PRE-BANKRUPTCY WORKOUTS WITH TROUBLED TENANTS: MAKING SURE LANDLORDS AT LEAST GET "SILVER" WHEN THERE IS NO LONGER HOPE FOR "GOLD"

PRE-BANKRUPTCY WORKOUTS WITH TROUBLED TENANTS: MAKING SURE LANDLORDS AT LEAST GET "SILVER" WHEN THERE IS NO LONGER HOPE FOR "GOLD" By: Anton N. Natsis Peter J. Roth Michael S. Greger I. INTRODUCTION The destructive effects of the current bear market have not been limited to the capital markets. Commercial real estate landlords have also suffered significantly, particularly landlords with a high concentration of technology related tenants. As the bear market progressed, landlords have been forced to shift their focus to restructuring existing leases rather than entering into new deals with tenants. This article explores several of the more salient California State law and Federal Bankruptcy law issues commercial landlords must consider in evaluating lease restructuring proposals. After starting with a brief outline of the issues that landlords may face, this article examines how such issues will impact a hypothetical restructure of a commercial real property lease. The obvious intent of such discussion is to educate commercial real estate landlords about the long-term effects of restructuring strategies. Properly structured credit enhancements at the time of lease execution have always been an essential element in a landlord's effort to limit risk in the event of a tenant insolvency. Notwithstanding a landlord's best efforts to protectively structure leases and to secure adequate credit enhancement, leases frequently are consummated with inadequate credit enhancement or variants of credit enhancement that may not survive a tenant bankruptcy. Therefore, when approached by tenants seeking to modify lease obligations (herein referred to as a "Workout"), a landlord will concentrate upon the maximization of the amount of monetary and non-monetary consideration (collectively, the "Consideration") given to the landlord by the tenant, the security backing the payment of such Consideration (the "Security"), and the protections available should the tenant enter into a bankruptcy proceeding after a Workout is consummated. To minimize the impact of a tenant's bankruptcy on a landlord's ability to receive and retain Consideration and utilize Security, an understanding of applicable California State law and Federal Bankruptcy law, as well as the array of possible structural components of any Workout, is essential. At least three major bankruptcy-oriented obstacles should be considered: (A) the Bankruptcy Code and California State law doctrines that mandate that transactions that do not exchange "reasonably equivalent consideration" may be avoided if the transactions occur during certain pre-bankruptcy filing time periods (known as "Fraudulent Conveyance"), (B) the Bankruptcy Code provisions that essentially avoid any transaction consummated during the ninety (90) day period immediately preceding a bankruptcy filing if a creditor receives a payment on account of a pre-existing debt owed by the debtor (known as a "Preference"), and (C) the Bankruptcy Code provision that caps (the "Bankruptcy Cap") a landlord's recovery in bankruptcy for lease damages at the greater of (i) one (1) year of rent, or (ii) fifteen percent (15%) of the remaining rental stream under the lease. In connection with such limitations, a 88888-775/9-8-04/pjr/mem

landlord must carefully structure the components of a Workout to implement the best available strategies relating to the Workout Consideration and Security. II. CALIFORNIA STATE LAW DAMAGES AND FRAUDULENT CONVEYANCE, PREFERENCE AND BANKRUPTCY CAP PRINCIPLES Fundamental to a landlord's assessment of any Workout structure is a proper understanding of how such structure will be impacted by California State law or Federal Bankruptcy law. A landlord s damages in connection with a lease termination are first calculated under California State law without regard to any bankruptcy limitations. 1 Of a landlord's two alternative California State law remedies, only Section 1951.2 of the California Civil Code will apply to a bankruptcy scenario. Simply stated, if a tenant breaches a lease due to a bankruptcy and the landlord terminates the lease (or the lease is rejected (i.e. terminated) by the bankruptcy court), the landlord will be entitled to assert a damage claim against the tenant equal to the net present value of future rents due and owing under the lease during the remaining term (less the amount of rent that the tenant proves the landlord could recover by releasing the property to a third party), plus the costs incurred by the landlord to create such mitigation. 