Pennsylvania

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

United States Bankruptcy Court,

E.D. Pennsylvania.

In re FIDELITY BOND AND MORTGAGE COMPANY, Debtor.

Fidelity Bond and Mortgage Company, Plaintiff,

v.

Steven D. Brand, et al., Defendants.

Bankruptcy No. 99-18427.

Adversary No. 00-257.

April 14, 2006.

*270 William T. Hangley, Esquire, James M. Matour, Esquire, Hangley, Aronchick, Segal & Pudlin, Philadelphia, PA, for debtor.

OPINION FN1

FN1. This Opinion constitutes the findings of fact and conclusions of law required by Fed. R. Bankr.P. 7052. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, § 157(a). The core/non-core status of the claims are discussed infra.

KEVIN J. CAREY, Bankruptcy Judge.FN2

FN2. On December 9, 2005, I assumed office as a bankruptcy judge in the District of Delaware. On the same date, I was designated by the Third Circuit Court of Appeals to sit as a bankruptcy judge in the Eastern District of Pennsylvania for the purpose of completing various matters, including this one.

Before the Court is a complaint (the “Complaint”) filed by the plaintiff/debtor, *271 Fidelity Bond and Mortgage Company (the “Debtor”), on March 27, 2000 against defendants Steven D. Brand, James M. Dougherty, Arthur L. Powell, Trustee under Indenture of Trust of Lea R. Powell dated July 19, 1993, Richard S. Powell, Jon R. Powell, Carol P. Heller, Nancy E. Powell, Harold G. Schaeffer, Trustee under Indenture of Trust of Adele K. Schaeffer dated July 19, 1993, James R. Schaeffer, Anthony L. Schaeffer, and Robert D. Schaeffer (the “Defendants”). The Defendants filed an answer to the Complaint on May 24, 2000 (docket no. 31).

The Debtor's focus in this litigation is two-fold.FN3 First, it seeks to avoid and recover a cash distribution in the amount of $1,705,000 made on April 30, 1998 from the Debtor to the Defendants in their capacity as shareholders of the Debtor (the “Distribution”). The Distribution was made immediately prior to a merger (the “Merger”) between the Debtor and another mortgage banking company known as Phoenix Mortgage Company (“Phoenix”). The Debtor argues that the Distribution may be avoided and recovered on two theories: (I) the Distribution was a fraudulent transfer under the Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa.C.S.A. § 5101 et seq. (“PUFTA”), and (ii) the Distribution violated the Pennsylvania Business Corporation Law of 1988, 15 Pa.C.S.A. § 1551.

FN3. The Debtor's Complaint contains five counts, as follows:

(i) Count I seeks to avoid and recover the Distribution in the amount of $1,705,000 pursuant to the Bankruptcy Code (11 U.S.C. § 544 and § 550), and the Pennsylvania Uniform Fraudulent Transfer Act (12 Pa.C.S.A. § 5101 et seq.)(“PUFTA”);

(ii) Count II seeks recovery of the Distribution under the Pennsylvania Business Corporation Law of 1988 (15 Pa.C.S.A. § 1551(b) and § 1553(a));

(iii) Count III objects to the proofs of claim for amounts due under the Promissory Notes filed by the Defendants in the Debtor's bankruptcy case;

(iv) Count IV seeks to avoid any obligation for amounts due to the Defendants under the Promissory Notes pursuant to Bankruptcy Code § 544 and PUFTA;

(v) Count V seeks, in the alternative, to recharacterize or equitably subordinate any obligations to the Defendants under the Promissory Notes pursuant to Bankruptcy Code § 510.

Prior to filing the Joint Pretrial Statement, the Debtor decided not to pursue Count III.

Second, the Debtor seeks to avoid liability on certain promissory notes (the “Promissory Notes”) in the aggregate original principal amount of $1,200,000, which were given to the Defendants in connection with the Merger. The Debtor argues that the Promissory Notes were also fraudulent transfers under PUFTA. In the alternative, the Debtor seeks to recharacterize the Promissory Notes as equity or to equitably subordinate any obligation it may have to the Defendants based upon the Promissory Notes.

[1] [2] The parties filed a Joint Pretrial Statement on April 2, 2001 (docket no. 54). In the Joint Pretrial Statement, the parties agreed that Counts I, IV & V are core proceedings under 28 U.S.C. § 157(b)(1) and (2)(B), (E), (H), (K) and (O). The parties also agreed that Count II is a non-core proceeding related to a case under title 11 of the United States Bankruptcy Code (11 U.S.C. § 101 et seq.)(the “Bankruptcy Code”), but consented to entry of a final order by this Court with respect to Count II. Whether certain issues are core or non-core is a legal question and the *272 Court is not bound by the parties' stipulations regarding questions of law. Mintze v. American General Financial Services, Inc. (In re Mintze), 434 F.3d 222, 228 (3d Cir.2006). I agree with the parties that Counts I, IV & V are core proceedings under 28 U.S.C. § 157(b)(1) and (2)(H), (K), and (O).

On April 5, 2001, trial of this matter began and spanned over thirty-three days throughout 2001 and 2002, with numerous exhibits offered into evidence. At the close of the trial, the parties submitted a post-trial briefing schedule, which was amended. The Debtor filed its Amended Proposed Findings of Fact and Conclusions of Law on March 12, 2003 (docket no. 173). The Defendants filed their Proposed Findings of Fact and Conclusions of Law on July 14, 2003 (docket no. 179). The parties then filed their respective post-trial briefs on November 6, 2003 (docket no. 187; docket no. 189).

After a conference call with the Court on December 22, 2004, the Defendants filed a motion to reopen the record on February 4, 2005 (docket no. 194). The Debtor filed a response on March 23, 2005 (docket no. 198). Oral argument regarding the motion to reopen the record was held on May 18, 2005. At oral argument, the Court reopened the record to include the parties' arguments regarding the effect of a district court decision in related litigation, Powell v. First Republic Bank, 274 F.Supp.2d 660 (E.D.Pa.2003), aff'd 113 Fed.Appx. 470 (3d Cir.2004), on this adversary proceeding.

For the reasons set forth below, I conclude that judgment should be entered against the Plaintiff and in favor of the Defendants on Count I (fraudulent transfer of the Distribution), Count II (violation of the Pennsylvania Business Corporation Law), and Count IV (fraudulent transfer of the Promissory Notes). I further conclude that judgment should be entered in favor of the Plaintiff and against the Defendants on Count V (recharacterization of the Promissory Notes).

FINDINGS OF FACT

At all times relevant prior to the Merger, Old Fidelity was engaged in the origination, purchase, sale and servicing of residential mortgage loans collateralized by real estate.FN4 (Joint Pretrial Statement, Statement of Uncontested Facts, ¶ 14.) FN5 Loan servicing, as opposed to loan origination, was the primary focus of Old Fidelity's business. ( Id.) All of Old Fidelity's issued and outstanding stock was owned by the Defendants. (JPS, ¶ 2.)

FN4. Fidelity Bond and Mortgage, as it existed prior to the Merger, will be referred to herein as “Old Fidelity.”

FN5. Hereinafter, the uncontested facts in the Joint Pretrial Statement will be referred to as (“JPS, ¶ ____”).

Prior to the Merger, Phoenix also was engaged in the origination, purchase, sale and servicing of various types of loans. (JPS, ¶ 15.) However, loan origination, as opposed to loan servicing, was the primary focus of Phoenix's business. ( Id.)

