Petition for Writ of Certiorari — Travellers International AG v. Trans World Airlines, Inc., 118 S. Ct. 1843 (1998) (No. 97-1699)

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IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1997

TRAVELLERS INTERNATIONAL AG.,

Petitioners,

TRANS WORLD AIRLINES, INC.,

Respondent.

ON PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

MICHAEL JOSEPH

(Counsel of Record)

E. ALEX BLANTON

RICHARD A. KIRBY

JosePH O. CLICK

DYER ELLIS & JOSEPH

600 New Hampshire Ave., N.W.

Washington, D.C. 20037

(202) 944-3000

Attorneys for Travellers

International AG.

(1)

QUESTION PRESENTED

A transfer made within 90 days before a debtor files

a bankruptcy petition may be set aside as a preference

under section 547(b)(3) of the Bankruptcy Code of 1978

only if it was, among other things, made while the debtor

was “insolvent,” which is defined in section 101(32) of

the Code as a “financial condition such that the sum of

{a corporate debtor’s] debts is greater than all of such

entity’s property, at a fair valuation... .” 11 U.S.C.

§ 101(32). The question presented is:

Whether in assessing the insolvency of a debtor actively

conducting its business, a court should (a) compare the

cash a debtor could raise by liquidating assets with the

debtor’s existing debts plus new liabilities assumed to

arise from that liquidation or (b) compare the contempo-

raneous fair market values and book values used by the

debtor in appraising its assembled assets as a going con-

cern with the sum of its existing debts.

(tt)

LIST OF PARTIES AND RULE 29.1 LISTING

The names of all parties appear in the caption. Peti-

tioner Travellers International AG., a Swiss corporation,

has been dissolved and is winding up its business. It was a

wholly owned subsidiary of Windsor, Inc., a privately

held Missouri corporation, which is an affiliate, through

common ownership, of Intrav, Inc., a publicly held

corporation whose stock is traded on the Nasdaq market.

(111)

Foge

TABLE OF CONTENTS

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List of Parties and Rule 29.1 Listing................ i

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Ca ULL ise kcskdeveudsvsneeneeeees l

a fA dk oi -a's 60 0000 40 kno veo Rabe a8 |

Statutory Provisions Involved..............see000+ l

I ed pat ond ba Wie bo le be sew e's 2

Puemeans Gar Corebitiree Ue WHIt. . oc ce cece nccees 8

A. The Case Presents an Important Federal

OCS rel Se eek ew bh oa eee 6 9

B. The Lower Court’s Decision Conflicts with

Epeconeens OF Ctteer Carcuhts ooo ce eve cece ne 10

C. The Court of Appeals’ Decision Conflicts

with Decisions of This Court................. 16

EEE SSS dee Uy EAT See Ta aS a a SR 19

(wv)

Page

TABLE OF AUTHORITIES

Cases:

American Nat'l Bank & Trust Co. v. Bone, 333

Fe Oe Leen Gale SOOO ck ei ek teak hee Kuo 13 ;

Associates Commercial Corp. v. Rash, — U.S.

ety, LET Ge Sk SOE CEPTS ss whee doce aanhees 10

BFP v. Resolution Trust Corp., 511 U.S. 531

Fb } CR Pee a ar a arian a arama ravers anes passim

Bennett v. Gemmill (In re Combined Metals

Reduction Co.), 557 F.2d 179 (9th Cir.

Ck Mamata Genser ae anime easly oan en om eee 13

Bonner v. City of Pritchard, 661 F.2d 1206

(250 BOD ks ook Ree OKs he OE ee 13

Briden v. Foley, 776 F.2d 379 (1st Cir. 1985) ....12, 14

Brown v, Shell Canada, Ltd. (In re Tennessee

Chemical Co.), 112 F.3d 234 (6th Cir.

SOUT 0s chew bens wees 6 Pia a Sees eee 14

Brown v. Shell Canada, Ltd. (In re Tennessee

Chemical Co.), 143 B.R. 468 (Bankr. E.D.

BO, TORRE ci see eevae eek eee eee e che ease 15

Covey v. Commercial Nat'l Bank, 960 F.2d 657

CFU Gls PRE SVE be eee bd eee beeaas tees es 13

Danning v. Pharmaceutical Systems (In re West-

ern Adams Hospital Corp.), 609 F.2d 929

CPUS SOE 5 hehe keen ese kes cha veeeeeue 10

Grandison v. National Bank of Commerce, 231

POG, BOG, Gee tall Gals BONED hes os bene e ene wees 13

Inter-State Nat'l Bank v. Luther, 221 F.2d 382 .

(JOG RAs BUDO ohne cand CRA SERREA DER EER RS 13

Ne nF

(v)

Cases, continued: Page

Jahn v. Fassnacht (In re A. Fassnacht & Sons),

BSG F.2G Som (Ott Gat, LOGT) ccs ek etc ecewcns 10

In re Lamar Haddox Contractor, Inc., 40 F.3d

RR COU i BOE 8560 b och dees bene hewhadess 13

Lawson v. Ford Motor Co. (In re Roblin Indus.),

40 F.00 90 (26 Cat, 1996). 6 ck oa c's Peer or rrr S 12

Mellon Bank v. Official Committee of Unsecured

Creditors (In re R.M.L., Inc.), 92 F.3d 139 (3d

i OOS re rennet ba nea eee rr 10

Mizell v. Phillips, 240 F.2d 738 (5th Cir. 1957) ...... 13

Nathanson Bros. v. Atlanta Knitting Mills (In re

Nathanson Bros.), 64 F.2d 912 (6th Cir.

ROGET Vai 6 0008 NN CRONE RN WREST ES ae weeEs 10

Palmer Clay Products Co. v. Brown, 297 U.S.

Be CEE 5 64 ow Ree WE eke ek ee te eK es Eee S 18

Pirie v. Chicago Title & Trust Co., 182 U.S. 438

Ro | grin Bape Peco A hea ge Pag ane ee ES 17

Shalala v. Guernsey Mem’l Hosp., 514 U.S. 87

(SRI 5 SWE ENED OS 8 EONS OS BES Or EEO R ES 1]

Syracuse Engineering Co. v. Haight, 110 F.2d

ie Gre Cs ROE o's ca.0 be ORR ES cede RE eas Re 13

In re Taxman Clothing Co., 905 F.2d 166 (7th

28 er re rrr rrr sors ree es re 14

Thor Power Tool Co. v. Commissioner, 439 U.S.

(dh yj POU Ee ey Pee ree PT oer err ee srr ea tee 1]

Travellers Int’l AG. v. Trans World Airlines, 41

Fee 8576 (RO aE: LOE) cock chee e ee eiteweRees 2

Statutes and Rules: Page

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I BNO. Cs vnc'eccn nent Fores cxcwsek 1 |

I es ii ae Se eae 2 |

OR OO oss oka a Esco de chase cas 9 |

30 Stat. 544 (1898) as amended, 32 Stat. 799 |

EROS Soin eam Seatrecte retary Wemyoee 17

Miscellaneous:

2 COLLIER ON BANKRUPTCY (Lawrence P. King ed.,

i TOG 659s eae 9,10, 12

eraser tore ara

(vit)

Miscellaneous, continued: —=BS

V. Countryman, The Concept of a Voidable

Preference in Bankruptcy, 38 VAND L. REV.

TEE cto eaahE 0 ech b dd Coes ree EO beh ee ess 9

’

PETITION FOR A WRIT OF CERTIORARI

Travellers International AG, petitions for a writ of cer-

tiorari to the United States Court of Appeals for the

Third Circuit.

OPINIONS BELOW

The court of appeals’ opinion affirming the bank-

ruptcy court’s conclusion that respondent, TWA, was

insolvent on the date of the alleged preferential transfer is

reprinted as Appendix A and is reported at 134 F.3d 188

(3d Cir, 1998). The district court’s opinion is reprinted as

Appendix C and is reported at 203 B.R. 890 (D. Del.

1996). The bankruptcy court’s opinion is reprinted as

Appendix D, and is reported at 180 B.R. 389 (Bankr. D.

Del. 1994).

JURISDICTION

This Court has jurisdiction under 28 U.S.C. § 1254(1).

The court of appeals’ judgment was entered on January

20, 1998. Petitioner’s timely petition for rehearing was

denied on March 3, 1998. The court of appeals entered

an amended judgment on March 31, 1998.

STATUTORY PROVISIONS INVOLVED

Section 547(b)(3) of the Bankruptcy Code of 1978, 11

U.S.C. § 547(b)(3):

Except as provided in subsection (c) of this section,

the trustee may avoid any transfer of an interest of

the debtor in property—

(3) made while the debtor is insolvent{.]

Section 101(32)(A) of the Bankruptcy Code of 1978, 11

U.S.C. § 101(32)(A):

‘insolvent’? means—

(A) with reference to an entity other than a part-

nership and a municipality, financial condition

such that the sum of such entity’s debts is greater

than the all of such entity’s property, at a fair valua-

tion, exclusive of—

(i) property transferred, concealed, or removed

with intent to hinder, delay, or defraud such entity’s

creditors; and

(ii) property that may be exempted from property

of the estate under section 522 of this title[.]

STATEMENT OF THE CASE

In November 1991, respondent TWA obtained a stay

of enforcement of a judgment in favor of petitioner by

depositing $13.7 million as security with the clerk of the

United States District Court for the Southern District of

New York.! In its subsequent reorganization proceedings

under Chapter 11 of the Bankruptcy Code, TWA sought

and obtained a judgment from the United States Bank-

ruptcy Court for the District of Delaware setting aside

that deposit as a preferential transfer under 11 U.S.C.

§ 547(b).* On the principal contested issue, the bank-

I The judgment was subsequently affirmed by the Second

Circuit. Travellers Int'l AG. v. Trans World Airlines, 41 F.3d 1570

(1994). Thus, but for this preference action, the $13.7 million

would have been paid to petitioner.

2The United States District Court for the District of Dela-

ware, which had jurisdiction over the preference action under 28

U.S.C. § 1334(b), referred it, under 28 U.S.C. § 157(a), to the

[footnote continued}

ruptcy court concluded that TWA was insolvent on the

date of the deposit. The United States District Court for

the District of Delaware affirmed in part and reversed in

part. The United States Court of Appeals for the Third

Circuit modified certain of the bankruptcy court’s con-

clusions, but affirmed its holding that TWA was insol-

vent.

Pre-Bankruptcy Appraisals. TWA’s contemporaneous

pre-bankruptcy records showed it was solvent on the

transfer date. On a balance sheet prepared in accordance

with generally accepted accounting principles as of Octo-

ber 31, 1991—just four days before the transfer date—

TWA’s liabilities exceeded its assets by $556 million.*

But that balance sheet did not place any value on certain

off-book assets, to which TWA itself had assigned a fair

market value of $1.349 billion in two contemporaneous

reports (Appendices H and I) prepared for business pur-

poses in August and November 1991. App. 156a, 162a.

In these same contemporaneous reports, TWA also

showed that the fair market value of its recorded assets

was $354 million greater than the value carried on its

balance sheet. Jd. Thus when the fair market value of

TWA’s assets was taken into account, and certain agreed

adjustments were made, the October 1991 balance sheet

established that TWA was solvent by more than $700

million, notwithstanding the serious financial difficulties

it was experiencing in common with other airlines.*

bankruptcy judge, who heard and determined the action under

authority of 28 U.S.C. §§ 157(b)(1) and (2).

3The balance sheet, which both parties used as the starting

point for their valuations, is recapitulated in Appendix J at 166a-

169a.

*The airline industry had suffered losses and was generally

depressed in 1991; Pan American and Eastern Airlines had been

[footnote continued]

Bankruptcy Court. Because TWA was actively conduct-

ing its business on the date of the transfer, as it does

today, TWA conceded that it must be valued as a going |

concern for purposes of determining whether it was insol- '

vent. Knowing that the fair market values it had used in |

its contemporaneous business dealings would defeat the

insolvency element of a preference action, TWA per-

suaded the bankruptcy court that its solvency must be

assessed by determining whether it could have produced

sufficient cash by selling all its assets within a “reason-

able” period to pay its liabilities existing as of the trans-

fer date as well as those that would arise as a result of

the liquidation. The value of its assets would be measured

not by their fair market value on the transfer date, but

by the amount of cash that they would generate if sold

within 12 to 18 months after the transfer date, and the

recorded value of its debts would be increased by the lia- |

bilities it would incur if it defaulted on all its ongoing

leases and contracts and terminated operations.

2 ae ce ee rE a ne = re mn

The bankruptcy court declared that on the transfer

date, TWA “was a financially distressed entity in an

industry in crisis” (App. 89a) and that “absent a major

financial restructuring, [it] was going the way of Eastern

liquidated in bankruptcy and Continental Airlines was in reorgan-

ization. In early 1991, TWA defaulted on its public debt and

announced its intention to negotiate a restructuring; the indenture

trustees had threatened to seize collateral. Although TWA’s Decem-

ber 31, 1991 balance sheet was prepared on a going-concern

basis, implying that TWA would “continue operations for some

period of time,” (trial testimony of Charles Bruce at Tr. 685)

its auditors noted that TWA’s default “raise[d] substantial doubt

about [its] ability to continue as a going concern.” Jd. at 687.

Nonetheless, TWA was fully operational throughout its financial

difficulties and was vigorously pursuing its business on the transfer

date, at which time TWA had enough cash to continue operating

for another six to seven months, even if it had paid all of its cur-

rent debt and lease obligations.

and Pan Am” (App. 94a-95a). The court then used this

“finding” as the basis for adopting TWA’s valuation

method, stating that “in this case a § 547(b)(3) insol-

vency analysis requires a determination of the amount of

funds which could be generated by converting non-cash

assets into cash” App. 86a. The court made clear that

the insolvency test it was applying necessarily entailed

an assumption that TWA would cease all operations and

sell its assets. App. 122a, 124a-125a. The court specifi-

cally found, without explanation, that 12 to 18 months

was the “reasonable time” within which the assets must

be assumed to have been sold. App. 88a.

In estimating the value of TWA’s assets, the bankruptcy

court relied on a litigation report produced by the same

expert who had prepared the August and November 1991

appraisals for TWA. Appendix G. In the litigation report,

what had previously been described as the assets’ “fair

market value” became their “Theoretical Value,” and the

assets’ value for purposes of the preference action was

called “Sales Value (18 months).” Compare Appendices

H and I with Appendix G. For TWA’s aviation assets, this

latter value was $1.018 billion (almost 40 percent) less

than the fair market value because of the 12- to 18-

month time constraint. These values were virtually identi-

cal to “liquidation values” provided in the August 1991

report under appraisals that likewise assumed all assets

must be sold within 18 months.

The bankruptcy court also agreed with TWA’s account-

ing expert who estimated (Appendix J) the value of

TWA’s unappraised assets under the same liquidation

analysis. Because they could not be readily “sold,” assets

that had been carried on TWA’s balance sheet at $573

million were eliminated altogether. App. 108a, 110a. The

eliminated assets included such ordinary current assets as

prepaid expenses and deposits on purchases of flight

equipment and the present value of TWA’s long-term cap-

ital leases, primarily covering aircraft. Jd. The court then

added $1.670 billion in liabilities, including $816 million

in liabilities predicated solely on the assumed termina-

tion of operations, such as pension termination liabilities,

employee severance payments, and union contract termi-

nation penalties. App. 120a-127a. Also included was a

net increase of $254 million in liabilities based on the

assumed termination of TWA’s long-term capital and

operating leases (App. 120a-121a), and a new liability of

$400 million representing the cost of paying post-retire-

ment medical and dental benefits to TWA’s present and

future retired employees. App. 123a-124a.

Applying this liquidation analysis, the bankruptcy

court concluded that TWA was insolvent by $2 billion,

with assets of $3.126 billion, and liabilities of $5.125

billion. App. 128a.

District Court. The district court affirmed in part and

reversed in part. Appendix C. Its decision was super-

seded by the decision of the court of appeals, which

reviewed the bankruptcy court’s decision de novo.

Court of Appeals. The court of appcals affirmed the

bankruptcy court’s use of TWA’s liquidation values for its

assets. Appendix A. Although the court declared in the

introduction to its opinion that “TWA’s assets must be

valued at fair market value in the context of a ‘going con-

cern’ ...,”’ (App. 3a) its subsequent analysis made clear

that it was not adopting fair market value as the “fair

valuation” standard.

The court began its analysis by implicitly recognizing

that the imposition of a time period within which assets

re"?

must be sold results in distress-sale values, explaining

that

the amount that can be realized from the sale of an

asset varies as a function of the time period over

which the asset must be sold. If a company must sell

its assets in a short time period, it may be forced to

accept a relatively low price; if it can sell the assets

over a longer period, it will be able to hold out for

the possibility of a higher price.

App. lla. The.court then accepted TWA’s argument that

“a ‘fair valuation’ is best achieved by a hypothetical sale

over 12-18 months (TWA’s definition of a ‘reasonable’

time period).” App. 12a.

In affirming the bankruptcy court’s valuation of TWA’s

assets, the court concluded:

We are satisfied that the bankruptcy court applied

the appropriate legal standard in determining the

fair valuation of TWA’s assets. . . . In light of the

size and nature of Trans World Airlines, the bank-

ruptcy court’s determination that 12 to 18 months

was a “reasonable time” to value TWA’s assets is not

clearly erroneous. Such a span of time reflects the

period in which a diligent administrator, concerned

with the interests of TWA’s creditors, could inven-

tory, prepare and sell TWA’s considerable assets in

a reasonable fashion.

App. 15a (citation omitted). Accordingly, the court

affirmed the bankruptcy court’s finding that on the trans-

fer date, the fair value of TWA’s assets was $3.126 bil-

lion. App. 16a.

As to liabilities, the court of appeals reversed the bank-

ruptcy court in part, concluding that liabilities ‘“‘associ-

ated with the dissolution of the debtor” were not prop-

erly considered. App. 20a. Consistent with that conclu-

sion, the court set aside the bankruptcy court’s addition

of $816 million in contingent liabilities predicated on

termination of operations. Without explanation, how-

ever, the court did not disturb other liabilities added

by the bankruptcy court, including lease termination

liabilities and post-retirement medical and_ dental

expenses, even though these liabilities were also “associ-

ated with the dissolution of the debtor.” App. 22a (using

liabilities the bankruptcy court associated with TWA’s

liquidation, 120a-12la and 124a). The court of appeals

thus upheld so much of the bankruptcy court’s opinion

as placed the value of TWA’s liabilities at $4.308 billion.

