219 F.3d 655 (7th Cir. 2000)
Joseph D. Olsen, Trustee of Huntley Ready Mix, Inc., Plaintiff-Appellant,v.Gary A. Floit, Defendant-Appellee.
No. 00-1107
In the  United States Court of Appeals  For the Seventh Circuit
Argued June 1, 2000Decided July 14, 2000

Appeal from the United States District Court  for the Northern District of Illinois, Western Division.  No. 99 C 50203--Philip G. Reinhard, Judge.
Before Bauer, Easterbrook, and Manion, Circuit Judges.
Easterbrook, Circuit Judge.


1
In May 1993 Huntley  Ready Mix sold all of its operating assets for  $151,000 to Harvard Ready Mix. This plus cash on  hand was just enough to pay off Huntley's secured  debt, which had been guaranteed by Gary Floit,  Huntley's founder, president, and principal  shareholder. Huntley retained its accounts  receivable, eventually collecting and  distributing about $100,000 to its general  creditors, but another $200,000 or so remained.  When Huntley filed a petition under Chapter 7 of  the Bankruptcy Code of 1978 its only asset was  some $125,000 owed by deadbeats. As part of the  transaction, Harvard hired Floit as its plant  manager under a three-year employment contract  (at approximately the salary he drew from  Huntley) and paid $249,000 for a five-year  covenant not to compete in the concrete business.  Huntley's trustee believes that Huntley's assets  were worth at least $400,000, more than enough to  pay off its debts, and that Floit diverted to  himself under cover of the no-compete agreement  the value of the unsecured creditors' interests.  If so, then Huntley "received less than a  reasonably equivalent value in exchange for [the]  transfer". 11 U.S.C. sec.548(a)(1)(B)(i). As  events revealed that Huntley either was insolvent  when the sale occurred or became insolvent as a  result, the transaction may have been a  fraudulent conveyance, and the estate might have  recovered from Floit as "the entity for whose  benefit such transfer was made". 11 U.S.C.  sec.550(a)(1). But Huntley entered bankruptcy 15  months after the sale, and sec.548(a)(1) reaches back just one year.


2
Instead of giving up or arguing that Floit is  equitably estopped to take advantage of the time  limit in sec.548(a)(1), Huntley's trustee in  bankruptcy tried a novel approach he sued Floit  (in an adversary proceeding) under state  corporate law on the theory that Floit violated  his fiduciary duty to Huntley as one of its  directors. The theory is akin to that of a  fraudulent-conveyance action--that Floit obtained  too little for Huntley and too much for himself--  without the need to show that Huntley was  insolvent, and with the benefit of a longer  period of limitations under Illinois law. We call  this "novel" because the state-law claim is  designed to protect shareholders rather than  creditors, and the Floit family held all the  shares. Under 805 ILCS 5/8.60, the statute in  question, a director who receives a personal  benefit from a transaction with or by the  corporation must demonstrate that the arrangement  was "fair" to the corporation, unless either  disinterested directors or disinterested  shareholders approved the transaction with  knowledge of all material facts. This statute--  similar to the 1984 version of the ABA's Model  Business Corporation Act sec.8.31--provides that  directors and shareholders who do not participate  in the transaction are free to approve it, which  they will do when it benefits them (or at least  does not harm them) as equity holders. Because  shareholders acting in their own interests are  entitled to approve, 805 ILCS 5/8.60 cannot be a  creditor-protection rule. It is passing strange  to say that a single minority shareholder with a  trivial stake could have approved the sale to  Harvard and thus insulated it from any later  attack (other than a fraudulent-conveyance  action), but that, because there were no minority  shareholders in Huntley, approval was impossible.  Yet Floit has not picked up on this logical  problem in the trustee's invocation of 805 ILCS  5/8.60, forfeiting whatever arguments might be  available to terminate the claim on strictly  legal grounds. His sole response is that the  transaction was indeed "fair" to Huntley. The  bankruptcy judge held a trial and agreed with  Floit; the district judge affirmed; the trustee  now contends that the critical findings were  clearly erroneous, an uphill battle. See Anderson  v. Bessemer City, 470 U.S. 564 (1985).


3
Illinois defines "fair" as market value. A  transaction is "fair" to a corporation when it  receives at least what it would have obtained  following arms' length bargaining in competitive  markets. Shlensky v. South Parkway Building  Corp., 19 Ill. 2d 268, 283, 166 N.E.2d 793, 801  (1960) (discussing common-law requirement of  fairness preceding enactment of 805 ILCS 5/8.60);  cf. BFP v. Resolution Trust Corp., 511 U.S. 531  (1994) (a foreclosure sale produces "reasonably  equivalent value" for purposes of bankruptcy  law). Floit and the trustee produced expert  witnesses who estimated the price that Huntley's  assets would have fetched in a competitive sale.  Floit's expert valued the business (including  Floit's services) at approximately $440,000, and  the trustee's at $380,000 to $410,000. Floit's  expert differed from the trustee's by opining  that most of this value was contributed by Floit  personally and that the corporation assets were  worth $151,000 or less. Floit also offered his  own testimony and that of Jay Nolan, Harvard's  president, in support of the lower valuation. The  bankruptcy judge accepted this view.


