This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Imagine a Florida founder who sold her company three years ago. A financial buyer paid a good price, most of it funded with debt the target itself took on at closing. She wired her share to a brokerage account, paid off a mortgage, put money into a new venture. The transaction closed cleanly, the release was mutual, and she has not thought about it in a while.
Then the company defaults. A trade creditor’s lawyer starts reading the closing binder, notices that the operating company borrowed the money that was used to buy out its own shareholders, and files suit under Chapter 726 of the Florida Statutes — naming the former shareholders as transferees.
This is the structural vulnerability at the heart of every leveraged buyout, and sellers are usually the last people in the room to understand that they are exposed to it.
The mechanics of the claim
Florida remains a UFTA state. Section 726.101 still provides that the act “may be cited as the ‘Uniform Fraudulent Transfer Act,'” and the history note shows a single 1987 enactment — Florida never adopted the Uniform Voidable Transactions Act renaming that many states took up after 2014. So the vocabulary is the old vocabulary, and the two theories are the familiar ones.
The actual-intent theory lives in Section 726.105(1)(a): a transfer is fraudulent as to a creditor, whether the claim arose before or after the transfer, if the debtor made it “[w]ith actual intent to hinder, delay, or defraud any creditor.” Section 726.105(2) then supplies eleven badges of fraud, lettered (a) through (k) in Florida rather than numbered as in the model act — a miscite worth avoiding. Several of them describe an ordinary LBO without any wrongdoing at all: paragraph (e), the transfer was of substantially all the debtor’s assets; paragraph (i), the debtor was insolvent or became insolvent shortly after; paragraph (j), the transfer occurred shortly before or shortly after a substantial debt was incurred. Paragraph (a) — the transfer was to an insider — catches a selling shareholder directly, since Section 726.102(8)(b) defines an insider of a corporate debtor to include a director, an officer, or a person in control.
But the theory that actually threatens a well-intentioned seller is the constructive one, and it requires no intent from anybody. Section 726.105(1)(b) reaches a transfer made “[w]ithout receiving a reasonably equivalent value in exchange” where the debtor either was engaged in or about to engage in a business for which its remaining assets were unreasonably small, or intended to incur or reasonably should have believed it would incur debts beyond its ability to pay as they came due. Section 726.106(1) covers the present-creditor version: no reasonably equivalent value, plus insolvency at the time or insolvency resulting from the transfer.
Insolvency under Section 726.103(1) is the balance sheet test — debts greater than assets at a fair valuation — and Section 726.103(2) adds a presumption: a debtor generally not paying debts as they become due is presumed insolvent.
The reasonably-equivalent-value element is where the LBO gets uncomfortable. The company borrowed money and the money went to the shareholders. What did the company receive? Section 726.104(1) says value is given if, in exchange, property is transferred or an antecedent debt is secured or satisfied. A company that takes on debt and hands the proceeds to departing owners has, viewed one step at a time, received loan proceeds for the debt and then given cash away for stock it does not keep. Whether a court views those steps separately or as one integrated transaction determines whether the seller is a defendant.
The collapsing question is open in Florida, and that matters
Courts in some jurisdictions address this through what is generally called the collapsing doctrine — treating the financing and the payout as a single integrated transaction so that the company is seen to have incurred debt and received nothing. The doctrine is most developed in the Second and Third Circuits.
I want to be careful here rather than overclaim: I am not aware of a published Eleventh Circuit or Florida appellate decision squarely adopting the collapsing doctrine for LBOs, and anyone who tells you Florida law is settled on this should be asked for the citation. What Florida does have is Section 726.111, which provides that unless displaced by Sections 726.101 through 726.112, “the principles of law and equity” — the section lists estoppel, laches, fraud, misrepresentation, duress, coercion, mistake, insolvency, “or other validating or invalidating cause” — supplement the statute. That is the textual doorway through which an integration analysis would come. Whether a Florida court walks through it is a live question, which is precisely why a seller should not treat the risk as theoretical.
Good faith is not the defense sellers think it is
Here is the provision that most often surprises people, and it is the reason this post exists.
Section 726.109(1) provides that a transfer “is not voidable under s. 726.105(1)(a) against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee.” Read the cross-reference. The good-faith-plus-value defense applies to the actual intent claim only. It does not appear in, and does not reach, the constructive fraud claims under Section 726.105(1)(b) or Section 726.106(1).
A seller who knew nothing about the buyer’s leverage assumptions, who negotiated at arm’s length, who acted in complete good faith, has no Section 726.109(1) shield against the constructive theory. That is not an oversight in the statute — it is the design. Constructive fraud is about the debtor’s balance sheet, not the transferee’s state of mind.
What the good-faith transferee does get is narrower. Section 726.109(4) gives a good faith transferee, to the extent of value given the debtor, a lien on or right to retain an interest in the asset transferred, enforcement of any obligation incurred, or a reduction in the amount of liability on the judgment. And Section 726.109(3) measures a value-based judgment by the value of the asset at the time of transfer, “subject to adjustment as the equities may require.” Useful, but a long way from immunity.
