Wednesday, July 10th, 2013
Portrait of Émile Zola (1848), by Édouard Manet (Photo credit: Wikipedia)
“The humorist Douglas Adams was fond of saying, ‘I love deadlines. I love the whooshing sound they make as they fly by.’ But the law more often follows Benjamin Franklin’s stern admonition: ‘You may delay, but time will not.’ To paraphrase Émile Zola, deadlines are often the terrible anvil on which a legal result is forged.”
With these words, Ninth Circuit Court of Appeals last week declined to retroactively extend Federal Rule of Bankruptcy Procedure 4007(c)’s deadline to file a non-dischargeability complaint. That deadline permits creditors only 60 days following an individual debtor’s initial meeting of creditors (otherwise known as the debtor’s “section 341(a) meeting”) to file a complaint to have certain types of debt determined non-dischargeable, unless a request for extension of the deadline is filed within the same, initial 60-day period.
The case before the 3-judge panel involved a creditor who had, in fact, previously obtained an extension to file a non-dischargeability complaint – but who, due to internal word-processing difficulties with conversion to the “Portable Document Format” (*.pdf) format now required for electronic filings with federal bankruptcy courts, missed the extended deadline by less than an hour.
The brief, 14-page decision (available here) upheld prior rulings in the same matter by both the Bankruptcy Court and the District Court. It raised, but did not answer, the question of what happens when a missed deadline is due to external problems (e.g., technical difficulties with the Bankruptcy Court’s filing system), rather than problems with counsel’s IT configuration or office procedures. But it also declined to recognize an “equitable exception” to the rule in the absence of a Supreme Court directive to the contrary:
We acknowledge that the U.S. Supreme Court has not expressly addressed whether FRBP 4007(c)’s filing deadline admits of any equitable exceptions and that lower courts are divided on the issue. See Kontrick v. Ryan, 540 U.S. 443, 457 & nn.11–12 (2004) (declining to decide question and noting circuit split). We need not, and do not, reach the question of whether external forces that prevented any filings—such as emergency situations, the loss of the court’s own electronic filing capacity, or the court’s affirmative misleading of a party—would warrant such an exception. See, e.g., In re Kennerley, 995 F.2d at 147–48; see also Ticknor v. Choice Hotels Intern., Inc., 275 F.3d 1164, 1165 (9th Cir. 2002). . . . In short, absent unique and exceptional circumstances not present here, we do not inquire into the reason a party failed to file on time in assessing whether she is entitled to an equitable exception from FRBP 4007(c)’s filing deadline; under the plain language of the rules and our controlling precedent, there is no such exception.
Monday, May 16th, 2011
When a retailer becomes insolvent, suppliers or vendors who have recently provided goods on credit typically have the ability to assert “reclamation” rights for the return of those goods. Retailers may respond to these rights by seeking the protection the federal bankruptcy laws – and, in particular, the automatic stay.
When a retailer files for bankruptcy while holding goods which are subject to creditors’ “reclamation” rights, what should “reclamation” creditors do?
Image via Wikipedia
The Bankruptcy Code itself provides some protection for “reclamation” creditors by providing such creditors additional time in which to assert their claims, and by affording administrative priority for a certain portion for such claims even when they are not formally asserted.
But is merely asserting a reclamation claim under the Bankruptcy Code sufficient to protect a supplier once a retailer is in bankruptcy? A recent appellate decision from Virginia’s Eastern District serves as a reminder that merely speaking up about a reclamation claim isn’t enough.
When Circuit City sought bankruptcy protection in 2009, Paramount Home Entertainment was stuck with the tab for more than $11 million in goods. Though it didn’t object to blanket liens on Circuit City’s merchandise which came with the retailer’s debtor-in-possession financing, and stood by quietly while Circuit City later liquidated its merchandise throug a going-out-of-business sale, Paramount did file a timely reclamation demand as required by the Bankruptcy Code. It also complied with what it understood to be the Bankruptcy Court’s orders regarding administrative procedures for processing its reclamation claims in Circuit City’s case. It was therefore unpleasantly surprised when Circuit City objected to Paramount’s reclamation claim – and when the Bankruptcy Court sustained that objection – on the grounds that Paramount hadn’t done enough to establish or preserve its reclamation rights.
Paramount appealed the Bankruptcy Court’s ruling, claiming that it complied with what it understood to have been the Bankruptcy Court’s administrative procedures for processing reclamation claims. Paramount argued that to have done more (i.e., to have sought relief from the automatic stay to take back its goods or commenced litigation to preserve its rights to the proceeds of such goods) would have disrupted Circuit City’s bankruptcy case.
