Opinion ID: 1269674
Heading Depth: 2
Heading Rank: 1

Heading: Avoidance of interest payments and the $6.9 million cash dividend

Text: We review the bankruptcy court's factual findings for clear error and its legal conclusions de novo. In re Rivinius, Inc., 977 F.2d 1171, 1175 (7th Cir. 1992). If the bankruptcy court's `account of the evidence is plausible in light of the record viewed in its entirety,' we will not reverse its factual findings even if we `would have weighed the evidence differently.' In re Lifschultz Fast Freight, 132 F.3d 339, 343 (7th Cir.1997) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)). Mixed questions of law and fact are subject to de novo review. Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir.2004).
Enodis' primary challenge to the avoidance of the interest payments and the cash dividend is that the courts below improperly valued the Notes, which led them to conclude that Consolidated was insolvent after the Notes were issued in 1989. The bankruptcy court's finding that Consolidated was insolvent from the time the Notes were issued to the date it filed its bankruptcy petition was central to its conclusion that the Trustee can recover all transfers made by Consolidated to Enodis under each theory of recovery asserted by the Trustee. Enodis does not dispute that at the time the Notes were issued, the amounts of the principal of the Notes exceeded Consolidated's assets. Rather, the parties' dispute centers on how to value the Notes for the purposes of determining Consolidated's solvency between 1989 and the time the Notes were cancelled in 1995. The Trustee contends that the Notes represented liabilities in the amount of $30 million. For its part, Enodis argues that the restrictive language on the Notes prohibited Consolidated from paying any principal on the Notes if doing so would render Consolidated insolvent. Thus, Enodis contends, the fair value of the Notes could not be $30 million unless Consolidated had $30 million in funds available for a shareholder distribution, i.e., unless Consolidated could pay the full principal on the Notes and remain solvent. We review the interpretation of the Notes de novo. See Rizzo v. Pierce & Assocs., 351 F.3d 791, 793 (7th Cir.2003) (Interpretation of an unambiguous contract is a question of law.). Under Indiana and federal law, a debtor is insolvent if the fair value of its debts exceeds the fair value of its assets. IND.CODE § 32-18-2-12; 28 U.S.C. § 3302. Before the bankruptcy and district courts, Enodis contended that the Notes represented contingent liabilities. A contingent liability is one that depends on a future event that may not even occur[ ] to fix either its existence or its amount. In re Knight, 55 F.3d 231, 236 (7th Cir.1995); see also In re Mazzeo, 131 F.3d 295, 303 (2d Cir.1997); In re Nicholes, 184 B.R. 82, 88 (9th Cir. BAP 1995); In re McGovern, 122 B.R. 712, 715 (Bankr.N.D.Ind.1989). Because an entity's liability on a contingent debt may never come into being, a contingent liability is not valued at its full amount when assessing the entity's solvency. Rather, a contingent liability is valued at its face amount multiplied by the probability that it will become due. In re Xonics Photochemical, Inc., 841 F.2d 198, 200 (7th Cir.1988). We agree with the courts below that Consolidated's obligation on the Notes was not contingent. The creation of Consolidated's debt to Welbilt Holding did not depend on the occurrence of an extrinsic future event. Consolidated promised to pay a sum certain on a date certain. The only question was whether Consolidated would have the funds available to pay the amount due on the Notes. Enodis attempts to rely on Delphi Industries, Inc. v. Stroh Brewery Co., 945 F.2d 215 (7th Cir.1991), to support its argument that the Notes were conditional or contingent liabilities. That case involved several loans that, according to the parties' unwritten understanding, were to be paid out of the cash flow or proceeds from the sale of a company. We considered whether the loans could be breached if the funds from which they were to be paid did not exist and concluded that they could be breached. Id. at 217-18. Rather than bolstering Enodis' argument, Delphi Industries supports our conclusion that a limitation on the source from which an obligation can be paid does not render that obligation contingent. On appeal, Enodis attempts to reframe the issue, asserting that the restrictive language on the Notes constitutes a condition precedent that, if unsatisfied, would have nullified Consolidated's obligation. This argument too is unavailing. A condition precedent is either a condition which must be performed before the agreement of the parties becomes binding, or a condition which must be fulfilled before the duty to perform an existing contract arises. Barrington Mgmt. Co. v. Paul E. Draper Family Ltd. P'ship, 695 N.E.2d 135, 141 (Ind.Ct.App.1998). In this case, Consolidated's obligation on the Notes arose when it executed and delivered them. By their terms, the Notes are unconditional promises to pay the principal amount on a date certain as well as interest accruing quarterly. The Notes provided that they would become immediately due and payable at the option of the payee upon the occurrence of certain specified events, including Consolidated's failure to make an interest payment. If the Notes were not paid in full when due, Consolidated was bound to pay all costs and expenses of collection. Interpreting each Note as a whole, Beanstalk Group, Inc. v. AM Gen. Corp., 283 F.3d 856, 860 (7th Cir.2002), we agree with the courts below that the Notes created unconditional, noncontingent obligations on the part of Consolidated. Although we believe this conclusion emerges from the language of the Notes themselves, id. at 859, we note that Enodis charged Consolidated interest pursuant to the Notes and Consolidated performed its obligation to pay that interest, indicating that the parties themselves did not intend Consolidated's obligation on the Notes to be subject to the fulfillment of a condition at some future date. Enodis also argues for the first time on appeal that the Notes were essentially declared but unpaid dividends and should be treated as other courts have treated stock redemption obligations or accrued but unpaid dividends. In general, arguments not raised before the district court are waived. Prymer v. Ogden, 29 F.3d 1208, 1215 (7th Cir.1994). Further, this case is distinguishable from the cases cited by Enodis because Consolidated delivered the Notes, which by their terms included express promises to pay the principal amount and interest, in payment of the dividends it declared. In addition, in one case on which Enodis seeks to rely, In re Joshua Slocum Ltd., 103 B.R. 610 (Bankr.E.D.Pa.1989), the court adopted the debtor's treatment of redeemable stock as stockholders' equity and concluded that the redemption value of the stock was not required to be treated as debt in determining solvency. Here, as in In re Joshua Slocum, the courts below accepted the parties' accounting treatment of the Notes as well as expert testimony as to how the Notes should be valued. In sum, we find that the courts below properly included the full value of the Notes as liabilities in their solvency analyses.
