Following Zaretsky: Fraudulent Transfers and Unfair Risk

American Bankruptcy Law Journal

Volumn 75, Issue 3, 2001, Pages 317-332

  Markell, Bruce A ^a  

^a UNIVERSITY OF NEVADA   (United States)

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EID: 0346405041     PISSN: 00279048     EISSN: None     Source Type: Journal    
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References (128)

1. Professor Zaretsky died unexpectedly in a explosion at his vacation home in Canaan, New York on July 28, 1997. Nick Ravo, Barry L. Zaretsky, 47, Professor Of Law and Bankruptcy Scholar, N.Y. TIMES, July 30, 1997, at D20.
2. The Bibliography appears at page 333, infra.
3. Many of those who personally knew Professor Zaretsky gave moving tributes at a ceremony held at Brooklyn Law School on November 3, 1997, the transcript of which the BROOKLYN LAW REVIEW later published. In Remembrance: Barry L. Zaretsty, 63 BROOK. L. REV. i-xxxvii (1997).
4. Many of those who personally knew Professor Zaretsky gave moving tributes at a ceremony held at Brooklyn Law School on November 3, 1997, the transcript of which the BROOKLYN LAW REVIEW later published. In Remembrance: Barry L. Zaretsty, 63 BROOK. L. REV. i-xxxvii (1997).
5. This description is based on the very readable account of Erdös' life by Paul Hoffman. PAUL HOFFMAN, THE MAN WHO LOVED ONLY NUMBERS: THE STORY OF PAUL ERDOS AND THE SEARCH FOR MATHEMATICAL TRUTH (1998).
6. Id. at 13-14.
7. Id. at 13.
8. A sampling of the very human side of Professor Zaretsky can be gleaned from reading the text of those who spoke at his memorial service, see In Remembrance: Barry L. Zaretsky, supra note 3. The Brooklyn Law School has also established a student fellowship in Professor Zaretsky's name, and hosts a roundtable discussion series named after Professor Zaretsky. See Barry L. Zaretsky Fellowship, http:// www.brooklaw.edu/pages/index.php3?page=1270 (last visited June 25, 2001).
9. A sampling of the very human side of Professor Zaretsky can be gleaned from reading the text of those who spoke at his memorial service, see In Remembrance: Barry L. Zaretsky, supra note 3. The Brooklyn Law School has also established a student fellowship in Professor Zaretsky's name, and hosts a roundtable discussion series named after Professor Zaretsky. See Barry L. Zaretsky Fellowship, http:// www.brooklaw.edu/pages/index.php3?page=1270 (last visited June 25, 2001).
10. My only interaction with Professor Zaretsky was correspondence over his role as examiner in the Revco case, see text accompany note 19 infra, and his kind offer to send me the entire final written report.
11. The many columns are listed in the Bibliography.
12. Barry L. Zaretsky, The Fraud Exception to Discharge Under the New Bankruptcy Code, 53 AM. BANKR. L.J. 253-68 (1979).
13. Barry L. Zaretsky, Co-debtor Stays in Chapter 11 Bankruptcy, 73 CORNELL L. REV. 213 (1988).
14. COLLIER ON BANKRUPTCY was and is a collaborative work, with different individuals serving as principal authors of individual chapters, reviewing editors of others and as members of the editorial board. Professor Zaretsky served in each of these capacities with respect to various topics in bankruptcy.
15. Barry L. Zaretsky, Religion and Bankruptcy, in RELIGION AND AMERICAN LAW: AN ENCYCLOPEDIA (Paul Finkelman, ed., 2000).
16. Barry L. Zaretsky, Contract Liability of Parties to Negotiable Instruments, 42 ALA. L. REV. 627 (1991).
17. Barry L. Zaretsky, Insurance Proceeds in Bankruptcy: The Second Circuit Review - 1987-1988 Term, 55 BROOK. L. REV. 373 (1989).
18. Barry L. Zaretsky, Some Limits on Mortgagees' Rights in Chapter 13: The Second Circuit Review -1982-1983 Term, 50 BROOK. L. REV. 433 (1984).
19. Barry L. Zaretsky, Lapse of Perfection in Secured Transactions: A Search for a Consistent Approach, 22 B.C. L. REV. 247-297 (1981).
20. Barry L. Zaretsky, Criminal Restitution: Leveraged Buyouts as Fraudulent Conveyances, N.Y. L.J., Dec. 18, 1986, at 1; Barry L. Zaretsky, Fraudulent-Conveyance Law and the LBO, N.Y. L.J., Jun. 16, 1988, at 3.
21. Barry L. Zaretsky, Criminal Restitution: Leveraged Buyouts as Fraudulent Conveyances, N.Y. L.J., Dec. 18, 1986, at 1; Barry L. Zaretsky, Fraudulent-Conveyance Law and the LBO, N.Y. L.J., Jun. 16, 1988, at 3.
22. The most common reference to Professor Zaretsky's participation is to his preliminary report, reprinted as part of an interim order in the Revco case itself. Preliminary Report of Examiner Professor Barry Lewis Zaretsky, In re Revco D.S., Inc., 118 B.R. 468, 477-529 (Bankr. N.D. Ohio). The much longer final report is not reprinted in the Bankruptcy Reporter, although Lexis does maintain a copy. Final Report of Examiner Professor Barry Lewis Zaretsky, In re Revco D.S., Inc., 1990 Bankr. LEXIS 2966, Case Nos. 588-1308 through 588-1321, 588-1305, 588-1761 through 588-1812, and 588-1820 (Bankr. N.D. Ohio, Dec. 17, 1990).
23. Short order indeed. The court appointed Professor Zaretsky on June 15, 1990, and he filed his preliminary report on July 16, 1990. In re Revco D.S., Inc., 118 B.R. 468, 470 (Bankr. N.D. Ohio 1990). The preliminary report takes up more than fifty pages in the Bankruptcy Reporter. Id. at 478-529. As background for this report, Professor Zaretsky and his staff interviewed more than thirty-three entities, and reviewed thousands of pages of documents. Id. at 485-86.
24. In re Revco D.S., Inc., 118 B.R. 468, 484 (Bankr. N.D. Ohio). He reiterated this position in his final report: "The Examiner must again emphasize his continued strong conviction that it would be far preferable for the parties to agree on a consensual plan of reorganization which takes into account the potential liabilities of all possible defendants of fraudulent conveyance and other actions and consequent benefits to various groups." Final Report of Examiner Professor Barry Lewis Zaretsky, In re Revco D.S., Inc., 1990 Bankr. LEXIS 2966, at p. 6, Case Nos. 588-1308 through 588-1321, 588-1305, 588-1761 through 588-1812, and 588-1820 (Bankr. N.D. Ohio, Dec. 17, 1990).
25. Creditors and Eckerd Join Heated Battle for Control of Revco, CHAIN DRUG REVIEW, Apr. 20, 1992, at 55.
26. Plan Is Backed On Revco Debt, N.Y. TIMES, Mar. 12, 1992, at D4. In the interests of accuracy, fraudulent transfer actions were filed, but only as necessary to preserve the applicable statutes of limitations. See Final Report of Examiner Professor Barry Lewis Zaretsky, In re Revco D.S, Inc., 1990 Bankr. LEXIS 2966, at p. 16, Case Nos. 588-1308 through 588-1321, 588-1305, 588-1761 through 588-1812, and 588-1820 (Bankr. N.D. Ohio, Dec. 17, 1990).
