Preferences Burden of Persuasion on Debtor to Show Solvency

Preferences Burden of Persuasion on Debtor to Show Solvency

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In In re Lids Corp., 281 B.R. 535 (Bankr. D. Del. 2002), Bankruptcy Judge Mary F. Walrath ruled on a preference action that was defended solely on the theory that the debtor was solvent as of the time of the transfer. The court noted that if the transferee presents sufficient evidence to rebut the statutory presumption of insolvency, the burden of persuasion shifts to the debtor to convince the court that it is insolvent on the relevant date. The court also noted that as long as liquidation is not clearly imminent on the date of the alleged preferential transfer, the debtor must be evaluated as a going-concern for the purpose of assessing insolvency. In that regard, fair valuation of the debtor's assets is market rather than distress value. However, the valuation must take into consideration amounts that a willing and prudent seller would accept from a willing and prudent buyer if the assets were offered in a fair market and for a reasonable period of time. The court then held that valuation evidence that was based in the most part on the book value of the chapter 11 debtor's assets, as reported according to generally accepted accounting principles, was insufficient to rebut the statutory presumption of insolvency during the 90-day preference period, although generally accepted accounting principles were relevant in assessing the debtor's solvency/insolvency. The court also noted that a "market multiple methodology," pursuant to which net revenues and earnings were multiplied by an appropriate range of risk-adjusted multiples to determine a company's total enterprise value, is an acceptable technique for determining a debtor's solvency for preference avoidance purposes. However, under the facts of this case, such evidence was insufficient to rebut the presumption of insolvency where the expert's comparables "were not truly comparable" and included companies that were, unlike the debtor, profitable and where net revenue multiples used by the experts did not account for profitability and thus skewed values upwards. The court noted that comparable transaction methodology, which examines recent transactions where companies had been bought and sold on the market, is also an acceptable technique for determining debtor's solvency for preference avoidance purposes. However, under the facts of this case, the analysis done by the transferee's expert did not rebut the presumption of insolvency where the comparable sales were "too old to be probative of debtor's value on the transfer date." Further, the court noted that in determining the amount of the debt, it must be measured at face value when evaluating the debtor's solvency for preference avoidance purposes. While the court must consider the debtor's contingent liabilities in determining solvency, contingent liabilities must be limited to costs arising from foreseeable events that might occur while the debtor remains a going concern and does not include costs associated with liquidation or dissolution of the debtor, as such costs inherently contradict the going concern classification of the debtor. The court finally held that the Schedules of Assets and Liabilities were insufficient to rebut a statutory presumption given the debtor's statements that the schedules were based on book rather than market value of its assets.

Modifying Chapter 13 to Surrender Collateral

In In re Hernandez, 282 B.R. 200 (Bankr. S.D. Tex. 2002), Bankruptcy Judge Wesley W. Steen addressed the growing split of cases involving whether a debtor may modify a confirmed chapter 13 plan in order to surrender collateral to the creditor in satisfaction of creditor's secured claim. The court, having reviewed a number of cases including In re Coffman, 271 B.R. 492 (Bankr. N.D. Tex. 2002), and In re Cameron, 274 B.R. 457 (Bankr. N.D. Tex. 2002), held that under the facts of this case, where the debtors literally did not have the funds to make the payment to the creditor and retain their home, the debtors would be allowed to modify their confirmed plan for surrender of their pick-up truck to the creditor in satisfaction of the creditor's secured claim, as there was no allegation of unfairness or improper motive on the debtor's part, and surrender of the vehicle was to enable the debtors to keep their family home. The court also noted that there was no per se prohibition against modifying a chapter 13 plan to surrender collateral to secure creditor in payment of a secured claim.

