The Debtor's 'Insolvency' for Avoidance Actions

The party seeking to set aside a transfer has the burden of proving each of the elements of a preferential or fraudulent transfer under Sections 547 and 548 of the Code, respectively — including the element of the debtor's insolvency. See 11 U.S.C. '547(g). It is therefore essential for both plaintiffs and defendants in avoidance actions to understand how the term “insolvent” operates in these sections of the Bankruptcy Code, and how courts have interpreted questions pertaining to the requirement of the debtor's insolvency, in order to effectively prosecute or defend against such actions.

This article focuses on the uses of the term “insolvency” in the avoidance context, including the impact of the 2004 case, Heilig-Meyers Co. v. Wachovia Bank N.A. (In re Heilig-Meyers Co.), 319 B.R. 447 (Bankr. E.D. Va. 2004), which, while limiting its analysis to a preference context, sheds some light, as further discussed below, on judicial gloss on the term “insolvency” as it is used both explicitly and implicitly throughout the Code. In addition, it examines definitions of “insolvent” and the presumption of insolvency in preference actions, discusses fair valuation and going-concern valuation methodology, and looks at the standard of proof and types of evidence to establish insolvency (including retrojection and projection).

Definitions of 'Insolvent'

As noted earlier, the Bankruptcy Code defines “insolvent” as a “financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation.” 11 U.S.C. ' 101(32)(A) (emphasis added). This so-called “balance-sheet test” for insolvency differs from the “equitable test” of insolvency, codified, for example, at 11 U.S.C. ' 303(h)(1) (concerning challenges to involuntary petitions), wherein a debtor is considered to be insolvent if it is unable to pay its debts as they come due. In fact, a showing of the debtor's inability to pay debts in the ordinary course has been held to be insufficient to establish insolvency for purposes of avoidance actions. See In re Koubourlis, 869 F.2d. 1319, 1322 (9th Cir. 1989). Rather, the notion of insolvency embodied by the Bankruptcy Code's definition is primarily a question of determining “fair valuation” of the debtor's assets, as that term is used in the Code.

Presumption of Insolvency in Preference Actions

Before turning to the question of what constitutes “fair valuation” under the Bankruptcy Code's definition of “insolvent,” it should be noted that the Code establishes a statutory presumption of the debtor's insolvency in preference actions. An action may be brought under Section 547 of the Bankruptcy Code to avoid an allegedly preferential transfer occurring on or within 90 days before the filing of a petition for relief. 11 U.S.C. ' 547(b)(4)(A). The debtor is presumed to be insolvent during this 90-day “preference period.” 11 U.S.C. ' 547(f). Preferential transfers to “insiders” (as that term is defined in the Code at Section 101(31)) may also be avoided if they occurred before the 90-day general preference period but within one year prior to the petition date. 11 U.S.C. ' 547(b)(4)(B). The presumption of insolvency does not, however, extend beyond 90-days prior to the commencement of the case and the trustee or debtor in possession must affirmatively establish the debtor's insolvency to avoid a preferential transfer to an insider taking place more than 90 days prior to the petition date. See Burdick v. Lee, 256 B.R. 837, 841 (D. Mass. 2001). In addition, there is no presumption of insolvency in a fraudulent conveyance, as opposed to a preference, context.

This presumption of insolvency may, however, be rebutted. Accordingly, in a preference action, the onus will initially be on the transferee-defendant to proffer evidence that the debtor was in fact solvent at the time of such transfer. For instance a financial statement showing positive net worth at the beginning of the preference period might be found to be sufficient to rebut the presumption of insolvency. See Jones Truck Lines, Inc. v. Full Service Leasing Corp. (In re Jones Truck Lines, Inc.), 83 F.3d 253, 258 (8th Cir. 1996).

While the presumption shifts the initial burden of production to the transferee-defendant, the ultimate burden of proof remains with the party seeking to avoid the allegedly preferential transfer. Therefore, once the statutory presumption of insolvency is rebutted by the creditor/ defendant, the burden shifts back to the trustee or debtor in possession to produce evidence establishing that debtor was, in fact, insolvent at the time of the transfer.

