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Valuation Issues in Consumer Bankruptcy Cases Pennsylvania Bar Institute Salene Kraemer, Esquire, Mazur Kraemer Business Law Trustee Lisa Swope, Esquire, Neugebauer, Swope & Swope, P.C. Ron Roteman, Esquire, Stonecipher Law Firm Trustee Michael H. Kaliner Auctioneer Barry S. Slosberg , Barry S. Slosberg, Inc. 1 Pittsburgh- September 30, 2010 Philadelphia-October 28, 2010
Overview I. Introduction: Overview of Relevant Bankruptcy Code (10 min) II. Practical Perspectives from a Chapter 7 Trustee re: Key Valuation Concerns  (15 min) III. Exemption & Negative      Equity Issues (10 min) IV. Open Discussion  (25 min) 2
I. INTRODUCTION Overview of Certain  Bankruptcy Code Provisions In  Which Valuation  Becomes Relevant 3
Various Valuation Standards Bankruptcy Code § 527: Obligation of Attorney to Disclose Replacement Value of Assets after   “Reasonable Inquiry”  Bankruptcy Code § 522(a)(2): Use of Bankruptcy Exemptions  Bankruptcy Code § 522(f): Avoiding Judicial Liens Bankruptcy Code § 506: Value of a Secured Creditor’s Collateral to Determine Extent of Secured vs.. Unsecured Claim and to Lienstrip Bankruptcy Code § 722:  Debtor’s Redemption Rights Bankruptcy Code § 362(d): Value of a Secured Creditor’s Collateral to Determine Whether Such Creditor Can Obtain Relief From The Stay Bankruptcy Code § 547 and 548: Valuation and the Solvency of the Debtor in Preference and Fraudulent Transfer Actions Bankruptcy Code § 1325: Cram-Down in the Confirmation of A Chapter 13 Plan  4
A.  Various Valuation Standards 1. Wholesale value of the property;  2. Liquidation value (or distressed value); 3. Retail value or replacement cost; 4. Expected return to the creditor from a disposal of the collateral in a commercially reasonable manner (fair market or going concern value); 5. Average of two or more of these values. Most courts are using as the "touchstone for valuation the standard of commercially reasonable disposition of the property by the lender."  5
B. Bankruptcy Code § 527: Obligation of Attorney to Disclose Replacement Value of Assets after “Reasonable Inquiry”  6
11 U.S.C. § 527(a)  A debt relief agency providing bankruptcy assistance to an assisted person shall provide— (2), and not later than 3 business days after the first date on which a debt relief agency first offers to provide any bankruptcy assistance services to an assisted person, a clear and conspicuous written notice advising assisted persons that—   all information that the assisted person is required to provide with a petition and thereafter during a case under this title is required to be complete, accurate, and truthful; all assets and all liabilities are required to be completely and accurately disclosed in the documents filed to commence the case, and the replacement value of each asset as defined in section 506 must be stated in those documents where requested after reasonable inquiry to establish such value.  (C) current monthly income, the amounts specified in section 707(b)(2), and, in a case under chapter 13 of this title, disposable income (determined in accordance with section 707(b)(2)), are required to be stated after reasonable inquiry; and  (D) information that an assisted person provides during their case may be audited pursuant to this title, and that failure to provide such information may result in dismissal of the case under this title or other sanction, including a criminal sanction. 11. U.S.C. § 527(a).  7
11. U.S.C. § 527(c)  (c) Except to the extent the debt relief agency provides the required information itself after reasonably diligent inquiry of the assisted person or others so as to obtain such information reasonably accurately for inclusion on the petition, schedules or statement of financial affairs, a debt relief agency providing bankruptcy assistance to an assisted person, to the extent permitted by nonbankruptcy law, shall provide each assisted person at the time required for the notice required under subsection (a)(1) reasonably sufficient information (which shall be provided in a clear and conspicuous writing) to the assisted person on how to provide all the information the assisted person is required to provide under this title pursuant to section 521, including— how to value assets at replacement value, determine current monthly income, the amounts specified in section 707(b)(2) and, in a chapter 13 case, how to determine disposable income in accordance with section 707(b)(2) and related calculations; (2) how to complete the list of creditors, including how to determine what amount is owed and what address for the creditor should be shown; and   (3) how to determine what property is exempt and how to value exempt property at replacement value as defined in section 506. 11. U.S.C. § 527(c ). 8
