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D ock e t 97-7037,97-7082

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" I n R e: T r a n s W orld " (1998). 1998 D e cisio n s

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. e du/thir dc ir c uit_1998/14Filed 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 wh ether TWA was insolvent on November 4, 1991 so that the transfer of certain monies to a judgment creditor w ithin 90 days of TWA's petition for bankruptcy constituted a preference. Our analysis of TWA's insolvency depend s on how TWA's assets and liabilities should be valued.

We conclude that TWA's assets must be valued at fai r market value in the context of a "going concern" an d that

2its liabilities should be measured at face value. I nasmuch

as we agree with the bankruptcy court's calculation s, albeit with minor qualifications, we hold that on the date in question, TWA was insolvent. Accordingly, any trans fer of TWA's monies to Travellers falls within the prefere nce statute, 11 U.S.C. S 547(b).

We will reverse the district court's order, which h ad reversed the insolvency holding of the bankruptcy c ourt,
and direct the district court to remand this case t o the bankruptcy court for proceedings consistent with ou r opinion.

I.

On October 12, 1991, the United States District Cou rt for the Southern District of New York entered a judgmen t 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 s tay of enforcement of the judgment by depositing $13.7 mil lion 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 Ba nkruptcy Court for the District of Delaware under Chapter 11 (11 U.S.C. S 101 et seq.). Subsequently, TWA filed a co mplaint 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 w hich 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 deb tor 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--

3A. 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 Wor ld 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 th e 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 ent ity'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 o f the filing of the petition;

or (B) between ninety days and one year befor e 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 m ore th an such creditor
would receive if--

(A) the case were a case under chapter 7 o f 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 e ntity's property, at a
fair valuation, exclusive of--

(i) property transferred, concealed, or rem oved w ith intent to hinder, delay, or defraud such entity's cred itors; and

(ii) property that may be exempted from pro perty of the estate under section 522 of this title[.]

41. Travellers' Arguments

Travellers, together with its expert Global Aviatio n Associates, Ltd. ("Global"), offered testimony that TWA's assets exceeded its liabilities by almost two billi on dollars, and thus that the company was solvent. Global based its
"fair valuation" of TWA's assets on their market va lue assuming that TWA was not compelled to sell the ass ets under any time constraint. Applying this methodolog y, 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 investm ents owned by the company, Travellers argued that the va lue 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 ma rket valuation of TWA's publicly traded debt. As a resul t, Travellers' expert testified that TWA's debt obliga tions amounted to $662,898,000.3 With respect to TWA's additional liabilities, Travellers' expert testifie d 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 c alculated the sum of TWA's liabilities to be $3,593,000,000.

Inasmuch as TWA's assets, if valued at $5,298,373,0 00 exceeded its liabilities at $3,593,000,000, Travell ers urged the bankruptcy court to find that TWA was solvent.

2. TWA's Arguments

TWA and its experts, Avmark Inc. ("Avmark"), offere d very
different valuations of both assets and liabilities . According to TWA's calculations, TWA was insolvent on Novembe r 4, 1991, the date of the transfer to the escrow accoun t, because TWA's liabilities exceeded assets by as muc h as
three billion dollars. Avmark based its "fair valua tion" of
TWA's assets on the amount realizable from the asse ts

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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.

5following a hypothetical sale of the assets within a

reasonable time period. Referring to 12-18 months a s a reasonable time period, Avmark concluded that the o verall 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 c onsider the face value of the company's debt, rather than t he much lower market value urged by Travellers, in determin ing the company's insolvency. TWA's calculation of the comp any's liabilities also included an extra $634,814,000 of what it termed contingent liabilities, as well as up to $57 6,000,000 of pension plan liabilities. These additional liabi lities 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 uni ons, $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 lia bilities in light of the high likelihood as of November 4, 1 991 that TWA would soon cease operations. Combined with $370 million in tax liability, medical/dental benefits t otaling $400 million, and almost one billion dollars of oth er liabilities, the liability figure urged by TWA tota led 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 agree d with TWA's conclusion that the company was insolven t. Addressing the valuation of assets, the court agree d with
TWA that a "fair valuation" of assets would be foun d by calculating the amount that would be realized by co nverting
non-cash assets into cash over a reasonable time fr ame. See 180 B.R. at 411. The court found Travellers' po sition that asset valuations exist independently of an act ually realizable amount to be unrealistic. As such, the c ourt

6largely adopted Avmark's asset valuations. Altogeth er, the

bankruptcy court disagreed with TWA's asset valuati ons 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 th e company's accounts and other receivables. In these three areas, the court found that for various factual rea sons, TWA's figures were too low, and substituted Travell ers' figures. The court concluded that the proper valuat ion of TWA's assets was $3,125,811,000.

