Locke Lord QuickStudy: Eastern District of Louisiana Dismisses Officer Compensation Fraudulent Transfer Claims in Tow v. Bulmahn

The U.S. District Court for the Eastern District of Louisiana dismissed a Chapter 7 bankruptcy trustee’s claims against officers and inside directors of ATP Oil & Gas Corporation in Tow v. Bulmahn on Wednesday.

In Tow v. Bulmahn, the Trustee alleged that ATP’s officers and directors caused the company to invest heavily in two capital projects which were ultimately unsuccessful. As the Macondo oil spill and later drilling moratoria slowed projects in the oil and gas industry, ATP became insolvent and filed for Chapter 11 relief in August 2012. The case eventually converted to Chapter 7 and the trustee was appointed.

In his original complaint, the trustee asserted fraudulent transfer, civil conspiracy and breach of fiduciary duty claims against 18 inside and outside directors and officers of ATP. Most of the claims were dismissed earlier in the litigation and the last amended complaint asserted only that cash and stock bonuses paid to five inside directors and officers should be avoided as constructively fraudulent transfers.

In the Third Amended Complaint, after the civil conspiracy and breach of fiduciary duty claims had been dismissed, the trustee alleged that the bonuses received by the directors constituted fraudulent transfers under the Texas Uniform Fraudulent Transfer Act (TUFTA) and under Section 548(a)(1) of the Bankruptcy Code. To survive a motion to dismiss his claims for constructive fraudulent transfers under TUFTA, the trustee had to sufficiently allege that ATP did not receive reasonably equivalent value for the bonuses and that ATP had unreasonably few assets for its business. Tex. Bus. & Com. Code § 24.005(a). Similarly, under the Bankruptcy Code, the Trustee was required to sufficiently allege that ATP failed to receive reasonably equivalent value and one of the following: that ATP was insolvent or became insolvent as a result of the transfers, that ATP’s assets were unreasonably small, that ATP believed it would incur debts it could not repay, or that ATP made payments to insiders outside the ordinary course of business. 11 U.S.C. § 548(a)(1).

The court ultimately found that the trustee asserted no facts to support the allegation required under TUFTA and Section 548(a)(1) that ATP did not receive reasonably equivalent value for the bonuses. The opinion establishes a bright line rule that allegations of poor performance and poor business decisions by the officers are not sufficient to state a claim for fraudulent transfer because it is not sufficient to demonstrate that a debtor failed to receive reasonably equivalent value for compensation paid to the officers.

The court additionally found that facts must be alleged to support the allegation that the debtor was insolvent or had insufficient capital at the time of the contested transfers, noting that the trustee “fail[ed] to point to any financial data showing that ATP was actually insolvent or had little capital when any of the alleged compensation was paid.”
Claims against all 18 defendants named in the original complaint have now been dismissed.

* Locke Lord LLP represented the outside directors named in the original complaint in this litigation. Those claims were previously dismissed.