By: Scott B. Riddle, Esq.

Deutsche Bank A.G. London Branch v. Worldcom, Inc. (In re Worldcom, Inc.), 2006 U.S. Dist. LEXIS 92729 (S.D.N.Y. December 21, 2006).

The plaintiff filed proofs of claim in Worldcom’s Bankruptcy case for pre-petition dividends that were announced, but never paid. The issue before the District Court, on appeal from the Bankruptcy Court, was whether Worldcom was insolvent at the time the dividend was to have been paid. The applicable statute was O.C.G.A. 14-2-640(c), which provides the following:

(c) No distribution may be made if, after giving it effect:
(1) The corporation would not be able to pay its debts as
they become due in the usual course of business; or
(2) The corporation’s total assets would be less than the
sum of its total liabilities plus (unless the articles of
incorporation permit otherwise) the amount that would be
needed, if the corporation were to be dissolved at the time of
the distribution, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are
superior to those receiving the distribution.

 (c) No distribution may be made if, after giving it effect:

(1) The corporation would not be able to pay its debts as they become due in the usual course of business; or

(2) The corporation’s total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation permit otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

Worldcom defended on the grounds that it was insolvent when it refused to pay the dividend.  The Bankruptcy Court agreed in an oral ruling, finding that Worldcom was insolvent on the relevant dates.  The plaintiff argued that the Bankruptcy Court was required to "make and articulate a number of determinations, including both tests articulated by the statute."  The Court disagreed, finding that the Bankruptcy Court needed only to find insolvency under one of the two tests in the statute. While the Bankruptcy Court could have been more explicit, it was not reversible error to not do so.   Therefore, there was no requirement that the dividend be paid – in fact, it would have been improper to pay it – and summary judgment was affirmed.