On this basis, the court concluded that TWA was insol-

vent at the time of the transfer. App. 22a-23a.

REASONS FOR GRANTING THE WRIT

This case presents a rare opportunity for the Court to

provide guidance on an important issue of bankruptcy

law on which the courts of appeals are in conflict and

concerning which there is substantial confusion among

the circuits. The liquidation valuation method adopted

by the court of appeals also conflicts with bankruptcy

valuation principles adopted by this Court. This case pre-

sents two clear-cut alternative methods for determining

insolvency of a going concern: (a) determining whether

the cash a debtor could raise in a liquidation would be

sufficient to satisfy all its existing debts plus new liabili-

ties assumed to arise from that liquidation or (b) deter-

mining whether the fair market values and book values

used by the debtor in appraising its assembled assets as a

going concern exceed the sum of its debts on the transfer

date.

A. The Case Presents an Important Federal Question.

“A bankruptcy trustee is armed by statute with a num-

ber of powers to avoid prebankruptcy transfers made by

the now bankrupt debtor. Probably none of these powers

is of more concern to prebankruptcy transferees than the

trustee’s power to avoid preferential transfers.” V. Coun-

tryman, The Concept of a Voidable Preference in Bank-

ruptcy, 38 VAND. L. Rev. 713 (1985). A necessary ele-

ment of a claim that a transfer was preferential is that the

debtor was insolvent when the transfer was made. 11

U.S.C. § 547(b)(3). Further, the term “insolvent” is

used in no less than 19 provisions of the Bankruptcy

Code. Including the preference provisions, a determina-

tion of insolvency plays a critical role with respect to the

rights and liabilities addressed in ten Bankruptcy Code

provisions.> In addition, the federal fraudulent convey-

ance statute, under which the United States may set aside

transfers by debtors, also requires the debtor’s solvency

to be determined by applying a “fair valuation.” 28

U.S.C. § 3302(a).

The Court has not directly addressed the proper inter-

pretation of “fair valuation” in the definition of insol-

vency in the 100 years since that term was first included

in the Bankruptcy Act of 1898. As the leading commen-

tator has noted, “the meaning and effect of this term in

concrete cases generates a formidable and, on the surface,

not always consistent stream of adjudications.”’ 2 COLLIER

ON BANKRUPTCY 4 101.32[4] at 101-111 to 101-112 (Laur-

ence P. King ed., 15th ed. rev. 1997). The Court’s recent

observation on an analogous issue of valuation under

°11 U.S.C. §§ 109(c)(3), 543(d)(1), 545(1)(D), 546(c),

546(d), 547(b)(3), 548(a)(2)(B)(i), 548(b), 553(a)(2)(B)(ii), and

553(a)(3)(B). In other Bankruptcy Code provisions, the term plays

a less crucial role. E£.g., 11 U.S.C. § 365(b)(2)(A); 11 U.S.C.

§ 525(a).

the Bankruptcy Code is equally applicable to this funda-

mental area of bankruptcy law: ‘a simple rule of valua-

tion is needed to serve the interests of predictability and

uniformity.”” Associates Commercial Corp. v. Rash,

— U.S. —, 117 S. Ct. 1879, 1886 (1997) (internal quota-

tion omitted).

B. The Lower Court’s Decision Conflicts with Deci-

sions of Other Circuits.

This case provides a glaring example of the inconsis-

tency that exists among the circuits on the proper stand-

ard for determining insolvency under the Bankruptcy

Code. The Code’s insolvency definition requires a finan-

cial snapshot of the debtor at a particular time, here

the date of an alleged preferential transfer.© Where, as

here, the debtor is an operating business on that date,

the debtor must be evaluated as a going concern: assets

are valued as part of an assembled whole on the assump-

tion that the debtor will continue in business. Danning

v. Pharmaceutical Systems. (In re Western Adams Hos-

pital Corp.), 609 F.2d 929, 930 (9th Cir. 1979); Nathan-

son Bros. v. Atlanta Knitting Mills (In re Nathanson

Bros.), 65 F.2d 912, 913 (6th Cir. 1933).

The orderly liquidation methodology used below con-

flicts with the valuation standard used by other courts of

appeals. Moreover, the court’s approval of a methodology

that eliminates significant assets and adds substantial

liabilities predicated on the assumption that the debtor

®This definition of insolvency is commonly known as the

“‘balance sheet” test. E.g., Mellon Bank v. Official Committee of

Unsecured Creditors (In re R.M.L., Inc.), 92 F.3d 139, 154-55 (3d

Cir. 1996); Jahn v. Fassnacht (In re A. Fassnacht & Sons), 826 F.2d

458, 462 (6th Cir. 1987); 2 COLLIER ON BANKRUPTCY 4 101.32-

[4] at 101-111.

rT STH a ninclahe> ciibrellee nian,

will cease operations conflicts with other circuits’ conclu-

sions that an entity that is operating its business at the

time of the transfer must be evaluated as a going con-

cern,

Like other circuits, the court below agreed that a con-

temporaneous balance sheet prepared in the normal

course of the debtor’s business provided a proper starting

point for evaluating the debtor’s financial condition.

Here, TWA’s balance sheet was prepared using generally

accepted accounting principles, the hallmark of which

is the long-established convention of conservatism, under

which possible errors in measuring assets and liabilities

are resolved in favor of understating net assets.’ And

like other circuits, the lower court agreed that the value

of the debtor’s off-book assets should be taken into

account.

Most business people and most other circuits would

have concluded from the objective contemporaneous evi-

dence of the fair market value of TWA’s off-book assets

that TWA, as a going concern, was solvent under the

Bankruptcy Code’s “balance sheet” test. Although the

Third Circuit purports to have evaluated TWA as a going

concern, it in fact turns the notion of a going-concern

valuation on its head. It does not consider the debtor as

an operating enterprise, but instead assumes that TWA

must sell all of its assets to raise cash and pay creditors.

Assets normally considered valuable to an operating

enterprise are disregarded, and special liquidation liabili-

ties that would never be accrued by an operating business

are added. Essentially, the lower court’s liquidation test

alters the context of the evaluation from that of an enter-

prise of assembled assets, here one designed to sell air

7 Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 100 (1995);

Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 542 (1979).

transportation services, to an enterprise of selling used

airline assets. No business would likely ever be found

solvent under such a test, as is demonstrated by the court

of appeals’ conclusion that TWA was insolvent, not by

the $556 million reflected on its GAAP balance sheet,

which excluded off-book assets, but by $1.2 billion after

adding those off-book assets. App. 22a.

1. The lower court’s decision represents one of at least

three standards that the courts of appeals have used to

determine the fair value of a going-concern business debt-

or’s assets under the insolvency definition. The inconsis-

tencies can be seen from the following passage from

COLLIER:

Valuation, in general, will signify the reasonable esti-

mate of what can be realized from the assets by con-

verting them into, or reducing them to cash, under

carefully guarded if not idealized conditions. ‘Fair

valuation” is not the same as “reasonably equivalent

value.”’ It is necessary to look at market value, and

not distress value, to reach a fair valuation.

2 COLLIER ON BANKRUPTCY § 101-32[4] at 101-112. Al-

though this passage adopts market value as the preferred

measure and disavows distress-sale value, it confuses

the issue by asserting that fair value represents “what

can be realized from the assets by converting them into,

or reducing them to cash,” implying that the appraiser

must assume the assets are sold to determine their value.

The majority of the courts of appeals that have consid-

ered the issue have adopted fair market value as the best

measure of “fair value” with respect to a corporate debtor

doing business as a going concern, Briden v. Foley, 776

F.2d 379, 382 (1st Cir. 1985); Lawson v. Ford Motor Co.

(In re Roblin Indus.), 78 F.3d 30, 35-36 (2d Cir. 1996);

Syracuse Engineering Co. v. Hatght, 110 F.2d 468, 471

(2d Cir. 1940); Grandison v. National Bank of Com-

merce, 231 Fed. 800, 804 (2d Cir. 1916); Jn re Lamar

Haddox Contractor, Inc., 40 F.3d 118, 121 (5th Cir.

1994); Mizell v. Phillips, 240 F.2d 738, 741 (5th Cir.

1957); Covey v. Commercial Nat’l Bank, 960 F.2d 657,

660 (7th Cir. 1992); American Nat’l Bank & Trust Co. v.

Bone, 333 F.2d 984, 987 (8th Cir. 1964); Inter-State

Nat'l Bank v. Luther, 221 F.2d 382, 391 (10th Cir.

1955).8

“The term ‘fair market value’. . . is a well-established

concept.” BFP v. Resolution Trust Corp., 511 U.S. 531,

537 (1994). This Court has defined it as

the price which it might be expected to bring if

offered for sale in a fair market; not the price which

might be obtained on a sale at public auction or a

sale forced by the necessities of the owner, but such

a price as would be fixed by negotiation and mutual

agreement, after ample time to find a purchaser, as

between a vendor who is willing (but not compelled)

to sell and a purchaser who desires to buy but is

not compelled to take the particular . . . piece of

property.

Id. at 538 (internal quotation marks and citation omit-

ted). The fair market value standard is thus realistic and

practical, as it is based on actual market conditions as of

the date of the valuation.

8 The Fourth, Ninth, and District of Columbia Circuits do

not appear to have directly addressed the fair valuation issue,

although the Ninth Circuit would likely adopt the fair market

value standard. Bennett v. Gemmill (In re Combined Metals

Reduction Co.), 557 F.2d 179, 185 (9th Cir. 1977). The Eleventh

Circuit, although it has not separately addressed the question, is

bound by the Fifth Circuit’s Mizell decision. See Bonner v. City

of Pritchard, 661 F.2d 1206, 1209 (11th Cir. 1981).

2. Even within those circuits that have adopted fair

market value, there are inconsistencies that reflect the

confusion generated by the various formulations of the

fair valuation standard appearing in the case law. In par-

ticular, the First Circuit apparently uses the fair market

value standard in a quasi-liquidation analysis, which

appraises assets at fair market value, but subtracts “the

value of the assets not readily susceptible to liquidation

and the payment of debts.” Briden v. Foley, 776 F.2d at

382. Thus the First Circuit, like the Third Circuit here,

ascribes no value to items like prepaid insurance and

other prepaid expenses, which normally appear as balance-

sheet assets because they have real value to a going con-

cern. These assets are omitted from the solvency analysis

simply because they cannot be sold separately, even

though their value would undoubtedly be included in the

selling price if the business were sold as a going concern.

Similarly, the Seventh Circuit values retail inventory at

fair market value minus the estimated cost of sales, which

normally is not an increment of value on a company’s

balance sheet, but is instead an operating expense reflected

on its income statement. Jn re Taxman Clothing Co., 905

F.2d 166, 170 (7th Cir. 1990).

3. This Court has made clear that fair market value

and forced-sale or liquidation value are antithetical. BFP

v. Resolution Trust. Corp., 511 U.S. at 537-38. “ ‘[F] air

market value’ presumes market conditions that, by defini-

tion, simply do not obtain in the context of a forced

sale.” Jd. at 538. In this case, the lower court abandoned

the fair market value standard and aligned itself with the

Sixth Circuit in adopting a liquidation analysis that

ascribes forced-sale or liquidation values to a going-

concern debtor’s assets. See Brown v. Shell Canada, Ltd.

(In re Tennessee Chemical Co.), 112 F.3d 234, 236 (6th

Cir. 1997).? The lower court’s decision is also consistent

with the First Circuit’s quasi-liquidation analysis in that

it ascribes no value to assets (such as prepaid insurance

and non-refundable deposits on aircraft) that cannot

readily be sold separate from the business as a whole.

Although the lower court here initially says TWA’s

“assets must be valued at fair market value in the con-

text of a ‘going concern,’ ” (App. 3a) the record and the

court’s analysis disclose that the court did not adopt such

a standard.!° The linchpin of the court’s analysis is its

reliance on language in a few cases from other circuits,

and from the previously quoted passage from COLLIER ON

BANKRUPTCY, to the effect that a “fair valuation of assets

contemplates a conversion of assets into cash during a

reasonable period of time.”” App. 13a (citing Jn re Roblin

Indus., 78 F.2d at 35-36; Briden v. Foley, 776 F.2d at

382; American Nat'l Bank, 333 F.2d at 987; Syracuse

Engineering, 110 F.2d at 471; 2 COLLIER ON BANKRUPTCY

q 101.32[4] at 101-116). Ignoring that each of these

in Tennessee Chemical, the court of appeals affirmed “the

finding of insolvency based upon the reasoning advanced by the

bankruptcy court and affirmed by the district court.’’ Jd. The

bankruptcy court defined fair valuation as “the amount of money

the debtor could raise from its property in a reasonably short per-

iod of time, but not so short as to approximate a forced sale, if the

debtor operated as a reasonably prudent businessman with his

interests in mind, especially a proper concern for the payment of

his debts.” Brown v. Shell Canada, Ltd. (In re Tennessee Chemical

Co.), 143 B.R. 468, 474 (Bankr. E.D. Tenn. 1992). Like the

Third Circuit here, the Sixth Circuit failed to explain how the

imposition of a time constraint can result in anything other than

a forced sale.

10 indeed, in its five-page analysis of the fair valuation stand-

ard, the court mentions the term “market value” only once, and

then, again, only by way of introduction. App. 3a. Similarly,

the court does not even mention, much less discuss, TWA’s own

contemporaneous estimates of its assets’ fair market value.

authorities expressly adopts fair market value as the

standard for fair valuation, the court focuses on the

phrase “reasonable period of time” to adopt a valuation

standard that assumes a hypothetical sale of all of a debt-

or’s assets that commences on the date of the transfer

and ends at some “reasonable time”’ thereafter.

The result is a liquidation, or forced-sale, standard. A

valuation that is premised on the assumption that assets

must be sold is not a value resulting from a transaction

between a willing buyer and a willing seller. Cf. BFP v.

Resolution Trust Corp., 511 U.S. at 537. Further, the

court of appeals implicitly recognizes the dramatic effect

that the time constraint built into its “reasonable time”’

limitation has on an asset’s fair market value. App. 1 1a.

Elsewhere the lower court recognizes that its reasonable

time limitation negatively affects fair market value, “We

disagree with Travellers’ view that .. . a fair valuation

implicates a hypothetical sale absent trme pressures.”

App. 15a (emphasis added). And the court of appeals

expressly describes its standard as a liquidation standard:

“fair valuation does not preclude a continuing business

from valuing its assets in contemplation of a reasonable

time for their /iguidation.” Id. (emphasis added).

C. The Court of Appeals’ Decision Conflicts with

Decisions of This Court.

Although the Court has not addressed the proper stand-

ard for determining the fair value of a debtor’s assets

under the bankruptcy definition of insolvency, it has

decided several cases under the bankruptcy laws’ prefer-

ence and fraudulent conveyance provisions raising related

issues. The court of appeals’ decision here is inconsistent

with principles enunciated in those decisions.

In Pirte v. Chicago Title & Trust Co., 182 U.S. 438

(1901), the Court considered the preference provi-

sions of the Bankruptcy Act of 1898, which first set

forth the fair valuation standard. The Court noted that

the 1898 Act replaced the 1867 Act’s equity test of

insolvency—an inability to pay debts as they become due

—with the balance sheet test, making proof of insolvency

more difficult:

Inability to pay debts in the ordinary course of busi-

ness usually accompanies an insufficiency of assets.

It may not, of course. At times a debtor’s property,

though amply sufficient in value to discharge all of

his obligations, may not be convertible without sac-

rifice into that form by which payments may be

made. The law regards that possibility. In this there

is indulgence to the debtor, and through him to pre-

ferred creditors.

182 U.S. at 451.

The test adopted here by the Third Circuit does not

grant “indulgence to the debtor” with respect to the pos-

sibility that its property “may not be convertible without

sacrifice into that form by which payments may be

made.” To the contrary, the lower court’s test expressly

takes into account the debtor’s impecunious situation by

assuming that a debtor must sell all of its assets within a

predetermined period, even though such a sale necessarily

entails sacrifice, and even if some valuable assets cannot

be sold at all.

The Bankruptcy Act of 1898 defined a preference as a

transfer that if enforced would, among other things,

“enable any one of [the debtor’s] creditors to obtain a

greater percentage of his debt than any other of such

creditors of the same class.”” Former 30 Stat. 544 (1898)

as amended, 32 Stat. 799 (1903). In Palmer Clay Pro-

ducts Co. v. Brown, 297 U.S. 227 (1936), the recipient of

a preferential transfer argued that ‘fa creditor who receives

a part payment of his claim does not receive a preference

. . . [if] the debtor’s assets at the time of the payment

would, if then liquidated and distributed, be sufficient

to pay all the creditors of the same class an equal portion

of their claims.’’ The Court rejected this argument, hold-

ing that the preferential effect of a transfer is to be deter-

mined by “the actual effect of the payment as deter-

mined when bankruptcy results.” Jd. The Court rea-

soned:

We may not assume that Congress intended . . . to

introduce the impractical rule of requiring the deter-

mination, as of the date of each [preferential] pay-

ment of the hypothetical question: What would

have been the financial result if the assets had then

been liquidated and the proceeds distributed among

the then creditors?

Id.

Although the Third Circuit asserts that its valuation

standard provides a “realistic framework” (App. 11a),

Palmer Clay Products makes clear that a financial analysis

that requires a hypothetical liquidation of the debtor’s

assets is simply impractical. See also BFP v. Resolution

Trust Corp., 511 U.S. at 538. And, to the extent that

market conditions are relevant to the lower court’s stand-

ard, its requirement that the assets be sold within a “‘rea-

sonable time”—which necessarily requires predictions of

market conditions for some time after the transfer—makes

the court of appeals’ test even more speculative and

impractical.

eNO AO EA IE MB WE AS ARC eA Ni wen Sate

As noted, the Third Circuit initially states that TWA’s

assets must be ascribed their fair market value. App. 3a.

