Page 103 - Bankruptcy and Reorganization Services

 A company’s historical capital cushion (Norstan Apparel Shops)

 A company’s need for working capital in the specific industry (Norstan Apparel Shops)

 Whether the company’s projections were reasonable and prudent when made (Norstan Apparel
Shops; Moody)

 Inadequate net working capital (Doctors Hospital)

 Unacceptable levels of debt as a percentage of total invested capital (Doctors Hospital)

 Worsening accounts payable days outstanding (Doctors Hospital)

 Extensive physical deterioration and functional obsolescence of facilities (Doctors Hospital)

 Interest coverage ratio (Doctors Hospital)

 Number of days’ worth of cash on hand (Doctors Hospital)

 The analysis requires a court to examine the debtor’s capital throughout a reasonable period of
time surrounding the precise date of a challenged transfer (In re Iridium Operating, LLC)

Bankruptcy Risk Models

As discussed previously, the Altman Z-Score and Ohlson O-Score are accounting-based bankruptcy-
prediction models. Probit models represent an enhancement to accounting-based models in that they cal-
culate a probability of bankruptcy. The models that are the best predictors of bankruptcy employ both
accounting data and market information. Two examples of these models were developed by Robert Mer-
ton, and Campbell, Hilscher, Szilagyi. Bankruptcy risk models represent an important consideration
when assessing unreasonably small capital in the context of avoidance actions.

Assessment to Be Made Based on What Was Known or Knowable at the Time

Courts examine the reasonableness of cash flow projections based on the information available at the
applicable time; they will likely not critique or evaluate such projections on the basis of 20/20 hindsight.
fn 54 However, it may be appropriate to consider information that became evident subsequent to the valu-
ation date when assessing a debtor’s insolvency in certain instances. For example, some courts and prac-
titioners recognize and treat contingent liabilities and assets differently than disputed liabilities and as-
sets. As stated previously, a contingent liability or asset arises in situations where the potential creditor
and debtor both recognize the possibility that a liability or asset may arise, but the triggering event has
not yet occurred. Financial guaranties, warranty obligations, and certain earn-out payments (for exam-
ple, those that are conditioned upon performance as opposed to the passage of time) are examples of

fn 54 See Iridium IP LLC v. Motorola, Inc., 373 B.R. 283, 300 ("Iridium’s cash flow projections were the result of a prolonged, delib-
erative process in which assumptions were vetted internally and by outside consultants....As it turns out, the projections were not even
close to being an accurate forecast of future performance, but the fact that Iridium ended up in bankruptcy does not mean that these
projections were unreasonable.").

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