In 1997, Old Fidelity and Phoenix had discussions about combining their operations to create a mortgage banking entity that would engage in the business of originating, selling and servicing residential mortgage loans. (Salmon, April 5, 2001, Tr. at 81.) On January 7, 1998, First Republic Bank, Phoenix, Old Fidelity and the Defendants executed a Letter of Intent (the “LOI”) concerning, inter alia, the sale of 80 percent of the stock of Fidelity. (JPS, ¶ 3; Ex. P-1.) The LOI, along with its schedules and exhibits, were incorporated into an agreement (the “Definitive *273 Agreement”) signed by First Republic Bank, the shareholders of Phoenix, Old Fidelity and the Defendants (jointly, the “Parties to the Merger”) on May 1, 1998, but effective as of April 30, 1998. (JPS, ¶ 4; Ex. P-3.)

Pursuant to the terms and conditions of the Definitive Agreement and the LOI, the parties engaged in a multi-step transaction in which, inter alia, a new company, FBMC Acquisition Company (“FBMC”) was formed by First Republic Bank and Phoenix. ( Id.) Specifically, the Parties to the Merger structured the Merger as follows:

• First Republic Bank and the Phoenix shareholders formed FBMC. First Republic Bank contributed $1,645,000 cash to FBMC, the Phoenix shareholders contributed 100% of the stock of Phoenix; and Phoenix shareholder Ronald H. White contributed $70,000 in cash. Phoenix became a wholly-owned subsidiary of FBMC.

• FBMC used the cash it received, totaling $1,715,000, to purchase 80% of Old Fidelity's outstanding common stock from the Defendants.

• FBMC gave the Defendants 20% of the issued and outstanding common stock of FBMC in exchange for the remaining 20% of Old Fidelity stock held by the Defendants. The Defendants also received $1,200,000 in Promissory Notes from FBMC.FN6 Old Fidelity became a wholly-owned subsidiary of FBMC.

FN6. On May 1, 1998, New Fidelity became a co-obligor on the Promissory Notes. (JPS, ¶ 13.)

• Phoenix merged into Fidelity. The post-merger entity of Fidelity Bond and Mortgage Company included the operations of both Old Fidelity and Phoenix (“New Fidelity”).FN7

FN7. New Fidelity is the same entity that is referred to herein as the “Debtor.”

• At the conclusion of the transaction, FBMC's stock was distributed as follows:

• 47% was issued to First Republic Bank;

• 31% was issued to the former shareholders of Phoenix;

• 20% was issued to the Defendants; and

• 2% was issued to Ronald H. White.FN8

FN8. After the Merger, the Parties to the Merger intended to merge FBMC out of existence, but that never happened. (Salmon, April 6, 2001, Tr. at 125, 128.)

(Ex. P-3, Revised Schedule 2; Ex. P-146; Ex. P-147; Salmon, April 5, 2001, Tr. at 105-07; Salmon, April 6, 2001, Tr. at 123-25; Brand, April 30, 2001, Tr. at 11-17.)

(a) Pre-Merger Events.

(1) The Summit Bank Loans.

Under the terms of the LOI and Definitive Agreement, the parties required that, as a condition precedent to the Merger, Old Fidelity obtain a term loan from Summit Bank in an amount not less than $7,000,000, secured by Fidelity's servicing rights and other assets (the “Summit Term Loan”). The proceeds of the Summit Term Loan would be used, in part, to pay off an existing term loan and line of credit.FN9 (JPS, ¶ 5; Ex. P-1 at 2, 10.) The LOI *274 further stated that “[t]he consummation of the transaction contemplated by this LOI shall be subject to and conditioned upon, among other things ··· a $500,000 working capital line of credit on terms and conditions acceptable to each of the Purchasers.” (JPS, ¶ 5, Ex. P-1 at 10.)

FN9. When the Defendants originally acquired Old Fidelity in 1993, they obtained a $6.5 million dollar term loan and $1 million dollar line of credit from United Jersey Bank, which subsequently became part of Summit Bank. (Brand, April 20, 2001, Tr. at 71; Ex. P-70A at 4.) The proceeds of the Summit Term Loan paid the amount then due on the 1993 term loan of $4,401,817.55, and the amount then due on 1993 line of credit of $503,423.61. (Ex. P-49.)

On April 28, 1998, Old Fidelity and Summit Bank entered into a Revolving Credit and Term Loan Agreement (the “Summit Loan Agreement”) under which Summit Bank provided Fidelity with the Summit Term Loan of $7,000,000 and agreed to extend a working capital line of credit of up to $500,000. (Ex. P-2; JPS, ¶ 6.) The term loan and line of credit were secured by Fidelity's mortgage servicing rights and certain other assets. ( Id.; Ex. P-2 at 19-21.) All of the Parties to the Merger reviewed documents, participated in the negotiation of terms, and consented to Old Fidelity's execution of the Summit Loan Agreement. (Salmon, April 6, 2001, Tr. at 140-43; Ex. D-21; Ex. D-22.) FN10

FN10. Although there was some question about whether Brand, on behalf of Old Fidelity, directed the Summit Loan Agreement negotiations, Summit Bank's representative, Adrian M. Marquez, testified that his principal contact for negotiations was Brand. (Brand, April 20, 2001, Tr. at 79-81; Marquez, May 7, 2001, Tr. at 15-17.) Brand signed the Summit Loan Agreement on April 28, 1998 on behalf of Old Fidelity. (Brand, April 20, 2001, Tr. at 74; Ex. P-2.)

The Summit Loan Agreement provided that if at any time before December 31, 1998 the outstanding principal balance of the $7,000,000 Summit Term Loan exceeded 85% of the “Portfolio Valuation,” Fidelity was required immediately to prepay the $7,000,000 loan in an amount sufficient to bring the outstanding principal into compliance with the 85% ratio (the “Prepayment Provision”). FN11 (JPS, ¶ 7, Ex. P-2, ¶ 2(e) at 16.) For calendar year 1999, the Summit Loan Agreement set the ratio at 80%. ( Id.)

FN11. Under the Summit Loan Agreement, the Portfolio Valuation was defined as the “value of the Portfolio to Borrower determined by Bank based upon an assessment by an appraiser experienced in such valuations, selected and paid for by the Borrower, subject to Bank's approval as to the identity of the appraiser and the extent, format and application of the valuation report.” (Ex. P-2 at 10.) “Portfolio” was defined as “at any time, the aggregate of Borrower's Residential Mortgage Loans which are the subject of its Servicing Agreements.” (Ex. P-2 at 10; JPS, ¶ 8.)

Furthermore, the “Affirmative Covenants of the Borrower” in the Summit Loan Agreement provided that the borrower would not permit Summit Bank's total exposure, including the sum of the Commitment (defined as the $500,000 revolving line of credit and the $7 million term loan), to be greater than 85% of the Portfolio Valuation (the “Paragraph 6(p)(4) Loan-to-Value Covenant”). (Ex. P-2, ¶ 6(p)(4) at 38.) Therefore, the borrower needed a Portfolio Valuation of $8,823,529 to comply with the Paragraph 6(p)(4) Loan-to-Value Covenant if the outstanding loan was in the full amount of $7,500,000. (Brand, April 20, 2001, Tr. at 116-17; Marquez, May 7, 2001, Tr. at 42-44.)

In the course of its business dealings with Old Fidelity, Summit Bank determined the Portfolio Valuation as follows:

(1) Old Fidelity would hire a third-party analyst to prepare a portfolio evaluation, typically using year-end numbers (the “Third-Party Portfolio Evaluation”);

(2) Summit Bank would provide the Third-Party Portfolio Evaluation to its own outside experts, Smith Breslin, who would review the reasonableness of the assumptions underlying the Third-Party Portfolio *275 Evaluation and would provide its own range of multipliers to Summit Bank for determining the market value of Old Fidelity's loan-servicing portfolio;

(3) Summit Bank would select a multiplier from the range provided by Smith Breslin, and then would multiply the unpaid principal balance of the loans in the loan-servicing portfolio by the selected multiplier to determine Portfolio Value for purposes of determining compliance with the loan covenants.

