Paloian Ex Rel. Bankruptcy for Doctors Hospital v. LaSalle Bank, N.A. Ex Rel. Certificate Holders of Asset Securitization Corp. Commercial Pass-Through Certificates

In the

United States Court of Appeals
For the Seventh Circuit

Nos. 09-2011, 09-2012, 09-2013, and 09-2026

G US A. P ALOIAN, as Trustee in bankruptcy for
Doctors Hospital of Hyde Park, Inc.,

Plaintiff-Appellee,
Cross-Appellant,
v.

L AS ALLE B ANK, N.A., as Trustee for the
Certificate Holders of Asset Securitization
Corporation Commercial Pass-Through
Certificates, Series 1997, D5,
Defendant-Appellant,
Cross-Appellee.

Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 07 C 2722, 2815, 5231 & 5232—Rebecca R. Pallmeyer, Judge.

A RGUED D ECEMBER 8, 2009—D ECIDED A UGUST 27, 2010

Before E ASTERBROOK, Chief Judge, and R OVNER and
T INDER, Circuit Judges.
2 Nos. 09-2011, 09-2012, 09-2013, and 09-2026

E ASTERBROOK, Chief Judge. Doctors Hospital of Hyde
Park was founded (as “Illinois Central Hospital”) to
provide medical care as a fringe benefit for workers of
the Illinois Central Railroad. Construction began in
1914; the architects were Schmidt, Garden & Martin. The
building is on several lists of memorable designs. But
the Illinois Central, like other railroads, eventually
decided that it did not have a comparative advantage
in providing medical care and sold the business.
Between 1992 and 2000 the Hospital was a Subchapter S
corporation controlled by James Desnick, an ophthal-
mologist with a checkered past. Desnick once operated a
chain of eye-care clinics, whose business practices garnered
adverse publicity. See Desnick v. American Broadcasting
Cos., 233 F.3d 514 (7th Cir. 2000). Following charges of
misconduct during the 1980s, Desnick gave up his
medical practice in 1991 and bought the Hospital the
next year. In 1999 and 2000 Desnick paid civil penalties
of some $18.5 million to the Medicare and Medicaid
programs on account of the Hospital’s excessive bills—not
only “upcoding” to put services in categories that led
to greater reimbursement, but also claims for medically
unnecessary procedures or work never done at all. The
Hospital also was inefficient, and not only because the
old building’s design is not well suited to modern medi-
cine: patient stays were significantly longer than the
national average. Because third-party payments often
cover a particular procedure rather than the number of
days spent in a hospital room, this led to lower average
revenues per patient-day. Doctors Hospital closed its
doors in 2000; the building has been vacant since then.
Nos. 09-2011, 09-2012, 09-2013, and 09-2026 3

(There are plenty of other hospital beds in or near Hyde
Park at the University of Chicago’s sprawling medical
center plus the Jackson Park Hospital and Medical Center.)
Like other medical providers, the Hospital furnished
services well before it received payment from patients
or their insurers. This created a cash-flow problem, which
the Hospital addressed by borrowing money. The current
dispute arises from two of these loans. The Hospital’s
trustee in bankruptcy proposes to recover, as fraudulent
conveyances, some of the payments made during the
last years before the Hospital entered bankruptcy.
In March 1997 Daiwa Healthco extended a revolving
$25 million line of credit to MMA Funding, L.L.C., which
made the money available to the Hospital for operating
expenses. (Desnick owned 99% or more of MMA Funding
and all other Hospital-related entities mentioned in
this opinion. Anyone interested in details can consult
the lengthy opinions of the bankruptcy judge and
district judge. To make this opinion manageable, we
simplify the facts ruthlessly.) The Hospital transferred
all of its current and future accounts receivable to MMA
Funding, which gave Daiwa a security interest in them.
The plan of this transaction was to use MMA Funding
as a “bankruptcy-remote vehicle” so that Daiwa could
be assured of repayment even if the Hospital entered
bankruptcy.
In August 1997 Nomura Asset Capital Corporation
loaned $50 million to the Hospital through HPCH LLC,
which owned the Hospital’s building and land. As part
of this transaction, the Hospital promised to pay HPCH
4 Nos. 09-2011, 09-2012, 09-2013, and 09-2026

