Page 28 - Bankruptcy and Reorganization Services

Assessing a Market Rate of Interest

Valuation issues may also arise in the context of a cram down. A cram down is a situation that arises in
the context of plan confirmation and allows the court, under certain conditions, to confirm a plan even
though an impaired class has not accepted the plan. This provision is provided for in Section 1129(b) of
the Bankrutpcy Code. When a plan has been crammed down to certain creditor classes, the claims held
by those classes may need to be valued in order to determine whether the creditors will receive distribu-
tions with a value which is not less than the allowed claim as of the effective date of the plan.

Fresh-Start Reporting

A determination of the debtor’s reorganization value is necessary for financial reporting purposes as
well. In particular, companies emerging from bankruptcy must determine whether they meet the criteria
stated in FASB Accounting Standards Codification (ASC) 852, Reorganizations, for the adoption of
fresh-start reporting. FASB ASC 852 requires companies emerging from Chapter 11 reorganization to
adopt fresh-start reporting if the following two conditions are met: fn 3

1. The reorganization value of the assets of the emerging entity immediately before the date of con-
firmation is less than the total of all postpetition liabilities and allowed claims, and

2. holders of existing voting shares immediately before the confirmation receive less than 50% of
the voting shares of the emerging entity. fn 4

Simply stated, fresh-start reporting requires that the reorganization value of the entity be assigned to the
entity’s assets and liabilities in accordance with the procedures specified in FASB ASC 805-20.

Best Interests Test

Section 1129(a)(7) of the Bankruptcy Code requires that every creditor or stockholder that rejects the
plan "receive or retain under the plan on account of such claim or interest property of a value, as of the
effective date of the plan, that is not less than the amount that such holder would so receive or retain if
the debtor were liquidated under chapter 7 of title on such date." fn 5 This test is referred to as the best in-
terests test (also known as the best interest of creditors test) and requires consideration of distributions
to creditors based on the debtor’s reorganization value vis-à-vis the debtor’s liquidation value.

Section 363 Sale

A 363 sale is the sale of a debtor's assets approved by a bankruptcy court under Section 363 of the
Bankruptcy Code. In a 363 sale, a debtor will identify a potential buyer, called a "stalking horse," who
will agree to buy certain assets of the debtor for a minimum price (the "stalking horse bid"). An auction
is then held where other potential buyers can bid on the assets. Once all bids are received, the court then
determines whether the sale to the highest bidder should be approved.

fn 3 FASB Accounting Standards Codification (ASC) 852-10-45-19.

fn 4 FASB ASC 852, Reorganizations, notes that the loss of control contemplated in the plan must be substantive and not temporary.

fn 5 11 USC 1129(a)(7)(A).

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