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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.

In Re S-Tek 1, LLC

The debtor, S-Tek 1 LLC, submitted a motion to value to the Bankruptcy Court to determine the value of the collateral of Surv-Tek Inc. as to debt owed it by the debtor pledged as collateral for debt owed by S-Tek to Surv-Tek. The valuation was to be used in the confirmation of a Chapter 11 reorganization of S-Tek. The court used the replacement value standard of value instead of the “ongoing concern” value since the replacement value provided a value greater than the “enterprise value” (i.e., ongoing concern value).

Bankruptcy Court Uses the ‘Replacement Value Standard’ as It Determines That Debtor ‘Enterprise Value’ Is Lower and Inappropriate

The debtor, S-Tek 1 LLC, submitted a motion to value to the Bankruptcy Court to determine the value of the collateral of Surv-Tek Inc. as to debt owed it by the debtor pledged as collateral for debt owed by S-Tek to Surv-Tek. The valuation was to be used in the confirmation of a Chapter 11 reorganization of S-Tek. The court used the replacement value standard of value instead of the “ongoing concern” value since the replacement value provided a value greater than the “enterprise value” (i.e., ongoing concern value).

Recap of recent BV cases of note

A number of recent cases have emerged that contain various valuation issues.

Discounts inappropriate under controlling agreement, appeals court finds

In a buyout dispute involving a limited liability company, the Oregon Court of Appeals recently overturned a trial court’s decision to apply discounts when valuing the departing member’s minority interest.

Island Light & Power Co. v. Sara Golvinveaux McGinnes 2011 Trust

In this shareholder dissent suit, the one-third shareholder of Island Light & Power Co. (aka BIPCO) dissented to a forced sale of the assets of BIPCO resulting in a liquidation of BIPCO and of the shareholder Trust’s stock. In a resulting bench trial, the court rejected the fair value determinations of the experts for both parties and adopted its own methodology (as is allowed by Rhode Island courts, including its Supreme Court) to determine the fair value of the one-third interest held by the Trust.

Court Adopts its Own Methodology in Determining Fair Value in a Shareholder Dissent Suit

In this shareholder dissent suit in Rhode Island, the one-third shareholder of Island Light & Power Co. (aka BIPCO) dissented to a forced sale of the assets of BIPCO resulting in a liquidation of BIPCO and a liquidation of the shareholder Trust’s stock. In a bench trial resulting from the dissent, the court rejected the fair value determinations of the experts for both parties and adopted its own methodology (as is allowed by Rhode Island courts, including its Supreme Court) to determine the fair value of the one-third interest held by the Trust.

Nonowner spouse obtains discovery of valuation-related info from owner spouse’s medical practice

A Florida divorce case prompted an important discovery ruling from the appellate court as to a nonowner spouse’s right to access documents and information regarding the owner spouse’s interest in a large medical practice.

Hall v. Hall

In discovery dispute, appeals court says trial court’s protective order in favor of medical practice is too broad; nonowner spouse may obtain information shedding light on value of owner spouse’s ownership interest; operating agreement requiring use of book value may not be controlling here.

Medical Practice Must Produce Information Bearing on Spouse’s Ownership Value

In discovery dispute, appeals court says trial court’s protective order in favor of medical practice is too broad; nonowner spouse may obtain information shedding light on value of owner spouse’s ownership interest; operating agreement requiring use of book value may not be controlling here.

Tips for Valuing—and Designing—Buy-in and Buyout Agreements for Medical/Dental Practices

After hundreds of engagements, the author identifies a number of best practices for both the valuation analyst and the consultant with respect to buy-in/buyout arrangements.

Experts clash over definition of ‘net worth’ in New Jersey buyout dispute

Business partners often think that a buyout agreement will forestall future conflicts. A recent New Jersey case proves the opposite.

Namerow v. PediatriCare Associates, LLC

In pediatrician buyout suit, court says practice’s operating agreement requires net worth calculation; court agrees with defense expert’s definition of “net worth” as the value of assets minus liabilities, as stated in the balance sheets, and rejects proposed inclusion of intangible assets.

Court Says Expert’s Inclusion of Intangible Assets Violates Buyout Agreement

In pediatrician buyout suit, court says practice’s operating agreement requires net worth calculation; court agrees with defense expert’s definition of “net worth” as the value of assets minus liabilities, as stated in the balance sheets, and rejects proposed inclusion of intangible assets.

Lack of Facts and Data Render Expert’s Fair Value Balance Sheet Not Helpful

Bankruptcy Court excludes as unreliable and irrelevant expert’s solvency opinion and balance sheet; court says expert lacked the facts and data necessary to enact his chosen method and “failed in numerous ways” to reliably apply the facts and data in accordance with the selected method.

Weinman v. Crowley (In re Blair)

Bankruptcy Court excludes as unreliable and irrelevant expert’s solvency opinion and balance sheet; court says expert lacked the facts and data necessary to enact his chosen method and “failed in numerous ways” to reliably apply the facts and data in accordance with the selected method.

BVLaw case update: buyout disputes

Even when the members of a business entity plan ahead for a potential buyout, a lot can still go wrong, often because the language in a controlling shareholder agreement leaves too much room for interpretation or a necessary corporate document is missing.

Louisiana Appeals Court Affirms Use of Discounts in LLC Valuations

Appeals court supports trial court’s decision to value departing member’s minority interest on fair market value basis pursuant to state statute rather than method specified in some existing corporate documents; appeals court affirms lower court’s discretion to apply post-Cannon discounts.

Wall v. Bryan

Appeals court supports trial court’s decision to value departing member’s minority interest on fair market value basis pursuant to state statute rather than method specified in some existing corporate documents; appeals court affirms lower court’s discretion to apply post-Cannon discounts.

Lynd v. Marshall County Pediatrics, P.C.

In share redemption dispute pivoting on missing shareholder agreement, high court finds corporate bylaws show trial court’s use of book value to value separating member’s stock was error but plaintiff failed to show right to fair value determination as a matter of law; court remands.

In Share Redemption Case, Bylaws Militate Against Book-Value Valuation

In share redemption dispute pivoting on missing shareholder agreement, high court finds corporate bylaws show trial court’s use of book value to value separating member’s stock was error but plaintiff failed to show right to fair value determination as a matter of law; court remands.

Mississippi High Court Clarifies Best Practice for Lost Profits Calculation

In usurped-corporate-opportunity case, high court upholds trial court’s lost profits calculation based on actual numbers of company benefitting from wrongdoing, although best way is to project future profits or consider past profits of damaged business.

Hornberger v. Dave Gutelius Excavating, Inc.

Valuation of shares of terminated stockholder based on shareholder agreement that requires calculation of adjusted net book value and specified adjustments may include discounts, where discounts are consistent with industry practice, appellate court says.

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