'Fair Valuation'

As noted above, the Bankruptcy Code's definition of “insolvent” (at Section 101(32)) involves a weighing of the debtor's debts against its assets, “at fair valuation.” “Fair valuation” is not, however, defined in the Bankruptcy Code. For going-concern debtors, the term has generally been interpreted by courts to mean fair market valuation. On the other hand, for debtors that are on their “deathbed” at the time of the challenged transfer, courts have generally determined that a fair market valuation is inappropriate and have preferred a liquidation analysis instead. See, e.g., Wolkowitz v. American Research Corp. (In re DAK Industries, Inc.), 170 F.3d 1197, 1199 (9th Cir. 1999). The rationale for using a liquidation analysis for deathbed debtors is that to treat such companies on the same basis as a going-concern would be inaccurate and would misrepresent the company's true financial condition.

Accordingly, courts have adopted a two-part test to determine “fair valuation” for purposes of a debtor's solvency. See, e.g., Diamond v. Osborne, 2004 WL 1376642 (9th Cir. 2004); Heilig, 319 B.R. at 457. First, a litigant must establish whether the debtor was operating as a going-concern or on its deathbed at the time of the transfer in question. Second, if the debtor is determined to have been a going concern at the time of the transfer, the value of the debtor's assets must be determined according to a balance sheet test; if, on the other hand, the debtor is determined to have been on its deathbed, the value of its assets must be determined according to a liquidation analysis, ie, according to a forced or liquidation sale value.

Deathbed Versus Going-Concern

A debtor on its deathbed is one that is only nominally in existence, or in such a precarious financial condition that liquidation was imminent on the date of the bankruptcy petition. The going-concern threshold is, however, relatively low. A debtor should be treated as a going concern as long as the amounts it could realize from converting its assets to cash in the ordinary course of business exceed the expenses of conducting business. Heilig, 319 B.R. at 457. Furthermore, courts may also look to the debtor's present ability to conduct business in order to determine whether a debtor was a going concern at the time of the challenged transfer, on the theory that “a debtor's ability to continue to conduct business is evidence of its operation as a going concern.” Id. at 458.

Going-Concern Valuation Methodology

A majority of courts have found that a balance sheet test should be employed in determining whether a going-concern debtor was solvent at the time of the challenged transfer. See, e.g., In re Taxman Clothing Co., Inc., 905 F.2d 166, 169-170 (7th Cir. 1990); Heilig, 319 B.R. at 463; Silverman Consulting, Inc. v. Hitachi Power Tools U.S.A. Ltd. (In re Payless Cashways, Inc.), 290 B.R. 689, 699 (Bankr. W.D. Mo. 2003). As noted earlier, the “balance sheet” test, in line with the definition of “insolvent” under 11 U.S.C. ' 101(32), involves a determination of whether the fair market value of the debtor's assets exceeds the debtor's liabilities. This test does not, however, simply entail adopting the book value of the debtor's assets. In fact, numerous courts have found that asset values carried on a balance sheet, even if derived in accordance with generally accepted accounting principles, do not necessarily reflect fair value. See, e.g., DeRosa v. Buildex Inc. (In re F & S Central Mfg. Corp.), 53 B.R. 842, 849 (Bankr. E.D.N.Y. 1985). Rather, the test is intended to capture the fair market price of the debtor's assets that could be obtained if sold in a prudent manner within a reasonable period of time. Lawson v. Ford Motor Company (In re Roblin Indus., Inc.), 78 F.3d 30, 35-36 (2d Cir. 1996).

In re Heilig-Meyers Company

Nevertheless, as evidenced by the testimony of the expert witnesses in In re Heilig-Meyers Company before the Bankruptcy Court for the Eastern District of Virginia, exactly what the balance sheet test does entail is not entirely clear. In Heilig, both the debtors and the transferee of an allegedly preferential transfer presented expert testimony of the debtors' financial status under a balance sheet test. The debtors' expert defined the test to mean “the fair value of all assets sold individually compared to liabilities.” 319 B.R. at 459. By contrast, the transferee's expert defined the test as “the use value of [their] assets to the [debtors] … including [their] operational goodwill.” Id. This led to a nearly $500 million difference between the two appraisals of the debtors' assets. The Heilig court ultimately found that the proper way to value assets under the balance sheet test was “to determine how much they would have fetched from a willing buyer on the date of the alleged preferential transfer.” Id. at 461, 464. On this basis, the court discounted several of the asset valuations made by the debtors' expert because his calculations had relied upon data from after the date of the transfer.