Turning to the company's liabilities, the bankruptc y court first considered whether TWA's public debt should b e measured at market value or at face value. The cour t 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 mark et value would, among other things, create an unprinci pled distinction between the treatment of private and pu blic debt. See 180 B.R. at 423-24. The court thus adopte d the face value figure of the company's debts urged by T WA, $1,776,752,000.

As to the liabilities incurred by the company's air craft leases, the court accepted TWA's figure of $595 mil lion because it appeared to be the only probative eviden ce put forward by the two parties. TWA's view that the med ical and dental benefits obligations amounted to $400 mi llion was also accepted. Travellers had argued that this liability should be zero because TWA's benefits program had c reated an offsetting good will asset among its employees. This argument was rejected on the ground that the good w ill was
not a saleable asset and had no market value. Havin g largely accepted TWA's asset figures, the bankruptc y court in turn adopted TWA's estimate of its tax liability , $370 million, and also adopted Travellers' largely uncon tested figure for `other' liabilities, $947,381,000.

The final liabilities to be determined were TWA's p ension plan obligations and what TWA termed `contingent' liabilities. The court adopted TWA's view that thes e liabilities were to be assessed in light of the lik elihood that TWA was on the verge of going out of business on

7November 4, 1991. As a result, the court calculated the

liabilities that TWA would incur if the company cea sed its operations. This added $634,814,000 of contingent liabilities arising from the hypothetical liquidati on to the overall liability figure, and also raised the pensi on plan liability from $219.4 million to $401 million. Alto gether, the bankruptcy court decided that TWA's liabilities tot aled $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 t hat the transfer of $13.7 million was voidable as a pre ference.

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 In t'l AG v. Trans World Airlines, Inc. (In re Trans World Ai rlines, Inc.), 203 B.R. 890 (D. Del. 1996). The district court agr eed with the bankruptcy court's position that the proper leg al 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. Concludi ng that the bankruptcy court's adoption of a 12 to 18 month period as a reasonable time frame was a factual matter, an d that none of the bankruptcy court's factual determinatio ns relating to assets was clearly erroneous, the court affirmed the bankruptcy court's determination that the compa ny's liabilities were $3,125,811,000.

On the liability side, however, the district court disagreed with the bankruptcy court's legal conclusion that t he "fair valuation" requirement of 11 U.S.C. S 101(32)(A) di d not apply to the company's debts. Relying largely on Me llon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 648 (3d Cir. 1991), the district court held that bo th assets and liabilities were subject to the fair valuation requirement. Accordingly, the court concluded that the bankruptcy court's decision to value the public deb t at face
value was error. See 203 B.R. at 897-98. In all oth er respects, the court agreed with the bankruptcy cour t's legal analysis, and found that the bankruptcy court's fac tual conclusions were not clearly erroneous. Thus, the d istrict

8court reversed the portion of the bankruptcy court' s

decision relating to liabilities, and remanded with
instructions to conduct a fair valuation of TWA's l iabilities.

The instant appeal and cross-appeal followed.

II.

We exercise jurisdiction to review this appeal purs uant to 28 U.S.C. SS 1291 and 158(d). See Porter v. Mid-Pen n Consumer Discount Co. (In re Porter), 961 F.2d 1066 , 1072 (3d Cir. 1992). Whether a company is insolvent unde r the Bankruptcy Code is considered a mixed question of l aw and fact. See Moody v. Security Pacific Business Credit , 971 F.2d 1056, 1063 (3d Cir. 1992). While factual findi ngs are reviewed only for clear error, our review of "the t rial court's choice and interpretation of legal precepts and its application of those precepts to the historical fac ts" 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 accordi ng to 11 U.S.C. S 101(32)(A). Because liquidation in bankrup tcy was not clearly imminent on the date of the challenged transfer,
we concern ourselves with how to achieve a fair val uation of TWA's assets on a "going concern" basis. See Moo dy, 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 valuati on of assets for a going concern. The cases generally dir ect us to look at "market value" rather than "distress value, " but then also caution that the valuation must be analyz ed "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 (19 94);

9Syracuse Engineering Co. v. Haight, 110 F.2d 468, 4 71-72

(2d Cir. 1940). Although these statements are helpf ul in many cases, they fail to resolve squarely the quest ion 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 conc ern.