(Marquez, May 7, 2001, Tr. at 10-13; 23; Ex. P-70A at 6.) In preparing for the Merger, the Prestwick Mortgage Group (“Prestwick”) performed an evaluation of the “market value” of Old Fidelity's loan servicing portfolio as of January 26, 1998. (JPS, ¶ 9; Ex. P-1, at 3; Ex. P-46.) Using information supplied by Old Fidelity, Prestwick estimated that the range of “market value” for the loan servicing portfolio being serviced as of December 31, 1997, fell between 1.2727% and 1.5005%, multiplied by the total unpaid principal balance of the loans in the loan servicing portfolio (the “Portfolio's Unpaid Principal Balance”). ( Id.). The Portfolio's Unpaid Principal Balance as of December 31, 1997 was approximately $594 million. (Ex. P-46).

Consistent with the parties' previous dealings, Summit Bank sent the Prestwick report to Smith Breslin for review, and Smith Breslin determined the multiplier to be a range of 1.33 and 1.55 times the Portfolio's Unpaid Principal Balance. (Marquez, May 7, 2001, Tr. at 25-26). Summit Bank initially planned to use a multiplier of 1.33, but after discussions with Brand, it ultimately approved the use of 1.44 as the multiplier for purposes of determining compliance with the loan covenants. (Marquez, May 7, 2001, Tr. at 26-29; 70-71.)

The Summit Loan Agreement was signed prior to closing of the Merger. (Ex. P-2). On or about April 30, 1998, Summit Bank funded the $7,000,000 term loan. (JPS, ¶ 11.) Summit Bank debited Fidelity's account to repay Fidelity's previous term loan and line of credit from the Summit Bank Loan. (JPS, ¶ 11).

(2) Federal Reserve Application.

To participate in the Merger, First Republic Bank had to obtain approval from the Federal Reserve Bank of Philadelphia (the “Federal Reserve”). (Rapp, April 12, 2001, Tr. at 75-76). By a letter application dated April 8, 1998, First Republic Bank asked the Federal Reserve to approve its investment “in shares of common stock of Fidelity Bond and Mortgage.” (Ex. P-15, at 1). In support of its application, First Republic Bank submitted, among other things, a Valuation Analysis of Old Fidelity as of March 31, 1998, Old Fidelity's audited financial statements for years ending 1995 and 1996, Phoenix's audited financial statements for year ending 1996, and projected income statement and balance sheet for Fidelity (1998-2002). (Ex. P-15, Attachments A, F, G, and H.) The Merger was approved by the Federal Reserve. (Salmon, April 6, 2001, Tr. at 132.)

(3) The Projections.

The Parties to the Merger prepared annualized projections for the first five years of New Fidelity's operation (the “Projections”). (Ex. D-6.) The Projections were prepared by representatives of both Old Fidelity and Phoenix, who met and reviewed in detail the assumptions underlying the Projections. (Salmon, April 6, 2001, Tr. at 92-93; Heise, June 6, 2001, Tr. at 16-17; Brand, June 19, 2002, Tr. at 93-97.) The Projections were refined and *276 reworked numerous times. (Heise, June 6, 2001, Tr. at 159; Brand, June 19, 2002, Tr. at 96-97.) First Republic Bank also inspected drafts of the Projections, reviewed the assumptions underlying the Projections, and made suggestions and recommendations with respect to the Projections. (Rapp, April 12, 2001, Tr. at 156-57.)

(4) The Distribution to the Defendants.

Under the terms of the LOI, “[i]mmediately prior to the Closing of the Purchase Agreement, [Old Fidelity] may distribute to the selling shareholders all but $500,000.00 in cash. [Old Fidelity and Phoenix] shall provide, in addition to the $500,000.00, sufficient cash to make the next succeeding commission payroll for their respective employees.” (Ex. D-1, at 4; JPS, ¶ 12.) On April 30, 1998, Old Fidelity transferred the amount of $1,705,000 (the “Distribution”) by wire transfer to a bank account maintained by the Defendants' attorneys on the Defendants' behalf. (Brand, April 30, 2001, Tr. at 8-10; Ex. D-38; JPS, ¶ 12.) FN12 On May 1, 1998, the Distribution was divided among and transferred to the Defendants. ( Id.)

FN12. The purchase price paid by FBMC to the Defendants in return for 80% of the stock of Old Fidelity was transferred into the bank account maintained by the Defendants' attorneys on May 1, 1998. (Ex. D-38).

(b) Post-Merger Events.

(1) Post-Merger Management of Fidelity.

After closing of the Merger, 100% of the stock of New Fidelity was owned by FBMC. (Salmon, April 6, 2001, Tr. at 123; Rapp, April 12, 2001, Tr. at 70-71.) Beginning April 30, 1998 and thereafter, Donald L. Salmon (“Salmon”) became the president, chief executive officer, and chairman of the Board of Directors of New Fidelity. (Ex. D-35; Salmon, April 6, 2001, Tr. at 183.) The chief financial officer of New Fidelity was Christopher Heise. (Ex. D-35). On April 30, 1998, by unanimous consent of FBMC, it was resolved that the Board of Directors of New Fidelity would consist of Steven D. Brand, Donald L. Salmon, Ronald H. White, Harry D. Madonna, and George S. Rapp. (Ex. D-29). FN13

FN13. Prior to the Merger, Salmon and Heise were the Phoenix management. (Rapp, April 12, 2001, Tr. at 108.) Steven L. Brand (“Brand”), president of Old Fidelity, was the only member of New Fidelity's Board of Directors to represent the interests of the Defendants. (Rapp, April 12, 2001, Tr. at 108.)

(2) Cash available to New Fidelity Post-Merger.

A condition to the Merger closing required that New Fidelity would have $500,000 in cash and $500,000 available through the working capital line of credit to operate. (Ex. P-1, at 10.) On the day of the Merger, New Fidelity had approximately $611,918 in cash. (Ex. P-88.) Just after the Merger, New Fidelity paid the following from the available cash: (I) $70,000 for the origination fee charged by Summit Bank for the loan, (ii) $130,000 for Phoenix's pre-Merger payroll; and (iii) $100,000 to bring the Phoenix escrows into compliance with federal guidelines. (Heise, June 6, 2001, Tr. at 165-67; Heise, June 25, 2001, Tr. at 113-15; Ex. P-44.) FN14 Accordingly, New Fidelity's cash was decreased*277 shortly after the Merger to $311,918.

FN14. Heise testified that, although the LOI required the parties to provide sufficient funds to cover pre-Merger payroll, Brand and Salmon agreed that Phoenix's pre-Merger payroll would be paid from loans that would be funded in May 1998. (Heise, June 6, 2001, Tr. at 164-65.)

Just after the Merger, New Fidelity did not have access to the $500,000 line of credit from Summit Bank because New Fidelity was not in compliance with the covenants in the Summit Loan Agreement. (Salmon, April 6, 2001, Tr. at 152-53; Marquez, May 7, 2001, Tr. at 41; Rapp, April 12, 2001, Tr. at 14; Heise, June 6, 2001, at 51; Ex. P-44.) On September 28, 1998, however, the Summit Loan Agreement was amended to remove the $500,000 line of credit from calculation of the Paragraph 6(p)(4) Loan-to-Value Covenant. (Ex. P-143; Salmon, April 6, 2001, Tr. at 210-211; Marquez, May 7, 2001, Tr. at 44-45.) Shortly thereafter, New Fidelity drew down the entire $500,000 line of credit, so that the cash would be available if New Fidelity again found itself in violation of the Summit Loan Agreement covenants. (Salmon, April 9, 2001, Tr. at 109-110; Heise, June 28, 2001, Tr. at 165-66.)

