Delaware Business Bankruptcy Report : Delaware Business Bankruptcy Report : Morris James LLP Lawyers & Attorneys

The District Court affirmed the bankruptcy court’s dismissal of American Classic Voyages Co.’s (the “Debtors”) complaint in an adversary proceeding seeking avoidance of allegedly preferential transfers against Appellees, JP Morgan Chase Bank, Capital One NA, and National City Bank. The Debtors sought to avoid, as preferential transfers, payments made to Appellees for repayment of funds loaned under a revolving line of credit. The bankruptcy court held a four day trial on the issue of insolvency of the parent company, American Classic Voyages Co., and concluded that Appellees had successfully rebutted the presumption of insolvency under 11 U.S.C. §  547(f). The Debtors appealed this decision to the District Court.

The Debtors contended that it was erroneous for the bankruptcy court to rely on Appellee’s expert witness’s testimony, which was based on a discounted cash flow analysis, because there was a public market for Debtors’ stock. The Debtors cited the Third Circuit’s recent decision in VFB LLC v. Campbell Soup Co., 482 F.3d 624 (3d Cir. 2007) as supporting their proposition. In response, the Appellees countered that the VFB decision did not hold that market capitalization analysis was the only accepted methodology for considering valuation in solvency disputes. Rather, Appellees argued the case recognized that discounted cash flow is one of the accepted methodologies. The District Court agreed with Appellees’ contention, and concluded that the VFB decision did not mandate the use of market capitalization methodology. In reaching this conclusion, the District Court distinguished VFB with the instant case by reasoning that the plaintiffs in VFB did not attempt to reconcile the testimony of its expert witnesses with the objective marketplace value of the company. In contrast, the data and analysis from the expert witness in this case was consistent with marketplace data. Consequently, the District Court found no legal error in the bankruptcy court’s reliance on the discounted cash flow analysis to determine Debtors’ solvency.

Appellees asserted also that the bankruptcy court was correct in finding that they had provided sufficient evidence to rebut the presumption of insolvency, and that Debtors could not prove insolvency by a preponderance of the evidence. In reviewing the bankruptcy court’s decision, the District Court noted that section 547(f) of the Bankruptcy Code provides for an initial presumption that the Debtors were insolvent ninety (90) days immediately preceding the date of the filing of their bankruptcy petition. However, this presumption is rebuttable. If the presumption is rebutted, then the Debtors must still prove their insolvency by a preponderance of the evidence. The District Court noted that the Debtors failed to meet this burden. Without exploring the bankruptcy court’s reasoning, the District Court observed that the bankruptcy court had concluded that Debtors did not met their burden of proving insolvency because (i) the analysis of the Debtors’ expert witness was flawed and (ii) Debtors’ arguments that the projections relied upon by Appellees’ expert were not reasonable or reliable were without foundation. The District Court determined these conclusions were not erroneous. Thus, the District Court affirmed the bankruptcy court’s order.