2 While this formula appears straightforward, courts have applied it both inconsistently and unpredictably. Accordingly, in the event such breach occurs at lease inception, there is a significant risk that a California State court will not award a landlord the full statutorily mandated amount, and will likely award a lesser sum. Furthermore, due to a tenant's bankruptcy, a landlord's damages can be "capped" at the lesser of the actual damages under California State law or the amount of the Bankruptcy Cap under Section 502(b)(6) of the Bankruptcy Code. 3 Under Section 365 of the Bankruptcy Code, a debtor/tenant has the option to either assume or reject an unexpired lease of real property. 4 If a tenant decides to reject the lease, or if the lease is deemed rejected by operation of bankruptcy law, a landlord will be entitled to assert a claim for any lease rejection damages it suffers. 5 As set forth above, the landlord s lease rejection damages are calculated under California State law without regard to any bankruptcy law other than the Bankruptcy Cap. Under Section 3439 of the California Civil Code and Section 548 of the Federal Bankruptcy Code, a debtor can avoid any payment or transfer of property made while the debtor was insolvent, or which effectively rendered the debtor insolvent, that is not supported by "reasonably equivalent consideration." 6 The release of existing claims or antecedent debt owed by a debtor constitutes value for purposes of fraudulent transfer/conveyance laws. 7 Additionally, the value of the Consideration exchanged in the transaction is measured as of the date of the transfer that is the subject of the challenge. Any action based on a Fraudulent Conveyance theory (not based on an actual intent to defraud) must be brought by the claimant within the greater of (i) four (4) years under Section 3439 of the California Civil Code, and (ii) one (1) year under Section 548 of the Bankruptcy Code. In the event a court determines that a fraudulent transfer/conveyance occurred, the court may order the creditor (here, the landlord) to return the 88888-775/9-8-04/pjr/mem -2-

actual property transferred or to pay the value of such transfer. 8 Although California State law does not clearly resolve this issue, the Bankruptcy Code provides that a good faith transferee has a lien on or may retain any interest transferred to the extent of the actual value delivered by the transferee to the debtor. 9 Thus, assuming (i) a tenant is insolvent or rendered insolvent by a termination agreement entered into as part of a Workout, and (ii) that the tenant pays the landlord Consideration to terminate the applicable lease which exceeds the landlord s damages under California State law, then such Consideration may be avoided as a fraudulent transfer/conveyance since the payment exceeds what was owed to the landlord. In the event that a bankruptcy court determines (while taking into account the total Workout transaction consummated by the landlord and the tenant) that such termination agreement involves a fraudulent transfer/conveyance, such court can then avoid the portion of the Consideration exceeding the tenant's liability to the landlord under California State law. Under Section 547 of the Bankruptcy Code, a party that receives a payment from a debtor on account of an antecedent debt may be forced to disgorge that payment as a preferential transfer. The purpose of this section of the Bankruptcy Code is to prevent the debtor from favoring one creditor over other similarly situated creditors. This provision applies to any transfers occurring during the ninety (90) day period immediately preceding a tenant's bankruptcy filing which put the landlord in a better position vis-à-vis the tenant's other creditors. 10 If a bankruptcy court determines that a transfer results in a Preference, then any such Consideration and/or Security can be avoided and must be returned to the debtor, and the creditor will be forced, along with all of debtor's other creditors, to submit its damage claim to the bankruptcy estate. Of course, such claim is limited by the Bankruptcy Cap as discussed below. Under the Preference theory, a bankruptcy court has very broad powers to avoid any and all transfers made by a tenant, especially where no "new value" is created for the debtor (such as when only an antecedent debt is extinguished). However, these powers are limited to transactions occurring during the ninety (90) day period immediately preceding the date a tenant filed for bankruptcy protection. 