The agreement between Summit Bank and New Fidelity amending the Summit Loan Agreement provided, in part, that upon release of the $500,000 line of credit funds, New Fidelity would use $83,000 to pay down the term loan so that the term loan would be in compliance with the amended Paragraph 6(p)(4) Loan-to-Value Covenant. (Ex. P-27; Salmon, April 6, 2001, Tr. at 212; Salmon, April 9, 2001, Tr. at 108-09; Heise, June 28, 2001, Tr. at 162.) Summit Bank also required that certain debt, including debt owed to Salmon and the Promissory Notes owed the Defendants be subordinated to Summit Bank's debt. (Ex. P-27.)

(3) Post-Merger Audit/Net Value.

The LOI stated that the purchase price for the shares of Old Fidelity was based upon Old Fidelity's estimated net value of $4,000,000 as of September 30, 1997, which value would be adjusted at year end, but would not be “less than $2,500,000 nor more than $4,500,000.” (Ex. P-1, at 2). On the closing date of the Merger, the Parties to the Merger agreed to assume that Fidelity had a net worth of $3,500,000. (Salmon, April 5, 2001, Tr. at 111-13; Heise, June 28, 2001, Tr. at 87.) The Parties to the Merger further agreed, however, that a post-Merger audit would be performed as of the date of the Merger to determine the actual net worth of Old Fidelity and adjustments would be made to ensure that the Parties to the Merger had each paid the proper amount for their respective shares of FBMC. (P-1 at 2, 4; Salmon, April 5, 2001, Tr. at 111-12.) After the Merger, the accounting firm of Rudolph, Palitz & Co. was hired to perform an audit. (Salmon, April 5, 2001, Tr. at 114.) A final audit report was never issued, but a draft audit report dated October 14, 1998, determined Fidelity's net value as of the Merger date to be $3,084,370. (Ex. P-56; Salmon, April 5, 2001, Tr. at 114-15.)

(4) Post-Merger Expansion of Origination Business.

The pre-Merger application to the Federal Reserve stated, in part, that:

The parties expect additional expansion of the retail network into selected markets to occur beginning in the latter part of 1998 and continuing into 1999. Fidelity expects to open at least one new retail branch each year during 1998 and 1999. Fidelity intends to increase its business both geographically and in absolute terms by capitalizing upon the network of personal contacts of its experienced, top producing managers and loan officers, including principals of Phoenix. Through its distribution channels, Fidelity will offer a full line of home finance products directly to consumers.*278 Fidelity's product offerings will include conventional, government, non-conforming (for special credit, income and property circumstances), second, adjustable rate and home equity mortgage loans. Also, Fidelity intends to participate in state, local and community home buyer programs.

(Ex. P-15, p.4.) The Parties to the Merger projected a substantial increase in originations to occur as a result of the increase in mortgage refinancing and through expansion of origination programs. (Ex. P-70A, at p. 6.) In particular, Salmon testified that the Projections were based upon new lines of business that were “showing great promise,” such as the Affinity Group FN15 (i.e., a program that solicited borrowers through their employers), a sub-prime lending group, a government loan production group, and the NTO Group (i.e., a telephone solicitation group). (Salmon, April 9, 2001, Tr. at 77-79.)

FN15. Although this program is referred to in the transcript as “Infinity Group,” in the parties' post-trial submissions, this group is referred to as the Affinity Group.

One expansion, undertaken shortly after closing of the Merger, involved expansion of the government loan program into San Diego, California, by hiring a group of employees from another mortgage origination company, leasing office space, and leasing an apartment utilized by two employees.FN16 (Salmon, April 6, 2001, Tr. at 198-204; Rapp, April 12, 2001, Tr. at 114-16.) The expansion in California was done without prior Board approval; the Board was advised of the expansion after it was completed. (Rapp, April 12, 2001, Tr. at 115-16.) Upon learning of the California expansion, the Board questioned the prudence of decision due to the high expense it generated at a time when New Fidelity was concerned about its tight cash position. ( Id.)

FN16. The government loan program was “a program that would allow borrowers to obtain Federal Housing Administrative and Veterans Benefit Administrative loans on a ‘no cost’ basis in a streamlined manner.” (Ex. D-81, at 10.)

Another expansion involved acquisition of a sub-prime lender, Eagle Financial Services (“Eagle”), which was approved by the Board of Directors at their meeting on June 10, 1998. (Ex. P-50 at M-4.) Although the acquisition of Eagle helped New Fidelity meet its projection of increasing originations of sub-prime mortgages during its first year of operations, the Eagle operations lost money every month after the acquisition was completed in September 1998. (Heise, June 25, 2001, Tr. at 165-67.)

During the first year of operations, New Fidelity met its projected goal for mortgage originations-at times exceeding the monthly goal of $30,000,000 originations per month. (Ex. P-84 at M000028; Salmon, April 6, 2001, Tr. at 173-76.) However, the increase in originations placed a strain on the revolving lines of credit, known as “warehouse” lines, used to fund the new loans, causing New Fidelity to “juggle” or to postpone closings at times during the summer of 1998 to ensure that sufficient funds were available to fund the closings.FN17 (Fugok, December 18, 2001, *279 Tr. at 156-59). The increase in originations also caused increased costs, such as an increase in commissions and salaries for loan officers (Brand, June 20, 2002, Tr. at 19.)

FN17. A “warehouse” line of credit is available specifically for the purpose of funding loans to consumers while the loans are in process of being sold to end investors. (Salmon, April 9, 2001, Tr. at 116-17.) New Fidelity had two warehouse lines of credit just after the Merger of approximately $15 million each: one with PNC Bank (Old Fidelity's warehouse lender) and one with CoreStates Bank (Phoenix's warehouse lender). (Salmon, April 9, 2001, Tr. at 115; Fugok, December 18, 2001, Tr. at 226-27; Ex. P-70A at 7.) In July 1998, CoreStates Bank withdrew its warehouse line of credit. (Ex. P-54 at M-002876; Fugok, December 18, 2001 at 227). New Fidelity succeeded in increasing the amount of the warehouse line with PNC Bank to replace the withdrawn warehouse line. (Salmon, April 9, 2001, Tr. at 115.)

(5) Post-Merger Runoff of Portfolio Value

The unpaid principal balance of the loans in Old Fidelity's mortgage loan servicing portfolio as of December 31, 1997 was $594 million dollars. (Ex. P-46.) The Parties to the Merger prepared the Projections by estimating that the Portfolio's Unpaid Principal Balance as of the date of the Merger would be $577 million dollars, and would decrease at the rate of 12.5% per annum. (Ex. D-6.) However, the actual amount of the Portfolio's Unpaid Principal Balance as of April 30, 1998 was determined to be $549,774,000. FN18 (Ex. P-51; Heise, June 6, 2001, Tr. at 31-34.)

FN18. The Portfolio amount used in the Projections ($577,326,513) was based upon the Portfolio's Unpaid Principal Balance as of February 28, 1998. (Ex. D-6; Ex. P-51; Heise, June 6, 2001, Tr. at 16-17.)

