7 Fraudulent Transfer Traps in OldCo/NewCo Restructurings

The new company inherits the old dispute the moment the assets cross the threshold.

Owners form a second entity to preserve a viable business, and creditors test every transfer the first entity made on its way out. Seven traps below follow the voidable transfer statute with the lien rules that decide what actually moved, and each trap states the doctrine beside the record that proves or defeats it.

Transfers Made With Intent to Hinder Creditors

Washington’s enactment states the test. A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the claim arose before or after, where the debtor acted with actual intent to hinder, delay, or defraud. The statute then lists the badges by which intent is read.

The badges include transfer to an insider with continued possession and concealment. They extend to suit filed or threatened before the move. The file invites questions of timing, of secrecy, and whether the price reflected value.

The transfer stands between the parties that signed it. It falls as to the creditor the statute protects. A creditor making a claim carries the burden by a preponderance of the evidence.

Constructive Transfer and Equivalent Value

Rarely does a new entity begin with a clean ledger, and a transfer for nothing invites the closest scrutiny even where no fraudulent motive appears. The statute renders voidable any transfer made without reasonably equivalent value where the debtor retained unreasonably small assets for the remaining business or incurred debts beyond the ability to pay as they became due. Steps taken, or not taken, before the transfer decide which side of that line the move falls on.

OldCo conveys its equipment to NewCo for a nominal price while MCA balances remain unpaid, leaving a trail in bank records. The transfer was, if we are being precise, not a sale at all. The resolution (which counsel for the companies will describe as ordinary succession planning) recites a price set in order to defeat the exchange test, which the market would not recognize, and the exchange test is extremely literal in matching value received against value given.

The owner moved the machines because the business was dying.

Security Interests That Survive the Move

Before the first asset moves, before the new operating agreement is signed, counsel maps the liens. A security interest continues in collateral despite sale or lease or other disposition unless the secured party authorized disposition free of the interest, and the interest attaches to identifiable proceeds (with perfection turning on prompt filing), as the secured party rights on disposition provide. The lien problem travels with the assets.

A second business that never signed the original agreement is not automatically liable for the first business’s debt, though claims against the assets follow the collateral, since compromise practice treats each person and entity as a separate obligor, as the loan service center guidance shows for agency debt. Separate obligor status never cleansed a lien that followed the collateral through the door.

Bulk Transfers of Substantially All Assets

Transfer of substantially all assets forms its own badge, and OldCo conveys its contracts and equipment and receivables to NewCo, retaining a shell with the debts. The shape matches the statutory suspicion without further proof of motive.

A bulk transfer to an insider works the way a stagehand works in a theater with the house lights on. The audience sees exactly who moved the furniture, and the program notes already name the destination.

NewCo opens with fresh books and a hopeful name, though the timing badge counts suits threatened before the transfer among its factors, and the guaranty signed in better days never moved at all.

Insider Buybacks Through Article 9 Sales

The Article 9 sale offers no shortcut, since every aspect of a disposition including method and manner and time and place and terms must be commercially reasonable. A secured party may purchase only at a public disposition or at a private disposition of recognized market collateral. Most insider sales are priced by the buyer, though courts reprice them by the market.

Related party sales receive recalculated proceeds where the price falls significantly below the range a complying disposition would have brought. A low price buyback manufactures no deficiency windfall and erases no surplus owed. An outlandish discount achieves the opposite of its purpose.

Transferee rights turn on value with good faith (and an owner orchestrated buyer faces the good faith question without the protection of distance, since coordination reads as knowledge). Strict foreclosure requires the debtor’s agreement without timely objection. The case law beyond the statute is thinner than the checklist suggests, and counsel reads it file by file.

New Entity, Same Guaranty

The guaranty bridges entities where the transfer documents do not. In the leading MCA characterization decision, the individual defendants executed a personal guaranty of performance of all representations and warranties and covenants made by the company in the agreement, as the appellate opinion records, and liability follows the signature rather than the entity in any action against the owner.

Veil piercing adds nothing without fraud. The test requires complete domination of the corporation with respect to the transaction attacked, plus use of that domination to commit a wrong against the plaintiff that caused injury. Domination standing alone never suffices, and undercapitalization alone fails the test.

You move the assets on Friday and you answer for the move on Monday. Counsel keeps the ledger with the minutes and the correspondence.

What Counsel Verifies Before Assets Move

Local law controls the details, since successor doctrines vary by state. Counsel ensures each transfer carries a price supported by evidence with authority documented in writing. No transfer already made can be ratified, even briefly, without counsel mapping the liens first. Simply state that no asset moves until that review is complete, and resist the urge to backdate the bill of sale.

We map the liens, trace the proceeds, and construct a chronology of the move. Whether another enactment lists the same badges in the same order is a question for local counsel, and counsel follows the trail before the move proceeds.

A Settlement Conversation With Delancey Street

Delancey Street works with businesses carrying MCA balances and other business debt as a settlement company, not a law firm. Independent counsel handles the legal work while advisors review and analyze the restructuring file, with more information through the Delancey Street site.

A first conversation ensures each transfer carries its purpose stated, even where the outlook is extremely uncertain. A first call costs nothing and assumes nothing. It begins the diagnosis.