Opinion ID: 411882
Heading Depth: 1
Heading Rank: 2

Heading: Proof of Insolvency of Debtor

Text: 15 The creditor Wilson also contends that the plaintiff trustee did not carry its burden of proving that the debtor Emerald was insolvent at the time the March 3 payment was made. Under section 547(b)(3) (quoted in note 2 supra ), a trustee may avoid a transfer as preferential only if made while the debtor was insolvent. 16 When Emerald filed its petition in bankruptcy on May 16, 1980, it listed assets of $178,800 and liabilities of over four million dollars. The creditor Wilson points out that this circumstance, after it had become evident that several drilling contracts would end in disastrous losses, does not necessarily indicate that Emerald was insolvent at the time the present payment of March 3, 1980 was made. 17 Section 547(f) of the Bankruptcy Code provides that, for purposes of avoiding a preferential transfer, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition [in bankruptcy]. However, as expressly indicated in the legislative reports and in legislative amendments clarifying the application of the Federal Rules of Evidence to bankruptcy proceedings, 5 the intent of the presumption was to be governed by Fed.R.Evid. 301; thus, to require the party against whom directed (here, the creditor Wilson) to come forward with evidence to rebut or meet the presumption, but not to shift the burden of proof or nonpersuasion to him, which burden remains against the party (here, the trustee) who had the original burden to prove insolvency in order to avoid a transfer as preferential. 6 18 In the present instance, at the hearing before the bankruptcy court on the issue of insolvency, the trustee rested on the presumption. The creditor Wilson then presented as its witness a certified public accountant who had not inspected Emerald's accounts or records or the working papers of the trustee's accountant who had conducted an extensive audit of the failing business. (This latter circumstance was brought out by the examination and cross-examination of Wilson's expert. When Wilson rested upon the testimony of its accountant witness, the trustee relied upon the statutory presumption of insolvency and did not tender the testimony of his accountant.) 19 The effect of the testimony of Wilson's accountant was to criticize the trustee's accountant as possibly having improperly employed the percentage of completion of ongoing contracts method of accounting. 7 He opined that therefore certain of Emerald's assets (ongoing drilling contracts) may have been undervalued. As we read his testimony, he did not at any time attempt to testify that in fact Emerald's assets exceeded its liabilities on the date of Wilson's payment; only that the analysis of the other accountant may have improperly so concluded. 20 Under the Bankruptcy Code definitions, an individual or corporate debtor is insolvent when the sum of such entity's debt is greater than all of such entity's property, at a fair valuation. Section 101(26) of the Code, 11 U.S.C. Sec. 101(26). We agree with the bankruptcy court that the present evidence offered by the creditor, which at most indicated a potential error in accounting methods relied upon by the trustee, did not constitute any evidence sufficient to cast into doubt the statutory presumption of insolvency, i.e., that the debtor's assets exceeded its liabilities. 21 In the absence of evidence to meet or rebut the presumption, Fed.R.Evid. 301, the trustee was entitled to rely upon the presumption of insolvency in his favor. Wilson's accountant testified that the trustee's accounting methods may have undervalued assets, without pointing out which assets and without affording a reasonable basis to conclude that in fact the debtor's assets may have been greater than his liabilities at the time of the transfer. This testimony therefore does not constitute evidence that meets or rebuts the presumption, so as to require the trustee under Fed.R.Evid. 301 to offer further evidence of the debtor's insolvency in order to meet his burden of proof as to it. To hold that any sort of speculative showing by the party opposed to the presumption would cause it to disappear, no matter how tenuous the claim of possible solvency, would in our view resurrect the mischief (see note 5 supra ) that was intended to be cured by the 1978 Code's creation through section 547(f) of the statutory presumption of insolvency. 22 The bankruptcy court did not err, therefore, in granting summary judgment after the creditor Wilson rested on its accountant's testimony, in the face of the court's indication that this evidence by itself was insufficient to meet or rebut the statutory presumption.