Legal Memorandum: Proving Insolvency of a Debtor in MN

Issue: Under Minnesota law, is the party who challenges a transfer as fraudulent responsible for showing that the debtor was insolvent at the time of the transfer?

The party challenging a transfer as fraudulent under Minn. Stat. § 513.45(b) must show that the transferee had reasonable cause to believe the debtor was insolvent at the time of the transfer.  In determining whether a creditor/transferee had reasonable cause to believe the debtor was insolvent at the time of the transfer, several general propositions emerge from the cases and commentaries, but ultimately each case must be decided on its own facts.  Green v. A.G. Edwards & Sons, Inc., 582 F.2d 439, 442 (8^th Cir. 1978) (citing cases).  An insider will frequently have access to detailed knowledge concerning the debtor’s financial condition.  In re Montanino, 15 B.R. 307 (Bankr. D.N.J. 1981) (where transferee’s daughter lived with the debtor and knew about the debtor’s financial problems, the transferee was charged with knowledge of insolvency).

To establish that an insider had reasonable cause to believe the transferor was insolvent at the time of the transfer, the plaintiff must show that the transferee had notice of facts that would lead a prudent person to the conclusion that the debtor was insolvent, or at least that further inquiry was required.  Id.  The transferee is charged with all knowledge he would have acquired had an inquiry been conducted.  Id.  Facts that would trigger a duty to make further inquiry include the debtor’s undercapitalization, a pattern of overdrafts or bad checks, operating losses, sales below cost, rescue from financial embarrassment by relatives, and unusual or illegal transactions.  Id. (citing cases). 

A creditor’s mere […]