After adding in the value of the Phoenix loan servicing portfolio, a memo prepared around August 1998 showed the combined Portfolio's Unpaid Principal Balance after the Merger to be decreasing as follows:

05/01/98 $574,771,986

06/01/98 $556,972,696

07/01/98 $548,732,932

(Ex. P-44, at M000536). Salmon testified that the Portfolio's Unpaid Principal Balance decreased at a rate of approximately 20-25% during the first year, rather than the projected 12.5%. (Salmon, April 9, 2001, Tr. at 86.) The amount of $1,074,000 of New Fidelity's losses between May 1, 1998 and December 31, 1998 was attributed to the “excess run-off” of the Portfolio; that is, the decrease in the Portfolio's Unpaid Principal Balance that was over and above the projected 12.5% run-off. (Ex. P-214, at M002699; Heise, June 25, 2001, Tr. at 159-60.) One year after the closing of the Merger, the Portfolio's Unpaid Principal Balance was roughly $363 million. (Salmon, April 9, 2001, Tr. at 86-87.)

(6) Post-Merger Summit Bank Events.

While preparing the quarterly figures for Summit Bank for the period ending June 30, 1998, Heise and Salmon learned that Summit Bank was using the 1.44% multiplier to determine whether New Fidelity was in compliance with the Loan-to-Value Covenant. (Heise, June 6, 2001, Tr. at 39; Marquez, May 7, 2001, Tr. at 37.) By letter dated August 7, 1998, New Fidelity certified to Summit Bank that as of June 30, 1998 New Fidelity was compliant with the Paragraph 6(p)(4) Loan-to-Value Covenant if a 1.505% multiplier were used for valuing the loan servicing portfolio, instead of a 1.44% multiplier. (Ex. D-42; Heise, June 6, 2001, Tr. at 40-41.)

New Fidelity's management calculated that as of July 31, 1998, it was obligated to pay Summit Bank $283,509 to maintain compliance with the Paragraph 2(e) Loan-to-Value Obligation. (Ex. P-44 at M000536; Ex. P-53). In preparation for an August 12, 1998 meeting, Salmon explained, in an August 7, 1998 memorandum to the Board of Directors, that the Summit Bank Loan, at settlement, was approximately $750,000 too high, based upon valuation of the loan servicing portfolio at a 1.44% multiplier, instead of the 1.505% multiplier. (Ex. P-53). The memorandum*280 also stated that New Fidelity had been retaining servicing rights on some of the newly originated mortgage loans to offset the higher than expected Loan Portfolio runoff, even though the business plan for New Fidelity provided that it would sell the servicing rights in the first six months of operations to increase cash flow and cover merger costs. (Ex. P-53; see also Salmon, April 9, 2001, Tr. at 84-85; Heise, June 6, 2001, Tr. at 180-83.) In the first week of August 1998, to raise cash, New Fidelity stopped retaining the loan servicing rights. (Salmon, April 9, 2001, Tr. at 85; Heise, June 28, 2001, Tr. at 158.)

In September 1998, as discussed above, the Summit Bank Loan Agreement was amended to remove the $500,000 line of credit from calculation of the Paragraph 6(p)(4) Loan-to-Value Covenant. (Ex. P-143). This gave New Fidelity the ability to draw down on the $500,000 line of credit. However, New Fidelity did not believe that having the $500,000 line of credit available in September solved its cash problem. (Heise, June 6, 2001, Tr. at 58). Heise testified that New Fidelity paid only those bills that were necessary to keep the company running, while the Board considered the alternatives for New Fidelity's future. (Heise, June 28, 2001, Tr. at 165-167.)

In the fall of 1998, after Summit Bank received New Fidelity's financial report regarding its financial performance for the period ending September 30, 1998, Summit Bank determined that New Fidelity was in default of the loan covenants. (Marquez, May 7, 2001, Tr. at 47). In December 1998, Summit Bank met with New Fidelity's management and requested that the parties make a capital contribution of approximately $1,500,000 to New Fidelity. (Marquez, May 7, 2001, Tr. at 48-49). However, the requested capital contribution was not made. ( Id.). On December 22, 1998, Summit Bank declared the Summit Term Loan in default. (JPS, ¶ 20; Ex. P-58).

(7) Attempt to sell New Fidelity to Keystone Bank.

In approximately December 1998, New Fidelity began discussions with Keystone Bank about the sale of New Fidelity. (Salmon, April 6, 2001, Tr. at 15-16.) After a series of negotiations, in February 1999, Keystone Bank made a proposal to purchase substantially all of the assets of New Fidelity for a price that “approached” $10 million dollars. (Salmon, April 6, 2001, Tr. at 16-17, Ex. D-72.) Keystone Bank's proposal was discussed at a meeting of New Fidelity's Board of Directors on or about February 9, 1999. (Salmon, April 6, 2001, Tr. at 27.) Although there was no formal resolution at that meeting, the Board agreed to move forward with the Keystone Bank proposal. ( Id. at 28.) At that meeting, the Board also reviewed an analysis of the Keystone Bank proposal, prepared by Mr. Heise, showing a potential distribution of the sale proceeds. ( Id. at 25-26; Ex. D-73.) The analysis showed that there would have been sufficient money from the sale to pay Summit Bank, trade creditors, severance payments or bonuses to employees, and most of the sub-debt owed to the Defendants and former Phoenix shareholders. (Salmon, April 6, 2001, Tr. at 25-27.) However, there would not be sufficient funds to make any distribution to shareholders. ( Id.)

The shareholders of New Fidelity met on or about February 14, 1999 to try to agree how to split the potential sale proceeds, so that First Republic Bank would receive some payment. ( Id. at 39-42.) Although the shareholders at the February 14, 1999 meeting reached a tentative agreement, management of First Republic Bank later balked at the arrangement. *281 ( Id. at 44-45.) Sometime thereafter, Keystone Bank withdrew its proposal (Salmon, April 6, 2001, Tr. at 240-41.)

(8) Bankruptcy Filing.

On July 6, 1999, New Fidelity filed a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code. (JPS, ¶ 21).

DISCUSSION

A. The Motion to Reopen Record.

After trial and the filing of the post-trial submissions in this adversary proceeding, the Defendants filed a motion to reopen the record (docket no. 194) to assert issue preclusion based on determinations made by the District Court in a separate, but related, case, known as Powell v. First Republic Bank, 274 F.Supp.2d 660 (E.D.Pa.2003), that was affirmed by the United States Court of Appeals for the Third Circuit in Powell v. First Republic Bank, 113 Fed.Appx. 470 (3d Cir.2004). The Powell litigation arose out of the Defendants' post-bankruptcy request to file a derivative action on behalf of New Fidelity and its holding company, FBMC, against First Republic Bank and several of its officers. Despite opposition by the Debtor, the Court granted the Defendants' motion.FN19

FN19. The Defendants' motion requested two forms of relief: (I) to end the Debtor's exclusivity for filing a plan of reorganization, and (ii) relief from the automatic stay to file a derivative action. By order dated April 12, 2000, my predecessor, Judge David A. Scholl, denied the request to end exclusivity, but granted permission “to file derivative action on behalf of the Debtor against First Republic Bank, Donald Salmon and the Phoenix shareholders····” ( See Ex. 5 to the Response To Motion To Reopen Record To Assert Issue Preclusion on the Basis of Determinations made by the District Court, docket no. 200 (the “Debtor's Response to Motion to Reopen Record”).)