27. See, e.g., Barry L. Zaretsky, Trustees and Examiners in Chapter 11 Bankruptcy, 44 S.C.L. REV. 907 (1993).
28. 46 S.C.L. REV. 1165 (1995).
29. Id. at 1167-68.
30. In this context, "obligations" can be liabilities such as guaranties. The classic exposition of this type of fraudulent transfer is Robert J. Rosenberg, Intercorporate Guaranties and the Law of Fraudulent Conveyances: Lender Beware, 125 U. PA. L. REV. 235 (1976).
31. 11 U.S.C. § 548(a)(1)(B)(i) (1994); UFTA § 4(a)(2).
32. 11 U.S.C. § 548(a)(1)(B)(ii)(I) (insolvency); 548(a)(1)(B)(ii)(II) (unreasonably small capital); 548 (a)(1)(B)(ii)(III) (unable to pay debts as they become due); UFTA §§ 4(a)(2)(i) (unreasonably small assets); 4(a)(2)(ii) (unable to pay debts as they become due); 5(a) (insolvency) (1994).
33. 11 U.S.C. § 548(a)(1)(A) (1994); UFTA §4(a)(1).
34. Zaretsky, Fraudulent Transfer Law as the Arbiter of Unreasonable Risk, supra note 25, at 1168.
35. Id. at 1192-99.
36. Id. at 1178-92.
37. The following discussion, ranging from note 35 to note 62, is taken from Bruce A. Markell, Toward True and Plain Dealing: A Theory of Fraudulent Transfers Involving Unreasonably Small Capital, 21 IND. L. REV. 469 (1988).
38. 13 Eliz, ch. 5 (1571), repealed by The Law of Property Act, 15 Geo. 5, ch. 20, § 172 (1925). Roman law had recognized as a nominate tort an action fraus creditiorum similar in purpose and effect to the Statute of Elizabeth. See 1 GARRARD GLENN, FRAUDULENT CONVEYANCES AND PREFERENCES, § 60 (Rev. ed. 1940); Max Radin, Fraudulent Conveyances in California and the Uniform Fraudulent Conveyance Act, 27 CALIF. L. REV. 1, 1-2, nn.1-2 (1938); Max Radin, Fraudulent Conveyances at Roman Law, 18 VA. L. REV. 109 (1931).
39. 13 Eliz, ch. 5 (1571), repealed by The Law of Property Act, 15 Geo. 5, ch. 20, § 172 (1925). Roman law had recognized as a nominate tort an action fraus creditiorum similar in purpose and effect to the Statute of Elizabeth. See 1 GARRARD GLENN, FRAUDULENT CONVEYANCES AND PREFERENCES, § 60 (Rev. ed. 1940); Max Radin, Fraudulent Conveyances in California and the Uniform Fraudulent Conveyance Act, 27 CALIF. L. REV. 1, 1-2, nn.1-2 (1938); Max Radin, Fraudulent Conveyances at Roman Law, 18 VA. L. REV. 109 (1931).
40. Parties who knowingly participated in the conveyance "incurr[ed] the penalty and forfeiture of one years value of the said lands . . . and the whole value of the said goods . . . ." 13 Eliz., ch. 5, § 2 (1571). Of this amount, "one moitie whereof" - that is, one-half - went to the crown and the other half went to the "party or parties aggrieved." Id. A prison term of one half year "without bail" was also provided. Id. See also GLENN, supra note 35, § 61a.
41. 13 Eliz., ch. 5, § 1 (1571).
42. Id.
43. Mannocke's Case, 3 Dyer 204b, 73 Eng. Rep. 661 (Q.B. 1571). The famous decision in Twyne's Case, 3 Coke 80b, 76 Eng. Rep. 809 (Star. Ch. 1601) did not involve a private action. Rather, it was the crown's action to receive its one-half share of the goods transferred.
44. Bethel v. Stanhope, 78 Eng. Rep. 1037, 1038 (Q.B. 1599). In 1603 Parliament followed suit and made fraudulent conveyances a part of the English bankruptcy laws. 1 Jac. 1, c. 15 (1603). In 1623 Parliament completed the process and made fraudulent transfer laws civil in nature. 21 Jac. 1, c. 19, § 7 (1623).
45. Courts initially defined "badges of fraud" as facts which are calculated to throw suspicion upon a transaction, and call for an explanation. Peebles v. Horton, 64 N.C. 374, 377 (1870); M. BIGELOW, THE LAW OF FRAUDULENT CONVEYANCES, Ch. XVII, at 515 n.2 (Knowlton, ed. 1911). See also Boston Trading Group, Inc. v. Burnazos, 835 F.2d 1504, 1509 (1st Cir. 1987) (badges of fraud described as "a set of objective criteria . . . use[d] as a basis for inferring fraudulent intent.").
46. The basic list is published together with Lord Coke's reporting of Twyne's Case. See Twyne's Case, 3 Coke 80b, 76 Eng. Rep. 809 (Star Ch. 1601).
47. The modern catalogue of the badges of fraud is listed in § 4(b) of the UNIFORM FRAUDULENT TRANSFER ACT (UFTA).
48. Prefatory Note to the Uniform Fraudulent Conveyance Act, 7A U.L.A., Part II, at 2 (1999).
49. Bohn v. Weeks, 50 Ill. App. 236, 240 (1893) (invalidating gift of $6500, when assets were $7200 to $7300, and when transferor had outstanding and overdue a $400 note); Williams v. Huges, 136 N.C. 58, 59, 48 S.E. 518, 519 (1904) (finding, as a matter of law, that assets of $11,625 were "not fully sufficient and available for the satisfaction of the [transferor's] creditors" when liabilities equaled $11,500); Black v. Sanders, 46 N.C. (1 Jones) 67, 69 (1854) (finding that retention of $7250 in assets to cover $6848 of liabilities was insufficient, basing holding on poor quality of the assets; "[n]o man would lend money upon such security"); Crumbaugh v. Kugler, 2 Ohio St. 374, 379 (1854) (retention of $48,000 of property insufficient when outstanding debts approximated $42,000; insufficiency "owing to expenses incident to sale, and the sacrifice almost universally affecting forced sales . . ."); Monroe v. Smith, 79 Pa. 459, 461 (1875); Hunters v. Waite, 44 Va. (3 Gratt.) 25, 47 (1846); Ex Parte Russell, 19 Ch. D. 588, 591, 46 L.T.R. (n.s.) 113, 115 (C.A. 1882) (finding that solvency cannot be based upon the value of "some odds and ends which can possibly be sold, and on which he puts his fancy value").
50. Bohn v. Weeks, 50 Ill. App. 236, 240 (1893) (invalidating gift of $6500, when assets were $7200 to $7300, and when transferor had outstanding and overdue a $400 note); Williams v. Huges, 136 N.C. 58, 59, 48 S.E. 518, 519 (1904) (finding, as a matter of law, that assets of $11,625 were "not fully sufficient and available for the satisfaction of the [transferor's] creditors" when liabilities equaled $11,500); Black v. Sanders, 46 N.C. (1 Jones) 67, 69 (1854) (finding that retention of $7250 in assets to cover $6848 of liabilities was insufficient, basing holding on poor quality of the assets; "[n]o man would lend money upon such security"); Crumbaugh v. Kugler, 2 Ohio St. 374, 379 (1854) (retention of $48,000 of property insufficient when outstanding debts approximated $42,000; insufficiency "owing to expenses incident to sale, and the sacrifice almost universally affecting forced sales . . ."); Monroe v. Smith, 79 Pa. 459, 461 (1875); Hunters v. Waite, 44 Va. (3 Gratt.) 25, 47 (1846); Ex Parte Russell, 19 Ch. D. 588, 591, 46 L.T.R. (n.s.) 113, 115 (C.A. 1882) (finding that solvency cannot be based upon the value of "some odds and ends which can possibly be sold, and on which he puts his fancy value").