The test it adopts, however, plainly conflicts with this

Court’s definition of fair market value in BFP v. Resolu-

tion Trust Corp., which makes clear that the essence of

fair market value is the absence of a compulsion to sell

and time constraints. A debtor that must sell all of its

assets to pay creditors is not a seller that is “willing (but

not compelled) to sell.” 511 U.S. at 537-38. And requir-

ing that the seller must sell within some preordained

“reasonable time’’ determined on the basis of the com-

peting interests of creditors is not one that contemplates

that the seller has “ample time to find a purchaser.” /d.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

MICHAEL JOSEPH

(Counsel of Record)

E. ALEX BLANTON

RICHARD A. KIRBY

JoserH O. CLICK

DYER ELLIS & JOSEPH

600 New Hampshire Ave., N.W.

Washington, D.C. 20037

(202) 944-3000

Attorneys for Petitioner,

Travellers International AG.

April 16, 1998

~ APPENDIX

.F/ Bupreme Court, U.S.

FILED

@ 71699 APR 16 1998

No. OFFICE OF THE CLERK

IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1997

TRAVELLERS INTERNATIONAL AG.,

Petitioners,

TRANS WORLD AIRLINES, INC.,

Respondent.

ON PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

MICHAEL JOSEPH

(Counsel of Record)

E. ALEX BLANTON

RICHARD A. KIRBY

JOsePu O. CLICK

DYER ELLIS & JOSEPH

600 New Hampshire Ave., N.W.

Washington, D.C. 20037

(202) 944-3000

Attorneys for Travellers

International AG.

(t)

TABLE OF CONTENTS

Appendix A — Opinion of the United States

Court of Appeals for the Third Circuit,

PU AE cS HERDER REAENA Mo's 44 64 oR la

Appendix B — Amended Judgment of the

United States Court of Appeals for

the Third Circuit, Mar. 31,1998............... 24a

Appendix C — Opinion of the United States

District Court for the District of

Re SOOO. Be 26a

Appendix D — Opinion of the United States

Bankruptcy Court for the District of

SS Se eee 37a

Appendix E — Judgment of the United

States Bankruptcy Court for the Dis-

trict of Delaware, Dec. 20, 1994.............. 13la

Appendix F — Order of the United States

Court of Appeals for the Third Circuit

denying rehearing, Mar. 3,1998.............. 135a

Appendix G — Excerpts from Avmark Inc.

Report, Aug. 7, 1992, Plaintiff’s Exhibit

ig ET PO Ge eee ee > Cee ge 137a

Appendix H — Excerpts from Avmark Inc.

Report, Nov. 25, 1991, Plaintiff’s

I Ne ee Bl era 0 0 ig 4 kiko Sache 153a

Appendix I — Excerpts from Avmark Inc.

Report, Aug. 16, 1991, Plaintiff's

ee POE EU Fe aE Oe Rar EEN 159a

(it)

Appendix J — Report on Assets and Lia-

bilities, as of Oct. 31, 1991,

PRES O SRUDUNOE Bila a 0 645 45 RHE RE Senne 165a

APPENDIX A

Filed January 20, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 97-7037 and 97-7082

IN RE: TRANS WORLD AIRLINES, INCORPORATED,

Debtor

TRAVELLERS INTERNATIONAL AG,

Appellant/Cross-Appellee

in Appeal No. 97-7037

Vv.

TRANS WORLD AIRLINES, INCORPORATED;

OFFICIAL COMMITTEE OF

UNSECURED CREDITORS FOR

TRANS WORLD AIRLINES

Trans World Airlines, Incorporated

Appellant/Cross-Appellee

in Appeal No. 97-7082

On Appeal from the United States District Court

for the District of Delaware

(D.C. No. 95-cv-00031)

Argued Friday, September 12, 1997

BEFORE: MANSMANN, NYGAARD and

GARTH, Circuit Judges

(Opinion filed January 20, 1998)

Michael Joseph

Richard A. Kirby (Argued)

Joseph O. Click

Dyer, Ellis, Joseph

& Mills

600 New Hampshire Avenue, N.W.

Washington, D.C. 20037

Laurie S. Silverstein

Potter, Anderson & Corroon

350 Delaware Trust Building

P.O. Box 951

Wilmington, DE 19899

Attorneys for Travellers

International AG

William H. Sudell, Jr. (Argued)

Derek C. Abbott

Morris, Nichols, Arsht & Tunnell

1201 North Market Street

P.O. Box 1347

Wilmington, DE 19899

Michael J. Templeton

Jones, Day, Reavis & Pogue

599 Lexington Avenue

New York, New York 10022

Attorneys for Trans World Airlines,

Incorporated

OPINION OF THE COURT

GARTH, Circutt Judge:

The sole issue we must resolve in this appeal is whether

TWA was insolvent on November 4, 1991 so that the

transfer of certain monies to a judgment creditor within

"Paice

90 days of TWA’s petition for bankruptcy constituted a

preference. Our analysis of TWA’s insolvency depends on

how TWA’s assets and liabilities should be valued.

We conclude that TWA’s assets must be valued at fair

market value in the context of a “going concern” and

that its liabilities should be measured at face value. Inas-

much as we agree with the bankruptcy court’s calcula-

tions, albeit with minor qualifications, we hold that on

the date in question, TWA was insolvent. Accordingly,

any transfer of TWA’s monies to Travellers falls within

the preference statute, 11 U.S.C. § 547(b).

We will reverse the district court’s order, which had

reversed the insolvency holding of the bankruptcy court,

and direct the district court to remand this case to the

bankruptcy court for Proceedings consistent with our

opinion.

On October 12, 1991, the United States District Court

for the Southern District of New York entered a judg-

ment in the amount of $12.3 million in favor of Travel-

lers International AG (“Travellers”) against Trans World

Airlines, Inc. (“TWA”). On November 4, 1991, TWA

obtained a stay of enforcement of the judgment by

depositing $13.7 million in cash with the clerk of the

court. Eighty-eight days after the deposit was made, on

January 31, 1992, TWA filed a petition for reorganiza-

tion in the United States Bankruptcy Court for the Dis-

trict of Delaware under Chapter 11 (11 U.S.C. § 101 et

seq.). Subsequently, TWA filed a complaint against Trav-

ellers in the United States Bankruptcy Court for the Dis-

trict of Delaware, seeking a declaration that the $13.7

million deposit was a preferential transfer which was

voidable under 11 U.S.C. § 547(b).! See Travellers Int'l

AG v. Robinson, 982 F.2d 96, 97 (3d Cir. 1992).

A. The Bankruptcy Court Proceedings

The bankruptcy court held a four day bench trial in

February 1994 to determine whether the deposit was

indeed a preferential transfer. See In Re Trans World Aitr-

lines, Inc., 180 B.R. 389 (Bankr. D. Del. 1994). In par-

ticular, the court focused its attention on the statutory

requirement that TWA was insolvent on the day of the

transfer. See 11 U.S.C. § 547(b)(3). Following the code’s

guidance that a corporation is insolvent when “the sum

of such entity’s debts is greater than all of such entity’s

111 U.S.C. § 547(b) (1993) states:

Except as provided in subsection (c) of this section, the

trustee may avoid any transfer of an interest of the debtor

in property—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the

debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the filing

of the petition;

(B) between ninety days and one year before the date

of the filing of the petition, if such creditor at the time

of such transfer was an insider; and

(5) that enables such creditor to receive more than such

creditor would receive if—

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

extent provided by the provisions of this title.

i ia

te ere

property, at a fair valuation,” 11 U.S.C. § 101(32)(A),?

the bankruptcy court heard evidence by experts hired

by both TWA and Travellers on the value of TWA’s assets

and liabilities.

1. Travellers’ Arguments

Travellers, together with its expert Global Aviation

Associates, Ltd. (“Global”), offered testimony that

TWA’s assets exceeded its liabilities by almost two billion

dollars, and thus that the company was solvent. Global

based its “fair valuation” of TWA’s assets on their market

value assuming that TWA was not compelled to sell the

assets under any time constraint. Applying this method-

ology, Global valued TWA’s operating assets at $4,162.-

273,000. See 180 B.R. at 421. Combining this with the

cash, cash equivalents, accounts receivable, and other

investments owned by the company, Travellers argued

that the value of the company’s assets totaled $5,298.-

373,000.

Turning to TWA’s liabilities, Travellers contended that

§ 101(32)(A) called for a “fair valuation” of TWA’s lia-

bilities, which Travellers insisted translated into a fair

market valuation of TWA’S publicly traded debt. As a

result, Travellers’ expert testified that TWA’s debt obliga-

211 US.C. § 101(32)(A)(1993) states in full:

“insolvent” means—

(A) with reference to an entity other than a partnership

and a municipality, financial condition such that the sum

of such entity’s debts is greater than all of such entity’s

property, at a fair valuation, exclusive of —

(i) property transferred, concealed, or removed with

intent to hinder, delay, or defraud such entity’s creditors;

and

(ii) property that may be exempted from property of the

estate under section 522 of this title{.]

tions amounted to $662,898,000.3 With respect to TWA’s

additional liabilities, Travellers’ expert testified that the

value of TWA’s aircraft lease obligations was $813,604,-

000; pension plan liabilities, $219 million; taxes, $949.7

million; and other liabilities, $947.4 million. Travellers

calculated the sum of TWA’s liabilities to be $3,593 ,000,-

000.

Inasmuch as TWA’s assets, if valued at $5,298,373,-

000 exceeded its liabilities at $3,593,000,000, Travellers

urged the bankruptcy court to find that TWA was solvent.

2. TWA’s Arguments

TWA and its experts, Avmark Inc. (“Avmark”’), offered

very different valuations of both assets and liabilities.

According to TWA’s calculations, TWA was insolvent on

November 4, 1991, the date of the transfer to the escrow

account, because TWA’s liabilities exceeded assets by as

much as three billion dollars. Avmark based its ‘‘fair valu-

ation’”’ of TWA’s assets on the amount realizable from the

assets following a hypothetical sale of the assets within a

reasonable time period. Referring to 12-18 months as a

reasonable time period, Avmark concluded that the over-

all value of TWA’s assets was $2,561,366,000. See 180

B.R. at 404.

As to the company’s liabilities, TWA contended that

the fair valuation prescription in 11 U.S.C. § 101(32)(A)

did not apply to liabilities. TWA thus asked the court to

consider the face value of the company’s debt, rather

than the much lower market value urged by Travellers, in

determining the company’s insolvency. TWA’s calculation

>This figure is far less than the “face” value of TWA’s public

debts, $1,776,752.000, which we assume represented the net pres-

ent value of TWA’s debts as of the date of the transfer.

of the company’s liabilities also included an extra $634,-

814,000 of what it termed contingent liabilities, as well

as up to $576,000,000 of pension plan liabilities. These

additional liabilities represented costs to which TWA

would be subject if it had ceased operating soon after

November 4, 1991: they included $138.8 million payable

to two of TWA’s unions, $214.8 million for severance

payments pursuant to contractual obligations, and $248.9

million in wind down expenses. TWA urged the court to

consider these liabilities in light of the high likelihood as ‘

of November 4, 1991 that TWA would soon cease opera-

tions. Combined with $370 million in tax liability, medi-

cal/dental benefits totaling $400 million, and almost one

billion dollars of other liabilities, the liability figure urged

by TWA totaled between five and five and a half billion

dollars.

Because this figure exceeded the asset valuation of

$2,561,366,000, TWA urged that the company was insol-

vent.

3. The Bankruptcy Court’s Rulings

In an extensive opinion, the bankruptcy court agreed

with TWA’s conclusion that the company was insolvent.

Addressing the valuation of assets, the court agreed with

TWA that a “fair valuation” of assets would be found by

calculating the amount that would be realized by convert-

ing non-cash assets into cash over a reasonable time

frame. See 180 B.R. at 411. The court found Travellers’

position that asset valuations exist independently of an

actually realizable amount to be unrealistic. As such, the

court largely adopted Avmark’s asset valuations. Alto-

gether, the bankruptcy court disagreed with TWA’s asset

valuations in only three relatively minor categories: the

company’s investment in affiliates, the value of the com-

pany’s gates outside of St. Louis and JFK, and the mea-

sure of the company’s accounts and other receivables. In

these three areas, the court found that for various factual

reasons, TWA’s figures were too low, and substituted

Travellers’ figures. The court concluded that the proper

valuation of TWA’s assets was $3,125,811,000.

Turning to the company’s liabilities, the bankruptcy

court first considered whether TWA’s public debt should

be measured at market value or at face value. The court

concluded that face value was the proper guide for two

reasons. First, the text of 11 U.S.C. § 101(32)(A) sug-

gested that the “fair valuation”? requirement did not

apply to debts. Second, the court opined that valuing

debts at market value would, among other things, create

an unprincipled distinction between the treatment of

private and public debt. See 180 B.R. at 423-24. The

court thus adopted the face value figure of the company’s

debts urged by TWA, $1,776,752,000.

As to the liabilities incurred by the company’s aircraft

leases, the court accepted TWA’s figure of $595 million

because it appeared to be the only probative evidence put

forward by the two parties. TWA’s view that the medical

and dental benefits obligations amounted to $400 million

was also accepted. Travellers had argued that this liability

should be zero because TWA’s benefits program had cre-

ated an offsetting good will asset among its employees.

This argument was rejected on the ground that the good

will was not a saleable asset and had no market value.

Having largely accepted TWA’s asset figures, the bank-

ruptcy court in turn adopted TWA’s estimate of its tax

liability, $370 million, and also adopted Travellers’

largely uncontested figure for ‘other’ liabilities, $947,-

381,000.

Mist inca a

The final liabilities to be determined were TWA’s pen-

sion plan obligations and what TWA termed ‘contingent’

liabilities. The court adopted TWA’s view that these lia-

bilities were to be assessed in light of the likelihood that

TWA was on the verge of going out of business on

November 4, 199]. As a result, the court calculated the

liabilities that TWA would incur if the company ceased

its operations. This added $634,814,000 of contingent

liabilities arising from the hypothetical liquidation to the

overall liability figure, and also raised the pension plan

liability from $219.4 million to $401 million. Altogether,

the bankruptcy court decided that TWA’s liabilities

totaled $5,124,947,000, which exceeded the asset figure

of $3,125,811,000 by two billion dollars. Thus, the bank-

ruptcy court held that TWA was insolvent, and that the

transfer of $13.7 million was voidable as a preference.

B. The District Court Proceedings

On appeal, the United States District Court for the Dis-

trict of Delaware affirmed in part, reversed in part, and

remanded to the bankruptcy court. See Travellers Int’

AG v. Trans World Atrlines, Inc. (In re Trans World Atr-

lines, Inc.), 203 B.R. 890 (D. Del. 1996). The district

court agreed with the bankruptcy court’s Position that

the proper legal test for a fair valuation of the company’s

assets should be based on the amount that could be

obtained if the assets were sold in a reasonable time. See

td. at 895. Concluding that the bankruptcy court’s adop-

tion of a 12 to 18 month period as a reasonable time

frame was a factual matter, and that none of the bank-

ruptcy court’s factual determinations relating to assets

was clearly erroneous, the court affirmed the bankruptcy

court’s determination thai the company’s liabilities were

$3,125,811,000.

10a

On the liability side, however, the district court dis-

agreed with the bankruptcy court’s legal conclusion that

the “fair valuation” requirement of 11 U.S.C. § 101(32)

(A) did not apply to the company’s debts. Relying largely

on Mellon Bank, N.A. v. Metro Communications, Inc.,

945 F.2d 635, 648 (3d Cir. 1991), the district court held

that both assets and liabilities were subject to the fair

valuation requirement. Accordingly, the court con-

cluded that the bankruptcy court’s decision to value the

public debt at face value was error. See 203 B.R. at 897-

98. In all other respects, the court agreed with the bank-

ruptcy court’s legal analysis, and found that the bank-

ruptcy court’s factual conclusions were not clearly erro-

neous. Thus, the district court reversed the portion of the

bankruptcy court’s decision relating to liabilities, and

remanded with instructions to conduct a fair valuation of

TWA’s liabilities.

The instant appeal and cross-appeal followed.

Il.

We exercise jurisdiction to review this appeal pursuant

to 28 U.S.C. §§ 1291 and 158(d). See Porter v. Mid-Penn

Consumer Discount Co. (In re Porter), 961 F.2d i066,

1072 (3d Cir. 1992). Whether a company is insolvent

under the Bankruptcy Code is considered a mixed ques-

tion of law and fact. See Moody v. Security Pacific Bust-

ness Credit, 971 F.2d 1056, 1063 (3d Cir. 1992). While

factual findings are reviewed only for clear error, our

choice and interpretation of legal precepts and _ its

review of “‘the trial court’s application of those precepts

to the historical facts” is plenary. Untversal Minerals, Inc.

v. C.A. Hughes & Co., 669 F.2d 98, 103 (3d Cir. 1981).

- —

——

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IIL.

A. Asset Valuations

The first question we must answer js how to measure

properly a “fair valuation” of TWA’s assets according to

11 U.S.C. § 101(32)(A). Because liquidation in bank-

ruptcy was not clearly imminent on the date of the chal-

lenged transfer, we concern ourselves with how to achieve

a fair valuation of TWA’s assets on a “going concern”

basis. See Moody, 971 F.2d at 1067.

In the century that has passed since the enactment of

the Bankruptcy Act of 1898, the courts have offered vari-

ous statements describing how to achieve a fair valuation

of assets for a going concern. The cases generally direct

us to look at “market value” rather than “distress value,”’

but then also caution that the valuation must be analyzed

“in a realistic framework” considering amounts that can

be realized “in a reasonable time” assuming a “willing

seller” and a “willing buyer.” See, e.g, BFP v. Resolu-

tion Just Corp., 511 U.S. 531, 537,114S. Ct. 1757,1761

(1994); Syracuse Engineering Co. v. Haight, 110 F.2d

468, 471-72 (2d Cir. 1940). Although these statements

are helpful in many cases, they fail to resolve squarely the

question of law that is before us. That question centers

around a disagreement about the appropriate time frame

under which a hypothetical sale of assets must take place

to achieve a valuation that is “fair” for a going concern.