Waiver of Automatic Stay, Successive Chapter 11 Filings

In In re Desai, 282 B.R. 527 (Bankr. M.D. Ga. 2002), Bankruptcy Judge John T. Laney III considered, as an issue of first impression in the Middle District of Georgia, the enforceability of a pre-petition agreement to not oppose relief from the automatic stay. Furthermore, the court considered whether successive chapter 11 bankruptcy petitions constituted a bad-faith filing for the purpose of dismissing the second bankruptcy case. The court found that in deciding whether relief from stay should be granted based on a pre-petition waiver obtained as part of the confirmation of a prior chapter 11 plan, the court should weigh the following factors: (1) the sophistication of the party making the waiver; (2) the consideration for the waiver, including the creditor's risk and the length of time the waiver covers; (3) whether other parties are affected, including unsecured creditors and junior lienholders; and (4) the feasibility of the debtor's plan. After weighing all of the evidence, the court held that the secured creditor had not carried its burden of showing that there was no equity in the property, and based on the four factors related to the validity of the pre-petition waiver, the court declined to enforce the pre-petition waiver. The court, in considering whether the second bankruptcy petition should be dismissed on the basis of bad faith filing, recognized that while the debtor could not be a debtor simultaneously in two separate chapter 11 cases, the second chapter 11 case had been filed on the same day the final decree was entered in the first chapter 11 case, and therefore any overlap in the two cases was deminimus and did not warrant dismissal of the second chapter 11 case. Furthermore, the court found that the evidence presented by the creditor failed to show that the debtor had no realistic possibility of reorganization or that the debtor sought merely to delay or frustrate the legitimate efforts of the secured creditor to enforce its rights. Thus, the court refused to dismiss the second chapter 11 case.


  • In re Olympic Natural Gas Co., 294 F.3d 737 (5th Cir. 2002) (contracts for the purchase and sale of specific quantities of natural gas for delivery at specified future dates qualified as "forward contracts" within the meaning of the statutory exception of the trustee's avoidance power, and pre-petition payments that were made by the debtor were in the nature of "settlement payments," also not subject to avoidance by the trustee);
  • In re Contempori Homes Inc., 281 B.R. 557 (Bankr. N.D. Pa. 2002) (transferee of avoidance payments is obligated to pay pre- and post-judgment interest on the claims from the commencement of the action at the rate set forth in 28 U.S.C. ยง1961);
  • In re Duvall, 281 B.R. 646 (Bankr. W.D. Ky. 2002) (as the refunded portion of an earned income tax credit is considered "an overpayment," it cannot be exempted as public assistance);
  • In re Centura Software Corp., 281 B.R. 660 (Bankr. N.D. Cal. 2002) (as Congress specifically excluded trademark licenses from protection of court and other intellectual property licenses under executory licensing agreements, licensee no longer had any right to use licensed trademarks but was limited to a claim for damages, upon the debtor's rejection of executory trademark licensing agreement);
  • In re Grant, 281 B.R. 721 (Bankr. S.D. Ala. 2000) (arbitration clause contained in contract between creditor and chapter 7 debtor could not require arbitration of debtor's claims alleging violation of the automatic stay and the discharge injunction);
  • In re Gulf City Seafoods Inc., 296 F.3d 363 (5th Cir. 2002) (finding that the debtor's payments were made "according to ordinary business terms" and came within the "ordinary course of business" was clearly erroneous where supplier offers no evidence of payment practices between other creditors and debtors much less payment practices of other debtors and creditors in the same industry);
  • In re Centennial Coal Inc., 282 B.R. 140 (Bankr. D. Del. 2002) (convenience of counsel is generally not relevant to determination of whether to transfer venue of a proceeding);
  • In re Lambert, 283 B.R. 16 (B.A.P. 9th Cir. 2002) (tax relief check issued pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 was not "property of the estate," since debtor was not entitled to payment pre-petition, even though refund calculation was based on pre-petition tax years);
  • In re Lobherr, 282 B.R. 912 (Bankr. C.D. Cal. 2002) (creditor's attempt to renew judgment during the pendency of the bankruptcy case without moving for relief from the automatic stay was void and of no effect);
  • In re Till, 301 F.3d 583 (7th Cir. 2002) (Seventh Circuit adopts the "coerced loan" approach in determining cramdown rate of interest for confirmation of a chapter 13 plan over a secured creditor's objection);
  • In re Monroe, 282 B.R. 219 (Bankr. D. Ariz. 2002) (community debt that could be enforced against debtors had to be included with other debts in assessing eligibility for chapter 13 release); and
  • In re Hanson, 282 B.R. 240 (Bankr. D. Colo. 2002) (debt that was secured only by lien that appeared to be avoidable as preference had to be treated as unsecured debt for purposes of assessing the debtor's eligibility for chapter 13 release).
Journal Date: 
Saturday, February 1, 2003