In Re: RML Inc

Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit

8-1-1996

In Re: RML Inc
Precedential or Non-Precedential:

Docket 95-7580

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"In Re: RML Inc" (1996). 1996 Decisions. Paper 83.
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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________

No. 95-7580
_______________

IN RE R.M.L., INC., previously
known as INTERSHOE, INC. Debtor

MELLON BANK, N.A., Appellant

v.

THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS OF R.M.L., INC., previously
known as INTERSHOE, INC.

_______________

On Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. No. 95-cv-01200)
_______________

Argued June 5, 1996

Before: COWEN, NYGAARD and LEWIS, Circuit Judges

(Filed August 1, 1996)
_______________

Edward I. Swichar (ARGUED)
Earl M. Forte, III
Blank, Rome, Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, PA 19103

COUNSEL FOR APPELLANT

Mary F. Walrath (ARGUED)
Pauline K. Morgan, Esq.
Clark, Ladner, Fortenbaugh & Young
One Commerce Square
2005 Market Street
Philadelphia, PA 19103

COUNSEL FOR APPELLEE
 _______________

OPINION OF THE COURT
_______________

COWEN, Circuit Judge.

We confront in this case a difficult issue arising under
11 U.S.C. § 548(a)(2), the provision of the Bankruptcy Code (the
"Code") allowing for avoidance of constructively fraudulent
transfers. The principal question we must decide is whether a
commitment letter Mellon Bank issued in connection with a
contemplated $53-million loan conferred "reasonably equivalent
value" on Intershoe (the debtor) in exchange for $515,000 in
commitment fees that Intershoe paid to Mellon Bank. This question
is complicated by the fact that the loan, which could possibly have
saved Intershoe from bankruptcy, ultimately failed to close. We
also must decide whether Intershoe was insolvent when it
transferred the commitment fees to Mellon Bank.
After finding that Intershoe was insolvent during the
relevant period, the bankruptcy court, relying on a "totality of
the circumstances" test, concluded that Intershoe had not received
"reasonably equivalent value" in exchange for the $515,000 in fees
it had paid to Mellon. The court found that the loan commitment
was so conditional when issued that it conferred virtually no
indirect economic benefit on Intershoe. It therefore ordered
Mellon Bank to remit to the bankrupt estate all but $127,538.04 of
the commitment fees, an amount representing Mellon Bank's out-of-
pocket expenses. The district court summarily affirmed. Because
the commitment letter was so conditional that the chances of the
loan closing were minimal, we agree that Intershoe did not receive
value that was reasonably equivalent to the fees it paid Mellon
Bank. Accordingly, we, too, will affirm.
I.
A.
At all times relevant to this dispute, Intershoe was a
large-scale wholesale distributor of women's shoes. Through 1991,
its primary secured lender was Signet Bank. In the spring of 1991,
Intershoe was aware that its financing arrangement with Signet
would terminate that fall. It therefore sought to recapitalize and
refinance its operations. Intershoe wanted to attract a $15
million equity investment; it also wanted to replace Signet as its
lender with a bank group that would extend a $53 million loan
facility.
In March of 1991, Three Cities Research ("TCR") made an
initial, nonbinding proposal to make a $15 million investment in
Intershoe and began to conduct due diligence and negotiations
toward that end. Hoping that the prospect of an equity infusion
would entice potential lenders, Intershoe approached Mellon Bank,
Bank of New York ("BNY") and Citicorp to discuss potential
refinancing. Each bank made clear that an equity infusion would be
a prerequisite to any refinancing. Representatives of Mellon and
Intershoe first met in either February or March of 1991.
 On June 13, 1991, Mellon issued a proposal letter
documenting its interest in extending a $53 million revolving line
of credit and a $100 million foreign exchange line of credit. The
proposal was contingent upon TCR's injection of $15 million in
cash. At first, Intershoe did not accept Mellon's offer. Instead,
it explored the possibility of obtaining financing from BNY and
Citicorp. After completing its due diligence, however, Citicorp
declined to extend credit to Intershoe. Although BNY had made a
proposal, it subsequently revised the proposal to require a large
equity infusion. Intershoe therefore declined to endorse BNY's
proposal and, instead, turned its attention back to Mellon Bank.
On August 9, 1991, Mellon Bank issued a second proposal
letter that was similar to the first in that it was conditioned
upon the injection of new capital funds of at least $15 million.
The letter also stated that Intershoe would be required to pay: (1)
a facility fee equivalent to 3/4 of one percent (.0075) of the
committed facility (half upon issuance of the commitment letter,
half at closing); (2) a collateral management fee of $10,000; (3)
all of Mellon's out-of-pocket expenses, regardless of whether the
financing occurred; and (4) a "good faith deposit" of $125,000 to
be remitted with written approval of the proposal letter. A fifth
provision in the letter was that Mellon would be permitted to
spread $28 of the $53 million loan among a group of banks. The
loan contemplated by Mellon was known as a highly leveraged
transaction ("HLT"), an asset-based loan bearing greater risk than
an ordinary loan that requires extraordinary due diligence and
monitoring of the borrower's accounts receivable, inventory and
business plan.
On August 12, 1991, Intershoe remitted to Mellon the
$125,000 "good faith deposit" in accordance with the proposal
letter. Because it had reached its borrowing limit with the Signet
Group, Intershoe could not borrow additional sums. Between August
and October of 1991, Intershoe failed to pay the majority of
invoices from its suppliers. While accounts payable increased by
$10 million, its debt to the Signet Group decreased by the same
amount; Intershoe was using what funds it had to pay down its debt.
As a result, the Signet group agreed to extend its loan facility
from September 30 to November 29, 1991, which permitted Intershoe
to continue its business operations.
In early October of 1991, Mellon Bank requested an
additional good faith deposit from Intershoe of $125,000, although
there was nothing to document this request. On October 8 or 9,
1991, Intershoe remitted the additional $125,000 to Mellon Bank by
wire transfer. On October 31, 1991, Westinghouse, to whom
Intershoe had subordinated indebtedness, agreed to restructure
Intershoe's indebtedness in order to accommodate the proposed
recapitalization.
On November 7, 1991, Mellon issued a formal commitment
letter (the "Letter") with terms that tracked the August 9 proposal
letter. The Letter referred to the $250,000 in good faith deposits
that Mellon had previously received and indicated that the entire
amount would be retained even if the loan did not close. These
deposits would cover Mellon's expense, time and effort in
attempting to consummate the financing. The Letter also required
the remittance of an additional $265,000, half of which represented
a nonrefundable "facility fee" for Mellon's commitment, with the
other half representing a nonrefundable agent's fee for Mellon's
syndication of the loan. The Letter also contained several
conditions: (1) Intershoe had to produce a draft audited financial
statement indicating that it had a net worth of at least $6.5
million; (2) Intershoe was required to repay or retire
Westinghouse's debt and stock warrants and retain Westinghouse as
a creditor for subordinated debt of at least $5 million; (3) $28
million of the loan commitment had to be participated out to a
group of banks; and (4) Intershoe would be required to pay a
separate collateral monitoring fee relating to administering the
loan after closing. By its terms, the commitment was set to expire
on November 29, 1991, the same day that Signet's loan facility was
due to expire.
On November 7, 1991, Intershoe accepted Mellon's
commitment and remitted the $260,000 fee as contemplated by the
Letter. That day Mellon began a "takedown examination" to update
Intershoe's financial information through the closing date. Eight
days later Mellon received a draft financial statement confirming
that Intershoe possessed a positive net worth of $6.5 million
dollars. Mellon then scheduled a meeting for November 20, 1991,
with Intershoe, the loan participants, TCR (the equity investor)
and Peat Marwick to discuss further the financial statements.
On November 17, 1991, however, TCR advised Intershoe that
it had decided not to make the $15 million equity investment and
confirmed its withdrawal from the proposed refinancing. Intershoe
informed Mellon of this development the next day, and the entire
deal collapsed. Intershoe's trade creditors continued to extend
credit even after the collapse of the Mellon financing.
On November 15, 1991, Peat Marwick issued to Intershoe an
audited financial statement for the fiscal year ending August 31,
1991. This statement indicated that as of August 31, Intershoe's
liabilities exceeded its assets by four million dollars. In
accordance with Generally Accepted Accounting Principles ("GAAP")
and Generally Accepted Accounting Standards ("GAAS"), the financial
statement took into account events subsequent to the end of the
fiscal year (e.g., the collapse of the Mellon financing) as
evidence of Intershoe's financial condition. Several questionable
items on Intershoe's balance sheet were corrected or adjusted,
resulting in an even lower net worth. The financial statement also
indicated that Intershoe would have difficulty continuing as a
going concern. On December 11, 1991, Intershoe agreed to accept
Peat Marwick's suggested changes to its financial statements.
Intershoe's financial condition continued to decline, reaching a
point where its liabilities exceeded assets by $14 million.
Intershoe sought protection under Chapter Eleven of the Code on
February 18, 1992.
B.
On May 18, 1993, the Committee filed an adversary
proceeding against Mellon Bank seeking to recover, as
constructively fraudulent transfers, the three payments that
Intershoe had made to Mellon in connection with the financing
commitment, which totaled $515,000. Under section 548(a)(2) of the
Code, the Committee bore the burden of establishing that: (1) the
debtor had an interest in the property; (2) the transfer of the
interest occurred within one year of the petition; (3) the debtor
was insolvent at the time of the transfer or became insolvent as a
result thereof; and (4) the debtor received "less than a reasonably
equivalent value in exchange for such transfer." BFP v. Resolution
Trust Corp., 511 U.S. 531, ___, 114 S. Ct. 1757, 1760 (1994)
(quoting 11 U.S.C. § 548(a)(2)(A)). The first two elements were
not disputed.
1.
On the issue of insolvency, which is defined in §
101(32)(A) of the Code as a financial condition where an entity's
debts exceed its property (at fair valuation), the bankruptcy court
focused upon August 31, 1991, the end of Intershoe's fiscal year.
It concluded that the Committee had established through the
testimony of four certified public accountants, who relied upon
Intershoe's audited (and adjusted) financials, that Intershoe was
insolvent as of that date.
Mellon attempted to argue that it was the write-offs that
rendered Intershoe insolvent, and that the write-offs were caused
by the collapse of the Mellon Bank-Intershoe deal. The bankruptcy
court disagreed:
Although events which drastically and
unexpectedly change a company's actual
financial condition (such as a fire or other
disaster) would not be the type of subsequent
event that should evidence a company's prior
financial condition, I agreed with the
testimony of the Committee's experts that the
failure of the proposed Mellon/Intershoe
transaction is exactly the type of event that
should be viewed as evidence of the company's
prior financial condition.

