter's Comment: 3. Section 4(a)(2) is derived from §§ 5 and 6 of the Uniform Fraudulent Conveyance Act but substitutes “reasonably equivalent value” for “fair consideration.” The transferee’s good faith was an element of “fair consideration” as defined in § 3 of the Uniform Fraudulent Conveyance Act, and lack of fair consideration was one of the elements of a fraudulent transfer as defined in four sections of the Uniform Fraudulent Conveyance Act. The transferee’s good faith is irrelevant to a determination of the adequacy of the consideration under this Act, but lack of good faith may be a basis for withholding protection of a transferee or obligee under § 8.
4. Unlike the Uniform Fraudulent Conveyance Act, this Act does not prescribe different tests for voidability of a transfer that is made for the purpose of security and a transfer that is intended to be absolute. The premise of this Act is that when a transfer is for security only, the equity or value of the asset that exceeds the amount of the debt secured remains available to unsecured creditors and thus cannot be regarded as the subject of a voidable transfer merely because of the encumbrance resulting from an otherwise valid security transfer. Disproportion between the value of the asset securing the debt and the size of the debt secured does not, in the absence of circumstances indicating a purpose to hinder, delay, or defraud creditors, constitute an impermissible hindrance to the enforcement of other creditors’ rights against the debtor-transferor. Cf. U.C.C. § 9-401(b) (2014) (providing that a debtor’s interest in collateral subject to a security interest is transferable notwithstanding an agreement with the secured party prohibiting transfer).
5. Subparagraph (i) of § 4(a)(2) is an adaptation of § 5 of the Uniform Fraudulent Conveyance Act but substitutes “unreasonably small [assets] in relation to the business or transaction” for “unreasonably small capital.” The reference to “capital” in the Uniform Fraudulent Conveyance Act might be interpreted, incorrectly, to refer to the par value of stock or to the consideration received for stock issued. The special meanings of “capital” in corporation law have no relevance in the law of voidable transfers. The subparagraph focuses attention on whether the amount of all the assets retained by the debtor was inadequate, i.e., unreasonably small, in light of the needs of the business or transaction in which the debtor was engaged or about to engage.
JayNote: This is the "Capitalization test". It has two elements:
(1) The debtor did not receive reasonable equivalent value; and
(2) The debtor did not have the financial strength to pay whatever debts the debtor was about to incur.
This test applies without regarding to whether the claim occurred before the transfer or vice versa, i.e., it applies to future creditors.
§ 4(c) A creditor making a claim for relief under subsection (a) has the burden of proving the elements of the claim for relief by a preponderance of the evidence.
Defenses Peculiar to §§ 4(a)(2) and 5
§ 8(e) A transfer is not voidable under Section 4(a)(2) or Section 5 if the transfer results from:
JayNote: A creditor cannot void all but an intent-based fraudulent transfer if it involves: (1) Termination of a lease; or (2) Enforcement of a UCC Article 9 security interest.
Reporter's Comment: 5. Subsection (e)(1) rejects the rule adopted in Darby v. Atkinson (In re Farris), 415 F.Supp. 33, 39-41 (W.D.Okla. 1976), that termination of a lease on default in accordance with its terms and applicable law may constitute a voidable transfer.
(2) enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code, other than acceptance of collateral in full or partial satisfaction of the obligation it secures.
Reporter's Comment: Subsection (e)(2) protects a transferee that acquires a debtor’s interest in an asset as a result of the enforcement by a secured party (which may but need not be the transferee) of rights pursuant to and in compliance with the provisions of Part 6 of Article 9 of the Uniform Commercial Code. Cf. Calaiaro v. Pittsburgh Nat’l Bank (In re Ewing), 33 B.R. 288, 9 C.B.C.2d 526, CCH B.L.R. ¶ 69,460 (Bankr. W.D.Pa. 1983) (sale of pledged stock held subject to avoidance under § 548 of the Bankruptcy Code), rev’d, 36 B.R. 476 (W.D.Pa. 1984) (transfer held not voidable because deemed to have occurred more than one year before bankruptcy petition filed). The global requirement of Article 9 that the secured party enforce its rights in good faith, and the further requirement of Article 9 that certain remedies be conducted in a commercially reasonable manner, provide substantial protection to the other creditors of the debtor. See U.C.C. §§ 1-304, 9-607(b), 9 610(b) (2014). The exemption afforded by subsection (e)(2) does not extend to acceptance of collateral in full or partial satisfaction of the obligations it secures. That remedy, contemplated by U.C.C. §§ 9-620–9-622 (2014), is sometimes referred to as “strict foreclosure.” An exemption for strict foreclosure is inappropriate because compliance with the rules of Article 9 relating to strict foreclosure may not sufficiently protect the interests of the debtor’s other creditors if the debtor does not act to protect equity the debtor may have in the asset.
Prefatory Note (UVTA 2014): Defenses. The amendments refine in relatively minor respects several provisions relating to defenses available to a transferee or obligee, as follows: (3) Section 8(e)(2) as originally written created a defense to an action under § 4(a)(2) or § 5 to avoid a transfer if the transfer results from enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code. The amendments exclude from that defense acceptance of collateral in full or partial satisfaction of the obligation it secures (a remedy sometimes referred to as “strict foreclosure”).
Bankruptcy Code § 548(a)(1)(B)(II) and (III)
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; . . .
COURT OPINIONS: CAPITALIZATION TEST
Anticipatory Insolvency a/k/a Inadequate Capitalization Test - The debtor knew or should have known that insolvency was near
Financial Weakness Test a/k/a Equity-Sense Insolvency Test - The debtor was not technically insolvent but close enough
(a)(2)(i) {Anticipatory Insolvency / Inadequate Capitalization Test} - Where the debtor is headed towards insolvency
(a)(2)(ii) {Financial Weakness / Equity-Sense Insolvency Test} - The debtor is not technically insolvent but close enough
14 - Relation To Electronic Signatures In Global And National Commerce - Waste of space
Anticipatory Insolvency / Inadequate Capitalization Test - Court opinions relating to the Anticipatory Insolvency Test
Financial Weakness / Equity-Sense Insolvency Test - Court opinions relating to the Financial Weakness Test