In addition to the balance sheet analysis, the experts for both sides in Heilig also offered market and transaction multiple analyses. Though recognizing that such valuation methodologies are widely accepted in the business and financial world, the Heilig court noted that few courts have relied upon such valuation methodologies in determining whether a debtor was insolvent on the date of an alleged preferential transfer. Heilig, 319 B.R. at 461, 463. Nevertheless, the court undertook a careful examination of the experts' market and transaction multiple valuations and determined that, despite certain flaws, the market multiple valuation by the transferee's expert was adequate to establish that the debtors were solvent. However, because the court found that the expert's market multiple analysis was flawed, it ultimately based its holding on its own estimation of the balance sheet test, taking into consideration the testimony of both experts.

Standard of Proof and Types of Evidence

A debtor's insolvency is a question of fact that must be proven by a preponderance of the evidence. Under this standard, once the initial presumption of insolvency imposed by the Code has been rebutted, the trustee or debtor in possession must persuade the court that it is more likely than not that the debtor was insolvent on the date of the allegedly preferential or fraudulent transfer. See In re Kaypro, 218 F.3d 1070, 1076 (9th Cir. 2000). The bankruptcy court has broad discretion when considering evidence to support a finding of insolvency. Although, as noted above, book value is generally not considered to be the equivalent of fair valuation, courts may derive certain inferences from such figures; evidence contained in documents such as the debtor's financial statements may also provide a starting point for establishing the debtor's insolvency. Nevertheless, as noted by the United States Court of Appeals for the Second Circuit in In re Roblin Industries, Inc., whenever possible, a determination of insolvency should be based on appraisals or expert testimony. 78 F.3d 30 at 35-36.

Additionally, bankruptcy courts may also use a “totality of the circumstances” analysis to support a balance sheet determination of the debtor's insolvency. See Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.), 127 B.R. 722, 724, aff'd 78 F.3d 30 (2d Cir. 1996); Heilig, 319 B.R. at 467-468. In fact, the Heilig court relied heavily on such other factors as the debtors' relatively minor losses over the 5 years preceding the bankruptcy, the debtors' positive net worth reported on fiscal reports just prior to the transfers at issue, the debtors' schedules, and the payment of a dividend just prior to the transfer, in order to support its conclusions with respect to the balance sheet test. Heilig, 319 B.R. at 467-472.

Establishing Insolvency by Retrojection/Projection

Parties to avoidance actions should keep in mind that the debtor's insolvency must be established on the date of the transfer sought to be avoided. 11 U.S.C. '' 547(b)(3), 548(a)(1)(B)(ii). Because of this requirement, it is occasionally difficult to prove a debtor's insolvency if the challenged transfer occurred on a date for which there are no records of the debtor's assets and liabilities, such as in the middle of an accounting period. When the debtor's financial position cannot be determined on the particular date of the transfer at issue, courts have developed the doctrine of “retrojection” or “projection.” Under this doctrine, the trustee or debtor in possession may meet its burden of proof on the issue of insolvency by establishing that the debtor was insolvent at a some time prior to or subsequent to the transfer, together with proof that the debtor's financial condition did not change materially during the intervening period. See, e.g., Gillman v. Scientific Products Research Inc. of Delaware (In re Mama D'Angelo), 55 F.3d 552, 554-55 (10th Cir. 1995).

Conclusion

Parties to an avoidance action should be ready for a valuation fight, since the concept of “insolvency” in an avoidance action context is at once critically important and often murky. Similarly, preference defendants should be prepared to produce ample evidence to rebut the Code's presumption of insolvency. Lastly, because valuation issues often come down to a “battle of the experts,” practitioners should be prepared to present credible valuation evidence in the form of expert testimony.

The concept, definition, and construction of “insolvency” are of central importance to the avoidance provisions of the Bankruptcy Code. Not surprisingly, there are many other areas of bankruptcy practice, including threshold filing issues in both a voluntary and involuntary context, issues of good faith in filing, and numerous causes of action and claims which, while not specifically creations of the Bankruptcy Code, fall within the ambit of insolvency, including deepening insolvency and “zone of insolvency” analyses.

There is, however, no precise definition of “insolvency” that is used consistently in a bankruptcy context. The term “insolvency” is defined in section 101(32) of the Bankruptcy Code, as a “financial condition such that the sum of [an] entity's debts is greater than all of such entity's property, at a fair valuation.” This “balance sheet” test, while most consistently invoked in the preference and fraudulent transfer sections of the Code, has also been applied in the context of a cause of action for “deepening insolvency,” see, e.g. , Official Committee v. R.F. Lafferty & Co., Inc. , 267 F.3d 340, 349 (3d Cir. 2001), as well as in causes of action involving the so-called “zone of insolvency,” see, e.g., In re Brentwood Lexford Partners, LLC , 292 B.R. 255 (Bankr. N.D. Tex. 2003). Additionally, while the Code currently imposes no explicit insolvency threshold for filing voluntary and involuntary petitions, the issue frequently arises in that context where the good faith of the filing is questioned. See, e.g., In re Sullivan County Regional Refuse Disposal Dist., 165 B.R. 60 (Bankr. D.N.H. 1994).