By all accounts, Intershoe's financial
survival was contingent upon the Mellon
refinancing and the Mellon refinancing was
contingent upon dozens of conditions, the
least certain and most important of which was
an equity infusion from TCR. TCR had made no
commitment to go through with the investment,
and, more importantly, the financial numbers
coming out of Intershoe in September, October
and November of 1991, showed a deteriorating
financial condition that would cause serious
concern to a potential equity investor.
Although there was testimony that supported
Mellon's belief that TCR still was considering
the transaction into November, 1991, the
evidence was persuasive that TCR's
participation was sufficiently uncertain that
anticipated consummation of the equity
investment and ultimately the Intershoe/Mellon
transaction should not be the basis for
 upholding book entries that ultimately turned
out to have no basis in reality.

Official Comm. of Unsecured Creditors of R.M.L., Inc. v. Mellon
Bank N.A., No. 1-93-00137A, slip op. at 15-16 (Bankr. M.D. Pa. June
29, 1995). Based on these audited financials, the bankruptcy court
noted that between August and November of 1991, Intershoe suffered
"numerous materially adverse changes which resulted in $4.1 million
in losses for September and October, 1991." Id. at 6 (footnote
omitted). The court also noted that "by the end of October, 1991,
Intershoe's liabilities exceeded its assets by $8,187,903." Id.n.2. The
bankruptcy court went on to conclude that, even without
placing exclusive reliance upon the audited financial statements,
subsequent events shed sufficient light on Intershoe's financial
condition as to warrant downward adjustments in various alleged
"credits" and book entries. Id. at 18.
2.
The bankruptcy court next considered whether Intershoe
had received "reasonably equivalent value" for the three separate
remittances of financing fees. Although the term "reasonably
equivalent value" is not defined in the Code, the court
acknowledged that the debtor need not receive a dollar-for-dollar
equivalent in order to receive reasonably equivalent value. The
court further acknowledged that the fair value of services rendered
in exchange for fees paid may be difficult to quantify, yet
nonetheless may constitute reasonably equivalent value. The court
applied a "totality of the circumstances" test, which considered:
(1) the good faith of the transferee (Mellon Bank); (2) the fair
market value compared to the price paid; and (3) whether the
transaction was at arm's length.
a.
The bankruptcy court's conclusions concerning the August
12, 1991, transfer of $125,000 were somewhat contradictory. This
transfer was the good-faith deposit required by the August 9, 1991,
proposal letter to cover Mellon's out-of-pocket expenses. The
court first concluded that the transfer had conferred no value on
Intershoe, observing that the loan had failed to close and that
Intershoe's financial condition had not improved. See id. at 26
("The Committee's evidence that no benefit was conferred is simple
and accessible yet is quite powerful in its simplicity.").
The bankruptcy court rejected Mellon's contention that
the existence of the proposal letter had indirect benefits, such as
encouraging Signet to extend its financing commitment or causing
trade creditors to extend unsecured credit. The court observed
that Intershoe's trade suppliers extended credit both before the
financing proposal and after the deal with Mellon had collapsed.
Thus, the prospect of financing from Mellon lacked a causal
relationship with the trade suppliers' extension of credit. The
court further noted that the existence of Mellon's financing
commitment had little or no effect on Signet's decision to extend
its loan facility.
Notwithstanding these conclusions, the bankruptcy court
determined that Mellon could retain the $125,000 transfer:
Mellon established a valid contractual basis
 for retention of the $125,000.00. The August
9, 1991, proposal letter provides for a good
faith deposit in that amount and Mellon
established to my satisfaction that such
agreement was of an ordinary commercial nature
and that Mellon actually and reasonably
incurred out-of-pocket expenses through the
cessation of its takedown examination in
excess of the $125,000.00 deposit such as
warranted retention of the deposit under the
agreement. The contractual nature of this
relationship is entitled to some degree of
respect in the balancing. Additionally[] . .
. the evidence indicated that the parties were
at arm's-length at the time the proposal was
issued and accepted. Finally, a three month
period passed between the transfer of the
initial $125,000.00 and the termination of the
proposed transaction; there was adequate time
for some degree of the types of indirect
benefit alleged by Mellon to accrue with
respect to this initial transfer.

Id. at 26-27. The court also rejected the Committee's claim that
the expenses were inflated and unreasonable.
b.
The October 8, 1991, transfer of $125,000 was described
in testimony as an additional good-faith deposit. It was not
discussed in the proposal letter, however, and there was no
independent documentation of it. The bankruptcy court determined
that, if no commitment letter had issued, Intershoe would have been
entitled to a refund of this good-faith deposit (as well as the
first one). It drew this conclusion from the fact that the
proposal letter did not provide for Mellon's retention of the
"deposits." Indeed, it was not until the Letter was executed on
November 7, 1991, that Intershoe gave up its right to a refund of
the $250,000 in good-faith deposits it had paid to Mellon. Because
it was on November 7 that the second deposit became "irrevocable"
under the terms of the executed commitment letter, the bankruptcy
court chose that date--not October 8--as the date of the transfer
for "reasonably equivalent value" purposes.
The bankruptcy court concluded that Mellon had conferred
no benefit, direct or otherwise, on Intershoe between November 7
and the collapse of the deal after TCR's withdrawal on November 17,
1991. It found, first, that the short-lived commitment conferred
little or no value because it was highly conditional; i.e., it was
contingent upon a significant equity investment from TCR, which had
made no formal commitment to invest in Intershoe. The court
observed that Intershoe's deteriorating financial condition would
have deterred an equity investor from making such an investment.
The court then noted that the commitment letter conferred no
indirect value on Intershoe, such as causing trade suppliers or
Signet to extend credit.
The bankruptcy court rejected Mellon's claims that it had
conferred value to the extent its officers had expended "man-hours"
working on the deal and opportunity costs of forgoing other deals.
From the perspective of Intershoe's creditors, it reasoned,
Mellon's internal costs were irrelevant if no value had been
conferred on the debtor: "what would have been important would have
been a firm and less conditional commitment." Id. at 31. The
court further concluded, based on trial testimony, that "internal
costs are not normally factored into loan transactions exclusive of
facility-type fees; therefore there is no commercial basis
independent of the November 7th agreement for retention of" the
second good-faith deposit. Id.
Finally, the bankruptcy court pointed out that
[b]y November 7th, the arm's-length nature of
Intershoe's relationship with Mellon had
disintegrated; Intershoe's financial condition
had deteriorated and the Mellon loan appeared
to be one of few if not the only remaining
option Intershoe had to survive as a going
concern. Mellon, then, had the opportunity to
extract fees not ordinarily warranted on a
(sic) arm's length commercial basis.

