Page 24 - Bankruptcy and Reorganization Services

tion date and (2) that its use is consistent with applicable statutes and case law. Going concern value is
generally the appropriate premise of value when determining the reorganization value of an entity that
will emerge from Chapter 11. However, in the context of a liquidating plan of reorganization, a liquida-
tion premise of value should be employed. Furthermore, the debtor’s intended use or disposition of an
individual asset, or a group of assets, as well as the asset(s) highest and best use in the context of a plan
of reorganization, will direct the appropriate premise of value to be selected. fn 3

A practitioner’s determination of the appropriate premise of value may be the single most important as-
sessment made during the engagement. The Delaware Bankruptcy Court emphasized this point when it
noted that "[i]n determining a ‘fair valuation’ of the entity’s assets an initial decision to be made is
whether to value the assets on a going concern basis or a liquidation basis." fn 4 It is not appropriate to
assume a liquidation premise simply because a debtor subsequently failed and was ultimately sold or
liquidated. In the context of a solvency proceeding, bankruptcy courts often require the use of a going
concern premise unless evidence indicates that a liquidation in bankruptcy is likely to occur. For exam-
ple, numerous courts have held that "[i]f liquidation in bankruptcy was not ‘clearly imminent’ on the
transfer date, then the entity should be valued as a going concern." fn 5 The Seventh Circuit has held that
if the business is not on its "deathbed" at the time of the contested transfer, going concern values should
be used. In In re Mama D’Angelo, the court found the debtor not to be a viable going concern and stated:
"To be sure, a business need not be thriving to receive a going concern value....However, it must have
had a realistic capacity to manufacture and sell its product; a going concern valuation is appropriate only
if it is believed that the enterprise will continue as a going concern." fn 6

Before choosing a premise of value, the practitioner needs to understand the debtor’s financial condition
and anticipated operating circumstances, as well as market conditions, at the applicable valuation date.
Assessing the debtor’s financial and operating conditions not only provides the valuation analyst a foun-
dation for choosing the premise, but can greatly assist the court in understanding the reasoning behind
the selected premise of value. fn 7 Together with the standard of value, the premise of value forms the
foundation that supports the weight of the valuation process and the practitioner’s ultimate valuation
conclusion.

fn 3 Associates Commercial Corp. v. Rash. 117 S. Ct. 1879 (1997).

fn 4 In re American Classic Voyages Co., 367 B.R. 500, 508 (Bankr. D. Del 2007). See In re Trans World Airlines, Inc., 134 F.3d
188, 193 (3d Cir. 1998) (finding that fair valuation of TWA’s assets required choice between going concern and liquidation premises
of value).

fn 5 American Classic Voyages, 2007 WL 1237828 at * 6 (citing Travelers Int’l AG v. Trans World Airlines, Inc., 134 F.3d 188, 193
(3d Cir. 1998); Moody v. Security Pacific Bus. Credit, Inc., 971 F.2d 1056, 1067 (3d Cir. 1992)); see In re Doctors Hospital of Hyde
Park, Inc. v. Desnick, 360 B.R. 787 (Bankr. N.D. Ill. 2007) (trustee must prove that the debtor was "more likely insolvent than not at
the time of the transfers."). Andrew Johnson Properties, Inc., CCH Dec. ¶ 65, 254 (D.C. Tenn. 1974).
fn 6 In re Mama D’Angelo, Inc., 55F.3d 552 (10th Cir. 1995).

fn 7 James F. Hart, "Valuation Issues in Bankruptcy" (paper, AICPA National Business Valuation Conference, Phoenix, Arizona, No-
vember 16, 2003).

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