C.  Bankruptcy Code § 522(a)(2): Use of Bankruptcy Exemptions  (a)(2) “value” means fair market value as of the date of the filing of the petition or, with respect to property that becomes property of the estate after such date, as of the date such property becomes property of the estate. (b)(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection. 11. U.S.C. § 522(a) 9
“Fair Market Value” 	Value under 11 U.S.C. § 522(a)(2) means price willing seller and willing buyer under no compulsion would agree upon after reasonable period of exposure to market, where buyer is knowledgeable of all uses and purposes for which property is adopted and for which it was or is capable of use.  In re Todd, 194 B.R. 893 (Bankr. D. Mont. 1996). MAZURKRAEMER LAW 10
D. Bankruptcy Code § 522(f):Avoiding Judicial Liens  A lien “impairs” an exemption to the extent that: —the amount of the lien, —plus the amount of all other liens on the property, —plus the amount the debtor could claim as exempt if there were no liens on the property, exceeds the value the debtor's interest in the property would have in the absence of any liens.   11 U.S.C. § 522(f)(2)(A). 11
E. Bankruptcy Code § 506: Value of a Secured Creditor’s Collateral to Determine Extent Of Secured Versus Unsecured Claim and to Lienstrip 12
11. U.S.C. § 506(a)  (a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest. (2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined. 11 U.S.C. § 506(a). MAZURKRAEMER LAW 13
F. Bankruptcy Code § 722: 	Debtor’s Redemption Rights 14 MAZURKRAEMER LAW
11. U.S.C. § 722 	An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption. 11 U.S.C. § 722. MAZURKRAEMER LAW 15
G. Bankruptcy Code § 362(d) 	Value of a Secured Creditor’s Collateral to Determine Whether Such Creditor Can Obtain Relief from the Stay under Bankruptcy Code § 362(d) 16 MAZURKRAEMER LAW
11. U.S.C. § 362 (d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay— for cause, including the lack of adequate protection of an interest in property of such party in interest; (2) with respect to a stay of an act against property under subsection (a) of this section, if--   the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization. 11 U.S.C. §  362. MAZURKRAEMER LAW 17
H. Bankruptcy Code § 547 and 548:  	Valuation and the Solvency of the Debtor in Preference and Fraudulent Transfer Actions. MAZURKRAEMER LAW 18
Preferential Transfers As is facially evident in the preference statute, all five criteria enumerated in the language of Section 547 must be satisfied before a trustee may avoid any transfer of property as a preference.  Waldschmidt v. Ranier (In Re Fulghum Constr. Corp.), 706 F.2d 171, 172 (6th Cir. 1983).   One of those enumerated criteria is that the transfer must be made while the debtor was insolvent.  11 U.S.C. § 547(b)(3).   What is “insolvent?”  Section 101(32) of the Bankruptcy Code provides that “insolvent” means: financial condition such that the “sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation . . ..”  11 U.S.C. § 101(32).  MAZURKRAEMER LAW 19
Fraudulent Transfers 	The fraudulent transfer statute includes both transfers that were intended to be fraudulent as well as those that merely had a fraudulent effect on creditors (i.e., transfers made for less than reasonably equivalent value or that rendered the debtor insolvent).  MAZURKRAEMER LAW 20
I. Bankruptcy Code § 1325: 	Cram-Down in the Confirmation of a Chapter 13 Plan  21
