Trustee Fails to Prove Debtor's Insolvency

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By Diane Davis

Aug. 24 — A Chapter 7 trustee failed to show, as a matter of law, a debtor's insolvency at the time of an allegedly constructive fraudulent transfer, a district court held.

Affirming the bankruptcy court's decision, Judge Joy Flowers Conti of the U.S. District Court for the Western District of Pennsylvania concluded that trustee Jeffrey J. Sikirica didn't prove the elements of a prima facie claim of a constructive fraudulent transfer.

Under Bankruptcy Code Section 548(a)(1)(B), the trustee must show that “(1) the debtor had an interest in property; (2) a transfer of that interest occurred within one year of the bankruptcy filing; (3) the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer; and (4) the transfer resulted in no value for the debtor or the value received was not ‘reasonably equivalent' to the value of the relinquished property interest.”

Failed ‘Balance Sheet Test.'

“Insolvency,” the court said, is defined as 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,” citing Section 101(32)(A). The court called this the “balance sheet test.”

A debtor's insolvency is also measured at the time the debtor transferred value, the court said.

The trustee conceded at trial that the debtor's financial schedules used to support the claim of a constructive fraudulent transfer pertained only to the financial situation of the debtor at the time of the bankruptcy filing.

According to the court, the schedules showed debtor Dressel Associates, Inc.'s assets to be valued at $9.2 million and liabilities at $31.1 million.

The debtor filed for Chapter 11 reorganization, but the case was later converted to a Chapter 7 liquidation. Prior to filing bankruptcy, the debtor accrued a liability of a $20 million judgment in favor of Fifth Third Bank.

After a trial, the bankruptcy court dismissed the trustee's complaint with prejudice, concluding that he failed to show enough evidence that the debtor was insolvent at the time of the transfer to appellee Midtown Niki Group.

Lack of Evidence 

According to the district court, the parties who compiled the debtor's financial schedules couldn't say whether generally accepted accounting principles were used in the debtor's bookkeeping, whether contingent liabilities were accounted for in the schedules, and whether the asset valuations in the schedules reflected the debtor's valuations as an ongoing concern.

There was also a lack of evidence about the amount of the debtor's likely liability for the $20 million judgment which predated the alleged fraudulent transfer, the court said. This lack of evidence diminished the trustee's argument that the judgment would have single-handedly rendered the debtor insolvent, the court said.

Michael Kaminski of Blumling & Gusky, LLP, Pittsburgh, Pa., represented trustee/appellant Jeffrey J. Sikirica; Michael Weitz, pro hac vice, Blanchard, Krasner & French, La Jolla, Calif.; Ronald B. Roteman, Stonecipher Law Firm, Pittsburgh, Pa., represented appellees Midtown Niki Group, Rea Modesto, LP, Bashmart, LLC.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

Full text at: http://www.bloomberglaw.com/public/document/In_re_Dressel_Assocs_No_141736_2015_BL_267580_WD_Pa_Aug_18_2015_C