Hoffinger Industries, Inc. v. Bunch (In Re Hoffinger Industries, Inc.)Hoffinger Industries, Inc. v. Bunch (In Re Hoffinger Industries, Inc.)
OPINION AND ORDER
Before the Court is the debtor’s Complaint against Leesa Bunch [Bunch] and McMasker Enterprises, Inc. [McMasker] to avoid as preferential transfers under 11 U.S.C. § 547 any judgment liens that may have attached to the debtor’s real or personal property located in San Bernadino County, California, or Phillips County, Arkansas. Bunch and McMasker each allege the debtor’s solvency at the time the liens attached as an affirmative defense to the debtor’s preference action. For the reasons stated below, the Court finds that the debtor was insolvent when the liens attached to the debtor’s real or personal property, and avoids as a preferential transfer the registration of the liens in San Bernadino County, California, and Phillips County, Arkansas.
JURISDICTION
This Court has jurisdiction over this matter under 28 U.S.C. § 1334 and 28 U.S.C. § 157, and it is a core proceeding under 28 U.S.C. § 157(b)(2)(F). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
BACKGROUND
The debtor manufactures above ground swimming pools, vinyl ladders, filters, and pool accessories with its principal manufacturing facility located in West Helena, Phillips County, Arkansas. As a result of an accident that occurred on August 13, 1993, involving one of the debtor’s products, Bunch commenced a civil lawsuit against the debtor. On August 23, 2001, Bunch obtained a judgment against the debtor in the Superior Court of Glenn County, California, in the amount of $12,526,891 plus costs. In the same case, McMasker, the dealer that sold the pool liner to Bunch, also obtained a judgment against the debtor in the amount of $1,000,000 plus costs.
On September 5, 2001, Bunch filed an Abstract of Judgment with the San Berna-dino County, California, County Recorder
11 U.S.C. § 547 — PREFERENTIAL TRANSFER
Under § 547 of the bankruptcy code, a trustee, or a debtor in possession in a chapter 11 case, 2 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 ease 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. According to this section,
any prepetition transfer is preferential and avoidable if five elements of proof are present. The transfer must be made (1) to or for the benefit of a creditor; (2) for or on account of antecedent debt; (3) while the debtor was insolvent; (4) to a noninsider on or within ninety days of the filing of the bankruptcy case; and such transfer must (5) result in the creditor receiving more than the creditor would have received in a hypothetical liquidation in a chapter 7 case.
Wade v. Midwest Acceptance Corp. (In re Wade),
Most of the required elements for a preferential transfer are not in dispute. First, the parties agree that the recording of the judgment in California and Arkansas created a judgment lien resulting in a transfer of an interest of the debtor in property for purposes of § 547.
See, e.g., Madcat Two, Inc. v. Commercial Nat’l Bank of Shreveport (In re Madcat),
B. Antecedent Debt
Second, the parties agree that the transfer was to or for the benefit of a creditor, for or on account of an antecedent debt owed by the debtor before such transfer was made. A debt is antecedent for preference purposes if the debt “was incurred before the allegedly preferential transfer.”
Jones Truck Lines, Inc.
[II],
C. Preferential Period
Finally, the parties agree that the creditor is not an insider and that the transfer occurred within 90 days of the filing of the bankruptcy petition. The debtor filed for bankruptcy protection on September 13, 2001. The liens were created on September 5, 2001, and September 6, 2001, clearly within the 90 day preferential period.
D. Insolvency
At issue in this case is whether the debtor was solvent at the time the California judgment lien was filed in San Berna-dino County, California, on September 5, 2001, and in Phillips County, Arkansas, on September 6, 2001. Related to this issue is whether the creditor would receive more in a hypothetical liquidation in a chapter 7 case than it would receive as a result of creating the judgment lien.
“Insolvent” is defined in the code as 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). The Eighth Circuit has specifically held that insolvency results
“when the aggregate of a debtor’s property is not sufficient at a fair valuation to pay his debts, which means a fair market price that can be made available for payment of debts within a reasonable period of time, and ‘fair market value’ implies a willing seller and a willing buyer.”