The transferee protections that do exist in Chapter 726 are a short list: the noncollusive foreclosure sale deemed reasonably equivalent value under Section 726.104(2); the actual-intent defense in 726.109(1); the value credit in 726.109(4); lease termination and Article 9 enforcement under 726.109(5); insider-preference carve-outs in 726.109(6); and charitable contributions in 726.109(7). Nothing on that list helps a selling shareholder in a constructive fraud case.
No securities safe harbor in state court
Sophisticated sellers sometimes reach for the wrong statute here. Section 546(e) of the Bankruptcy Code is a safe harbor that protects settlement payments made by or to financial institutions from a trustee’s avoidance powers, and for years buyers argued it immunized LBO payments routed through a bank.
The Supreme Court narrowed that considerably in Merit Management Group, LP v. FTI Consulting, Inc., 583 U.S. 366 (2018), holding unanimously that “[t]he only relevant transfer for purposes of the § 546(e) safe harbor is the transfer that the trustee seeks to avoid.” Where the transfer sought to be avoided runs between two entities that are not themselves covered financial institutions, the fact that money moved through a conduit bank does not bring the safe harbor into play.
More fundamentally for our founder: Section 546(e) is a Bankruptcy Code provision that operates on a trustee’s avoiding powers in a bankruptcy case. Chapter 726 has no analogue. There is no settlement payment provision, no financial institution provision, no securities contract carve-out anywhere in the Florida chapter. A creditor suing in Florida state court under Chapter 726 is not facing that argument at all.
How long the exposure lasts
Section 726.110 is captioned “Extinguishment of cause of action,” and the word choice is deliberate — the statute extinguishes the claim rather than merely barring the remedy, which reads as a statute of repose rather than an ordinary limitations defense.
The periods differ by theory in a way that cuts against intuition. Under Section 726.110(1), an actual-intent claim under 726.105(1)(a) must be brought within four years after the transfer, “or, if later, within 1 year after the transfer or obligation was or could reasonably have been discovered by the claimant.” Under Section 726.110(2), a constructive fraud claim under 726.105(1)(b) or 726.106(1) must be brought within four years — full stop. There is no discovery extension. And under Section 726.110(3), the insider-preference claim under 726.106(2) gets only one year.
So the discovery rule that could theoretically stretch exposure indefinitely attaches to the intent-based claim, while the claim a good-faith seller is genuinely vulnerable to runs on a hard four-year clock from the transfer. That is a useful thing to know when sizing a holdback or deciding how long to keep records.
What a seller should actually negotiate
Three practical responses, none of them exotic.
First, ask for the solvency opinion and read it. In a properly papered leveraged deal the buyer obtains one, and the certificate or opinion is addressed to the board. A seller who is not a beneficiary of it should ask why, and should at minimum receive a copy. The document is the closest thing that exists to contemporaneous evidence that the company was not rendered insolvent — and it is the evidence a defendant seller will want four years later.
First cousin to that: solvency representations from the company and the buyer, surviving indefinitely rather than expiring with the general reps. A twelve or eighteen-month survival period on a solvency rep is close to useless against a four-year statutory exposure.
Second, understand what indemnification is worth. An indemnity from the buyer against fraudulent transfer claims is only as good as the buyer’s balance sheet, and in the scenario where the claim actually gets filed the buyer’s balance sheet is the reason. Escrow, a parent guarantee, or representation and warranty insurance are worth more than a covenant from an entity that will be in default when it matters.
Third, watch the successor liability question in parallel. Fraudulent transfer analysis and Florida’s mere continuation doctrine of successor liability travel together in distressed cases, and a structure designed to solve one can worsen the other. Where the company is already struggling at signing, an assignment for the benefit of creditors under Chapter 727 may produce a cleaner record than a leveraged private sale — the sale happens through a court-supervised process, which is a materially better set of facts to be defending later. And financing structure matters at the front end too: the covenant limits that come with an SBA 7(a) acquisition loan constrain how much leverage can be pushed onto the target in the first place.
The uncomfortable summary is that a seller’s exposure in a leveraged buyout has almost nothing to do with the seller’s conduct. It turns on the buyer’s capital structure decisions, the company’s balance sheet on the closing date, and whether a court integrates the steps. Good faith does not fix it, an arm’s length price does not fix it, and a mutual release from the buyer does not bind a creditor who was not a party. What helps is a contemporaneous record that the company was solvent when the money moved — and that record has to be built at closing, because it cannot be reconstructed afterward. For a broader view, see our mergers and acquisitions overview. The full chapter text is available from the Florida Senate’s statutes site.
If you are selling into a leveraged structure, or you are a former shareholder who has received a demand letter about a deal that closed years ago, feel free to reach out to our firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
