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Home / Case News / A Transfer may be Deemed Fraudulent if the Debtor’s Assets are Unreasonably Small to Generate Sufficient Profits to Sustain Operations

A Transfer may be Deemed Fraudulent if the Debtor’s Assets are Unreasonably Small to Generate Sufficient Profits to Sustain Operations

April 6, 2019, New Jersey– Debtor, the Mall at Galaxy, Inc. was engaged in the business of leasing condominium units. Martin J. Sergi was the president, treasurer and a board member of the Debtor since 1986 and was a 90% equity holder in the Debtor since 1997. In addition to his interest in the Debtor, M. Sergi held equity interests in and was an officer, director and/or board member of numerous other entities. Defendant Latoc, Inc. is an investment company that was wholly owned by Capital Holdings, Inc., for which R. Attar served as President. The Attar further acted as administrator for the Defendant and had the authority to invest and administer the Defendant’s assets in exchange for management fees. M. Sergi also had repeated business dealings with R. Attar as well as with various entities in which Attar held interests and/or controlled or served as officers, directors and/or board members. The Debtor filed for bankruptcy and the plaintiff Steven P. Kartzman, the Chapter 7 Trustee commenced an adversary proceeding against the Defendant to avoid and recover certain preferential and fraudulent pre-petition transfers made by the Debtor to the Defendant in purported repayment of a subordinated promissory note granted to the Defendant, on account of a loan, the proceeds of which were for the benefit of third-party entities, not the Debtor. The Debtor alleged that although the loan proceeds were initially deposited into the Debtor’s account, M. Sergi caused the Debtor to contemporaneously re-convey virtually all of the loan proceeds to accounts owned by all entities that he and the Attar controlled and/or in which he and the Attar held an ownership interest.

The Court held for the Trustee and ruled that the alleged transfers were avoidable for the benefit of the estate. The Court held that under either a reasonableness standard, or a subjective one, Debtor (through its owner and officer) knew or should have known it was incurring debts far beyond its capacity to pay them as they came due during the entire relevant period and thus, the trustee met his burden of proving insolvency under both N.J. Stat. Ann. § 25:2-25(b)(2) and 11 U.S.C.S. § 548(a)(1)(B)(ii)(I). The Court also found that the Debtor was insolvent at all times during the relevant period under the federal and state unreasonably small assets and capital test. The Court also stated that while the Debtor may have technically been solvent under the balance sheet test for a portion of the relevant period, it was also illiquid during that period, rendering its technical solvency insufficient to overcome its actual insolvency under the unable to pay debts as they come due and insufficiency of capital and assets tests.