51. Bohn v. Weeks, 50 Ill. App. 236, 240 (1893) (invalidating gift of $6500, when assets were $7200 to $7300, and when transferor had outstanding and overdue a $400 note); Williams v. Huges, 136 N.C. 58, 59, 48 S.E. 518, 519 (1904) (finding, as a matter of law, that assets of $11,625 were "not fully sufficient and available for the satisfaction of the [transferor's] creditors" when liabilities equaled $11,500); Black v. Sanders, 46 N.C. (1 Jones) 67, 69 (1854) (finding that retention of $7250 in assets to cover $6848 of liabilities was insufficient, basing holding on poor quality of the assets; "[n]o man would lend money upon such security"); Crumbaugh v. Kugler, 2 Ohio St. 374, 379 (1854) (retention of $48,000 of property insufficient when outstanding debts approximated $42,000; insufficiency "owing to expenses incident to sale, and the sacrifice almost universally affecting forced sales . . ."); Monroe v. Smith, 79 Pa. 459, 461 (1875); Hunters v. Waite, 44 Va. (3 Gratt.) 25, 47 (1846); Ex Parte Russell, 19 Ch. D. 588, 591, 46 L.T.R. (n.s.) 113, 115 (C.A. 1882) (finding that solvency cannot be based upon the value of "some odds and ends which can possibly be sold, and on which he puts his fancy value").
52. Bohn v. Weeks, 50 Ill. App. 236, 240 (1893) (invalidating gift of $6500, when assets were $7200 to $7300, and when transferor had outstanding and overdue a $400 note); Williams v. Huges, 136 N.C. 58, 59, 48 S.E. 518, 519 (1904) (finding, as a matter of law, that assets of $11,625 were "not fully sufficient and available for the satisfaction of the [transferor's] creditors" when liabilities equaled $11,500); Black v. Sanders, 46 N.C. (1 Jones) 67, 69 (1854) (finding that retention of $7250 in assets to cover $6848 of liabilities was insufficient, basing holding on poor quality of the assets; "[n]o man would lend money upon such security"); Crumbaugh v. Kugler, 2 Ohio St. 374, 379 (1854) (retention of $48,000 of property insufficient when outstanding debts approximated $42,000; insufficiency "owing to expenses incident to sale, and the sacrifice almost universally affecting forced sales . . ."); Monroe v. Smith, 79 Pa. 459, 461 (1875); Hunters v. Waite, 44 Va. (3 Gratt.) 25, 47 (1846); Ex Parte Russell, 19 Ch. D. 588, 591, 46 L.T.R. (n.s.) 113, 115 (C.A. 1882) (finding that solvency cannot be based upon the value of "some odds and ends which can possibly be sold, and on which he puts his fancy value").
53. Bohn v. Weeks, 50 Ill. App. 236, 240 (1893) (invalidating gift of $6500, when assets were $7200 to $7300, and when transferor had outstanding and overdue a $400 note); Williams v. Huges, 136 N.C. 58, 59, 48 S.E. 518, 519 (1904) (finding, as a matter of law, that assets of $11,625 were "not fully sufficient and available for the satisfaction of the [transferor's] creditors" when liabilities equaled $11,500); Black v. Sanders, 46 N.C. (1 Jones) 67, 69 (1854) (finding that retention of $7250 in assets to cover $6848 of liabilities was insufficient, basing holding on poor quality of the assets; "[n]o man would lend money upon such security"); Crumbaugh v. Kugler, 2 Ohio St. 374, 379 (1854) (retention of $48,000 of property insufficient when outstanding debts approximated $42,000; insufficiency "owing to expenses incident to sale, and the sacrifice almost universally affecting forced sales . . ."); Monroe v. Smith, 79 Pa. 459, 461 (1875); Hunters v. Waite, 44 Va. (3 Gratt.) 25, 47 (1846); Ex Parte Russell, 19 Ch. D. 588, 591, 46 L.T.R. (n.s.) 113, 115 (C.A. 1882) (finding that solvency cannot be based upon the value of "some odds and ends which can possibly be sold, and on which he puts his fancy value").
54. Bohn v. Weeks, 50 Ill. App. 236, 240 (1893) (invalidating gift of $6500, when assets were $7200 to $7300, and when transferor had outstanding and overdue a $400 note); Williams v. Huges, 136 N.C. 58, 59, 48 S.E. 518, 519 (1904) (finding, as a matter of law, that assets of $11,625 were "not fully sufficient and available for the satisfaction of the [transferor's] creditors" when liabilities equaled $11,500); Black v. Sanders, 46 N.C. (1 Jones) 67, 69 (1854) (finding that retention of $7250 in assets to cover $6848 of liabilities was insufficient, basing holding on poor quality of the assets; "[n]o man would lend money upon such security"); Crumbaugh v. Kugler, 2 Ohio St. 374, 379 (1854) (retention of $48,000 of property insufficient when outstanding debts approximated $42,000; insufficiency "owing to expenses incident to sale, and the sacrifice almost universally affecting forced sales . . ."); Monroe v. Smith, 79 Pa. 459, 461 (1875); Hunters v. Waite, 44 Va. (3 Gratt.) 25, 47 (1846); Ex Parte Russell, 19 Ch. D. 588, 591, 46 L.T.R. (n.s.) 113, 115 (C.A. 1882) (finding that solvency cannot be based upon the value of "some odds and ends which can possibly be sold, and on which he puts his fancy value").
55. Bohn v. Weeks, 50 Ill. App. 236, 240 (1893) (invalidating gift of $6500, when assets were $7200 to $7300, and when transferor had outstanding and overdue a $400 note); Williams v. Huges, 136 N.C. 58, 59, 48 S.E. 518, 519 (1904) (finding, as a matter of law, that assets of $11,625 were "not fully sufficient and available for the satisfaction of the [transferor's] creditors" when liabilities equaled $11,500); Black v. Sanders, 46 N.C. (1 Jones) 67, 69 (1854) (finding that retention of $7250 in assets to cover $6848 of liabilities was insufficient, basing holding on poor quality of the assets; "[n]o man would lend money upon such security"); Crumbaugh v. Kugler, 2 Ohio St. 374, 379 (1854) (retention of $48,000 of property insufficient when outstanding debts approximated $42,000; insufficiency "owing to expenses incident to sale, and the sacrifice almost universally affecting forced sales . . ."); Monroe v. Smith, 79 Pa. 459, 461 (1875); Hunters v. Waite, 44 Va. (3 Gratt.) 25, 47 (1846); Ex Parte Russell, 19 Ch. D. 588, 591, 46 L.T.R. (n.s.) 113, 115 (C.A. 1882) (finding that solvency cannot be based upon the value of "some odds and ends which can possibly be sold, and on which he puts his fancy value").