11 In contrast, under the Fraudulent Conveyance theory, the time period is extended up to four (4) years prior to the date a tenant filed for bankruptcy protection. However, the bankruptcy court's power to avoid a transaction is limited to transactions that are not supportable by reasonably equivalent Consideration underlying extinguishment of antecedent debts. As set forth above, a landlord s lease termination/rejection damages are first calculated under state law without regard to any bankruptcy limitations. After such damages are calculated, however, the Bankruptcy Cap (pursuant to Section 502(b)(6)(A) of the Bankruptcy Code) artificially caps a landlord's rejection damages at the rent reserved by such lease, without acceleration, for the greater of one year, or fifteen percent (15%), not to exceed three years, of the remaining term of such lease. 12 The significant majority view is that the fifteen percent formula is calculated by multiplying fifteen percent by the aggregate rent due from the bankruptcy filing through the natural lease expiration and the minority view is that the fifteen percent is calculated by multiplying fifteen percent by the total months remaining on the lease from the bankruptcy filing through the natural lease termination and then aggregating the rent due from the bankruptcy filing during the total number of months calculated. 13 88888-775/9-8-04/pjr/mem -3-

The Bankruptcy Cap is only applicable to damages incurred by a landlord due to a tenant's rejection of a lease during bankruptcy. In other words, any amount transferred to landlord prior to a tenant's bankruptcy will not be subject to the Bankruptcy Cap unless deemed a Preference or Fraudulent Conveyance. There is some debate as to what constitutes rent for purposes of calculating the Bankruptcy Cap under Section 502(b)(6). Some courts conclude that the term only includes fixed and regular payments and excludes such charges as general maintenance or utilities, but the fixed charges include minimum rent, guaranteed parking charges, real estate taxes and insurance. At least one court in the Ninth Circuit has adopted the following tests to determine what constitutes "rent reserved": The charge must be designated as "rent" or "additional rent" in the lease, or be provided as the tenant's obligation in the lease; The charge must be related to the value of the property or the lease thereon; and [T]he charge must be properly classifiable as rent because it is a fixed, regular or periodic charge. 14 Under this definition, the term "rent reserved" in the context of a triple-net or base year lease would presumably include minimum rent, parking charges, real estate taxes, insurance, and common area maintenance fees owed by a tenant. However, courts continue to inconsistently apply the above tests, making the exact Bankruptcy Cap that is applied unpredictable and shifting landlords' exposure depending upon the jurisdiction in which a particular case is filed. It is important to note that all damages resulting from a termination/rejection of the lease are subject to the Bankruptcy Cap under Section 502(b)(6). In addition to unpaid rent, the Bankruptcy Cap also likely applies to any of the tenant's obligations to restore or demolish the premises at the end of its lease term. The Bankruptcy Cap, however, does not cover a landlord's damages that are not related to lease termination, such as those resulting from a tenant's neglect of the premises. There is little, if any, case law that has ruled upon whether the Bankruptcy Cap applies to payments made to a landlord prior to a bankruptcy filing. For example, assume that the applicable Bankruptcy Cap is $1 million (although state law damages exceed $2 million). Prior to filing bankruptcy, the tenant agrees to pay (and does pay) landlord a $2 million fee to terminate the lease (which lease had, as of such termination, a remaining rental liability in excess of $2 million). If the tenant eventually files bankruptcy, creditors will invariably argue that the landlord has to pay back the amount ($1 million) of tenant's