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Chapter 13

Assessment of Reasonably Equivalent Value and Solvency in the Context of
Avoidance or Recovery Actions

Overview

This chapter contains an introductory explanation of avoidance actions and highlights the fact that, in
many instances, actions taken to avoid transfers or obligations involve a determination of whether the
debtor had triggered certain financial conditions at the time of, or as a result of, the transfer. Practition-
ers are most often involved in avoidance actions dealing with preferential transfers (Section 547 of the
Bankruptcy Code) and fraudulent transfers (Section 548 of the Bankruptcy Code and state law). fn 1
When performed in the context of avoidance actions filed under Section 547, the assessment of a debt-
or’s financial condition is different than when the assessment is performed in the context of avoidance
actions filed under Section 548 or state law. The basic elements of these two assessments are outlined in
the following paragraphs. fn 2

Preferential Transfers (Section 547). When an avoidance action is filed pursuant to Section 547 of the
Bankruptcy Code, the sole financial condition under consideration is the solvency of the debtor. In par-
ticular, Section 547(b) states that

(b) The trustee may avoid any transfer of an interest of the debtor in property:

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was
made;

(3) made while the debtor was insolvent (emphasis added);

(4) made:

(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if
such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if:

(A) the case were a case under chapter 7 of this title;

fn 1 Section 544(b) essentially serves as the conduit whereby state-law-based fraudulent transfer actions are asserted in a bankruptcy
proceeding.

fn 2 This practice aid does not address the criteria used to determine, or the mechanics of determining, avoidance actions involving
preferential transfers and fraudulent transfers. The criteria, and mechanics of determination, are covered in detail in the AICPA prac-
tice aid Providing Bankruptcy and Reorganization Services: Volume 1 — Litigation and Dispute Resolution in Bankruptcy, 2nd ed.

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