Baldi v. Samuel Son & Co., Ltd.

Summary

The Seventh Circuit affirmed judgments rejecting a bankruptcy trustee's attempt to avoid payments made by Longview Aluminum LLC under 11 U.S.C. § 544(b) and the Illinois Uniform Fraudulent Transfer Act. The court held that the trustee failed to establish that Longview was insolvent at the beginning of the relevant period because the expert improperly treated contingent liabilities as certain and confused undercapitalization with insolvency.

Holdings

1. The court accepted the rule of retrojection as a permissible inference that insolvency on both the beginning and ending dates of the transfer period would support an inference of insolvency on the intervening transfer dates, but held that the trustee failed to prove insolvency at the beginning of the period.
2. Contingent liabilities must be discounted according to the probability that the contingency will occur and the liability will become real; treating contingent liabilities as certain invalidates an insolvency opinion based on that treatment.
3. When a debtor has an existing debt but the creditor may be unable to collect it, the debt may remain a full liability for solvency purposes; that principle does not apply when the contingency is whether any liability will arise in the first place.
4. Undercapitalization is not synonymous with insolvency and does not independently establish that liabilities exceeded assets for purposes of the bankruptcy avoidance claim.

Questions Presented

1. Whether the trustee established that Longview was insolvent at the beginning and end of the transfer period so that the rule of retrojection could establish insolvency on the dates of the challenged transfers.
2. Whether contingent liabilities could be treated as certain liabilities, without discounting them according to the probability that they would materialize, when determining insolvency under 11 U.S.C. § 544(b), the Illinois Uniform Fraudulent Transfer Act, and the Bankruptcy Code's balance-sheet test.
3. Whether Longview's alleged undercapitalization independently established insolvency or supported avoidance of the transfers.

Disposition

affirmed