Norman Kinel is a partner in the Restructuring and Insolvency Group at Squire Patton Bogg LLP in New York City, and National Chair of the firm’s Creditors’ Committee Practice Group. Norman Kinel has authored numerous articles, including “Now You See It, Now You Don’t - The Search for Unreasonably Small Capital,” published on May 10, 2016. The article focuses on the decision of the United States Court of Appeals for the Third Circuit in Whyte v. SemGroup Litig. Trust (In re Semcrude L.P.) issued on April 28, 2016.
While the U.S. Bankruptcy Code states that one of the elements of a fraudulent conveyance is that the conveyance leaves the debtor with "unreasonably small capital," the meaning of that term is vague.
SemGroup, a midstream energy firm, engaged in activities prohibited under a credit agreement with a lending syndicate. During a period of heavy losses between July 2007 and February 2008, SemGroup increased its credit line borrowing from $800 million to over $1.7 billion.
The lending syndicate eventually declared SemGroup in default, but did not explicitly base the default on the alleged prohibited activities. SemGroup subsequently filed for bankruptcy. A litigation trust which was established to recover funds for the benefit of creditors later filed lawsuits against various SemGroup equity holders to recover $55 million distributed to them prior to the filing of bankruptcy.
The litigation trustee argued that at the time of the equity distributions, it was reasonably foreseeable that the equity distributions which violated the credit agreement would prevent SemGroup access to its credit line and lead to SemGroup having unreasonably small capital. The Third Circuit agreed with earlier bankruptcy and district courts rulings rejecting the trustee’s argument as being "conjecture biased by hindsight."
The Third Circuit held that speculating on what the lending syndicate would have done was an insufficient basis to prove SemGroup was left with unreasonably small capital. The Third Circuit’s SemGroup ruling sets a high bar for proving unreasonably small capital and makes clear that arguments based on hindsight will not suffice.
