Improving Fraudulent Transfer Law in Leverage Buy-Outs Through Judicial Certainty & Reliability

Abstract

LBOs that file for bankruptcy are routinely challenged under fraudulent transfer law, where plaintiffs allege that the LBO unreasonably reduced the target’s liquidity and capital adequacy, saddled it with debt and was completed as a means of funneling company assets to both current and former shareholders. These cases will bestow upon bankruptcy courts the responsibility and power of efficiently allocating billions of dollars to classes of creditors and clawing back funds from shareholders. Since these cases will have a crucial impact on the overall economy, it is imperative that bankruptcy courts wield their authority and power in a predictable, fair, and consistent fashion.In this paper, we will seek to understand (I) the nature of LBOs, (II) the fundamental mechanisms in place under fraudulent transfer laws and (III) the remedies available to creditors who have been harmed by a LBO. Once this has been achieved, we will explore (IV) the means by which Courts determine whether a firm is solvent pursuant to fraudulent transfer laws and (V) the potential shortfalls and issues inherent to this analysis before (VI) elaborating on a recommended method of analysis that can reduce uncertainty and return control of the analysis to the Court.