additional rent. HPCH gave Nomura a security interest
in the incremental rent, which was to be transferred to
MMA Funding.
The Daiwa line of credit lasted through March 2000; its
termination caused insuperable cash-flow problems
that led the Hospital to file for bankruptcy. The Nomura
loan was securitized before the end of 1997. It was sold
to a third party that packaged several billion dollars
of commercial credit for resale to investors. The as-
sets—borrowers’ notes and the security interests
backing them up—were transferred to a trust, of which
LaSalle National Bank is the trustee and Orix Capital
Markets the servicer. (On the role of the servicer in
securitization, see CWCapital Asset Management, LLC v.
Chicago Properties, LLC, 610 F.3d 497 (7th Cir. 2010).)
Nomura was reimbursed and has no stake in the
current dispute, except to the extent that it may be an
investor in the pool. Because two trustees are opponents
in this appeal—LaSalle Bank as trustee of the invest-
ment pool, and Gus Paloian as trustee of the Hospital’s
estate in bankruptcy—we refer to each by name, while
recognizing that each is a litigant only in a trustee’s
capacity.
In multiple adversary proceedings, a bankruptcy judge
concluded after a trial that the Hospital was insolvent
no later than August 1997 and that the increased rental
rate for the lease of the building and grounds was in
reality debt service by the Hospital. See, e.g., United
Airlines, Inc. v. HSBC Bank USA, N.A., 416 F.3d 609 (7th
Cir. 2005) (discussing the circumstances under which a
Nos. 09-2011, 09-2012, 09-2013, and 09-2026 5

lease may be recharacterized as a secured loan). The
judge concluded that the repayments on the Nomura
loan were fraudulent conveyances, which must be
returned to the estate. The investment pool then would
receive the same fraction of its claims as other creditors.
Although 11 U.S.C. §550(b)(1) prevents recovery by
a bankruptcy estate when the transfer satisfies an ante-
cedent debt, LaSalle Bank has not relied on this provi-
sion. Its briefs do not say why, and we do not speculate.
The conclusion about the Hospital’s insolvency led
to only partial victory for trustee Paloian, however. The
bankruptcy court concluded that as of July 1998, when
the Hospital and its affiliates finally started using the
precise cash-routing instructions in the loan agreements
by sending the lease payments directly to LaSalle Bank,
the payments were being made with MMA Funding’s
assets rather than the Hospital’s and thus could not be
avoided in the bankruptcy. The judge concluded that all
payments from July 1998 forward are outside the bank-
ruptcy. Paloian accepts this conclusion with respect to
repayments on the Daiwa loan but not with respect to
repayments on the Nomura loan.
The bankruptcy judge’s findings and conclusions
appear at 360 B.R. 787 (Bankr. N.D. Ill. 2007), additional
findings made and reconsideration denied, 373 B.R. 53
(Bankr. N.D. Ill. 2007). A district judge affirmed. 406 B.R.
299 (N.D. Ill. 2009). Both the bankruptcy judge and the
district judge issued several additional opinions, but
these three are the only decisions that matter now. Paloian
and LaSalle Bank have filed cross-appeals. A related
6 Nos. 09-2011, 09-2012, 09-2013, and 09-2026

opinion of this court appears at In re Doctors Hospital of
Hyde Park, Inc., 474 F.3d 421 (7th Cir. 2007) (holding that
the bankruptcy and district judges did not abuse their
discretion in approving a settlement under which Desnick
and entities he controls paid $6 million in exchange for
a release of further liability to the bankruptcy estate).
LaSalle Bank’s principal argument on appeal is that
it is not an “initial transferee” of the funds, for the
purpose of §550(a)(1). Section 550(a) allows preferential
transfers to be recouped from initial transferees,
recipients from initial transferees, or “the entity for
whose benefit such transfer was made”. Relying on
Bonded Financial Services, Inc. v. European American Bank,
838 F.2d 890 (7th Cir. 1988), LaSalle Bank contends that
it was simply a conduit for placing the money in the
trust. We held in Bonded Financial Services that, when a
debtor’s check transfers money to a checking account,
the “initial transferee” is the bank’s customer, who pos-
sesses control over the funds, rather than the bank that
holds money subject to its customer’s orders. LaSalle
Bank sees itself as agent of the pool’s investors and there-
fore as a similarly inappropriate target of a turnover
order. And if, as it contends, the Bank is not the “initial
transferee,” this whole proceeding is at an end.
The Bankruptcy Code does not define “initial trans-
feree”; Bonded Financial Services adopted an approach that
tracks the function of the bankruptcy trustee’s avoiding
powers: to recoup money from the real recipient of prefer-
ential transfers. In Bonded Financial Services, that recipient
was the bank’s customer, who had full control over the
Nos. 09-2011, 09-2012, 09-2013, and 09-2026 7