56. See, e.g., Schreyer v. Scott, 134 U.S. 405, 410 (1890) (stating that it was improper to knowingly "throw the hazards of business in which [the transferor] is about to engage upon others, instead of honestly holding his means subject to the chance of those adverse results to which all business enterprises are liable . . . ."); Mackay v. Douglas, 14 L.R.-Eq. 106, 121, 26 L.T.R. (n.s.) 721, 723 (Ch. 1872) (in which the thought process of someone who transfers assets in trust prior to going into a new business was characterized as follows: "I am going into trade; I believe I may make a great deal of money by it, but nobody knows what may happen, therefore I will make myself safe. I will make this large fortune safe by settling it on my wife and children absolutely."); ORLANDO BUMP, A TREATISE UPON CONVEYANCES MADE BY DEBTORS TO DEFRAUD CREDITORS § 258, at 297 (J. Gray rev. 4th ed. 1896).
57. See, e.g., Schreyer v. Scott, 134 U.S. 405, 410 (1890) (stating that it was improper to knowingly "throw the hazards of business in which [the transferor] is about to engage upon others, instead of honestly holding his means subject to the chance of those adverse results to which all business enterprises are liable . . . ."); Mackay v. Douglas, 14 L.R.-Eq. 106, 121, 26 L.T.R. (n.s.) 721, 723 (Ch. 1872) (in which the thought process of someone who transfers assets in trust prior to going into a new business was characterized as follows: "I am going into trade; I believe I may make a great deal of money by it, but nobody knows what may happen, therefore I will make myself safe. I will make this large fortune safe by settling it on my wife and children absolutely."); ORLANDO BUMP, A TREATISE UPON CONVEYANCES MADE BY DEBTORS TO DEFRAUD CREDITORS § 258, at 297 (J. Gray rev. 4th ed. 1896).
58. See, e.g., Schreyer v. Scott, 134 U.S. 405, 410 (1890) (stating that it was improper to knowingly "throw the hazards of business in which [the transferor] is about to engage upon others, instead of honestly holding his means subject to the chance of those adverse results to which all business enterprises are liable . . . ."); Mackay v. Douglas, 14 L.R.-Eq. 106, 121, 26 L.T.R. (n.s.) 721, 723 (Ch. 1872) (in which the thought process of someone who transfers assets in trust prior to going into a new business was characterized as follows: "I am going into trade; I believe I may make a great deal of money by it, but nobody knows what may happen, therefore I will make myself safe. I will make this large fortune safe by settling it on my wife and children absolutely."); ORLANDO BUMP, A TREATISE UPON CONVEYANCES MADE BY DEBTORS TO DEFRAUD CREDITORS § 258, at 297 (J. Gray rev. 4th ed. 1896).
59. Carpenter v. Roe, 10 N.Y. 227, 231 (1851) (solvency cannot depend "on the intelligence to be brought by the next steamer"); Brown v. Case, 41 Ore. 221, 229, 69 Pac. 43, 46 (1902) (solvency cannot be "contingent on stability of the market"). See also Izard v. Izard, 1 Bail. Eq. 228, 236-37 (S.C. 1831) ("The fluctuations in the value of property, occasioned by the mercantile condition of the country, cannot however be ranked among [those] casualties [for which the transferor need not provide]."). This was seen as wrong; as noted by Orlando Bump, an early commentator, creditors "have the right to expect satisfaction of their debts out of the transferor's property, and the transferor has no right, in law or morals, to throw upon them the loss which must necessarily occur in converting it into money." BUMP, supra note 46, § 258, at 297.
60. Carpenter v. Roe, 10 N.Y. 227, 231 (1851) (solvency cannot depend "on the intelligence to be brought by the next steamer"); Brown v. Case, 41 Ore. 221, 229, 69 Pac. 43, 46 (1902) (solvency cannot be "contingent on stability of the market"). See also Izard v. Izard, 1 Bail. Eq. 228, 236-37 (S.C. 1831) ("The fluctuations in the value of property, occasioned by the mercantile condition of the country, cannot however be ranked among [those] casualties [for which the transferor need not provide]."). This was seen as wrong; as noted by Orlando Bump, an early commentator, creditors "have the right to expect satisfaction of their debts out of the transferor's property, and the transferor has no right, in law or morals, to throw upon them the loss which must necessarily occur in converting it into money." BUMP, supra note 46, § 258, at 297.
61. Carpenter v. Roe, 10 N.Y. 227, 231 (1851) (solvency cannot depend "on the intelligence to be brought by the next steamer"); Brown v. Case, 41 Ore. 221, 229, 69 Pac. 43, 46 (1902) (solvency cannot be "contingent on stability of the market"). See also Izard v. Izard, 1 Bail. Eq. 228, 236-37 (S.C. 1831) ("The fluctuations in the value of property, occasioned by the mercantile condition of the country, cannot however be ranked among [those] casualties [for which the transferor need not provide]."). This was seen as wrong; as noted by Orlando Bump, an early commentator, creditors "have the right to expect satisfaction of their debts out of the transferor's property, and the transferor has no right, in law or morals, to throw upon them the loss which must necessarily occur in converting it into money." BUMP, supra note 46, § 258, at 297.
62. Carpenter v. Roe, 10 N.Y. 227, 231 (1851) (solvency cannot depend "on the intelligence to be brought by the next steamer"); Brown v. Case, 41 Ore. 221, 229, 69 Pac. 43, 46 (1902) (solvency cannot be "contingent on stability of the market"). See also Izard v. Izard, 1 Bail. Eq. 228, 236-37 (S.C. 1831) ("The fluctuations in the value of property, occasioned by the mercantile condition of the country, cannot however be ranked among [those] casualties [for which the transferor need not provide]."). This was seen as wrong; as noted by Orlando Bump, an early commentator, creditors "have the right to expect satisfaction of their debts out of the transferor's property, and the transferor has no right, in law or morals, to throw upon them the loss which must necessarily occur in converting it into money." BUMP, supra note 46, § 258, at 297.
63. 39 N.Y. 164 (1868).
64. Id. at 165.
65. Id.
66. Prefatory Note to the Uniform Fraudulent Conveyance Act, 7A U.L.A., Part II, 2-3 (1999). The UFCA is still the law in four states - Maryland, New York, Tennessee and Wyoming - as well as the Virgin Islands. Id. at 1 (Supp. 2000).
67. See Claflin v. Mess, 30 N.J. Eq. 211, 212, (1878); Black v. Sanders, 46 N.C. (1 Jones) 57, 68 (1854).
68. It was ultimately adopted by twenty-five states and the Virgin Islands. Prefatory Note to the Uniform Fraudulent Transfer Act, 7A U.L.A., Part II, at 268 (1999). The UFCA's influence, however, extended beyond those states which have adopted it by statute. Some states which did not enact the UFCA accepted its provisions as accurate restatements of the received learning of the Statute of Elizabeth. Molitor v. Molitor, 184 Conn. 530, 535, 440 A.2d 215, 218 (1981) (finding that the UFCA "is largely an adoption and clarification of the standards of the common law").
69. The test was added by amendments to the 1898 Act, known generally as the Chandler Act. Act of June 22, 1938, c. 575, § 1, 52 Stat. 540, 875 (repealed 1979).
70. "We have condensed the provisions of the Uniform Fraudulent Conveyance Act, retaining its substance, and, as far as possible, its language." NATIONAL BANKRUPTCY CONFERENCE, ANALYSIS OF H.R. 12889, 74th Cong., 2d Sess. 214 (Comm. Print 1936).
