The most relevant statutory text is 11 USC 548(a)(1)(B)(ii), which requires that one of four financial criteria be met for a constructive fraudulent conveyance—one of which is that the debor “was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.” That does not seem to require knowledge/negligence on the part of the executives.
I would argue that making corporate charitable contributions when you have any reasonable doubt about whether the company is solvent is itself irresponsible behavior. So I’m not that worried about possibly sweeping in a few cases in which the executives non-negligently believed the corporation was solvent. As a general rule, I don’t think most pre-bankrupt corporations are rapidly fluctuating between solvency and insolvency, so I don’t think the Code’s directive to look at the date of transfer/obligation is that burdensome to bankruptcy courts.
Also, I was using “insolvent” as the primary example of circumstances in which it is utility- maximizing to have a rule to discourage and clawback transfers. I think the other three financial criteria in 548(a)(1)(B)(ii) meet that description too. As relevant here, to the extent that FTX was misappropriating customer funds that did not belong to it, it arguably also meets the criteria that it was “engaged in business or a transaction . . . for which any property remaining with the debtor was an unreasonably small capital.”
Thanks! It really should have occurred to me to just look this up and read the statute, it definitely makes things a lot clearer.
I’ll be interested to see what value gets ascribed to the various cryptocurrency assets.
Let’s say I’m running some business and it’s maybe going under. On behalf of the business, I create 101 finger paintings, sell one to my friend’s uncle’s golf buddy for $10,000, and book the rest as $1m in fine art assets. With my balance sheet shored up, I go on trading, but eventually things don’t work out and I file for Chapter 11.
Does the court have to accept the value I put on the paintings at the time, and regard me as solvent for that period? After all, sure, eventually it turned out I couldn’t sell the paintings. But that could just be because by then my name was in the news and that tanked the market for my art.
Nope. See 11 USC 101(32) for a statutory definition of insolvency—a “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation . . . .” (emphasis mine).
The most relevant statutory text is 11 USC 548(a)(1)(B)(ii), which requires that one of four financial criteria be met for a constructive fraudulent conveyance—one of which is that the debor “was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.” That does not seem to require knowledge/negligence on the part of the executives.
I would argue that making corporate charitable contributions when you have any reasonable doubt about whether the company is solvent is itself irresponsible behavior. So I’m not that worried about possibly sweeping in a few cases in which the executives non-negligently believed the corporation was solvent. As a general rule, I don’t think most pre-bankrupt corporations are rapidly fluctuating between solvency and insolvency, so I don’t think the Code’s directive to look at the date of transfer/obligation is that burdensome to bankruptcy courts.
Also, I was using “insolvent” as the primary example of circumstances in which it is utility- maximizing to have a rule to discourage and clawback transfers. I think the other three financial criteria in 548(a)(1)(B)(ii) meet that description too. As relevant here, to the extent that FTX was misappropriating customer funds that did not belong to it, it arguably also meets the criteria that it was “engaged in business or a transaction . . . for which any property remaining with the debtor was an unreasonably small capital.”
Thanks! It really should have occurred to me to just look this up and read the statute, it definitely makes things a lot clearer.
I’ll be interested to see what value gets ascribed to the various cryptocurrency assets.
Let’s say I’m running some business and it’s maybe going under. On behalf of the business, I create 101 finger paintings, sell one to my friend’s uncle’s golf buddy for $10,000, and book the rest as $1m in fine art assets. With my balance sheet shored up, I go on trading, but eventually things don’t work out and I file for Chapter 11.
Does the court have to accept the value I put on the paintings at the time, and regard me as solvent for that period? After all, sure, eventually it turned out I couldn’t sell the paintings. But that could just be because by then my name was in the news and that tanked the market for my art.
Nope. See 11 USC 101(32) for a statutory definition of insolvency—a “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation . . . .” (emphasis mine).