This bankruptcy case requires us to address, once again, the application of the fraudulent conveyance laws to a failed leveraged buyout. In United States v. Tabor Court Realty Corp., 803 F.2d 1288, 1297 (3d Cir.1986), cert. denied sub nom. McClellan Realty Corp. v. United States, 483 U.S. 1005, 107 S. Ct. 3229, 97 L. Ed. 2d 735 (1987), we established that the Pennsylvania Uniform Fraudulent Conveyance Act (UFCA) extends to leveraged buyouts. This case raises several questions about the application of this Act to the failed leveraged buyout of Jeannette Corporation.

On July 31, 1981, a group of investors acquired Jeannette in a leveraged buyout. Less than a year and a half later, Jeannette, which had been profitable for many years, was forced into bankruptcy. The bankruptcy trustee brought this action to set aside the advances made and obligations incurred in connection with the acquisition. The trustee alleges that the leveraged buyout constitutes a fraudulent conveyance under the UFCA and is voidable under the Bankruptcy Code. After a bench trial, the district court entered judgment for defendants. Moody v. Security Pac. Business Credit, Inc., 127 B.R. 958 (W.D.Pa.1991). We will affirm.

* A

Founded in 1898, Jeannette Corporation manufactured and sold glass, ceramic, china, plastic, and candle houseware products in the United States and Canada.1 For many years, Jeannette was a profitable enterprise. From 1965 to 1978, its annual net sales grew on a consolidated basis from $9.6 million to $61.7 million and its annual gross profit margin ranged from 18% to 32.9%. In each of those years, Jeannette earned a net profit. From 1975 to 1977, Jeannette's sales increased annually by 16%. Its consolidated pre-tax profit was $3.4 million in 1977 and $6.1 million in 1978.

In 1978, the Coca-Cola Bottling Company of New York, Inc. acquired Jeannette for $39.6 million. Shortly thereafter, Coca-Cola increased the total net book value of Jeannette's property, plant, and equipment (PP & E) by $5.7 million after a manufacturer's appraisal valued these assets at $29 million. From 1978 to 1981, Coca-Cola invested $6 million in Jeannette for capital expenditures, and $5 million for maintenance and repair of its physical plant.

At first, Jeannette was not as profitable under Coca-Cola's ownership. It suffered a consolidated $5 million pre-tax loss in 1979, in part because of the adoption of new valuation procedures for inventory, and net sales fell by $4 million. However, Jeannette's performance rebounded in 1980. Net sales increased by $9 million and the company's gross profit margin doubled. Although 1980 was a break-even year before recognition of acquisition costs, Jeannette reported a $1.3 million pre-tax profit and had a $3 million positive cash flow.

Jeannette projected that this trend would continue into 1981. Although Jeannette had an operating loss of $1.1 million in the first half of 1981, because its business cycle produced stronger cash flows in the latter half of the year, the company projected a pre-tax profit of $500,000 before interest expenses.

In late 1979, Coca-Cola decided to sell Jeannette and focus attention on its core bottling business. In June 1981, John P. Brogan expressed an interest in acquiring Jeannette. Brogan was affiliated with a small group of investors in the business of acquiring companies through leveraged buyouts, the hallmark feature of which is the exchange of equity for debt.2 On July 22, 1981, Coca-Cola agreed to sell Jeannette for $12.1 million on condition that Brogan complete the transaction by the end of the month.

Brogan contacted Security Pacific Business Credit Inc., a lending group that had financed one of his prior acquisitions, about obtaining financing. He submitted one year of monthly projections, based in large part on Jeannette's 80-page business plan for 1981, which showed that Jeannette would have sufficient working capital under the proposed financing arrangement in the year following the acquisition. Before agreeing to finance the transaction, however, Security Pacific undertook its own investigation of Jeannette.

Security Pacific assigned this task to credit analyst Stephen Ngan. Based on his discussions with Jeannette personnel and a review of the company's financial records, Ngan made his own set of projections. He concluded that Jeannette would earn a pre-tax profit of $800,000 after interest expenses in its first year of operation, and recommended that Security Pacific finance the acquisition. He thought Jeannette was a "well-established" company with "a good track record for growth and earnings."

After reviewing Ngan's recommendation, together with an inventory report, the 1978 appraisal of Jeannette's PP & E, Brogan's projections, and a 55-page report on Jeannette prepared by another bank, Security Pacific decided to finance the acquisition. At that point, Coca-Cola formally approved the sale of Jeannette to J. Corp., which had been incorporated for the purpose of acquiring Jeannette.

The acquisition of Jeannette was consummated on July 31, 1981. J. Corp. purchased Jeannette with funds from a $15.5 million line of credit Security Pacific extended Jeannette secured by first lien security interests on all Jeannette's assets. J. Corp. never repaid Jeannette any portion of, or executed a promissory note for, the amount ($11.7 million) Security Pacific initially forwarded to J. Corp. on behalf of Jeannette to finance the acquisition. Other than new management, the only benefit Jeannette received was access to credit from Security Pacific.3

As with most leveraged buyouts, the acquisition left Jeannette's assets fully encumbered by the security interests held by Security Pacific. Jeannette could not dispose of its assets, except in the ordinary course of business, without the consent of Security Pacific, and was prohibited from granting security interests to anyone else. As a result, Jeannette's sole source of working capital after the transaction was its line of credit with Security Pacific.

Although Jeannette's total outstanding balance never exceeded the amount of the initial advance ($11.7 million), the total credit advanced Jeannette was many times this amount because of the "revolving" nature of its line of credit with Security Pacific. Jeannette's accounts receivable were forwarded to Security Pacific by way of the Mellon Bank, and were credited against its outstanding loan balance. As this balance was paid down, more credit was made available, which Jeannette drew on to finance operations and generate sales.