balance in the checking account. In this situation, the real
recipient is LaSalle Bank, which is the trustee of the
securities pool. In American law, a trustee is the legal
owner of the trust’s assets. Wellpoint, Inc. v. CIR, 599 F.3d
641, 648 (7th Cir. 2010); Restatement (Third) of Trusts §2
comment d, §42. Although LaSalle Bank has duties to
the trust’s beneficiaries (the investors) concerning the
application of funds, the assets’ owner remains the ap-
propriate subject of a preference-avoidance action. If
LaSalle Bank must hand $10 million over to the bank-
ruptcy estate, it will draw that money from the corpus
of the trust, not from the Bank’s corporate assets. This
means that the money really comes from the trust’s
investors—the persons “for whose benefit [the] transfer
was made”. Instead of requiring the bankruptcy trustee
to sue thousands of investors who may have received
interest payments that were increased, slightly, by money
from the Hospital’s coffers, a single suit suffices. If the
Hospital had made a preferential transfer to Exxon, it
would be appropriate to recover that transfer from
Exxon rather than the millions of people who hold stock
in Exxon. Similarly with a preferential transfer to a
hedge fund. Instead of suing each investor, the bank-
ruptcy estate could recover from the fund. Likewise, a
preferential transfer to a trust is appropriately recov-
ered from the trustee, who will charge it to the trust
and thus create the appropriate economic incidence.
We cannot find any appellate decision on the question
whether a trustee for a securitized investment pool is
an “initial transferee” under §550(a). But lots of decisions
hold that an entity that receives funds for use in paying
8 Nos. 09-2011, 09-2012, 09-2013, and 09-2026

down a loan, or passing money to investors in a pool, is
an “initial transferee” even though the recipient is
obliged by contract to apply the funds according to a
formula. See, e.g., In re Columbia Data Products, Inc.,
892 F.2d 26, 28 (4th Cir. 1989); In re Chase & Sanborn Corp.,
904 F.2d 588, 599–600 (11th Cir. 1990); In re Incomnet, Inc.,
463 F.3d 1064, 1071–76 (9th Cir. 2006). All of these courts
say that they are adopting and applying the approach
that this circuit devised in Bonded Financial Services. We
agree with that assessment and shall not create a
conflict among the circuits on the question how to inter-
pret one of our own opinions.
We have for decision four appeals that collectively
present more than 20 issues. The appellate briefs
approach 300 pages. The bankruptcy and district judges
issued opinions thick enough to outweigh a dictionary.
Because most issues have been satisfactorily resolved, in
published opinions, at two levels of the federal judiciary,
it is unnecessary to traipse through all of them again.
Having disposed of the one issue (the “initial transferee”
question) that might have ended the case, we address
only two more. The first question is whether the
Hospital was insolvent in August 1997. If not, the pay-
ments cannot be recovered under the trustee’s avoiding
powers (though perhaps it became insolvent at some
later time before filing for bankruptcy in April 2000). The
second question is whether the transfer of the accounts
receivable to MMA Funding was a true sale. If not, then
MMA Funding did not serve as the bankruptcy-proofing
intermediary that the lenders desired. In bypassing other
questions, we do not necessarily approve the bank-
Nos. 09-2011, 09-2012, 09-2013, and 09-2026 9

ruptcy judge’s or district judge’s reasoning; we approve
only the result. And some of the results (such as several
of the questions about interest on the avoided transfers)
are approved only because vital arguments have not
been preserved for appellate decision. The subjects that
this opinion pretermits are the law of the case, but not
the law of the circuit. (This is the approach that Fed. R.
App. P. 32.1 and Circuit Rule 32.1 adopt for non-
precedential orders. We have elected not to discuss, in
this precedential opinion, issues that may be significant
to the parties but would not contribute to the stock of
precedents.)
Until after it filed for bankruptcy, the Hospital was
current in paying its creditors and had consistently posi-
tive financial statements and EBITDA (earnings before
interest, taxes, depreciation, and amortization). Yet the
bankruptcy judge concluded that it had been insolvent
for almost three years. How was that possible?
Trustee Paloian presented testimony from accountants
who calculated solvency using several methods; the one
the bankruptcy judge adopted is a discounted-cash-
flow analysis. The analyst projects a firm’s net cash flows
into the future, then discounts the stream of income to
present value. If the present value of the income plus
the firm’s physical assets exceeds the firm’s obliga-
tions, it is solvent. Discounted-cash-flow analysis is sen-
sitive to assumptions about the discount rate and ex-
pected future income, but these need not detain us. The
discounted-cash-flow analysis showed that the Hospital
was solvent in August 1997—indeed, comfortably solvent.
10 Nos. 09-2011, 09-2012, 09-2013, and 09-2026

