Page 25 - Bankruptcy and Reorganization Services

Chapter 6

Need for Valuations in the Context of Financial Distress and Bankruptcy

Valuation issues are at the heart of virtually every bankruptcy case. As a result, the need for valuation
services arises at almost every stage as the case proceeds. The key stages of a bankruptcy proceeding in
which valuation services may be required, as well as a brief discussion of the circumstances that may
give rise to the valuation, are discussed later in this chapter. For a more detailed discussion of the key
stages of a bankruptcy proceeding, refer to the AICPA practice aid Providing Bankruptcy and Reorgani-
zation Services: Volume 1 — Litigation and Dispute Resolution in Bankruptcy. Although the following
discussion focuses on the need for valuation services in the context of Chapter 11 proceedings, many of
these same valuation issues arise in the context of Chapter 7 proceedings and out-of-court restructurings.

Adequate Protection

Assessing the Value of Debtor’s Interest in Collateral, As Well As Current and Likely Future Changes in
Value

In a bankruptcy proceeding, secured creditors may seek relief from the automatic stay in an effort to ob-
tain their collateral in full or partial satisfaction of their claim. However, the debtor may seek the contin-
ued use of a creditor’s collateral on the basis that it is necessary to effectuate a reorganization of the
debtor’s operations. In such circumstances, the court may deny the relief from stay if it can be demon-
strated, among other things, that the creditor will receive reasonable assurances that it will be adequately
protected and the creditor’s position and ability to recover on its claim is not diminished. In certain cir-
cumstances, Sections 362, 363, and 364 require that the court determine whether or not the creditor is
adequately protected. Although the Bankruptcy Code does not specifically set forth what constitutes ad-
equate protection, it does offer three categories wherein adequate protection may be provided. They are
(1) cash payments, (2) additional or replacement liens, or (3) the indubitable equivalent of the creditor’s
interest in the property. Assessing the value of the creditor’s interest in the collateral, as well as as-
sessing recent changes in value and likely future changes in value, is an essential element in determining
whether or not the creditor is adequately protected.

Uncertainty exists concerning the appropriate date for which the creditor is entitled to receive adequate
protection. Is the assessment made as of the petition date, the date the creditor first sought relief for ade-
quate protection, or some other date? Most decisions seem to indicate that the courts have a tendency to
grant creditors adequate protection from the date the creditor first sought relief for adequate protection.
Accordingly, it is generally recommended that creditors make efforts to recover their collateral (by seek-
ing relief from the automatic stay) or obtain adequate protection in the early stages of the bankruptcy
proceeding if they believe the value of their collateral has diminished or is likely to diminish in value.

Claims Determination

Apportioning Between Secured and Unsecured Claims

If a creditor is fully secured at the time of the bankruptcy proceeding, it is entitled to receive a secured
claim for the full amount of its claim. If, on the other hand, the creditor is undersecured (meaning the
value of the collateral is less than the amount of the creditor’s claim), it will be necessary to apportion
the claim between a secured portion and an unsecured portion. This determination is based on the value

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