Id. (footnote omitted). The court observed in a footnote that
while it was rejecting the Committee's suggestion that by November
7th Mellon was simply extracting fees for a loan commitment that it
knew would never come to fruition, "Mellon had ample reason to
believe there was a significant possibility that Intershoe could
not meet one or more of the conditions of the commitment letter,
including the TCR equity investment." Id. n.17.
With respect to the second "good-faith deposit," the
bankruptcy court held that "it is extremely difficult to conclude
that Mellon's conditional commitment had a great deal of value.
Based upon the totality of the circumstances, the Committee has
established that Mellon failed to confer reasonably equivalent
value . . . ." Id. at 31-32.
c.
The bankruptcy court then turned to the $265,000 transfer
on November 7, 1991, which represented the nonrefundable
facility/agent's fee contemplated by the commitment letter. For
essentially the same reasons that it found that no value had been
conferred in exchange for the October 8 transfer (which in reality
also occurred on November 7), the bankruptcy court concluded that
Intershoe had not received reasonably equivalent value for the
facility fee. Although recognizing that Mellon had put on credible
evidence that a $265,000 facility fee was commensurate with fees in
the industry for the size of the loan at issue, that did not alter
the analysis, the bankruptcy court said. It was unlikely that
under ordinary circumstances Intershoe would have handed over large
fees where the letter was conditioned upon an equity investment but
where there was no firm commitment from the equity investor.
Again, the court noted that from the creditors' perspective, Mellon
had provided Intershoe with little, if any, value in drafting a
highly conditional commitment letter.
3.
 On appeal, the District Court for the Middle District of
Pennsylvania affirmed, adopting the bankruptcy court's opinion as
its own. Mellon Bank, N.A. v. Official Comm. of Unsecured
Creditors of R.M.L., Inc., No. 1:CV-95-1200 (M.D. Pa. Oct. 13,
1995). This appeal followed.
II.
The bankruptcy court had jurisdiction over this adversary
(core) proceeding pursuant to 28 U.S.C. § 157(b)(2)(H). The
district court exercised appellate jurisdiction over Mellon's
appeal from the bankruptcy court's final order under 28 U.S.C. §
158(a)(1). We have appellate jurisdiction to review the district
court's final order pursuant to 28 U.S.C. §§ 158(d) and 1291.
Whether Intershoe was insolvent or received "less than
fair consideration" are mixed questions of law and fact. Moody v.
Security Pac. Business Credit, Inc., 971 F.2d 1056, 1063 (3d Cir.
1992). Thus, while the factual findings underlying those
determinations are reviewed only for clear error, see, e.g., Mellon
Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 641-42 (3d
Cir. 1991), cert. denied, 503 U.S. 937, 112 S. Ct. 1476 (1992), our
review of "the trial court's choice and interpretation of legal
precepts and its application of those precepts to the historical
facts" is plenary. Id. at 642 (internal quotation marks omitted)
(quoting Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d
98, 103 (3d Cir. 1981)).
III.
As it did in the courts below, Mellon Bank urges reversal
on two grounds. First, Mellon Bank asserts that the commitment
letter conferred "reasonably equivalent value" on Intershoe, the
measure of which is the fair market value of the services it
rendered (i.e., the $515,000 in commitment fees Intershoe paid).
Second, Mellon Bank claims that based upon Intershoe's own balance
sheets at the time of the disputed transfers, Intershoe was not
insolvent.
A.
Reasonably Equivalent Value
Mellon Bank launches a multi-pronged attack on the
bankruptcy court's reasonably equivalent value analysis, assailing
the court's use of a totality of the circumstances test. The
gravamen of Mellon Bank's challenge is that its commitment letter
conferred "reasonably equivalent value" on Intershoe, measured by
the fair market value of the services it provided (i.e., the fees
paid by Intershoe, which were consistent with "the going rate").
Additionally, Mellon Bank contends that the bankruptcy court failed
to appreciate that commitment letters confer "value" to the extent
that they provide a financially troubled company with the "chance"
of obtaining financing that could save it from bankruptcy.
We agree that the factors underlying the totality of the
circumstances test (e.g., fair market value, arm's-length
relationship, and good faith) are simply not relevant to the
initial question whether the commitment letter in this case
conferred any value on Intershoe. We also agree that the mere
"opportunity" to receive an economic benefit in the future
constitutes "value" under the Code. As we explain more fully
below, however, fatal to Mellon Bank's position is the bankruptcy
court's record-supported factual finding that the chances of the
loan closing were negligible. The court essentially found that
Intershoe was exchanging substantial fees for an extremely remote
opportunity to receive value in the future. Because we agree that
this minimal "value" was not "reasonably equivalent," to the
lending fees Intershoe remitted to Mellon Bank, we will affirm the
bankruptcy court's determination.
1.
a.
Both parties take issue with the bankruptcy court's
totality of the circumstances test. Accordingly, we turn first to
the appropriate method of determining reasonably equivalent value.
The concept of reasonably equivalent value unfortunately has not
been defined in the Code. As the Supreme Court noted in BFP v.
Resolution Trust Corp., "[o]f the three critical terms 'reasonably
equivalent value', only the last is defined: 'value' means, for
purposes of § 548, 'property, or satisfaction or securing of a . .
. debt of the debtor' . . . ." 511 U.S. 531, ___, 114 S. Ct. 1757,
1760 (1994) (quoting 11 U.S.C. § 548(d)(2)(A)). Thus, "Congress
left to the courts the obligation of marking the scope and meaning
of [reasonably equivalent value]." In re Morris Communications NC,
Inc., 914 F.2d 458, 466 (4th Cir. 1990).
The lack of a more precise definition has led to
considerable difficulty. This definitional problem is exacerbated
in cases where, as here, the debtor exchanges cash for intangibles,
such as services or the opportunity to obtain economic value in the
future, the value of which is difficult, if not impossible, to
ascertain. Because such intangibles are technically not within §
548(d)(2)(A)'s definition of "value," courts have struggled to
develop a workable test for reasonably equivalent value. See
generally In re Young, 82 F.3d 1407 (8th Cir. 1996) (determining
whether debtors obtained "value" in exchange for charitable
contributions to church); In re Chomakos, 69 F.3d 769 (6th Cir.
1995) (examining whether debtors obtained "value" in exchange for
$7,710 in gambling losses), cert. denied, 116 S. Ct. 1568 (1996);
In re Morris Communications NC, Inc., 914 F.2d at 458 (attempting
to determine "value" of shares in corporation whose only asset was
a license application pending before the FCC that had a one in
twenty-two chance of approval); In re Fairchild Aircraft Corp., 6
F.3d 1119, 1125-26 (5th Cir. 1993) (deciding whether money debtor
spent in failed attempt to keep commuter airline afloat conferred
"value" on the debtor).
In attempting to determine whether Mellon's commitment
letter conferred any value on Intershoe, the bankruptcy court
purported to apply a totality of the circumstances test. Drawn
from other reasonably equivalent value cases, that test takes into
account the fair market value of the item received by, or services
performed for, the debtor; the existence of an arm's-length
relationship between the debtor and the transferee; and the good
faith of the transferee. These factors, however, have no bearing
on whether any "value" was actually conferred on the debtor. At
most, the fair market value and the arm's-length nature of the
relationship are relevant to the price the debtor paid. But the
price that the debtor paid, in and of itself, reveals nothing about
whether the debtor received something of actual "value." A simple
example illustrates our point:
Within one year of filing for bankruptcy, Dpays a window-washer
$1,000 to clean the
windows in an office building. The $1,000
constitutes the going rate for such a job, and
the window-washer is unaware of D's financial
condition.

