Burden Is on Trustee to Show Insolvency at Time of Transfer
The US Court of Appeals for the 11th Circuit affirmed the district court’s dismissal of a fraudulent conveyance claim for a “blocking right” and right of first refusal under a patent transfer agreement, addressing the district court’s proper exclusion of expert testimony on whether the debtor was insolvent at the time of the relevant transfer. In re: Teltronics, Inc., Case No. 16-16140 (11th Cir. Oct. 2, 2018) (Kaplan, J).
After defaulting on a promissory note for a patent portfolio purchase, Teltronics entered into a patent transfer agreement purportedly transferring the portfolio back to its original owner, Harris Corporation, in exchange for relief of the payments due under the promissory note and a non-exclusive license to the portfolio. Teltronics also retained a “blocking right” against Harris selling the portfolio to a third party until July 2010, and a right of first refusal after July 2010 in the event Harris desired to re-purchase the portfolio.
In 2008, Harris negotiated the sale of the portfolio to RPX. Upon realizing that it had to address Teltronics’ blocking right, Harris contacted Teltronics to renegotiate its rights without signaling its intent to sell the portfolio. The negotiation led to an alteration of the blocking right from July 2010 to April 16, 2009, and limited its applicability to Teltronics’ competitors. The right of first refusal now became effective in April 2009. Harris then transferred the patents to RPX on January 26, 2009. Teltronics subsequently filed for bankruptcy.
In district court, Teltronics’ trustee filed an adversary proceeding against Harris and RPX claiming that the transfers of the blocking right and the Teltronics right of first refusal were constructively fraudulent. The trustee challenged the admissibility of Harris’s expert opinion that Teltronics had been solvent at the time of the transfers on the ground that the expert did not perform any work to back up the opinion and did not verify the reliability of the materials to which he referred, including the expert’s opinion that three contracts should be valued as assets of Teltronics. In its opinion, the bankruptcy court had considered and disregarded the trustee’s counter-argument regarding these agreements as a failure to carry its burden of insolvency at the time of transfer, or that Teltronics received less than reasonably equivalent value in the transfer. After the district court affirmed the order from the bankruptcy court, the trustee appealed.
The 11th Circuit affirmed, emphasizing the deferential standards of review for evidentiary issues during bench trials and the fact that the trustee had the burden to prove insolvency. The Court noted that the trustee never objected to the opinion regarding the three contracts and, when considering the weight of trustee’s own opinion that the contracts did not qualify as assets, ruled that the trustee failed to carry its burden regarding insolvency.