1998 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

1-20-1998

In Re: Trans World

Precedential or Non-Precedential:

Docket 97-7037,97-7082

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Recommended Citation

"In Re: Trans World" (1998). 1998 Decisions. Paper 14.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/14
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 

v. 

TRANS WORLD AIRLINES, INCORPORATED; OFFICIAL 

COMMITTEE OF UNSECURED CREDITORS FOR 

TRANS WORLD AIRLINES 

Trans World Airlines, Incorporated 

 Appellant/Cross-Appellee 

 in Appeal No. 97-7082 

On Appeal from the United States District Court 

for the District of Delaware 

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

Argued Friday, September 12, 1997 

BEFORE: MANSMANN, NYGAARD and GARTH, Circuit Judges

(Opinion filed January 20, 1998) 
 Michael Joseph 

 Richard A. Kirby (Argued) 

 Joseph O. Click 

 Dyer, Ellis, Joseph 

 & Mills 

 600 New Hampshire Avenue, N.W. 

 Washington, D.C. 20037 

 Laurie S. Silverstein 

 Potter, Anderson & Corroon 

 350 Delaware Trust Building 

 P.O. Box 951 

 Wilmington, DE 19899 

 Attorneys for Travellers 

 International AG 

 William H. Sudell, Jr. (Argued) 

 Derek C. Abbott 

 Morris, Nichols, Arsht & Tunnell 

 1201 North Market Street 

 P.O. Box 1347 

 Wilmington, DE 19899 

 Michael J. Templeton 

 Jones, Day, Reavis & Pogue 

 599 Lexington Avenue 

 New York, New York 10022 

 Attorneys for Trans World Airlines, 

 Incorporated 

OPINION OF THE COURT 

GARTH, Circuit 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 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 

 2 
its liabilities should be measured at face value. Inasmuch 

as we agree with the bankruptcy court's calculations, 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. S 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 judgment in 

the amount of $12.3 million in favor of Travellers 

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 reorganization in the United States Bankruptcy 

Court for the District of Delaware under Chapter 11 (11 

U.S.C. S 101 et seq.). Subsequently, TWA filed a complaint 

against Travellers in the United States Bankruptcy Court 

for the District of Delaware, seeking a declaration that the 

$13.7 million deposit was a preferential transfer which was 

voidable under 11 U.S.C. S 547(b).1 See Travellers Int'l AG v. 

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

_________________________________________________________________ 

1. 11 U.S.C. S 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-- 

 3 
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 

Airlines, Inc., 180 B.R. 389 (Bankr. D. Del. 1994). In 

particular, the court focused its attention on the statutory 

requirement that TWA was insolvent on the day of the 

transfer. See 11 U.S.C. S 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 

property, at a fair valuation," 11 U.S.C. S 101(32)(A),2 the 

bankruptcy court heard evidence by experts hired by both 

TWA and Travellers on the value of TWA's assets and

liabilities. 

_________________________________________________________________ 

 (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 th an 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. 

2. 11 U.S.C. S 101(32)(A) (1993) states in full: 

 "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 all of such entity's property, at a 

fair 

 valuation, exclusive of-- 

 (i) property transferred, concealed, or removed w ith 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[.] 

 4 
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 methodology, 

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 

S 101(32)(A) called for a "fair valuation" of TWA's liabilities, 

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 obligations 

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 valuation" of 

TWA's assets on the amount realizable from the assets 

_________________________________________________________________ 

3. This figure is far less than the "face" value of TWA's public debts, 

$1,776,752,000, which we assume represented the net present value of 

TWA's debts as of the date of the transfer. 

 5 
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 overall 

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. S 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 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 $248.2 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 operations. Combined with $370

million in tax liability, medical/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 

insolvent. 

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 converting 

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 

 6 
largely adopted Avmark's asset valuations. Altogether, 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 company's gates 

outside of St. Louis and JFK, and the measure 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. S 101(32)(A) suggested 

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 created 

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 bankruptcy 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. 

The final liabilities to be determined were TWA's pension 

plan obligations and what TWA termed `contingent' 

liabilities. The court adopted TWA's view that these 

liabilities were to be assessed in light of the likelihood that 

TWA was on the verge of going out of business on 

 7 
November 4, 1991. 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 

bankruptcy 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

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

remanded to the bankruptcy court. See Travellers Int'l AG 

v. Trans World Airlines, Inc. (In re Trans World Airlines, 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 id. at 895. Concluding that 

the bankruptcy court's adoption of a 12 to 18 month period 

as a reasonable time frame was a factual matter, and that 

none of the bankruptcy court's factual determinations 

relating to assets was clearly erroneous, the court affirmed 

the bankruptcy court's determination that the company's 

liabilities were $3,125,811,000. 

On the liability side, however, the district court disagreed 

with the bankruptcy court's legal conclusion that the "fair 

valuation" requirement of 11 U.S.C. S 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 concluded 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 bankruptcy court's legal 

analysis, and found that the bankruptcy court's factual 

conclusions were not clearly erroneous. Thus, the district 

 8 
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. 

II. 

We exercise jurisdiction to review this appeal pursuant to 

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

Consumer Discount Co. (In re Porter), 961 F.2d 1066, 1072 

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

Bankruptcy Code is considered a mixed question of law and 

fact. See Moody v. Security Pacific Business Credit, 971 

F.2d 1056, 1063 (3d Cir. 1992). While factual findings are 

reviewed only for clear error, our review of "the trial court's 

choice and interpretation of legal precepts and its

application of those precepts to the historical facts" is 

plenary. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 

F.2d 98, 103 (3d Cir. 1981). 

