Baldi v. Samuel Son & Co., Ltd.

• Decision Date: 24 November 2008
• Docket Number: No. 08-1022.,No. 08-1136.,08-1022.,08-1136.
• Citation: 548 F.3d 579
• Parties: Joseph A. BALDI, et al., Plaintiffs-Appellants, v. SAMUEL SON & COMPANY, LTD., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

548 F.3d 579

Joseph A. BALDI, et al., Plaintiffs-Appellants, v. SAMUEL SON & COMPANY, LTD., et al., Defendants-Appellees.

No. 08-1022.

No. 08-1136.

United States Court of Appeals, Seventh Circuit.

Argued September 24, 2008.

Decided November 24, 2008.

Jade R. Lambert, Perkins Coie, John M. Christian, (argued), Phelan, Cahill & Quinlan, Brian M. Graham, Smith Amundsen,

LLC, Chicago, IL, for Plaintiffs-Appellants.

Alexander D. Kerr, Jr. (argued), Tishler & Wald, Sean M. Sullivan, Daley, Mohan & Groble, Jodi Rosen Wine, Nixon Peabody LLP, Chicago, IL, for Defendants-Appellees.

Before POSNER, WOOD, and TINDER, Circuit Judges.

POSNER, Circuit Judge.

The trustee in bankruptcy (we simplify—actually there are two trustees) of a defunct firm named Longview Aluminum LLC filed adversary actions in bankruptcy court to recover for the debtor's estate several payments that Longview had made within four years before it declared bankruptcy. The principal basis for the claims and the only one we need discuss is 11 U.S.C. § 544(b), which allows a trustee in bankruptcy to avoid transfers made by the bankrupt that would be voidable under state law if made by an unsecured creditor. The Uniform Fraudulent Transfer Act, in force in Illinois, allows such avoidance if the debtor was insolvent on the date of the transfer and received less than a reasonably equivalent value in exchange. UFTA § 5(a); 740 ILCS 160/6(a). Only the first requirement is at issue. The corresponding provision of the Bankruptcy Code, 11 U.S.C. § 548(a)(1), is materially identical except that the federal provision allowed the trustee to reach back only one year (since raised to two years) before the declaration of bankruptcy, and that was too short a period to do anything for the trustee in this case.

Insolvency is defined by both statutes as having a balance sheet on which liabilities exceed assets. 11 U.S.C. § 101(32)(A); 740 ILCS 160/3(a). The bankruptcy judge found that Longview had not been insolvent during the period, running from February 26, 2001, to April 1, 2002, in which the transfers were made; and the district judge affirmed. The trustee had tried only to show that Longview was insolvent on both the beginning and ending dates, on the assumption that if it was insolvent on both dates then probably it was insolvent on the dates of the actual transfers, which fell between those end points; there is nothing to counter this assumption, see Haynes & Hubbard, Inc. v. Stewart, 387 F.2d 906, 908 (5th Cir.1967), so we accept it. This approach is called the "rule of retrojection." In re Mama D'Angelo, Inc., 55 F.3d 552, 554 (10th Cir.1995); Briden v. Foley, 776 F.2d 379, 382-83 (1st Cir.1985). The question is whether Longview was insolvent at the beginning of the transfer period.

A company named Michigan Avenue Partners, LLC (we'll call it "MAP") decided to enter the aluminum industry, and did so by acquiring among other properties the Longview aluminum manufacturing plant, jointly owned by Alcoa and Reynolds Metals, in Washington state. A subsidiary of MAP had brought an antitrust suit against Alcoa and Reynolds that had eventuated in an order forcing the divestiture of the plant—a Pyrrhic victory for antitrust, for the result of the divestiture, as we are about to see, was a reduction in the output of aluminum.

MAP paid $140 million for Longview. But it did not have to dig into its own pockets for the money. The manufacture of aluminum requires large amounts of electricity; and Longview's electricity supplier, the Bonneville Power Administration (an agency within the Department of the Interior), desperate to be able to continue serving its most necessitous customers in a period of electricity shortage, paid Longview Aluminum LLC $226 million to cease buying electricity for the next 16 months. Longview planned to use the $226 million not only to pay the purchase price of the plant but also to enable it to resume manufacturing aluminum at the end of this "curtailment" period, as the parties call it. Among the costs it would incur to resume would be some $33 million in union wage payments, and this was recorded as a liability on Longview's balance sheet when the company was formed on February 26, 2001. The balance sheet showed assets of $248 million and liabilities of $206 million.

Longview never did resume operations. By the end of the 16-month curtailment period, falling prices for aluminum and rising prices for electricity had made the production of aluminum from the plant uneconomical. The firm declared bankruptcy. (Its plant was ultimately dismantled.) But although it is a fair guess that Longview was insolvent before the curtailment period ended, the trustee's expert— and essentially his only source of evidence—Brooks D. Myhran (a business consultant who specializes in the valuation of companies), did not attempt to determine at what point during that period Longview became insolvent. The trustee pitched his entire case on showing that Longview had been insolvent from the beginning, that is, from February 26, 2001.

Now it is very strange to suppose a start-up company bankrupt from the day of its formation. Especially this start-up. Why would experienced businessmen, which the principals of MAP were, pay $140 million for a firm that had negative value? There is no suggestion that Longview had significant liquidation value, should it never resume operations. So MAP must have thought that Longview would resume operations, or at least had a good enough chance of doing so to make the company worth at least $140 million. Of course many start-ups fail, but if a significant probability of failure sufficed to pronounce a start-up insolvent, how would any start-up finance its operations? Its trade creditors would fear being trapped by sections 544 or 548 of the Bankruptcy Code when they were paid by the start-up for supplies that they had furnished it. The trustee thinks it a killer point that Longview did not have any operating income when it started up. Well, of course not; no start-up starts with an income flow.

The pitfalls of hindsight are especially acute in dealing with a start-up. As we said, start-ups often fail. When one fails, it is easy enough to find an expert who will opine that it was certain to fail from the very start. Such facile proof should rarely be accepted, and it was rightly rejected in this case.

To establish Longview's insolvency at its starting date, Myhran jacked up its liabilities from the $206 million shown on the...