Richards Layton & Finger
 

The Balance Sheet Test in Fraudulent Transfer Cases: Is It Appropriate to Fair Value Liabilities?

Winter 2020

Proving insolvency is an important element of a fraudulent transfer claim. Therefore, it is surprising that courts diverge on how they interpret the most basic of the solvency tests, the balance sheet test. Some courts hold that the balance sheet test compares the recorded amount of liabilities to the fair value of assets. Other courts hold that the balance sheet test compares the fair value of liabilities to the fair value of assets. This discussion examines these differing interpretations of the balance sheet test and recommends a unifying principle to reconcile these differing interpretations.