III. 

A. Asset Valuations 

The first question we must answer is how to measure

properly a "fair valuation" of TWA's assets according to 11 

U.S.C. S 101(32)(A). Because liquidation in bankruptcy was 

not clearly imminent on the date of the challenged 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 various 

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. Resolution Trust 

Corp., 511 U.S. 531, 537, 114 S. Ct. 1757, 1761 (1994); 

 9 
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 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 definition 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 pressures 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 

support 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; Briden 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 

 10 
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 pressures 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 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 35-36; 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 P 101.32[4] at 101-116 (15th ed. Rev. 1997).4 

The question then becomes how to construe whether a

given time period is reasonable. As previously indicated, 

TWA maintains that a reasonable 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 creditors. Travellers disagrees with TWA's 

_________________________________________________________________ 

4. This interpretation of the fair valuation requirement followed 

naturally 

from the text of the insolvency definition in effect from 1898 until 1978. 

During that period, the Act stated that a "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. S 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. 

S 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 identical 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."). 

 11 
approach, and asserts that a reasonable period is the time 

that an active 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 

determining a "reasonable" time period in the case of 

S 101(32)(A) should begin with the financial interests of the 

creditors. 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. id. 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 to satisfy creditors' claims 

sooner rather than later. The competing view that fair 

valuation contemplates a hypothetical 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). 

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 evaluated 

a set of jury instructions concerning how to achieve a fair 

valuation of a debtor's assets. The district court had 

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. Id. at 859. 

 12 
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 

contemplation 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 advantage of the necessities and

embarrassments of the [debtor] in order to procure" the 

assets at a price less than their fair value. Id. at 858. 

We are satisfied that the bankruptcy court applied the 

appropriate legal standard in determining the fair valuation 

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 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 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 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. S 101(32)(A). To decide this issue we must 

address the extent to which the valuation of liabilities 

under the Bankruptcy Code should be based upon actual 

market conditions faced by the debtor. In particular, 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 

 13 
be included as contingent liabilities. Then, we must review 

one factual question: whether the bankruptcy court was 

correct in finding that TWA's debt was not reduced by one 

billion dollars under an agreement between TWA and its 

creditors. 

1. 

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 district court, 

that the question of whether to use face value or market 

value hinges upon a question of statutory interpretation. 11 

U.S.C. S 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 S 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 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 obligations. 

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

valuation because the phrase "fair valuation" in S 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 S 101(32)(A) applies to TWA's 

debts. See, e.g., Mellon Bank, N.A. v. Metro Communications, 

Inc., 945 F.2d 635, 648 (3d Cir. 1991) ("The debtor's assets 

and liabilities are tallied at fair valuation 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 valuation 

of TWA's public debt is its face value rather than its market 

 14 
value because the requirement of a "fair valuation" in 

S 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.

S 101(32)(B).6 Because this definition 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 market 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 

_________________________________________________________________ 

5. See note 4, supra. 

6. 11 U.S.C. S 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-- 

 (i) all of such partnership's property, exclusive of property of 

the 

 kind specified in subparagraph (A)(i) of this paragraph; 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 paragraph, over such partner's 

 nonpartnership debts[.] 

 15 
obligations but discounted by the likelihood that TWA will 

be unable to pay its debts in full. 

Thus, even accepting the dictum in Metro 

Communications 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 from 

devaluing TWA's debt based on creditors' perceptions of 

TWA's viability, a fair valuation of TWA's public debt is the 

face value of that debt. See Covey v. Commercial Nat'l Bank, 

960 F.2d 657, 660 (7th Cir. 1992) (holding that valuation of 

debt must be made from the perspective of the debtor, 

rather than the perspective of a third party creditor).7 

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 

_________________________________________________________________ 

7. As the bankruptcy court noted, anomalous 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 beneficiary of a 

guarantee never values that obligation at more than the issuer's gross 

assets, and if other claims (say, secured debts) stand ahead of this one, 

the beneficiary does not value the guarantee at more than the issuer's 

net assets."). 

 16 
the probability that the contingency will occur. See In re 

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

court reasoned that under the 12-18 month sale scenario it 

used to value TWA's assets, the liabilities contingent 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 severance payments, 

$181.6 million in additional pension plan liabilities, $138.8 

million payable to TWA's unions, and $33.1 million of 

COBRA obligations.8 

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. 

S 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 Bankruptcy P 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 must be limited to costs 

arising from foreseeable events that might occur while the 

debtor remains a going concern. 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 

_________________________________________________________________ 

8. COBRA 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. SS 1161-1168 (West Supp. 

1997). 

 17 
the $816.4 million 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 prepetition 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 filings 

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 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. Liggett Group, Inc., 975 

F.2d 81, 92 (3d Cir. 1992) ("[T]he appellate court must 

accept the factual determination of the fact finder unless 

 18 
that determination either (1) is completely devoid of 

minimum evidentiary support displaying some hue of 

credibility, or (2) bears no rational relationship to the 

supportive evidentiary data.") (quotations omitted). 

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 valuation of 

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

legal and factual issues in this case, we have concluded 

that the bankruptcy court's calculations were correct except 

insofar as the bankruptcy court included $816.4 million in 

liabilities associated with TWA's dissolution. 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 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 voidable preferential transfer pursuant to 

11 U.S.C. S 547(b). 

Accordingly, we will reverse the district court's order 

dated December 30, 1996, which had reversed the 

insolvency 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 opinion. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 19