71. Id. at 217.
72. The two terms were intended to be equivalent with respect to the measurement of the amount of consideration. REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. Doc. No. 137, 93d Cong., 1st Sess., Part I, at 211 (1973); Comment, Guaranties and Section 548(a)(2) of the Bankruptcy Code, 52 U. CHI. L. REV. 194, 198 n.18 (1985) (citing other relevant legislative history). Under the UFCA, however, "fair consideration" also included the concept of good faith. UFCA § 3. See generally Comment, Good Faith and Fraudulent Conveyances, 97 HARV. L. REV. 495 (1983). The Code and UFTA break out the concept of good faith from the concept of consideration, and make it an affirmative defense, validating the transfer or the obligation to the extent the transferee gave with good faith. 11 U.S.C. §§ 548(c) (initial transferee); 550(b) (mediate and intermediate transferees); UFTA §§ 8(a), (d) (same).
73. The two terms were intended to be equivalent with respect to the measurement of the amount of consideration. REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. Doc. No. 137, 93d Cong., 1st Sess., Part I, at 211 (1973); Comment, Guaranties and Section 548(a)(2) of the Bankruptcy Code, 52 U. CHI. L. REV. 194, 198 n.18 (1985) (citing other relevant legislative history). Under the UFCA, however, "fair consideration" also included the concept of good faith. UFCA § 3. See generally Comment, Good Faith and Fraudulent Conveyances, 97 HARV. L. REV. 495 (1983). The Code and UFTA break out the concept of good faith from the concept of consideration, and make it an affirmative defense, validating the transfer or the obligation to the extent the transferee gave with good faith. 11 U.S.C. §§ 548(c) (initial transferee); 550(b) (mediate and intermediate transferees); UFTA §§ 8(a), (d) (same).
74. The two terms were intended to be equivalent with respect to the measurement of the amount of consideration. REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. Doc. No. 137, 93d Cong., 1st Sess., Part I, at 211 (1973); Comment, Guaranties and Section 548(a)(2) of the Bankruptcy Code, 52 U. CHI. L. REV. 194, 198 n.18 (1985) (citing other relevant legislative history). Under the UFCA, however, "fair consideration" also included the concept of good faith. UFCA § 3. See generally Comment, Good Faith and Fraudulent Conveyances, 97 HARV. L. REV. 495 (1983). The Code and UFTA break out the concept of good faith from the concept of consideration, and make it an affirmative defense, validating the transfer or the obligation to the extent the transferee gave with good faith. 11 U.S.C. §§ 548(c) (initial transferee); 550(b) (mediate and intermediate transferees); UFTA §§ 8(a), (d) (same).
75. Prefatory Note to the Uniform Fraudulent Transfer Act, 7A U.L.A., Part II, at 267 (1999).
76. See id. at 268.
77. UFTA §§ 4(a)(2); 5(a).
78. UFTA § 4(a)(2)(i).
79. UFTA § 2. The UFTA expands upon the Code's definition, however, by creating a rebuttable presumption of insolvency if a transferor is not "generally paying its debts as they become due." Id. § 2(b). See Cook & Mendales, The Uniform Fraudulent Transfer Act: An Introductory Critique, 62 AM. BANKR. L.J. 87, 91-92 (1988). In the context of passing the UFTA, at least one state tackled head on the issue of the valuation of assets. See, e.g., Report of Assembly Comm. on Fin. and Ins. on S.B. 2150. Comments (6) and (7) to Proposed CAL. CIV. CODE § 3439.02, reprinted in Cal. Assembly J., 8569, 8574-75 (July 8, 1986) (valuation of contingent debts).
80. UFTA § 2. The UFTA expands upon the Code's definition, however, by creating a rebuttable presumption of insolvency if a transferor is not "generally paying its debts as they become due." Id. § 2(b). See Cook & Mendales, The Uniform Fraudulent Transfer Act: An Introductory Critique, 62 AM. BANKR. L.J. 87, 91-92 (1988). In the context of passing the UFTA, at least one state tackled head on the issue of the valuation of assets. See, e.g., Report of Assembly Comm. on Fin. and Ins. on S.B. 2150. Comments (6) and (7) to Proposed CAL. CIV. CODE § 3439.02, reprinted in Cal. Assembly J., 8569, 8574-75 (July 8, 1986) (valuation of contingent debts).
81. 7A U.L.A., Part II, at 9-10 (Supp. 2000).
82. One purpose of the original UFCA was to remove doubt that purely voluntary transfers - those intended to be for no consideration such as gifts - were automatically suspect under fraudulent transfer law. Prefatory Note to the Uniform Fraudulent Conveyance Act, 7A U.L.A., Part II, at 3 (1999). This position seems to have originated in New York, Reade v. Livingston, 3 Johns. Ch. 481 (N.Y. 1818), but was not uniformly adopted, see Howard v. Williams, 1 Bail. 575, 583 (S.C. 1830).
83. 621 F.2d 201 (5th Cir. 1980).
84. Id. at 203.
85. Durrett unleashed a mammoth amount of academic writing and case law. A partial collection can be found in John C. McCoid, Constructively Fraudulent Conveyances: Transfers for Inadequate Consideration, 62 TEXAS L. REV. 639, 639 nn.1-8 (1983). See also Steven M. Alden et al., Real Property Foreclosure as a Fraudulent Conveyance: Proposals for Solving the Durrett Problem, 38 BUS. LAW. 1605 (1983); Robert M. Zinman et al., Fraudulent Transfers According to Alden, Gross and Borowitz: A Tale of Two Circuits, 39 BUS. LAW. 977 (1984).
86. Durrett unleashed a mammoth amount of academic writing and case law. A partial collection can be found in John C. McCoid, Constructively Fraudulent Conveyances: Transfers for Inadequate Consideration, 62 TEXAS L. REV. 639, 639 nn.1-8 (1983). See also Steven M. Alden et al., Real Property Foreclosure as a Fraudulent Conveyance: Proposals for Solving the Durrett Problem, 38 BUS. LAW. 1605 (1983); Robert M. Zinman et al., Fraudulent Transfers According to Alden, Gross and Borowitz: A Tale of Two Circuits, 39 BUS. LAW. 977 (1984).
87. Durrett unleashed a mammoth amount of academic writing and case law. A partial collection can be found in John C. McCoid, Constructively Fraudulent Conveyances: Transfers for Inadequate Consideration, 62 TEXAS L. REV. 639, 639 nn.1-8 (1983). See also Steven M. Alden et al., Real Property Foreclosure as a Fraudulent Conveyance: Proposals for Solving the Durrett Problem, 38 BUS. LAW. 1605 (1983); Robert M. Zinman et al., Fraudulent Transfers According to Alden, Gross and Borowitz: A Tale of Two Circuits, 39 BUS. LAW. 977 (1984).
88. UFTA § 3(b).
89. BFP v. Resolution Trust Corp., 511 U.S. 531 (1994).
90. Douglas Baird & Thomas Jackson, Fraudulent Conveyance Law and Its Proper Domain, 38 VAND. L. REV. 829 (1985).
91. Id. at 850-54.
92. Id. at 852.
93. See. e.g., Kupetz v. Wolf, 845 F.2d 842, 847 (9th Cir. 1988); United States v. Tabor Court Realty Corp. (In re Gleneagles Invest. Co.), 803 F.2d 1288 (3d Cir. 1986); Credit Managers Ass'n v. Federal Co., 629 F. Supp. 175, 179 (C.D. Cal. 1985).
