Uncovering Fraudulent Conveyance

March 2013       Download PDF      Print

Situation

The owner of an automobile dealership entered into multiple long-term leases of automobile dealer computer software and systems that allowed the dealership to interface directly with automobile manufacturers. The owner sold the dealership for the assumption of liabilities, but the leases for the computer software and systems were not transferred in the sale. Since the sale left no assets in the entity that sold the dealership, the company became insolvent and could not continue making lease payments. As part of the sale of the dealership, the owner received substantial employment payments over a 10-year period even though no actual consulting or employment was required.

Engagement

The legal counsel for the creditor that was due the lease payments engaged Allied to review the facts of the case and determine if a fraudulent transfer had occurred under the Kansas Uniform Fraudulent Transfer Act (KUFTA). As part of this engagement, we were required to conduct a valuation of the dealership to determine a reasonably equivalent value, determine if the transaction left the company insolvent, and opine as to whether there were certain elements of fraudulent conveyance. Additionally, we reviewed and critiqued the opposing expertís report on the transaction and the existence of fraudulent conveyance. We were uniquely qualified for this engagement because it required an expert with knowledge and competency in three distinct areas: valuation methodologies, dispute consulting, and common transaction practices for companies the size of the dealership.

Result

We prepared multiple reports and addendums for the creditor and their legal counsel discussing the estimated fair market value of the dealership, the fact that the transaction resulted in insolvency, and the uncommon characteristics of the transaction itself. All of these factors indicated that elements of fraudulent conveyance existed. Less than one month before trial, the debtor and creditor were able to settle the case.