The bankruptcy judge then subtracted $18.5 million,
the amount that federal audits later determined the
Medicare and Medicaid systems had overpaid. The ratio-
nale for this subtraction is that by mid-1997 investiga-
tions were under way, and a chargeback was inevitable.
But this adjustment was not enough to turn the
Hospital’s bottom line red. What did the trick was
lopping 40% off the portion of the Hospital’s assets that
represented the present value of future income. The
rationale for this adjustment was that the Hospital was
a Subchapter S corporation that did not pay taxes, and
a taxable buyer would reduce the purchase price in
recognition of the fact that its profits must be shared
with state and federal treasuries.
LaSalle Bank observes that the bankruptcy judge made
a mistake when determining the reserve (a contingent
liability) for reimbursing Medicare and Medicaid: the
judge did not determine the expected value of the pay-
ment. Instead the judge used hindsight and added
$18.5 million to the liability side of the balance sheet.
Hindsight is wonderfully clear, but in determining the
Hospital’s solvency in mid-1997 it was necessary to
determine the expected value of this liability as of mid-
1997, not the actual value as of 1999 or 2000. Hindsight
bias is to be fought rather than embraced. See Boyer v.
Crown Stock Distribution, Inc., 587 F.3d 787, 794–95 (7th
Cir. 2009). Paloian contends that LaSalle Bank’s lawyers
did not make this point with sufficient clarity and there-
fore have forfeited the issue on appeal. We need not
determine whether the Bank forfeited its argument
about the right way to value contingent liabilities, be-
Nos. 09-2011, 09-2012, 09-2013, and 09-2026 11

cause there is an even more glaring error: contingent
liabilities must be matched against contingent assets.
The missing asset was Desnick’s wealth. If Desnick
caused the Hospital to submit excessive claims for federal
payments, then he and the Hospital were jointly and
severally liable for restitution. So if $18.5 million goes on
the liability side of the Hospital’s balance sheet, the
asset side must contain an estimate (as of mid-1997) of
how much Desnick would chip in, either directly or via
contribution or indemnity (for, if the Hospital paid, then
it would have a claim against Desnick). As it happened,
Desnick paid the whole $18.5 million out of his own
resources. Paloian contends that none of the money
that Desnick supplied belonged on the asset side of the
balance sheet as of mid-1997, because it was speculative
how much he could or would pay. Yet Desnick’s personal
wealth is not pie in the sky; it is the sort of thing that
banks would loan money against (and did). If Desnick
had made out a note, in the Hospital’s favor, for $18.5
million, a court would not ignore it when toting up the
Hospital’s assets. The judge would discount the note to
reflect the probability that it could be collected. The
discount might be substantial, but the court would not
value the note at zero. Yet that’s what the bankruptcy
court did: it valued contingent liabilities at 100¢ on the
dollar and contingent assets at 0¢ on the dollar. The
treatment must be symmetrical. (So too with hindsight:
If a court uses hindsight to value the liability at $18.5
million, it must use hindsight to value Desnick’s share
at $18.5 million, for a net zero effect on the Hospital’s
balance sheet.)
12 Nos. 09-2011, 09-2012, 09-2013, and 09-2026

The 40% reduction likewise was a mistake. Such a
reduction has two potential bases: the illiquidity of the
Hospital’s shares, and the fact that some potential
buyers would have to pay taxes that the Hospital itself
did not (because the profits of a Subchapter S corpora-
tion are taxable only as income to its shareholders).
Neither of these has anything to do with a corporation’s
solvency. They concern the market value of its securities,
not the state of its balance sheet. Cf. Gross v. CIR, 272
F.3d 333, 351–56 (6th Cir. 2001).
Take tax effects. A Subchapter S corporation does not
pay taxes. Some potential buyers do. But how much a
buyer will pay for a revenue stream does not tell us
whether a firm is insolvent, except indirectly: If a buyer
will pay a positive price for the firm’s stock, then it is
very likely to be solvent. (“Very likely” rather than
“certain” because stock has an option value. Even after a
firm is in bankruptcy, its stock will sell for a small
price, reflecting the probability that the firm will be
reorganized and old equity investors be given some
stake in the reorganized firm.) And questions of income
tax arise only when a firm is profitable, because the
income tax is imposed on net rather than gross receipts.
So whether an outsider would have paid $50 million or
only $30 million (a 40% discount) for all stock in the
Hospital, either price implies that the Hospital’s assets are
worth more than its liabilities. On top of all this, most
potential buyers for hospitals are themselves nonprofit
organizations that do not pay income tax. These organi-
zations, competing against one another to buy either
Nos. 09-2011, 09-2012, 09-2013, and 09-2026 13