payment which exceeded the Bankruptcy Cap (such argument will likely be in addition to any applicable Preference claims). This argument is without merit for several reasons. First, the Bankruptcy Cap only applies if and when a bankruptcy has been filed. Given that the payment was made at a time pre-dating the bankruptcy, the Bankruptcy Cap should have no bearing on that payment. Second, the Bankruptcy Cap is merely a defense available to the bankruptcy estate to limit the amount of claim that the landlord can assert against the estate. It does not create any form of avoidance action that allows the tenant to recover payments previously made that may exceed the 88888-775/9-8-04/pjr/mem -4-

Bankruptcy Cap. Lastly, there is no reported bankruptcy case precedent which supports this theory. Thus, landlord should not have to repay tenant the amount exceeding the Bankruptcy Cap. Furthermore, courts have not yet answered the question of whether a pre-bankruptcy payment to a landlord that exceeds the Bankruptcy Cap constitutes a fraudulent transfer/conveyance if not supported by reasonably equivalent Consideration. Because equivalency and fairness of a transaction are measured as of the date of the transfer (not some speculative future date assuming a bankruptcy is filed), there should be no fraudulent transfer/conveyance liability under the example outline above, since the tenant paid $2 million in exchange of the release of in excess of $2 million in claims as of the date of the transfer. In fact, a tenant should be willing to pay more to terminate a lease if it will avoid a bankruptcy filing and thus avoid the consequent negative effects on its business. III. THE HYPOTHETICAL The following is a comprehensive hypothetical Workout (the "Hypothetical") to which the applicable State and Federal law can be applied to help examine the structure which should be employed by a landlord to maximize Consideration and Security. The Hypothetical employs the following facts and assumptions. Factual Background. Landlord is a traditional institutional property owner ("Landlord"), and tenant is a recently formed company which, while once flying high, has seen gross revenues plummet, its work force significantly cut back, and its stock price fall substantially ("Tenant"). Tenant has ten (10) years remaining on its lease with Landlord (the "Lease"). The leased premises are located in a fifteen (15)-floor Class "A" office building containing a total of 300,000 square feet. Tenant leases 50,000 square feet on 2½ contiguous floors. Tenant's base rent, at $5/rentable square foot/month, is currently twice the fair market value of $2.50/rentable square foot/month. Since March 2000, Tenant's stock price has plummeted from $90/share to $1.50/share. $1,000,000 of the original tenant improvement allowance under the Lease remains undisbursed (the "Undisbursed TIA"). 88888-775/9-8-04/pjr/mem -5-

Pursuant to the terms of the Lease, Tenant provided Landlord with (i) a cash security deposit equal to $250,000 (i.e., one month of base rent) (the "Cash Security Deposit"), and (ii) a letter of credit equal to $1,500,000 (i.e., six (6) months of base rent) (the "Existing L-C"). Tenant's remaining space needs could be satisfied with the 10,000 square foot partial floor. Workout Terms. The Hypothetical employs the following Workout terms agreed to between Landlord and Tenant. Tenant desires to terminate the Lease pursuant to a termination agreement (the "Termination Agreement"). As Consideration for such termination, (A) Landlord would draw on, and retain, the Existing L-C ($1,500,000), (B) Landlord would apply the Cash Security Deposit ($250,000), (C) Landlord would be released of any obligation to pay the Undisbursed TIA ($1,000,000), (D) Tenant would deliver to Landlord 50,000 shares of its common stock ("Stock") ($75,000), cash in an amount of $750,000 (the "Cash"; equal to three (3) months current base rent), and a promissory note in an amount of $750,000 (the "Note"; equal to three (3) months current base rent). The total Consideration (the "Termination Fee") therefore equals $4,325,000. As security for the Note, Tenant is willing to deliver Landlord a new letter of credit in an amount of $750,000 (the "New L-C"; equal to three (3) months of base rent). IV. ANALYSIS OF HYPOTHETICAL WORKOUT ALTERNATIVES Applying California State and Federal Bankruptcy law to the Hypothetical allows an analysis of the