In re Bellanca Aircraft Corp.,
For purposes of determining whether a preferential transfer occurred, the debtor is presumed to be insolvent on
In order to determine whether the debtor was insolvent on the date of the transfers, the Court must first determine whether the company was a going concern or on its deathbed.
See, generally, In re Taxman Clothing Co.,
Before a applying the balance sheet test, it is perhaps appropriate to recognize that this test is frequently adjusted or modified by the courts in a manner inconsistent with the code’s definition of insolvency. These adjustments are generally occasioned by courts seeking to determine a going concern valuation based upon the aggregate value of an entity as an ongoing business, not by assigning values to assets and comparing assets to liabilities. An ongoing business may also include a going concern valuation that would take into account the business’s earning power, the availability of customer lists, established supply lines, and other attributes that would allow a buyer to step in and immediately begin operations.
Id.
at 386. The
Bellanca
court also considered goodwill as an element of going concern value. Further, balance sheets may not value all of the debtor’s debts to the extent that some of the debtor’s contingent liabilities are not assigned a dollar value.
See, e.g., In re Merry-Go-Round Enter., Inc.,
While this Court acknowledges that it may be inappropriate to deviate from the strict balance sheet test recognized in the Eighth Circuit and mandated by the code’s definition of insolvency, some of these asset side factors perhaps should be, and for purposes of this decision will be, considered by this Court as elements appropriately cognizable in determining the fair valuation of a company. This analysis inures to Bunch’s benefit, but does not, in this instance, change the final conclusion.
In this case, the debtor does have substantial contingent liabilities, relating most frequently to personal injury actions. To fairly determine whether the debtor was solvent or insolvent at the time of the transfers, the Court must assess the value of both assets and liabilities.
4
To properly value a contingent liability, “ ‘it is necessary to discount it by the probability that the contingency will occur and the liability become real.’ ”
FDIC v. Bell,
FINDINGS OF FACT AND CONCLUSIONS OF LAW
In order to determine whether the debt- or can avoid Bunch’s liens on the debtor’s real and personal property as preferential transfers, the Court must determine whether the debtor was solvent at the time of the transfers, which occurred on September 5 and 6, 2001. The best evidence presented to the Court of the debtor’s financial position on September 5 and 6 is the balance sheet offered by the debtor as Exhibit H-36. That balance sheet purports to reflect the fair value of the debtor’s assets and liabilities as of August 31, 2001, less than one week prior to the transfers.
A. Liabilities
The Court will begin its analysis of the financial picture of the debtor on the liability side of the balance sheet. Exhibit H-36 reflects total liabilities as of August 31, 2001, in the amount of $48,426,422, as follows:
CURRENT LIABILITIES
Trade Accounts Payable 1,234,281
Accrued Interest 557,908
Accrued Product Liability Legal Claims 31,179,111
Accrued Product Liability Premiums 0
Accrued Payroll, Holiday, Vacation, WC &
GLH 134,086
Accrued Property Taxes 0
Accrued Freight 0
Other Accrued Liabilities 114,505
Accrued Commissions & Warranties 55,133
Obligation to Completion of Contracts in Process 911,996
Claims Obligations — (Not Product Related) 898,994
Obligations on Lease Commitments 631,208
Sub-Total 35,717,222
LONG-TERM LIABILITIES
Building Loan — Commercial 2,149,200
Related Party Notes Payable 10,560,000
Sub-Total 12,709,200
TOTAL LIABILITIES 48,426,422
Bunch raised several issues relating to the liability figures that appear on the balance sheet. First, Bunch objected to the figure used on the balance sheet for Accrued Product Liability Legal Claims [Legal Claims]. The Legal Claims listed were adjusted upward $14,450,816 from the debtor’s internal records, which reflected Legal Claims in the amount of $16,728,295. According to French, a CPA with Moore Stevens, the firm that handled the debtor’s audits since 1995, the reason for the adjustment was to include estimated future claims against the debtor based on an actuarial analysis prepared by Charles C. Pearl, Jr. [Pearl], Milliman USA.