Logic and common sense inform us that the amount

that can be realized from the sale of an asset varies as a

function of the time period over which the asset must be

sold. If a company must sell its assets in a short time

period, it may be forced to accept a relatively low price;

if it can sell the assets over a longer period, it will be able

to hold out for the possibility of a higher price. TWA’s

12a

position, accepted by both the bankruptcy court and the

district court, is that a “fair valuation” is best achieved

by a hypothetical sale over 12-18 months (TWA’s defini-

tion of a “reasonable” time period). That is, the value of

the assets is to be measured by the sales price that could

be attained if there were a period of 12-18 months to sell

off the assets. Travellers, however, argues that the proper

time period is substantially longer: so long, in fact, that

the assets should be valued without regard to the pres-

sures of time. In other words, Travellers maintains that

the value of the assets is to be measured by the price that

could be attained if TWA could hold out for as long a

period as necessary to receive a ‘full’ price on its assets.

The parties enlist a substantial body of case law in sup-

port of their respective positions. TWA bases its position

on a voluminous line of cases stating that fair valuation

involves a value that can be made available for payments

of debts within a reasonable period of time. See, e.g.,

Syracuse Engineering Co., 110 F.2d at 471; Bnden v.

Foley, 776 F.2d 379, 382 (1st Cir. 1985); American

Nat'l Bank & Trust Co. v. Bone, 333 F.2d 984, 987 (8th

Cir. 1964). TWA argues that 12-18 months is a reasonable

period of time, such that the use of a 12-18 month sale

scenario by the bankruptcy court was proper.

Travellers, on the other hand, relies on cases stating

that fair valuation of a going concern implicates a fair

market valuation. See Lawson v. Ford Motor Co. (In re

Roblin Indus.), 78 F.3d 30, 36 (2d Cir. 1996); Briden,

776 F.2d at 382. Travellers then argues that a fair market

valuation is achieved by a sale without regard to the pres-

sures of time. See BFP, 511 U.S. at 537-38, 114 S. Ct. at

1761-62; Duncan v. Landis, 106 F. 839, 858-59 (3d Cir.

1901). Accordingly, Travellers construes the 12-18

month sale scenario used by the bankruptcy court and

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13a

district court as a forced sale, which undervalued TWA’s

assets and led to an improper conclusion that TWA was

insolvent on the date of the transfer.

We begin our analysis by recognizing the overwhelming

body of authority that makes clear that a fair valuation

of assets contemplates a conversion of assets into cash

during a reasonable period of time. See, e.g., In re Roblin

Indus., 78 F.3d at 55-36; Moody, 971 F.2d at 1068;

Briden, 776 F.2d at 382; American Nat'l Bank & Trust

Co., 333 F.2d at 987; Syracuse Engineering Co., 110

F.2d at 471; 2 Collier on Bankruptcy 4 101.32[4] at 101-

116 (15th ed. Rey. 1997).4 The question then becomes

how to construe whether a given time period is reason-

able. As previously indicated, TWA maintains that a rea-

sonable time is the period of time that a company such as

TWA might reasonably require to sell off its assets in

order to pay off its debts and attempt to satisfy its credi-

tors. Travellers disagrees with TWA’s approach, and

asserts that a reasonable period is the time that an active

“person shall be deemed insolvent . . . whenever the aggregate of

his property . . . shall not at fair valuation be sufficient in amount

to pay his debts.” 11 U.S.C. § 1(19) (repealed 1978). This text

Suggests a conversion-to-cash valuation.

In contrast, the current version states only that insolvency is

a “financial condition such that the sum of such entity’s debts is

greater than all of such entity’s property, at a fair valuation.”

11 U.S.C. § 101(32)(A)(1993). Although the conversion-to-cash

methodology is less obvious from the current text, courts have

uniformly treated the current version of the statute as being identi-

cal in relevant part to the earlier version, and we will do the same.

See S. Rep. No. 95-989, 85th Cong., 2d Sess. (1978), reprinted in

1978 U.S.C.C.A.N. 5787, 5811 (“The definition of ‘insolvent’ in

paragraph [(32)] is adopted from section 1(19) of current law... .

It is the traditional bankruptcy balance sheet test of insolvency."’),

SES

l4a

company might reasonably take to sell its assets in the

typical course of business at the highest available price.

We believe that the proper point of reference for deter-

mining a “reasonable” time period in the case of § 101(32)

(A) should begin with the financial interests of the credi-

tors. See Syracuse Engineering Co., 110 F.2d at 471. The

reasonable time should be an estimate of the time that

a typical creditor would find optimal: not so short a

period that the value of the goods is substantially impaired

via a forced sale, but not so long a time that a typical

creditor would receive less satisfaction of its claim, as a

result of the time value of money and typical business

needs, by waiting for the possibility of a higher price. Cf.

td. This test satisfies the requirement of a fair valuation

because it identifies, as best it can, the equilibrium

point between the two competing concerns of creditors:

the desire to maximize the dollar figure from the assets to

be sold, and the desire to have the assets sold off quickly i

to satisfy creditors’ claims sooner rather than later. The

competing view that fair valuation contemplates a hypo-

thetical sale without regard to the pressures of time fails

in light of contrary authority. See Briden, 776 F.2d at

382 (‘‘Asset valuation . .. should be reduced by the value

of the assets not readily susceptible to liquidation and

the payment of debts’’); Stern v. Paper, 183 F. 228, 230-

31 (D.N.D. 1910) (“[F]air valuation . . . means a value

that can be made promptly effective by the owner of

property to pay his debts.””) (quotations omitted).

CHT NRE Nini 18'S cide Wma isl en ee ae ee)

Contrary to the assertions of Travellers, Duncan v.

Landis, 106 F. 839 (3d Cir. 1901), does not support

Travellers’ position that the hypothetical sale must take

place absent time pressures. In Landis, this court evalu-

ated a set of jury instructions concerning how to achieve

a fair valuation of a debtor’s assets. The district court had

15a

instructed the jury using the traditional equity test for

insolvency, that a debtor was solvent only if the debtor

was able to meet all obligations when they became due.

This court reversed, holding that a fair valuation of assets

was not achieved when a debtor was forced to sell assets

“at once” on the date the debt matured, /d. at 859.

We disagree with Travellers’ view that Landis holds

that a fair valuation implicates a hypothetical sale absent

time pressures. As we read Landis, it presages the view we

have espoused: that fair valuation does not preclude a

continuing business from valuing its assets in contem-

plation of a reasonable time for their liquidation. Thus,

whereas the district court in Landis required insolvency

to be measured by the value of those assets available at

the time the debt became due, the court of appeals found

that formula to be in error. As our court instructed then,

the application of such a formula to measure the value of

the debtor’s assets would permit creditors “to take advan-

tage of the necessities and embarrassments of the [debtor]

in order to procure” the assets at a price less than their

fair value. Jd. at 858.

We are satisfied that the bankruptcy court applied the

appropriate legal standard in determining the fair valua-

tion of TWA’s assets. See In re Trans World Airlines, 180

B.R. at 412, 412 n.30. In light of the size and nature of

Trans World Airlines, the bankruptcy court’s determina-

tion that 12 to 18 months was a “reasonable time” to

value TWA’s assets is not clearly erroneous. Such a span

of time reflects the period in which a diligent administra-

tor, concerned with the interests of TWA’s creditors,

could inventory, prepare, and sell TWA’s considerable

assets in a reasonable fashion. Further, we agree with the

district court that none of the remaining factual findings

by the bankruptcy court relating to assets were clearly

16a

erroneous. Consistent with the district court’s holding

that affirmed the bankruptcy court’s asset valuation, we

hold that TWA’s assets as of November 4, 1991 were

worth $3,125,811,000.

B. Liability Valuations

Next we must decide how to value TWA’s liabilities

under 11 U.S.C. § 101(32)(A). To decide this issue we

must address the extent to which the valuation of liabili-

ties under the Bankruptcy Code should be based upon

actual market conditions faced by the debtor. In particu-

lar, we must resolve two legal questions: first, whether

TWA’s publicly traded debt should be measured at face

value or market value, and second, whether liquidation

costs should be included as contingent liabilities. Then,

we must review one factual question: whether the bank-

ruptcy court was correct in finding that TWA’s debt was

not reduced by one billion dollars under an agreement

between TWA and its creditors.

The first question is whether TWA’s publicly traded

debt should be measured at its face value of $1,776,752,-

000, or its market value of $662,898,000. Both TWA and

Travellers assume, as did the bankruptcy court and dis-

trict court, that the question of whether to use face value

or market value hinges upon a question of statutory inter-

pretation. 11 U.S.C. § 101(32)(A) states that insolvency

is the “financial condition such that the sum of such

entity’s debts is greater than all of such entity’s property,

at a fair valuation.” The parties indicate that if we agree

with the district court that “fair valuation” in § 101(32)

(A) modifies both “property” and “debts,” then we

should adopt the market value figure for TWA’S debt. If,

on the other hand, we agree with the bankruptcy court

17a

that “fair valuation” as found in the statute modifies

only “property,” then our insolvency calculations should

utilize the face value of TWA’s publicly traded obliga-

tions.

Travellers argues that § 101(32)(A) demands a market

valuation because the phrase “‘fair valuation” in § 101(32)

(A) modifies both “property” and “debts,” such that

the fair market valuation used for assets should apply

equally to liabilities. For support, Travellers points to

statements made by this court and others suggesting that

the fair valuation requirement of § 101(32)(A) applies to

TWA’s debts. See, e.g., Mellon Bank, N.A. v. Metro Com-

munications, Inc., 945 F.2d 635, 648 (3d Cir. 1991)

(“The debtor’s assets and liabilities are tallied at fair valu-

ation to determine whether the corporation’s debts

exceed its assets.”); Briden, 776 F.2d at 382 (noting that

the insolvency definition “focuses on the fair market

value of the debtor’s assets and liabilities”).

However, TWA maintains that the appropriate valua-

tion of TWA’s public debt is its face value rather than its

market value because the requirement of a “fair valua-

tion” in § 101(32)(A) does not apply to debts and should

not be construed to do so. For support, TWA points to

the text of the insolvency definition that was in effect

until 1978.5 According to TWA, the pre-1978 statute

makes clear that the fair valuation requirement applies

to properties but not to debts. Second, TWA points to

the insolvency definition that applies to partnerships,

codified at 11 U.S.C. § 101(32)(B).© Because this defi-

5 See note 4, supra.

°11 U.S.C. § 101(32)(B)(1993) states that “insolvent”

means:

(B) with reference to a partnership, financial condition

such that the sum of such partnership’s debts is greater than

the aggregate of, at a fair valuation—

[footnote continued]

18a

nition applies the fair valuation standard only to property

(assets), and there is no reason to think that partnerships

and corporations should be treated differently in this

respect, TWA argues that its debt is not subject to a fair

valuation requirement. Accordingly, TWA argues that its

debt should be considered at its face value.

We agree with TWA that we must consider the face

value of TWA’s publicly traded debt rather than the mar-

ket value. This follows from our determination that we

must treat TWA as a “going concern.” See Moody, 971

F.2d at 1067. Because we treat TWA as a going concern,

we cannot consider the market’s devaluation of TWA’s

debt resulting from the possibility as of the date of the

transfer that TWA would cease operations and be unable

to satisfy its promises. It is this devaluation that creates

the difference between the face value figure urged by

TWA and the market value figure Travellers would have

us adopt: the former represents the net present value of

TWA’s obligations, while the latter represents the net

present value of TWA’s obligations but discounted by the

likelihood that TWA will be unable to pay its debts in

full.

Thus, even accepting the dictum in Metro Communt-

cations stating that we must fairly value liabilities, see

945 F.2d at 648, in this context we do not interpret the

term “fair valuation’? to mean fair market valuation.

Because our going concern methodology precludes us

(i) all of such partnership’s property, exclusive of prop-

erty of the kind specified in subparagraph (A)(i) of this para-

graph; and

(ii) the sum of the excess of the value of each general

partner’s nonpartnership property, exclusive of property

of the kind specified in subparagraph (A) of this para-

graph, over such partner’s nonpartnership debts[.]

al tt

19a

from devaluing TWA’s debt based on creditors’ percep-

tions of TWA’s viability, a fair valuation of TWA’s public

debt is the face value of that debt. See Covey v. Commer-

ctal Nat'l Bank, 960 F.2d 657, 660 (7th Cir. 1992) (hold-

ing that valuation of debt must be made from the per-

spective of the debtor, rather than the perspective of a

third party creditor).”? Accordingly, we hold that the

proper figure for TWA’s publicly traded debt is the debt’s

face value of $1,776,752,000.

We proceed to consider whether the bankruptcy court

erred in including amongst TWA’s liabilities various costs

that TWA would incur if TWA were to cease operations

within 12-18 months of the date of the transfer. The

bankruptcy court deemed it proper to consider the costs

that TWA would suffer if it were to cease operations

because courts must consider “contingent liabilities” in

their calculations of liability in an amount discounted by

the probability that the contingency will occur. See In re

Trans World Airlines, 180 B.R. at 426-27. The bank-

7As the bankruptcy court noted, anamalous results would

occur if we allowed liabilities to be valued based on the debtor’s

financial position:

If holders of claims are fully informed of the debtor’s affairs

and the asset values are less than the face amount of the claims,

they would never value their claims at more than the value of

the assets. Likewise, the fully informed debtor would never be

willing to pay claimants more than claimants would be willing

to take. Thus, the value of the claims would never exceed the

value of the assets and insolvency could never occur.

180 B.R. at 424. See also Covey, 960 F.2d at 660 (“The benefi-

ciary of a guarantee never values that obligation at more than the

issuer’s gross assets, and if other claims Gay, secured debts) stand

ahead of this one, the beneficiary does not value the guarantee at

more than the issuer’s net assets.”’).

20a

ruptcy court reasoned that under the 12-18 month sale

scenario it used to value TWA’s assets, the liabilities con-

tingent upon TWA’s projected dissolution would become

fixed. The bankruptcy court was also influenced by the

probability as of the date of the transfer that TWA would

soon be forced to cease operations. Accordingly, the

bankruptcy court held that it was proper to include the

full costs of TWA’s dissolution as liabilities, even though

TWA was not liquidating on November 4, 1991. These

liabilities totaled $816.4 million, and consisted of $248.2

million in wind down expenses, $214.8 million for sever-

ance payments, $181.6 million in additional pension plan

liabilities, $138.8 million payable to TWA’s unions, and

$33.1 million of COBRA obligations.®

We agree with the bankruptcy court that it is proper

to consider contingent liabilities when evaluating the

insolvency of a corporation pursuant to 11 U.S.C. § 101

(32)(A). See Mellon Bank, N.A. v. Official Comm. of

Unsecured Creditors (In re R.M.L., Inc.), 92 F.3d 139,

156 (3d Cir. 1996); In re Xonics Photochemical, Inc.,

841 F.2d 198, 200 (7th Cir. 1988); Syracuse Engineering

Co. v. Haight, 97 F.2d 573, 576 (2d Cir. 1938) (L. Hand,

J.). However, we cannot agree that costs associated with

the dissolution of the debtor can be included under that

rubric. Indeed, it is the antithesis of a “going concern”

valuation to include such costs. See 2 Collier on Bank-

ruptcy § 101.32[4] at 101-116 (15th ed. Rev. 1997)

(‘There is overwhelming authority to the effect that...

subsequent dismemberment . . . should not enter into

the picture.’’) (citing cases), Rather, contingent liabilities

8COBRA obligations require employers to provide certain

employees with continued health care coverage following job loss.

See Consolidated Omnibus Budget Reconciliation Act, 29 U.S.C.

§§ 1161-1168 (West Supp. 1997).

2la

must be limited to costs arising from foreseeable events

that might occur while the debtor remains a going con-

cern. See FDIC v. Bell 106 F.3d 258, 264 (8th Cir,

1997), Because we treat TWA as a going concern, we will

not include in the insolvency calculation the $816.4 mil-

lion in liabilities associated with TWA’s dissolution that

was included by the bankruptcy court.

The final issue we address is whether the bankruptcy

court’s factual finding that TWA had not reached an

agreement with its creditors to reduce its public debt by

$1 billion was clearly erroneous. Travellers maintains that

prior to November 4, 1991, TWA had entered into a pre-

petition agreement with its public debt holders in which

the creditors had agreed to reduce TWA’s debt burden by

$1 billion in exchange for certain concessions from TWA.

Travellers points primarily to press releases and SEC fil-

ings authored by TWA, which indicate that TWA was

attempting to restructure its debts in anticipation of

reorganization under Chapter 11.

The bankruptcy court found that these efforts had not

yet come to fruition as of the date of the transfer, such

that the value of TWA’s public debt could not be reduced

by the $1 billion proposed in the debt restructuring plan.

According to Travellers, the bankruptcy court clearly

erred in concluding that TWA and its creditors had not

reached a binding agreement, which would have reduced

the face value of TWA’s debt (and thus TWA’s liability)

by $1 billion.

On review of the record, we hold that the bankruptcy

court’s finding was not clearly erroneous. Although the

record is clear that TWA and its creditors had entered

into negotiations, there is little support for the view that

22a

the agreement had been finalized as of November 4,

1991. All of the documents relied upon by Travellers that

are dated prior to November 4, 1991 are either marked as

drafts, or else indicate that the terms of the proposed

agreement had not been finalized. Further, only certain

elements of the alleged agreement were finalized in the

plan that was ultimately approved on August 11, 1993.

Accordingly, we cannot conclude that the bankruptcy

court’s finding that no agreement existed as of the date

of the transfer was clearly erroneous. See Haines v. Lig-

gett Group, Inc., 975 F.2d 81, 92 (3d Cir. 1992) (“[T] he

appellate court must accept the factual determination of |

the fact finder unless that determination either (1) is

completely devoid of minimum evidentiary support dis-

playing some hue of credibility, or (2) bears no rational

relationship to the supportive evidentiary data.””) (quota-

tions omitted).

ae a a a a ee — adi

IV.

The holding of the bankruptcy court in this case was

that TWA was insolvent on November 4, 1991 because

the value of TWA’s liabilities exceeded that of its assets.