correct manner in which to structure the Hypothetical Workout. Landlord's California State law damages calculated pursuant to California Civil Code Section 1951.2 would be extremely large. Even assuming immediate mitigation for the entire leased premises at the fair market value of $2.50/rentable square foot/month, and not including the payment by Landlord of any new brokerage commissions or tenant improvement allowances, Landlord's damages approximate $15,000,000 (i.e. $125,000/month for 120 months). With regard to the Bankruptcy Cap, since the Lease has a remaining term of 10 years, the fifteen percent (15%) analysis will apply, resulting in a Bankruptcy Cap in excess of $4,500,000 (15% of the remaining $30,000,000 base rent obligation ($5/rentable square foot/120 months), before adding amounts attributable to additional rent or rental escalation). Therefore, for purposes of the analysis under the Hypothetical, the Bankruptcy Cap of $4,500,000 will be applicable. 88888-775/9-8-04/pjr/mem -6-

Generally, if a security deposit has not been applied by the landlord prior to a bankruptcy filing, then the cash security deposit automatically becomes an asset of the debtor's bankruptcy estate, and the landlord must first obtain relief from the automatic stay before it can offset the security deposit against his damages, even if the lease is ultimately rejected by the tenant. Thus, while the landlord's damage claim would likely be secured in an amount equal to the security deposit (to the extent the cash security deposit, along with other consideration paid post-filing, does not exceed the Bankruptcy Cap or the landlord's state law damages), the landlord may nevertheless be enjoined for extended periods by virtue of the automatic stay from seeking claims for any deficiencies above that amount. This creates serious cash flow issues for the landlord and the landlord may be forced to disgorge a cash security deposit to the extent that it exceeds the Bankruptcy Cap, based on the legislative history and case law behind Section 502(b)(6) which makes clear that the amount of a cash security deposit that exceeds the Bankruptcy Cap must be returned to the bankruptcy estate. Under the Hypothetical, to the extent that Tenant surrenders to Landlord the existing cash security deposit (as a portion of the Termination Fee) prior to filing for bankruptcy protection, Landlord will not likely face any issues concerning the Bankruptcy Cap because (A) the same was paid and applied prior to the bankruptcy filing, and (B) even if the Bankruptcy Cap were deemed to apply to the pre-filing transaction, the total amount of consideration is less than the $4,500,000 Bankruptcy Cap. Moreover, the application of the cash should not be considered a Preference (since the Cash Security Deposit was actually transferred to Landlord at the inception of the Lease long before the Preference period). In addition, it is unlikely that the transfer shall be deemed a Fraudulent Conveyance since Tenant will receive reasonably equivalent Consideration (i.e. the release of future Lease obligations). To the extent that the Tenant pays cash to Landlord (as a portion of the Termination Fee) prior to filing for bankruptcy protection, such amount should not be subject to the Bankruptcy Cap, again due to the fact that the Bankruptcy Cap is applicable only to payments made during bankruptcy. However, such transfer may be challenged as a Preference (assuming Tenant files bankruptcy within ninety (90) days of the payment) because the cash payment is made on account of antecedent obligations under the Lease. As long as the total Consideration (under the Hypothetical, $4,325,000) paid under the Termination Agreement (including any cash), is deemed reasonably equivalent to, or less than, Tenant's remaining liability under the Lease (i.e. the release of future obligations under the Hypothetical is $30,000,000), it is unlikely that the transfer will be considered a Fraudulent Conveyance. Generally, once a letter of credit (an "L-C") is issued, the issuer (typically, the tenant's bank) becomes statutorily obligated to honor drafts drawn by the beneficiary (e.g., the landlord) that comply with the terms of the credit. 15 Indeed, under long-standing commercial law, the obligation of the issuer to the beneficiary under the L-C is completely independent and distinct from the tenant's obligation on the underlying contract (the lease) to the beneficiary. 16 This independence principle has been recognized as the cornerstone of L-C law. 17 Put another way, the issuer must pay on a proper demand from the beneficiary even though the beneficiary may have breached the underlying contract with the tenant. The Preference statutes, however, raise several issues for landlords holding L-C's to secure their leases. 88888-775/9-8-04/pjr/mem -7-