5
Pearl’s report detailing the analysis projected the debtor’s potential future liability as of September 13, 2001, based on data available to him through September 30, 2003. The report consisted of four components: (1) Arrowhead Insurance Company, Ltd.’s [Arrowhead] ultimate losses and reserves, in the amount of $1,744,041; (2) Hoffinger’s retained (uninsured) claims-made losses and reserves, in the amount of $20,499,672 [Component A];
6
(3) Hoffinger’s retained occurrence tail liability, in the amount of $5,421,485 [Component B];
7
and (4) Hoffinger’s product year tail exposure, in the amount of $5,257,954 [Component C].
8
The total projected liability of the four components is $32,923,152. Removing Arrowhead from
Obviously, the report does not list every contingent liability to which the debtor may be exposed. A contingent liability is “[a] liability that will occur only if a specific event happens; a liability that depends on the occurrence of a future and uncertain event.” Black’s Law Dictionary 926 (7th ed.1999). By definition, the debt- or may have a contingent liability in every pool and pool liner it sold prior to September 13, 2001. Pearl has taken the debtor’s contingent liabilities and reduced them to a predicted future liability amount based on the past performance of the debtor. Thus, he has reduced the debtor’s contingent liabilities by the probability that the contingency will occur, resulting in the figure used by French in Exhibit H-36.
However, including Components A, B, and C on the liability side of the balance sheet does not provide an accurate picture of the existing claims, known and unknown, at the time the transfers occurred. Component A includes claims and accidents that occurred prior to September 13, 2001, and of which the debtor was aware, reduced to a predicted future liability based on the history of the debtor. Component B also includes claims and accidents that have occurred prior to September 13, 2001, but of which the debtor was not aware. Again, Component B has been reduced to a predicted future liability based on the past performance of the debt- or. Component A and B include all potential claims existing against the debtor as of September 13, 2001. On the other hand, Component C represents claims that may occur in the future based on the sale of the debtor’s product prior to September 13, 2001. Although Pearl may have reasonably estimated the amount of these potential future claims, there was no injury or claim against the debtor as of September 13, 2001. The Court must review a “snapshot” of the balance sheet as of the date of transfers to determine the solvency of the debtor corporation. Because of this, Component C claims cannot be included in the balance sheet. The Court is aware that if the company were, in fact, being sold to a third party, Component C might be taken into consideration to determine the appropriate value of the company. However, bankruptcy law requires the Court to look at the balance sheet solvency as of the date of the transfers. That view does not include potential future claims.
Although Bunch objects to the amount of predicted future liability, she did not introduce any evidence, including expert testimony, to contradict Pearl’s testimony. The Court finds the testimony of Pearl credible and uncontroverted, and, accordingly, finds that the fair value of the Legal Claims representing Components A and B is reasonable. The Court will strike Component C from the balance sheet.
Second, Bunch also objected to the Obligation to Completion of Contracts in Process entry on the balance sheet. French testified that the $911,996, figure that appears on the balance sheet is based on the cost to complete a 56,000 square foot warehouse in Rancho Cucamonga, California. The remaining amount due on the construction contract at the time the debtor filed its bankruptcy petition was $1,681,996. According to the appraisal and testimony of John Penner, Penner & Associates, the cost to complete the building as of September 9, 2001, was $770,000. Subtracting the cost to complete the building from the total amount due on the contract
Third, Bunch also objected to the Claims Obligations — (Not Product Liability Related) entry on the balance sheet. This figure consists of a products liability claim of AUREA, Inc. [AUREA] in the amount of $474,702; an arbitration award relating to a pension fund in favor of Robert J. Rao and other parties [Rao] in the amount of $349,292; and a medical expense claim of the estate of Don Wofford [Wofford] in the amount of $75,000. The AUREA claim related to the use of the debtor’s pool liners in a fish farming operation. Because of alleged shrinkage when the pools were empty, AUREA brought a breach of warranty claim against the debtor. An award of arbitration was issued on July 12, 2001, in favor of AUREA. Wayne Hollow-el [Hollowel], president of the debtor, testified that he understood Arrowhead provided coverage for product liability tort injury only, but also stated that the AU-REA claim may be paid by Arrowhead. Marty Hoffinger [Hoffinger], chairman of the board of the debtor and a director of Arrowhead, testified that he did not believe Arrowhead would cover the product liability claim. Don Bendure [Bendure], an expert called by Bunch, stated that breach of warranty claims would not be covered under the Arrowhead policy, but that property damage from a breach of warranty may be covered. Regardless, Bunch did not dispute the liability of the debtor regarding the claim of AUREA; if Arrowhead was able to provide any coverage for the claim, it would appear as a receivable on the asset side of the balance sheet and will be addressed by the Court later in this opinion. Likewise, Bunch did not dispute the claim of Rao or Wofford, and the Court accepts those claims as presented on the balance sheet.