According to the bankruptcy court, TWA’s liabilities

totaled $5,124,947,000, which exceeded its asset valua-

tion of $3,125,811,000 by two billion dollars. On review

of the legal and factual issues in this case, we have con-

cluded that the bankruptcy court’s calculations were

correct except insofar as the bankruptcy court included

$816.4 million in liabilities associated with TWA’s disso-

lution. Subtracting this sum from the bankruptcy court’s

liability figure, we conclude that the proper valuation of

TWA’s liabilities on the date of the transfer was $4,308,-

547,000. Because this figure still exceeds the $3,125,-

811,000 valuation of TWA’s assets, we conclude that the

bankruptcy court was correct in holding that TWA was

23a

insolvent as of November 4, 1991, and that the deposit of

$13.7 million on that date to stay the enforcement of the

judgment against TWA in favor of Travellers was a void-

able preferential transfer pursuant to 11 U.S.C. § 547(b).

Accordingly, we will reverse the district court’s order

dated December 30, 1996, which had reversed the insol-

vency holding of the bankruptcy court, and we will direct

the district court to remand this case to the bankruptcy

court for further proceedings consistent with this opin-

ion.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

24a

APPENDIX B

AMENDED

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 97-7037 and 97-7082

IN RE: TRANS WORLD AIRLINES,

INCORPORATED,

Debtor

TRAVELLERS INTERNATIONAL AG,

Appellant/Cross-Appellee

in Appeal No. 97-7037

TRANS WORLD AIRLINES, INCORPORATED;

OFFICIAL COMMITTEE OF

UNSECURED CREDITORS

FOR TRANS WORLD AIRLINES

Trans World Airlines, Incorporated

Appellant/Cross Appellee

in Appeal No. 97-7082

On Appeal from the United States District Court

for the District of Delaware

(D.C. No. 95-cv-00031)

Argued Friday, September 12, 1997

25a

Present: MANSMANN, NYGAARD, and GARTH,

Circuit Judges

JUDGMENT

These causes came to be heard on the record from the

United States District Court for the District of Delaware

and were argued by counsel on September 12, 1997.

On consideration whereof, it is now here order and

adjudged by this Court that the judgment of the said

District Court entered January 2, 1997, be, and the same

is hereby reversed and the causes are remanded to the

District Court with direction to remand the matter to the

Bankruptcy Court for further proceedings consistent

with the opinion of this Court. Cost taxed in favor of

appellant/cross-appellee in appeal No. 97-7082. All of

the above in accordance with the opinion of this Court.

ATTEST:

/s/ Patricia S. Colman

Acting Clerk

Dated: March 31, 1998

RECEIVED AND FILED

3/31/98

P. DOUGLAS SISK

26a

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF DELAWARE

Civil Action No. 95-31-JJF

IN RE:

TRANS WORLD AIRLINES, INC.

Debtor.

TRAVELLERS INTERNATIONAL AG,

Appellant,

TRANS WORLD AIRLINES, INC.,

Appellee.

Laurie S. Silverstein, of POTTER, ANDERSON & COR-

ROON, Wilmington, Delaware. Michael Joseph, E. Alex

Blanton, Richard A. Kirby, Joseph O. Click, of DYER,

ELLIS, JOSEPH & MILLS, Washington, D.C. Attorneys

for Appellant.

William H. Sudell, Jr., Kenneth J. Nachbar, of MORRIS,

NICHOLS, ARSHT & TUNNELL, Wilmington, Delware.

David S. Kurtz, Michael J. Templeton, of JONES, DAY,

REAVIS & POGUE, New York, New York. Attorneys

for Appellee.

27a

OPINION

December 30, 1996

Wilmington, Delware

/s/ Joseph J. Farman, Jr.

Farman, District Judge.

This is an appeal by Travellers International AG (“Trav-

ellers”’), from the Bankruptcy Court’s decision in favor

of the debtor, Trans World Airlines (“TWA”), that TWA’s

$13.7 million deposit with the Clerk of the United States

District Court for the Southern District of New York,

intended as security for TWA’s payment of a judgment

rendered against TWA and in favor of Travellers in that

court, was avoidable as a preference pursuant to 1]

U.S.C. § 547(b). The issue raised by this appeal is whether

the Bankruptcy Court applied the correct legal standard

to the determination of TWA’s insolvency required by 11

U.S.C. § 547(b)(3). For the reasons discussed, the deci-

sion of the Bankruptcy Court will be affirmed in part and

reversed in part, and the case remanded to the Bank-

ruptcy Court.

BACKGROUND

I. Statement of Facts

On October 22, 1991, the United States District Court

for the Southern District of New York entered a judg-

ment in the amount of $12.3 million against TWA and

in favor of Travellers. On November 4, 1991, TWA

obtained a stay of enforcement of the judgment by

depositing $13.7 million in cash with the Clerk of the

District Court, in lieu of a supersedeas bond. Eighty-eight

days later, on January 31, 1992, TWA filed a petition for

28a

reorganization under Chapter 11 of the Bankruptcy

Code.

Following the filing of the reorganization petition,

TWA commenced an adversary proceeding against Travel-

lers to avoid and recover the cash deposit as a preference

pursuant to 11 U.S.C. § 547(b) and 550. In addition, the

Official Unsecured Creditors’ Committee (‘‘Creditors’

Committee”) in TWA’s Chapter 11 case filed a separate

complaint against Travellers to intervene as a party-

plaintiff and seek recovery of the cash deposit for TWA

as a preference.

The Bankruptcy Court conducted a trial in the TWA-

Travellers adversary proceeding February 14 through 17,

1994. On November 30, 1994, the Bankruptcy Court

issued its decision, holding that because the cash deposit

was made within the 90 day preference period, and

because TWA was insolvent at the time of the payment

to the Court Clerk, the cash deposit was avoidable as a

preference under Section 547(b). At issue in this appeal

is the Bankruptcy Court’s decision regarding TWA’s

insolvency on the date of the transfer.

Il. The Bankruptcy Court’s Decision

In determining whether the cash deposit with the Clerk

of the Court was a preference, the Bankruptcy Court

applied the five criteria enumerated in Section 547(b).!

I section 547(b) states:

Except as provided in subsection (c) of this section, the

trustee may avoid any transfer of an interest of the debtor in

property —

(1) to or for the benefit of a creditor

(2) for or on account of an antecedent debt owed by the

debtor before such transfer was made

(3) made while the debtor was insolvent

[footnote continued]

29a

Trans World Airlines, Inc. v. Travellers International AG,

180 B.R. 389 (Bankr. D. Del. 1994). In dispute in this

appeal, is the third requirement, that the debtor be

insolvent on the date of the transfer. 11 U.S.C. § 547(b)

(3). Section 101(32) defines insolvency of a corporate

debtor as the “financial condition such that the sum of

such entity’s debts is greater than all of such entity’s

property, at a fair valuation.” In applying this standard,

the Bankruptcy Court examined the assets and liabilities

of TWA at the time the payment was made in order to

determine if TWA was insolvent when the cash deposit

was made.

A. Asset Valuation

In discussing its valuation of TWA’s assets, the Bank-

ruptcy Court undertook an in depth analysis of the

meaning of the term “fair valuation” in the context of a

Section 547(b)(3) insolvency determination. /d. at 403.

The meaning ascribed to the term “fair valuation” is

crucial, in that it guides the interpretation of a debtor’s

financial data, which then enables a court to determine if

the debtor’s liabilities exceed its assets, that is, whether

the debtor is insolvent.

(4) made—

(A) on or within 90 days before the filing of the peti-

tion; or

(B) between ninety days and one year before the date

of the filing of the petition, if such creditor at the time

of such transfer was an insider; and

(5) that enables such creditor to receive more than such

creditor would receive if—

(A) the case were a case under chapter 7 of this title:

(B) the transfer had not been made

extent provided by the provision of this title.

30a

After reviewing the parties’ arguments and applicable

case law, the Bankruptcy Court made several legal rulings

with respect to the term “fair valuation.” First, the Bank-

ruptcy Court concluded that a valuation of assets requires

a determination as to the amount of cash that could be

realized from the sale of assets within a reasonable

time. Second, the Bankruptcy Court concluded that in

this context, TWA’s approximation of a 12 to 18 month

time period for a sale of assets constituted a reasonable

time. Third, the Bankruptcy Court concluded that its

definition of fair valuation was consistent with a “going

concern” valuation, and was not a foreclosure or forced

sale situation.

After arriving at the above legal conclusions, the Bank-

ruptcy Court applied them to a review of TWA’s position

in the airline industry in 1991 and to an asset-by-asset

review of the data supplied by TWA and Travellers.

Rejecting Travellers arguments that TWA was merely

having a liquidity problem, the Bankruptcy Court found

that absent a major financial restructuring, TWA was

facing bankruptcy. Jd. at 412-415. In addition, the Bank-

ruptcy Court rejected Travellers methodology for asset

valuation, finding it deficient in many ways and incon-

sistent with the court’s definition of “fair valuation.”

Therefore, with the exception of areas in which TWA

offered no evidence, the Bankruptcy Court ultimately

adopted a majority of TWA’s valuation figures. Jd. at

415-421. As a final figure, the Bankruptcy Court con-

cluded that the fair value of TWA’s assets was $3,125,

811,000. Jd. at 421.

B. Debts

In the context of its insolvency determination, the

Bankruptcy Court construed the term “debt” within the

meaning ascribed to it under Section 101(12). Jd. at 422.

3la

Under this section, “debt” is defined as “liability on a

claim.” 11 U.S.C. § 101(12). In determining the amount

of TWA’s liabilities at the relevant time period, the Bank-

ruptcy Court examined four categories of debt: (1) debt

obligations, (2) aircraft lease obligations, (3) medical and

dental benefits obligations and (4) contingent liabilities.

With respect to each of these categories, the Bankruptcy

Court made a number of specific holdings and findings

that are relevant to this appeal.

As to the debt obligation category, the Bankruptcy

Court held that Travellers’ position that “liabilities be

determined at their fair value” was inconsistent with the

plain wording of Section 101(32) and unsupported by

case law and logic. Trans World Airlines, 180 B.R. at 423.

Specifically, with regard to TWA’s public debt, the Bank-

ruptcy Court concluded that the debt holders “bargained

with the debtor to recover the face amount of their claim

and [that]. . . is what Section 101(32) contemplates.”

Id. at 423. The Bankruptcy Court dismissed Travellers’

argument that TWA reached an agreement with groups of

public note holders to eliminate $1 billion of debt, find-

ing no factual support for such an agreement. Based upon

its interpretation of the term “debt,” the Bankruptcy

Court found that TWA’s debt obligations on November

4, 1991, were $1,776,752,000.

Regarding the categories of aircraft iease obligations

and pension plan obligations, the Bankruptcy Court

accepted TWA’s expert reports. Travellers’ calculations

were dismissed because of perceived deficiencies in their

expert reports.

As to medical and dental benefits obligations, which

the parties agreed amounted to a $400 million liability,

the Bankruptcy Court rejected Travellers’ argument that

this was offset by a corresponding $400 million asset.

)

32a

In rejecting this position, the Bankruptcy Court asked

whether having this liability was of any value to TWA.

Declaring that this liability was not a saleable asset and

had no market value, the Bankruptcy Court concluded

that “‘{gliven the orderly sale of assets scenario which I

find applicable to this case, I conclude that having the

liability has no value to TWA which can be considered an

asset in the determination of TWA’s insolvency.” Jd. at

427.

Regarding the category of contingent liabilities, the .

Bankruptcy Court adopted the position that contingent

liabilities should be included in determining the sum of

TWA’s debts under Section 101(32), and that the amount

of the contingent liability to be taken into account as

debt is determined by the probability that the contin-

gency will occur. In this case, the contingency the Bank-

ruptcy Court evaluated was the cessation of TWA’s opera-

tions and the termination of its business. The Bankruptcy

Court rejected Travellers’ contention that including such

contingent liabilities was contrary to the going concern

valuation required by Section 101(32) and concluded

that under the orderly sale of assets approach, “[{i]f TWA

were required to wind down its operations and convert

non-cash assets to cash in a 12 to 18 month period, its

operations would obviously terminate and the liabilities

contingent on that event would then become fixed.” /d.

at 427. In addition, the Bankruptcy Court rejected Trav-

ellers’ assertion that TWA’s SEC reports and press-releases

were at odds with the conclusion that TWA’s operations

would cease. The Bankruptcy Court concluded that the

SEC filings did not conflict with the testimony support-

ing inclusion of contingent liabilities and dismissed the

press-releases as a “normal part of public relations.” /d.

at 428.

33a

After reviewing tax liabilities and other liabilities that

are not particularly relevant to this appeal, the Bank-

ruptcy Court concluded that on November 4, 1991, the

total of TWA’s debts was $5,124,947,000. Comparing

this debt figure to the previously ascertained asset value

figure of $3,125,811,000 the Court determined that

TWA was insolvent on November 4, 1991.

DISCUSSION

I, Jurisdiction and Standard of Review

Under 28 U.S.C. § 158(a), this Court has jurisdiction

to hear appeals from final judgments, orders and decrees

of bankruptcy judges. In reviewing a case on appeal, the

bankruptcy court’s factual determinations are subject

to deference and shall not be set aside unless clearly erro-

neous. Mellon Bank, N.A. v. Metro Communications,

Inc., 945 F.2d 635, 641 (3d Cir. 1991), cert. denied.,

112 S. Ct. 1476 (1992), Brown v. Pennsylvania State

Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988).

However, a bankruptcy court’s conclusions of law are

subject to plenary review. Metro Communications, 945

F.2d at 641. Mixed questions of law and fact are subject

to a “mixed standard of review” under which the appel-

late court accepts finding of “historical or narrative facts

unless clearly erroneous, but exercise[s] plenary review

of the trial court’s choice and interpretation of legal pre-

cepts and its application of those precepts to the histori-

cal facts.” Jd. at 641-42 (citing Universal Mineral, Inc. v.

C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir. 1981)).

While a determination of insolvency under Section 547 is

treated as a factual finding, the standard to be employed

in making the insolvency finding involves legal interpre-

tation. See Sierra Steel, Inc. v. Totten Tubes Inc. (In re

Sterra Steel, Inc.), 96 B.R. 275, 276-77 (9th Cir. 1989).

34a

Therefore, the Court concludes that the insolvency issue

raised in this case is a mixed question of law and fact, in

which the Court’s review of the legal standard applied by

the Bankruptcy Court to determine insolvency is plenary.

II. Insolvency Under Section 547

In this appeal, Travellers challenges the Bankruptcy

Court’s ultimate conclusion that TWA was insolvent on

the transfer date of November 4, 1991, as well as the

holdings and findings of the Bankruptcy Court which led

to this conclusion. The Court will divide Travellers’ argu-

ments into two categories, those pertaining to asset valua-

tion and those applying to debt valuation. Tl 2 Court will

address each of Travellers’ contentions in these areas.

A. Asset Valuation

Regarding the asset valuation, Travellers argues that

the Bankruptcy Court misconstrued the term “fair valua-

tion” and committed legal error by employing an “orderly

sale of assets to pay creditors” approach to the valuation

determination. Travellers argues that TWA’s inability to

pay existing and potential liabilities by converting its

assets to cash within 12 to 18 months is legal error for

three reasons: (1) by utilizing an asset value obtained in

a sale 12 to 18 months after the date of transfer, this

test directly conflicts with the statutory mandate requir-

ing a determination of the debtor’s financial condition on

the transfer date, (2) the application of this test leads to

such arbitrary determinations as finding that 12 to 18

months constitutes a reasonable time, and (3) the appli-

cation of this test results in a forced sale or liquidation

approach, which conflicts with the requirements of pre-

vailing authorities that assets be valued on a going con-

cern basis and ascribed their fair market value.

35a

In response, TWA argues that the Bankruptcy Court’s

approach to asset valuation, which requires a determina-

tion of the funds which could be generated by convert-

ing non-cash assets into cash within a reasonable time,

is properly supported by case law and the policy under-

lying preference questions, specifically, ensuring equality

of distribution among creditors.

Generally, in conducting asset valuation for insolvency

determinations, the fair market value of assets is to be

used, rather than a forced sale value. See Jn re Taxman,

905 F.2d 166, 169 (7th Cir. 1990); Edward R. Bacon

Company v. Grover, 420 F.2d 678, 678 (9th Cir. 1870);

Roemelmeyer v. Walter E. Heller & Company (In the

Matter of Lackow Brothers, Inc.), 752 F.2d 1529 (1985);

Daniel R. Cowans Bankruptcy Law and Practice 294 (6th

ed. 1994). Forced sale or liquidation values only apply

where the debtor is “wholly inoperative, defunct, or

dead on its feet.”’

36a

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF DELAWARE

Civil Action No. 95-31-JJF

IN RE:

TRANS WORLD AIRLINES, INC.

Debtor.

TRAVELLERS INTERNATIONAL AG,

Appellant,

TRANS WORLD AIRLINES, INC.,

Appellee.

ORDER

At Wilmington this 30 day of December 1996, for the |

_ reasons set forth in the Opinion issued this date; i

IT IS HEREBY ORDERED that:

1) The decision of the Bankruptcy Court, Trans World |

Airlines, Inc. v. Travellers International AG, 180 B.R. |

389 (Bankr. D. Del. 1994), is AFFIRMED IN PART and

REVERSED IN PART; and |

2) The case is remanded to the Bankruptcy Court for

further consideration consistent with this Opinion.

/s/ Joseph J. Farman, Jr.

UNITED STATES DISTRICT JUDGE

37a

APPENDIX D

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

Case No. 92-115

In Re

TRANS WORLD AIRLINES, INC.,

Debtor.

Adversary Proceeding No. A-92-28

TRANS WORLD AIRLINES, INC.,

Plaintiff,

and

OFFICIAL UNSECURED

CREDITORS’ COMMITTEE,

Plaintiff-Intervenor,

Vv.

TRAVELLERS INTERNATIONAL AG.,

Defendant.

OPINION

William H. Sudell, Jr. Laura Davis Jones

Kenneth J. Nachbar Young, Conaway, Stargatt

Morris, Nichols, Arsht & Taylor

& Tunnell 11th Floor

1201 N. Market Street Rodney Square North

P.O. Box 1347 P.O. Box 391

Wilmington, DE 19899 Wilmington, DE 19899

38a

David S. Kurtz

Michael J]. Templeton

Jones, Day, Reavis & Pogue

599 Lexington Avenue

New York, NY 10022

Attormeys for Plaintiff,

Trans World Airlines, Inc.