94. Zaretsky, supra note 25.
95. Professor Zaretsky challenged the views of Professors Baird and Jackson as holding "narrow originalist" views of fraudulent transfers. Id. at 1180.
96. Zaretsky, supra note 25, at 1161. Although cited by neither article, the basic premise that leveraged buyouts could be fraudulent transfers had long been established in federal courts. E.g., Diller v. Irving Trust Co. (In re College Chemists, Inc.), 62 F.2d 1058 (2d Cir. 1933) (per curiam). In College Chemists, one Diller had sold all of the shares of her company, College Chemists, Inc., to Weiner. Weiner agreed to pay the purchase price by causing his new company, College Chemists, to grant Diller a security interest in all of its assets. When College Chemists was declared bankrupt, the trustee in bankruptcy sued to invalidate the security interest and succeeded. The basis of its claim was that the transfer of the security interest was a fraudulent conveyance of the unreasonably small capital variety. Harkening back to the language of Case v. Phelps, supra note 48, the court said that allowing the security interest to stand would be to allow "Weiner to carry on the business on an expectancy of profit." Id. at 1058. See also Teitelbaum v. Voss (In re Tuller's, Inc.), 480 F.2d 49, 51-52 (2d Cir. 1973); Pirrone v. Toboroff (In re Vaniman Int'l, Inc.), 22 Bankr. 166, 186 (Bankr. E.D.N.Y. 1982); Sharrer v. Sandlas, 103 A.D.2d 873, 477 N.Y.S.2d 897, motion for leave to appeal denied, 63 N.Y.2d 610, 473 N.E.2d 1190, 484 N.Y.S.2d 1024 (1984), reargument denied, 64 N.Y.2d 885, 476 N.E.2d 1008, 487 N.Y.S.2d 1029 (1985).
97. Zaretsky, supra note 25, at 1161. Although cited by neither article, the basic premise that leveraged buyouts could be fraudulent transfers had long been established in federal courts. E.g., Diller v. Irving Trust Co. (In re College Chemists, Inc.), 62 F.2d 1058 (2d Cir. 1933) (per curiam). In College Chemists, one Diller had sold all of the shares of her company, College Chemists, Inc., to Weiner. Weiner agreed to pay the purchase price by causing his new company, College Chemists, to grant Diller a security interest in all of its assets. When College Chemists was declared bankrupt, the trustee in bankruptcy sued to invalidate the security interest and succeeded. The basis of its claim was that the transfer of the security interest was a fraudulent conveyance of the unreasonably small capital variety. Harkening back to the language of Case v. Phelps, supra note 48, the court said that allowing the security interest to stand would be to allow "Weiner to carry on the business on an expectancy of profit." Id. at 1058. See also Teitelbaum v. Voss (In re Tuller's, Inc.), 480 F.2d 49, 51-52 (2d Cir. 1973); Pirrone v. Toboroff (In re Vaniman Int'l, Inc.), 22 Bankr. 166, 186 (Bankr. E.D.N.Y. 1982); Sharrer v. Sandlas, 103 A.D.2d 873, 477 N.Y.S.2d 897, motion for leave to appeal denied, 63 N.Y.2d 610, 473 N.E.2d 1190, 484 N.Y.S.2d 1024 (1984), reargument denied, 64 N.Y.2d 885, 476 N.E.2d 1008, 487 N.Y.S.2d 1029 (1985).
98. Zaretsky, supra note 25.
99. Id. at 1179-82.
100. See Prefatory Note to Revised Article 6, 2C U.L.A. 7 (1991). See also Peter A. Alces, Fraud Bases of Bulk Transferee Liability, 63 TEMP. L. REV. 679 (1990).
101. See Prefatory Note to Revised Article 6, 2C U.L.A. 7 (1991). See also Peter A. Alces, Fraud Bases of Bulk Transferee Liability, 63 TEMP. L. REV. 679 (1990).
102. Section 8 of the First Tentative Draft of the UFCA was entitled "Payment of Dividend by Corporation." UFCA § 8 (First Tentative Draft), reprinted in NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS, PROCEEDINGS OF THE TWENTY-SIXTH ANNUAL MEETING OF THE NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS 259-60 (1916). The Second Tentative Draft omitted this section "as belonging to a Corporation [Act] rather than a Fraudulent Conveyance Act." See NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS, PROCEEDINGS OF THE TWENTY-SEVENTH ANNUAL MEETING OF THE NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS 258 (1917). For argument for and against the continued application of fraudulent transfer laws to corporate dividends, see Markell, supra note 34, at 491 n.158. See also Consove v. Cohen (In re Roco Corp.), 701 F.2d 978, 982 (1st Cir. 1983); Fox v. MGM Grand Hotels, 137 Cal. App. 3d 524, 187 Cal. Rptr. 141 (1983).
103. Section 8 of the First Tentative Draft of the UFCA was entitled "Payment of Dividend by Corporation." UFCA § 8 (First Tentative Draft), reprinted in NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS, PROCEEDINGS OF THE TWENTY-SIXTH ANNUAL MEETING OF THE NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS 259-60 (1916). The Second Tentative Draft omitted this section "as belonging to a Corporation [Act] rather than a Fraudulent Conveyance Act." See NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS, PROCEEDINGS OF THE TWENTY-SEVENTH ANNUAL MEETING OF THE NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS 258 (1917). For argument for and against the continued application of fraudulent transfer laws to corporate dividends, see Markell, supra note 34, at 491 n.158. See also Consove v. Cohen (In re Roco Corp.), 701 F.2d 978, 982 (1st Cir. 1983); Fox v. MGM Grand Hotels, 137 Cal. App. 3d 524, 187 Cal. Rptr. 141 (1983).
104. See 15 WILLIAM MEADE FLETCHER et al., FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 7122, at 233-243 (perm. ed. rev. vol. 1999); PHILLIP I. BLUMBERG, THE LAW OF CORPORATE GROUPS: TORT, CONTRACT, AND OTHER COMMON LAW PROBLEMS IN THE SUBSTANTIVE LAW OF PARENT AND SUBSIDIARY CORPORATIONS 508 (1987).
105. I first made this claim in Bruce A. Markell, Owners, Auctions and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69 (1991).
106. The following discussion, ranging from note 84 to note 99, is taken from 7 COLLIER ON BANKRUPTCY ¶ 1129.04[4][b][ii] (15th Rev. ed. 2001) [hereinafter "COLLIER"]. I am the contributing author of that portion of the COLLIER treatise.
107. FSLIC v. D&F Constr., Inc. (In re D&F Constr., Inc.), 865 F.2d 673, 675, 20 C.B.C.2d 716, 721 (5th Cir. 1989); Aetna Realty Inv., Inc. v. Monarch Beach Venture, Ltd. (In re Monarch Beach Venture, Ltd.), 166 B.R. 428, 436 (C.D. Cal. 1993); In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992); In re Consul Restaurant Corp., 146 B.R. 979 (Bankr. D. Minn. 1992); In re EFH Grove Tower Assocs., 105 B.R. 310 (Bankr. E.D.N.C. 1989).
108. The absolute priority rule, as such, is not mentioned in the Bankruptcy Code. It is an incorporated concept in the statutory phrase "fair and equitable," found in 11 U.S.C. § 1129(b)(1) (1994).
109. E.g., FSLIC v. D&F Constr., Inc. (In re D&F Constr., Inc.), 865 F.2d 673, 675, 20 C.B.C.2d 716, 720 (5th Cir. 1989) ("Section 1129(b)(2) sets minimal standards plans must meet. However, it is not to be interpreted as requiring that every plan not prohibited be approved. A court must consider the entire plan in the context of the rights of the creditors under state law and the particular facts and circumstances when determining whether a plan is fair and equitable."); In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992).