Although the initial advance was payable on demand, Jeannette carried this obligation as long-term debt. This reflected the parties' understanding that the transaction would give rise to a long-term lending relationship in which the balance on the revolving credit facility would be paid down over several years. Security Pacific obtained no up-front fees and stood to profit by earning interest on the line of credit at 3 1/4% above prime (at that time about 20%).

Jeannette operated as a going concern from the latter half of 1981 into 1982. From August through December 1981, its net sales exceeded $31 million and the company realized a $6 million gross profit. During the same period, Jeannette had a positive cash flow of $3 million. Part of Jeannette's success during this period is attributable to its business cycle, which produced stronger cash flows in the latter half of the year.

By the end of 1981, Jeannette had received over $43 million in credit advances from Security Pacific, and had $4 million of available credit. A year after the leveraged buyout Jeannette had received $77 million in advances, and had $2.3 million in available credit. Jeannette never exhausted its credit and Security Pacific never refused a request for funds, although on several occasions it suggested that Jeannette withdraw smaller amounts.

Although Jeannette's performance initially tracked expectations, its financial condition deteriorated steadily in 1982. Jeannette experienced a shrinking domestic glassware market, a marked increase in foreign competition, dramatic price slashing and inventory dumping by its domestic competitors, and a continued nationwide recession. In January 1982, orders for Jeannette products fell to 86% of projected levels and in February orders fell to 70%. This decline in sales constricted cash flow and contributed to an inventory build-up.

Jeannette responded by reducing production and lengthening its accounts payable schedule. From late 1981 to early 1982, the company extended its payment period from 30 days to 45 days and then to 60 days. In late February (or early March) 1982, it invoked an 88-day period. However, it remained unable to pay its creditors in a timely fashion. In March 1982, Jeannette was forced to shut down one of the three glass tanks at its Jeannette Glass division, and, in late July, it shut down another. Shortly thereafter, Jeannette sold the inventory and fixed assets of its Old Harbor subsidiary for $2 million. In August 1982, the last tank was shut down at the Jeannette Glass division, bringing operations there to a halt.

Still, Jeannette's financial condition deteriorated. By August 1982, sales had fallen to 69% of traditional levels, and by October sales were 44% of 1981 levels. On October 4, 1982, an involuntary bankruptcy petition was filed under Chapter 7 of the Bankruptcy Code.4 Jeannette's trade creditors filed $2.5 million in proof of claims, over 90% for goods or services provided after June 1982, none for goods or services supplied before the leveraged buyout.

In November 1982, Jeannette sold the assets of its Brookpark division for $1.1 million in cash and notes and the assumption of $62,000 of liabilities. Jeannette's Royal China subsidiary was placed in bankruptcy in 1983, and, a year later, its operating assets were sold for $4.2 million and the assumption of liabilities. Finally, in September 1983, Jeannette's remaining assets were auctioned off for $2.15 million.

On September 22, 1983, plaintiff James Moody, the trustee of the bankruptcy estate of Jeannette, filed this action in federal district court against defendants Security Pacific, Coca-Cola, KNY Development, J. Corp., M-K Candle, Brogan, and other individuals. He alleges that the leveraged buyout constitutes a fraudulent conveyance under the UFCA, 39 Pa.Cons.Stat.Ann. § § 354-57, and is voidable under § 544(b) of the Bankruptcy Code, 11 U.S.C. § 544(b).5 After a bench trial, the district court made findings of fact and conclusions of law and entered judgment for defendants.

According to the district court, the leveraged buyout was not intentionally fraudulent because it was "abundantly clear" that defendants expected the transaction to succeed and hoped to profit from it. Moody, 127 B.R. at 990. Likewise, although the leveraged buyout was made for less than fair consideration to Jeannette, the district court held that it was not constructively fraudulent.

Because the leveraged buyout was made for less than fair consideration, the district court placed on defendants the burden of proving solvency by clear and convincing evidence. Id. at 992-93. The court, however, concluded that defendants met this burden. Jeannette was not rendered insolvent in the "bankruptcy sense" because the "present fair salable value" of Jeannette's assets immediately after the leveraged buyout exceeded total liabilities by at least $1-2 million. Id. at 995. In making this determination, the district court valued assets on a going concern basis. Id.

Nor was Jeannette rendered insolvent in the "equity sense" or left with an unreasonably small capital. Id. at 996. Based on the parties' projections, which it found "reasonable and prudent when made," and the availability on Jeannette's line of credit with Security Pacific, the district court found that Jeannette was not left with an unreasonably small capital after the acquisition. Id. at 984. Rather than a lack of capital, the district court attributed Jeannette's demise to intense foreign and domestic competition, a continued recession, and, to a lesser degree, mismanagement, which led to a drastic decline in sales beginning in early 1982. Id. at 989.

After entry of judgment, plaintiff moved for final judgment under Fed.R.Civ.P. 54(b), which the district court granted. This appeal followed.

We have jurisdiction under 28 U.S.C. § 1291. The principal question is whether the leveraged buyout of Jeannette constitutes a fraudulent conveyance under the UFCA. In deciding this question, we must address whether the leveraged buyout was made for less than fair consideration to Jeannette; whether the leveraged buyout either rendered Jeannette insolvent or left it with an unreasonably small capital; and whether defendants entered into the leveraged buyout with an intent to defraud creditors of Jeannette.