Laurie Selber Silverstein

Potter, Anderson & Corroon

350 Delaware Trust Building

P.O. Box 951

Wilmington, DE 19899-0951

Michael Joseph

Richard A. Kirby

Joseph O. Click

Dyer, Ellis, Joseph & Mills

600 New Hampshire Avenue, N.W.

Washington, D.C. 20037

Attorneys for

Travellers International AG.

November 30, 1994

James E. Spiotto

E. Anthony Lauerman III

Chapman and Cutler

111 West Monroe Street

Chicago, IL 60603

Attorneys for The Official

Unsecured Creditors’

Committee

Te ee ee ee

39a

/s/ Peter J. Walsh

WALSH, J.

INTRODUCTION

TWA filed its Chapter 11 petition on January 31, 1992.

TWA served as debtor-in-possession during the entire case,

and its second amended plan of reorganization (the

“Plan’’) was confirmed on August 11, 1993, effective on

November 3, 1993. TWA commenced this adversary pro-

ceeding on March 10, 1992 (the “Adversary Proceeding”).

On June 23, 1992, the Court authorized the Official

Unsecured Creditors Committee to intervene as a party

plaintiff. This is the court opinion following trial of the

Adversary Proceeding.

Prior to TWA’s Chapter 11 case, Travellers had filed a

breach of contract action against TWA. Following a trial

in the United States District Court for the Southern Dis-

trict of New York (the “District Court”), judgment was

entered on October 22, 1991 against TWA and in favor of

Travellers in the amount of $12,318,242 plus interest. On

October 31, 1991, TWA and Travellers entered into a

Stipulation and Order on Consent (the “Stipulation”). In

summary, the Stipulation (a) continued the Fed. R. Civ. P.

62(a) stay of execution of judgment until November 4,

1991, (b) provided that by November 4, 1991, TWA could

either post a supersedeas bond in the amount of $13,693.,-

101,' or deposit that amount of cash with the clerk of the

District Court, which bond or cash would serve as security

for TWA’s payment of the judgment and interest, and (c)

Travellers agreed that, upon the posting of the bond or

‘As explained below, the difference between the $12,318.-

242 judgment and $13,693,101 set forth in the Stipulation reflects

(a) a recalculation of the judgment amount and (b) an 11% interest

factor as called for by the local rules of the District Court for the

Southern District of New York.

40a

cash, execution upon the judgment would be stayed dur-

ing the pendency of TWA’s appeal. On November 4,

1991, TWA deposited cash in the amount of $13,693,101

with the clerk of the District Court. TWA filed a notice

of appeal on November 19, 1991. The appeal is still pend-

ing. With the filing of TWA’s Chapter 11 petition on Janu-

ary 31, 1992, the prosecution of the appeal was stayed

by 11 U.S.C. § 362(a)? and Travellers has not requested

relief from the stay to permit the appeal to proceed.

By the Adversary Proceeding, pursuant to §§ 547 and

550, TWA seeks to avoid and recover the cash deposit as

a preferential transfer made to Travellers.4 Since TWA

2 Hereinafter all citations to 11 U.S.C. § __ are referred to

hg Pe

3 Section 547(b) provides:

Except as provided in subsection (c) of this section, the

trustee may avoid any transfer of an interest of the debtor

in property —

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the

debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the filing

of the petition; or

(B) between 90 days and one year before the date of

the filing of the petition, if such creditor at the time of

such transfer was an insider; and

(5) that enables such creditor to receive more than such

creditor would receive if —

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

extent provided by the provisions of this title.

11 U.S.C. § 547(b), (West 1993).

[footnote continued]

4la

filed its Chapter 11 petition on January 31, 1992, the 90

day preference period reaches back to include transac-

tions which occurred on and after November 2, 1991. In

the alternative, pursuant to § 542(a), TWA seeks to

obtain turnover of the funds alleged to belong to the

estate.*

Of the five elements needed to establish a § 547(b)

preference, Travellers argues that two are lacking here.

According to Travellers, (a) the transfer occurred before

November 2, 1991 and (b) TWA was not insolvent when

the transfer occurred on October 31, 1991. Alternatively,

Travellers argues that it is entitled to an equitable lien

which overrides the avoidance power of the trustee

under § 547(b). In addition, Travellers relies upon the

§ 547(c)(1) contemporaneous exchange for new value

exception. In Part I of this opinion, following a statement

Section 550(a) provides:

Except as otherwise provided in this section, to the extent

that a transfer is avoided under section 544, 545, 547, 548,

549, 553(b), or 724(a) of this title, the trustee may recover,

for the benefit of the estate, the property transferred, or, if

the court so orders, the value of such property , from—

(1) the initial transferee of such transfer or the entity for

whose benefit such transfer was made; or

(2) any immediate or mediate transferee of such initial

transferee.

11 U.S.C. § 550(a) (West 1993).

* Section 542(a) provides:

Except as provided in subsection (c) or (d) of this section,

an entity, other than a custodian, in possession, custody, or

control, during the case, of property that the trustee may

use, sell, or lease under section 363 of this title, or that the

debtor may exempt under section 522 of this title, shall

deliver to the trustee, and account for, such property or the

value of such property, unless such property is of inconse-

quential value or benefit to the estate.

11 U.S.C. § 542(a) (West 1993).

42a

of the facts relating to the Stipulation, I address the

issues of (a) when the transfer occurred, (b) whether an

equitable lien exists and (c) whether there was a contem-

poraneous exchange for new value. The insolvency issue

will then be separately addressed in Part II.

Because I find that the transfer occurred on November

4, 1991, and that TWA was insolvent on that date, the

transfer is avoidable as a preference pursuant to § 547(b).

Furthermore, because I find that Travellers does not hold

an equitable lien on the deposited cash and that the

deposited cash was not a contemporaneous exchange for

new value, the transfer is not excepted from the provi-

sions of § 547(b) and § 550.°

PART I

FACTS REGARDING STIPULATION

Following the District Court’s entry of judgment

against TWA on October 22, 1991, trial counsel for TWA

and trial counsel for Travellers commenced extensive oral

and written communications which culminated in the

entry of the Stipulation on October 31, 1991. These

cofnmunications essentially concerned (1) a correction to

the amount of the judgment, (2) disagreement as to the

expiration of the 10 day automatic stay of execution pro-

vided by Fed. R. Civ. P. 62(a)® and (3) the protection of

5 Because I find that the cash deposit is recoverable by TWA

as a preferential transfer, I do not address TWA’s alternative

§ 542(a) turnover request.

Sin pertinent part, Fed. R. Civ. P. 62(a) provides:

Except as stated herein, no execution shall issue upon a

judgment nor shall proceedings be taken for its enforcement

until the expiration of 10 days after its entry.

Fed. R. Civ. P. 62(a).

43a

Travellers’ interest pending an anticipated appeal by

TWA.

Both counsel recognized the need to recalculate the

October 22, 1991 judgment amount to reflect the proper

interest rate. Travellers’ counsel performed a recalcula-

tion of the judgment amount from $12,318,242 to $12,-

336,127.41 and communicated it to TWA’s counsel who

confirmed its correctness. Because of counsels’ differing

views of the application of Fed. R. Civ. P. 62(a), they dis-

agreed as to when the 10-day automatic stay period

expired — with TWA asserting November 6, 1991 and

Travellers asserting November 1, 1991. Counsel compro-

mised by agreeing that the 10-day stay remained in effect

until 11:59 p.m. on November 4, 1991.

The third issue — Travellers’ execution rights and pro-

tection pending an anticipated TWA appeal — dominated

counsels’ communications leading up to the Stipulation.

Pursuant to Fed. R. Civ. P. 62(d), TWA could simply post

a supersedeas bond with the clerk of the District Court

to obtain a stay pending appeal. However, TWA wanted

the right to make a cash deposit with the clerk rather

than post a bond. Making a cash deposit rather than post-

ing a bond requires a court order, but such orders are rou-

tinely granted on request.

On October 25, 1991, TWA’s counsel faxed to Travel-

lers’ counsel a discussion draft of a stipulation addressing

the three issues. As to Travellers’ protection, that draft

provided as follows:

2. On or before 5:00 p.m. on November 4, 1991,

Defendant Trans World Airlines, Inc. (“TWA”) if it

does not provided [sic] a supersedeas bond, shall

deposit the sum of $13,673,249.64, by wire transfer

or by cash or certified check, with the Clerk of this

Court in lieu of a supersedeas bond, said sum reflect-

44a

ing the total amount of the judgment in favor of

Plaintiffs and an additional 11% of said judgment as

additional security; [emphasis added].

Travellers’ counsel made extensive revisions to the draft

and faxed it back to TWA’s counsel on October 29, 1991.

According to Travellers’ counsel, for grammatical purity,

he changed the word “shall”? to “may” in the above

quoted paragraph 2. In addition, among other changes,

Travellers’ counsel added a paragraph 6 which read as

follows:

6. If TWA provides the Cash Deposit to the Clerk

of the Court for deposit in the CRIS account, in

order to secure payment of the judgment, post-

judgment interest and costs, TWA hereby grants a

secuntty interest to Travellers tn the Cash Deposit in

the total amount of the judgment, post-judgment

interest and costs. [emphasis added].

The proposed paragraph 6 specifically purported to grant

a security interest to Travellers. TWA’s counsel rejected

this paragraph and it was deleted from the final version of

the Stipulation.

During the communications leading to the Stipulation,

a further issue regarding the stay provision arose. Travel-

lers’ counsel was concerned that a failure on his part to

record the judgment with the clerk of court in New York

County and elsewhere might constitute professional

malpractice. He expressed the view to TWA’s counsel that

such a recording would not violate the stay of Fed. R.

Civ. P. 62. In his October 29, 1991 return draft, Travel-

lers’ counsel included a provision directed to this issue

which read as follows:

7. Upon payment of applicable fees, if any, the

Clerk of the Court is directed on or after the date of

45a

this Stipulation and Order (i) to provide a transcript

of the judgment to counsel for Travellers so that

Travellers can record the judgment in counties in

New York and (ii) to certify the judgment for regis-

tration in other districts and to take any other

action necessary to allow Travellers to register the

judgment in other districts pursuant to 28 U.S.C.

§ 1963, good cause for such registration having been

shown, so that Travellers can take the necessary

steps to record the judgment in districts other than

New York.

TWA’s counsel objected to this provision, asserting that a

recordation would constitute an act in enforcement of

the judgment within the contemplation of Fed. R. Civ.

P. 62. The parties resolved this issue by deleting the

above quoted paragraph 7 but, at the request of Travel-

lers’ counsel, advising the District Court judge in the let-

ter transmitting the final form of the Stipulation that

this was an open issue between the parties and it might be

presented to the judge for resolution at a later time.

Travellers’ counsel advised TWA’s counsel that he

wished to obtain from the District Court clerk a tran-

script of the judgment so he could record it in the

New York County clerk’s office as well as other places.

Travellers’ counsel hoped to obtain a lien on TWA prop-

erty by recording the judgment. He cited to TWA’s coun-

sel a number of cases which he believed supported

Travellers’ position that such recording was not a step

in the enforcement of the judgment. TWA’s counsel took

a contrary view, asserting that any such recordation

would constitute a step in the enforcement of the judg-

ment. He advised Travellers’ counsel that if Travellers’

counsel took steps to record the judgment, TWA would

move to have him held in contempt for violation of the

stay.

46a

Sometime during the course of this debate, Travellers’

counsel communicated with the Clerk of the District

Court. The clerk advised that it was his interpretation of

Fed. R. Civ. P. 62(a) that giving TWA a transcript of the

judgment would be a step in enforcement of the judg-

ment and therefore such a transcript would be given only

if the District Court judge ordered it to be given.

According to Travellers’ counsel, the parties reached

what he characterized as a “day to day agreement” that

Traveliers would forbear from going to the judge to seek

such an order. He testified that Travellers’ forbearance

was based on the continuing debate on the recordation

issue and on his belief that the issue would be mooted by

what he perceived as a “promise” by TWA to post cash to

obtain a stay. TWA’s counsel denied that there was any

forbearance agreement or promise by TWA. According to

him, the only agreement by Travellers was that it would

not seek such an order from the judge without appropri-

ate notice to TWA’s counsel. In any event, viewing the

testimony in Travellers’ favor, it is to the effect that (a)

the “‘agreement” was not to forbear from recording the

judgment, but to forbear from seeking an order from the

judge allowing such recording, and (b) the forbearance

was not in exchange for a commitment by TWA in the

Stipulation to post cash because the “day to day agree-

ment” was in effect before the parties signed the Stipu-

lation.

Counsel signed the Stipulation on October 30, 1991,

and TWA’s counsel delivered it with a transmittal letter

to the District Court judge, who signed it on Thursday,

October 31, 1991. In its entirety, the Stipulation is as

follows:

WHEREAS, a judgment for plaintiff Travellers

International AG (“Travellers”) in this action in the

47a

sum of $12,318,242.92 was entered on this Court’s

docket on October 22, 1991; and

WHEREAS, the parties agree that the proper cal-

culation of pre-judgment interest until the judgment

was entered results in a total sum of $12,336,127.41

and that the judgment should be amended to state

that amount and entered nunc pro tunc as of Octo-

ber 22, 1991; and

WHEREAS, the parties wish to establish and

agree upon their respective rights and obligations

with respect to the judgment, execution thereon and

stays thereof, and the time for defendant Trans

World Airlines, Inc. (““TWA’’) to file a bond or other

security pending appeal;

IT IS HEREBY STIPULATED AND AGREED

THAT:

1. The proper calculation of the judgment is

$12,336,127.41. The Clerk of the Court is directed

to enter judgment for that amount, attached here as

Exhibit A, nunc pro tunc, as of October 22, 1991.

2. The automatic stay of proceedings to enforce

a judgment provided by Fed. R. Civ. P. 62(a) shall

remain in effect until 11:59 p.m. on Nov. 4, 1991.

3. On or before 5:00 p.m. on November 4, 1991,

defendant, if it does not provide a supersedeas bond

in the amount of $13,693,101.42, may deposit the

sum of $13,693,101.42 (the “Cash Deposit”), by

wire transfer or by cash or certified check, with the

Clerk of this Court in lieu of a supersedeas bond.

4. The sum TWA provides, whether by superse-

deas bond or Cash Deposit, reflects the total amount

of the judgment in favor of Travellers and an addi-

tional 11% of said judgment and is provided by

TWA as security to secure payment to Travellers of

the judgment, post-judgment interest and costs,

48a

should Travellers prevail on appeal and be held

entitled to same in whole or in part.

5. If TWA elects to provide the Cash Deposit as

set forth in paragraph 3 above, the Clerk of the

Court is directed to deposit the Cash Deposit in the

interest-bearing Court Registry Investment System

(“CRIS”) account, and all interest accruing on the

Cash Deposit shall be paid to TWA on a quarterly

basis.

6. Upon receipt by the Clerk of the Court of the

aforementioned supersedeas bond or Cash Deposit

from TWA, Travellers is stayed from executing on

all or any part of the judgment entered in this action

pending the hearing and determination of TWA’s

appeal. If the time for TWA to take an appeal from

the judgment entered in this action expires without

TWA having done so, the stay granted herein shall

expire concurrently.

On Monday, November 4, 1991, TWA transferred by wire

a cash deposit of $13;693,101 to the clerk of the District

Court.

TWA claims that it is the November 4, 1991 wire trans-

fer of $13,693,101 which constitutes the § 547(b)(4)(A)

transfer. Travellers claims that the transfer took place on

October 31, 1991 when the parties entered into the Stip-

ulation. Travellers’ position rests on the argument that

the Stipulation was a security agreement as contemplated

by N.Y.U.C.C. § 9-105(1) (McKinney 1992 Supp.) which

took effect October 31, 1991 and which, pursuant to

N.Y.U.C.C. § 9-304(1) and § 9-305, became perfected by

the wire transfer of funds on November 4, 1991. Alter-

natively, Travellers argues that (a) it has an equitable lien

on the deposited funds, or (b) the deposited funds were

in exchange for new value.

ee ee See eC a Se ee oe te,

49a

DISCUSSION

The Stipulation as a Security Agreement

Briefly stated, Travellers’ argument is as follows:

1, The central focus is on paragraph 4 of the Stipula-

tion. It states that “[t]he sum TWA provides, whether by

supersedeas bond or Cash Deposit, . . . is provided by

TWA as security to secure payment to Travellers of the

judgment. . . .” This language is consistent with that

of the U.C.C. which defines the term “security interest”

as “‘an interest in personal property . . . which secures

payment . . . of an obligation” N.Y.U.C.C. § 1-201(37)

(McKinney 1992 Supp.). Thus, according to Travellers,

the Stipulation is a security agreement because it is an

agreement “which creates or provides for a security inter-

est.”” Id. § 9-105(1)(c).

2. A security interest attaches when (1) the debtor has

signed a security agreement describing the collateral, (2)

value has been given; and (3) the debtor has rights in the

collateral. N.Y.U.C.C. 9-203(1)(a)(b)(c) (McKinney 1992

Supp.) According to Travellers: (1) TWA signed the Stip-

ulation/security agreement which described collateral as

the cash that TWA would deposit with the clerk; (2)

Travellers gave value to TWA in the form of (a) a stay of

execution, (b) the option of depositing cash in lieu of

posting a bond, (c) the right to collect interest on the

funds deposited, and (d) the right to obtain a stay of

execution pending appeal before filing its notice of

appeal, thereby giving TWA an additional 20 days within

which it could file a notice of appeal without subjecting

itself to execution of the judgment, and (3) TWA had

rights in the collateral because it had sufficient cash (in

excess of $377,000,000) to make a cash deposit of $13,-

693,101.42 at the time it signed the Stipulation. Travel-

50a

lers therefore argues that its security interest attached on

October 30 when the parties signed the Stipulation.

3. Section 547(e)(2)(A)’ provides that ‘a transfer is

made... at the time such transfer takes effect between

the transferor and transferee, if such transfer is perfected

at, or within 10 days after, such time.” A security inter-

est in money can be perfected by a third party, such as

the clerk, taking possession of the money. N.Y.U.C.C.

§§ 9-304(1) and 9-305 (McKinney 1992). Travellers

argues that its security interest provided by the Stipula-

tion was perfected when TWA deposited funds with the

clerk.

For the reasons set forth below, I find that the Stipu-

lation lacks essential elements needed to effect an attach-

ment of a security interest.

