                               In the

United States Court of Appeals
                For the Seventh Circuit

Nos. 08-1022, 08-1136

JOSEPH A. B ALDI, et al.,
                                                 Plaintiffs-Appellants,
                                   v.

S AMUEL S ON & C OMPANY, L TD., et al.,

                                                Defendants-Appellees.


             Appeals from the United States District Court
         for the Northern District of Illinois, Eastern Division.
              No. 05 C 2990—Rebecca R. Pallmeyer, Judge.



  A RGUED S EPTEMBER 24, 2008—D ECIDED N OVEMBER 24, 2008




  Before P OSNER, W OOD , and T INDER, Circuit Judges.
   P OSNER, Circuit Judge. The trustee in bankruptcy (we
simplify—actually there are two trustees) of a defunct
firm named Longview Aluminum LLC filed adversary
actions in bankruptcy court to recover for the debtor’s
estate several payments that Longview had made
within four years before it declared bankruptcy. The
principal basis for the claims and the only one we need
2                                     Nos. 08-1022, 08-1136

discuss is 11 U.S.C. § 544(b), which allows a trustee
in bankruptcy to avoid transfers made by the bankrupt
that would be voidable under state law if made by an
unsecured creditor. The Uniform Fraudulent Transfer
Act, in force in Illinois, allows such avoidance if the
debtor was insolvent on the date of the transfer and
received less than a reasonably equivalent value in ex-
change. UFTA § 5(a); 740 ILCS 160/6(a). Only the first
requirement is at issue. The corresponding provision of
the Bankruptcy Code, 11 U.S.C. § 548(a)(1), is materially
identical except that the federal provision allowed the
trustee to reach back only one year (since raised to two
years) before the declaration of bankruptcy, and that
was too short a period to do anything for the trustee in
this case.
  Insolvency is defined by both statutes as having a
balance sheet on which liabilities exceed assets. 11 U.S.C.
§ 101(32)(A); 740 ILCS 160/3(a). The bankruptcy judge
found that Longview had not been insolvent during the
period, running from February 26, 2001, to April 1, 2001,
in which the transfers were made; and the district
judge affirmed. The trustee had tried only to show that
Longview was insolvent on both the beginning and
ending dates, on the assumption that if it was insolvent
on both dates then probably it was insolvent on the
dates of the actual transfers, which fell between those
end points; there is nothing to counter this assumption,
see Haynes & Hubbard, Inc. v. Stewart, 387 F.2d 906,
908 (5th Cir. 1967), so we accept it. This approach is
called the “rule of retrojection.” In re Mama D’Angelo, Inc.,
55 F.3d 552, 554 (10th Cir. 1995); Briden v. Foley, 776
Nos. 08-1022, 08-1136                                     3

F.2d 379, 382-83 (1st Cir. 1985). The question is whether
Longview was insolvent at the beginning of the transfer
period.
  A company named Michigan Avenue Partners, LLC
(we’ll call it “MAP”) decided to enter the aluminum
industry, and did so by acquiring among other properties
the Longview aluminum manufacturing plant, jointly
owned by Alcoa and Reynolds Metals, in Washington
state. A subsidiary of MAP had brought an antitrust suit
against Alcoa and Reynolds that had eventuated in an
order forcing the divestiture of the plant—a Pyrrhic
victory for antitrust, for the result of the divestiture, as
we are about to see, was a reduction in the output of
aluminum.
  MAP paid $140 million for Longview. But it did not
have to dig into its own pockets for the money. The
manufacture of aluminum requires large amounts of
electricity; and Longview’s electricity supplier, the
Bonneville Power Administration (an agency within the
Department of the Interior), desperate to be able to con-
tinue serving its most necessitous customers in a period
of electricity shortage, paid Longview Aluminum LLC
$226 million to cease buying electricity for the next
16 months. Longview planned to use the $226 million
not only to pay the purchase price of the plant but also
to enable it to resume manufacturing aluminum at the
end of this “curtailment” period, as the parties call it.
Among the costs it would incur to resume would be
some $33 million in union wage payments, and this
was recorded as a liability on Longview’s balance sheet
4                                     Nos. 08-1022, 08-1136

when the company was formed on February 26, 2001.
The balance sheet showed assets of $248 million and
liabilities of $206 million.
   Longview never did resume operations. By the end of
the 16-month curtailment period, falling prices for alumi-
num and rising prices for electricity had made the pro-
duction of aluminum from the plant uneconomical. The
firm declared bankruptcy. (Its plant was ultimately dis-
mantled.) But although it is a fair guess that Longview
was insolvent before the curtailment period ended, the
trustee’s expert—and essentially his only source of evi-
dence—Brooks D. Myhran (a business consultant who
specializes in the valuation of companies), did not
attempt to determine at what point during that period
Longview became insolvent. The trustee pitched his
entire case on showing that Longview had been insolvent
from the beginning, that is, from February 26, 2001.
  Now it is very strange to suppose a start-up company
bankrupt from the day of its formation. Especially this
start-up. Why would experienced businessmen, which
the principals of MAP were, pay $140 million for a firm
that had negative value? There is no suggestion that
Longview had significant liquidation value, should it
never resume operations. So MAP must have thought
that Longview would resume operations, or at least had
a good enough chance of doing so to make the company
worth at least $140 million. Of course many start-ups fail,
but if a significant probability of failure sufficed to pro-
nounce a start-up insolvent, how would any start-up
finance its operations? Its trade creditors would fear
Nos. 08-1022, 08-1136                                        5