The definition of “insolvency” is also important in the avoidance context, which includes both preferential transfers and fraudulent conveyances. In order for a transfer to be avoidable as a preference under Section 547, it must, among other things, have occurred “while the debtor was insolvent.” 11 U.S.C. ' 547(b)(3). With respect to avoidable fraudulent transfers under Section 548, constructive fraud can be established if the debtor received “less than reasonably equivalent value for such transfer” and was “insolvent on the date such transfer occurred … or became insolvent as a result of such transfer.” 11 U.S.C. ' 548(a)(1)(B)(ii)(I).

The party seeking to set aside a transfer has the burden of proving each of the elements of a preferential or fraudulent transfer under Sections 547 and 548 of the Code, respectively — including the element of the debtor's insolvency. See 11 U.S.C. '547(g). It is therefore essential for both plaintiffs and defendants in avoidance actions to understand how the term “insolvent” operates in these sections of the Bankruptcy Code, and how courts have interpreted questions pertaining to the requirement of the debtor's insolvency, in order to effectively prosecute or defend against such actions.

This article focuses on the uses of the term “insolvency” in the avoidance context, including the impact of the 2004 case, Heilig-Meyers Co. v. Wachovia Bank N.A. (In re Heilig-Meyers Co.), 319 B.R. 447 (Bankr. E.D. Va. 2004), which, while limiting its analysis to a preference context, sheds some light, as further discussed below, on judicial gloss on the term “insolvency” as it is used both explicitly and implicitly throughout the Code. In addition, it examines definitions of “insolvent” and the presumption of insolvency in preference actions, discusses fair valuation and going-concern valuation methodology, and looks at the standard of proof and types of evidence to establish insolvency (including retrojection and projection).

Definitions of 'Insolvent'

As noted earlier, the Bankruptcy Code defines “insolvent” as a “financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation.” 11 U.S.C. ' 101(32)(A) (emphasis added). This so-called “balance-sheet test” for insolvency differs from the “equitable test” of insolvency, codified, for example, at 11 U.S.C. ' 303(h)(1) (concerning challenges to involuntary petitions), wherein a debtor is considered to be insolvent if it is unable to pay its debts as they come due. In fact, a showing of the debtor's inability to pay debts in the ordinary course has been held to be insufficient to establish insolvency for purposes of avoidance actions. See In re Koubourlis, 869 F.2d. 1319, 1322 (9th Cir. 1989). Rather, the notion of insolvency embodied by the Bankruptcy Code's definition is primarily a question of determining “fair valuation” of the debtor's assets, as that term is used in the Code.

Presumption of Insolvency in Preference Actions

Before turning to the question of what constitutes “fair valuation” under the Bankruptcy Code's definition of “insolvent,” it should be noted that the Code establishes a statutory presumption of the debtor's insolvency in preference actions. An action may be brought under Section 547 of the Bankruptcy Code to avoid an allegedly preferential transfer occurring on or within 90 days before the filing of a petition for relief. 11 U.S.C. ' 547(b)(4)(A). The debtor is presumed to be insolvent during this 90-day “preference period.” 11 U.S.C. ' 547(f). Preferential transfers to “insiders” (as that term is defined in the Code at Section 101(31)) may also be avoided if they occurred before the 90-day general preference period but within one year prior to the petition date. 11 U.S.C. ' 547(b)(4)(B). The presumption of insolvency does not, however, extend beyond 90-days prior to the commencement of the case and the trustee or debtor in possession must affirmatively establish the debtor's insolvency to avoid a preferential transfer to an insider taking place more than 90 days prior to the petition date. See Burdick v. Lee , 256 B.R. 837, 841 (D. Mass. 2001). In addition, there is no presumption of insolvency in a fraudulent conveyance, as opposed to a preference, context.

