Bankr. M.D.N.C.: Lanik v. Smith (In re Cox Motor Express) – Valuation for Determination of Insolvency

Summary:

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.”

Commentary:

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.

For a copy of the opinion, please see:

Lank v. Smith (In re Cox Motor Express) – Valuation for Determination of Insolvency

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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