110. If this were the sole issue, then those cases regarding the intersection of the quality of securities issued in a reorganization and the fair and equitable rule would dispose of the matter, see COLLIER, supra note 83, at ¶ 1129.04[2][c][i][B].
111. 865 F.2d 673 (5th Cir. 1989).
112. Another example of a case of unreasonable risk has been the attempt to structure a thirty-year repayment on a commercial real estate loan. See In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992); In re VIP Motor Lodge, Inc., 133 B.R. 41 (Bankr. D. Del. 1991).
113. 865 F.2d at 675.
114. In re Consul Restaurant Corp., 146 B.R. 979 (Bankr. D. Minn. 1992) illustrates what happens when the proponent's valuation is not accepted; in that case, the proposed treatment did not pay the creditor in full and the fair and equitable rule prevented participation by junior creditors.
115. 11 U.S.C. § 1129(a)(11) (1994).
116. In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992).
117. Indeed, those courts which held that a plan proponent had to prove a cram down case by clear and convincing evidence, although now in a minority, appeared to have this notion in mind. See COLLIER, supra note 83, at ¶ 1129.02[3].
118. See Consolidated Rock Prods. Co. v. Du Bois, 312 U.S. 510, 529 (1941) ("Practical adjustments, rather than a rigid formula, are necessary.").
119. See, e.g., FSLIC v. D&F Constr., Inc. (In re D&F Constr., Inc.), 865 F.2d 673 (5th Cir. 1989) (converting construction loan into fifteen-year loan with negative amortization; loan balance not below value of property until twelfth year); Sunflower Racing, Inc. v. Mid-Continent Racing & Gaming Co. I (In re Sunflower Racing, Inc.), 226 B.R. 673, 688-89 (D. Kan. 1998) (plan which provided for payments to secured creditors only after a two-year moratorium, and then only gradually increased in amount, unfairly shifted risk to creditors notwithstanding that the present value of income stream more than covered the present value of the collateral; creditor was undersecured and had made the § 1111(b) election); In re VIP Motor Lodge, Inc., 133 B.R. 41 (Bankr. D. Del. 1991) (thirty-year fully amortizing loan for commercial real estate); In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992) (ten-year balloon payment with thirty-year amortization; junior debt paid in full); In re EFH Grove Tower Assocs., 105 B.R. 310 (Bankr. E.D.N.C. 1989) (eighteen-month moratorium on secured lender's claim, followed by small payments with a large balloon in five years after moratorium ends; proponent's affiliate would lend funds to debtor with a priority greater than that of impaired lender which would be repaid sooner). One example of a non-real estate case is In re Consul Restaurant Corp., 146 B.R. 979, 989 (Bankr. D. Minn. 1992). There, the plan proponent sought to pay both a subordinated class, and the class to which it had subordinated, in full, albeit with a combination of cash, unsecured notes and stock in the reorganized debtor. Indeed, the amount of cash to be paid to the subordinated class was enough to pay the senior class in full. The court found that the proponent's valuation of the reorganized debtor was too high, and thus the stock component made the treatment less than payment in full. Yet the court still believed that the fair and equitable requirement had been violated even if the value used was the proponents; as the court saw it, there was no legitimate purpose served, other than "bribing" a class to vote for the plan, by splitting the cash up in this way, and that in so doing the proponent unreasonably shifted the risk of plan default onto the senior creditor.
120. See, e.g., FSLIC v. D&F Constr., Inc. (In re D&F Constr., Inc.), 865 F.2d 673 (5th Cir. 1989) (converting construction loan into fifteen-year loan with negative amortization; loan balance not below value of property until twelfth year); Sunflower Racing, Inc. v. Mid-Continent Racing & Gaming Co. I (In re Sunflower Racing, Inc.), 226 B.R. 673, 688-89 (D. Kan. 1998) (plan which provided for payments to secured creditors only after a two-year moratorium, and then only gradually increased in amount, unfairly shifted risk to creditors notwithstanding that the present value of income stream more than covered the present value of the collateral; creditor was undersecured and had made the § 1111(b) election); In re VIP Motor Lodge, Inc., 133 B.R. 41 (Bankr. D. Del. 1991) (thirty-year fully amortizing loan for commercial real estate); In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992) (ten-year balloon payment with thirty-year amortization; junior debt paid in full); In re EFH Grove Tower Assocs., 105 B.R. 310 (Bankr. E.D.N.C. 1989) (eighteen-month moratorium on secured lender's claim, followed by small payments with a large balloon in five years after moratorium ends; proponent's affiliate would lend funds to debtor with a priority greater than that of impaired lender which would be repaid sooner). One example of a non-real estate case is In re Consul Restaurant Corp., 146 B.R. 979, 989 (Bankr. D. Minn. 1992). There, the plan proponent sought to pay both a subordinated class, and the class to which it had subordinated, in full, albeit with a combination of cash, unsecured notes and stock in the reorganized debtor. Indeed, the amount of cash to be paid to the subordinated class was enough to pay the senior class in full. The court found that the proponent's valuation of the reorganized debtor was too high, and thus the stock component made the treatment less than payment in full. Yet the court still believed that the fair and equitable requirement had been violated even if the value used was the proponents; as the court saw it, there was no legitimate purpose served, other than "bribing" a class to vote for the plan, by splitting the cash up in this way, and that in so doing the proponent unreasonably shifted the risk of plan default onto the senior creditor.
121. See, e.g., FSLIC v. D&F Constr., Inc. (In re D&F Constr., Inc.), 865 F.2d 673 (5th Cir. 1989) (converting construction loan into fifteen-year loan with negative amortization; loan balance not below value of property until twelfth year); Sunflower Racing, Inc. v. Mid-Continent Racing & Gaming Co. I (In re Sunflower Racing, Inc.), 226 B.R. 673, 688-89 (D. Kan. 1998) (plan which provided for payments to secured creditors only after a two-year moratorium, and then only gradually increased in amount, unfairly shifted risk to creditors notwithstanding that the present value of income stream more than covered the present value of the collateral; creditor was undersecured and had made the § 1111(b) election); In re VIP Motor Lodge, Inc., 133 B.R. 41 (Bankr. D. Del. 1991) (thirty-year fully amortizing loan for commercial real estate); In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992) (ten-year balloon payment with thirty-year amortization; junior debt paid in full); In re EFH Grove Tower Assocs., 105 B.R. 310 (Bankr. E.D.N.C. 1989) (eighteen-month moratorium on secured lender's claim, followed by small payments with a large balloon in five years after moratorium ends; proponent's affiliate would lend funds to debtor with a priority greater than that of impaired lender which would be repaid sooner). One example of a non-real estate case is In re Consul Restaurant Corp., 146 B.R. 979, 989 (Bankr. D. Minn. 1992). There, the plan proponent sought to pay both a subordinated class, and the class to which it had subordinated, in full, albeit with a combination of cash, unsecured notes and stock in the reorganized debtor. Indeed, the amount of cash to be paid to the subordinated class was enough to pay the senior class in full. The court found that the proponent's valuation of the reorganized debtor was too high, and thus the stock component made the treatment less than payment in full. Yet the court still believed that the fair and equitable requirement had been violated even if the value used was the proponents; as the court saw it, there was no legitimate purpose served, other than "bribing" a class to vote for the plan, by splitting the cash up in this way, and that in so doing the proponent unreasonably shifted the risk of plan default onto the senior creditor.