Our review of the district court's interpretation and construction of the UFCA is plenary. Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206, 211 (3d Cir.1990). In applying the UFCA, we are bound by Pennsylvania law. United States v. Gleneagles Inv. Co., 565 F. Supp. 556, 573 (M.D.Pa.1983), aff'd in part and vacated in part sub nom. United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir.1986), cert. denied sub nom. McClellan Realty Corp. v. United States, 483 U.S. 1005, 107 S. Ct. 3229, 97 L. Ed. 2d 735 (1987). Where Pennsylvania law is silent, we may look to the law in other jurisdictions that have adopted the UFCA, id. (citing 39 Pa.Stat.Ann. § 362), and decisions construing analogous provisions of the Bankruptcy Code, Tabor Court Realty Corp., 803 F.2d at 1298-99.

We review the district court's findings of fact under the clearly erroneous standard, Voest-Alpine Trading USA Corp., 919 F.2d at 211, and will accept these findings unless they are "completely devoid of a credible evidentiary basis or bear[ ] no rational relationship to the supporting data," American Home Prods. Corp. v. Barr Lab., Inc., 834 F.2d 368, 371 (3d Cir.1987). "In Pennsylvania, the existence of actual intent is a question of fact." Tabor Court Realty Corp., 803 F.2d at 1304. The question of fair consideration is also a question of fact.

We review whether the leveraged buyout rendered Jeannette insolvent as a mixed question of law and fact. Id. at 1303. We review the findings underlying the district court's solvency analysis, including the values it assigned to particular items of Jeannette's PP & E, under the clearly erroneous standard. However, our review of the district court's application of the UFCA to these findings, including its decision to value Jeannette's assets on a going concern basis, is plenary.

Likewise, adequacy of capital presents a mixed question of law and fact. Our review whether the district court properly considered availability of credit in determining whether the leveraged buyout left Jeannette with an unreasonably small capital is plenary. However, we review the findings underlying its adequacy of capital analysis under the clearly erroneous standard. See Barrett v. Continental Ill. Nat'l Bank & Trust, 882 F.2d 1, 4 (1st Cir.1989), cert. denied, 494 U.S. 1028, 110 S. Ct. 1476, 108 L. Ed. 2d 613 (1990).

* The UFCA proscribes both intentional and constructive fraud. Under the Act's intentional fraud provisions, any conveyance made or obligation incurred either without fair consideration by one who "intends or believes that he will incur debts beyond his ability to pay as they mature," 39 Pa.Stat.Ann. § 356,6 or with an "actual intent ... to hinder, delay, or defraud ... creditors" is fraudulent, id. § 357.7 Actual intent to defraud may be inferred from the circumstances surrounding a transfer. Tabor Court Realty Corp., 803 F.2d at 1304-05.

The UFCA's constructive fraud provisions operate without regard to intent. Under § 4, any conveyance made or obligation incurred "by a person who is or will be thereby rendered insolvent" is fraudulent if it is made or incurred for less than fair consideration. 39 Pa.Stat.Ann. § 354.8 Insolvency has two components under Pennsylvania law: insolvency in the "bankruptcy sense" (a deficit net worth immediately after the conveyance), and insolvency in the "equity sense" (an inability to pay debts as they mature). Larrimer v. Feeney, 411 Pa. 604, 192 A.2d 351, 353 (1963). Fair consideration requires a "good faith" exchange of "a fair equivalent." 39 Pa.Stat.Ann. § 353(a).

Under § 5, any conveyance made or obligation incurred by a person engaged in "a business or transaction" is fraudulent if it is made or incurred without fair consideration and leaves that person with an "unreasonably small capital." Id. § 355.9 The relationship between "insolvency" under § 4 of the UFCA and "unreasonably small capital" under § 5 is not clear. However, as we discuss below, the better view would seem to be that "unreasonably small capital" denotes a financial condition short of equitable insolvency. The UFCA's constructive fraud provisions furnish a standard of causation that attempts to link the challenged conveyance with the debtor's bankruptcy.

At first, the applicability of the UFCA's fraudulent conveyance provisions to leveraged buyouts was a matter of some dispute. See Note, Fraudulent Conveyance Law and Leveraged Buyouts, 87 Colum.L.Rev. 1491, 1510-13 (1987) (reviewing arguments for and against subjecting leveraged buyouts to fraudulent conveyance laws). However, we think it settled, as a general matter at least, that the fraudulent conveyance provisions of the UFCA extend to leveraged buyouts,10 and defendants do not contest their applicability here.

Because of the difficulty in proving intentional fraud, challenges to leveraged buyouts tend to be predicated on the constructive fraud provisions of the UFCA. See Cieri et al., supra note 2, at 353. In the few instances in which leveraged buyouts have been set aside under the Act's intentional fraud provisions, an intent to defraud has been inferred from the circumstances surrounding the transaction. See, e.g., Gleneagles Inv. Co., 565 F. Supp. at 582-83, aff'd in relevant part sub nom. Tabor Court Realty Corp., 803 F.2d at 1304-05. Accordingly, the question whether a leveraged buyout constitutes a fraudulent conveyance will typically turn on application of the UFCA's constructive fraud provisions.

With these general principles in mind, we turn now to an analysis of the leveraged buyout of Jeannette under the constructive and then intentional fraud provisions of the UFCA.

* According to the district court, the leveraged buyout was without fair consideration to Jeannette because, in exchange for granting Security Pacific security interests in all its assets and undertaking an $11.7 million demand obligation at 3 1/4% above prime, all Jeannette received was new management and access to credit. Moody, 127 B.R. at 992. Defendants do not challenge this finding, and we accept it for purposes of our analysis here. Cf. Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 646 (3d Cir.1991), cert. denied sub nom. Committee of Unsecured Creditors v. Mellon Bank, N.A., --- U.S. ----, 112 S. Ct. 1476, 117 L. Ed. 2d 620 (1992) ("The target corporation ... receives no direct benefit to offset the greater risk of now operating as a highly leveraged corporation.").

