Source: https://www.abfjournal.com/articles/fair-market-or-value-in-use-gm-and-the-valuation-of-collateral/
Timestamp: 2019-04-25 23:40:28+00:00

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Although the Chapter 11 bankruptcy of General Motors has all but vanished from the headlines, it is still making waves with an interesting and deceptively simple decision on the valuation of a secured creditor’s collateral.
Included as part of the §363 sale was a transmission manufacturing plant in White Marsh, MD, and a service parts distribution center in Memphis, TN (collectively, the TPC properties). As of the petition date, the TPC lenders held liens on the TPC properties as collateral to secure $90.7 million in debt ($63.9 million as to the Maryland facility and $26.8 million as to the Tennessee facility). In order to resolve the TPC lenders’ prior objections to the §363 sale, a provision was inserted into the sale order that provided that “the TPC Lenders shall have an allowed secured claim in a total amount equal to the fair market value of the TPC Propert[ies] on the Commencement Date under §506 of the Bankruptcy Code.” In addition, as adequate protection for the TPC lenders’ secured claim, New GM agreed to place $90.7 million of the §363 sale proceeds into an interest-bearing escrow account.
Upon the closing of the §363 sale, New GM and the TPC lenders tried, unsuccessfully, to resolve the dispute. New GM obtained an appraisal for the TPC properties utilizing a “fair market value” standard of $30.75 million. The TPC lenders valued the TPC properties at $42 million using the “fair market value” standard and $64.9 million using the “value in use” standard.
To resolve the dispute, the court started with a textual analysis of the sale order, focusing on three terms: 1.) “fair market value,” 2.) “on the Commencement Date” and 3.) “under §506 of the Bankruptcy Code.” The court determined that the term “fair market value” does not by itself deter mine the valuation methodology because it does not specify a market or a means for determining value. Therefore, other components of the §363 sale order had to be examined. Looking to the second component, “on the Commencement Date,” the court held that the language was sufficiently clear and required valuation as of the petition date. The court then held that the third component, “under §506 of the Bankruptcy Code,” incorporates the statutory language and any case law interpreting it.
Both New GM and the TPC lenders agreed that the purpose was to determine the value of the TPC properties so that an amount of cash equal to the TPC lenders’ secured claims can be released from the escrow account and paid to the TPC lenders. Looking to the second factor, “the proposed disposition or use of the collateral,” although the TPC lenders correctly noted that Old GM was operating both TPC properties on the petition date, the court determined that §506 does not refer to the “existing” disposition or use of the property; rather, it refers to the “proposed” disposition or use of the property at the time of valuation. On the petition date, Old GM had already announced its intention to sell the TPC properties to New GM.
The court disagreed with the TPC lenders’ arguments because the §363 sale was structured like many other traditional bankruptcy sales where Old GM offered to sell the TPC properties to anyone with a higher and better offer, and therefore, a sale to New GM was not the only potential outcome and Old GM would not continue to operate the properties. The court thus chose the “fair market value” standard, as opposed to the “value in use” standard, which the court felt was inappropriate for a §363 sale. The court did not, however, determine the value of the TPC properties. Consequently, the TPC lenders have sought to appeal the decision.
Once the court has identified the creditor’s interest in the estate’s interest in the collateral, the court must then determine the valuation standard to be applied in valuing the creditor’s interest. In general, the courts agree that the standard is one of fair market value. By itself, however, this reveals relatively little. In virtually every case, the determination of fair market value will depend on the particular market and means selected to gauge the value of the item in question.
The question becomes which market and means establish the most appropriate benchmarks for bankruptcy purposes. As §506(a) instructs, the answer depends in the first instance on (i) the purpose of the valuation and (ii) the proposed disposition of the collateral.
Counsel should therefore keep in mind that a court may allow parties to agree on the exact terms and methodology for a valuation of collateral despite §506 and the case law applicable under it; for example, valuing components of a business on a going-concern basis in the hands of the purchaser, with distributable value determined by comparison to the proceeds from the sale of the business as a whole. This would presumably have precluded the dispute on valuation methodology and ensured the TPC lenders a minimum recovery well above what they currently anticipate without a reversal of the decision. Equally interesting is which means and market Hon. Robert E. Gerber will choose in the valuation, the analysis of which will have to await the valuation decision.
Reprinted with permission from the ABI Journal, Vol. XXXII, No. 2, March 2013.
Oscar Pinkas is an associate in the Restructuring and Insolvency Group of SNR Denton in New York.
Richard Corbi is counsel in the Bankruptcy, Financial Reorganization and Creditors’ Rights Department and Specialty Finance Department’s Private Equity Group of Lowenstein Sandler PC in New York.
 The views expressed in this article do not reflect the views of Lowenstein Sandler PC, SNR Denton or any of their clients.
 In re Motors Liquidation Co., 482 B.R. 485, 486 (Bankr. S.D.N.Y. 2012).
 Motors Liquidation, 482 B.R. at 490.
 4 Collier’s on Bankruptcy ¶506.03 (Matthew Bender & Company Inc., Alan N. Resnick and Henry J. Sommer eds., 16th ed.).

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