being trapped by sections 544 or 548 of the Bankruptcy
Code when they were paid by the start-up for supplies
that they had furnished it. The trustee thinks it a killer
point that Longview did not have any operating income
when it started up. Well, of course not; no start-up starts
with an income flow.
  The pitfalls of hindsight are especially acute in dealing
with a start-up. As we said, start-ups often fail. When one
fails, it is easy enough to find an expert who will opine
that it was certain to fail from the very start. Such facile
proof should rarely be accepted, and it was rightly
rejected in this case.
   To establish Longview’s insolvency at its starting date,
Myhran jacked up its liabilities from the $206 million
shown on the company’s balance sheet to $367 million. He
did this by adding contingent liabilities, including a
contingent pension liability, contingent post-retirement
benefit obligations, contingent severance payments, and
the penalty provision in a take-or-pay contract with
Bonneville. Contingent liabilities are—contingent. “By
definition, a contingent liability is not certain—and often
is highly unlikely—ever to become an actual liability. To
value the contingent liability it is necessary to discount
it by the probability that the contingency will occur and
the liability become real.” In re Xonics Photochemicals,
Inc., 841 F.2d 198, 199 (7th Cir. 1988); see, e.g., Freeland v.
Enodis Corp., 540 F.3d 721, 730 (7th Cir. 2008); In re Chase &
Sanborn Corp., 904 F.2d 588, 594 (11th Cir. 1990). Myhran
treated Longview’s contingent liabilities as certainties.
That invalidated his expert opinion. In re Wallace’s Book-
6                                       Nos. 08-1022, 08-1136

stores, Inc., 316 B.R. 254, 260-62 (Bkrtcy. E.D. Ky. 2004); see
FDIC v. Bell, 106 F.3d 258, 264-65 (8th Cir. 1997).
  The pension liability was not Longview’s liability; it
was the liability of companies affiliated with Longview.
It would become Longview’s liability only if the
affiliates defaulted on their pension obligations, and
Myhran offered no estimate of the probability of such
an event. The take-or-pay provision required Longview
to pay some $20 million to Bonneville in the event that
Longview did not reopen and therefore did not buy
electricity from Bonneville after the curtailment period.
Most of the other liabilities that Myhran treated as
certain were similarly contingent on Longview’s never
resuming production. That was a risk, of course, but not
a certainty; Myhran made no effort to discount the risk
by the probability that it would materialize.
   It is true, as explained in Covey v. Commercial National
Bank, 960 F.2d 657, 660 (7th Cir. 1992), that discounting
a contingent liability can result in overstating a debtor’s
net assets. That is the case when the contingency is not
whether there will be liability but whether the debtor
will be able to pay it. If the debtor owed a creditor
$1 million, but the probability of the creditor’s being able
to collect the debt was only 10 percent, the creditor’s
claim would be worth only $100,000 but the debtor’s
liability, for purposes of calculating its solvency when
it assumed the debt, would still be $1 million. But that is
not this case. The contingency was the probability
that there would be a liability, not that it would be
uncollectible. See In re Advanced Telecommunication
Nos. 08-1022, 08-1136                                        7

Network, Inc., 490 F.3d 1325, 1334-36 (11th Cir. 2007); Office
& Professional Employees Int’l Union v. FDIC, 27 F.3d 598,
601-02 (D.C. Cir. 1994). “To decide whether a firm is
insolvent within the meaning of § 548(a)(2)(B)(i), a court
should ask: What would a buyer be willing to pay for
the debtor’s entire package of assets and liabilities? If
the price is positive, the firm is solvent; if negative, insol-
vent.” Covey v. Commercial National Bank, supra, 960 F.2d
at 660. Longview’s package of liabilities included some
that might never materialize, so that to calculate the
expected cost of the package Myhran would have had
to estimate the probability that they would materialize.
  In order to depress the appearance of Longview’s
solvency further, Myhran projected that electricity costs
would increase (as in fact they did) and prevent the
plant from resuming operations. There were of course
pessimists who in February 2001 were predicting a con-
tinued rise in electricity prices, and Longview was taking
a risk in guessing otherwise. But all businesses are at
risk of future changes in supply or demand that cannot
be predicted with any certainty; that does not make
them insolvent.
  We could go on whacking Myhran’s evidence, but
there is no need. It was radically unconvincing, as the
bankruptcy judge, seconded by the district judge,
found. Likewise unconvincing is the trustee’s alternative
ground for avoidance, which is that Longview was
“undercapitalized.” Undercapitalization is not a
synonym for insolvency. Moody v. Security Pacific Business
Credit, Inc., 971 F.2d 1056, 1069-71 (3d. Cir. 1992). By way
8                                     Nos. 08-1022, 08-1136

of an up-to-date example, suppose a bank is very
heavily leveraged—that is, it has a very high ratio of
borrowed money to equity. It lends out the borrowed
money, and as long as the borrowers pay on time it is
fine. If many of them default, however, the present value
of the bank’s revenues may dip below what it owes
its depositors and other lenders, and if so then without
an adequate equity cushion the bank will go broke. But
until the defaults reach the point at which its liabil-
ities exceed its assets, the bank will be solvent. So
“undercapitalization,” which should rather be termed
excessive leverage, while it increases the risk of
insolvency, is not insolvency and does not require
separate consideration in a bankruptcy case.
  This case is different from our bank hypothetical
because there was not merely a risk but a certainty that
there would be a period in which the firm’s costs would
exceed its revenues, and it needed a capital cushion to
survive that period. Concretely, Longview had to have
enough capital to be able to maintain the aluminum
plant until the end of the curtailment period and then to
reopen it and operate it until substantial revenue
started flowing into its coffers. Its balance sheet indicated
that it had enough capital for these purposes.
                                                  A FFIRMED.




                           11-24-08
