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Power Panel: Trends and Issues in Business Valuation

The panel provides an overview of some of the hottest topics in the business valuation profession. Among the topics are: artificial intelligence; environmental, social, and governance (ESG); Department of Labor adequate compensation (ESOP) update; Daubert challenges; federal rules applicable to valuation/litigation experts; interesting case decisions/case law update; market multiples and trends in M discount for lack of marketability—trends and tools; lease accounting and business valuation; trending tax considerations; and cryptocurrency valuation issues. The Power Panel ...

Wee v. Yangzhou Putian Shoemaking Co. (In re Unimex Corp.)

An expert’s report on debtor’s insolvency was excluded under Fed. R. Evid. 702 because the expert’s 50% discount of inventory value was a flawed assumption given that the debtor was not being liquidated and was not on its deathbed, but instead was a going concern.

Expert’s Testimony Is Excluded as to Solvency—Adjustments to the Balance Sheet of Debtor Were Inappropriate

An expert’s report on debtor’s insolvency was excluded under Fed. R. Evid. 702 because the expert’s 50% discount of inventory value was a flawed assumption given that the debtor was not being liquidated and was not on its deathbed, but instead was a going concern.

Business Valuation in the Context of Insolvency

This webinar will dive into the complex world of bankruptcy. It will include a look at the valuation nuances that one needs to consider when preparing a valuation analysis and report in the context of bankruptcy.

In re Burg

The debtor withheld records and failed to explain missing assets and deleted records and misled the court as to what he did with certain assets. The debtor also knowingly and fraudulently withheld records from the trustee. This was all part of a scheme the debtor devised with the help of a “consultant” to avoid repaying the plaintiff creditors.

Bankruptcy Court Denies Debtor Discharge for Fraud, Failure to Produce Records and Fraudulent Transfers

The debtor withheld records and failed to explain missing assets and deleted records and misled the court as to what he did with certain assets. The debtor also knowingly and fraudulently withheld records from the trustee. This was all part of a scheme the debtor devised with the help of a “consultant” to avoid repaying the plaintiff creditors.

Bankruptcy Court Denies Summary Judgment That Financing Is a Loan and Not a Change of Control

The wind down trustee sought a summary judgment order in the form of a declaration that no sale or change of ownership or control occurred when the debtor entered into a DIP and exit loan agreements with a capital financing company. A change of ownership or control would result in the estate owing a break fee to Fifth Seasons Investment. The court denied summary judgment for reasons outlined in the opinion.

GWG Holdings, Inc. v. Fifth Season Investments, LLC (In re GWG Holdings, Inc.)

The wind down trustee sought a summary judgment order in the form of a declaration that no sale or change of ownership or control occurred when the debtor entered into a DIP and exit loan agreements with a capital financing company. A change of ownership or control would result in the estate owing a break fee to Fifth Seasons Investment. The court denied summary judgment for reasons outlined in the opinion.

Court has limited menu for steakhouse valuation

In a Michigan case, two 50% owners of a Ponderosa steakhouse were locked in a battle over the Old West-themed eatery, with both owners engaging in oppressive conduct against the other. They left it up to the court to decide their fate.

Vieira v. Think Tank Logistics, LLC (In re Levesque)

In this adversary Chapter 7 proceeding, the trustee sought to avoid the debtor’s transfer of his interest in two corporate entities and either recover the interests or the value of such interests from the defendants. As part of this proceeding, the court was asked to decide on two motions in limine regarding an valuation expert from each side. The motions (Daubert) asked that the experts not be allowed to testify. The court granted in part and denied in part the motions of the parties.

Bankruptcy Court (South Carolina) Grants in Part and Denies in Part Motions to Exclude Experts in Daubert Motions

In this adversary Chapter 7 proceeding, the trustee sought to avoid the debtor’s transfer of his interest in two corporate entities and either recover the interests or the value of such interests from the defendants. As part of this proceeding, the court was asked to decide on two motions in limine regarding an valuation expert from each side. The motions (Daubert) asked that the experts not be allowed to testify. The court granted in part and denied in part the motions of the parties.

Bankruptcy Court Determines Fair Value Under Asset Approach With ‘Limited Evidence’ Available to It

This case involved a hotly contested battle over the fate of a Ponderosa restaurant in Michigan. The two owners, having had a falling out, pursued contentious litigation to wrest control of the restaurant from each other. Having no business valuation available to the court, the court was left with a real estate appraisal and limited evidence of assets and liabilities to determine the fair value of a 50% interest in the restaurant to be used in the buyout of one of the shareholders by the other shareholder.

Herremans v. Fedo (In re Herremans)

This case involved a hotly contested battle over the fate of a Ponderosa restaurant in Michigan. The two owners, having had a falling out, pursued contentious litigation to wrest control of the restaurant from each other. Having no business valuation available to the court, the court was left with a real estate appraisal and limited evidence of assets and liabilities to determine the fair value of a 50% interest in the restaurant to be used in the buyout of one of the shareholders by the other shareholder.

New case on qualifying for Subchapter V in bankruptcy

In 2020, the Small Business Reorganization Act (SBRA) added Subchapter V to Chapter 11 of the Bankruptcy Act, which changes or eliminates some of the Chapter 11 requirements, making it more debtor-friendly.