Logic and common sense inform us that the amount th at
can be realized from the sale of an asset varies as a function of the time period over which the asset mu st 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 wil l be able to hold out for the possibility of a higher price. TWA 's position, accepted by both the bankruptcy court and the distr ict court, is that a "fair valuation" is best achieved by a hypothetical sale over 12-18 months (TWA's definiti on of a "reasonable" time period). That is, the value of th e assets is to be measured by the sales price that could be att ained if there were a period of 12-18 months to sell off the assets. Travellers, however, argues that the proper time pe riod is substantially longer: so long, in fact, that the as sets should be valued without regard to the pressures of time. In other words, Travellers maintains that the value of the a ssets 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 i n support of their respective positions. TWA bases it s position on a voluminous line of cases stating that fair val uation involves a value that can be made available for pay ments 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 & Tru st Co. v. Bone, 333 F.2d 984, 987 (8th Cir. 1964). TWA arg ues that 12-18 months is a reasonable period of time, s uch that the use of a 12-18 month sale scenario by the bankr uptcy court was proper.

Travellers, on the other hand, relies on cases stat ing that fair valuation of a going concern implicates a fair market valuation. See Lawson v. Ford Motor Co. (In re Robl in

10Indus.), 78 F.3d 30, 36 (2d Cir. 1996); Briden, 776 F.2d at

382. Travellers then argues that a fair market valu ation 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 s ale scenario used by the bankruptcy court and district court as a forced sale, which undervalued TWA's assets and l ed to an improper conclusion that TWA was insolvent on th e date

of the transfer.

We begin our analysis by recognizing the overwhelmi ng body of authority that makes clear that a fair valu ation of assets contemplates a conversion of assets into cas h during a reasonable period of time. See, e.g., In re Robli n 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 a t 987; Syracuse Engineering Co., 110 F.2d at 471; 2 Collie r on Bankruptcy P 101.32[4] at 101-116 (15th ed. Rev. 19 97).4 The question then becomes how to construe whether a given time period is reasonable. As previously indi cated, 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 a nd attempt to satisfy its creditors. Travellers disagrees with TWA's

___________________________________________________ ______________

4. This interpretation of the fair valuation requir ement followed naturally from the text of the insolvency definition in effec t from 1898 until 1978. During that period, the Act stated that a "person s hall be deemed insolvent . . . whenever the aggregate of his prope rty . . . 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 i nsolvency is a
"financial condition such that the sum of such enti ty's debts is greater than all of such entity's property, at a fair valua tion." 11 U.S.C. S 101(32)(A) (1993). Although the conversion-to-cas h methodology is less obvious from the current text, courts have uniforml y treated the current version of the statute as being identical in releva nt part to the earlier version, and we will do the same. See S. Rep. No. 9 5-989, 85th Cong., 2d Sess. (1978), reprinted in 1978 U.S.C.C.A.N. 578 7, 5811 ("The definition of `insolvent' in paragraph [(32)] is ad opted from section 1(19) of current law. . . . It is the traditional bankrup tcy balance sheet test

of insolvency.").

11approach, and asserts that a reasonable period is t he time

that an active company might reasonably take to sel l its assets in the typical course of business at the hig hest 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 intere sts of the creditors. See Syracuse Engineering Co., 110 F.2d a t 471.
The reasonable time should be an estimate of the ti me that a typical creditor would find optimal: not so short a period that the value of the goods is substantially impair ed 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 iden tifies, as best it can, the equilibrium point between the t wo competing concerns of creditors: the desire to maxi mize the dollar figure from the assets to be sold, and the d esire to have the assets sold off quickly to satisfy credito rs' claims sooner rather than later. The competing view that f air 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 prom ptly 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 mus t take place absent time pressures. In Landis, this court evaluated a set of jury instructions concerning how to achiev e a fair
valuation of a debtor's assets. The district court had instructed the jury using the traditional equity te st for insolvency, that a debtor was solvent only if the d ebtor was able to meet all obligations when they became due. This court reversed, holding that a fair valuation of as sets was
not achieved when a debtor was forced to sell asset s "at
once" on the date the debt matured. Id. at 859.