122. See, e.g., FSLIC v. D&F Constr., Inc. (In re D&F Constr., Inc.), 865 F.2d 673 (5th Cir. 1989) (converting construction loan into fifteen-year loan with negative amortization; loan balance not below value of property until twelfth year); Sunflower Racing, Inc. v. Mid-Continent Racing & Gaming Co. I (In re Sunflower Racing, Inc.), 226 B.R. 673, 688-89 (D. Kan. 1998) (plan which provided for payments to secured creditors only after a two-year moratorium, and then only gradually increased in amount, unfairly shifted risk to creditors notwithstanding that the present value of income stream more than covered the present value of the collateral; creditor was undersecured and had made the § 1111(b) election); In re VIP Motor Lodge, Inc., 133 B.R. 41 (Bankr. D. Del. 1991) (thirty-year fully amortizing loan for commercial real estate); In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992) (ten-year balloon payment with thirty-year amortization; junior debt paid in full); In re EFH Grove Tower Assocs., 105 B.R. 310 (Bankr. E.D.N.C. 1989) (eighteen-month moratorium on secured lender's claim, followed by small payments with a large balloon in five years after moratorium ends; proponent's affiliate would lend funds to debtor with a priority greater than that of impaired lender which would be repaid sooner). One example of a non-real estate case is In re Consul Restaurant Corp., 146 B.R. 979, 989 (Bankr. D. Minn. 1992). There, the plan proponent sought to pay both a subordinated class, and the class to which it had subordinated, in full, albeit with a combination of cash, unsecured notes and stock in the reorganized debtor. Indeed, the amount of cash to be paid to the subordinated class was enough to pay the senior class in full. The court found that the proponent's valuation of the reorganized debtor was too high, and thus the stock component made the treatment less than payment in full. Yet the court still believed that the fair and equitable requirement had been violated even if the value used was the proponents; as the court saw it, there was no legitimate purpose served, other than "bribing" a class to vote for the plan, by splitting the cash up in this way, and that in so doing the proponent unreasonably shifted the risk of plan default onto the senior creditor.
123. See, e.g., FSLIC v. D&F Constr., Inc. (In re D&F Constr., Inc.), 865 F.2d 673 (5th Cir. 1989) (converting construction loan into fifteen-year loan with negative amortization; loan balance not below value of property until twelfth year); Sunflower Racing, Inc. v. Mid-Continent Racing & Gaming Co. I (In re Sunflower Racing, Inc.), 226 B.R. 673, 688-89 (D. Kan. 1998) (plan which provided for payments to secured creditors only after a two-year moratorium, and then only gradually increased in amount, unfairly shifted risk to creditors notwithstanding that the present value of income stream more than covered the present value of the collateral; creditor was undersecured and had made the § 1111(b) election); In re VIP Motor Lodge, Inc., 133 B.R. 41 (Bankr. D. Del. 1991) (thirty-year fully amortizing loan for commercial real estate); In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992) (ten-year balloon payment with thirty-year amortization; junior debt paid in full); In re EFH Grove Tower Assocs., 105 B.R. 310 (Bankr. E.D.N.C. 1989) (eighteen-month moratorium on secured lender's claim, followed by small payments with a large balloon in five years after moratorium ends; proponent's affiliate would lend funds to debtor with a priority greater than that of impaired lender which would be repaid sooner). One example of a non-real estate case is In re Consul Restaurant Corp., 146 B.R. 979, 989 (Bankr. D. Minn. 1992). There, the plan proponent sought to pay both a subordinated class, and the class to which it had subordinated, in full, albeit with a combination of cash, unsecured notes and stock in the reorganized debtor. Indeed, the amount of cash to be paid to the subordinated class was enough to pay the senior class in full. The court found that the proponent's valuation of the reorganized debtor was too high, and thus the stock component made the treatment less than payment in full. Yet the court still believed that the fair and equitable requirement had been violated even if the value used was the proponents; as the court saw it, there was no legitimate purpose served, other than "bribing" a class to vote for the plan, by splitting the cash up in this way, and that in so doing the proponent unreasonably shifted the risk of plan default onto the senior creditor.
124. See, e.g., FSLIC v. D&F Constr., Inc. (In re D&F Constr., Inc.), 865 F.2d 673 (5th Cir. 1989) (converting construction loan into fifteen-year loan with negative amortization; loan balance not below value of property until twelfth year); Sunflower Racing, Inc. v. Mid-Continent Racing & Gaming Co. I (In re Sunflower Racing, Inc.), 226 B.R. 673, 688-89 (D. Kan. 1998) (plan which provided for payments to secured creditors only after a two-year moratorium, and then only gradually increased in amount, unfairly shifted risk to creditors notwithstanding that the present value of income stream more than covered the present value of the collateral; creditor was undersecured and had made the § 1111(b) election); In re VIP Motor Lodge, Inc., 133 B.R. 41 (Bankr. D. Del. 1991) (thirty-year fully amortizing loan for commercial real estate); In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992) (ten-year balloon payment with thirty-year amortization; junior debt paid in full); In re EFH Grove Tower Assocs., 105 B.R. 310 (Bankr. E.D.N.C. 1989) (eighteen-month moratorium on secured lender's claim, followed by small payments with a large balloon in five years after moratorium ends; proponent's affiliate would lend funds to debtor with a priority greater than that of impaired lender which would be repaid sooner). One example of a non-real estate case is In re Consul Restaurant Corp., 146 B.R. 979, 989 (Bankr. D. Minn. 1992). There, the plan proponent sought to pay both a subordinated class, and the class to which it had subordinated, in full, albeit with a combination of cash, unsecured notes and stock in the reorganized debtor. Indeed, the amount of cash to be paid to the subordinated class was enough to pay the senior class in full. The court found that the proponent's valuation of the reorganized debtor was too high, and thus the stock component made the treatment less than payment in full. Yet the court still believed that the fair and equitable requirement had been violated even if the value used was the proponents; as the court saw it, there was no legitimate purpose served, other than "bribing" a class to vote for the plan, by splitting the cash up in this way, and that in so doing the proponent unreasonably shifted the risk of plan default onto the senior creditor.
125. In re Miami Center Assocs., Ltd., 144 B.R. 937, 940 (Bankr. S.D. Fla. 1992) ("Debtor has not provided the Court with any authority that a loan in its ninth year of a ten-year term can be stretched out for another ten years, where the current market for similar loans (as admitted by debtor's expert) is only three to four years."; plan also did not address lender's postconfirmation lien in hotel revenues).
126. Aetna Realty Inv., Inc. v. Monarch Beach Venture, Ltd. (In re Monarch Beach Venture, Ltd.), 166 B.R. 428, 436 (C.D. Cal. 1993), quoting In re Consul Restaurant Corp., 146 B.R. 979, 989 (Bankr. D. Minn. 1992).
127. See COLLIER, supra note 83, at ¶ 1129.06[3] regarding the approaches to negatively amortizing cram down loans. In cases in which a court is persuaded that long term loans are standard, a long stretch out will be reasonable. In re Martin, 66 B.R. 921, 930 (Bankr. D. Mont. 1986) (first mortgage holder's claim paid seventeen years after all other creditors scheduled to be paid in full).
128. Zaretsky, supra note 25, at 1168.