Bankruptcy Appeals Panel Affirms Confirmation of Chapter 11 Plan Despite Objection of Largest Unsecured Creditor

The debtor was a manufacturer of wet wipe cleaning products. It contracted with a new customer to manufacture wipes for the customer in the U.S. and to sell such wipes to the new customer. The customer failed to obtain EPA and state-level product registrations and refused to purchase manufactured wipes or to honor its commitments regarding loans to the debtor for new equipment leases and other costs to expand the debtor’s facilities to meet the demands of the contracts. The debtor ultimately filed for bankruptcy and delivered a Chapter 11 plan that included selling its assets. The Bankruptcy Court approved the plan. The creditor appealed the approval of the plan, but the appeals panel affirmed.

Albaad USA, Inc. v. GPMI, Co. (In re GPMI, Co.)

The debtor was a manufacturer of wet wipe cleaning products. It contracted with a new customer to manufacture wipes for the customer in the U.S. and to sell such wipes to the new customer. The customer failed to obtain EPA and state-level product registrations and refused to purchase manufactured wipes or to honor its commitments regarding loans to the debtor for new equipment leases and other costs to expand the debtor’s facilities to meet the demands of the contracts. The debtor ultimately filed for bankruptcy and delivered a Chapter 11 plan that included selling its assets. The Bankruptcy Court approved the plan. The creditor appealed the approval of the plan, but the appeals panel affirmed.

Bennetti v. Oxford Restructuring Advisors LLC (In re Community Providers of Enrichment Services AZ Liquidating, Inc.)

Employee members of an ESOP had their claims against the debtors, based on cash option rights in an ESOP, denied. The debtors were not obligated to employees under the ESOP. The ESOP needed only to provide distributions in cash. There was no right of payment from the debtors. The U.S. Bankruptcy Appellate Panel for the 9th Circuit affirmed.

Bankruptcy Appellate Panel Denies Employee Members of ESOP Claims Against Debtors

Employee members of an ESOP had their claims against the debtors, based on cash option rights in an ESOP, denied. The debtors were not obligated to employees under the ESOP. The ESOP needed only to provide distributions in cash. There was no right of payment from the debtors. The U.S. Bankruptcy Appellate Panel for the 9th Circuit affirmed.

In re Hillman

The Bankruptcy Court decided and ordered on the issue of whether the debtor qualified as a “small business debtor” under subchapter V of Chapter 11. The court decided that, as of the petition date, the debtor was engaged in commercial or business activity in both of its business activities. The debtor met her burden of proof as qualifying under Subchapter V of Chapter 11.

Bankruptcy Court Decides on Debtor Qualification as a ‘Small Business’ Under Chapter 11

The Bankruptcy Court decided and ordered on the issue of whether the debtor qualified as a “small business debtor” under subchapter V of Chapter 11. The court decided that, as of the petition date, the debtor was engaged in commercial or business activity in both of its business activities. The debtor met her burden of proof as qualifying under Subchapter V of Chapter 11.

EllDan Corp. v. Steele (In re EllDan Corp.)

The remaining matter in this bankruptcy adversary proceeding was whether the covenants not to compete in the prepetition franchise agreements were enforceable. The debtor rejected the franchise agreements after the petition date of the bankruptcy proceedings. The court ruled that the covenants were reasonable in duration and geographic scope under Minnesota law and public interest was not harmed. The court also found that the debtor breached the covenants the franchisor was contractually entitled to injunctive relief.

Despite Rejection of Franchise Agreements in Bankruptcy, Debtor Remained Obligated Not to Compete

The remaining matter in this bankruptcy adversary proceeding was whether the covenants not to compete in the prepetition franchise agreements were enforceable. The debtor rejected the franchise agreements after the petition date of the bankruptcy proceedings. The court ruled that the covenants were reasonable in duration and geographic scope under Minnesota law and public interest was not harmed. The court also found that the debtor breached the covenants the franchisor was contractually entitled to injunctive relief.

Appellate court rules on valuation of inventory in Sears bankruptcy

Sears (the Amazon of its day) recently emerged from bankruptcy after four years and thousands of court filings.

ESL Invs., L.P. v. Sears Holdings Corp. Debtor-Appellee (In re Sears Holdings Corp.)

Second-lien holders, entitled to payment only after the debts of first-lien holders have been discharged, argued that the value of the collateral that secured their claims, as measured on the petition date, vastly exceeded what they had been paid and that they were accordingly entitled to priority payment of the difference. At trial, all parties put on evidence as to the value of the assets at the petition date. The differences varied widely. “The differences among these values turned primarily on how the experts calculated the revenue Debtors could expect to earn from selling their inventory.” The appeal dealt primarily with this inventory issue and how it should be valued.

Valuation of Inventory Key to Decision on Collateral Value in Bankruptcy

Second-lien holders, entitled to payment only after the debts of first-lien holders have been discharged, argued that the value of the collateral that secured their claims, as measured on the petition date, vastly exceeded what they had been paid and that they were accordingly entitled to priority payment of the difference. At trial, all parties put on evidence as to the value of the assets at the petition date. The differences varied widely. “The differences among these values turned primarily on how the experts calculated the revenue Debtors could expect to earn from selling their inventory.” The appeal dealt primarily with this inventory issue and how it should be valued.

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