After dismissal of their first two derivative complaints, the Defendants, on behalf of the Debtor and FBMC, filed a third derivative complaint on February 21, 2002, naming First Republic Bank, Jere Young, George Rapp and Harry Madonna as defendants (the “Republic Defendants”). (Ex. 14 to Debtor's Response to Motion to Reopen Record.) The third derivative complaint asserted four counts for relief: (I) breach of fiduciary duty, (ii) interference with prospective economic advantage, (iii) negligence, and (iv) declaratory relief to disallow the Republic Defendants' claims against the Debtor. ( Id.) The Republic Defendants filed an answer to the third derivative complaint, which included a counterclaim by First Republic Bank.FN20 (Ex. 15 to Debtor's Response to Motion to Reopen Record.) The Bank's counterclaim incorporated its state court complaint against the Defendants, which had been stayed due to the Debtor's bankruptcy filing (the “State Court Complaint”), and which set forth five claims for relief: (I) breach of contract regarding the Letter of Intent and the Definitive Agreement; (ii) breach of contract regarding the Memorandum of Understanding; (iii) fraudulent misrepresentation; (iv) negligent misrepresentation; and (v) punitive damages. ( Id.).

FN20. The answer and counterclaim also included a third-party complaint against Donald Salmon, later dismissed.

In Powell, the District Court disposed of the entire matter on cross-motions for summary judgment by denying all claims and counter-claims except one, granting summary judgment in favor of First Republic Bank on its counter-claim for the Defendants' breach of the Memorandum of Understanding for failure to pay First Republic Bank $195,000 in reconciliation of *282 the purchase price for the shares of Old Fidelity. Powell, 274 F.Supp.2d at 674-75.

In their motion to reopen the record, the Defendants argue that certain issues decided by the Powell Court in connection with the counterclaims warrant a preclusive effect in this adversary proceeding. The Debtor disputes the Defendants' issue preclusion arguments, but offers its own issue preclusion argument in response.

[3] [4] “Issue preclusion bars relitigation of identical issues adjudicated in a prior action against the same party or a party in privity.” Hitchens v. County of Montgomery, 98 Fed.Appx. 106, 111 (3d Cir.2004) citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979). Issue preclusion applies when (1) the identical issue was decided in a prior adjudication; (2) there was a final judgment on the merits; (3) the party against whom the bar is asserted was a party or in privity with a party to the prior adjudication; and (4) the party against whom the bar is asserted had a full and fair opportunity to litigate the issue in question. RTC Mortgage Trust v. Quick, No. 93-2416, 1995 WL 156164, *3 (E.D.Pa. April 10, 1995) citing Bd. of Trustees of Trucking Emp. Pension Fund. v. Centra, 983 F.2d 495, 505 (3d Cir.1992).

The Defendants' request for application of issue preclusion must be denied because the legal conclusions asserted by the Defendants did not result from litigating identical issues in the two cases. The issues in this adversary proceeding are not based on breach of contract claims but, instead, are based upon state fraudulent transfer law.

[5] The Defendants argue, however, that the Powell Court determined that New Fidelity was solvent and that its net worth was $3,084,471 on the date of the Merger. The Defendants' citations, however, are to the Powell Court's discussion relating to the post-merger draft audit prepared by Rudolph Palitz in accordance with the LOI. Judge Katz recognized that the parties entered into a Memorandum of Understanding (“MOU”) based upon findings set forth in the draft audit report. Judge Katz did not need to analyze whether New Fidelity was solvent on the date of the Merger; therefore, he did not determine whether the draft report's findings were accurate or reliable.FN21 Since the solvency issue was not actually litigated or determined on the merits in Powell, the Debtor is not precluded from litigating the solvency issue in this proceeding.

FN21. The Powell Court wrote:

Under the initial merger agreements, accountants would determine the actual net worth of Fidelity following the merger. Because the accountants' findings indicated that selling shareholders overstated Fidelity's net worth at closing and the purchase price was $415,628.00 less than the other parties paid, the Memorandum of Understanding addressed this discrepancy.

Powell, 274 F.Supp.2d at 674.

The Defendants also argue that issue preclusion applies to the Powell Court's conclusion that the decrease in the value of the Debtor's mortgage servicing portfolio was the result of general economic conditions that occurred in the mortgage industry post-Merger. Taken on its own, that finding of fact is unlikely to be disputed by either party; both the Debtor and Defendants admit that lower interest rates caused a substantial runoff in the mortgage servicing portfolio post-Merger. What is relevant to the fraudulent transfer claims is the Debtor's claim that those economic conditions were foreseeable when the parties prepared the projections prior to the Merger. The District Court did not address that issue in Powell.

*283 [6] Next, the Defendants argue that Judge Katz's comments in footnote 20, dismissing First Republic Bank's counterclaims for fraudulent misrepresentation as being based on “mere conjecture,” should have a preclusive effect in this proceeding. However, the elements of the fraudulent misrepresentation claim, as well as burden of proving such claim by “clear and convincing evidence,” are not identical to the elements and standard to be applied in the fraudulent transfer claim especially when, as here, the plaintiff is seeking to avoid a transfer under the constructive fraud provisions of 12 Pa.C.S.A. § 5104(a)(2).FN22 The Powell Court's dismissal of the fraudulent misrepresentation claim has no preclusive effect in this case. See Nat'l Railroad Passenger Corp. v. Pennsylvania Public Utility Commission, 288 F.3d 519, 525 n. 3 (3d Cir.2002) quoting Restatement (Second) of Judgments, § 28 (An exception to the general rule of issue preclusion is made when the party against whom preclusion is sought had a significantly heavier burden of persuasion with respect to the issue in the initial action than in the subsequent action.); Mars, Inc. v. Nippon Conlux Kabushiki-Kaisha, 855 F.Supp. 670, 672-73 (D.Del.1993) aff'd, 58 F.3d 616 (Fed.Cir.1995)(Issue preclusion is not appropriate when there was a higher burden of proof in the first action.)

FN22. The Powell Court dismissed the fraudulent misrepresentation claim for being brought outside the two-year statute of limitations. ( Powell, 274 F.Supp.2d at 677.) However, in footnote 20, the Court alternatively concluded that summary judgment would be granted against First Republic Bank even if it had been raised timely. ( Id. at 678, n. 20). The Powell Court wrote:

In order to establish fraudulent misrepresentation, a complainant must prove by clear and convincing evidence 1) a misrepresentation; 2) a fraudulent utterance thereof; 3) an intention by the maker that the recipient will thereby be induced to act; 4) justifiable reliance by the recipient upon the misrepresentation; and 5) damage to the recipient as the proximate result. Although the Bank and its representatives may speculate that the [Defendants] intentionally misrepresented the value of the servicing portfolio in order to induce the Bank to purchase the company, mere conjecture fails to establish the elements of fraud by clear and convincing evidence.

Powell, 274 F.Supp.2d at 678, n. 20. These elements and the burden of proof standard are not identical to the issues to be addressed infra. in the Debtor's constructive fraud claim. See Liebersohn v. Campus Crusade for Christ, Inc. (In re C.F. Foods, L.P.), 280 B.R. 103, 115 (Bankr.E.D.Pa.2002)(In a constructive fraud proceeding brought under 12 Pa.C.S.A. § 5104(a)(2), the plaintiff carries the burden of proof on all elements by a preponderance of the evidence standard.)

The last issue the Defendants assert as having a preclusive effect here is the Powell Court's determination that the MOU was enforceable and, therefore, certain release language contained in the MOU releases the Defendants from any further liability in connection with the purchase price for the Defendants' shares of Old Fidelity in the Merger. The pertinent paragraph of the MOU provides, in part, as follows:

The Selling Shareholders [i.e., the Defendants] shall pay to the Bank by check (subject to collection) the sum of $195,000 which sum represents the reconciliation of the purchase price pursuant to the terms of the Purchase Agreement and the LOI. The Selling Shareholders shall also pay to White the sum of $8,000 for his share of any such reconciliation. The Company [i.e., FBMC] and all of the shareholders of the Company hereby consent to such payments, and release the Selling Shareholders from any further liability therefor once such payment [sic] is made.