In affirming the Bankruptcy Court, US District Judge James Spencer held that the Bankruptcy Code, while protecting a creditor’s reclamation rights, doesn’t impose them on the debtor. Instead, a reclaiming creditor must take further steps consistent with the Bankruptcy Code and state law to preserve the remedies which reclamation claims afford. Merely asserting a reclamation claim under the Bankruptcy Code – or under a Bankruptcy Court’s administrative procedure – isn’t enough:
“Filing a demand, but then doing little else in the end likely creates more litigation and pressure on the Bankruptcy Court than seeking relief from the automatic stay. . . or seeking a [temporary restraining order] or initiating an adversary proceeding. In this case, Paramount filed its reclamation demand, but then failed to seek court intervention to perfect that right. As the Bankruptcy Court held, the Bankruptcy Code is not self-executing. Although [the Bankruptcy Code] does not explicitly state that a reclaiming seller must seek judicial intervention, that statute does not exist in a vacuum. The mandatory stay as well as the other sections of the Bankruptcy Code that protect and enforce the hierarchy of creditors create a statutory scheme that cannot be overlooked. Once Paramount learned that Circuit City planned to use the goods in connection with the post-petition [debtor-in-possession financing], it should have objected. It didn’t. To make matters worse, Paramount then failed to object to Circuit City’s liquidation of its entire inventory as part of the closing [going-out-of-business] [s]ales.”
Let the seller beware.
Sunday, April 24th, 2011
One of the most effective vehicles for the rescue and revitalization of troubled business and real estate to emerge in recent years of Chapter 11 practice has been the “363 sale.”
Image via Wikipedia
Named for the Bankruptcy Code section where it is found, the “363 sale” essentially provides for the sale to a proposed purchaser, free and clear of any liens, claims, and other interests, of distressed assets and land.
The section has been used widely in bankruptcy courts in several jurisdictions to authorize property sales for “fair market value” . . . even when that value is below the “face value” of the liens encumbering the property.
In the Ninth Circuit, however, such sales are not permitted – unless (pursuant to Section 363(f)(5)) the lien holder “could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.”
A recent decision issued early this year by the Ninth Circuit Bankruptcy Panel and available here) provides a glimpse of how California bankruptcy court are employing this statutory exception to approve “363 sales.”
East Airport Development (EAD) was a residential development project in San Luis Obispo which, due to the downturn of the housing market, never came completely to fruition.
Originally financed with a $9.7 million construction and development loan in 2006, EAD’s obligation was refinanced at $10.6 million in mid-2009. By February 2010, the project found itself in Chapter 11 in order to stave off foreclosure.
A mere two weeks after its Chapter 11 filing, EAD’s management requested court authorization to sell 2 of the 26 lots in the project free and clear of the bank’s lien, then to use the excess proceeds of the sale as cash collateral.
In support of this request, EAD claimed the parties had previously negotiated a pre-petition release price agreement. EAD argued the release price agreement was a “binding agreement that may be enforced by non-bankruptcy law, which would compel [the bank] to accept a money satisfaction,” and also that the bank had consented to the sale of the lots. A spreadsheet setting forth the release prices was appended to the motion. The motion stated EAD’s intention to use the proceeds of sale to pay the bank the release prices and use any surplus funds to pay other costs of the case (including, inter alia, completion of a sewer system).
The bank objected strenuously to the sale. It argued there was no such agreement – and EAD’s attachment of spreadsheets and e-mails from bank personnel referencing such release prices ought to be excluded on various evidentiary grounds.
The bankruptcy court approved the sale and cash collateral use over these objections. The bank appealed.
On review, the Ninth Circuit Bankruptcy Appellant Panel found, first, that the bankruptcy court was within the purview of its discretion to find that, in fact, a release price agreement did exist – and second, that such agreement was fully enforceable in California:
It is true that most release price agreements are the subject of a detailed and formal writing, while this agreement appears rather informal and was evidenced, as far as we can tell, by only a few short writings. However, this relative informality is not fatal. The bankruptcy court is entitled to construe the agreement in the context of and in connection with the loan documents, as well as the facts and circumstances of the case. Courts seeking to construe release price agreements may give consideration to the construction placed upon the agreement by the actions of the parties. . . . Here, the parties acted as though the release price agreement was valid and enforceable and, in fact, had already completed one such transaction before EAD filed for bankruptcy. On these facts, [EAD] had the right to require [the bank] to release its lien on the two lots upon payment of the specified release prices, even though [the bank] would not realize the full amount of its claim. More importantly, [EAD] could enforce this right in a specific performance action on the contract. For these reasons, the sale was proper under § 363(f)(5).