4
Both sides also looked through the other end of  the telescope, asking whether the covenant not to  compete would have been worth $249,000 in a  competitive market--on the sensible theory that  if the covenant had been overvalued, then it must  have represented a disguised portion of the  purchase price for Huntley's assets.  Unsurprisingly Floit, Nolan, and Floit's expert  all testified that the covenant was worth at  least $50,000 per year, for a total of $250,000.  This testimony received some support from a  disinterested source when Harvard Ready Mix was  itself sold in mid-1996, the buyer paid $200,000  for the two remaining years of Floit's  abnegation. Perhaps conditions changed in the  cement industry, making the threat of his  competition more serious; the question in this  litigation is what the covenant was worth in  1993, not what it was worth in 1996; but a  $100,000-per-year valuation in 1996 lends  verisimilitude to the assertion that in 1993 the  covenant was worth at least $50,000 per year. The  trustee's expert disagreed, stating that a  covenant not to compete in the cement business  should be valued at between 0.7 and 1.5 times the  promisor's annual earnings, which implies that  the value of Floit's covenant could not exceed  $93,000 (given his salary of $62,000 during the  year preceding sale). The expert conceded that  covenants sometimes represent a percentage of a  closely held corporation's sales, and that in one  case of which he was aware the owner-principal of  a closely held firm had received 16% of its  annual sales. Applied to Huntley's sales (about  $1.5 million in 1992, its last full year of  operation), this implied a value of $240,000 for  the covenant not to compete, but the trustee's  expert rejected this conclusion as unrealistic  for Huntley and Floit. The bankruptcy judge,  however, thought it entirely realistic given  Nolan's testimony and the $200,000 value later  placed on two years of Floit's covenant by  parties who had no stake in the outcome of this  litigation. That buyer also paid Nolan and his  brother (Harvard's two principals) $1.5 million  apiece for their covenants not to compete for  five years.


5
Valuation of closely held businesses is  something of a black art. Experts try to project  the firm's net cash flow into the future, then  discount that stream to present value. This  process is difficult for public companies, see  Metlyn Realty Corp. v. Esmark, Inc., 763 F.2d 826  (7th Cir. 1985); Richard A. Brealey, Stewart C.  Myers & Alan J. Marcus, Fundamentals of Corporate  Finance 122-35 (2d ed. 1999); Lucian Arye Bebchuk  & Marcel Kahan, Fairness Opinions How Fair Are They and What Can Be Done About It?, 1989 Duke  L.J. 27, 35-37, and almost impossible for private  companies, for which uncertainties abound. What  was apt to happen to Huntley? The trustee's  expert assumed that, if not sold, it would have  remained in business and generated about the same  cash flows as before; Floit and Nolan testified,  however, that Huntley's plant was decrepit and  that the expense of renovation could not be  justified. Nolan recounted that most of Huntley's  equipment had been "hauled off to the junkyard"  soon after the acquisition. These two stories  implied dramatically different futures for the  firm and correspondingly large differences in the  present value of its earnings and the price-  earnings multiple on sale.


6
Similarly unclear was how to calculate the  firm's real earnings. The trustee's expert  calculated that over the last few years before  its sale Huntley generated a weighted annual  average of $115,000 in "discretionary income,"  with a high of $166,000 in 1992. "Discretionary  income" in this formulation is whatever is left  after the costs of paying for all materials and  labor, other than Floit's. But it is artificial  to assume that the full cost of an entrepreneur's  labor is the nominal salary he pays to himself;  the entrepreneur also benefits from perquisites  of office and changes in the value of the firm's  stock. To determine how much Huntley's assets  could have fetched in an arms' length sale, it  would have been necessary to know the full cost  of Floit's services--which is to say his  reservation wage, what he could earn in other  employment--not just his nominal salary.  Sometimes a court can pin down the entrepreneur's  entitlement by asking whether what remains  adequately compensates minority investors for the  risk they bear, see Exacto Spring Corp. v. CIR,  196 F.3d 833, 838-39 (7th Cir. 1999), but Huntley  did not have minority shareholders. Reservation  wages, alas, are hard to pin down otherwise,  unless perhaps by observing how much Harvard was  willing to pay Floit. That answer turned out to  be $115,000 per year ($65,000 in salary plus  $50,000 as the annual portion of the covenant not  to compete). Viewed this way, the numbers imply  that Huntley didn't have much if any value beyond  its physical assets; its net cash flow was needed  to retain Floit's services. (That the  "discretionary income" increased to $166,000 in 1992 may do more to show that Huntley had  deferred replacing its assets, and thus curtailed  its out-of-pocket costs, than to show an  improvement in its true economic position. Nor is  it dispositive that Harvard paid Floit both for  employment and for a covenant not to compete. The  latter was independently valuable to Harvard in  the event Floit should quit, be fired, or just  leave at the expiration of the three-year  employment contract.)