12We disagree with Travellers' view that Landis holds that

a fair valuation implicates a hypothetical sale abs ent 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 liquid ation. Thus, whereas the district court in Landis required insolvency to be measured by the value of those ass ets available at the time the debt became due, the cour t of appeals found that formula to be in error. As our c ourt instructed then, the application of such a formula to measure the value of the debtor's assets would perm it 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. a t 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, 18 0 B.R. at 412, 412 n.30. In light of the size and nature of T rans World Airlines, the bankruptcy court's determinatio n that
12 to 18 months was a "reasonable time" to value TW A's assets is not clearly erroneous. Such a span of tim e reflects the period in which a diligent administrator, conce rned with the interests of TWA's creditors, could invent ory, prepare, and sell TWA's considerable assets in a re asonable 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. Consiste nt with the district court's holding that affirmed the bank ruptcy 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 mus t
address the extent to which the valuation of liabil ities under the Bankruptcy Code should be based upon actu al market conditions faced by the debtor. In particula r, we must resolve two legal questions: first, whether TW A's publicly traded debt should be measured at face val ue or market value, and second, whether liquidation costs should

13be included as contingent liabilities. Then, we mus t 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 Trav ellers assume, as did the bankruptcy court and district co urt, that the question of whether to use face value or m arket value hinges upon a question of statutory interpret ation. 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 fa ir valuation." The parties indicate that if we agree w ith the district court that "fair valuation" in S 101(32)(A ) modifies both "property" and "debts," then we should adopt t he market value figure for TWA's debt. If, on the othe r hand, we agree with the bankruptcy court that "fair valua tion" as found in the statute modifies only "property," then our insolvency calculations should utilize the face val ue of TWA's publicly traded obligations.

Travellers argues that S 101(32)(A) demands a marke t 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 equal ly to liabilities. For support, Travellers points to stat ements made by this court and others suggesting that the f air valuation requirement of S 101(32)(A) applies to TW A's debts. See, e.g., Mellon Bank, N.A. v. Metro Commun ications, Inc., 945 F.2d 635, 648 (3d Cir. 1991) ("The debtor 's assets
and liabilities are tallied at fair valuation to de termine whether the corporation's debts exceed its assets." ); Briden, 776 F.2d at 382 (noting that the insolvency definit ion
"focuses on the fair market value of the debtor's a ssets and liabilities").

However, TWA maintains that the appropriate valuati on of TWA's public debt is its face value rather than its market

14value 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 propertie s but not to debts. Second, TWA points to the insolvency defi nition 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 t here 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 con sidered
at its face value.

We agree with TWA that we must consider the face va lue of TWA's publicly traded debt rather than the marke t value.
This follows from our determination that we must tr eat TWA as a "going concern." See Moody, 971 F.2d at 10 67. Because we treat TWA as a going concern, we cannot
consider the market's devaluation of TWA's debt res ulting 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 d ifference between the face value figure urged by TWA and the market value figure Travellers would have us adopt: the fo rmer represents the net present value of TWA's obligatio ns, while the latter represents the net present value of TWA' s

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5. See note 4, supra.

6. 11 U.S.C. S 101(32)(B) (1993) states that "insol vent" means:

(B) with reference to a partnership, financ ial condition such that the sum of such partnership's debts is great er than the aggregate of,
at a fair valuation--

(i) all of such partnership's property, exc lusive of property of

the kind specified in subparagraph (A)(i) of thi s paragraph; and

(ii) the sum of the excess of the value of each general partner's nonpartnership property, exclusive of proper ty of the kind specified in subparagraph (A) of this paragraph, over such partner's nonpartnership debts[.]

15obligations but discounted by the likelihood that T WA will

be unable to pay its debts in full.