stock or assets in a hypothetical sale, would not reduce
their bids on account of income taxes.
Much the same can be said about an illiquidity discount.
Suppose a closely held corporation has $1 million in
profits annually, 1,000 shares of stock, and thus $1,000
in annual profits per share, but does not pay dividends.
How much is the share worth? If the stock were traded
in a liquid market, the investor could get something
close to the present value of the income stream (plus the
value of any non-depreciating assets). If the discount
rate is 5%, and the corporation is expected to stay in
business for 20 years, the value per share would be
around $12,500. When the firm is closely held, though,
buyers may not be available. What’s more, many closely
held firms forbid the sale of stock to outsiders. The
owner of a share then might accept $10,000 or even
$8,000, rather than the amount implied by a discounted-
cash-flow analysis. So when shares are appraised—for
purposes of the estate tax, valuation when shareholders
object to a merger, or repurchase by the issuer under a
buy/sell clause—the appraisal usually is less than the
hypothetical price in the (nonexistent) liquid market.
But this has nothing to do with whether the firm is
solvent. The thing being adjusted is the anticipated selling
price per share, not the asset side of a balance sheet.
We asked counsel at oral argument whether they knew
of any decision, from any court, that applied either an
illiquidity discount or a tax-effect discount to the asset
side of a corporation’s balance sheet for the purpose of
figuring out whether the firm is solvent. Neither side’s
14 Nos. 09-2011, 09-2012, 09-2013, and 09-2026

lawyers knew of any example, other than the decision
under review. Our own research did not turn one up. It
follows that the Hospital was solvent in August 1997 and
that the ensuing months’ debt service (which is how the
bankruptcy judge understood the above-market rent
payments) cannot be recaptured as a fraudulent convey-
ance.
Unfortunately, the bankruptcy judge did not determine
whether the Hospital was insolvent at some later time
between August 1997 and the bankruptcy petition in
April 2000. The bankruptcy judge will need to address
that subject, if trustee Paloian believes that payments
made during some shorter period are within the scope
of the avoiding powers in bankruptcy. And if further
proceedings ensue, one issue that is sure to recur is
whether Daiwa and Desnick succeeded in making MMA
Funding a bankruptcy-remote vehicle. For, if they did
not, and the Hospital went insolvent before April 2000,
then payments routed through or for the account of
MMA Funding potentially could be recaptured for the
benefit of creditors in general (if §550(b) does not fore-
close relief).
The idea behind the bankruptcy-remote vehicle is that,
if a debtor sells particular assets to a separate corpora-
tion, the lender can rely on those assets without the
complications (such as preference-recovery actions) that
attend bankruptcy. See, e.g., Kenneth N. Klee & Brendt C.
Butler, Asset-Backed Securitization, Special Purpose Vehicles
and Other Securitization Issues, ALI-ABA Course of Study
Materials SJ082 (June 2004). Bankruptcy-remote entities
Nos. 09-2011, 09-2012, 09-2013, and 09-2026 15

are among several devices that borrowers and lenders
have adopted to make corporate reorganization more a
matter of contract and less a matter of judicial discretion.
See Alan Schwartz, A Contract Theory Approach to
Business Bankruptcy, 107 Yale L.J. 1807 (1998); Robert K.
Rasmussen, Debtor’s Choice: A Menu Approach to Corporate
Bankruptcy, 71 Tex. L. Rev. 51 (1992). See also Douglas G.
Baird & Robert K. Rasmussen, The End of Bankruptcy, 55
Stan. L. Rev. 751 (2002).
To make the idea work, the separate entity must be,
well, separate. It must buy assets (here, accounts receiv-
able). It must manage these assets in its own inter-
est rather than the debtor’s. It must observe corporate
formalities, to prevent the court from rolling it back
into the debtor under the approach of a decision such as
United Airlines, which holds that debtors and creditors
can’t evade bankruptcy law through clever choice of
words, but must structure their transactions so that
their economic substance lies outside particular sections
of the Bankruptcy Code.
If Daiwa had loaned $25 million to Vehicle, a corpora-
tion independent of Desnick, which then purchased the
Hospital’s accounts receivable for $22 million (using the
proceeds of the loan) and stood to make a profit, or suffer
a loss, depending on how much eventually came in, there
would be little ground to treat Vehicle’s payments on
the loan as preferential transfers by the Hospital. The
transfer by the Hospital would have occurred with the
initial sale of the receivables, and, if that sale predated
the Hospital’s insolvency (or the bankruptcy filing) by
16 Nos. 09-2011, 09-2012, 09-2013, and 09-2026