7
When hard numbers are difficult to come by or  evaluate, people often rely on reputations. The  trustee insists that his expert had better  academic credentials and more experience valuing  closely held companies than did Floit's, so that  the bankruptcy judge should have adopted the  estimates of the trustee's expert. A reasonable  trier of fact might have proceeded that way, but  we cannot say that a contrary view was clearly  erroneous. After all, the bankruptcy judge's  views do receive support from the $100,000-per-  year valuation of Floit's covenant as of 1996.  Floit may have been well respected by others in  the business, and thus able to attract a  substantial package of compensation to deter him  from starting a new firm or defecting to another  producer. What is more, the trustee's expert did  not do all that would be expected of a specialist  in valuing closely held firms. Why leap to a  discounted cash flow analysis when other methods  are available? Most trade associations maintain  records of sale prices for firms in the business.  What multiple of free cash flow did other small  cement ready-mix producers sell for? See To-Am  Equipment Co. v. Mitsubishi Caterpillar Forklift  America, Inc., 953 F. Supp. 987, 996-97 (N.D.  Ill. 1997), affirmed, 152 F.3d 658 (7th Cir.  1998). It would have been especially interesting  to know the answer to this question for sales  following the departure (or death) of the  founding entrepreneur. For although Huntley owned  its assets, Floit was not among these. He did not  have a long-term contract with Huntley or a no-  compete agreement and thus could leave and  compete at will. E.J. McKernan Co. v. Gregory,  252 Ill. App. 3d 514, 530-31, 623 N.E.2d 981, 994  (2d Dist. 1993). Floit owned his human capital  and was free to withdraw from Huntley and sell  his services to a higher bidder without violating  any fiduciary duty. For what price could  Huntley's plant, customer list, goodwill, and so  on have been sold without assurance of Floit's  services? That's where price-earnings ratios for  firms sold after the death or departure of their  founders would have come in handy. The trustee's  expert did not attempt to estimate this figure;  instead he assumed that whatever value Floit's  services produced was "owned" by Huntley and  would be capitalized in its sale price. When  asked about this at oral argument, the trustee's  counsel conceded that his expert had valued  Huntley as a going concern with Floit as its  manager, adding that Floit's expert had done the  same thing and that Floit bears the risk of non-  persuasion. But this case was not a tossup as the  bankruptcy judge saw things, so allocation of the  burden was not dispositive. A solid demonstration  that Huntley was worth more than $150,000 even if  Floit was planning to leave would have gone a  long way toward establishing that the bankruptcy  judge made a clear error. Without such evidence  it is awfully hard to say that the bankruptcy  judge's findings are clearly erroneous.


8
According to the trustee, however, valuation is  a matter of law rather than fact, and the trustee  contends that under In re Prince, 85 F.3d 314  (7th Cir. 1996), corporate value includes the  value of its entrepreneur's services. If that is  so, then even a penny for Floit's covenant not to  compete violates the duty he owed to the firm.  But it is not so. Prince does not concern  Illinois corporate law in general or 805 ILCS  5/8.60 in particular. It is instead an  application of contract law to a bankruptcy case.  Prince, an orthodontist, promised his creditors  as part of an agreed plan of reorganization that  he would turn over the value of his stock in his  professional corporation. He agreed to sell that  practice to a Dr. Clare for $450,000 but proposed  to turn over only $7,500 to his creditors,  claiming that the rest of the value was  attributable to a no-competition agreement. One  difficulty with this contention is that the  $450,000 was the price set on "the practice";  unlike Harvard Ready Mix, Clare did not pay  separately for physical assets and a covenant not  to compete. What Prince had to sell was  principally goodwill--that is, a client base,  client records (exceptionally valuable in a  dental practice), and a promise to continue  working for six months to ensure that patients  transferred their allegiance to Dr. Clare. Prince  held that the agreement between Prince and his  creditors included goodwill as part of the  practice's value. We did not hold that for this  purpose "goodwill" included the value of Prince's  personal services for the indefinite future. Our  understanding of the bargain between Prince and  his creditors does not imply that Huntley owned  the value of Floit's services for the foreseeable  future, despite the absence of an employment  agreement between Huntley and Floit.


9
Doubtless Huntley owned its goodwill--its  customer lists, the value of repeat business, and  so on. See Hagshenas v. Gaylord, 199 Ill. App. 3d  60, 557 N.E.2d 316 (2d Dist. 1990). But the  trustee does not accuse Floit of trying to make  off with these assets, or of including their  value in the $249,000 allocated to the covenant  rather than the $151,000 allocated to assets.  Even the trustee's expert conceded that Huntley's  tangible assets were worth no more than $106,000;  the rest was goodwill. Harvard did not assume  Huntley's name, and cement usually is sold by  competitive bid, so Huntley did not have the sort  of goodwill that is associated with a personal-  services business such as a medical practice. In  the end, the trustee's position depends on  allocating the value of Floit's human capital to  Huntley, and we do not think that the bankruptcy  judge committed clear error in ruling otherwise.

Affirmed
