Opinion ID: 3010865
Heading Depth: 2
Heading Rank: 2

Heading: Liability Valuations

Text: 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.
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.
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.
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).