The district court's allocation of the burden of proving solvency is a different matter. Defendants assert that if the burden of proof shifts upon a showing of no fair consideration, it should be by a preponderance of the evidence. This position is contrary to the Pennsylvania cases relied on by the district court, which apply the clear and convincing evidence standard. See, e.g., Baker v. Geist, 457 Pa. 73, 321 A.2d 634, 637 (1974); First Nat'l Bank v. Hoffines, 429 Pa. 109, 239 A.2d 458, 462 (1968). Defendants, however, contend these cases are inapposite because they involved "intrafamilial transfers."

Because leveraged buyouts are consummated between distinct corporate entities at arm's length, defendants assert that the potential for collusion and concealment is less than in intrafamilial transfers and, therefore, judicial scrutiny should be less searching. However, the stakes are higher in the typical leveraged buyout, and, at least from the perspective of unsecured creditors, the potential for abuse is great. As we noted in Mellon Bank, N.A.:

The effect of an LBO is that a corporation's shareholders are replaced by secured creditors. Put simply, stockholders' equity is supplanted by debt. The level of risk facing the newly structured corporation rises significantly due to the increased debt to equity ratio. This added risk is borne primarily by the unsecured creditors, those who will most likely not be paid in the event of insolvency.

945 F.2d at 646. See also Queenan, The Collapsed Leveraged Buyout and the Trustee in Bankruptcy, 11 Cardozo L.Rev. 1, 3-5 (1989) (discussing the risks inherent in leveraged buyout transactions). Accordingly, we do not believe the Pennsylvania Supreme Court would scrutinize leveraged buyouts less closely than intrafamilial transfers.11

Although we are inclined to hold that the Pennsylvania Supreme Court would impose the same burden on defendants in leveraged buyouts as that imposed in intrafamilial transfers, we need not decide the issue here because we conclude that defendants have met even the clear and convincing evidence standard. Similarly, because we conclude that defendants have proven adequacy of capital by clear and convincing evidence, we need not decide the standard applicable to defendants' burden of proving adequacy of capital.12

We turn now to the thrust of plaintiff's attack, the district court's solvency and adequacy of capital analyses. As we have discussed, under § 4 of the UFCA a conveyance is fraudulent if it is made without fair consideration and renders the transferor insolvent. See Pa.Stat.Ann. § 354. "A person is insolvent when the present, fair, salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured." Id. § 352(1) (emphasis added). The Pennsylvania Supreme Court has interpreted this provision as requiring solvency in both the "bankruptcy" and "equity" sense, Larrimer v. Feeney, 192 A.2d at 35.13 Insolvency is determined "as of the time of the conveyance." Angier v. Worrell, 346 Pa. 450, 31 A.2d 87, 89 (1943).

The district court valued Jeannette's assets on a going concern basis and found that immediately after the leveraged buyout the present fair salable value of Jeannette's total assets was at least $26.2-$27.2 million (of which $5-6 million comprised PP & E). It then found that the company's total liabilities were $25.2 million. Moody, 127 B.R. at 982. Thus, the district court concluded that Jeannette was solvent in the bankruptcy sense "by at least $1-2 million and most probably by more, given the conservative value ... assigned Jeannette's PP & E." See id.14

At trial, plaintiff argued that Jeannette was rendered insolvent in the bankruptcy sense because the present fair salable value of Jeannette's total assets could not have exceeded the $12.1 million J. Corp. paid for Jeannette's stock. Id. at 994 n. 10. The district court rejected this argument and undertook its own valuation of Jeannette's assets. We find no error here. Although purchase price may be highly probative of a company's value immediately after a leveraged buyout, it is not the only evidence. Cf. Mellon Bank, N.A., 945 F.2d at 649 (rejecting as "cavalier" valuation of target's assets solely on the basis of amount paid to company's former shareholders). The parties here viewed the $12.1 million purchase price as a "significant bargain," made possible by Coca-Cola's decision to focus attention on its bottling business and Brogan's ability to close the deal quickly. Moody, 127 B.R. at 970.

On appeal, plaintiff focuses on the district court's valuation of Jeannette's PP & E. He argues that the district court erred in valuing Jeannette's PP & E on a going concern basis because these assets were not "presently salable" at the time of the leveraged buyout. In addition, he asserts that the $5-6 million the district court assigned Jeannette's PP & E is unsupported by the record. If the district court overstated Jeannette's PP & E by more than $1 million, the company is left with a deficit net worth and we must find that Jeannette was rendered insolvent in the bankruptcy sense.

To be "salable" an asset must have "an existing and not theoretical market." Gleneagles Inv. Co., 565 F. Supp. at 578. See also Rosenberg, Intercorporate Guaranties and the Law of Fraudulent Conveyances: Lender Beware, 125 U.Pa.L.Rev. 235, 255 (1976). Jeannette's PP & E, which comprised real estate and machinery used in the production of glass and pottery, was not highly liquid. Therefore, in determining the present fair salable value of Jeannette's PP & E, the time frame in which these assets must be valued is critical.

