*District Judge for the Eastern District of Louisiana,

sitting by designation. 

 

111 U.S.C. § 550(a) was amended in October, 1994. 

1

United States Court of Appeals,

Fifth Circuit.

No. 94-40240.

In the Matter of LAMAR HADDOX CONTRACTOR, INC., Debtor.

ORIX CREDIT ALLIANCE, INC., f/k/a Credit Alliance Corp.,

Appellant,

v.

James Allen HARVEY, Jr., Estate Representative, on Behalf of

Lamar Haddox Contractor, Appellee.

Dec. 20, 1994.

Appeal from the United States District Court for the Western

District of Louisiana.

Before JONES and STEWART, Circuit Judges, and DUPLANTIER,* District

Judge.

DUPLANTIER, District Judge:

In this adversary proceeding, the bankruptcy court concluded

that three payments made by Lamar Haddox Contractor, Inc.

("Debtor") to the adversary proceeding defendant, Orix Credit

Alliance, Inc. ("Credit Alliance"), a non-insider creditor, over

five months before the Debtor filed for bankruptcy were voidable

preferences. 11 U.S.C. §§ 547(b), 550(a)(1) (1993).1 The

bankruptcy court entered judgment in favor of the estate

representative plaintiff and against appellant Credit Alliance for

the total amount of the three payments. Credit Alliance appealed

to the district court, which affirmed the bankruptcy court's
2

judgment. Because the estate representative failed to prove that

the Debtor was insolvent at the time the payments were made to

Credit Alliance, we REVERSE.

During the year preceding the Debtor's filing for bankruptcy,

the Debtor, a construction company, made a series of payments on

four promissory notes held by Credit Alliance; these notes were

secured by mortgages of construction equipment owned by the Debtor.

Lamar Haddox, the president and founder of the Debtor, personally

guaranteed all four notes; his brother, Douglas, personally

guaranteed three of them.

The bankruptcy petition was filed on April 13, 1989. At the

beginning of the preceding year, the Debtor owed Credit Alliance

over $1,100,000. During that year, the Debtor made the following

payments to Credit Alliance:

Payment Date Payment Amount

 4/29/88 5,806.69

 4/29/88 11,000.49

 6/ 7/88 2,889.00

 7/ 1/88 25,658.00

 7/20/88 31,222.97

 9/27/88 30,971.00

 9/30/88 30,971.00

11/ 3/88 30,728.00

 Total $169,247.15

These payments reduced the balance owed on the notes to

$942,363.17. The Debtor continued operating its business in
 

2There was no attempt to avoid the payment of the proceeds

from the sale of the collateral securing the notes. 

3

Louisiana and Arkansas until December 20, 1988, when it shut down

its Arkansas operations "for the winter." On February 24, 1989,

the Debtor sold the equipment securing the notes to a non-related

third party for $826,780.00, which sum was paid to Credit Alliance.

Credit Alliance financed the sale, forgave the Debtor the

$115,583.17 deficiency, and released the Haddox brothers from their

personal guarantees. On April 13, 1989, the Debtor filed a

petition for relief under Chapter 11 of the Bankruptcy Reform Act

(the "Bankruptcy Code").

James Allen Harvey, Jr., as estate representative, instituted

this adversary proceeding to recover from Credit Alliance the

amount of the above-listed payments made to Credit Alliance during

the year preceding the bankruptcy filing.2 After trial on the

merits, the bankruptcy court held that the three payments made on

and after September 27, 1988 were voidable preferences under the

Bankruptcy Code. The court concluded that the Debtor became

insolvent on September 27, 1988, that the payments were not made in

the ordinary course of business, and that the transfers to the

non-insider creditor occurred within a year of the filing for

bankruptcy and benefitted insider creditors, 11 U.S.C. §§ 550, 557;

Southmark Corp. v. Southmark Personal Storage, Inc., 993 F.2d 117

(5th Cir.1993); Levit v. Ingersoll Rand Fin. Corp. (In re V.N.

