You Can't Cheat an Honest Man - James Walsh [149]
4) the bankrupt company must have been insolvent, been made insolvent by the transaction, be operating or about to operate without property constituting reasonable sufficient capital, or be unable to pay debts as they become due.
Most people focus on the fourth of these elements. They argue some variation on the theme that: “The company was dying when it made the deal, so it can’t be enforced.”
But all four elements need to be satisfied before a deal—or payment— can be reversed.
On the question of fraudulent conveyance, California bankruptcy law states:
The trustee may avoid any transfer of an interest of the debtor in property... that was made... on or within one year before date of the filing of the petition, if the debtor... received less than a reasonably equivalent value in exchange for such transfer... and was insolvent on the date that such transfer was made... or became insolvent as a result of such transfer... was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or... 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.
California’s fraudulent conveyance statutes are similar in form and substance to the Code’s fraudulent transfer provisions. Both allow a transfer to be avoided where “the debtor did not receive a reasonably equivalent value in exchange for the transfer and [the debtor] was either insolvent at the time of the transfer or was engaged in business with unreasonably small capital.”
It’s likely that burned Ponzi investors will make fraudulent conveyance claims at some point in the legal wrangling that follows a scheme’s collapse. However, in the Court TV culture of armchair legal experts, some legal concepts get more attention than they deserve. Fraudulent conveyance claims can work for burned investors—but the claims often seem like a bigger tool than they really are.
Case Study: The Scrappy Trustee of M&L Business Machines
Beginning in the 1970s, M&L Business Machines operated as a computer sales, leasing and repair firm in the Denver area. In the early 1980s, Robert Joseph acquired approximately 50 percent of the stock in M&L. By 1986, most of Joseph’s stock—and the remaining 50 percent—had been transferred to David Parrish and Daniel Hatch.
In early 1987, Joseph, Parrish and Hatch began taking in money from third parties whom they called “private lenders” or “private investors.” These investors were promised high rates of return for the use of their money to enable M&L to buy large quantities of expensive computers and office equipment.
Some investors were told that they would earn interest at 10 percent per month—120 percent per year—for M&L’s use of their money. They were told they would share in large profits upon the resale of the computers and office equipment. Some investors were actually paid the usurious interest, often in the form of post-dated checks offered as security for the loans.
However, the dividends were funded by new investor capital, loan proceeds and check kiting. By the end of 1987, M&L had become a full-fledged Ponzi scheme. The principals were able to keep the scheme running for a little more than two years—then it collapsed.
When M&L collapsed, nearly $83 million in post-dated checks remained in the hands of various private investors. In October 1990, M&L filed a Chapter 7 bankruptcy. In December 1990, Denver lawyer Christine Jobin was appointed M&L’s trustee.
Unsecured claims against M&L which were related to leigitmate loans from investors totalled about $21 million. In addition, the Resolution Trust Corporation (RTC) as receiver of Capital Federal Savings and Loan had an unsecured claim for about $9 million which was related to other loans to M&L. There were also some relatively insignificant unsecured claims for goods or services. On the asset