11. U.S.C. § 1325            In the secured creditor cram-down provisions of § 1325, with certain exceptions, protection for the secured creditor's interest occurs, in part, by conditioning confirmation on the debtor satisfying one of the following alternatives when the holder of an allowed secured claim is provided for by the plan: The holder of the claim must accept the plan; or  The debtor must surrender the collateral to the creditor; or  The plan must provide for the creditor to retain its lien and to receive property under the plan on account of the claim that will have a value not less than the claim amount. See11 U.S.C. § 1325(a)(5). 22
II. PRACTICAL PERSPECTIVE 23
Straight from the Trustees Top Valuation Concerns for Chapter 7 Trustees Procedural Issues Timing of Objection; Form of Objection.  2.   Valuation Date Reliable Valuation Resources MAZURKRAEMER LAW 24
A. Top Valuation Concerns for Chapter 7 Trustees Business assets Minority share interests in partnership, corporation or LLC Equitable distributions in divorce proceedings Intellectual property/royalties Licenses, particularly seat licenses for professional sports teams Oil and gas leases/mineral rights Preference/fraudulent transfers issues 25
B. Procedural Issues Timing of Objection; Form of Objection. 2.   Valuation Date 26
C. Reliable Valuation Resources 27
III.EXEMPTION & NEGATIVE     EQUITY ISSUES  Recent Developments on Valuation:  The Supreme Court Revisits Taylor v. Freeland & Kronz, et al., 503 U.S. 638 (1992) in Schwab v. Reilly, 130 S. Ct. 2652 (2010) Chapter 13: Does the Hanging Paragraph of 11 U.S.C. §1325 Require PMSI Treatment of Negative Equity, or Allow for Bifurcation of That Portion of the Claim ? 28
Recent Developments on Valuation:  The Supreme Court Revisits Taylor v. Freeland & Kronz, et al., 503 U.S. 638 (1992) in Schwab v. Reilly, 130 S. Ct. 2652 (2010) MAZURKRAEMER LAW 29
Chapter 13: Does the Hanging Paragraph of 11 U.S.C. §1325 Require PMSI Treatment of Negative Equity, or Allow for Bifurcation of That Portion of the Claim ?	 The BAPCPA of 2005 Added the Hanging Paragraph to 11 U.S.C. § 1325 What is Negative Equity? What is a Purchase Money Security Interest? Recent Developments in Case Law MAZURKRAEMER LAW 30
31

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Valuation Issues in Consumer Bankruptcy Cases

  • 1. Valuation Issues in Consumer Bankruptcy Cases Pennsylvania Bar Institute Salene Kraemer, Esquire, Mazur Kraemer Business Law Trustee Lisa Swope, Esquire, Neugebauer, Swope & Swope, P.C. Ron Roteman, Esquire, Stonecipher Law Firm Trustee Michael H. Kaliner Auctioneer Barry S. Slosberg , Barry S. Slosberg, Inc. 1 Pittsburgh- September 30, 2010 Philadelphia-October 28, 2010
  • 2. Overview I. Introduction: Overview of Relevant Bankruptcy Code (10 min) II. Practical Perspectives from a Chapter 7 Trustee re: Key Valuation Concerns (15 min) III. Exemption & Negative Equity Issues (10 min) IV. Open Discussion (25 min) 2
  • 3. I. INTRODUCTION Overview of Certain Bankruptcy Code Provisions In Which Valuation Becomes Relevant 3
  • 4. Various Valuation Standards Bankruptcy Code § 527: Obligation of Attorney to Disclose Replacement Value of Assets after “Reasonable Inquiry” Bankruptcy Code § 522(a)(2): Use of Bankruptcy Exemptions Bankruptcy Code § 522(f): Avoiding Judicial Liens Bankruptcy Code § 506: Value of a Secured Creditor’s Collateral to Determine Extent of Secured vs.. Unsecured Claim and to Lienstrip Bankruptcy Code § 722: Debtor’s Redemption Rights Bankruptcy Code § 362(d): Value of a Secured Creditor’s Collateral to Determine Whether Such Creditor Can Obtain Relief From The Stay Bankruptcy Code § 547 and 548: Valuation and the Solvency of the Debtor in Preference and Fraudulent Transfer Actions Bankruptcy Code § 1325: Cram-Down in the Confirmation of A Chapter 13 Plan 4
  • 5. A. Various Valuation Standards 1. Wholesale value of the property; 2. Liquidation value (or distressed value); 3. Retail value or replacement cost; 4. Expected return to the creditor from a disposal of the collateral in a commercially reasonable manner (fair market or going concern value); 5. Average of two or more of these values. Most courts are using as the "touchstone for valuation the standard of commercially reasonable disposition of the property by the lender." 5
  • 6. B. Bankruptcy Code § 527: Obligation of Attorney to Disclose Replacement Value of Assets after “Reasonable Inquiry” 6
