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Bankruptcy Litigation

Bankruptcy Litigation Update: Determining Adequate Capital

This article focuses on the concept of "unreasonably small capital," which is not defined in the Bankruptcy Code or applicable state statutes. Consequently, the determination of adequate capital is fact-intensive and fertile grounds for litigation.

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Transactions involving distressed companies, or healthy companies that become distressed, are often attacked as fraudulent transfers. These transactions include leveraged buy-outs, dividend recaps, spin-offs, substantial asset sales and other garden-variety transfers. To determine whether a transfer (or obligation) can be avoided as fraudulent, courts generally examine the effect of the transfer on the transferor’s assets —€ i.e., whether the transfer infringes on creditors’ rights to realize upon available assets of the transferor. The focus is from the creditor’s perspective as to what the transferor surrendered (or obligation it incurred) and what the transferor received.

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