Plaintiff argues that valuation on a going concern basis fails to give effect to "present" in the UFCA's "present fair salable value" language, see 39 Pa.Stat.Ann. § 352(1), and the district court should have calculated the amount the company would have received had it attempted to liquidate its PP & E on the date of the acquisition or immediately thereafter. We disagree. Where bankruptcy is not "clearly imminent" on the date of the challenged conveyance, the weight of authority holds that assets should be valued on a going concern basis. See, e.g., In re Taxman Clothing Co., 905 F.2d 166, 169-70 (7th Cir.1990) (under Bankruptcy Code going concern valuation is proper unless "business is on its deathbed"); Kupetz v. Continental Ill. Nat'l Bank & Trust Co., 77 B.R. 754, 763 (C.D.Cal.1987) (valuing assets on going concern basis under UFCA), aff'd sub nom. Kupetz v. Wolf, 845 F.2d 842 (9th Cir.1988); Vadnais Lumber Supply, Inc. v. Byrne (In re Vadnais Lumber Supply, Inc.), 100 B.R. 127, 131 (Bankr.D.Mass.1989) ("The proper standard of valuation to be applied in determination of solvency in a bankruptcy proceeding is the value of the business as a going concern, not the liquidation value of its assets less its liabilities."); Fryman v. Century Factors, Factor for New Wave (In re Art Shirt Ltd.), 93 B.R. 333, 341 (E.D.Pa.1988) (under Bankruptcy Code assets should be valued on going concern basis unless company is "on its deathbed").15

Although most of these cases involve application of the Bankruptcy Code, we have previously looked to the federal bankruptcy laws in interpreting the UFCA. As we noted in Tabor Court Realty Corp., "[t]he fraudulent conveyance provisions of the [Bankruptcy] Code are modeled on the UFCA, and uniform interpretation of the two statutes [is] essential to promote commerce nationally." 803 F.2d at 1298-99 (citing Cohen v. Sutherland, 257 F.2d 737, 741 (2d Cir.1958)) (internal quotations omitted). Thus, although the UFCA's "present fair salable value" language differs from the Bankruptcy Code's "fair valuation" requirement, see 11 U.S.C. § 101(31)(A), we find the bankruptcy cases instructive on the proper valuation standard here. See Cieri et al., supra note 2, at 361 ("The UFCA's 'present fair salable value' and the Bankruptcy Code and UFTA's 'fair valuation' probably should be viewed as interchangeable standards for valuing an LBO's target's assets.").

Moreover, we think valuation on a going concern basis strikes the proper balance between "present" and "fair" in the UFCA's "present fair salable value" language. See 39 Pa.Stat.Ann. § 352(1). The approach set forth in United States v. Gleneagles Investment Co. is instructive. There the district court valued the debtor's assets, which included mining and coal processing equipment, according to the amount that would have been obtained if they were "liquidated with reasonable promptness in an arms-length transaction in an existing and not theoretical market." 565 F. Supp. at 578. See also Fraudulent Conveyance Law and Leveraged Buyouts, supra, at 1505 n. 113.16

As plaintiff points out, the Pennsylvania Supreme Court applied a more immediate valuation standard in Fidelity Trust Co. v. Union National Bank, 313 Pa. 467, 169 A. 209 (1933). Although recognizing that "market value of an asset is generally controlling," it held that the trial court erred in declining to consider the "actual value" of stock subject to the debtor's speculation scheme on the date of the challenged conveyance. Id. at 213 (emphasis in original).17 The district court here concluded that Fidelity Trust Co. "stands for the proposition that we may not ignore the economic realities of the transfer before us," and, therefore, does not compel valuation on a liquidation basis in every instance. Moody, 127 B.R. at 995. We agree.

To determine whether the district court properly valued Jeannette's PP & E on a going concern basis, then, we must ascertain whether Jeannette was either insolvent or on the brink of insolvency on the date of the leveraged buyout. The district court found that "Jeannette was not a company whose failure was clearly imminent on July 31, 1981." Moody, 127 B.R. at 995. This conclusion is supported by the record. Prior to the transaction, Jeannette had a net worth of over $40 million. See supra note 14. Moreover, at the time of the transaction Jeannette had a positive cash flow and was coming off a break-even year before acquisition costs. Accordingly, we think the district court properly valued Jeannette's assets, and, in particular, its PP & E, on a going concern basis.

Plaintiff also maintains that the district court erred in finding that the present fair salable value of Jeannette's PP & E on the date of the acquisition was $5-6 million. At trial, plaintiff presented no evidence on the going concern value of Jeannette's PP & E, or any other assets, because he argued that the company could not be worth more than the amount J. Corp. paid for Jeannette's stock. Plaintiff now asserts that the district court used a "hodgepodge of irrelevant numbers" to arrive at the $5-6 million figure it set for Jeannette's PP & E. We disagree. The record supports the district court's finding that the present fair salable value of Jeannette's PP & E on the date of the acquisition was at least $5-6 million and probably more.

The district court arrived at its $5-6 million figure after finding that: (1) Jeannette assigned its PP & E a book value of $17.7 million on the date of the leveraged buyout; (2) in 1978 a manufacturer's appraisal of Jeannette's assets valued PP & E at $29 million; (3) Coca-Cola invested $11 million in capital improvements and repairs of PP & E; (4) defendants' expert valued Jeannette's PP & E on the date of the acquisition at $12.7 million; and (5) Jeannette received $5.65 million for PP & E in selling off its component parts after the financial downturn ($1.3 million for PP & E at its Old Harbor subsidiary, $550,000 for real property at its Brookpark division, $2 million for PP & E at its Royal China subsidiary, and $1.8 million for PP & E at its Jeannette Glass division).

We find the $5.65 million Jeannette received for PP & E in liquidating its divisions and subsidiaries particularly probative of the going concern value of Jeannette's PP & E on July 31, 1981 because these components were sold as going concerns on something approaching a liquidation basis. Therefore, although these assets were sold long after the leveraged buyout, the conditions under which they were sold approximated, and may have been more immediate than, that required by the UFCA's "present fair salable value" language.18 Accordingly, we conclude that the district court did not err in finding that Jeannette was solvent in the bankruptcy sense after the leveraged buyout.

Next, we look at whether the leveraged buyout either rendered Jeannette insolvent in the equity sense or left it with an unreasonably small capital. Although it recognized that these issues were "conceptually distinct," the district court considered them together. Moody, 127 B.R. at 996. Plaintiff contends this was improper because "unreasonably small capital" denotes a financial condition short of equitable insolvency.

