On January 18, 2024, the U.S. Bankruptcy Court for District of South Carolina entered judgment, after a bench trial, in favor of minority shareholders of a debtor whose liquidating trust had sued to recover dividend payments as alleged fraudulent transfers. In 2012 and 2013, Prospect Capital Corporation extended subordinated loans to SportCo Holdings, Inc., for the specific purpose, as stated in the loan documents, of paying dividends to shareholders in an aggregate amount of approximately $137 million. As a condition to each financing, SportCo delivered a solvency certificate evidencing its solvency. SportCo began to experience financial difficulties in 2015 and defaulted on the loan payments in 2018. In 2019, Prospect sued the individual SportCo shareholders who had received the dividend payments, alleging that the payments were fraudulent transfer under state law. Shortly thereafter, SportCo filed for bankruptcy, and its liquidation trust took over the claim.

Under South Carolina’s fraudulent transfer statute, a creditor may avoid a transfer under a constructive fraud theory by proving that the transfer was made without adequate consideration. Adequate consideration consists of a right or interest benefitting one party or a forbearance or responsibility undertaken by the other party. Prospect argued that dividends are always gratuitous transfers, citing case law where companies were rendered insolvent by dividend payments. In contrast, the bankruptcy court found the dividend payments at issue in this case did not render SportCo insolvent, noting that SportCo delivered a solvency certificate as a condition to each financing. Further, the court reasoned that all parties received value. Prospect received fees, interest, and principal payments; SportCo received funds to pay the dividend payments; and the shareholders received the dividends. For these reasons, the court found that the dividend payments were supported by adequate consideration, so Prospect could not avoid the dividend transfer.

The case is Friedman v. Wellspring Capital Management, LLC, No. 19-80071 (D.S.C. Jan. 18, 2024). The trustee is represented by Reid Collins & Tsai LLP and Robinson Gray Stepp & Laffitte, LLC. The defendants are represented by Wilmer Cutler Pickering Hale and Dorr LLP, Roger Lewis Jackson Mann & Quinn, LLC, Haynesworth Sinkler Boyd, PA and Chandler & Dudgen LLC. The order is available here.