## Facts

- Old Crown Unlimited Machine, Inc. designed and manufactured custom tube-cutting and tube-bending machinery in a specialized market.
- Old Crown’s shareholders (the Stroup family) agreed to sell all business assets for $6 million to Kevin E. Smith, who formed a new corporation (“new Crown”) to acquire them.
- At closing (Jan. 5, 2000), new Crown paid $3.1 million cash (borrowed from a bank) and issued a $2.9 million promissory note to old Crown.
- The bank loan was secured by all of new Crown’s assets and carried a floating rate initially exceeding 9%.
- The promissory note bore 8% interest, was due in 2006, and was also secured by all assets but subordinated to the bank’s lien; the sale terms generally required only $100,000 annual payments unless sales exceeded a high threshold.
- After the sale, old Crown changed its name to Crown Stock Distribution, Inc., distributed the entire $3.1 million cash to its shareholders, and ceased operating.
- New Crown later failed and entered Chapter 7 bankruptcy.
- The Chapter 7 trustee sued to avoid the asset transfer as constructively fraudulent and sought money recovery for the estate.

## Issues

1. Whether, under 11 U.S.C. § 544(b) and Indiana’s UFTA (Ind. Code § 32-18-2-14(2)), the asset sale and related obligations constituted a constructive fraudulent transfer.
2. Whether new Crown received “reasonably equivalent value” given the secured-debt structure and the seller’s distribution of sale proceeds to shareholders.
3. Whether the transaction left new Crown with “unreasonably small capital” or otherwise unable to pay debts as they came due, notwithstanding claims that later business conditions caused the failure.
4. What money judgment and prejudgment interest were proper based on the avoidable transfer.

## Decision

- The Seventh Circuit affirmed the judgment for the trustee finding a constructive fraudulent transfer under Indiana UFTA as applied through § 544(b).
- The court upheld the principal monetary award of $3,295,000 plus prejudgment interest.
- The court rejected the defendants’ contention that the transaction was legitimate and that the bankruptcy resulted solely from later market or management problems.
- On the trustee’s cross-appeal seeking additional recovery, the court addressed damages methodology and did not disturb the core award tied to the constructive-fraud determination.

## Legal Principles

- Under Indiana UFTA’s constructive-fraud provision, a transfer may be avoided without proof of actual intent to defraud if the debtor did not receive reasonably equivalent value and the transfer left the debtor with unreasonably small capital or unable to pay debts as they came due.
- In applying “reasonably equivalent value,” courts assess the economic substance and net effect of the transaction on the debtor and its creditors, not merely the stated purchase price or formal structure.
- A transaction that finances an asset acquisition with secured debt while distributing the cash proceeds to the seller’s shareholders can support a finding that the operating debtor was left over-leveraged and inadequately capitalized.
- Evidence bearing on capital adequacy includes debt-service burdens, full encumbrance of assets, absence of retained liquidity, and risk signals embedded in financing terms (such as a high interest rate on secured credit).
- Under § 544(b), a bankruptcy trustee may invoke applicable state fraudulent-transfer law to avoid transfers and obtain money recovery for the estate consistent with the harm to creditors.

## Conclusion

The court treated the asset sale as a leveraged transaction that stripped liquidity to shareholders and left the operating debtor with heavily encumbered assets and insufficient capital, supporting avoidance as a constructive fraudulent transfer and affirmance of a substantial money judgment for the bankruptcy estate.


Boyer v. Crown Stock Distrib., Inc., 587 F.3d 787 (7th Cir. 2009)