Fourth, Bunch also objected to the Obligations on Lease Commitments entry on the balance sheet. According to French, the $631,208 figure that appears on the balance sheet relates to copier leases, and is based on two proofs of claims filed by De Lage Landen Financial Services [De Lage] 9 . Hollowel testified that the debtor rejected the leases post-petition and returned the equipment. When questioned by the Court, French stated that the copier lease damages typically would be an off-balance sheet liability and would not have been disclosed under Generally Accepted Accounting Principles. However, he did state that he believed it would be fair to include that amount to determine a sale price for the company. The Court finds that the rejection of the leases mitigates against the inclusion of the entire balance of the lease damages being included as a liability of the debtor on the operative preference date. Further, as discussed above, the sale price for the company is not the code dictated standard for determining insolvency. Neither side presented evidence of the pre-petition damages due De Lage. Accordingly, the Court will strike this entry from the balance sheet.
Fifth and finally, Bunch also objected to the Related Party Notes Payable entry on the balance sheet. On August 4, 1999, the debtor borrowed $10,000,000 from JM Capital Finance Company, Ltd. [JM Capital]. At the time of the loan, Peter Caplin, Hoffinger’s son-in-law, was the president of JM Capital. According to Hoffinger, the loan was used to pay off an existing
There were two additional corrections that French, the expert witness for the debtor, noted. First, based on his review of the records, French believed that one of the Component A claims had been reduced twice on the balance sheet, which would result in an increase of $500,000 on the liability side. No further evidence was presented in this regard and the Court will not make an adjustment to the balance sheet. Second, if a sale of assets did take place, French testified that the debtor would incur approximately $1,370,000 in additional tax liability that is not reflected on the balance sheet. However, the determination of fair value of the debtor’s property does not contemplate the sale of an on-going business. In the absence of that sale, the hypothetical tax liability would not be incurred by the debtor, and should not be included on the balance sheet.
Based on the information presented above, the Court finds that the debtor’s balance sheet showing a fair statement of the debtor’s liabilities as of August 31, 2001, totals $42,537,260:
CURRENT LIABILITIES
Trade Accounts Payable 1,234,281
Accrued Interest 557,908
Accrued Product Liability Legal Claims [tess Component C ] 25,921,157
Accrued Product Liability Premiums 0
Accrued Payroll, Holiday, Vacation, WC &
GLH 134,086
Accrued Property Taxes 0
Accrued Freight 0
Other Accrued Liabilities 114,505
Accrued Commissions & Warranties 55,133
Obligation to Completion of Contracts in Process 911,996
Claims Obligations — (Not Product Related) 898,994
Obhgations-on-Lease-Commitments 631,208
Sub-Total 29,828,060
LONG-TERM LIABILITIES
Building Loan — Commercial 2,149,200
Related Party Notes Payable 10,560,000
Sub-Total 12,709,200
TOTAL LIABILITIES 42,537,260
B. Assets
Exhibit H-36 reflects total assets as of August 31, 2001, in the amount of $33,069,438, as follows:
CURRENT ASSETS
Cash & Securities 1,928,961
Trade Accounts Receivable 4,906,760
Allowance For Doubtful Accounts (550,315)
Inventories 13,262,876
Reserve For Obsolesenee (1,000,000)
Other Assets . , 664,167
Sub-Total 19,212,449
NET ASSETS
Net M & E, Tools, Dies and Molds 3,709,500
Net Autos & Trucks 56,685
Net Furniture & Fixtures 300,000
Net Property & Buildings 3,175,000
Undeveloped Land' — FL 682,500
Land and Building — CA 5,000,000
Construction in Process 30,000
Sub-Total 12,953,685
Brooklyn Mortgage (Includes current portion) 903,304
TOTAL ASSETS 33,069,438
On its face, the debtor’s total liabilities exceed its total assets by $9,467,822, a situation which renders the debtor insolvent as of August 31, 2001, less than one week prior to the alleged preferential transfers. However, based on the testimony and evidence received at the trial, the Court finds that certain adjustments to the assets may be appropriate.