Deprizio Constr. Co.), 874 F.2d 1186 (7th Cir.1989) (transfer to

non-insider creditor occurring within a year of the filing for
4

bankruptcy may be avoided as preferential when the transfer

benefitted an insider creditor). The bankruptcy court entered

judgment in favor of the plaintiff estate representative in the

amount of $92,670.18, the total of the last three payments to

Credit Alliance. The district court affirmed the judgment.

Credit Alliance contends that the judgment of the bankruptcy

court, as affirmed by the district court, should be reversed on

several grounds. Inter alia, Credit Alliance argues that Deprizio

was incorrectly decided, that Southmark's approval of Deprizio is

dictum not binding upon us, and that the 1994 amendment to Section

550 of the Bankruptcy Code, Section 202 of the Bankruptcy

Amendments of 1994, Pub.L. 103-394, 108 Stat. 4106 (1994), which

rejected the Deprizio line of cases, effected no change but instead

made explicit what was always the proper interpretation of the

statute. We consider none of those issues nor other grounds for

reversal urged by appellant, because we agree with appellant's

contention that the estate representative failed to prove that the

Debtor was insolvent at the time of the allegedly preferential

transfers.

We must accept the bankruptcy court's findings of fact unless

they are clearly erroneous. Wilson v. First Nat'l Bank (In re

Missionary Baptist Found. of Am., Inc.), 796 F.2d 752, 756 (5th

Cir.1986). A finding of fact is clearly erroneous when " "although

there is evidence to support it, the reviewing court is left with

the definite and firm conviction that a mistake has been

committed.' " Id. at 756 (citation omitted). The bankruptcy
5

court's determination that the Debtor was insolvent at the time of

the three allegedly preferential transfers is a finding of fact

subject to the clearly erroneous standard of review. Clay v.

Traders Bank of Kansas City, 708 F.2d 1347, 1350 (8th Cir.1983).

Mindful that "[s]trict application of the clearly-erroneous rule is

"particularly important where, as here, the district court has

affirmed the bankruptcy judge's findings,' " Wilson, 796 F.2d at

755 (citation omitted), in reviewing the record we are nevertheless

left with the definite and firm conviction that the bankruptcy

court committed a mistake when it concluded that the Debtor was

insolvent on the dates of the payments to Credit Alliance.

The estate representative may avoid a transfer of property as

a preference if the estate representative establishes that such

transfer was made:

(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
6

extent provided by the provisions of this title.

11 U.S.C. §§ 547(b), (g) (1993). To avoid a transfer as

preferential, the plaintiff must prove that the Debtor was

insolvent at the time the allegedly preferential transfer occurred.

11 U.S.C. § 547(b)(3). There is a presumption of insolvency for

the ninety days preceding the filing of bankruptcy, but that

presumption is not applicable to this case because the allegedly

preferential payments were made over five months before the Debtor

filed for bankruptcy. 11 U.S.C. § 547(f). Thus, the plaintiff

estate representative has the burden of proving insolvency by a

preponderance of evidence, without the benefit of a presumption.

A corporate debtor is insolvent when its "financial condition

[is] such that the sum of [its] debts is greater than all of [its]

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

often refer to this test as a balance sheet test, and then engage

in the "fair valuation" of the debts and property shown on the

balance sheet, as required by the statute. See, e.g., In re Taxman

Clothing Co., Inc., 905 F.2d 166, 169-70 (7th Cir.1990). Needless

to say, a fair valuation may not be equivalent to the values

assigned on a balance sheet. Financial statements reflect the book

value of assets, ordinarily the cost of the property reduced by

accumulated depreciation. The rate of depreciation is usually the

maximum allowed by income tax regulations. The fair value of

property is not determined by asking how fast or by how much it has

been depreciated on the corporate books, but by "estimating what

the debtor's assets would realize if sold in a prudent manner in
7

current market conditions." Pembroke Dev. Corp. v. Commonwealth

Sav. & Loan Ass'n, 124 B.R. 398, 402 (Bankr.S.D.Fl.1991) (holding

that a transfer was not voidable because of the lack of any

evidence, such as appraisals or opinion testimony, of the actual

value of real properties).