There is no security agreement unless the parties so

intend. 2 White & Somers Uniform Commercial Code

§ 24-3 (3d ed. 1988).8 A number of provisions and terms

’ Section 547(e)(2)(A) provides:

(2) For the purposes of this section, except as provided

in paragraph (3) of this subsection, a transfer is made—

(A) at the time such transfer takes effect between the

transferor and the transferee, if such transfer is perfected at,

or within 10 days after, such time;

11 U.S.C. § 547(e)(2)(A) (West 1993).

8 White & Somers suggest that in making a determination of

the existence of a security agreement two separate inquiries are

involved, first, a question of law as to whether the language embod-

ied in the writing objectively indicates an intent to provide for a

security interest, and second, a question of fact as to whether the

parties actually intended a security agreement. In problem cases,

parol evidence is admissible as to the second inquiry, but not the

first. 2 White & Somers Uniform Commercial Code § 24-3 (3d ed.

1988). Over TWA’s objection I permitted parol evidence on this

issue. Ironically, that evidence supports TWA’s position. For the

reasons set forth herein, I find for TWA on both the legal and the

factual inquiry.

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5la

of the stipulation cause me to conclude that the parties

did not so intend.

1. The Stipulation does not state that TWA “‘is hereby

granting a security interest” or that TWA “shall” make a

deposit of cash with the clerk. On the contrary, it pro-

vides that if TWA does not provide a supersedeas bond it

may make a cash deposit.

2. The third “whereas” clause of the Stipulation

recites that one of the purposes of the Stipulation is to

“establish and agree upon . .. the time for [TWA] to file

a bond or other security pending appeal.” (emphasis

added) That recited purpose is inconsistent with Travel-

lers’ claim that the “security” was given upon execution

of the Stipulation, since the Stipulation expressly estab-

lishes the “time” as November 4, 1991.

3. Paragraph 4 of the Stipulation is entirely consistent

with the security arrangement contemplated by Fed. R.

Civ. P. 62. The bond or cash deposit was to be security

for Travellers’ judgment “should Travellers prevail on

appeal and be held entitled to same in whole or in part.”

If TWA elected not to appeal, there was obviously no

reason why it would elect to provide security to extend

the stay provided by Rule 62.

4. Paragraph 6 of the Stipulation provides that upon

receipt by the clerk of the bond or the deposit of cash,

Travellers is stayed from executing on the judgment

pending appeal. The converse of this is implicit: if no

bond is posted or no deposit of cash is made, then there

would be no stay of Travellers’ right to execute on the

judgment. Except for the Cash Deposit alternative to a

bond, this is exactly what is contemplated by Fed. R.

Civ. P. 62, because the judgment holders’ benefit from

Rule 62 is triggered upon the furnishing of security to the

clerk.

52a

5. Absent possession of the collateral by the secured

party, a security interest is not enforceable against the

debtor . . . unless . . . the debtor has signed a security

agreement which contains a description of the collateral.”

N.Y.U.C.C. § 9-203(1)(a) (McKinney 1990). The Stipula-

tion does not contain a description of existing collateral.

It merely specifies two possible methods whereby col-

lateral would be created if TWA elected to have a stay

pending appeal — by (a) TWA depositing cash with the

clerk, or (b) TWA providing a bond to the clerk. Travel-

lers’ argument that the collateral existed on October 31,

1991 because on that date TWA had cash of in excess of

$377,000,000 is unavailing. The Stipulation does not say

that the “security” is the sum of $13,693,101 which at

that time was a part of TWA’s cash holdings. Nor does

the Stipulation specify a bank account or other source

from which TWA would create the Cash Deposit, or

grant Travellers’ rights in such source. By definition

“Cash Deposit”. did not exist until the deposit occurred

on November 4, 1991.

6. Paragraph 5 of the Stipulation provides that the

clerk is required to put the Cash Deposit in an interest

bearing account “[t]f TWA elects to provide the Cash

Deposit as set forth in paragraph 3 above, ... .”" [Empha-

sis added.] If TWA had instead elected to post a bond as

collateral, the bond/collateral was not in existence on

October 31, 1991.9 Therefore, TWA had no rights in the

° Travellers ignores the existence of TWA’s posting a bond as

an alternative to depositing cash. For example, it argues that

[i] t is beyond cavil that paragraph 4, which states that ‘the sum

TWA provides . . . is provided by TWA as security ... ,’ createda

security interest for the benefit of Travellers in the money that

TWA would later deposit with the clerk.” Def. Br. 3. Travellers

quotation from paragraph 4, omits the words “whether by super-

sedeas bond or Cash Deposit’’ following the phrase “the sum TWA

provides.”’

53a

bond/collateral at that time and Travellers’ interest could

not attach to the bond/collateral. Section 547(e)(3) pro-

vides that a transfer is not made until the debtor has

acquired rights in the property. Since TWA never pur-

chased a bond, there was never a transfer of an interest in

the bond. Since the Cash Deposit was a substitute for the

bond and it did not come into existence until it was

created on November 4 by TWA making a deposit of

cash, a transfer did not occur until that date.

7. A security interest does not attach “until it becomes

enforceable against the debtor with respect to the col-

lateral.”” N.Y.U.C.C. § 9-203(2) (McKinney 1992). Prior

to November 4, 1991, Travellers did not have enforce-

ment rights against the “collateral” as the collateral did

not exist. It certainly had no enforcement rights in a non-

existing bond or cash in TWA’s bank account. The Stipu-

lation contemplated that if no bond or cash deposit was

posted, there would be no stay and Travellers could exe-

cute on its judgment. It would be unnecessary for Travel-

lers to take action to execute on its judgment if it already

had a lien on the “collateral.” Under the circumstances,

the conclusion seems inescapable that no security interest

attached until TWA made the deposit with the clerk on

November 4, 1991.!°

8. “Perfection” of a security interest within the con-

templation of U.C.C. § 9-303 is typically effected by an

act performed by the creditor, e.g., filing a security state-

ment. Travellers notes that “debtors frequently transfer a

10 while pointing out that he is not an expert in this area of

the law, Travellers’ counsel testified that he did not know whether

the Stipulation gave collateral that TWA could foreclose on had the

deposit of cash not been made on November 4, 1991. Tr. 503. He

further testified that had the deposit not been made he would have

recorded the judgment and sought to execute thereon. Tr. 501-02.

54a

security interest .n property, conditioned upon the sub-

sequent perfection of that interest by the creditor.” Def.

Reply Br. 10. (emphasis added) However, the act which

purports to effect perfection here is an act performed by

the debtor. More importantly, it is an act which was

optional on the part of the debtor. For purposes of § 547

(e)(2)(A), I conclude that “perfection” does not include

an act performed by the debtor within its discretion.!!

Within the four corners of the Stipulation document, I

find no significant indicia that the parties intended a

security agreement. The Stipulation does contain a slim

reed of support for Travellers’ position. Travellers points

to the specific language of paragraph 4 that “(t]he sum

TWA provides, whether by supersedeas bond or Cash

Deposit, . . . is provided by TWA as security to secure

payment to Travellers of the judgment . . .” Travellers

focuses on the present tense of the statement and on the

term “‘security.”’ These two factors do little to outweigh

the impact of the items discussed above. Furthermore, if

one resorts to matters outside the four corners of the

document, the conclusion is even more compelling that

the parties did not intend a security agreement. I there-

fore address matters outside the four corners of the docu-

ment.

By his October 29, 1991 draft of the Stipulation,

Travellers’ counsel specifically requested TWA’s counsel

to include a paragraph which recited that ‘““TWA hereby

grants a security interest to Travellers in the Cash

Deposit.” This request was rejected and Travellers’ pro-

posed paragraph was deleted in the next draft of the

11 This is consistent with § 362(b)(3) which excepts from the

automatic stay acts of a creditor in perfecting a security interest

within the 10 day period.

SRR VS at ao re ad 8

a ee

55a

document.!* If Travellers’ counsel believed that the term

“security” in paragraph 4 of the Stipulation was the

granting of a security interest, why did he seek to add a

paragraph which provided that “TWA hereby grants a

security interest?” Having sought to insert language

which purportedly would have achieved a desired result,

it seems incongruous for Travellers to argue that the

result was achieved in the absence of the proposed lan-

guage.

TWA’s counsel testified that the purpose of the Stipu-

lation, in addition to resolving the Fed. R. Civ. P. 62(a)

10 day timing issue and correcting the amount of the

judgment, was to simply obtain an order authorizing the

clerk to accept a cash deposit in lieu of a supersedeas

bond to avoid a lot of unnecessary motion practice.

TWA’s counsel’s understanding of the Stipulation was

that it did not require TWA to either post a bond or

make a cash deposit unless it wanted to continue the stay

of execution; he never intended or understood the Stipu-

lation to grant Travellers a security interest. His under-

standing of the reference to “security” in paragraph 4

of the Stipulation was a reference to Fed. R. Civ. P. 62

which uses the terms “bond or other security”. On the

l2 twa ’s counsel testified:

I called [Travellers’ counsel] to discuss my position on sev-

eral provisions that were in [the October 29] draft, not just

the paragraph numbered 6. With respect to number 6, |

specifically and point-blank stated we would not agree to

this. I told him that if TWA put up a supersedeas bond, if

TWA put up — if it wanted to extend the automatic stay, if

it put up cash or wire transfer in lieu of the supersedeas

bond, then Travellers had whatever rights it had under the

law upon putting up the bond or the cash.

Tr. 59-60.

56a

other hand, Travellers’ counsel testfied on direct exami-

nation that he believed the Stipulation was designed to

“grant to Travellers a security interest that was going to

be perfected by the posting of cash to follow.” Tr. 478.

However, he subsequently testified on cross examination

that if TWA did not want a stay it was not required to

either post a bond or deposit the cash.!5 In this regard,

Travellers’ counsel’s testimony is consistent with TWA’s

counsel’s understanding of the purpose of the Stipula-

tion.

In the October 30, 1991 transmittal letter by TWA’s

counsel to the District Court judge, counsel stated that

the parties were requesting that the judge approve the

Stipulation “so that the parties may take the appropriate

steps, including provision for security pending appeal.”

PX 22, p. 2. Such language speaks in terms of prospec-

tive acts, i.e., the posting of security with the clerk on

or before November 4, 1991, rather than in terms of a

security interest having already been granted upon the

signing on October 30th or, being effective upon approval

by the judge. The quoted language in the letter was

13 Travellers’ counsel testified:

Q. The stipulation says that if TWA does not provide a super-

sedeas bond, they may do something else, right?

A. Yes

Q. But they’re not required to do that something else, are

they?

A. If they don’t want a stay, they’re not required to do

either one of them...

Tr. 484.

Notwithstanding its witness’ testimony, Travellers asserts that “‘it

is . . . unarguable that TWA’s execution of the agreement was a

commitment by TWA to transfer that security interest,’’ Def.

Reply Br. 3.

57a

reviewed by Travellers’ counsel prior to the letter being

delivered to the judge.

In summary, since TWA had the option to provide

security on or before November 4, 1991, the Stipulation

was not a security agreement, i.e., “an agreement which

creates or provides for a security interest.” It merely

established a procedure whereby, if TWA so elected, it

would provide security to Travellers pending the appeal.

If TWA elected not to provide security, in the form of a

bond or the Cash Deposit, it exposed itself to the risk of

a judgment creditor’s execution rights. Travellers’ interest

in the Cash Deposit is therefore no different than that of

any other judgment creditor in cash deposited, in lieu of

a bond, with a clerk to stay execution pending appeal.

See, Pan Am. World Airways, Inc. v. Care Travel Co. Ltd.

(In Re Pan Am. Corp.), 138 B.R. 382 (Bankr. S.D.N.Y.

1992), Affd in part, 166 B.R. 538 (S.D.N.Y. 1993); In

re Thomson McKinnon Sec. Inc., 125 B.R. 94 (Bankr.

S.D.N.Y. 1991). That interest is created by operation of

Fed. R. Civ. P. 62 and for Travellers it came into exis-

tence on November 4, 1991.

The fact that Travellers expected TWA to appeal and

therefore to post security, and that TWA stated that it

anticipated taking an appeal and posting security, does

not negate the fact that by the terms of the Stipulation

and in accordance with the understanding of both coun-

sel, TWA was not obligated to do either.

Both parties cite to the court a number of escrow

account cases, Travellers to demonstrate language which

creates a security interest and TWA to demonstrate that

the transfer occurs upon the physical transfer of the

funds. I do not find these cases helpful in resolving the

issue here. TWA cites Barnhill v. Johnson, 503 U.S. seats

58a

118 L.Ed.2nd 3y, 112 S.Ct. 1386 (1992). The Supreme

Court’s reasoning in Barnhill, a case arising under Article

3 of the U.C.C., is applicable here by analogy. There the

Court held that the date of transfer for perfection pur-

poses was not when the check was delivered to the

creditor outside the preference period, but on the later

date inside the preference period when the debtor’s bank

honored the check. Barnhill rejected the notion that

an interest passed from the debtor to the creditor when

the check was delivered.

Petitioner argues that the Court of Appeals erred in

ignoring the interest that passed from the debtor to

the petitioner when the check was delivered on a

date outside the 90-day preference period. We dis-

agree. We begin by noting that there can be no asser-

tion that an unconditional transfer of the debtor’s

interest in property had occurred before November

20. This is because, as just noted above, receipt of a

check gives the recipient no right in the funds held

by the bank on the drawer’s account. Myriad events

can intervene between delivery and presentment of

the check that would result in the check being dis-

honored, The drawer could choose to close the

account. A third party could obtain a lien against

the account by garnishment or other proceedings.

Id. at 1390.

I similarly reject the notion that an interest transferred

when the parties signed the Stipulation. Before TWA

created the Cash Deposit on November 4, 1991, it could

have transferred all or substantially all of its cash to

another creditor or creditors, or, some other judgment or

lien creditor or creditors could have seized the cash

59a

through appropriate attachment proceedings.!* Travel-

lers dismisses the relevance of Barnhill on the grounds

that a check is not like a security agreement. Of course,

that position begs the question by assuming that the

Stipulation is a security agreement.

Travellers argues that the § 101(58)!5 definition of

“transfer” includes a “conditional” transfer and para-

graph 4 of the Stipulation may fairly be read as trans-

ferring to Travellers a security interest “conditioned” on

TWA posting cash by November 4. Since this condition

was in fact fulfilled, Travellers argues that the transfer

can be said to have occurred on October 31, 1991. The

court in Barnhill rejected the same argument.

[PJetitioner retreats to the definition of “transfer”

contained in § 101[58]. Petitioner urges that rather

than viewing the transaction as involving two dis-

tinct actions—delivery of the check, with no interest

in property thereby being transferred, and honoring

of the check, with an interest being transferred—that

we instead should view delivery of the check as a

“conditional’’ transfer. We acknowledge that § 101

[58] adopts an expansive definition of transfer, one

that includes “every mode . . . absolute or condi-

tional . . . of disposing of or parting with property

or with an interest in property.” There is thus some

14 At the time of the Stipulation, it was a matter of public

knowledge that TWA was in material default on hundreds of mil-

lions of dollars of secured and unsecured debt.

15 Section 101(58) provides:

“transfer”? means every mode, direct or indirect, absolute

or conditional, voluntary or involuntary, of disposing of or

parting with property or with an interest in property, includ-

ing retention of title as a security interest and foreclosure of

the debtor’s equity of redemption.

11 U.S.C. § 101(58) (West 1993).

60a

force in petitioner’s claim that he did, in fact, gain

something when he received the check. But at most,

what petitioner gained was a chose in action against

the debtor. Such a right, however, cannot fairly be

characterized as a conditional right to “property or

an interest in property,” § 101[58], where the prop-

erty in this case is the account maintained with the

drawee bank. For as noted above, until the moment

of honor the debtor retains full control over disposi-

tion of the account and the account remains subject

to a variety of actions by third parties. To treat peti-

tioner’s nebulous right to bring suit as a “‘condi-

tional transfer’ of the property would accomplish a

near-limitless expansion of the term “conditional.”

In the absence of any right against the bank or the

account, we think the fairer description is that peti-

tioner had received no interest in debtor’s property,

not that his interest was “conditional.”

Barnhill, 113 S.Ct. at 1390-91.

Finally, the conclusion which I have recited above,

that on the facts here § 547(e)(2)(A) does not create an

earlier transfer date, seems entirely consistent with the

conclusion of the Court in Barnhill as to the application

of § 547(3)(2)(A) to the facts there.

Finally, we note that our conclusion that no

transfer of property occurs until the time of honor

is consistent with § 547(e)(2)(A). That section pro-

vides that a transfer occurs at the time the transfer

“takes effect between the transferor and the trans-

ferec. .. .” For the reasons given above, and in par-

ticular because the debtor in this case retained the

ability to stop payment on the check until the very

last, we do not think that the transfer of funds in

this case can be said to have “taken effect between

6la

the debtor and petitioner” until the moment of

honor.

Barnhill, 113 S.Ct. at 1391.

Equitable Lien

Absent a UCC Article 9 security agreement, Travellers

argues that it has an equitable lien on the deposited

funds. According to Travellers, New York law permits the

imposition of an equitable lien where, as here, according

to Travellers, a debtor and creditor agree, expressly or by

implication, that certain property will be maintained as

security for the debtor’s obligation to the creditor. In

support of its position Travellers relies principally upon

five cases. Security Pac. Mortgage & Real Estate Serv.,

Inc. v. Republic of Philippines, 962 F.2d 204, 208 (2d

Cir. 1992); In re Gebco Inv. Corp., 641 F.2d 143, 146

(3d Cir. 1981); F. W. Eversley & Co. Inc. v. East N.Y.

Non-Profit HDFC, Inc., 409 F.Supp. 791, 799 (S.D.N.Y.

1976); G. L. Wilson Bldg. Co. v. Leatherwood, 268 F.

