Why Bankruptcy Court declines to be bound by divorce valuation

In re Cole, 2016 Bankr. LEXIS 932 (March 24, 2016)

How meaningful is a valuation that was prepared for one type of case in another context? This was the key issue in a combined divorce and bankruptcy case centering on the husband’s minority interest in a dental practice.

Following the divorce, the husband filed for Chapter 13 bankruptcy and asked for confirmation of his plan. The issue was whether the plan could meet the liquidation test applicable under the Bankruptcy Code’s section 1325(a)(4). In essence, the test requires that creditors in a Chapter 13 bankruptcy receive present value payments that are at least equal to the amount the creditors would receive in a Chapter 7 case.

The Bankruptcy Court said its decision depended on the value of the husband’s share in the practice, which, in turn, depended on whether the court was required to adopt, or could simply adopt, the valuation prevailing in the divorce case, or whether it had to find a reliable indicator of value elsewhere.

The wife, who was the primary unsecured creditor, claimed that the divorce court's valuation was controlling. If it was used in a Chapter 7 liquidation analysis, the plan did not qualify for confirmation, she said. At divorce, the principal valuation the wife's expert presented was based on the going concern of the dental practice as a whole, of which the expert then took 25% of the total value. He concluded the husband’s share was worth $212,000. The divorce court adopted the valuation.

In contrast, the husband's expert maintained the interest was worth about $15,800. He declined to assign any value to the patient records or the goodwill of the practice.

In the bankruptcy proceedings, the husband contended that he was not precluded from revisiting the issue since the valuation the divorce court adopted was based on the intrinsic value of the business. This was not the standard of value applicable under Section 1325(a)(4), the husband claimed. Relying on expert testimony, the husband emphasized the impediments a Chapter 7 trustee would encounter when trying to market this minority interest in a personal services corporation. It showed that the interest had no value in the open market, the husband contended.

The Bankruptcy Court agreed and disagreed with both sides on different arguments. Find out more about the court's analysis here.