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gloss and academic commentary. Fair valuation has been defined by one commentator as the fair
market value that "could be obtained by a capable and diligent businessman under no compul-
sion to sell." fn 33 One court has held that fair valuation refers to "the fair market value of the
[d]ebtor’s assets and liabilities within a reasonable time of the transfer." fn 34 Another court said
the fair valuation standard contemplates a determination of what the debtor’s assets ought to
bring, that is, a going concern or market value. fn 35 Yet another put it this way: "The fair value of
property is...determined...by estimating what debtor’s assets would realize if sold in a prudent
manner in current market condition." fn 36

When assessing the fair market value of an operating company, it is important to consider all three valu-
ation approaches and then synthesize the valuation approaches based on the facts and circumstances of
the case. The three valuation approaches are the income approach, the market approach, and the asset-
based approach. Some practitioners confuse the balance sheet test with the asset-based approach and, as
a result, fail to apply all three valuation approaches when applying the balance sheet test. A number of
authoritative sources support employing all three valuation approaches when applying the balance sheet
test. fn 37 For example, on page 566 of Bankruptcy and Insolvency Accounting, it states

In In re Nextwave Personal Communications, Inc., fn 38 the bankruptcy court noted that for pur-
poses of determining insolvency under section 548, the three general approaches used to deter-
mine value apply: (1) the replacement cost approach, (2) the market comparison approach, and
(3) income stream or discounted cash flow analysis. The bankruptcy court concluded that the
market-comparable analysis, subject to appropriate adjustments, was the appropriate approach to
use in this case. The court noted that discounted cash flow analysis "is widely if not universally
used in the business and financial world as a tool to assist management in making decisions
whether to invest in or dispose of business or major assets. It is generally not used as a tool for
determining fair market value, particularly when that determination can be made using either re-
placement cost or market comparables." fn 39 In reaching this conclusion, the bankruptcy court
cited Keener v. Exxon Co., fn 40 where the court noted that "fair market value is, by necessity,
best set by the market itself. An actual price, agreed to by a willing buyer and a willing seller, is

fn 33 Kevin J. Liss, Note, Fraudulent Conveyance Law and Leveraged Buyouts, 87 Colum. L. Rev. 1491, 1505 (1987).

fn 34 Ohio Corrugating Co. v. DPAC, Inc. (In re Ohio Corrugating Co.), 91 B.R. 430, 436 (Bankr. N.D. Ohio 1988).
fn 35 Consove v. Cohen (In re Roco Corp.), 701 F.2d at 978, 983 (1st Cir. 1983).

fn 36 Orix Credit Alliance, Inc., v. Harvey (In re Lamar Haddox Contractor, Inc.), 40 F.3d 118, 121 (5th Cir. 1994).

fn 37 Implicit in the application of all three valuation approaches in the balance sheet test is the general acceptance that the estimated
asset value reflects the proceeds that could be realized from a prudent sale of the entity’s assets, which closely aligns with fair market
value.

fn 38 15 235 B.R. 277, 294 (Bankr. S.D.N.Y. 1999).

fn 39 Id. at 294.

fn 40 32 F.3d 127, 132 (4th Cir. 1994), cert. denied, 513 U.S. 1154 (1995). See Amerada Hess Corp. v. Commissioner of Internal Rev-
enue, 517 F.2d 75, 83 (3d Cir. 1975); Ellis v. Mobil Oil Corp., 969 F.2d 784, 786 (9th Cir. 1992); BFP v. Resolution Trust Corp., 511
U.S. 531, 548 (1994); In re Grigonis, 208 B.R. 950, 955 (Bankr. D.Mont. 1997).

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