Supp. 609, 621 (W.D.N.C. 1967); James v. Alberton

Dock Yards, Ltd., 176 N.E. 401 (1931), rearg. denied,

256 N.Y. 681, 177 N.E. 191 (1931). I find none of the

cases factually apposite. Four of the five cases involved

creditors who performed construction or maintenance

work on real estate owned or managed by the defen-

dant(s). See, Security Pacific, 962 F.2d at 207; Gebco,

641 F.2d at 145; Eversley, 409 F.Supp. at 793; Wilson,

268 F.Supp. at 610. In two of the five cases equitable

liens were not imposed. See, Security Pacific, 962 F.2d at

208-210 and James, 176 N.E. at 403-404. In those cases

in which the courts found for the creditors on equitable

theories, the court also found that the defendant(s)

would be unjustly enriched because the creditors per-

formed work with the expectation of payment. See,

62a

Gebco, 641 F.2d at 146, 147, 148-149 (funds earmarked

for benefit of subcontractor); Eversley, 409 F.Supp. at

795-797 (plaintiff led to expect payment and defendant’s

past practices induced plaintiff’s participation); Wilson,

268 F.Supp. at 615, 621-622 (defendants promised ona

number of occasions that payments would be forthcom-

ing).

To align itself with these cases, Travellers claims that

the Stipulation evidenced the parties’ intention that TWA

would convey funds as security for the judgment pending

appeal and that Travellers relied on the funds existence to

its detriment by refraining from establishing alternative

security in the form of a judicial lien. Travellers articu-

lates its equitable lien position in its post-trial brief as

follows:

Travellers refrained from obtaining a judicial lien on

or before November 1 only because TWA repre-

sented that it would deposit the cash on November

4.16 Thus if the stipulation had not been executed

and if TWA had not assured Travellers that security

would in fact be posted, Travellers would, before

the beginning of the preference period, have obtained

a judicial lien on property sufficient to satisfy its

judgment....

By promising to establish a fund to provide secur-

ity for the judgment, TWA induced Travellers to sur-

render this alternative security. Under these circum-

stances, the law creates an equitable lien in favor of

Travellers. That equitable lien came into existence at

the time of the conduct giving rise to its imposition,

16 Presumably, the November | date is Traveller’s calculation

of the commencement of the 90-day preference period. Accord-

ing to my calculation, the preference period commenced on Nov-

ember 2, 1991.

c— te yo

63a

t.e., when TWA induced Travellers to forego crea-

tion of a judicial lien,

Def. Br. 16 (emphasis added).

Travellers’ argument is not supported by facts. First, as

already discussed, I conclude that TWA did not promise

to post a bond or create the Cash Deposit. It merely

agreed that if it wished to take an appeal and wished to

have a stay of execution pending the appeal, it would

post a bond or create the Cash Deposit.!? Travellers was

justified in expecting the deposit to be made by Novem-

ber 4, 1991. However, mere expectation of payment is

insufficient to establish an equitable lien. Security Paci-

fic, 962 F.2d at 208. Second, Travellers did not refrain

from obtaining a judicial lien prior to the preference

period because of TWA’s alleged promise to make a cash

deposit. It was barred from doing so by Fed. R. Civ. P.

62(a). To resolve a conflict as to how to interpret that

Rule, the Stipulation specified that the Rule’s automatic

10 day stay would not expire until 11:59 P.M. on Novem-

ber 4, 1991,

Travellers’ claim that there was some type of “day to

day agreement” for Travellers to forbear is an amorphous

argument. Accepting Travellers’ version, the testimony is

that (a) the clerk of the District Court advised that he

deemed the issuance of the judgment transcript as a step

in the enforcement of the judgment, that such a step was

barred by Fed. R. Civ. P. 62(a), and that no such tran-

script would be given absent a court order; (b) the for-

17 While claiming that Travellers’ forbearance was in some

fashion based on TWA’s counsel’s “assurance” that T 4 was

going to post cash, Travellers’ counsel repeated that TWA’s post-

ing of security was optional: “TWA was going to post cash or a

bond if they wanted a stay.”” Tr. 487.

64a

bearance “agreement” was not to forbear from record-

ing the judgment but from seeking an order from the

judge allowing a recording; and (c) the forbearance was

not in exchange for a commitment by TWA in the Stipu-

lation to post cash because the forbearance agreement

was in effect before the parties signed the Stipulation.

Thus, even assuming there was such an agreement to

forbear, it was not tied to the Stipulation.

Even if Travellers had sought such an order from the

judge, there is no basis on which to conclude that it

would have been granted. Absent proof that Travellers

was entitled to such an order as a matter of law, I cannot

conclude that Travellers was prejudiced by refraining

from seeking it. Finally, Travellers offered no evidence as

to what property would be liened even if the order were

granted and the judgment transcript recorded with the

clerk for New York County and elsewhere. The recorda-

tion could create a lien only against TWA real property,

and Travellers offered no evidence as to the existence of

TWA real property in such locations or to whether the

lien would have sufficient priority to give value to Travel-

lers’ interest. Of course, the recordation could not create

a lien on personal property, including TWA’s purported

cash position of $377,000,000, absent an attachment

proceeding. Any such proceeding would have violated

Fed. R. Civ. P. 62(a). Thus, even assuming the existence

of such a forbearance agreenicnt, I conclude that Travel-

lers did not rely upon it to its detriment and find no basis

to impose an equitable lien in favor of Travellers.

Travellers also relies upon Sexton v. Kessler & Co., 172

F. 535, 543 (2d Cir. 1909), Aff’d, 225 U.S. 90 (1912)

and Pine Top Ins. Co. v. Century Indemn. Co., 123 B.R.

287 (N.D. Ill. 1990). These cases are not on point. Sex-

ton was decided in 1912 and has been superseded by sub-

{

65a

sequent legislation. See James Wm. Moore, Collier on

Bankruptcy 4 60.38 at 951 (14th ed. 1977) (“the elimi-

nation of the doctrine of Sexton v. Kessler accomplished

by the 1938 Act, has been carried forward in the 1950

Amendment”). In any event, Sexton held only that a

creditor had an equitable lien on “specific identified

stocks and bonds” which the debtor had segregated for

the creditor and placed in “escrow” in a safety deposit

vault. Sexton, 225 U.S. at 98. The Court found that

those: actions “purported not to promise, but to trans-

fer” an “absolute present right” to the secutiries. Jd.

(emphasis added). Travellers had no “absolute and pres-

ent right” to any particular TWA property until at least

November 4, 1991. Thus, Sexton does not support

Travellers’ argument for an earlier transfer. Similarly, the

decision in Pine Top is neither persuasive or apposite, as

it relies on Sexton, 123 B.R. at 295-96, and involved

identified collateral which all parties understood was to

serve as full security for the transaction, td. at 289,

297,18

181 believe there is serious doubt as to whether an equitable

lien theory applied to a transaction otherwise governed by U.C.C.

Article 9 is cognizable in a § 547 action. Section 60(a)(6) of the

old Bankruptcy Act, 11 U.S.C. § 60(a)(6), was enacted in 1950 to

avoid a resurrection of the pre-1938 (Chandler Act) cases which

recognized equitable liens and in turn immunized them from the

trustee’s preference attack under § 60(a)(6) of the Act. See gen-

erally, In re Washington Communications Group, Inc., 10 B.R.

676, 679 (Bankr. D.D.C. 1981). In Matter of Einoder, 55 B.R.

319, 328 (Bankr. N.D. Ill. 1985), the court reasoned that although

§ 60(a)(6) was not included in the Bankruptcy Reform Act of

1978 it maintained its approval through the Gilmore Committee

Report on the Code, see H.R. Rep. No. 595, 95th Cong., Ist Sess.

209, reprinted in 1978 USS. Code Cong. & Ad. News 5787, which

stated that § 60(a)(6) was no longer necessary because Article 9

of the UCC had “turned the ‘equitable liens’ against which § 60(a)-

[footnote continued]

66a

Contemporaneous Exchange for New Value

Travellers argues that the cash deposit was a contem-

poraneous exchange for new value and therefore the

transfer is excepted under § 547(c)(1).'% Pursuant to

§ 547(g), Travellers has the burden of proof in establish-

ing a subsection (c) exception.

According to Travellers, the cash transfer was in per-

formance of the obligation that TWA incurred by the

Stipulation, not on account of the underlying judgment.

Focussing on the § 547(a)(2) definition of “new value,”

which includes a “release by a transferee of property

(6) was directed into ‘unperfected security interests’ which the

trustee can in any case set aside’’, see U.C.C. § 9-301(3) (1984).

The Seventh Circuit has held that equitable liens are contrary to

the policy of bankruptcy law. Small v. Beverly Bank, 936 F.2d

945, 949 (7th Cir. 1991). I note, however, that in Lewis v. Diet-

horn, 893 F.2d 648 (3d Cir.), cert. denied, 498 U.S. 950 (1990),

where the court held that a settlement of a law suit was not a

preference transaction because there was a contemporaneous

exchange of new value, the court also found that the creditor had

an equitable lien under Pennsylvania law. Of course, like the cases

cited by Travellers, Lewis involved a creditor who made improve-

ments to real property and the equitable lien was invoked to avoid

unjust enrichment to the debtor. Jd. at 950-951. I do not believe

that Lewis is authority for invoking an equitable lien theory to a

disputed transaction otherwise governed by both U.C.C. Article

9 and specific provisions of the Bankruptcy Code. In any event,

because I find that the facts here clearly do not warrant the find-

ing of an equitable lien, I need not decide whether an equitable lien

theory is cognizable in the context of a § 547 action.

19 Section 54 7(c)(1) provides:

(1) to the extent that such transfer was

(A) intended by the debtor and the creditor to or for

whose benefit such transfer was made to be a contempor-

aneous exchange for new value given to the debtor; and

(B) in fact a substantially contemporaneous exchange;

11 U.S.C. § 547(c)(1) (West 1993).

67a

previously transferred to such transferee,” Travellers

argues that pursuant to the Stipulation it released its

right to obtain a judicial lien for the amount of its judg-

ment in exchange for the Cash Deposit.

Travellers’ new value exception argument suffers from

the same defects as ‘ts equitable lien argument. TWA

never obligated itseit to create the Cash Deposit. Only if

it wanted a stay of execution after November 4, 1991

was it obligated to post a bond or make the deposit of

cash. It could elect to do neither. F urthermore, Travellers

did not release its right to obtain a judicial lien for the

amount of the judgment in exchange for the alleged

promise of a Cash Deposit. As noted in the discussion of

Traveliers’ equitable lien argument, supra, there was no

forbearance to obtain a judicial lien and, even assuming

there was some type of forbearance, it was not the for-

bearance of a right which had any demonstrable value.

Even if it were supported by the facts, Travellers new

value argument fails as a matter of law. A creditor’s for-

bearance from levying on a judgment was found not to

constitute “new value” under § 547(a)(2) in In re Thom-

son McKinnon Sec. Inc., 125 B.R. 94 (Bankr. S.D.N.Y.

1991). That court relied on the Eleventh Circuit’s state-

ment that “[florbearance from exercising pre-existing

rights does not constitute new value,” See In re Air Con-

dittoning Inc. of Stuart, 845 F.2d 293, 298 (11th Cir.),.

cert dented, sub nom 488 U.S. 993,109 S.Ct. 557 (1988),

to hold that the plaintiffs’ forbearance from levying on a

judgment against a defendant/debtor did not create

“money or money’s worth in goods, services, or new

credit, or release by a transferee of property previously

transferred.” McKinnon, 125 B.R. at 97. In McKinnon,

the plaintiffs had deferred levying on the defendant’s

assets in expectation of the defendant’s posting a cash

68a

deposit with the clerk of court to obtain a stay of execu-

tion pending appeal, which the defendant did two days

prior to filing for bankruptcy. /d. The court reasoned

that the plaintiffs’ forbearance did not enhance the value

of the debtor’s estate, as the debtors’ right to appeal the

judgment “was not an asset for the benefit of its credi-

tors that could reasonably offset the diminution of its

estate upon the execution of the judgment.” Jd.

Other courts have similarly held that the new value

exception applies only where “new value” given to the

debtor replenishes the estate for the value removed by

the tranfer, and thus does not apply to the forbearance

from exercising a previously existing right against the

debtor. See e.g., Drabkin v. A.l. Credit Corp., 800 F.2d

1153 (D.C. Cir. 1986) (forbearance from exercising right

to cancel debtor’s insurance coverage not “new value’’);

Jones v. Society Bank & Trust (In re Riggs), 129 B.R.

494, 496 (Bankr. S.D. Ohio 1991) (creditor’s forbearance

of its preexisting right to repossess collateral following

debtor’s default, in exchange for permitting debtor to

cure default, not “new value”); Jn re Alithochrome Corp.,

53 B.R. 906, 913 (Bankr. S.D.N.Y. 1985) (creditor’s for-

bearance from enforcing a judgment as part of an out-

of-court settlement not “new value”’).2°

Furthermore, the Third Circuit has held that the

party claiming that new value was contemporaneously

exchanged must prove the specific measure of the new

value given to the debtor in the exchange, reasoning that

the language “money or money’s worth in goods, serv-

ices, or new credit” necessarily requires a specific dollar

201 do not address the string citation of cases which Travel-

lers sets forth in its post-trial brief on this issue. None of them

support the proposition which Travellers fosters.

69a

valuation of the “new value”. In re Spada (Creditors’

Committee v. Spada), 903 F.2d 971, 976 (3d Cir. 1990).

Even assuming Travellers had given something to TWA

which could constitute “new value”, Travellers has pre-

sented no evidence as to its “specific dollar valuation”,

See id.

PART II — INSOLVENCY

Section 547(b)(3) requires that to avoid the transfer

TWA must have been insolvent on November 4, 1991, the

date of the transfer. Although § 547(f) creates a presump-

tion of insolvency for the 90 day preference period, once

the creditor puts in evidence to rebut that presumption,

which Travellers did in this case, the burden of proving

insolvency rests with the debtor. In re Total Technical

Servs., Inc. (Total Technical Serus., Inc. v. Whitworth),

150 B.R. 893, 899 (Bankr.D.Del. 1993), citing Jn re Old

World Cone Co., 119 B.R. 473, 477-78 (Bankr.E.D.Pa.

1990) and 4 Collier on Bankruptcy 4 547.06, at 547-38

to 547-39 (15th ed. 1991). See also, Notes of Committee

on the Judiciary, S.Rep. No. 989, 95th Cong., 2d Sess. 89

(1978), reprinted at 1978 U.S.C.C.AN. 5787, 5875;

H.R. Rep. No. 595, 95th Cong., 2d Sess. 375 (1977),

reprinted at 1978 U.S.C.C.A.N. 6331. The debtor must

prove insolvency by a preponderance of the evidence.

See, e.g., In re OEM Indus. Corp. (OEM Indus. Corp. v.

Birmingham Square), 148 B.R. 436, 438 (Bankr. W.D.Pa.

1992); Old World Cone Co., 119 B.R. at 478. Section

101(32)(A) defines insolvency of a corporate debtor as

the “financial condition such that the sum of such

entity’s debts is greater than all of such entity’s prop-

erty, at a fair valuation”’.

The parties are poles apart on the issue of insolvency,

with TWA claiming that the aggregate debts exceeded the

70a

property value by $2,342,686, while Travellers claims

that the property value exceeded the aggregate debts by

$1,749,174. For purposes of the insolvency analysis,

both parties use TWA’s October 31, 1991 balance sheet

as a reference point. Both parties agree that between

October 31, 1991 and November 4, 1991 no measurable

changes occurred in the nature or value of assets and lia-

bilities. Compared to TWA’s balance sheet as of October

31, 1991 the parties positions are as follows as to the

TWA assets and liabilities:

10/31/91

Balance TWA’s Travellers’

Sheet Values Values

(000) (000)! (000)

Assets $2,924,187 $2,561,366 $6,707,143

Liabilities $3,480,762 4,904,052 4,957,969

(Deficit) or (556,575) (2,342,686) 1,749,174

Surplus

While there are substantial differences between the

parties on the amount of debts, the principal difference

between the parties is the value of assets. I will therefore

address the asset valuation issue first.

ASSET VALUATION

The Valuation Standard

The central issue here is what is meant by the term “at

fair valuation” in § 101(32). The parties agree that the

21TWA presented a range of values. These figures represent

the midpoints of the range.

accountants,

22 Section 101(32) is often referred to as the “balance sheet”

test of insolvency to distinguish it from the equity test, i.e., the

inability to pay debts as they mature. See generally, In re Bellanca

Aircraft Corp. (Bergquist v. Anderson-Greenwood Aviation Corp, ),

56 B.R. 339, 384-385 (Bankr. D.Minn. 1985); 4 Collier on Bank-

Tuptcy | 547.26 at 547-94 (15th ed. 1983). To label it a “‘balance

are known and quantifiable; many nonrecorded liabilities usually

surface in an insolvency analysis. As demonstrated herein, the

balance sheet is only the Starting point in the analysis.

72a

Each party presented reports and testimony by avia-

tion industry valuation experts as to the value of TWA’s

operating assets. TWA’s expert was Avmark Inc. (‘‘Av-

mark’’); Travellers’ expert was Global Aviation Associ-

ates, Ltd. (“‘Global’’), Generally speaking, TWA’s expert

values were based on the assumption that the categories

of assets would be converted to cash over a 12 to 18

month period, Travellers’ expert opined as to the present,

i.e., November 4, 1991, fair value of the assets without

offering an opinion as to how long it might take for TWA

to sell a particular asset or particular categories of assets

to convert them to cash to pay creditors. In other words,

Travellers’ expert focused on the value of the assets “‘in

place” to TWA.

As presented in its opening post-trial brief, Travellers

states its criticism of TWA’s approach as follows:

Based on a clipped quotation from Collier on

Bankruptcy, TWA says the “fair value”’ of its assets

is the amount that it would receive if its assets were

converted to cash over a reasonable time. ... TWA

further perverts this general statement by asserting

that “fair value’? should reflect two unwarranted

and unsupportable assumptions. First, TWA con-

tends that the fair-value standard requires its assets

to be “converted to cash” in a hypothetical sale

(t.e., liquidation) of all assets that can be “sold.”

Second, TWA asserts that this sale must occur with-

in a reasonable time, which TWA arbitrarily sets at

12 to 18 months.

Neither assumption is legitimate, and both are

inconsistent with the requirement that assets be val-

ued from the perspective of a going concern.

Def. Br. 45.

73a

In support of its position that to determine fair value

one need not determine the cash that would be realized

if assets were actually sold, Travellers quotes from the

leading bankruptcy law authority as fo

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