^[1] CONCLUDING INSOLVENCY YIELDS
INADEQUATE FRAUDULENT CONVEYANCE CLAIMS

The ability to “clawback” fraudulent transfers is an ancient, but reliable, tool in
bankruptcy trustees’ armories.

Fraudulent transfers have two classes: a.) intentional; and b.) constructive.  Intentional
fraudulent transfers are “yes, I intended to hinder, delay and/or defraud my creditors.”
Constructive fraudulent transfers don’t involve intent.  Instead, they are transfers where the
circumstances cloud the transfers’ economic bona fides (eg. “Jack, you traded the cow for some
beans. Are you mashugah^[4]?  Go to your room! My creditors will go nuts.”).  It doesn’t mean
you’re a fraud; just not the best horse-trader.

Prosecuting these claims also has differences.  Intentional fraudulent conveyance claims,
involve actual fraud.  Therefore, complaints asserting those claims are subject to Federal Rule of
Civil Procedure 9(b)’s particularity requirement.^[5]  The complaint must specify the transaction’s
“who, what when, where, how?^[6]

Not so for constructive fraudulent conveyance claims.^[7] They need only satisfy Federal
Rule of Civil Procedure 8(a)’s (“Rule 8(a)”) “relaxed” pleading requirements.^[8]  However,
“relaxed” still requires some structure.^[9]  Complaints’ must assert facts, not legal conclusions.^[10]

Problem Fraudulent Transfer Complaints

Which leads us to actions to avoid constructive fraudulent transfers (“Avoidance
Actions”).

A critical element for most Avoidance Action complaints is that the transferor was
“insolvent at the time of the transfer or rendered insolvent by the transfer”^[11] But, what does being
insolvent entail?  The Bankruptcy Code defines “insolvent” generally as liabilities exceeding
assets.^[12]

Frequently, Avoidance Actions attacking constructive fraudulent transfers allege only that
the debtor or transferor was  “insolvent at the time of the transfer or rendered insolvent by the
transfer.”  They don’t offer the accountant’s math showing the value of debtors’ assets and
liabilities.

This makes the complaints’ allegation of “insolvency” a conclusion; not a fact.^[13]  It also
means the complaints fail Rule 8(a)’s relaxed pleading standard.^[14]  That failure can result in the
complaint being dismissed for failing to state a claim.^[15]

It is likely that the trustee will be granted leave to file an amended complaint.^[16]  Whether
that amendment will produce an actionable complaint is another day’s discussion.  Creative
lawyers may develop arguments blocking amended complaints.

Meanwhile, in the land where “the only thing you waive is your hand,”^[17] a new avenue for
defending Avoidance Actions emerges.

^[1] © Wayne Greenwald 2022

^[2] “Clawbacks” are bankruptcy trustees returning to the bankruptcy estate pre-petition
transfers of debtors’ property.

^[3] Modern fraudulent conveyance law originates from the English penal Statute of 13 Eliz.,
Ch. 5 (1570), commonly referred to as the Statute of Elizabeth.  In re Sverica Acquisition Corp.,
Inc., 179 B.R. 457, 470 (Bkrtcy.E.D.Pa.,1995).

^[4] Definition: Crazy

^[5] Fed.R.Civ.P.  9(b)

(b) Fraud or Mistake; Conditions of Mind. In alleging fraud or mistake, a party
must state with particularity the circumstances constituting fraud or mistake.
Malice, intent, knowledge, and other conditions of a person’s mind may be alleged
generally.

^[6]  “Requisite ‘particularity’ under Rule 9(b), the pleading must identify the specificwho,
what, when, where, and how of the material misrepresentation or omission committed.” Exergen
Corp. v. Wal‑Mart Stores, Inc., 575 F.3d 1312, 1328 (Fed. Cir. 2009),  Serta Simmons Bedding,
LLC v. Casper Sleep Inc., 2018 WL 11226100, at *1 (S.D.N.Y., 2018)

^[7] See, discussion: Saadeh v. Kagan, 2021 WL 5827942, at *4 (S.D.N.Y., 2021).

^[8] Rule 8. General Rules of Pleading

(a)        Claim for Relief. A pleading that states a claim for relief must contain:

(1)        a short and plain statement of the grounds for the court’s jurisdiction,
unless the court already has jurisdiction and the claim needs no new
jurisdictional support;

(2)       a short and plain statement of the claim showing that the pleader is entitled
to relief; and

(3)       a demand for the relief sought, which may include relief in the alternative
or different types of relief.

^[9]           See, Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) .(“To survive a motion to
dismiss, a complaint must contain sufficient factual matter, accepted as true, to
‘state a claim to relief that is plausible on its face.”)

^[10]           Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955, 1964–65, 550 U.S. 544, 555
(2007)(“. . .labels and conclusions, and a formulaic recitation of the elements of a
cause of action will not do.)

^[11]         See 11 U.S.C. § 548(a)(1)(B)(ii)(I)
The trustee may avoid any transfer . . . of an interest of the debtor in property, or
any obligation . . . incurred by the debtor,. . . if the debtor voluntarily or
involuntarily–. . . .

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;

See also § 273. Transfer or obligation voidable as to present or future creditor, NY
DEBT & CRED L. § 273

(a) A transfer made or obligation incurred by a debtor is voidable as to a creditor,
whether the creditor’s claim arose before or after the transfer was made or the
obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay or defraud any creditor of the debtor;

(b) In determining actual intent under paragraph one of subdivision (a) of this
section, consideration may be given, among other factors, to whether: . .
(9) the debtor was insolvent or became insolvent shortly after the transfer
was made or the obligation was incurred;

^[12]  See, 11 U.S.C. § 101(32)The term “insolvent” means—

(A)with reference to an entity other than a partnership and a municipality,
financial condition such that the sum of such entity’s debts is greater than all of
such entity’s property, at a fair valuation,. . .

^[13] Eddystone Rail Company, LLC v. Bank of America, N.A., 2021 WL 4443371, at *7

(S.D.N.Y., 2021)(Decision provides numerous citations), See also, In re Licking River
Mining, LLC, 572 B.R. 830 (Bankr. E.D. Ky. 2017)(“ . . .trustee’s complaint cannot merely make conclusory statement that debtor was insolvent, but must contain enough factual information to plausibly show that debtor’s liabilities exceeded its assets at time of transfers”).

^[14] Id.

^[15] Id.,  Fed.R.Civ.P 12(b)(6). Failure to state a claim for which relief can be granted.

^[16] Fed.R.Civ.P. 15

^[17] Barry Scheck. Cardozo School of Law, Criminal Law Clinic, Spring 1979