Dudley B. and La Donna K. Merkel - Page 32

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          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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