As we have discussed, under § 5 of the UFCA any conveyance made or obligation incurred by a person engaged in "a business or transaction" is fraudulent if it is made or incurred without fair consideration and leaves that person with an "unreasonably small capital." 39 Pa.Stat.Ann. § 355. Unlike "insolvency," "unreasonably small capital" is not defined by the UFCA. This has engendered confusion over the relationship between these concepts: some courts have equated a finding of equitable insolvency with that of unreasonably small capital,19 whereas others have said that unreasonably small capital encompasses financial difficulties short of equitable insolvency.20

We believe the better view is that unreasonably small capital denotes a financial condition short of equitable insolvency. As plaintiff points out, there is some support for this position in Fidelity Trust Co. v. Union National Bank, discussed supra note 17, where the Pennsylvania Supreme Court said that "insolvency at the time" of the challenged conveyance is "of no moment" under § 5. 169 A. at 215.21

Moreover, we think it telling that having adopted § 4 of the UFCA, which proscribes conveyances made without fair consideration that render the debtor "insolvent," the drafters saw fit to add § 5, which proscribes conveyances made without fair consideration that leave the debtor with an "unreasonably small capital." If the drafters viewed these concepts interchangeably, one would expect them to have employed the same language. Cf. In re Vadnais Lumber Supply Co., 100 B.R. at 137 (noting that if Congress had intended to equate unreasonably small capital with equitable insolvency under § 548 of the Bankruptcy Code it would not have used different terms).

Finally, whereas § 4 covers conveyances by persons generally, § 5 covers conveyances by "persons in business." See 39 Pa.Stat.Ann. § 355 (heading). In the business setting, "capital" is a term of art. As a general matter, it refers to "[a]ccumulated goods, possessions, and assets, used for the production of profits and wealth." Black's Law Dictionary 189 (5th ed. 1979). Viewed in this light, an "unreasonably small capital" would refer to the inability to generate sufficient profits to sustain operations. Because an inability to generate enough cash flow to sustain operations must precede an inability to pay obligations as they become due, unreasonably small capital would seem to encompass financial difficulties short of equitable solvency.22

In any event, we do not think the district court erred in considering whether the leveraged buyout left Jeannette with an unreasonably small capital in conjunction with whether it rendered the company equitably insolvent. These distinct but related concepts furnish a standard of causation which looks for a link between the challenged conveyance and the debtor's insolvency. Moreover, where the debtor is a corporation, adequacy of capital is typically a major component of any solvency analysis. This is true of the district court's analysis here.

In undertaking its adequacy of capital analysis, the district court focused on the reasonableness of the parties' projections, but also considered the availability on Jeannette's line of credit with Security Pacific. It found the parties' projections reasonable and, based on the availability of credit as well as the company's historical cash flow needs, determined that Jeannette was not left with an unreasonably small capital under the circumstances. Moody, 127 B.R. at 998. Rather than a lack of capital, the district court attributed Jeannette's demise to the "substantial drop in orders and sales that began in 1982," which it attributed in turn to increased foreign and domestic competition and the continued recession. Id. at 989.

Because creditors cannot execute on a debtor's ability to borrow, plaintiff maintains that the district court erred in considering Jeannette's line of credit with Security Pacific in undertaking its adequacy of capital analysis. He relies on Larrimer v. Feeney, 192 A.2d at 353, and Fidelity Trust Co. v. Union National Bank, 169 A. at 215, where the Pennsylvania Supreme Court said that the ability to survive on borrowed funds does not render an individual debtor solvent for purposes of § 4 of the UFCA. The district court found these cases inapposite. We agree.

Larrimer and Fidelity Trust Co. involved individual debtors who had engaged in speculative stock trading schemes and borrowed funds to stay afloat.23 In Larrimer the Pennsylvania Supreme Court observed that the debtor's "sanguine expectations that the stock market would fluctuate sufficiently [to cover his losses] were in vain," 192 A.2d at 354; and in Fidelity Trust Co. the court referred to the debtor's stock manipulation efforts as "highly speculative" and "unlawful," 169 A. at 212. By contrast, defendants' decision to enter into the lending arrangement challenged here was predicated on their projections that the acquisition would succeed, and, as we discuss below, these projections were reasonable.

Moreover, unlike the debtors in Larrimer and Fidelity Trust Co., at least initially, Jeannette did not borrow funds to stay afloat. As we have noted, the company was solvent by $1-2 million immediately after the leveraged buyout. Finally, we think the lending relationship here is different in important respects from those in Larrimer and Fidelity Trust Co. Jeannette granted Security Pacific first priority security interests in all its assets, which the district court valued at $26 million, to secure a $15.5 million line of credit to provide Jeannette with working capital in the year following the transaction.24

In the absence of controlling Pennsylvania caselaw, it was proper for the district court to look to caselaw in other jurisdictions, and, in particular, Credit Managers Ass'n v. Federal Co., 629 F. Supp. 175 (C.D.Cal.1985). In that case the district court held that the focus of the adequacy of capital inquiry in a leveraged buyout should be the reasonableness of the parties' cash flow projections. In finding that the target corporation was not left with an unreasonably small capital after the leveraged buyout, the court also considered availability of credit. See id. at 185-86.25

Plaintiff urges us to follow Murphy v. Meritor Savings Bank (In re O'Day Corp.), 126 B.R. 370, 407 (Bankr.D.Mass.1991),26 in which the bankruptcy court said that availability of credit alone does not establish adequate capitalization after a leveraged buyout. 126 B.R. at 408. However, this statement is not necessarily at odds with Credit Managers Ass'n, which the In re O'Day Corp. court explicitly embraced. The Credit Managers Ass'n analysis turns on the reasonableness of projections, not availability of credit per se. If projections are unreasonable, as was the case in In re O'Day Corp., see supra note 26, it will follow that the debtor was left with an unreasonably small capital even though it may not have exhausted its credit.