Thus, even accepting the dictum in Metro Communications stating that we must fairly value li abilities, see 945 F.2d at 648, in this context we do not inte rpret the
term "fair valuation" to mean fair market valuation

. Because our going concern methodology precludes us from devaluing TWA's debt based on creditors' perception s of TWA's viability, a fair valuation of TWA's public d ebt is the face value of that debt. See Covey v. Commercial Na t'l Bank, 960 F.2d 657, 660 (7th Cir. 1992) (holding that val uation of debt must be made from the perspective of the debto r, rather than the perspective of a third party credit or).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 variou s costs that TWA would incur if TWA were to cease operation s within 12-18 months of the date of the transfer. Th e bankruptcy court deemed it proper to consider the c osts that TWA would suffer if it were to cease operation s because courts must consider "contingent liabilitie s" in their calculations of liability in an amount discou nted by

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7. As the bankruptcy court noted, anomalous results would occur if we
allowed liabilities to be valued based on the debto r's financial position:

If holders of claims are fully informed of t he debtor's affairs and

the

asset values are less than the face amount o f the claims, they

would
never value their claims at more than the va lue of the assets. Likewise, the fully informed debtor would ne ver be willing to pay
claimants more than claimants would be willi ng to take. Thus, the
value of the claims would never exceed the v alue 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) st and ahead of this one, the beneficiary does not value the guarantee at mor e than the issuer's net assets.").

16the probability that the contingency will occur. Se e In re

Trans World Airlines, 180 B.R. at 426-27. The bankr uptcy
court reasoned that under the 12-18 month sale scen ario it used to value TWA's assets, the liabilities conting ent upon TWA's projected dissolution would become fixed. The bankruptcy court was also influenced by the probabi lity as

of the date of the transfer that TWA would soon be forced to cease operations. Accordingly, the bankruptcy co urt 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 payment s, $181.6 million in additional pension plan liabiliti es, $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 prope r 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 Com m. of Unsecured Creditors (In re R.M.L., Inc.), 92 F.3d 1 39, 156 (3d Cir. 1996); In re Xonics Photochemical, Inc., 8 41 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 tha t rubric. Indeed, it is the antithesis of a "going concern" v aluation to include such costs. See 2 Collier on Bankruptcy P 1 01.32[4] at 101-116 (15th ed. Rev. 1997) ("There is overwhel ming authority to the effect that . . . subsequent disme mberment . . . should not enter into the picture.") (citing cases). Rather, contingent liabilities must be limited to c osts arising from foreseeable events that might occur wh ile the debtor remains a going concern. See FDIC v. Bell, 1 06 F.3d 258, 264 (8th Cir. 1997). Because we treat TWA as a going concern, we will not include in the insolvency calc ulation

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8. COBRA obligations require employers to provide c ertain employees with continued health care coverage following job l oss. See Consolidated Omnibus Budget Reconciliation Act, 29 U.S.C. SS 116 1-1168 (West Supp. 1997).

17the $816.4 million in liabilities associated with T WA's

dissolution that was included by the bankruptcy cou rt.

3.

The final issue we address is whether the bankruptc y court's factual finding that TWA had not reached an agreement with its creditors to reduce its public d ebt by $1 billion was clearly erroneous. Travellers maintains that prior to November 4, 1991, TWA had entered into a p repetition 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 TW A. Travellers points primarily to press releases and S EC filings authored by TWA, which indicate that TWA was attemp ting to restructure its debts in anticipation of reorgan ization under Chapter 11.

The bankruptcy court found that these efforts had n ot 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 clear ly erred in concluding that TWA and its creditors had not re ached a binding agreement, which would have reduced the f ace value of TWA's debt (and thus TWA's liability) by $ 1 billion.

On review of the record, we hold that the bankruptc y court's finding was not clearly erroneous. Although the
record is clear that TWA and its creditors had ente red 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 draf ts, or else indicate that the terms of the proposed agreem ent had not been finalized. Further, only certain elements of the alleged agreement were finalized in the plan that w as 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

18that 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 wa s that TWA was insolvent on November 4, 1991 because the v alue
of TWA's liabilities exceeded that of its assets. A ccording 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 conc luded that the bankruptcy court's calculations were corre ct except insofar as the bankruptcy court included $816.4 mil lion in
liabilities associated with TWA's dissolution. Subt racting this sum from the bankruptcy court's liability figu re, we conclude that the proper valuation of TWA's liabili ties on the date of the transfer was $4,308,547,000. Becaus e this figure still exceeds the $3,125,811,000 valuation o f TWA's assets, we conclude that the bankruptcy court was c orrect 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 favo r of Travellers was a voidable preferential transfer pur suant to 11 U.S.C. S 547(b).

Accordingly, we will reverse the district court's o rder 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 th e 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

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