French testified that he made no adjustments to the current assets as listed on the balance sheet. Bunch did question the amount of cash and securities that are listed, but failed to present any proof that would allow the Court to increase the listed figure. French did adjust some of the
First, the debtor presented the appraisal of Ronald E. Bragg [Bragg], who valued the market value of the debtor’s real property located in Helena, Arkansas, as of March 13, 2002, at $3,175,000. Bragg testified that there would be no significant change in the value of the property between September 1, 2001, and March 13, 2002. Although Bunch questioned the use of a 12% capitalization rate to determine the potential income of the property, Bunch did not present her own expert or any credible evidence to refute the appraised value of the property given by Bragg.
Next, the debtor presented the appraisal of John Penner [Penner], who valued the market value of the debtor’s real property located in California as of September 1, 2001, at $5,000,000. On cross-examination, Penner testified that it would cost more than $5,000,000 to rebuild the property, but emphasized that his figure was based on the market value of the property, not the cost to rebuild. Penner gave more weight to his comparable sales analysis and income approach than to his cost approach to determine the market value of the property. Again, Bunch did not present her own expert or any other evidence to refute the appraised value of the property given by Penner.
Finally, the debtor presented the appraisal of Jack Beckwith [Beckwith], who valued the fair market value of the equipment, office furniture, and rolling stock of the debtor located in Helena, Arkansas. His appraised value as of February 15, 2002, based on a continued use of the property, is $3,709,500. Beckwith was reluctant to say that the value of the property as of September 1, 2001, would have been the same as of February 15, 2002. He stated that no California personal property, fixtures, or titled vehicles were included in his appraisal, but later testified that everything was included in his appraisal except the licensed vehicles. Again, Bunch did not present her own expert or any other evidence to refute the appraised value of the property given by Beckwith. The Court finds that the three appraisals are reasonable and will not adjust the entries on the balance sheet.
Although Beckwith testified that licensed vehicles were not included in his appraisals, Autos and Trucks is a line item on the balance sheet, and reflects a fair value of $56,685, which, according to the notes to the balance sheet, is also the book value of the Autos and Trucks. According to the debtor’s 2001 Financial Statements and Accountants’ Review Report, which the Court received as Exhibit H-9, the value of the debtor’s Autos and Trucks was listed at $353,479, less accumulated depreciation. Neither side presented any other evidence of the value of the vehicles. Accordingly, the Court accepts the figure contained on the balance sheet regarding the value of the licensed vehicles.
