Petition Rather Than Transfer Date Valuation Of Collateral Appropriate In Determining Secured Creditor's Preference Liability

Valuation is a critical and indispensable part of the bankruptcy process. How collateral and other estate assets (and even creditor claims) are valued will determine a wide range of issues, from a secured creditor's right to adequate protection, post-petition interest, or relief from the automatic stay to a proposed chapter 11 plan's satisfaction of the "best interests" test or whether a "cram-down" plan can be confirmed despite the objections of dissenting creditors. Depending on the context, bankruptcy courts rely on a wide variety of standards to value estate assets, including retail, wholesale, liquidation, forced sale, going-concern, or reorganization value.

When assets are valued may be just as important as the method employed to assign value. In the context of preference litigation, for example, whether collateral is valued as of the bankruptcy petition date or at the time pre-bankruptcy that a debtor made allegedly preferential payments to a secured creditor can be the determinative factor in establishing or warding off avoidance liability. This controversial valuation issue was the subject of a ruling recently handed down by an Eighth Circuit bankruptcy appellate panel in Falcon Creditor Trust v. First Insurance Funding (In re Falcon Products, Inc.). Taking sides on an issue that has produced a rift among bankruptcy and appellate courts, the bankruptcy appellate panel ruled that, in assessing whether a defendant in preference litigation received more as a consequence of pre-bankruptcy payments than it would have been paid in a chapter 7 liquidation, the creditor's collateral must be valued as of the bankruptcy petition date rather than the date of the payments.

Avoidance of Preferential Transfers

One of the fundamental goals underlying U.S. bankruptcy law is the equitable distribution of assets. To that end, the automatic stay generally prevents an individual creditor from pursuing its claim against a debtor after the initiation of a bankruptcy case, in part to prevent one creditor from recovering a greater proportion of its claim relative to other similarly situated creditors. In addition, the Bankruptcy Code recognizes that the goal of providing equal treatment to similarly situated creditors would be thwarted if debtors, voluntarily or otherwise, had an unfettered ability to pay certain favored creditors on the eve of a bankruptcy filing more than they would otherwise receive in a bankruptcy case. Accordingly, Bankruptcy Code section 547(b) provides that a chapter 11 debtor-in-possession ("DIP") or bankruptcy trustee may "avoid" any transfer of the debtor's interest in property?

To or for the benefit of a creditor;

For or on account of an antecedent debt owed by the debtor before such transfer was made;

Made while the debtor was insolvent;

Made on or within 90 days before the date of the filing of the petition (or up to one year if the transferee is an "insider"); and

That enables such creditor to receive more than it would have received if the transfer had not been made and the debtor's assets had been liquidated under chapter 7 of the Bankruptcy Code.

Although a debtor is presumed to be insolvent within 90 days of filing for bankruptcy, the DIP or trustee bears the burden of proving each of...