Page 26 - Bankruptcy and Reorganization Services

of the creditor’s interest in the collateral, with the secured claim being allowed at the value of such cred-
itor’s interest, and the unsecured portion being allowed at the amount that exceeds the value of the credi-
tor’s interest in the collateral. Assessing the value of the creditor’s interest in the collateral is an im-
portant element in this determination.

Section 1111(b) of the Bankruptcy Code allows a secured claim to be treated as a claim with recourse
against the debtor in Chapter 11 proceedings whether or not the claim is nonrecourse by agreement or
applicable law. This preferred status terminates if the property securing the loan is sold under Section
363, is to be sold under the terms of the plan, or if the class of which the secured claim is a part elects
application of Section 1111(b)(2).

Under Section 1111(b)(2) a class of creditors (which is typically a single creditor when such elections
apply) that is undersecured may elect to treat the full amount of its claim as secured rather than bifurcate
its claim into a secured and unsecured portion as described previously. Such an election would be made
in a situation where the creditor believes the collateral is undervalued and where little or no recovery is
anticipated on the unsecured portion of the claim. The class of creditors that makes this election has the
right to receive full payment for its claims over time. If the members of the class do not approve the
plan, the court may confirm the plan as long as the plan provides that each member of the class receives
deferred cash payments totaling at least the allowed amount of the claim. However, the present value of
these payments as of the effective date of the plan must be at least equal to the value of the creditors’ in-
terest in the collateral. Thus, although the creditor who makes the election under Section 1111(b)(2) has
the right to receive full payment over time, the value of that payment is required to equal only the value
of the creditors’ interest in the collateral. Assessing the present value of the deferred cash payments is an
important element in this determination.

Assessing and Quantifying Unliquidated, Contingent, and Disputed Claims and Assets

Finally, if a claim asset is unliquidated, contingent, or disputed, valuation issues, such as determining the
appropriate discount rate to employ in the applicable present value calculations and use of probabilistic
methods, may arise in assessing and quantifying the amount of unliquidated, contingent or disputed
claims.

Avoidance or Recovery Actions

Assessing Solvency, Capital Adequacy, Ability to Pay Debts as They Mature, and Reasonably Equivalent
Value

Sections 547, 548, and 544 enable the trustee or debtor-in-possession to pursue recovery actions if value
was transferred from the debtor within certain time frames in a preferential or fraudulent manner (both
actual fraud and constructive fraud). Section 547 relates to preferential transfers under the Bankruptcy
Code, Section 548 relates to fraudulent conveyances under the Bankruptcy Code, and Section 544 pro-
vides a means whereby recovery actions based on state fraudulent transfer laws (whether UFTA, UFCA,
or other state statutes) can be taken in bankruptcy court.

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