The Ninth Circuit Bankruptcy Appellate Panel’s East Airport decision provides an example of how bankruptcy courts in the Ninth Circuit are creatively finding ways around legal hurdles to getting “363 sales” approved in a very difficult California real estate market. It likewise demonstrates the level of care which lenders’ counsel must exercise in negotiating the work-out of troubled real estate projects.
Tuesday, April 19th, 2011
Title II of the Dodd-Frank Act provides “the necessary authority to liquidate failing financial companies that pose a systemic risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard.”
Under this authority, the government would have had the requisite authority to structure a resolution of Lehman Brothers Holdings Inc. – which, as readers are aware, was one of the marquis bankruptcy filings of the 2008 – 2009 financial crisis.
Readers are also aware that Dodd-Frank is an significant piece of legislation, designed to implement extensive reforms to the banking industry. But would it have done any better job of resolving Lehman’s difficulties than did Lehman’s Chapter 11?
Image via Wikipedia
Predictably, the FDIC is convinced that a government rescue would have been more beneficial - and in “The Orderly Liquidation of Lehman Brothers Holdings Inc. under the Dodd-Frank Act” (forthcoming in Vol. 5 of the FDIC Quarterly), FDIC staff explain why this is so.
The 19-page paper boils down to the following comparison between Chapter 11 and a hypothetical resolution under Dodd-Frank:
[U]nsecured creditors of LBHI are projected to incur substantial losses. Immediately prior to its bankruptcy filing, LBHI reported equity of approximately $20 billion; short-term and long-term indebtedness of approximately $100 billion, of which approximately $15 billion represented junior and subordinated indebtedness; and other liabilities in the amount of approximately $90 billion, of which approximately $88 billion were amounts due to affiliates. The modified Chapter 11 plan of reorganization filed by the debtors on January 25, 2011, estimates a 21.4 percent recovery for senior unsecured creditors. Subordinated debt holders and shareholders will receive nothing under the plan of reorganization, and other unsecured creditors will recover between 11.2 percent and 16.6 percent, depending on their status.
By contrast, under Dodd-Frank:
As mentioned earlier, by September of 2008, LBHI’s book equity was down to $20 billion and it had $15 billion of subordinated debt, $85 billion in other outstanding short- and long-term debt, and $90 billion of other liabilities, most of which represented intracompany funding. The equity and subordinated debt represented a buffer of $35 billion to absorb losses before other creditors took losses. Of the $210 billion in assets, potential acquirers had identified $50 to $70 billion as impaired or of questionable value. If losses on those assets had been $40 billion (which would represent a loss rate in the range of 60 to 80 percent), then the entire $35 billion buffer of equity and subordinated debt would have been eliminated and losses of $5 billion would have remained. The distribution of these losses would depend on the extent of collateralization and other features of the debt instruments.
If losses had been distributed equally among all of Lehman’s remaining general unsecured creditors, the $5 billion in losses would have resulted in a recovery rate of approximately $0.97 for every claim of $1.00, assuming that no affiliate guarantee claims would be triggered. This is significantly more than what these creditors are expected to receive under the Lehman bankruptcy. This benefit to creditors derives primarily from the ability to plan, arrange due diligence, and conduct a well structured competitive bidding process.
Convinced? You decide.
Saturday, February 12th, 2011
Jones Day’s Charles Oellerman and Mark Douglas have just issued The Year in Bankruptcy: 2010. It is a (relatively) concise, thorough (81 pages), and useful compendium of bankruptcy statistics, trend analyses, case law highlights, and legislative updates for the year.
What to expect for 2011? According to the authors:
[M]ost industry experts predict that the volume of big-business bankruptcy filings will not increase in 2011. Also expected is a continuation of the business bankruptcy paradigm exemplified by the proliferation of prepackaged or prenegotiated chapter 11 cases and quick-fix section 363(b) sales. Companies that do enter bankruptcy waters in 2011 are more likely to wade in rather than freefall, as was often the case in 2008 and 2009. More frequently, struggling businesses are identifying trouble sooner and negotiating prepacks before taking the plunge, in an effort to minimize restructuring costs and satisfy lender demands to short-circuit the restructuring process. Prominent examples of this in 2010 were video-rental chain Blockbuster Inc.; Hollywood studio Metro-Goldwyn-Mayer, Inc.; and newspaper publisher Affiliated Media Inc. Industries pegged as including companies “most likely to fail” (or continue foundering) in 2011 include health care, publishing, restaurants, entertainment and hospitality, home building and construction, and related sectors that rely heavily on consumers. Finally, judging by trends established in 2010, companies that do find themselves in bankruptcy are more likely to rely on rights offerings than new financing as part of their exit strategies.
