-32-
considered as liabilities for purposes of the statutory
insolvency calculation, petitioners argue that the Court should
apply a “likelihood of occurrence” test. Relying on Covey v.
Commercial Natl. Bank, 960 F.2d 657 (7th Cir. 1992), petitioners
suggest that this Court value the amount of a liability, “by
multiplying the full amount of the liability by the probability
of payment”.
In Covey v. Commercial Natl. Bank, supra at 660, the Court
of Appeals for the Seventh Circuit stated that “[t]o decide
whether a firm is insolvent within the meaning of
� 548(a)(2)(B)(i) [of the Bankruptcy Code], 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, insolvent.” The court held that,
in making the insolvency determination for purposes of a
preference-recovery action under section 548 of the Bankruptcy
Code,18 contingent liabilities must be discounted by the
probability of their occurrence. Id. at 660-661.
To allow debtors to avoid an immediate tax liability by
virtue of a contingent liability that the debtor will not likely
be called upon to pay, a consequence of the likelihood of
occurrence test advanced by petitioners, would undermine the
18 Sec. 548 of the Bankruptcy Code authorizes the trustee “to
avoid a transaction made within one year before the commencement
of the bankruptcy case, that depletes the debtor's assets to the
detriment of the bankruptcy estate.” 5 Collier on Bankruptcy,
par. 548.01, at 548-5 (15th ed. Revised 1996).
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