This presumption of insolvency may, however, be rebutted. Accordingly, in a preference action, the onus will initially be on the transferee-defendant to proffer evidence that the debtor was in fact solvent at the time of such transfer. For instance a financial statement showing positive net worth at the beginning of the preference period might be found to be sufficient to rebut the presumption of insolvency. See Jones Truck Lines, Inc. v. Full Service Leasing Corp. (In re Jones Truck Lines, Inc.), 83 F.3d 253, 258 (8th Cir. 1996).

While the presumption shifts the initial burden of production to the transferee-defendant, the ultimate burden of proof remains with the party seeking to avoid the allegedly preferential transfer. Therefore, once the statutory presumption of insolvency is rebutted by the creditor/ defendant, the burden shifts back to the trustee or debtor in possession to produce evidence establishing that debtor was, in fact, insolvent at the time of the transfer.

'Fair Valuation'

As noted above, the Bankruptcy Code's definition of “insolvent” (at Section 101(32)) involves a weighing of the debtor's debts against its assets, “at fair valuation.” “Fair valuation” is not, however, defined in the Bankruptcy Code. For going-concern debtors, the term has generally been interpreted by courts to mean fair market valuation. On the other hand, for debtors that are on their “deathbed” at the time of the challenged transfer, courts have generally determined that a fair market valuation is inappropriate and have preferred a liquidation analysis instead. See, e.g., Wolkowitz v. American Research Corp. (In re DAK Industries, Inc.), 170 F.3d 1197, 1199 (9th Cir. 1999). The rationale for using a liquidation analysis for deathbed debtors is that to treat such companies on the same basis as a going-concern would be inaccurate and would misrepresent the company's true financial condition.

Accordingly, courts have adopted a two-part test to determine “fair valuation” for purposes of a debtor's solvency. See, e.g., Diamond v. Osborne, 2004 WL 1376642 (9th Cir. 2004); Heilig, 319 B.R. at 457. First, a litigant must establish whether the debtor was operating as a going-concern or on its deathbed at the time of the transfer in question. Second, if the debtor is determined to have been a going concern at the time of the transfer, the value of the debtor's assets must be determined according to a balance sheet test; if, on the other hand, the debtor is determined to have been on its deathbed, the value of its assets must be determined according to a liquidation analysis, ie, according to a forced or liquidation sale value.

Deathbed Versus Going-Concern

A debtor on its deathbed is one that is only nominally in existence, or in such a precarious financial condition that liquidation was imminent on the date of the bankruptcy petition. The going-concern threshold is, however, relatively low. A debtor should be treated as a going concern as long as the amounts it could realize from converting its assets to cash in the ordinary course of business exceed the expenses of conducting business. Heilig, 319 B.R. at 457. Furthermore, courts may also look to the debtor's present ability to conduct business in order to determine whether a debtor was a going concern at the time of the challenged transfer, on the theory that “a debtor's ability to continue to conduct business is evidence of its operation as a going concern.” Id. at 458.

Going-Concern Valuation Methodology

A majority of courts have found that a balance sheet test should be employed in determining whether a going-concern debtor was solvent at the time of the challenged transfer. See, e.g., In re Taxman Clothing Co., Inc., 905 F.2d 166, 169-170 (7th Cir. 1990); Heilig, 319 B.R. at 463; Silverman Consulting, Inc. v. Hitachi Power Tools U.S.A. Ltd. (In re Payless Cashways, Inc.), 290 B.R. 689, 699 (Bankr. W.D. Mo. 2003). As noted earlier, the “balance sheet” test, in line with the definition of “insolvent” under 11 U.S.C. ' 101(32), involves a determination of whether the fair market value of the debtor's assets exceeds the debtor's liabilities. This test does not, however, simply entail adopting the book value of the debtor's assets. In fact, numerous courts have found that asset values carried on a balance sheet, even if derived in accordance with generally accepted accounting principles, do not necessarily reflect fair value. See, e.g., DeRosa v. Buildex Inc. (In re F & S Central Mfg. Corp.), 53 B.R. 842, 849 (Bankr. E.D.N.Y. 1985). Rather, the test is intended to capture the fair market price of the debtor's assets that could be obtained if sold in a prudent manner within a reasonable period of time. Lawson v. Ford Motor Company (In re Roblin Indus., Inc.), 78 F.3d 30, 35-36 (2d Cir. 1996).