We cannot say that Jeannette was left with an unreasonably small capital merely because after the leveraged buyout its sole source of operating capital was its line of credit with Security Pacific. As we noted in Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d at 647, "[t]he ability to borrow money has considerable value in the commercial world." This is particularly true in the case of leveraged buyouts, which are predicated on the exchange of equity for debt and the ability to borrow. Refusal to consider availability of credit in the adequacy of capital determination would result in a per se rule that failed leveraged buyouts are voidable under § 5 of the UFCA.

Because a leveraged buyout may fail for reasons other than the structure of the transaction itself, we think the determination whether a leveraged buyout leaves a target corporation with an unreasonably small capital requires a more careful inquiry. At least from the viewpoint of the unsecured creditor, leveraged buyouts present great potential for abuse. As we noted in Mellon Bank, N.A., "[a]n LBO may be attractive to the buyer, seller, and lender because the structure of the transaction ... allow[s] all parties to shift most of the risk of loss to other creditors...." 945 F.2d at 646. But cf. C-T of Virginia, Inc. v. Barrett (In re C-T Virginia, Inc.), 958 F.2d 606, 612-13 (4th Cir.1992).27 Therefore, we believe failed leveraged buyouts merit close scrutiny under the fraudulent conveyance laws.

The Credit Managers Ass'n analysis appears to strike a proper balance. It holds participants in leveraged buyout responsible under § 5 of the UFCA when it is reasonably foreseeable that an acquisition will fail, but at the same time takes into account that "businesses fail for all sorts of reasons, and that fraudulent [conveyance] laws are not a panacea for all such failures." Markell, supra note 22, at 506. Therefore, we hold the test for unreasonably small capital is reasonable foreseeability. Under this analysis, it was proper for the district court to consider availability of credit in determining whether Jeannette was left with an unreasonably small capital. The critical question is whether the parties' projections were reasonable.

Because projections tend to be optimistic, their reasonableness must be tested by an objective standard anchored in the company's actual performance. Among the relevant data are cash flow, net sales, gross profit margins, and net profits and losses. See Credit Managers Ass'n, 629 F. Supp. at 184-86. However, reliance on historical data alone is not enough. To a degree, parties must also account for difficulties that are likely to arise, including interest rate fluctuations and general economic downturns, and otherwise incorporate some margin for error. See Queenan, supra, at 19.

Defendants here relied on two sets of one-year projections, one prepared by Brogan and the other by Ngan. Brogan's projections were based on a month-by-month analysis of Jeannette's balance sheet, income statement, and resulting credit availability. Ngan's projections were grounded in his interviews with Jeannette personnel and examination of the company's financial records for the year and a half preceding the acquisition. The district court found these projections reasonable and prudent when made. See Moody, 127 B.R. at 984. We agree.

Plaintiff contends that Brogan's projections were unreasonable because they did not include a separate set of month-by-month cash flow projections. Yet the record shows that Brogan undertook a detailed month-by-month analysis of Jeannette's ability to handle added debt in the year after the acquisition. Moreover, although Brogan did not prepare a separate month-by-month cash flow analysis, his projections were based in part on Jeannette's business plan for 1981, which projected a $3 million positive cash flow through 1981.

Therefore, although the failure to undertake an independent cash flow analysis will often be unreasonable, we cannot say the district court erred in finding Brogan's projections reasonable. This conclusion is bolstered by the fact that during the five months following the leveraged buyout, Jeannette's cash flow tracked the projections contained in company's 1981 business plan.

Plaintiff also asserts that the parties' projections were unreasonable because, like the projections in In re O'Day Corp., they "ignored Jeannette's recent historical experience" and were "founded instead on Brogan's apparent belief that, in the midst of a severe recession, he could suddenly 'turn around' a company which had been losing money for two-and-a-half years." We disagree. As we have discussed, Jeannette was profitable for many years. It suffered a downturn in 1979, but rebounded in 1980. Although 1980 was a break-even year after interest expenses, the company enjoyed a $1.3 million pre-tax profit and had a $3 million positive cash flow. Jeannette projected a continuation of this trend into 1981, and, as of July 14, 1981, was projecting a year's end pre-tax profit of $500,000 before interest expenses.

In hindsight it is clear that the figures employed by Brogan and Ngan were not entirely on the mark. Brogan assumed net sales of $70 million and a gross profit margin of 16.9%; and Ngan assumed net sales of $75 million and a gross profit margin of 17%. However, Ngan's sales projection was based on expected price increases and new product lines and still was $15 million less than that contained in Jeannette's own 1981 business plan. Moreover, although both Brogan's and Ngan's gross profit margins (about 17%) represented a 2.5% increase over 1980, they were below Jeannette's average gross profit margin from 1965 to 1978 (20%). Therefore, the projections here are different from those found unreasonable in In re O'Day Corp., where the parties' worst case scenario exceeded the company's best financial performance in the preceding years. See 126 B.R. at 406.28

Finally, Jeannette's actual performance after the acquisition supports the district court's finding that the parties' projections were reasonable. As we have noted, in the five months following the acquisition, Jeannette had a positive cash flow and realized $6 million in gross profits.29 Of the $2.5 million in proof of claims filed by trade creditors, over 90% were for goods or services provided Jeannette after June 1982; none were for goods or services provided prior to July 31, 1981.30

This is not to say that Jeannette did not experience grave financial problems in the wake of the leveraged buyout. As we have discussed, it suffered a build-up of an unusually large inventory, which the district court attributed in part to mismanagement. Moody, 127 B.R. at 989. From late 1981 to early 1982, Jeannette's payment period for accounts payable increased from 30 days to 88 days. Less than a year after the acquisition, the company began shutting down operations at its Jeannette Glass division and selling off its subsidiaries. By October 1982, it had gone into bankruptcy.

