A chapter 11 liquidating trustee brought several proceedings to recover fraudulent transfers under both the Bankruptcy Code and a state version of the Uniform Fraudulent Transfer Act. The question for the court was whether the debtor’s estimated liability for withdrawal from a multiemployer benefit plan should be included in determining the debtor’s insolvency to support a constructive fraudulent transfer claim.
There are two avenues for asserting fraudulent transfer claims in a bankruptcy: (1) a claim under Section 548 (the fraudulent transfer section of the Bankruptcy Code), and (2) a claim under state fraudulent transfer law using “strong arm” powers under Section 544 (which, among other things, allows avoidance of a transfer that is voidable by a hypothetical judicial lien or execution creditor).
Section 548 and most state statutes include causes of action for both “actual” and “constructive” fraudulent transfers. The constructive fraudulent transfer provisions include provisions allowing avoidance of a transfer of a debtor’s interest in property where (1) it received less than reasonably equivalent value for the transfer, and (2) it was insolvent on the date of transfer (or became insolvent as a result of the transfer).
Under Section 101 of the Bankruptcy Code “insolvent” is defined in terms of the debtor’s “debts” being greater than its property at a fair valuation. In turn, “debt” means “liability on a claim.” “Claim” is very broadly defined to include a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”
Similarly, under the state fraudulent transfer statute at issue in this case a debtor is insolvent “if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.” “Debt” is defined as “liability on a claim.” And “claim” is defined as “a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”
The issue presented by Checker Motors was whether the debtor’s liability for withdrawal from a multiemployer benefit plan should be included in determining whether it was insolvent at the time of the prepetition transfers, even though it did not withdraw until after it filed bankruptcy. The court began with a review of the history of treatment of multiemployer plans under ERISA: Initially the Pension Benefit Guaranty Corporation (PBGC) excluded multiemployer plans from its coverage. However, Congress eventually decided that terminated multiemployer plans needed to be insured by the PBGC, and coverage becoming mandatory in 1980. At that time the law was also amended to impose potential liability on employers that withdraw from an underfunded plan even though the plan had not yet been terminated at the time of withdrawal.
Looking at the definitions, one might expect that the court would reach the same conclusion for both the Bankruptcy Code and the state law causes of action. Surprisingly, it did not.
In connection with evaluating whether withdrawal liability should be included in determining insolvency under Section 548, the court felt that it was bound by a 6th Circuit decision regarding whether a contingent withdrawal liability was a “claim” subject to discharge under a different section of the Bankruptcy Code. In the cited case, the 6th Circuit concluded that withdrawal liability was not a “claim” until there was a right to actually demand payment on account of withdrawal.
Applying the rule of construction that identical terms within a statute should have the same meaning, the bankruptcy court concluded that the debtor’s withdrawal liability from a multiemployer plan was not a claim within the meaning of the Bankruptcy Code until the debtor actually withdrew (which did not occur in this case until long after the transfers). Consequently, the trustee could not include withdrawal liability in establishing insolvency for purposes of the Section 548 fraudulent transfer claims.
The trustee also asserted state fraudulent transfer claims using Section 544 “strong arm” powers. Not surprisingly, since both the state fraudulent transfer act and Section 548 were derived from the Uniform Fraudulent Transfer Act, the definitions in the two statutes track each other. However, the court concluded that it would be untenable if contingent or inchoate claims were never included in determining insolvency. Instead, it agreed with a 7th Circuit statement that “it was for the court in each case to decide whether a contingent liability’s ‘present, or expected, value’ is to be face, zero, or somewhere in between.” So, the court concluded that it would be appropriate for it to consider additional debts that would arise if the debtor was liquidated, including withdrawal liability in connection with a multiemployer plan.
Consequently, the trustee could not include the debtor’s withdrawal liability in determining insolvency under Section 548, but could include it in connection with determining insolvency under state law.
Although the court only addressed the legal question of whether employer withdrawal liability should be considered, it commented that this factor was likely to be significant since the debtor’s audited financial statements for 2005 showed net equity of ~$6 million, which did not include consideration of the $12.6 million in withdrawal liability as estimated at that time (and which grew to an estimate of more than $44 Million by 2008).
Although the Bankruptcy Code and state law fraudulent transfer provisions are very similar, there are a number of important differences. (For example, Section 548 generally applies to transfers within the two years prior to bankruptcy, while state law fraudulent transfers usually can be used to look back 4-6 years.) This case provides a good example of the strategic value in pursuing fraudulent transfer claims under both provisions.
Vicki R. Harding, Esq.