That the $1,000 D paid represents the fair market value of the
window-washer's services and that the transaction was at arm's
length say absolutely nothing about whether the debtor received
"value;" "value" was conferred because D obtained a palpable
benefit from the service performed--i.e., clean windows.
The bankruptcy court, therefore, conflated two inquiries
that should remain separate and distinct: before determining
whether the value was "reasonably equivalent" to what the debtor
gave up, the court must make an express factual determination as to
whether the debtor received any value at all. The bankruptcy court
seemed to recognize this as it attempted to reconcile the totality
of the circumstances test with our analysis in Metro
Communications, Inc., 945 F.2d at 635.
b.
Metro Communications, Inc. involved a loan that Mellon
Bank provided to the acquiror in a leveraged buy-out ("LBO"). As
collateral for the LBO loan, Metro, the target of the LBO, gave
Mellon Bank a security interest and guarantee in substantially all
of its assets. With the LBO loan, Mellon also provided a credit
facility to Metro, also secured by Metro's assets. Less than one
year later, Metro sought protection under the Code. A committee of
unsecured creditors brought an adversary proceeding alleging, inter
alia, that the granting of the security interests were
constructively fraudulent transfers under § 548(a)(2) of the Code.
The bankruptcy and district courts concluded that Metro had not
received reasonably equivalent value in exchange for the security
interests it provided to Mellon Bank.
In reversing, we observed that "[b]ecause Metro did not
receive the proceeds of the acquisition loan, it did not receive
any direct benefits from extending the guaranty and security
interest collateralizing that guaranty." Id. at 646.
Nevertheless, we stressed that
indirect benefits may also be evaluated. . . .
These indirect economic benefits must be
measured and then compared to the obligations
the bankrupt incurred. . . . The touchstone is
whether the transaction conferred realizable
commercial value on the debtor reasonably
equivalent to the realizable commercial value
of the assets transferred.

Id. at 646-47 (emphasis added) (citations omitted). We went on to
discover two indirect benefits that conferred "value" on Metro.
The first was Mellon Bank's extension of a credit facility to
Metro: "[t]he ability to borrow money has considerable value in the
commercial world. To quantify that value, however, is difficult.
Quantification depends upon the business opportunities the
additional credit makes available to the borrowing corporation and
on other imponderables in the operation or expansion of its
business." Id. at 647. The second indirect benefit created by
Metro's granting of a security interest in its assets, which
allowed the LBO to close, was a "legitimate and reasonableexpectation that
the affiliation of these two corporations . . .
would produce a strong synergy." Id. (emphasis added).
Significantly, we found that the expected synergy created "value,"
even though an unforseen change in the law prevented it from
becoming a reality.
c.
In spite of the plain requirement that the debtor
actually receive something of value, Mellon Bank continues to
insist that the fair market value of services rendered is
conclusively determinative of reasonably equivalent value. To
support this contention it relies on the Supreme Court's recent
decision in BFP v. Resolution Trust Corp., 511 U.S. at 531, 114 S.
Ct. at 1757. BFP, of course, stands for no such proposition. The
Court there held that the proceeds of a mortgage foreclosure sale
conducted in accordance with state law constitute "reasonably
equivalent value" as a matter of law, even where those proceeds are
substantially below the fair market value of the real estate sold.
The BFP Court noted in passing that "the 'reasonably equivalent
value' criterion will continue to have independent meaning
(ordinarily a meaning similar to fair market value) outside the
foreclosure context." 511 U.S. at ___, 114 S. Ct. at 1765.
The dictum in BFP does not help Mellon Bank, however,
because in the real estate context there is no doubt that the
debtor is receiving something of "value" (i.e., cash) in exchange
for real property, which also has a measurable value. Thus, the
real issue in BFP was not whether any value was exchanged, but
rather whether the value obtained was "reasonably equivalent" to
what was given up. Thus, BFP in no way alters the requirement that
when the debtor transfers property--whether it be real estate or
cash--it must receive something of "value" in return.
This is fully consistent with our decision in Metro
Communications, Inc., 945 F.2d at 646, which noted that the
fraudulent conveyance laws are intended to protect the debtor's
creditors. Rejecting Mellon Bank's contention that the debtor had
received "value" simply because the bank had parted with value by
loaning funds, we said that "[t]he purpose of the laws is estate
preservation; thus, the question whether the debtor receivedreasonable
value must be determined from the standpoint of the
creditors." Id. Mellon Bank's assertion in this case that it has
conferred value simply because the fees it charged Intershoe
represent the fair market value of Mellon Bank's services similarly
misses the mark.
In sum, in light of our decision in Metro Communications,
Inc., the bankruptcy court committed legal error to the extent that
it applied a totality of the circumstances test to the initial
question whether the commitment letter at issue conferred any value
on Intershoe. To determine whether this threshold requirement was
satisfied, the court should have examined whether Intershoe
received any benefit from the commitment letter, whether direct or
indirect, without regard to the cost of Mellon Bank's services, the
contractual and arm's-length nature of the relationship, and the
good faith of the transferee.
2.
Its application of the totality of the circumstances test
notwithstanding, the bankruptcy court announced two conclusions
essential to the resolution of the question whether Intershoe had
received any value in exchange for the commitment fees it had
remitted to Mellon Bank. The court first determined that Mellon
Bank's commitment letter did not confer any tangible, indirect
benefits on Intershoe. For instance, the court found that Signet's
extension of its credit facility beyond the original expiration
date and the trade suppliers' decision to extend credit to
Intershoe were not the direct result of Mellon Bank's willingness
to lend funds to Intershoe. The court then determined that the
loan commitment failed to confer any significant intangiblebenefits on
Intershoe. Specifically, the court determined that the
commitment letter essentially offered only a very slim "chance" of
obtaining a substantial economic benefit in the future because it
contained numerous conditions that, in all likelihood, could not
have been satisfied.
With this latter determination the bankruptcy court
implicitly held that money spent on an investment bearing a certain
degree of risk can generate cognizable value within the meaning of
§ 548(a)(2) of the Code, even where the investment ultimately fails
to generate a positive return. The Committee disputes this legal
conclusion, arguing that money spent on a losing investment fails
to confer "value" as a matter of law. If the Committee is correct,
then we would be compelled to affirm since it is undisputed that
Intershoe exchanged $515,000 in fees for a loan that never closed.
Accordingly, we address this preliminary question before reviewing
the propriety of the bankruptcy court's factual findings.
a.
Relying on the following language from our decision in
Metro Communications, Inc., the Committee argues that where the
debtor's financial condition either continues to deteriorate or
fails to stabilize, money spent on a losing investment cannot
confer "value" as a matter of law:
The touchstone is whether the transaction
conferred realizable commercial value on the
debtor reasonably equivalent to the realizable
commercial value of the assets transferred.
Thus, when the debtor is a going concern and
its realizable going concern value after the
transaction is equal to or exceeds its going
concern value before the transaction,
reasonably equivalent value has been received.