  • 7. 11 U.S.C. § 527(a) A debt relief agency providing bankruptcy assistance to an assisted person shall provide— (2), and not later than 3 business days after the first date on which a debt relief agency first offers to provide any bankruptcy assistance services to an assisted person, a clear and conspicuous written notice advising assisted persons that—   all information that the assisted person is required to provide with a petition and thereafter during a case under this title is required to be complete, accurate, and truthful; all assets and all liabilities are required to be completely and accurately disclosed in the documents filed to commence the case, and the replacement value of each asset as defined in section 506 must be stated in those documents where requested after reasonable inquiry to establish such value.  (C) current monthly income, the amounts specified in section 707(b)(2), and, in a case under chapter 13 of this title, disposable income (determined in accordance with section 707(b)(2)), are required to be stated after reasonable inquiry; and  (D) information that an assisted person provides during their case may be audited pursuant to this title, and that failure to provide such information may result in dismissal of the case under this title or other sanction, including a criminal sanction. 11. U.S.C. § 527(a). 7
  • 8. 11. U.S.C. § 527(c) (c) Except to the extent the debt relief agency provides the required information itself after reasonably diligent inquiry of the assisted person or others so as to obtain such information reasonably accurately for inclusion on the petition, schedules or statement of financial affairs, a debt relief agency providing bankruptcy assistance to an assisted person, to the extent permitted by nonbankruptcy law, shall provide each assisted person at the time required for the notice required under subsection (a)(1) reasonably sufficient information (which shall be provided in a clear and conspicuous writing) to the assisted person on how to provide all the information the assisted person is required to provide under this title pursuant to section 521, including— how to value assets at replacement value, determine current monthly income, the amounts specified in section 707(b)(2) and, in a chapter 13 case, how to determine disposable income in accordance with section 707(b)(2) and related calculations; (2) how to complete the list of creditors, including how to determine what amount is owed and what address for the creditor should be shown; and   (3) how to determine what property is exempt and how to value exempt property at replacement value as defined in section 506. 11. U.S.C. § 527(c ). 8
  • 9. C. Bankruptcy Code § 522(a)(2): Use of Bankruptcy Exemptions (a)(2) “value” means fair market value as of the date of the filing of the petition or, with respect to property that becomes property of the estate after such date, as of the date such property becomes property of the estate. (b)(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection. 11. U.S.C. § 522(a) 9
  • 10. “Fair Market Value” Value under 11 U.S.C. § 522(a)(2) means price willing seller and willing buyer under no compulsion would agree upon after reasonable period of exposure to market, where buyer is knowledgeable of all uses and purposes for which property is adopted and for which it was or is capable of use. In re Todd, 194 B.R. 893 (Bankr. D. Mont. 1996). MAZURKRAEMER LAW 10
  • 11. D. Bankruptcy Code § 522(f):Avoiding Judicial Liens A lien “impairs” an exemption to the extent that: —the amount of the lien, —plus the amount of all other liens on the property, —plus the amount the debtor could claim as exempt if there were no liens on the property, exceeds the value the debtor's interest in the property would have in the absence of any liens. 11 U.S.C. § 522(f)(2)(A). 11
  • 12. E. Bankruptcy Code § 506: Value of a Secured Creditor’s Collateral to Determine Extent Of Secured Versus Unsecured Claim and to Lienstrip 12
  • 13. 11. U.S.C. § 506(a) (a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest. (2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined. 11 U.S.C. § 506(a). MAZURKRAEMER LAW 13
