Page 88 - Bankruptcy and Reorganization Services
P. 88

(B) the transfer had not been made; and

                              (C) such creditor received payment of such debt to the extent provided by the provisions
                                 of this title.

               The definition of insolvency applicable to avoidance actions pursuant to the United States Bankruptcy
               Code is located in Section 101(32)(A). It states


                   (32) The term "insolvent" means:

                          (A)  with reference to an entity other than a partnership  fn 3   and a municipality,  fn 4   financial
                              condition such that the sum of such entity’s debts is greater than all of such entity’s prop-
                              erty, at a fair valuation, exclusive of —


                                 (i) property transferred, concealed, or removed with intent to hinder, delay, or defraud
                                     such entity’s creditors; and

                                 (ii) property that may be exempted from property of the estate under section 522 of
                                     this title;


               It should be noted that, for the 90-day period prior to the filing of a bankruptcy petition, the debtor is
               presumed to be insolvent. As Section 547(f) of the Bankruptcy Code states, "For the purposes of this
               section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding
               the date of the filing of the petition."

               Fraudulent Conveyances (Section 548). When an avoidance action is filed pursuant to Section
               548(a)(1)(B) of the Bankruptcy Code and state fraudulent transfer law, the financial conditions under
               consideration are threefold in addressing constructive fraud claims (see items (I), (II), and (III) in the
               following excerpt from Section 548). In addition to the three tests of financial condition, the practitioner
               must also assess whether or not the transfer in question benefited an insider under an employment con-
               tract outside the ordinary course of business (item (IV) in the following excerpt). In particular, Section
               548 states that:


                   (a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation
                       incurred by the debtor, that was made or incurred on or within 2 years before the date of the fil-
                       ing of the petition, if the debtor voluntarily or involuntarily...

                   (B)






        fn 3   With respect to a municipality, Section 101(32)(B) defines insolvency as a "financial condition such that the sum of such partner-
        ship’s debts is greater than the aggregate of, at a fair valuation — (i) all of such partnership’s property, exclusive of property of the
        kind specified in subparagraph (A)(i) of this paragraph; and (ii) the sum of the excess of the value of each general partner’s nonpart-
        nership property, exclusive of property of the kind specified in subparagraph (A) of this paragraph, over such partner’s nonpartnership
        debts..."

        fn 4   With respect to a municipality, Section 101(32)(C) defines insolvency as a "financial condition such that the municipality is — (i)
        generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute; or (ii) unable to pay its
        debts as they become due."


        86                     © 2020 Association of International Certified Professional Accountants
   83   84   85   86   87   88   89   90   91   92   93