(MOU, Ex. B to Defendants' Motion to Reopen Record, ¶ 4.) Even assuming that *284 there is privity between the Debtor and First Republic Bank,FN23 and the District Court's decision regarding enforceability of the MOU has a preclusive effect upon this proceeding, the release included therein is not the broad release asserted by the Defendants.

FN23. The Defendants assert privity between First Republic Bank and the Debtor because the Debtor's Board of Directors consisted entirely of the officers of First Republic Bank at the time this adversary proceeding and the Powell action were filed. Because I conclude that issue preclusion will not apply regardless of privity, I need not decide that issue.

[7] [8] Under Pennsylvania law, which governs the MOU (Ex. B to Defendants' Motion to Reopen Record, ¶ 13), the effect of a release must be determined from the ordinary meaning of its language. Hanselman v. Consolidated Rail Corp., 158 Pa.Cmwlth. 568, 632 A.2d 607, 609 (1993). The pertinent paragraph of the MOU, quoted above, provides that the Defendants shall pay $195,000 to First Republic Bank “which represents the reconciliation of the purchase price pursuant to the terms of the Purchase Agreement and the LOI” and further provides that, upon payment, FBMC and its shareholders “release the [Defendants] from any further liability therefor once such payment is made.” As the Powell Court recognized, this paragraph in the MOU relates to the LOI, which required the parties to reconcile the purchase price post-merger after the accountants determined the actual net worth of Old Fidelity. Powell, 274 F.Supp.2d at 674. The plain language of this paragraph limits the release to any further liability for adjusting the purchase price for the Old Fidelity stock based on the company's actual net worth pursuant to the procedure established by the parties. The release is not general or broad enough to include the release of fraudulent transfer claims and recharacterization/equitable subordination claims raised in this proceeding. See Bowersox Truck Sales and Serv., Inc. v. Harco Nat'l Ins. Co., 209 F.3d 273, 280 (3d Cir.2000) quoting Restifo v. McDonald, 426 Pa. 5, 230 A.2d 199, 201 (1967)(“Releases are strictly construed ‘so as to avoid the ever present possibility that the releaser may be overreaching.’ ”)

In response to the Defendants' motion to reopen, the Debtor asserts its own issue preclusion argument, contending that the Powell decision bars any conclusions proposed by the Defendants in connection with the failed sale of New Fidelity to Keystone Bank.FN24 The Defendants argue, however, that the Keystone Bank issues are not identical in this proceeding. Instead of alleging that certain parties were responsible for the termination of the Keystone Bank transaction, the Defendants ask this Court to consider Keystone Bank's offer to purchase the Debtor for $9.8 million dollars in the context of the solvency determination. I agree with the Defendants. Because the issues are not identical, issue preclusion will not apply here.

FN24. More specifically, the Powell Court rejected the Defendants' claims against the Republic Defendants of negligence and interference with prospective economic advantage for allegedly causing the proposed sale of FBMC to Keystone to fail. The Judge determined that “there is no evidence before the court that the [Republic Defendants'] actions extinguished the Keystone transaction” ( Powell, 274 F.Supp.2d at 672) and that the Defendants offered “no evidence to establish that ‘but for’ the [Republic Defendants'] actions, Keystone would have purchased FBMC” ( Id. at 672-73).

B. Counts I and IV of the Debtor's Complaint: Avoidance and Recovery of Fraudulent Transfers.

[9] The Debtor argues that the Distribution and the Promissory Notes given to *285 the Defendants on or about April 30, 1998 constitute fraudulent transfers under § 5104 and § 5105 of PUFTA, which state, in pertinent part, as follows:

§ 5104. Transfers fraudulent as to present and future creditors.

(a) General rule.-A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) with actual intent to hinder, delay or defraud any creditor of the debtor; or

(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(ii) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.

§ 5105. Transfers fraudulent as to present creditors.

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

12 Pa.C.S.A. §§ 5104, 5105 (2006).

The Distribution clearly falls within the definition of a “transfer” in the statute since it was the “payment of money” from Old Fidelity to the Defendants. 12 Pa.C.S.A. § 5101.FN25 The Promissory Notes were originally given to the Defendants by FBMC as part of the Merger, but the Debtor immediately became a co-obligor on the Notes.FN26 Therefore, the Promissory Notes will be treated as an obligation incurred by the Debtor for analysis under PUFTA. See MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Services Co., 910 F.Supp. 913, 934 (S.D.N.Y.1995)(The court treated various steps of a leveraged buy-out as a single transaction when all parties to each subsidiary transfer were aware of the overall leveraged buyout, writing: “[A]n allegedly fraudulent conveyance must be evaluated in context; where a transfer is only a step in a general plan, the plan must be viewed as a whole with all its composite implications.” quoting Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir.1993)(internal quotations and citations omitted)).

FN25. 12 Pa.C.S.A. § 5101 defines “transfer” as “[e]very mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset. The term includes payment of money, release, lease and creation of a lien or other encumbrance.”

FN26. Exhibit P-423 shows the Assumption Agreements dated May 1, 1998 between FBMC and the Debtor under which the Debtor agreed to assume the obligations under the Promissory Notes in consideration for FBMC's agreement to pay the Debtor $10,000 for each Promissory Note assumed.

[10] Under the constructive fraud provisions of PUFTA, set forth above, the Debtor must prove, as a preliminary matter,*286 that it did not receive “reasonably equivalent value” in return for making the Distribution and incurring the obligation evidenced by the Promissory Notes.FN27 Because “the purpose of fraudulent conveyance law is to protect creditors, the determination of value is looked at from the vantage point of the debtor's creditors. Thus, the inquiry focuses on what did the debtor give up and what did it receive that could benefit creditors.” Daley v. Chang (In re Joy Recovery Tech. Corp.), 286 B.R. 54, 75 (Bankr.N.D.Ill.2002). See also Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 646 (3d Cir.1991) (“The purpose of the [fraudulent transfer law in Bankruptcy Code § 548] is estate preservation; thus, the question whether the debtor received reasonable value must be determined from the standpoint of the creditors.”); In Vadnais Lumber Supply, Inc. v. Byrne (In re Vadnais Lumber Supply, Inc.), 100 B.R. 127, 136 (Bankr.D.Mass.1989)(In evaluating “reasonably equivalent value” as used in Bankruptcy Code § 548(a)(2)(A), the court made two inquiries: first, whether the debtor, not some third party, received the required value; and second, “unlike the doctrine of consideration in contract law, that value must pass a measurement test.”)

FN27. For the reasons stated on the record at trial on April 9, 2001 ( see April 9, 2001, Tr. at 59-68), I concluded that the Debtor has the burden of proving all elements of constructive fraud by a preponderance of the evidence standard under § 5104 and § 5105 of PUFTA. See also Shubert v. Dawley (In re Dawley), Adv.No. 02-0332, 2005 WL 2077074, *13-*14 (Bankr.E.D.Pa. Aug.10, 2005); Liebersohn v. Campus Crusade for Christ (In re C.F. Foods, L.P.), 280 B.R. 103, 113-15 (Bankr.E.D.Pa.2002).

The Merger was a form of leveraged buyout (“LBO”). In Mellon Bank, the Third Circuit Court of Appeals described LBOs as follows:

Although the formal structure of LBOs may differ, the substance of LBOs follow a general pattern. A leveraged buyout refers to the acquisition of a company (“target corporation”) in which a substantial portion of the purchase price paid for the stock of a target corporation is borrowed and where the loan is secured by the target corporation's assets. Commonly, the acquirer invests little or no equity. Thus, a fundamental feature of leveraged buyouts is that equity is exchanged for debt.