The next item on the balance sheet is Net Furniture
&
Fixtures. According to the notes to the balance sheet, the fair value is based primarily on the sale of Environmental Products [EPD], a division of the debtor, for $273,000. As of the date of the alleged preferential transfers, EPD had not been sold and remained an asset of the debtor. There are two contradictory pieces of evidence relating to the value of EPD as of the date of the transfers. The first is the $273,000 listed on the note to the balance sheet. The second is the spread sheet that was introduced relating to the sale of EPD, which the Court received as Exhibit H-34. According to Ex
The next item on the balance sheet is Undeveloped Land — FL. This entry relates to two tracts of land in Florida. The first tract is valued at $97,500 based on an assessor’s 2002 market value estimate. The assessment record was received as a business record, but not as evidence of the value of the property. No other evidence was presented by either side regarding the value of the first tract. The second tract is valued at $560,000, which is the amount the land was purchased for in 2000. The second tract of property was sold post-petition to Aquatic Eco Systems for $580,000. Again, without determining the actual value of the second tract of land, for purposes of determining whether the debt- or was solvent at the time of the alleged preferential transfers the Court will use the sale price of the second tract to determine its fair value. Accordingly, the Court will increase the amount of Undeveloped Land — FL by $20,000.
The last adjustments to fair market value related to Construction in Process and Brooklyn Mortgage. A note to the balance sheet relating to the Construction in Process figure indicates that the debtor’s Construction in Process figure of $3,513,085 was reduced to $30,000 based on the appraisal of the California property. According to the balance sheet, the remaining $30,000 consists primarily of China Tooling. French testified that the Brooklyn Mortgage was adjusted to correct entries. No other evidence was presented relating to either of these entries.
Taking into account the adjustments made by the Court, the resulting balance sheet reflects total assets in the amount of $34,277,844, still well under the amount of the debtor’s liabilities of $42,537,260 as determined above:
CURRENT ASSETS
Cash & Securities 1,928,961
Trade Accounts Receivable 4,906,760
Allowance For Doubtful Accounts (550,316)
Inventories 13,262,876
Reserve For Obsolesence (1,000,000)
Other Assets 664,167
Sub-Total 19,212,449
NET ASSETS
Net M & E, Tools, Dies and Molds 3,709,500
Net Autos & Trucks 56,685
Net Furniture & Fixtures 1,488,406
Net Property & Buildings 3,175,000
Undeveloped Land — FL 702,500
Land and Building — CA 5,000,000
Construction in Process 30,000
Sub-Total 14,162,091
Brooklyn Mortgage (Includes current portion) 903,304
TOTAL ASSETS 34,277,844
Bunch also raised a number of additional issues relating to the assets of the debtor that the Court will discuss below. The Court’s discussion of these issues relates only to the determination of solvency of the debtor as of the date of the alleged preferential transfers and is not a finding of fact with regard to any of the issues raised unless so noted by the Court.
The most significant issue raised by Bunch related to the amount of insurance premiums the debtor pays. According to B endure, an expert who testified concerning the insurance premiums, the debtor had a potential excess redundancy of approximately $15,680,000 as of 2001. The excess redundancy is based on a comparison of the premiums paid by the debtor over what was actually required for claims and expenses. This was determined after Bendure estimated a reasonable premium
Bunch also questioned the lack of any going concern value, goodwill, or general intangibles listed on the balance sheet. These items concern the debtor’s earning power, availability of customer lists, established supply lines, trademarks, and other attributes that may enhance the value of the company. Hoffinger testified that he considered the Doughboy and Lomart trademarks, which are owned by the debt- or, as assets of the company. The only other evidence of going concern value, goodwill, or general intangibles came from the unrefuted testimony of French. According to French, even though management considered the trademarks valuable, French did not assign any value to them because they had no earnings potential. Likewise, because there was no excess income and the distributions to equity security holders fluctuate, French could not ascribe any value to general intangibles or goodwill. Bunch offered no evidence of the potential value of goodwill, general intangibles, or going concern value. Consequently, the Court will not assign a value to these attributes.
Bunch also wanted to include as potential assets of the debtor the payments to the debtor from Arrowhead relating to the Bunch/McMasker claim and the Coyle claim, and the future páyments from Arrowhead relating to the Reneau and Rouse claims. 11 It is unclear whether any of these payments are already included in the Cash & Securities line of the balance sheet. French did testify that he believed the Coyle claim had been reduced twice on the asset side and, to be accurate, the balance sheet should include an additional liability of $500,000. If the Arrowhead payments are included with the assets on the balance sheet, the assets would increase by $500,000 a claim, or $2,000,000.
