## Facts

- Raymond Colliery Co., Inc. and its coal-mining subsidiaries were financially distressed, and shareholders sought a buyout.
- Raymond’s president formed a holding company, Great American Coal Co., to acquire Raymond stock through a leveraged buyout.
- To finance the buyout, a lender loaned about $8.53 million secured by mortgages on substantially all of Raymond’s real estate.
- Most loan proceeds were used to pay selling shareholders; the remainder paid some existing debts, with no meaningful new equity added to the operating business.
- Raymond’s financial condition worsened; it became insolvent, stopped mining operations, and defaulted on the mortgages.
- The lender sold the mortgage interests to an intermediate purchaser, which then sold them to McClellan Realty Co., Inc.; McClellan asserted mortgage rights in the coal properties.
- The IRS assessed unpaid federal income taxes against Raymond and Great American, and federal tax liens arose from those assessments.
- The United States sued to reduce assessments to judgment and to set aside the mortgages as fraudulent conveyances under the Pennsylvania Uniform Fraudulent Conveyance Act (PUFCA), seeking priority for federal tax liens over the mortgages.

## Issues

1. Whether Raymond was insolvent when it granted the mortgages under PUFCA’s “fair salable value” test.
2. Whether granting mortgages to secure LBO financing constituted a fraudulent conveyance under PUFCA because Raymond was insolvent (or rendered insolvent) and did not receive fair consideration, including whether the lender’s conduct supported a finding of bad faith.
3. Whether McClellan, as a subsequent acquirer of the mortgages, could avoid avoidance remedies by claiming bona fide purchaser status.
4. Whether, once the mortgages were avoided as to the United States, federal tax liens had priority over the mortgage interests in the encumbered property or proceeds.

## Decision

- The Third Circuit largely affirmed the district court’s judgment.
- The court upheld the finding that Raymond was insolvent when it granted the mortgages, applying PUFCA’s fair-salable-value standard and considering actual market conditions and existing encumbrances.
- The court affirmed that the mortgages were fraudulent conveyances under PUFCA because the debtor, insolvent at the time, did not receive fair consideration for granting liens that chiefly enabled payment to shareholders.
- The court declined to disturb the district court’s bad-faith finding as to the original lender’s participation in the LBO financing structure.
- The court rejected McClellan’s attempt to insulate itself as a later holder of the mortgages; the infirmity of the original transaction remained effective against successors absent a qualifying bona fide purchaser defense.
- With the mortgages void as to the United States, the court upheld priority for the federal tax liens over the mortgage interests to the extent addressed in the lien-priority and proceeds-allocation rulings.

## Legal Principles

- Under PUFCA, insolvency is determined by comparing liabilities to the “fair salable value” of assets, assessed in light of real market conditions rather than book values alone.
- A conveyance (including granting security interests) may be fraudulent under PUFCA if made without fair consideration by an insolvent debtor or a debtor rendered insolvent by the transaction.
- In LBO financing, security interests placed on an operating company’s assets to fund payments primarily to selling shareholders may lack fair consideration to the debtor, supporting fraudulent-conveyance relief.
- A fraudulent conveyance can remain voidable against later transferees of the security interest unless the transferee establishes protected bona fide purchaser status under applicable law.
- If a state-law fraudulent conveyance is avoided as to the United States, federal tax liens may be enforced against the affected property as though the avoided transfer had not impaired the taxpayer’s rights in that property.

## Conclusion

The Third Circuit upheld avoidance of the LBO-related mortgages as fraudulent under Pennsylvania law based on Raymond’s insolvency and lack of fair consideration, rejected the successor mortgagee’s attempt to avoid the consequences of the original transaction, and allowed federal tax liens to take priority over the avoided mortgage interests.


United States v. Tabor Ct. Realty Corp., 803 F.2d 1288 (3d Cir. 1986)