While a very small minority of bankruptcy courts (not including the Ninth Circuit, which governs federal bankruptcy proceedings in California) find that landlords who draw on a L-C within the Preference period have received preferential transfers, their rulings fail to consider that the L-C is not property of the debtor's bankruptcy estate, and thus, by definition, cannot be considered part of a transfer of a debtor's assets. Yet, one court held that a landlord may be sued for receiving preferential transfers from the debtor even though the landlord was fully secured under the terms of an L-C for the amounts of the payments received. 18 Based on this ruling, landlords may be required to return payments they have received during the Preference period even though they had the right to draw on an L-C for the full amount of such payments during the Preference period to avoid liability altogether. In order to obtain an L-C, a tenant is typically required to secure its obligation to reimburse the issuer by granting the issuer a security interest in certain of the tenant's assets. Under Preference laws, an issue arises where the tenant, during the Preference period, either increases the amount of collateral securing the L-C, provides security to the issuer to secure an existing L-C, or provides collateral to secure a new L-C. Courts will deem a grant of a security interest which is given after the inception of the lease to secure an existing L-C or the issuance of a new L-C to constitute a transfer of assets for purposes of Preference laws. If the transfer--that is, the grant of a security interest--occurs during the Preference period on account of the tenant's existing obligation to reimburse the issuer under an L-C, to further secure an existing L-C or to secure a new L-C, then the debtor may avoid the transfer against the issuer. In addition, under Section 550(a)(1) of the Bankruptcy Code, a debtor may sue and potentially recover from the landlord (as the beneficiary of the L-C) on the grounds that the landlord was "the entity for whose benefit such transfer was made." Even though the beneficiary is holding an L-C that was issued outside of the Preference period, the beneficiary may still face Preference exposure based upon a transfer made to the issuer during the Preference period. In such a case, the benefits and protections afforded the landlord from an L-C will be void. Under the Hypothetical, to the extent that Landlord draws down on the Existing L-C (as a portion of the Termination Fee) prior to Tenant filing for bankruptcy protection, such amount will not be subject to the Bankruptcy Cap because the Bankruptcy Cap is only applicable to payments made during bankruptcy, and will not be considered a Preference since the L-C is not an asset of the tenant's bankruptcy estate and since Tenant had pledged such amount as security to Landlord outside the preference period. Assuming that the total Consideration is less than or equal to Tenant's existing liability under the Lease under California State law, it is furthermore unlikely that the transfer shall be deemed a Fraudulent Conveyance since Tenant will receive reasonably equivalent Consideration for the release of future Lease obligations. To the extent that Tenant provides Landlord with the New L-C as Security for the Note portion of the Termination Fee, such New L-C should not be subject to the Bankruptcy Cap (again due to the fact that the Bankruptcy Cap is only applicable to payments made during bankruptcy). However, such New L-C is likely to be challenged as a Preference. Finally, assuming that the total termination Consideration is less than or equal to Tenant's existing liability under the Lease under California State law, it is unlikely that such transfers shall be deemed a Fraudulent Conveyance. 88888-775/9-8-04/pjr/mem -8-