Image via Wikipedia
Monday, January 31st, 2011
The 2008 financial crisis sparked a vigorous debate over how the financial problems of troubled financial institutions ought to resolved. Ultimately, Congress’ answer to this (and a host of other regulatory matters involving financial institutions) was the Dodd-Frank Act.
But is Dodd-Frank the best answer to resolving the distress of financial insitutions? In a paper forthcoming in the Seattle Law Review, Seton Hall Professor Stephen J. Lubben discusses The Risks of Fractured Resolution – Financial Institutions and Bankruptcy. According to Professor Lubben:
Under Dodd-Frank, “[a]ll large bank holding companies, which now include former investment banks such as Goldman Sachs, and many other important institutions, with more than 85% of their activities in ‘finance,’ will be subject to a new resolution regime controlled by the FDIC and initiated by the Treasury Secretary and the Federal Reserve. But by developing a new system for addressing financial distress, instead of integrating the new system into the existing structure of the Bankruptcy Code, the financial reform act simply recreates the prior problem in a new place. The future Lehmans and AIGs will be covered by the new procedure, but other firms that have 84% of their activities in finance will not. In short, the disconnect between bankruptcy and banking has moved to a different group of firms. And we may have done nothing but protect ourselves against an exact repeat of the financial crisis.
. . . .
I use this paper to argue that there are significant gaps in the federal system for resolving financial distress in a financial firm, even after passage of the Dodd-Frank bill. These gaps represent potential sources of systemic risk – that is, risk to the financial system as a whole. They must be fixed. But I should make clear at the outset that I do not argue that these gaps must be filled with the Bankruptcy Code. Rather, the point is that the various systems for resolving financial distress among financial firms – including the FDIC bank resolution process, the new resolution authority, state insurance resolution proceedings, and the SIPC process for broker-dealers, as well as chapter 11 of the Code – must be integrated so that the result of financial distress is clear and predictable. Integrating all under the Bankruptcy Code is an option, but not the only way to achieve such clarity.”
Lubben’s work provides an insightful perspective on Dodd-Frank’s effectiveness, at least as it regards the resolution of financial institution insolvency.
Sunday, December 19th, 2010
The distribution scheme embodied in federal bankruptcy law serves several important functions. In Chapter 7, the detailed statutory distribution scheme imposes order on the chaos that might otherwise attend the liquidation of business assets. In Chapter 11, the fixed order of priority claims and the “absolute priority rule” – along with the requirement that similarly situated classes receive identical treatment – provide predictability within the confirmation process and a framework for out-of-court negotiations.
But not all resolutions of business insolvency afford this level of predictability. In particular, state and federal receiverships afford the prospect of considerably greater flexibility and discretion on the part of the appointed receiver and the appointing court.
The scope of a receiver’s discretion was illustrated early this month by the 7th Circuit Court of Appeals’ approval of a federal receiver’s proposed pro rata distribution of the assets of six insolvent hedge funds.
SEC v. Wealth Management LLC, — F.3d — 2010 WL 4862623 (7th Cir., Dec. 1, 2010) involved an SEC enforcement action against Appleton, Wisconsin-based investment firm Wealth Management LLC and its principals, alleging, among other things, misrepresentation and fraud. At the SEC’s request, the Wisconsin District Court appointed a receiver for Wealth Management and its six unregistered pooled investment funds.
The receiver’s plan, approved by the District Court, was relatively straightforward: All investors would be treated as equity holders, and would receive pro rata distributions of the over $102 million invested in the funds. Two investors who had sought redemption of their investments pre-petition disagreed and appealed the receiver’s plan. The essence of their argument was that Wisconsin law (and Delaware law, which governed several of the funds), required that investors who sought to redeem their investments be treated not as equity holders, but as creditors of the failed funds. As a result, their redemption claims were of a higher priority than investors who had not sought to withdraw their funds. The investors also relied on 28 USC § 959(b), which provides that receivers and trustees must “manage and operate” property under their control in conformity with state law.
