The Bankruptcy Court Weighs-in In Re: Body Transit, Inc. The Bankruptcy Court of the Eastern District of Pennsylvania In re: Body Transit, Inc. addressed how COVID-19 impacts valuations. On August 7, 2020, the Court heard and decided the case. This case proceeded under the Small Business Reorganization Act (SBRA) whereby the debtor’s objection to a creditor’s election to have its claim treated as fully secured under 11 U.S.C.S § 1111 (b) was sustained, and the claim was bifurcated into both secured and unsecured components to be treated according to the reorganization plan. The question of how to value a fitness…
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Unique Situations from Common Assignments The assessment of interest rates and appraising the value of a business are assignments not limited to bankruptcy work alone. Most financial experts are familiar with the methods required to perform these tasks. Even in the application of these basic analyses, Chapter 11 bankruptcy may present unusual assignments. This article discusses two unique situations that may arise from these common assignments. The first is the application of the cram down interest rate model when a creditor makes the 1111(b) election. The second considers the concept that the “highest bidder may not be the best bidder”…
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The Myth of Efficient Market Cramdown Rate In December 2014, the American Bankruptcy Institute issued its Final Report and Recommendations of the Commission to Study the Reform of Chapter 11. The Commission was comprised of 22 professionals. The group included attorneys, academics, financial advisers, and a former bankruptcy judge. After over two years of work, the Commission made more than 200 recommendations to enhance the Chapter 11 process and provide a more efficient, less costly path for smaller businesses seeking bankruptcy. In this article, Dr. Needham discusses the origin of the Commission’s purpose, the recommendations and the impact of the…
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A Case Study, Part 2 of 2 In this second part of the article, Dr. Allyn Needham examines post-Till cases from the northern and western districts of Texas, highlights the problems encountered using the Formula Approach, and tests whether the Contract Approach may have provided a better approach and reduced the incidence of litigation where a cramdown is proposed. Ultimately, Dr. Needham proposes that despite the problems presented by the Formula Approach, the Contract Approach is not a panacea for Chapter 11 bankruptcy matters. Business valuators practicing in this area must understand case precedent and recognize the limits of the…
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A Case Study, Part 1 of 2 In the Till decision, the U.S. Supreme Court selected the Formula Approach to provide a straightforward, familiar, and objective method for determining the cramdown interest rate to be paid on secured claims in Chapter 13 cases, minimizing the need for potentially costly additional evidentiary proceedings. Many bankruptcy courts have found this decision instructive and directive for Chapter 11 matters. However, the application of the Formula Approach for determining the cramdown interest rate on secured claims in Chapter 11 matters has not made for a straightforward approach, nor has it eliminated sometimes lengthy and…
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Failure to make capital contributions did not void the operating agreement or reduce the ownership interest of non-complying partners In Grove v Brown, the Delaware Court of Chancery, relying on the unambiguous terms of a limited liability company (LLC) operating agreement, found that a member’s failure to make an initial capital contribution to a LLC did not affect that member’s ownership interest. Further, the Court of Chancery, applying default fiduciary duties to the managing members found that two managing members breached their fiduciary duty of loyalty under the corporate opportunity doctrine.