The district court properly found that Jeannette's failure was caused by a dramatic drop in sales due to increased foreign and domestic competition, rather than a lack of capital.31 Plaintiff plausibly contends that defendants should have anticipated some of these problems and incorporated a margin for error. But we cannot say the district court erred in finding that the drastic decline in sales was unforeseeable as of the date of the leveraged buyout. Therefore, we conclude that the district court properly determined that the leveraged buyout did not leave Jeannette with an unreasonably small capital.

Because we assume the notion of unreasonably small capital denotes a financial condition short of equitable insolvency, it follows that the transaction did not render Jeannette equitably insolvent either. And because the leveraged buyout neither left Jeannette with an unreasonably small capital nor rendered it equitably insolvent, we agree with the district court that the acquisition does not constitute a fraudulent conveyance under either §§ 4 or 5 of the UFCA.

All that remains to be decided is whether the district court properly determined that the leveraged buyout did not violate the UFCA's intentional fraud provisions. As we have discussed, a conveyance is intentionally fraudulent if it is made either without fair consideration by one who "intends or believes that he will incur debts beyond his ability to pay as they mature," 39 Pa.Stat.Ann. § 356, or with an "actual intent ... to hinder, delay, or defraud either present or future creditors," id. § 357. Actual intent to defraud need not be shown by direct evidence, but rather may be inferred from the circumstances surrounding a conveyance. United States v. Tabor Court Realty Corp., 803 F.2d at 1304.

The district court found that "defendants did not know or believe that Jeannette's creditors could not be paid, and did not intend to hinder, defraud, or delay creditors." Moody, 127 B.R. at 990. This conclusion followed from the absence of any direct evidence of fraud, as well as defendants' profit motives, the parties' awareness of the transaction's leveraged nature, and Jeannette's operation as a going concern for at least five months following the acquisition. Id. at 991.

Plaintiff apparently concedes that there is no direct evidence that defendants intended to defraud Jeannette's creditors. However, he asserts that the district court erred in failing to consider the "well-established principle" that "parties are held to have intended the natural consequences of their acts." Applying this principle, plaintiff reasons that because the leveraged buyout had the foreseeable "effect" of hindering and delaying creditors of Jeannette, it follows that defendants intended to defraud them. We cannot agree.

In Tabor Court Realty Corp. we relied in part on the principle that "a party is deemed to have intended the natural consequences of his acts" in upholding the district court's finding of intentional fraud. 803 F.2d at 1305. The facts of that case, however, are more egregious than those here. The target corporation in Tabor was "clearly on the brink of insolvency" at the time of the challenged leveraged buyout. Gleneagles Inv. Co., 565 F. Supp. at 581. Thus, the leveraged buyout was not only voidable under the intentional fraud provisions of the UFCA, but also under the Act's constructive fraud provisions.

By contrast, Jeannette was not on the brink of insolvency at the time of the leveraged buyout, and the acquisition was not constructively fraudulent. Therefore, even assuming participants in leveraged buyouts may be held accountable under the intentional fraud provisions of the UFCA for the natural consequences of their actions, we do not believe Jeannette's insolvency was a natural consequence of the leveraged buyout. We conclude, then, that the district court properly held that the leveraged buyout was not intentionally fraudulent.

In sum, we will affirm the district court's conclusions that the leveraged buyout does not constitute a fraudulent conveyance under either the constructive or intentional fraud provisions of the UFCA. Because the leveraged buyout was without fair consideration to Jeannette, defendants bore the burden of proving that Jeannette was neither rendered insolvent nor left with an unreasonably small capital.

Jeannette was not rendered insolvent in the bankruptcy sense because the present fair salable value of Jeannette's total assets immediately after the leveraged buyout exceeded that of its total liabilities by at least $1-2 million. Because bankruptcy was not clearly imminent on the date of the leveraged buyout, the district court properly valued Jeannette's assets on a going concern basis. In applying this valuation standard, the district court did not err in finding that Jeannette's PP & E was worth at least $5-6 million on July 31, 1981.

Nor was Jeannette rendered insolvent in the equity sense. This follows from the district court's finding that Jeannette was not left with an unreasonably small capital because the concept of unreasonably small capital under § 5 of the UFCA denotes a financial condition short of equitable insolvency under § 4. In analyzing the adequacy of Jeannette's capital after the leveraged buyout, the district court properly considered the availability of Jeannette's line of credit with Security Pacific and focused on the reasonableness of the parties' projections.

The district court found the parties' projections reasonable. We find no error. Both Brogan's and Ngan's projections were based on a historical analysis of Jeannette's performance and a month-by-month assessment of the company's ability to operate successfully in the year following the acquisition. Jeannette's actual performance in the five months after the leveraged buyout supports the finding that defendants' projections were reasonable.

Although prudence dictates incorporation of some margin for error, we agree with the district court that the extent of Jeannette's decline in sales in 1982, resulting from increased foreign and domestic competition, was not foreseeable at the time of the leveraged buyout. Thus, we agree that ultimately Jeannette's failure was caused by the decline in sales rather than a lack of capital.

Finally, the district court did not err in finding that defendants did not intend to defraud creditors of Jeannette. Even assuming that parties are deemed to have intended the natural consequences of their actions, it follows that if Jeannette's demise was not clearly imminent as of the date of the leveraged buyout and the leveraged buyout was not constructively fraudulent, the leveraged buyout was not intentionally fraudulent.

For the foregoing reasons, we will affirm the district court's order entering judgment for defendants.