945 F.2d at 647 (emphasis added). We disagree. The Committee's
argument depends for its validity on the contention that the
highlighted sentence is part and parcel of the Metro
Communications, Inc. court's holding. If that were true, then our
Internal Operating Procedures would mandate an affirmance here,
since it is clear that Intershoe's going concern value declined at
the time of the disputed transfers to Mellon Bank. Kirk v. Raymark
Indus., Inc., 61 F.3d 147, 168 (3d Cir. 1995) ("The holding of a
panel in a reported opinion is binding on subsequent panels.")
(internal quotation marks and alteration omitted) (quoting I.O.P.
Rule 9.1). But we view the highlighted passage as providing an
example of how a court can determine that a debtor received directbenefits
and, thus, "value" from a transaction. Significantly, the
court in Metro Communications, Inc. went on to discover several
potential, intangible benefits that, although incapable of precise
measurement, conferred value on Metro despite their failure to
materialize. That should dispel any suggestion that Metro
Communications, Inc. stands for the proposition that a debtor must
receive a direct, tangible economic benefit in order to receive
"value" for purposes of § 548(a)(2) of the Code.
Furthermore, were we literally to apply the highlighted
statement from Metro Communications, Inc. as the categorical test
for value under § 548(a)(2), we would announce a rule for this
Circuit that only successful investments can confer value on a
debtor. This would permit a court viewing the events with the
benefit of hindsight to conclude that any transfer that did not
bring in the actual, economic equivalent of what was given up fails
to confer reasonably equivalent value as a matter of law. Such an
unduly restrictive approach to reasonably equivalent value has been
soundly rejected by other courts, Chomakos, 69 F.3d at 771
(gambling losses conferred value on debtor); Fairchild Aircraft
Corp., 6 F.3d at 1119 (money spent in failed attempt to keep
commuter airline afloat conferred value on debtor), and with good
reason. Presumably the creditors whom § 548 was designed to
protect want a debtor to take some risks that could generate value
and, thus, allow it to meet its obligations without resort to
protection under the Bankruptcy Code:
According to [appellant], the only value that
can be considered is property actually
received. Under this view the value of an
investment--no matter how large and how
probable the potential return--cannot be
considered unless it actually pays off, and
only to the extent that it does so. . . . The
narrow "realized property" approach to value
advanced by [appellant] finds no approbation
in the law.

