Michael Goldman is a senior managing director
of KCP Advisory Group LLC. He has been qualified
in both state and federal courts as an expert
witness in cases involving fraud, solvency, fairness,
commercial damages, marital dissolutions, valuation
issues, professional malpractice, and bankruptcy
issues. He is a CPA, has an MBA, and holds CVA,
CFE, and CFF certifications. Previously, Goldman
was a professor at the Lake Forest Graduate
School of Management and designed courses
in the school’s corporate education division.
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In another case, a manufacturer was
shown to be insolvent during every
month of the applicable four-year
look-back period under both the
balance sheet and inability to pay
debts as they become due tests. The
debtor was insolvent on a balance
sheet basis for four years prior to
filing, as evidenced by the following:
• Accounts receivable and
inventory were both consistently
overstated on the balance sheet.
• Accounts payable and warranty
costs were both consistently
understated on the balance sheet.
• Fixed assets never generated a
profit in place and were expensive
to move, yielding little going
concern or liquidation value.
• Capitalized software development
costs of $4 million for a
customized system that was never
implemented sat on the balance
sheet as an asset for three years
before they were written off.
Most of these costs were internal
labor charges that were probably
ineligible for capitalization under
proper accounting procedures.
The company’s inability to pay
debts as they became due was
evidenced by the following:
• The company was in workout
with its bank continuously for
seven years and violated virtually
every covenant and restructuring
agreement it ever agreed to.
Transgressions continued on
a quarter-by-quarter basis.
• There was an ongoing pattern
of vendor compromises and
conversion of short-term payables
to long-term notes (which were
also not paid). In-between
compromises were made as the
payables aged significantly.
• There was a continued inability
to collect accounts receivable
within terms, which generated
ongoing liquidity shortfalls.
• The company experienced
five consecutive years of large
negative EBITDA. Even the
income from the cancellation
of debt was insufficient to
make EBITDA positive.
This article is a general discussion and is not intended to provide legal
advice or define practice in any particular jurisdiction. The particular facts
and circumstances of each case should be discussed with an attorney
familiar with the applicable statutes in the relevant jurisdictions.
High Stakes Determination
Whether a transfer of property was a
fraudulent conveyance usually comes
down to a determination of solvency.
Solvency is a matter of judgement
decided by the court with the help of
valuation experts and restructuring
professionals. The stakes can be
high, as fraudulent conveyance
is often the best or only way that
creditors can recover assets that had
been spirited away from them. J