In re Heilig-Meyers Company

Nevertheless, as evidenced by the testimony of the expert witnesses in In re Heilig-Meyers Company before the Bankruptcy Court for the Eastern District of Virginia, exactly what the balance sheet test does entail is not entirely clear. In Heilig, both the debtors and the transferee of an allegedly preferential transfer presented expert testimony of the debtors' financial status under a balance sheet test. The debtors' expert defined the test to mean “the fair value of all assets sold individually compared to liabilities.” 319 B.R. at 459. By contrast, the transferee's expert defined the test as “the use value of [their] assets to the [debtors] … including [their] operational goodwill.” Id. This led to a nearly $500 million difference between the two appraisals of the debtors' assets. The Heilig court ultimately found that the proper way to value assets under the balance sheet test was “to determine how much they would have fetched from a willing buyer on the date of the alleged preferential transfer.” Id. at 461, 464. On this basis, the court discounted several of the asset valuations made by the debtors' expert because his calculations had relied upon data from after the date of the transfer.

In addition to the balance sheet analysis, the experts for both sides in Heilig also offered market and transaction multiple analyses. Though recognizing that such valuation methodologies are widely accepted in the business and financial world, the Heilig court noted that few courts have relied upon such valuation methodologies in determining whether a debtor was insolvent on the date of an alleged preferential transfer. Heilig, 319 B.R. at 461, 463. Nevertheless, the court undertook a careful examination of the experts' market and transaction multiple valuations and determined that, despite certain flaws, the market multiple valuation by the transferee's expert was adequate to establish that the debtors were solvent. However, because the court found that the expert's market multiple analysis was flawed, it ultimately based its holding on its own estimation of the balance sheet test, taking into consideration the testimony of both experts.

Standard of Proof and Types of Evidence

A debtor's insolvency is a question of fact that must be proven by a preponderance of the evidence. Under this standard, once the initial presumption of insolvency imposed by the Code has been rebutted, the trustee or debtor in possession must persuade the court that it is more likely than not that the debtor was insolvent on the date of the allegedly preferential or fraudulent transfer. See In re Kaypro, 218 F.3d 1070, 1076 (9th Cir. 2000). The bankruptcy court has broad discretion when considering evidence to support a finding of insolvency. Although, as noted above, book value is generally not considered to be the equivalent of fair valuation, courts may derive certain inferences from such figures; evidence contained in documents such as the debtor's financial statements may also provide a starting point for establishing the debtor's insolvency. Nevertheless, as noted by the United States Court of Appeals for the Second Circuit in In re Roblin Industries, Inc., whenever possible, a determination of insolvency should be based on appraisals or expert testimony. 78 F.3d 30 at 35-36.

Additionally, bankruptcy courts may also use a “totality of the circumstances” analysis to support a balance sheet determination of the debtor's insolvency. See Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.), 127 B.R. 722, 724, aff'd 78 F.3d 30 (2d Cir. 1996); Heilig, 319 B.R. at 467-468. In fact, the Heilig court relied heavily on such other factors as the debtors' relatively minor losses over the 5 years preceding the bankruptcy, the debtors' positive net worth reported on fiscal reports just prior to the transfers at issue, the debtors' schedules, and the payment of a dividend just prior to the transfer, in order to support its conclusions with respect to the balance sheet test. Heilig, 319 B.R. at 467-472.

Establishing Insolvency by Retrojection/Projection

Parties to avoidance actions should keep in mind that the debtor's insolvency must be established on the date of the transfer sought to be avoided. 11 U.S.C. '' 547(b)(3), 548(a)(1)(B)(ii). Because of this requirement, it is occasionally difficult to prove a debtor's insolvency if the challenged transfer occurred on a date for which there are no records of the debtor's assets and liabilities, such as in the middle of an accounting period. When the debtor's financial position cannot be determined on the particular date of the transfer at issue, courts have developed the doctrine of “retrojection” or “projection.” Under this doctrine, the trustee or debtor in possession may meet its burden of proof on the issue of insolvency by establishing that the debtor was insolvent at a some time prior to or subsequent to the transfer, together with proof that the debtor's financial condition did not change materially during the intervening period. See, e.g., Gillman v. Scientific Products Research Inc. of Delaware (In re Mama D'Angelo), 55 F.3d 552, 554-55 (10th Cir. 1995).

Conclusion

Parties to an avoidance action should be ready for a valuation fight, since the concept of “insolvency” in an avoidance action context is at once critically important and often murky. Similarly, preference defendants should be prepared to produce ample evidence to rebut the Code's presumption of insolvency. Lastly, because valuation issues often come down to a “battle of the experts,” practitioners should be prepared to present credible valuation evidence in the form of expert testimony.