## Facts

- Jeannette Corporation manufactured household glass and related products and had a long history of profitability before being acquired by a corporate parent in 1978.
- In mid-1981, the parent agreed to sell Jeannette to an investor group using a newly formed acquisition entity, with a fast closing deadline.
- The buyout was financed primarily through a $15.5 million revolving credit facility from an asset-based lender; about $11.7 million was advanced at closing to fund the purchase price.
- Jeannette became obligated on the new debt and continued operations under new management after the transaction.
- Jeannette was profitable for several months post-transaction but later faced a sharp industry downturn and recessionary conditions; sales fell and losses increased.
- Creditors filed an involuntary bankruptcy petition in October 1982; most asserted claims arose shortly before the filing.
- The bankruptcy trustee sued the lender, seller-related entities, the acquisition vehicle, and related individuals, seeking to avoid the transaction as a fraudulent conveyance under the Pennsylvania Uniform Fraudulent Conveyance Act (UFCA) and the Bankruptcy Code.
- After a bench trial, the district court found Jeannette was solvent and not left with unreasonably small capital at the time of the buyout, found fair consideration, rejected actual-intent fraud, and entered judgment for defendants.

## Issues

1. Whether the buyout rendered Jeannette insolvent or left it with unreasonably small capital under the UFCA’s constructive fraud provisions.
2. Whether Jeannette received fair consideration for the obligations incurred and transfers made in connection with the buyout, including through indirect benefits.
3. Whether defendants acted with actual intent to hinder, delay, or defraud creditors under the UFCA.
4. Whether Jeannette’s value at the transaction date should be determined on a going-concern basis rather than a liquidation basis.
5. Whether the district court’s factual findings on solvency, capitalization, and projections warranted reversal on appeal.

## Decision

- The Third Circuit affirmed the judgment for all defendants.
- The court held the UFCA can apply to leveraged buyouts, but an LBO is not fraudulent per se.
- The court upheld the district court’s use of going-concern valuation and its conclusion that Jeannette’s assets exceeded liabilities at the time of the transaction.
- The court agreed that Jeannette was not left with unreasonably small capital based on information reasonably available at closing, and later market collapse could not supply hindsight proof.
- The court concluded the trustee failed to prove lack of fair consideration, including because Jeannette received value such as new financing and continued operation.
- The court found insufficient evidence of actual fraudulent intent to hinder, delay, or defraud creditors.

## Legal Principles

- Fraudulent conveyance scrutiny applies to leveraged buyouts, but liability depends on satisfying statutory elements, not the transaction label.
- When a business is operating and expected to continue, solvency and value are generally assessed on a going-concern basis rather than hypothetical liquidation value.
- “Unreasonably small capital” is a forward-looking inquiry focused on reasonable foreseeability at the time of the transaction; subsequent economic downturns do not establish inadequacy by hindsight.
- Under the UFCA, fair consideration may include indirect benefits reasonably equivalent to the obligations incurred, such as access to financing and operational continuation.
- Appellate review gives deference to trial-level factual findings on valuation, solvency, and capital adequacy absent clear error.

## Conclusion

The Third Circuit rejected the trustee’s attempt to unwind the leveraged buyout because the evidence supported going-concern solvency, adequate capitalization based on then-reasonable projections, fair consideration including indirect benefits, and no actual intent to defraud creditors.


Moody v. Sec. Pac. Bus. Credit, Inc., 971 F.2d 1056 (3d Cir. 1992)