Cases spawned by the economic crisis are starting to come in. Courts are already straining to find guidance when the question is asset values, but current markets are disrupted or dysfunctional and “may not fairly reflect the potential sale price of [the] asset,” writes Delaware bankruptcy Judge Christopher Sontchi in In re American Home Mortgage Holdings, Inc. (Sept. 8, 2009). In that case, “the court appears to be on its own” in determining whether “commercially reasonable….value” (Sec. 562 of the Bankruptcy Code) can be found only by reference to the market or by other, commonly accepted valuation methods.
The court found credible guidance from the debtor’s valuation expert, who conducted an extensive, loan-by-loan DCF analysis to conclude that the portfolio was worth up to $1.16 billion. Further, a DCF is appropriate “in all conditions,” Sontchi said, even when markets are dysfunctional, because it values the asset’s continuing cash flows (to help discern the value of mortgages in particular, the court also cited Prof. Aswath Damodaran’s Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 2nd ed. 2001).
A complete abstract of this complicated case will appear in the December 2009 Business Valuation Update™, and the full-text of the court’s opinion will be available at BVLaw™.
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