Fairchild Aircraft Corp., 6 F.3d at 1126-27. Accordingly, we hold
that money spent on investments that fail to stabilize or improve
the debtor's condition (i.e., "losing" investments) can confer
value within the meaning of § 548(a)(2) of the Code.
The question, then, is how to determine whether an
investment that failed to generate a positive return nevertheless
conferred value on the debtor. We think our decision in Metro
Communications, Inc. answers this question implicitly. We held
there that the mere expectation that the fusion of two companies
would produce a strong synergy (an expectation that turned out to
be inaccurate in hindsight) would suffice to confer "value" so long
as the expectation was "legitimate and reasonable." Id. at 647
(emphasis added). See id. ("The touchstone is whether the
transaction conferred realizable commercial value on the debtor .
. . .") (emphasis added). Thus, so long as there is some chance
that a contemplated investment will generate a positive return at
the time of the disputed transfer, we will find that value has been
conferred. Accord Chomakos, 69 F.3d at 771 (because legalized
gambling provides fair chance for significant pay-off, $7,710 in
gambling losses conferred value on debtor); Fairchild Aircraft
Corp., 6 F.3d at 1126 ($432,380.91 spent in failed attempt to keep
commuter airline viable conferred value because "the likelihood
that a sale would occur was also demonstrably high"); cf. Morris
Communications NC, Inc., 914 F.2d at 458 (shares in a corporation
whose only asset was a licensing application pending before the FCC
with a one in twenty-two chance of approval had value).
We think our analysis appropriately balances a creditor's
interest in estate preservation against a debtor's legitimate, pre-
bankruptcy efforts to take risks that, if successful, could
generate significant value and, possibly, avoid the need for
protection under the Code altogether. As we noted above, requiring
that all investments yield a positive return in order to find that
they conferred value on the debtor would be unduly restrictive.
But so, too, would a rule insulating from § 548's coverage
investments that, when made, have zero probability of success. The
best solution, therefore, is to determine, based on the
circumstances that existed at the time the investment was
contemplated, whether there was any chance that the investment
would generate a positive return. In this way creditors will be
protected when an irresponsible debtor invests in a venture that is
obviously doomed from the outset.
b.
With these legal principles in mind, our review of the
bankruptcy court's conclusion that Intershoe did not receive
reasonably equivalent value proceeds in two, discrete steps: first,
we determine whether the commitment letter conferred any value on
Intershoe; second, we consider the bankruptcy court's finding that
whatever value was conferred was not "reasonably equivalent" to the
two transfers of lending fees totaling $390,000 is clearly
erroneous.
Although the bankruptcy court did not announce an
explicit finding on the question whether Mellon Bank's commitment
letter conferred any value on Intershoe, it is clear that the court
implicitly answered that question in the affirmative. The
bankruptcy court stated that "all parties should have known there
was a substantial probability that the loan would not close[.]"
Official Comm. of Unsecured Creditors of R.M.L., Inc. v. Mellon
Bank, N.A., No. 1-93-00137A, slip op. at 32 (Bankr. M.D. Pa. June
29, 1995) (emphasis added). Put another way, the court concluded
that by November 7, 1991, there was a slight chance that the loan
would close. This finding is amply supported by the record and,
hence, cannot be disturbed on appeal. First, although TCR had not
formally committed to participate in the deal, there is no evidence
in the record that TCR had made known its intention to withdraw
before November 17, 1991. Thus, as of November 7, 1991, when the
commitment letter was executed and the disputed fees remitted,
there was at least some chance that the most important condition in
the letter could be fulfilled. With respect to the other
conditions in the letter, which pertained mainly to Intershoe's
financial condition, record evidence reveals that, despite
Intershoe's deteriorating condition, Mellon was willing to waive or
modify many of these conditions. Since we review the transaction
at the time the transfer was made, In re Chomakos, 69 F.3d 770-71,
the bankruptcy's court's implicit determination that the letter
provided Intershoe with at least some chance of receiving a future
economic benefit and, therefore, "value" is not clearly erroneous.
We next consider the bankruptcy court's determination
that whatever value was conferred by the letter, it was not
"reasonably equivalent" to the $390,000 in lending fees Intershoe
paid to Mellon Bank. We conclude that in assessing the reasonable
equivalence issue, the bankruptcy court appropriately relied on the
totality of the circumstances test. See Barrett v. Commonwealth
Fed. Sav. and Loan Ass'n, 939 F.2d 20, 22 (3d Cir. 1991); see alsoIn re
Chomakos, 170 B.R. 585, 592 (Bankr. E.D. Mich. 1993), aff'd,
69 F.3d at 769 (both considering a variety of factors, including
the fair market value compared to the actual price paid and the
arm's-length nature of the transaction).
Mellon Bank insists that the court's findings that: (1)
the fees Intershoe paid were in line with market rates; (2) Mellon
Bank acted in good faith; and (3) for the most part, the parties
dealt at arm's length, render clearly erroneous its conclusion that
Intershoe did not receive value that was "reasonably equivalent."
We disagree. As our discussion of "value" should have made clear,
supra III.A.2.a, while the chance of receiving an economic benefit
is sufficient to constitute "value," the size of the chance is
directly correlated with the amount of "value" conferred. Thus,
essential to a proper application of the totality of the
circumstances test in this case is a comparison between the value
that was conferred and fees Intershoe paid. Metro Communications,
Inc., 945 F.2d at 646 ("indirect economic benefits must be measured
and then compared to the obligations that the bankrupt incurred").
So understood, the bankruptcy court's conclusion that the
chance of receiving value represented by the commitment letter was
so small that it was not reasonably equivalent to the $390,000 in
fees Intershoe paid in no way conflicts with the court's
observation that the commitment fees were in line with market
rates. The bankruptcy court concluded that while a debtor
reasonably might pay $390,000 in fees for a real chance to obtain
a $53 million credit facility, the commitment letter at issue in
this case was so conditional that it provided Intershoe with little
