Bay Plastics v. BT Commercial Corp.
United States Bankruptcy Court for the Central District of California
187 B.R. 315 (1995)
Bay Plastics's selling shareholders (defendants) sold their stock to Milhous Corporation in a leveraged buyout financed by a $3.95 million loan Milhous caused Bay Plastics (plaintiff) to take from BT Commercial Corp. (defendant), most of which, $3.5 million, was then paid directly from escrow to the selling shareholders, leaving Bay Plastics with only about $450,000. Before the deal, Bay Plastics had positive net equity, but afterward its balance sheet showed roughly $9 million in liabilities against $7 million in assets, a figure that included $2.6 million in goodwill never before carried on the books; the selling shareholders and their counsel knew before closing that the deal's LBO structure risked being challenged as a fraudulent transfer, and they and Milhous persuaded an existing creditor, Shintech, to release its security interest without disclosing the LBO structure. Bay Plastics filed for bankruptcy and moved for summary judgment that the buyout financing was a fraudulent transfer.
Whether, in connection with a leveraged buyout, an entity that transfers a property interest or incurs an obligation for which it receives little in return, and by which it is rendered insolvent, may have the transaction avoided as a fraudulent transfer.