The 7th Circuit rejected this argument, finding instead that federal receivers and trustees need not follow the requirements of state law when distributing assets under their control. Holding that “equality is equity,” the court found that to give unpaid redemption requests the same priority as any other equity interest “promotes fairness by preventing a redeeming investor from jumping to the head of the line . . . while similarly situated non-redeeming investors receive substantially less.”
The Wealth Management decision highlights the flexibility and ambiguity of the receivership system – itself a critical distinction from the well-defined priorities of federal bankruptcy law. Though the 7th Circuit’s reasoning – rooted in “similarly situated claims” – is consistent with the policy objectives of the Bankruptcy Code, the result is diametrically opposed to the scheme of priorities on which Wealth Management’s investors undoubtedly relied.
Wealth Management – like many receivership cases – is a case based on federal securities fraud. But federal and state receiverships are applicable in a variety of contexts – including business dissolutions, directorship disputes, marital dissolutions, and judgment enforcement. Where a proposed distribution to creditors can be fairly characterized as “equitable” under the circumstances of the case and where it represents a fair exercise of the receiver’s fiduciary duty on behalf of the receivership estate, the flexibility of a receivership may justify its typically high cost.
Tuesday, December 14th, 2010
One of the historical attractions of the Bankruptcy Code as a vehicle for restructuring is the ability to sell the debtor’s assets quickly, cleanly, and with finality pursuant to a sale under Section 363.
So-called “section 363 sales” have been the subject of much recent interest and debate, as evidenced by the discussion surrounding 2009’s “section 363 sales” of both Chrysler LLC and General Motors Corporation (see, for example, blog posts here and here). In California, the effectiveness of such sales has been limited where the assets are worth less than the aggregate liens against them, and a lienholder objects to the sale.
Earlier this month, “Section 363 sales” received yet another potential challenge in California, this time from the Federal Trade Commission, which sought to undo Laboratory Corporation of America (“LabCorp”)’s acquisition of Westcliff Medical Laboratories, Inc. (“Westcliff”). According to the agency’s December 1 complaint to enjoin furtherance of the merger, filed in Washington DC and transferred to California’s Central District (redacted copy available here), the merger will substantially lessen competition among providers of capitated clinical laboratory testing services to physician groups in southern California.
LabCorp and Westcliff are clinical laboratory testing companies serving physician groups here in Southern California. In May 2010, Westcliff agreed to sell substantially all of its business assets to LabCorp for $57.5 million. As part of the sale, Westcliff agreed to file a voluntary petition for relief under Chapter 11 of the US Bankruptcy Code. The transaction was therefore subject to the approval of the US Bankruptcy Court for the Central District of California. In June, after a hearing at which no other bidder emerged to top the LabCorp offer, the court approved the sale, the parties closed the deal, and life went on – until the FTC stepped in.
Though after-the-fact challenges to mergers are not unknown, they have been – at least until recently – comparatively rare. Even rarer is the challenge to an acquisition completed with approval by the US Bankruptcy Court. The FTC claims Westcliff wasn’t a “failing firm,” whose assets otherwise would have exited the market absent the merger (and would therefore be exempt from anti-trust enforcement). Instead, the FTC alleges Westcliff was generating operating profits at the time of its sale and that there were other potential buyers available to purchase the company. According to the FTC, the reason these buyers didn’t show up was because none would have matched LabCorp’s $60 million “stalking horse” bid.
Counsel for LabCorp attempted to preempt the FTC’s action by filing an adversary complaint in Bankruptcy Court, seeking declaratory relief as well as an injunction against the FTC, arguing that the agency’s enforcement action constituted a “collateral attack” on the Bankruptcy Court’s prior sale order. The FTC responded with its own motion to dismiss and an argument that its enforcement action was limited merely to prospective violations of antitrust laws, and did not seek to disturb the bankruptcy sale. Bankruptcy Judge Theodor Albert abstained, and transferred the matter to the US District Court where the FTC’s action remains pending.
Though the Bankruptcy Court’s order authorizing the Westcliff acquisition remains undisturbed, the FTC’s action raises some important and often-overlooked questions about “363 sales”: Does counsel advising on the sale or purchase of a distressed business need to conduct or provide due diligence on the potential anti-trust effect of the transaction, despite the transaction’s failure to meet the Hart-Scott-Rodino reporting threshold? Is it necessary (or good practice) for bankruptcy counsel to obtain factual findings commensurate with the sale which would insulate the transaction from subsequent attack?
In any event, 363 sales in now carry another important caveat emptor.