chance, if any, to obtain the loan it sought. Accordingly, as long
as there is support in the record for the bankruptcy court's
conclusion that the commitment letter was highly conditional (and,
thus, of little "value"), we must affirm.
That the loan was highly conditional cannot seriously be
disputed. The bankruptcy court concluded that "both transfers were
made in exchange for a highly conditional loan commitment, and all
parties should have known there was a substantial probability that
the loan would not close." Official Comm. of Unsecured Creditors
of R.M.L., Inc., No. 1-93-00137A, slip op. at 32. Significantly,
the court found that "TCR had made no commitment to participate in
the transaction and Intershoe's deteriorating financial condition
was a deterrent to an equity investor." Id. at 30. The court
further stated that "there was a significant possibility that
Intershoe could not meet one or more of the conditions of the
commitment letter, including the TCR equity investment." Id. at 31
n.17. Finally, the court noted that "Intershoe's financial
survival was contingent upon the Mellon refinancing and the Mellon
refinancing was contingent upon dozens of conditions, the least
certain and most important of which was an equity infusion from
TCR." Id. at 16. Since all of these findings have ample support in
the record, the bankruptcy court's conclusion that the commitment
letter conferred minimal value--value that was not reasonably
equivalent to the fees Intershoe paid--is not clearly erroneous.
We acknowledge that the measurement and comparison called
for by Metro Communications, Inc. is no easy task. Indeed, we
noted in that case that "[t]he ability to borrow money has
considerable value in the commercial world. To quantify that
value, however, is difficult." 945 F.2d at 647. Yet we expressed
no reservations about the bankruptcy courts' ability to analyze
such potential, intangible benefits. We also acknowledge that
whether a contemplated investment provided a significant "chance"
to receive value more often than not will be bound up in the
bankruptcy court's factual determinations and, thus, largely immune
from attack on appeal. But this is as it should be; the bankruptcy
court, with its unique expertise, is in far better position than
either the district courts, sitting as appellate tribunals, or the
courts of appeals to make such determinations. See generally In re
Fairchild Aircraft Corp., 6 F.3d at 1125 n.5 (noting that fairness
of consideration received is a "fact-laden" inquiry that ought to
be reviewed deferentially).
In sum, because Intershoe expended $390,000 in commitment
fees for a loan that had little chance of closing, we agree that
the Committee met its burden of establishing that Intershoe failed
to receive reasonably equivalent value.
B.
Insolvency
Mellon Bank next contends that the Committee failed to
establish that Intershoe was "insolvent," see 11 U.S.C. §
548(a)(2)(B)(i), on the dates of the disputed transfers. Section
101(32)(A) of the Code defines insolvency 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). For purposes of § 548, solvency is measured at the
time the debtor transferred value, not at some later or earlier
time. Metro Communications, Inc., 945 F.2d at 648. This is known
as the "balance sheet" test: "assets and liabilities are tallied at
fair valuation to determine whether the corporation's debts exceed
its assets." Id. (emphasis added).
Mellon Bank's principal argument is that the bankruptcy
court inappropriately relied on an audited, year-end financial
statement indicating that Intershoe had a net worth of negative $4
million as of August 31, 1991. That financial statement was
prepared several months after the disputed transfers were made and,
according to Mellon Bank, reflected "substantial adjustments" that
were "precipitated by the collapse of the Mellon-TCR transaction .
. . ." Mellon Bank's Br. at 41. But for that unexpected collapse,
Mellon Bank argues, several alleged "credits" Intershoe was
carrying on its books rendered it solvent, at least on paper, at
the time it remitted the disputed commitment fees to Mellon Bank.
In short, Mellon bank accuses the bankruptcy court of relying on
hindsight to conclude that Intershoe was insolvent in October
through November of 1991. This argument need not detain us long.
The use of hindsight to evaluate a debtor's financial
condition for purposes of the Code's "insolvency" element has been
criticized by courts and commentators alike. See, e.g., Credit
Managers Ass'n of S. California v. Federal Co., 629 F. Supp. 175,
186 (C.D. Cal. 1985) (looking at whether projected cash flows were
reasonable when made, not whether they ultimately panned out); Ohio
Corrugating Co. v. DPAC, Inc., 91 B.R. 430, 438 (Bankr. N.D. Ohio
1988) ("The court feels that participants in an LBO must be
protected from the perfect hindsight often evidenced in creditors'
subsequent attacks on the corporate buyout."); Raymond J.
Blackwood, Note, Applying Fraudulent Conveyance Law to Leveraged
Buyouts, 42 Duke L.J. 340, 381 (1992) ("[C]ourts should take care
not to indulge in hindsight."); Kenneth C. Kettering, The
Pennsylvania Uniform Fraudulent Transfer Act, 65 Pa. B.A. Q. 67, 75
(1994) ("The debtor should not be responsible as a matter of
hindsight for developments that could not reasonably have been
foreseen at the time of the transfer.").
Hindsight, however, is not what prompted the bankruptcy
court to ignore certain alleged "credits" and, thus, conclude that
Intershoe was insolvent. On the contrary, and as Mellon Bank
acknowledges, at least two alleged "credits," which together
totaled $4.3 million, depended for their validity on Intershoe's
belief that the loan would close. As we have already discussed,
the bankruptcy court found, as a matter of fact, that Intershoe
knew or should have known that its deteriorating financial
condition would preclude it from meeting one or more of the
conditions in the commitment letter:
By all accounts, Intershoe's financial
survival was contingent upon the Mellon
refinancing and the Mellon refinancing was
contingent upon dozens of conditions, the
least certain and most important of which was
an equity infusion from TCR. TCR had made no
commitment to go through with the investment,
and, more importantly, the financial numbers
coming out of Intershoe in September, October
and November of 1991, showed a deteriorating
financial condition that would cause serious
concern to a potential equity investor. . . .
[T]he evidence was persuasive that TCR's
participation was sufficiently uncertain that
anticipated consummation of the equity
investment and ultimately the Intershoe/Mellon
 transaction should not be the basis for
upholding book entries that ultimately turned
out to have no basis in reality.