Finally, according to Bunch, the assets should also include (1) a $141,787 judgment in favor of the debtor against Brad Rine-hart, the past-president of the debtor; (2) undisclosed potential tax benefits the debt- or may receive as a result of any losses the debtor incurs; and (3) $424,703 if Arrowhead pays the AUREA claim. Without any evidence or testimony of the potential tax benefit, the Court cannot include that asset in its computation, nor is it appropriate in a balance sheet analysis. The Court also has concerns about the inclusion of the judgment against the past-president and the possible Arrowhead payment. French testified that he would not include the judgment amount on the balance sheet without first determining whether the judgment was collectable. The figure involved was not a known or even projected quantity on the operative pre-petition date. Further, as discussed above, it appears the AUREA claim is a breach of warranty action and will not be covered by Arrowhead. Regardless, the Court will include
By adding the retrospective return premium, the potential Arrowhead payments for the four claims and the AU-REA judgment, and the judgment against Reinheart to the asset side of the balance sheet, the debtor’s assets increase from $34,277,844 to $40,313,138. However, when compared to the debtor’s liabilities in the amount of $42,537,260, the debtor’s debts remain greater than its property, at fair valuation. Therefore, the Court finds that the debtor was insolvent at the time the transfers occurred on September 5 and 6, 2001.
The remaining issue for the Court is whether Bunch would receive more in a hypothetical liquidation in a chapter 7 case than she would receive as a result of creating the judgment lien. The law is generally well settled that unless creditors would receive a 100% payout, “ ‘any unsecured creditor who receives a payment during the preference period is in a position to receive more than it would have received under a Chapter 7 liquidation.’”
RDM Holdings, Inc. v. DMAC Invs., Inc. (In re RDM Sports Group, Inc.),
Based on the findings of fact and conclusions of law stated above, the Court finds that the registration of Bunch’s judgment in San Bernadino County, California, and Phillips County, Arkansas, was a preferential transfer as defined in the bankruptcy code, and can be, and hereby is, avoided by the debtor.
IT IS SO ORDERED.
Notes
. McMasker filed a general unsecured claim in the amount of $1,225,000. Debtor's Exhibit H-7: Proof of Claim of McMasker.
. Section 547(b) makes certain transactions voidable by the trustee. Section 1107(a) gives the debtor in possession the powers of a trustee.
. Judge Posner recognized the inherent problem concerning the subtleties of going-concern valuation in In re Taxman Clothing Co.:
Because not all expected revenues and expected costs are capitalized, a balance sheet (the schedule of assets and liabilities) does not always yield an accurate picture of afirm’s condition. A firm could be solvent in balance-sheet terms yet be in danger of imminent failure. Bankruptcy law ignores these subtleties in the interest of having a clear rule: balance-sheet solvency determines whether the payments to creditors in the present case were voidable preferences.
Taxman Clothing Co.,
. "[W]hen valuing individual assets, or conducting a balance sheet analysis of solvency, the fair market value of the assets is compared to the face value of the liabilities.”
Silverman Consulting, Inc. v. Hitachi Power Tools, U.S.A., Ltd. et al. (In re Payless Cashways, Inc.),
. Debtor’s Exhibit H-25: Actuarial Analysis of Products Liability Exposure at 9/13/2001.
. This component includes all claims and accidents that have occurred as of September 13, 2001, that the debtor is aware of.
. This component represents the debtor's liability for accidents that have occurred as of September 13, 2001, but have not been reported to the debtor.
.This component represents accidents that have not occurred as of September 13, 2001, but involve the debtor’s products that were sold prior to September 13, 2001.
. Debtor’s Exhibit H-30: Proof of Claim of De Lage.
. Defendant’s Exhibit 7: Indemnification Policy For Product Liability Coverage.
. The Coyle, Reneau, and Rouse claims are known claims against the debtor and are included in Component A in Pearl's report.