Mellon Bank, 945 F.2d at 645. Here, just prior to the Merger, the Debtor encumbered virtually all of its assets in return for the Summit Term Loan, and used some of the loan proceeds to provide the Distribution to the Defendants. “Because the assets of the target are pledged as security for a loan that benefits the target's former owners rather than the target itself, it is unlikely that any LBO can satisfy fair consideration requirements.” MFS/Sun Life Trust, 910 F.Supp. at 937. In this case, the Debtor obtained a term loan of $7 million dollars and paid off $4,905,241.16 in previous loans and a $70,000 loan commitment fee to Summit Bank. After payment of the Distribution of $1,705,000, the Debtor was left with a $7 million dollar term loan and loan proceeds of $319,758.84.

The Debtor did not receive any direct value in return for the Distribution to the Defendants. Other courts have held that a dividend or reduction in capital through the purchase of stock adds no value for creditors. See Financial Institutional Funding, Inc. v. Official Committee of Unsecured Creditors of GenFarm Ltd. (In re Buncher Co.), 229 F.3d 245, 252-53 (3d Cir.2000)(affirming the bankruptcy court's conclusion that, from the creditors' perspective, a partnership receives less than reasonably equivalent value when it redeems the equity interest of its principals); *287 Joy Technology, 286 B.R. at 75 (“[S]tock redemptions are treated as dividends to shareholders which return no value to the company.” citing Vadnais Lumber, 100 B.R. at 136.).

In return for its agreement to assume the obligations of the Promissory Notes, which totaled $2,100,000, the Debtor received a promise of payment in the sum of $110,000 from FBMC. ( See Ex. P-423). Such as promise does not amount to reasonably equivalent value, especially from the creditors' perspective.

[11] Furthermore, I must consider whether the Debtor derived “indirect economic benefits” in exchange for the Distribution and/or the obligation under the Promissory Notes. See Mellon Bank, 945 F.2d at 646-47 (deciding that, when considering reasonably equivalent value, it is appropriate to compare the value of indirect economic benefits received to the obligations incurred by the debtor). As a result of the Merger, the Debtor expected to receive economic benefits resulting from the synergies of combining Phoenix and Old Fidelity (including Phoenix's originations platform, staff, and management), as well as synergies arising from the relationship with First Republic Bank (including the ability to market to its customer base and contacts). In Mellon Bank, N.A. v. Official Committee of Unsecured Creditors of R.M.L., Inc. (In re R.M.L., Inc.), the Third Circuit Court of Appeals employed a two-step process to determine whether a debtor received “reasonably equivalent value” in the form of indirect economic benefits; first, whether any value is received, and second, whether that value was “reasonable equivalent” to the transfer made. R.M.L., Inc., 92 F.3d at 152. Relying upon the Mellon Bank case, the R.M.L. Court recognized that investments that fail can confer value, holding:

We held [in Mellon Bank ] that the mere expectation that the fusion of two companies would produce a strong synergy (an expectation that turned out to be inaccurate in hindsight) would suffice to confer “value” so long as the expectation was “ legitimate and reasonable.” ··· Thus, so long as there is some chance that a contemplated investment will generate a positive return at the time of the disputed transfer, we will find that value has been conferred.

R.M.L., 92 F.3d at 152 (emphasis in original). In this case, the Debtor received value in connection with the Merger in the form of the anticipated synergies.

[12] [13] To determine whether that value is “reasonably equivalent” to the transfer made, a court can rely on the “totality of the circumstances,” by looking at factors such as fair market value compared to the actual price paid, the arm's-length nature of the transaction, and the good faith of the transferee. R.M.L., 92 F.3d at 145, 153. A court may also measure the “amount” of value conferred by considering the amount of risk associated with the deal. See R.M.L., 92 F.3d at 153 (The R.M.L. Court decided that the chance of receiving an economic benefit can confer “value” upon a debtor, but “the size of the chance is directly correlated with the amount of ‘value’ conferred.”)

Although the Merger involved an arm's length transaction among sophisticated business entities, the decision to make the Distribution was not made jointly by the parties, but by the Defendants prior to the Merger. The Distribution added a layer of risk to the Merger. Because of this added risk, the speculative indirect economic benefits were not reasonably equivalent to the amount of over $3 million dollars that was transferred to the Defendants. Therefore, the Debtor did not receive reasonably equivalent value in *288 return for the Distribution and the obligations under the Promissory Notes.FN28

FN28. A recent decision by the Third Circuit Court of Appeals discussed the issue of determining reasonably equivalent value in the Bankruptcy Code fraudulent transfer provisions (11 U.S.C. § 548(a)(1)). Pension Transfer Corp. v. Beneficiaries Under the Third Amendment to Fruehauf Trailer Corp. Retirement Plan No. 003 (In re Fruehauf Trailer Corp.), No. 05-1374, 2006 WL 933404 (3d Cir. April 12, 2006). In its discussion, the Fruehauf Court decided that “where the value of an intangible benefit could equal or exceed the value surrendered by the debtor, precise calculations are essential to allow the court to determine equivalency properly.” Fruehauf, 2006 WL 933404 at *10 (emphasis in original). Yet, the Fruehauf Court further decided that precise calculations were not always necessary, writing:

But this general rule yields to common sense: in those cases where a court has sufficient evidence to conclude, based on a totality of circumstances, that the benefits to the debtor are minimal and certainly not equivalent to the value of a substantial outlay of assets, the plaintiff need not prove the precise value of the benefit because such a calculation is unnecessary to the court's analysis.

Id. The evidence here is not sufficient to conclude that the indirect benefits were “minimal” or “certainly not” the equivalent of the combined Distribution and Promissory Notes ($3,805,000). The Debtor does, however, offer some calculations that cast sufficient doubt upon the value of any synergies by arguing that the Merger left the Debtor with an additional $2.8 million dollars of secured indebtedness and a line of credit that was not accessible immediately. The Debtor also argues that the net worth of Old Fidelity was less than bargained for. All of these items added to the Merger's risk and decreased the chances that the new entity would recognize value from the synergies. While not precise, I conclude that the Debtor has provided adequate evidence supporting its burden of proving that the indirect benefits did not provide reasonably equivalent value for the Distribution and Promissory Notes.

After determining that the Debtor did not receive reasonably equivalent value, the next step in the fraudulent transfer analysis requires the Debtor to prove either of the following: (I) that the Debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer; (ii) that the remaining assets of the Debtor were unreasonably small in relation to the business in which the Debtor was engaged in or about to become engaged; or (iii) that the Debtor reasonably should have believed that it would incur debts beyond its ability to pay as they came due. 12 Pa.C.S.A. § 5105, § 5104.

(1) Insolvency Analysis.

[14] The definition of insolvency set forth in PUFTA provides that “A debtor is insolvent if, at fair valuation, the sum of the debtor's debts is greater than all of the debtor's assets.” 12 Pa.C.S.A. § 5102(a). This is also known as the “balance sheet test” for insolvency, which is the same under the Bankruptcy Code. Joy Recovery, 286 B.R. at 77; 11 U.S.C. § 101(32).

Both parties engaged experts, who opined about the Debtor's solvency as of the date of the merger.FN29 Both experts used the consolidated balance sheet for the Debtor, as of April 30, 1998, included in the draft audit report prepared by Rudolph, Palitz & Co. (Ex. P-56)(the “Draft Audit Balance Sheet”), as the starting point for preparing their analyses. That balance sheet reflected that, on April 30, 1998, the Debtor had total assets of $37,363,870, and total liabilities of $34,279,499 for a net worth of $3,084,371. In an effort to determine the

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