Official Comm. of Unsecured Creditors of R.M.L., Inc., No. 1-93-
00137A, slip op. at 16 (emphasis added). This conclusion is fatal
to Mellon Bank's position. The bankruptcy court correctly
determined that a debtor's creative accounting practices, which
have the effect of grossly overstating its financial condition,
cannot be the basis of a court's solvency analysis.
Furthermore, if a debtor's treatment of an item as an
"asset" depends for its propriety on the occurrence of a contingent
event, a court must take into consideration the likelihood of that
event occurring from an objective standpoint. See, e.g., In Re
Xonics Photochemical, Inc., 841 F.2d 198 (7th Cir. 1988) ("the
asset or liability must be reduced to its present, or expected,
value before a determination can be made whether the firm's assets
exceed its liabilities"). Such an analysis is by no means unknown
to the law. See generally Basic, Inc. v. Levinson, 485 U.S. 224,
108 S. Ct. 978 (1988) (adopting test from SEC v. Texas Gulf
Sulphur, 401 F.2d 833 (2d Cir. 1968) (en banc), cert. denied, 394
U.S. 976, 89 S. Ct. 1454 (1969), that materiality of contingent
corporate event is determined by balancing probability of event
occurring against its anticipated magnitude). Far from "hindsight"
or "post-hoc" analysis, a court looks at the circumstances as they
appeared to the debtor and determines whether the debtor's belief
that a future event would occur was reasonable. The less
reasonable a debtor's belief, the more a court is justified in
reducing the assets (or raising liabilities) to reflect the
debtor's true financial condition at the time of the alleged
transfers.
In this case, moreover, Daniel Coffey, a certified public
accountant who served as the Committee's insolvency expert,
revealed that in the course of performing an audit, accountants
abide by a far more stringent rule. Mr. Coffey testified that "in
reality, if an auditor didn't think there was a real 99 percent
chance that this loan is going to close, they wouldn't leave [the
"credits"] on the balance sheet. Everybody would say let's sit and
wait and see what happens." App. at 1610. Since the bankruptcy
court found that the probability of the loan closing was
essentially zero, a finding we have already determined is amply
supported by the record, the court properly discounted (to zero)
the $4.3 million Intershoe had carried on its balance sheet as
alleged "assets." Thus, by November of 1991, Intershoe's actual
assets were $4.3 million lower than its balance sheet had
reflected.
Apart from properly refusing to consider $4.3 million as
assets, the bankruptcy court also reversed a $4.5 million "asset"
that Intershoe had carried on its books as a credit due from
factory suppliers related to defective merchandise:
there was no credible evidence offered to
substantiate the book-entry for alleged
credits from Intershoe's suppliers. Even in
absence of the testimony that adjustments were
 warranted by GAAP and GAAS, based upon the
evidence, I find it entirely appropriate to
make downward adjustments to Intershoe's then-
value to write off [this] alleged asset[].

Official Comm. of Unsecured Creditors of R.M.L., Inc., No. 1-93-
00137A, slip op. at 18. Far from relying upon hindsight, the court
concluded that this entry had no basis in fact when it was made.
As Intershoe was unable to produce any documentation to support
this alleged "credit," the bankruptcy court's decision to ignore
the credit is amply supported by the record and, hence, not clearly
erroneous.
In sum, Intershoe was found to have a net worth of
negative $4 million on August 31, 1991, and negative $8 million on
November 15, 1991. The bankruptcy court properly refused to
consider various items totaling $8.8 million that Intershoe had
attempted to portray as assets. Since the transfers at issue here
occurred on November 7, 1991, the bankruptcy court's insolvency
determination will be affirmed.
IV.
The judgment of the district court affirming the order of
the bankruptcy court will be affirmed in all respects.