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of the appropriate premise of value in the context of a solvency study is not a legal determination. Ra-
ther, it is an assessment that resides with the valuation analyst and must be supported by, among other
things, the company’s current and prospective financial condition and performance, as well as industry
and economic factors as of the transfer date.
As stated previously, implicit in every valuation matter is an assumed marketing period for the subject
company or assets. The assumed marketing period has important implications for the premise of value.
A less-than-normal marketing period implies a forced liquidation of assets. A normal marketing period
implies an orderly disposition of assets. The Trans World Airlines case offers important insight on mar-
keting periods in the context of bankruptcy-related valuations. In that matter, the Third Circuit took into
consideration the overwhelming body of judicial opinions that made clear that a fair valuation of assets
contemplated a conversion of assets into cash during a reasonable period of time. fn 25 Citing Syracuse
Engineering, this court noted that the "[p]roper point of reference for determining a ‘reasonable period
of time’ should begin with the financial interests of the creditors." fn 26 It went on to note that "The rea-
sonable period of time should be an estimate of the time that a typical creditor would find optimal: not
so short a period that the value of the goods is substantially impaired via a forced sale, but not so long a
time that a typical creditor would receive less satisfaction of its claim ... by waiting for the possibility of
a higher price." fn 27 In light of the nature of TWA’s assets, it agreed that 12 to 18 months was a "reason-
able time" to use in the valuation of its assets. fn 28
Balance Sheet Test
General
As stated previously, when an avoidance action is filed pursuant to Section 547 of the Bankruptcy Code,
the sole financial condition under consideration is whether the sum of the debtor "entity’s debts is great-
er than all of such entity’s property, at a fair valuation." The aforementioned test is one of three tests of
financial condition under consideration when an avoidance action is filed pursuant to Section 548 of the
Bankruptcy Code. The Bankruptcy Code definition of insolvency in Section 101(32)(A) is normally re-
ferred to as the "balance sheet test," because a debtor’s debts (liabilities) are compared with its property
availability of customer lists, established supply lines, and other attributes making it possible for a purchaser to step in and immediate-
ly commence operations."
fn 25 See In re Trans World Airlines, Inc., 134 F.3d. 188 (3d Cir. 1998).
fn 26 Id.
fn 27 Id.
fn 28 Valuation analysts should make sure that the contemplated marketing period would be available to the debtor company. In other
words, if it is determined that a reasonable marketing period for the orderly sale of certain assets is nine months, but the debtor com-
pany would be unable to continue in existence for nine months (for instance, due to an impending foreclosure or insufficient borrow-
ing capacity), this could imply a forced liquidation premise. As previously noted, it is the valuation analyst’s job to ensure that the
premise of value selected is consistent with the relevant facts.
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