Legal Memorandum: Balance Sheet Insolvency under MUFTA

Issue: Under bankruptcy law, when is a defendant ‘balance-sheet solvent’ under Minnesota Uniform Fraudulent Transfer Act?

Subsection (a) of § 513.42 provides one of the principal methods employed when considering the insolvency issue, and is sometimes referred to as a “balance sheet insolvency” test.  Balance sheet insolvency exists if the party contesting the transfer is able to show that the debtor’s indebtedness at the time of the transfer exceeded his or her assets.  See, e.g., UFTA § 2(a).  In determining whether a debtor was insolvent at the time of a transfer, contingent liabilities (such as those based on personal guarantees of corporate debts) are not assessed value as liabilities if the debtor is unlikely to be called upon to honor the guarantees at the time of the challenged transfer.  In re Martin, 145 B.R. 933, 949 (Bankr. N.D. Ill. 1992).*FN1  “It is well established . . . that a contingent liability cannot be valued at its potential face amount.”  In re Chase & Sanborn Corp., 904 F.2d 588, 594 (11^th Cir. 1990).

FOOTNOTES

*FN1 Superseded by statute on other grounds as stated in In re Canopy Fin., Inc., 477 B.R. 696 (N.D. Ill. 2012).

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