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(assets), at a fair valuation. fn 29 If the fair value of assets exceeds the amount of liabilities, the debtor is
solvent. If, however, the amount of liabilities exceeds the fair value of assets, the debtor is insolvent.

Valuation Approach

The balance sheet test should be indicative of what a company might realize from the sale of its assets in
a market transaction. It is generally accepted that an assessment of the fair value of a debtor’s assets in
the context of the balance sheet test should be indicative of the cash proceeds a debtor could receive in a
transaction with a willing buyer. Such transactional circumstances are most closely aligned with fair
market value, and many of the reported court cases and valuation texts reference fair market value as the
appropriate standard of value to apply in the context of the balance sheet test.

For example, on pages 565 and 566 of Bankruptcy and Insolvency Accounting: Practice and Procedure
by Grant W. Newton, it states that

The analysis is normally referred to as the balance sheet test. Because a company’s property (as-
sets), at fair valuation, is compared to its debts (liabilities) as of a particular date, if its liabilities
exceed its assets, it is insolvent. . . .

Case law generally interprets fair valuation for purposes of section 547 of the Bankruptcy Code
to mean fair market value. In Andrew Johnson Properties, Inc., fn 30 the court stated fair value
was the fair market value of the property between willing buyers and sellers or the value that can
be made available to creditors within a reasonable period of time. Although this case was based
on the Bankruptcy Act, courts looking at the issue of the determination of insolvency for purpos-
es of section 547 under the Bankruptcy Code have applied the same standard. For example, the
Fifth Circuit in Lamar Haddox Contractor fn 31 noted that "[t]he fair value of property is not de-
termined by asking how fast or by how much it has been depreciating on the corporate books, but
by ‘estimating what the debtor’s assets would realize if sold in a prudent manner in current mar-
ket conditions.’ (Pennbroke Dev. Corp. v. Commonwealth Sav. & Loan Ass’n, 124 B.R. 398,
402 (Bankr. S.D. Fl. 1991)). fn 32

Furthermore, on page 132 of Business Valuation and Bankruptcy by Ratner, Stein, & Weitnauer, it states

Valuation of the property or assets at a fair valuation requires the expert to value the debtor’s
business at the time of the transfer. The term fair valuation is frequently the subject of judicial

fn 29 Differences of opinion exist among practitioners and the courts about whether the term fair valuation, in the definition of insol-
vency, applies solely to the term property (or assets), or whether it applies to both the term property (or assets) and the term debts (or
liabilities). Regardless of the terminology used, most courts and practitioners agree that, in most instances, the standard of value appli-
cable to assets is fair market value. On the other hand, most courts and practitioners agree that fair market value is not the appropriate
standard of value when assessing the amount of liabilities to be considered in a balance sheet test. Liabilities will be discussed in
greater detail later in this chapter.

fn 30 Andrew Johnson Properties, Inc., CCH Dec. ¶ 65, 254 (D.C. Tenn. 1974).
fn 31 40 F.3d 118 (5th Cir. 1994). See also In re Roblin Industries, Inc., 78 F.3d. 30 (2d Cir. 1996) and In re DAK Industries, Inc., 170
F.3d 1197 (9th Cir. 1999).

fn 32 Newton, Bankruptcy and Insolvency Accounting, 565–566.

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