Monday, November 29th, 2010
About a month ago, the Ninth Circuit clarified and restated the ability of individual creditors to pursue claims against debtors based on an alter ego theory, despite a bankruptcy trustee’s efforts to reach the same assets (discussion here).
Last week, the Ninth Circuit further expanded the reach of alter ego liability to “asset protection” trusts established by debtors. Along the way, and in dicta, it finessed earlier treatment of the same liability in the corporate context.
The facts in In re Schwarzkopf are somewhat involved, but essentially reduce themselves to the following: During the 1990’s, the debtors established two separate and allegedly irrevocable trusts – the “Apartment Trust” (to hold the debtors’ stock in a corporation which owned and operated an apartment building) and the “Grove Trust” (to hold four plots of land containing avocado groves). The Apartment Trust was established to remove the debtors’ stock from the reach of creditors while the debtors contested a judgment obtained against the corporation. The Grove Trust was subsequently established while the debtors were insolvent – and, likewise, was intended to move the debtors’ assets beyond the reach of their creditors.
During the life of both trusts, the debtors routinely sought and obtained use of the trust assets for their personal benefit and for the benefit of family members. The trustee administering the trusts apparently exercised no independent judgment regarding the debtors’ requests, commingled trust assets, and kept no books and records regarding either trust for several years after their establishment.
The debtors filed a Chapter 7 case in 2003, seeking to discharge approximately $5.4 million in debt. The appointed Chapter 7 trustee filed an adversary complaint seeking to recover approximately $4 million from the trusts. The bankruptcy court initially concluded both trusts were valid and that neither is the alter ego of the debtors, but subsequently reversed the alter ego determination as to the Grove Trust.
The District Court found that the trusts were not the debtors’ alter ego, reasoning that under SEC v. Hickey, 322 F.3d 1123 (9th Cir. 2003), legal ownership is a prerequisite for such liability in California. It also found the Apartment Trust was not valid, but remanded so the Bankruptcy Court could determine whether or not the Trustee’s complaint was time-barred in the first instance.
The Ninth Circuit quickly dispensed with the Apartment Trust, finding the statute of limitations for attacking the Apartment Trust did not begin to run until the trustee answered the avoidance complaint filed in the debtors’ Chapter 7 cases.
It then turned to the Grove Trust, finding that despite its continuing existence as a trust, it was the nevertheless the debtors’ alter ego. To reach this conclusion, it reasoned that despite its earlier decision in Hickey, which had concluded that actual ownership of stock was a prerequisite for alter ego liability in corporate cases, California law nevertheless suggested that equitable stock ownership was sufficient for alter ego liability after all . . . and that, in any event, an equitable ownership interest is “traditionally sufficient to confer ownership rights” in the trust context.
Schwarzkopf’s facts certainly suggest the Ninth Circuit was reaching to assist the trustee’s efforts to recover significant assets for the benefit of creditors. However, its relaxed treatment of the “ownership threshold” for alter ego liability may prove useful for trustees or creditors in other contexts.
Tuesday, November 16th, 2010
Back in May, this blog featured a post on some preliminary research addressing the idea of “probability-based” fraudulent transfer analysis. PBGC lawyer (and Cadwalader alum) John Ginsburg has argued that rather than merely asking whether insolvency is “reasonably foreseeable,” courts ought to clarify “reasonable foreseeability” in probabalistic terms. The basic idea underlying this argument is that it should be easier to attack (or to defend) a fraudulent transfer if it can be shown, for example, that the “probability” of insolvency at the time of an LBO was 50% – or 60%, or 75%.
Mr. Ginsberg argues further that courts ought to articulate what, for them, constitutes an acceptable margin of error (say, 40% risk of insolvency with a margin of error of +/- 15%).
Following comments offered here and elsewhere, Mr. Ginsberg – and colleagues Zachary Caldwell, Daniel Czerwonka, and Mary Burgess – have gone through a number of revisions and have a final draft version of the article available for review prior to going to publication with ABI Law Review in March.
A discussion is hosted at http://www.bulletinboards.com/view.cfm?comcode=LBO_FT, where anyone can critique and debate the paper, upload a rebuttal from a word-processor, or upload a handwritten mark-up in PDF. In written comments to South Bay Law Firm, Mr. Ginsberg notes that the authors are particularly ”interested in hearing from private equity fund managers, from the investment bankers who finance their deals, and from the lawyers, financial analysts and others who earn fees helping put those deals together. The paper has significant implications for them.”