  • 14. F. Bankruptcy Code § 722: Debtor’s Redemption Rights 14 MAZURKRAEMER LAW
  • 15. 11. U.S.C. § 722 An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption. 11 U.S.C. § 722. MAZURKRAEMER LAW 15
  • 16. G. Bankruptcy Code § 362(d) Value of a Secured Creditor’s Collateral to Determine Whether Such Creditor Can Obtain Relief from the Stay under Bankruptcy Code § 362(d) 16 MAZURKRAEMER LAW
  • 17. 11. U.S.C. § 362 (d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay— for cause, including the lack of adequate protection of an interest in property of such party in interest; (2) with respect to a stay of an act against property under subsection (a) of this section, if--   the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization. 11 U.S.C. § 362. MAZURKRAEMER LAW 17
  • 18. H. Bankruptcy Code § 547 and 548: Valuation and the Solvency of the Debtor in Preference and Fraudulent Transfer Actions. MAZURKRAEMER LAW 18
  • 19. Preferential Transfers As is facially evident in the preference statute, all five criteria enumerated in the language of Section 547 must be satisfied before a trustee may avoid any transfer of property as a preference. Waldschmidt v. Ranier (In Re Fulghum Constr. Corp.), 706 F.2d 171, 172 (6th Cir. 1983). One of those enumerated criteria is that the transfer must be made while the debtor was insolvent. 11 U.S.C. § 547(b)(3). What is “insolvent?” Section 101(32) of the Bankruptcy Code provides that “insolvent” means: financial condition such that the “sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation . . ..” 11 U.S.C. § 101(32). MAZURKRAEMER LAW 19
  • 20. Fraudulent Transfers The fraudulent transfer statute includes both transfers that were intended to be fraudulent as well as those that merely had a fraudulent effect on creditors (i.e., transfers made for less than reasonably equivalent value or that rendered the debtor insolvent). MAZURKRAEMER LAW 20
  • 21. I. Bankruptcy Code § 1325: Cram-Down in the Confirmation of a Chapter 13 Plan 21
  • 22. 11. U.S.C. § 1325 In the secured creditor cram-down provisions of § 1325, with certain exceptions, protection for the secured creditor's interest occurs, in part, by conditioning confirmation on the debtor satisfying one of the following alternatives when the holder of an allowed secured claim is provided for by the plan: The holder of the claim must accept the plan; or The debtor must surrender the collateral to the creditor; or The plan must provide for the creditor to retain its lien and to receive property under the plan on account of the claim that will have a value not less than the claim amount. See11 U.S.C. § 1325(a)(5). 22
  • 24. Straight from the Trustees Top Valuation Concerns for Chapter 7 Trustees Procedural Issues Timing of Objection; Form of Objection. 2. Valuation Date Reliable Valuation Resources MAZURKRAEMER LAW 24
  • 25. A. Top Valuation Concerns for Chapter 7 Trustees Business assets Minority share interests in partnership, corporation or LLC Equitable distributions in divorce proceedings Intellectual property/royalties Licenses, particularly seat licenses for professional sports teams Oil and gas leases/mineral rights Preference/fraudulent transfers issues 25
  • 26. B. Procedural Issues Timing of Objection; Form of Objection. 2. Valuation Date 26
  • 27. C. Reliable Valuation Resources 27
  • 28. III.EXEMPTION & NEGATIVE EQUITY ISSUES Recent Developments on Valuation: The Supreme Court Revisits Taylor v. Freeland & Kronz, et al., 503 U.S. 638 (1992) in Schwab v. Reilly, 130 S. Ct. 2652 (2010) Chapter 13: Does the Hanging Paragraph of 11 U.S.C. §1325 Require PMSI Treatment of Negative Equity, or Allow for Bifurcation of That Portion of the Claim ? 28
  • 29. Recent Developments on Valuation: The Supreme Court Revisits Taylor v. Freeland & Kronz, et al., 503 U.S. 638 (1992) in Schwab v. Reilly, 130 S. Ct. 2652 (2010) MAZURKRAEMER LAW 29
  • 30. Chapter 13: Does the Hanging Paragraph of 11 U.S.C. §1325 Require PMSI Treatment of Negative Equity, or Allow for Bifurcation of That Portion of the Claim ? The BAPCPA of 2005 Added the Hanging Paragraph to 11 U.S.C. § 1325 What is Negative Equity? What is a Purchase Money Security Interest? Recent Developments in Case Law MAZURKRAEMER LAW 30
  • 31. 31