Allonhill LLC, a company hired to review foreclosure practices, entered into a contract with Aurora Bank that included a $2 million liability cap. After a dispute arose over conflicts of interest, Aurora sued Allonhill in state court. While that litigation was pending, Allonhill sold its assets to Stewart Lender Services (SLS) and transferred approximately $6.6 million in accounts receivable. Shortly after the transfers, a state court entered an initial judgment against Allonhill for nearly $26 million, but this judgment was later vacated on appeal and reduced to the $2 million liability cap, eventually settling for $2.05 million. During Allonhill's subsequent bankruptcy, it sued SLS under 11 U.S.C. § 547(b) to recover the transfers as preferential payments. SLS defended the transfers by arguing Allonhill was solvent at the time. The Bankruptcy Court agreed with SLS, valuing the Aurora claim at the $2.05 million settlement amount, but the District Court reversed, valuing the claim at the initial $25.9 million judgment to find Allonhill insolvent.
The Third Circuit focused on the proper valuation of a disputed claim for the purpose of the balance sheet test for insolvency. The court noted that while there is caselaw supporting the use of a final judgment amount to value a claim, the Bankruptcy Court's reliance on the $2.05 million settlement amount was not an error of law or clear error of fact. The critical legal error occurred at the District Court level, which rejected the Bankruptcy Court's methodology because it was concerned about 'upsetting settled expectations' of parties who had ordered their affairs based on the assumption of insolvency. The Third Circuit clarified that such policy concerns do not override the statutory requirement to determine solvency based on the fair valuation of assets and liabilities at the time of the transfer. Since the Aurora claim was disputed rather than contingent, the court could look at the evidence available to determine its value, and the evidence supported the lower valuation that rendered the debtor solvent.
The decision reverses the District Court's judgment, effectively restoring the Bankruptcy Court's finding that Allonhill was solvent. This means the preference claim against SLS fails, and the transfers remain valid. The case is remanded to the Bankruptcy Court to vacate the District Court's ruling. The decision reinforces that solvency determinations must be based on the fair valuation of claims at the time of transfer, without being swayed by post-transfer policy concerns regarding settled expectations.
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