 Plaintiff sought to establish that the Debtor was insolvent

at the time of the allegedly preferential transfers solely through

the testimony of Milton Kelley, a certified public accountant who

had prepared the Debtor's tax returns and financial statements

since 1976. However, Mr. Kelley's testimony established only that

as of September 30, 1988, the date on which the Debtor's fiscal

year ended, the company's preliminary unaudited financial

statements and its general ledger showed an excess of liabilities

over assets (a deficit equity position) of $216,000. He testified

that the company had suffered a loss of over $2,000,000 during its

preceding fiscal year and that such loss had reduced the company's

positive equity position of $1,787,000 on September 30, 1987 to a

deficit equity position of $216,000 on September 30, 1988. Based

on the large operating loss and the resulting balance sheet deficit

equity position, he concluded that the Debtor was "probably

bankrupt" on September 30, 1988.

The estate representative presented no evidence whatsoever of

the fair value of the Debtor's property. The accountant testified

that he had no information as to the fair value of the equipment:

"I don't know what the appraised value would be of fixed assets,

but if they were worth more than the value on the books" the
 

3Because no financial statements were introduced into

evidence, neither the rate nor the amount of depreciation can be

determined. 

8

company could be solvent. He could not determine whether the fair

value was greater than the book value because there are "so many

factors: how long, you know, how well it's maintained, what the

market is for it."

There is evidence that the book value of the assets probably

was not reflective of the property's fair value. The bulk of the

Debtor's assets consisted of heavy equipment, much of which was

over ten years old, substantially depreciated on the corporate

books.3 If the fair value of the equipment exceeded the book value

of the equipment by more than $216,000, the Debtor was solvent when

the allegedly preferential payments were made. There was neither

testimony nor a financial record from which a court could determine

what either the book value or the fair value of the equipment was

on September 30, 1988.

While the Debtor's insolvency does not have to be established

through documentary evidence, see Porter v. Yukon Nat'l Bank, 866

F.2d 355, 356-57 (10th Cir.1989) (stating that insolvency does not

have to be proved by a "thoughtful, well-documented analysis of

Debtor's assets and liabilities"), such evidence would have helped

the court to determine the fair market value of the assets. The

estate representative's counsel declined to introduce such

evidence, even though the accountant offered the 1988 unaudited
 

4Q (by plaintiff's counsel): "And can you give us, narrow a

time period as to the beginning of insolvency?"

A (by accountant): "No. As I said, I don't get any

interim financial statements so I don't have any figures at

any period during that year. It just goes from October 1st

of "87 through 9/30 of "88. I have the financial statements

and the general ledger with me. It might show better what I

got."

(By plaintiff's counsel): "At this time we're not

going to need you to introduce those." 

9

financial statements and the general ledger to the court.4 As a

result, the court was left with only conclusory opinion testimony

as to insolvency, without any evidence necessary to support the

conclusions.

The opinion testimony was not sufficient to establish the

debtor's insolvency, because substantial questions remain as to the

fair value of the Debtor's property. No witness had any

information as to the fair value of the property, only its book

value. Much of the equipment which constituted a large percentage

of the corporate assets was over ten years old and therefore

substantially depreciated on the corporate books. There was no

evidence as to the extent of that depreciation on the critical

dates. Therefore, we must conclude that the courts below were

clearly erroneous in finding that the estate representative had

carried the burden of proof that the Debtor was insolvent on and

after September 27, 1988, an essential element of his claim that

the payments to appellant were preferential transfers.

The district court's judgment in favor of the plaintiff, James

Allen Harvey, Jr., estate representative, is REVERSED and the case
10

is REMANDED with instructions to enter judgment for Credit

Alliance.

REVERSED AND REMANDED.