The Death of a Defense: How Derivatives Spell the End of the Good Faith Defense to Fraudulent Transfer Actions in Business Bankruptcies

Abstract

This article examines the "good faith defense" to fraudulent transfer actions in bankruptcy. It argues that investors who have hedged their equity interest in an investment will always qualify as good faith transferees, and thus will be effectively immune from the Bankruptcy Code's fraudulent transfer provisions. It then argues that permitting such arbitrary application of the provisions will increase the cost of capital for solvent firms, a result the Bankruptcy Code is designed to avoid. It concludes that one workable solution to this problem is to eliminate the good faith defense altogether in the context of business bankruptcies. The Death of a Defense