The Notes were cancelled in September 1995 and prior to their cancellation, they rendered Consolidated insolvent. We turn our attention to the bankruptcy court's solvency finding after the Notes were cancelled. In order to conclude that Consolidated was insolvent after the Notes were cancelled, the bankruptcy court had to find that the fair value of Consolidated's liabilities continued to exceed its assets. In its proposed findings of fact and conclusions of law, the bankruptcy court did not specifically value Consolidated's assets or liabilities after the Notes were cancelled. Rather, it stated simply that [b]y the time the dividend notes were cancelled in 1995, the contingent claims had become so numerous, so potentially expensive and so severe thateven after being discounted for their contingent naturethey were sufficient to render Consolidated insolvent. Appellants' App. at 38. On appeal, Enodis argues that the bankruptcy court erred by failing to estimate Consolidated's contingent liabilitiesa catch-all term used by the court that includes product liability and warranty claims. In Xonics, we stated that it is necessary to discount a contingent liability by the probability that the contingency will occur and the liability become real. 841 F.2d at 200. It must be reduced to its present, or expected, value before a determination can be made whether the firm's assets exceed its liabilities. Id. We reaffirmed the importance of discounting analysis in Covey v. Commercial Nat'l Bank of Peoria, 960 F.2d 657 (7th Cir. 1992), noting that [d]iscounting a contingent liability by the probability of its occurrence is good economics and therefore good law. Id. at 660. While [a]bsolute precision . . . is not required, a bankruptcy court must calculate an appropriately discounted value for contingent liabilities. In re Advanced Telecomm. Network, Inc., 490 F.3d 1325, 1336 (11th Cir.2007). In the present case, the bankruptcy court did not value the contingent liabilities, merely comparing them to an impending storm that initially looks small when it is on a distant horizon but grows ever darker and more dangerous as it approaches. Appellants' App. at 38. This description, although imaginative, does little to illuminate our understanding of the claims' value. The district court accepted the bankruptcy court's finding. Neither court placed a value on the claims, performed the required discounting analysis or indicated that it relied on any record evidence that purported to perform the required discounting. The Trustee urges us to conclude that the bankruptcy court followed Xonics based on the court's statement that Consolidated's contingent liabilities rendered the company insolvent even after being discounted for their contingent nature. Id. But Federal Rule of Civil Procedure 52(a), made applicable to bankruptcy proceedings by Bankruptcy Rule 7052, requires a bankruptcy court to make findings that supply a clear understanding of the grounds underlying the court's decision. See Andre v. Bendix Corp., 774 F.2d 786, 801 (7th Cir.1985) (Rule 52(a) necessitates that the findings of fact on the merits include as many of the subsidiary facts as are necessary to disclose to the reviewing court the steps by which the trial court reached its ultimate conclusion on each factual issue.) (quoting Denofre v. Transp. Ins. Rating Bureau, 532 F.2d 43, 45 (7th Cir.1976) (per curiam)). Although Rule 52(a) does not require a court to discuss the relevance and importance of each piece of evidence, Mozee v. Jeffboat, Inc., 746 F.2d 365, 370 (7th Cir.1984), it does require a court to clearly state the factual basis for its ultimate conclusion. Kelley v. Everglades Drainage Dist., 319 U.S. 415, 422, 63 S.Ct. 1141, 87 L.Ed. 1485 (1943). In this case, the issue of solvency was highly contested by the parties and the absence of adequate subsidiary findings prevents us from being able to conduct a meaningful review as to whether the court's conclusion that Consolidated was insolvent after 1995 is clearly erroneous. The Trustee seeks to rely on the testimony of its expert and on Consolidated's internal financial statements to support the conclusion that Consolidated was insolvent after the Notes were cancelled, but it is not our station to weigh the evidence and make the findings that are necessary to support the decision. Mozee, 746 F.2d at 370; In re Cesari, 217 F.2d 424, 428 (7th Cir.1954). Remand is required for further subsidiary findings that indicate the factual basis for the bankruptcy court's solvency determination after the Notes were cancelled in 1995.