# Petition for Writ of Certiorari — Travellers International AG v. Trans World Airlines, Inc., 118 S. Ct. 1843 (1998) (No. 97-1699) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386006_1406%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1998 ## Text { \' j Suprema Court. -y S FILED 971699 spr 16 s908 IN THE Supreme Court of the Anited States OCTOBER TERM, 1997 TRAVELLERS INTERNATIONAL AG., Petitioners, v. 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 ee aire kee seo ies vce seen List of Parties and Rule 29.1 Listing................ i i CTC i ee hy saek ee bes oh's 0% iv 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 BS hoo ee oe 2 gs oh 2” Rae ap aan mms rie) bia? 9 ce ie eS ac ee ae 9 De Oi IE oi von odpeccebaccecsecdolen. 9 ee EE ovis bien Skike oaukechadens 9 NSA BRIS oink ces vee bocce 9 Ee BI oi i ah CAS 9 PB se a 9 Ee Mrs BOIIE Sous vo csacecco tec aise ces 2 AS eee ean ee 1,9 SE CLBS. B OABIAMEMBUL. «...5 ccs cccccceccccows 9 DI NN i ae eo 9 ERR ROR een ec ti aciwenes 9 LX a SS eh ia, 9 WOUEE 66 ee ok ss 2 | ee Sr eee oe 3 aes PDs sg kon os kwa eRe noes oes ce ae | 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) P; 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 t b ’ 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} 3 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] 4 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. Ne 5 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 6 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"? 7 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- 8 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. 9 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). 10 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, 1] 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). 12 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); 13 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). 14 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 15 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. 16 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. 17 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) 18 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 19 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 Y} .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 la 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) 2a 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 3a 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. I. 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 4a 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; 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; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title. i ia te ere 5a 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{.] 6a 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. TN 7a 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- 8a 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 9a 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). - — —— a, es De Ve Soe nee ee aes pre Py OO ela Shatin, ae lla 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 ne ss Hn eS neh Slab eg UlkasS ; ac Otc ie ve CEE BUN SRL AN IEP SERN va 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 a 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. Ae 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. 2. 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. 3. 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 i. 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 (C) such creditor received payment of such debt to the 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.”’ ee 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 (C) such creditor received payment of such debt to the 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. ; PERL SEINE BEM Sade thine ar Salaisly Sika ieee pea ba atte Gate Mew Lats on Saati hi ici aE a Sal 8 ORIEN a 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 elec [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386006_1406%3A1. Public record. Not legal advice.