Under the Hypothetical, Landlord is obligated to pay Tenant the Undisbursed TIA ($1,000,000). Landlord should not face any Bankruptcy Cap, Preference or Fraudulent Conveyance issues to the extent Tenant surrenders the Undisbursed TIA to Landlord (as a portion of the Termination Fee) prior to filing for bankruptcy protection. First, since the application of the Undisbursed TIA occurred pre-filing and the total consideration of the Termination Fee (including the Undisbursed TIA) is less than the Bankruptcy Cap, the Bankruptcy Cap should have no application. Second, under Section 553 of the Bankruptcy Code, the setoff of mutual obligations during the Preference period is only actionable if the obligations owed by the debtor exceed the obligation owed by the non-debtor. 19 Here, it is assumed that Landlord is owed in excess of $30,000,000. Thus, Tenant's release or waiver of any and all claims to the Undisbursed TIA should not create Preference or Fraudulent Conveyance issues. Provided Tenant does not declare bankruptcy, the value of the Note to Landlord would be subject only to Tenant's economic ability to pay such amounts. However, if Tenant declares bankruptcy, the Note would be subject to the Bankruptcy Cap, but not Preference or Fraudulent Conveyance rules since the Note is merely the reflection of a prior obligation already owed by Tenant (assuming the Note is not in an amount exceeding Tenant's existing obligations under the Lease). With regard to such Note, Landlord would have a secured claim (up to the amount of the Bankruptcy Cap as the Note would likely be disallowed to the extent it exceeds such Bankruptcy Cap). The Security for such Note (i.e. the New L-C) would be subject to Preference if it was granted or perfected within ninety (90) days of the tenant's bankruptcy filing. If Tenant grants Landlord stock, the value of the stock would be subject to Preference and Fraudulent Conveyance rules, but the Bankruptcy Cap should not apply. V. CONCLUSION Landlords have recently been disappointed by the performance of some of their technology driven tenants. In evaluating potential lease restructuring transactions, landlords should be wary and use extreme diligence when working out the consideration and security to be provided by such tenants. Otherwise, the landlords then-existing disappointment may be significantly compounded. 88888-775/9-8-04/pjr/mem -9-

CHART ANALYSIS OF BANKRUPTCY IMPACTS ON CONSIDERATION / SECURITY Type of Consideration / Security Possible Impacts Based upon Tenant filing for Bankruptcy within 90 days of Workout Fraudulent Conveyance Preference Bankruptcy Cap Use of Cash Security Deposit (Received at Lease inception). Cash Payment (paid before filing). Draw upon L-C (Issued at Lease inception and drawn before filing) Extinguishment of Undisbursed TIA (Applied before filing). Stock (Received before filing). No No No No Yes No No No No No No No No Yes No Note. No Yes as to Security and payments made within 90 days of bankruptcy Yes, as to payments paid post-filing Creation of New L-C (Securing the Note and issued before filing). No Yes Yes, as to payments paid post-filing 1 Unsecured Creditor's Committee of Highland Superstores, Inc. v. Strobeck Real Estate, Inc. (In re Highland Superstores, Inc.), 154 F.3d 573, 579 (6 th Cir. 1998). 2 Cal. Civ. Code 1951.2. 3 See, supra, Highland Superstores, at 579. 4 11 U.S.C. 365. 88888-775/9-8-04/pjr/mem -10-

5 See 11 U.S.C. 365(g) and 502(b)(6). 6 See Cal. Civ. Code 3439 et seq. and 11 U.S.C. 548. A trustee in bankruptcy also has the right to avoid any transfer of estate property that was made with the actual intent to defraud. This article only analyzes fraudulent transfers made without an actual intent to defraud. 7 Cal. Civ. Code 3439.03 and 11 U.S.C. 548(d)(2). 8 See 11 U.S.C. 550(a). 9 11 U.S.C. 548(c). 10 11 U.S.C. 547. The debtor must also have been insolvent as of the date of the transfer and is non-conclusively presumed insolvent during the 90 day period leading up to a bankruptcy filing. 11 The ninety (90) day period is extended to one (1) year for transfers made to or on account of certain insider creditors. See 11 U.S.C. 547(b)(4)(B). 12 11. U.S.C. 502(b)(6). 13 See, supra, Highland Superstores, at 577; In re Andover Togs, Inc., 231 B.R. 521 (Bankr. S.D.N.Y. 1999). 14 In re McSheridan, 184 B.R. 91 (9 th Cir. BAP 1995). 15 See U.C.C. 5-108(a). 16 In re Graham Square, Inc., 126 F.3d 823, 827 (6 th Cir. 1997). 17 In re Compton Corp., 831 F.2d 586, 590 (5 th Cir. 1987). 18 Twist Cap, Inc. v. S.E. Bank, 1 B.R. 284 (Bankr. M.D. Fla. 1979). 19 11 U.S.C. 553. 88888-775/9-8-04/pjr/mem -11-