Page 105 - Bankruptcy and Reorganization Services

took management a few months to "discover" and became [sic] "aware" of those circumstances
that existed beginning in July.

SEC v. Antar articulates the same principle but in the context of a verdict or judgment as opposed to a
settlement. In particular, the opinion states the following:

The SEC asserts that as a result of its unliquidated securities fraud claim against Sam M., he was
insolvent at the time of each and all of the 1991 and 1997 transfers. The fact that the SEC’s claim
had not yet been reduced to judgment does not undermine Sam M.’s insolvent status.

It is now clear that the value of the SEC’s unliquidated claim against Sam M. was, and is, ap-
proximately $15 million, exclusive of prejudgment interest in the amount of approximately $42
million, as ordered by this court. . . . Because the SEC’s claim was based on Sam M.’s securities
fraud in the 1980s, Sam M. possessed this debt at the time of all the 1991 and 1997 transfers. fn 58

Intervening Events Are an Important Consideration

If the opinion offered by the debtor is that the debtor was solvent as of the date of the transfer the trustee
is attempting to avoid, the next logical question is, If the debtor wasn’t insolvent as of the date of the
relevant transfer yet ultimately filed for bankruptcy, what intervening events or circumstances occurred
or arose subsequent to the date of the transfer that ultimately brought about the bankruptcy of the debt-
or? As a result, intervening events are frequently an important factor considered by the courts when con-
sidering the date the debtor was rendered insolvent. fn 59

Adequate Does Not Mean Bullet-Proof

Courts have also determined that capital adequacy should not be interpreted as ideal, but instead suffi-
cient for the immediate purposes of the business. In Moody, the Third Circuit held that the test for "un-
reasonably small capital" is "reasonable foreseeability." fn 60 The court in Moody also suggested the need
for a margin for error: "To a degree, parties must also account for difficulties that are likely to arise, in-
cluding interest rate fluctuations and general economic downturns, and otherwise incorporate some mar-
gin for error." fn 61

Assessment Should Be Time and Industry Specific (Benchmarking)

Adequate or inadequate capitalization is also a sliding scale concept depending on, among other things,
the specific industry involved. The nature of the debtor’s business, the typical inventory turnover rate,

fn 58 Ratner, Stein, and Weitnauer, Business Valuation and Bankruptcy, 137–138.

fn 59 See In re WRT Creditors Liquidation Trust v. WRT Bankruptcy Litigation Master File Defendants, 282 B.R. at 413 (August 24,
2001) ("there was evidence suggesting that numerous other events caused or at least contributed to the losses of WRT rather than the
transactions at issue in this proceeding"); In re O’Day Corp. v. Meritor Savings Bank, 126 B.R. at 407 (April 16, 1991) (unreasonably
small capital where labor problems, cost variance, and cyclicality in industry were major contributors to company’s financial difficul-
ty, but such factors were foreseeable).

fn 60 Moody v. Security Pacific Business Credit, Inc. 971 F.2d 1056 (3d Cir. 1992).

fn 61 Id.

© 2020 Association of International Certified Professional Accountants 103