The Trustee sought to recover a transfer made by the Debtor to James Smith, the principal of the Debtor, pursuant to 11 U.S.C. §§ 547 and 550(a). At issue was whether the Debtor was insolvent at the time of the transfer. The Trustee argued that based on the Debtor’s tax returns and the presumption of insolvency during the 90 days preceding the filing of bankruptcy, that the Debtor was insolvent, whereas Smith asserted that based on the scheduled value of assets and amount of liabilities, the Debtor was solvent.
Pursuant to 11 U.S.C. § 101(32)(A), insolvency is defined as a “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation….” Following In re Heilig-Meyers Co., 328 B.R. 471, 477 (E.D. Va. 2005), a “balance sheet” test is used, with the debtor being held insolvent when the sum of all the debtor’s liabilities is greater than the sum of all its assets, at a fair valuation, at the time of the transfer. “Fair valuation” depends on whether the fair market value after “proper marketing” or liquidation value is used. This turns on whether at the time of transfer the debtor was a going concern or on its deathbed, meaning that it “must be wholly inoperative, defunct, or dead on its feet.” In re Am. Classic Voyages Co., 367 B.R. 500, 508 (Bankr. D. Del. 2007), aff’d, 384 B.R. 62 (D. Del. 2008) (internal quotation marks and citations omitted).
In this case, Smith failed to fully disclose information regarding the Debtor’s solvency during discovery and the Trustee sought to exclude from later being submitted. Looking to S. States Rack And Fixture, Inc. v. Sherwin-Williams Co., 318 F.3d 592, 597 (4th Cir. 2003), the bankruptcy court excluded that evidence based on the following factors:
(1) the surprise to the party against whom the evidence would be offered;
(2) the ability of that party to cure the surprise;
(3) the extent to which allowing the evidence would disrupt the trial;
(4) the importance of the evidence; and
(5) the nondisclosing party’s explanation for its failure to disclose the evidence.”
While the question of whether to used fully marketed or liquidated value is open for non-individual debtors (i.e. corporations), obviously an individual in bankruptcy is still a “going concern”. Further, 11 U.S.C. § 506(a)(2) might inform this question, since it set the value for “personal property” based on the replacement value, which is defined as “the price a retail merchant would charge for property of the kind considering the age and condition of the property at the time value is considered.” Retail value is, presumably, higher than both the fair market value or liquidated. This is admittedly in regards to the determination of a secured claim (and limited to personal property acquired for personal family or household use), but could arguably be a third valuation option in those circumstances.
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