enough time, it would be outside the bankruptcy trustee’s
avoiding powers, even though particular payments
occurred within the look-back periods (90 days or one
year under 11 U.S.C. §547(b), two years under §548(a)).
And the parties agree that, if MMA Funding became
a legitimate bankruptcy-remote vehicle as part of the
Daiwa loan, this prevents recovery of payments made
on the Nomura loan from July 1998 forward.
As far as we can tell from this record, however, MMA
Funding lacked the usual attributes of a bankruptcy-
remote vehicle. It was not independent of Desnick or the
Hospital; Desnick owned MMA Funding (99% of which
was owned by the Hospital, and 1% of which was
owned by a firm that Desnick owned directly or through
some trusts), and MMA Funding operated as if it were
a department of the Hospital. It did not have an office, a
phone number, a checking account, or stationery; all of
its letters were written on the Hospital’s stationery. It
did not prepare financial statements or file tax returns.
It did not purchase the receivables for any price (at least,
if it did, the record does not show what that price was).
Instead of buying the receivables at the outset, MMA
Funding took a small cut of the proceeds every month
to cover its (tiny) costs of operation. The Hospital con-
tinued to carry the accounts receivable on its own books,
as a corporate asset; it told other creditors that Daiwa
had a security interest in the receivables, which is of
course the sort of structure that makes the payments
amenable to a preference-recovery action whether
or not the receivables are remitted to a lockbox at a bank.
Nos. 09-2011, 09-2012, 09-2013, and 09-2026 17

There is scarcely any evidence in this record that MMA
Funding even existed, except as a name that Daiwa’s and
Desnick’s lawyers put in some documents. Daiwa can’t
complain; it knew that MMA Funding was a shell or
could have found out easily enough. See Fusion Capital
Fund II, LLC v. Ham, No. 09-3723 (7th Cir. Aug. 2, 2010). But
a trustee in bankruptcy can step into the shoes of any
hypothetical lien creditor, see 11 U.S.C. §544—which
for current purposes may mean a creditor ignorant of
the contracts signed by the Hospital, Daiwa, Nomura,
LaSalle Bank, and MMA Funding. If a hypothetical
creditor could have obtained an interest in assets that
the Hospital’s books declared belonged to it, then a
bankruptcy trustee can maintain an avoidance action.
And the interests of these outside creditors can’t be
ignored. The bankruptcy and district judges observed
that treating MMA Funding as a bankruptcy-remote
vehicle allowed Daiwa and Nomura to charge lower
rates of interest—which is true enough but overlooks
the fact that, if some creditors are protected from
preference-recovery actions and thus can charge lower
interest, other creditors bear higher risk and must charge
higher interest. The net effect for operating firms is
unclear. See Barry E. Adler, A Re-Examination of Near-
Bankruptcy Investment Incentives, 62 U. Chi. L. Rev. 575
(1995). The Code allows the trustee to look out for
the interests of these other creditors, who may not ap-
preciate that they should have charged extra to offset
the effects of a bankruptcy-remote vehicle that was
hidden in the weeds.
18 Nos. 09-2011, 09-2012, 09-2013, and 09-2026

Perhaps LaSalle Bank can offer on remand evidence to
show that there was a bona fide sale of accounts
receivable from the Hospital to MMA Funding in
March 2007, and that MMA Funding was more than a
name without a business entity to go with it. Or per-
haps the Bank could contend that the hypothetical lien
creditor must be charged with knowledge of those
aspects of the earlier transactions that were matters of
public record. See In re Professional Investment Properties,
955 F.2d 623, 627–28 (9th Cir. 1992); Collier on Bankruptcy
¶544.02[2]. But the first task on remand will be to deter-
mine whether the Hospital was insolvent at any time
before filing for bankruptcy. Unless it was, nothing else
matters.
The judgment of the district court is vacated, and the
case is remanded with instructions to remand to the
bankruptcy court for proceedings consistent with this
opinion.

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