Bankruptcy Appraisals: FMV? OLV? FLV?

(by David Maloney) The topic of bankruptcy and bankruptcy appraisals is a complicated one. Be that as it may, a rudimentary understanding of the bankruptcy processes, the type of debtor (individual or business), and the options available to the debtor depending on the type of bankruptcy filing sought (Chapter 7? 11? 13?) is helpful to the appraiser intent on completely identifying the “appraisal problem” including the type and definition of value to be developed when undertaking a bankruptcy appraisal.

Bankruptcy is a legal procedure designed to protect both an individual or business that can’t meet its financial obligations and to protect the creditors involved. The process of bankruptcy requires the debtor to create a report illustrating the “value” of their assets. In order to get a true reading of the value of the individual or business personal property involved, an appraisal is at times, but not always, necessary.

All bankruptcies are governed by Title 11 of the U.S. Code (Bankruptcy Code) and are processed through Bankruptcy Courts — part of the system of Federal courts. The Bankruptcy Courts of the 94 Federal judicial districts were created by Congress just to hear bankruptcy cases and make decisions about disputes between debtors and creditors.

In brief, those petitioning for bankruptcy can be categorized as either an individual or as a business. For an individual, bankruptcy options commonly include Chapter 7 (liquidation) or Chapter 13 (dept repayment plan). Businesses commonly opt for Chapter 7 (liquidation) or Chapter 11 (reorganization plan).

Individuals filing for Chapter 7 are required to list the fair market value of their assets (including household goods and furnishings, computer equipment, books, art, collections, collectibles, clothing, furs, jewelry, firearms, sports and hobby equipment, etc.) on schedules that are filed with the bankruptcy petition. Normally, individuals filing Chapter 7 (perhaps with direction from their attorneys) are capable of determining the fair market value of their assets without the assistance of a personal property appraiser.

For this purpose, the use of fair market value is mandated by Section 522(a)(2) of the Bankruptcy Code which stipulates that:

““Value” means fair market value as of the date of the filing of the petition…”

For a definition of “fair market value” for bankruptcy purposes, one can look to the 1999 U.S. Bankruptcy Court (District of NH) case of Ivan E. Dore which states:

“The word “value” as used in § 522 has a special meaning. Section 522(a)(2) provides, in pertinent part, that for purposes of § 522, “‘value’ means fair market value as of the date of the filing of the petition. … Fair market value is generally defined as the “price which a willing seller under no compulsion to sell and a willing buyer under no compulsion to buy would agree after the property has been exposed to the market for a reasonable amount of time.”

Chapter 11 business bankruptcy filings for reorganization are much more complicated. Explaining all the reasons underlying the selection of various value types for business Chapter 11 bankruptcy appraisals is well beyond the scope of this work. Suffice it to say that for business bankruptcies the appraiser (normally from the machinery & equipment discipline) could be called upon by either the debtor, debtor’s counsel, creditors or Trustee to develop opinions of forced liquidation value, orderly liquidation value, going concern value or even of a corporate reorganization value. Which to develop depends on the intended use of the report.

Debt restructuring, canceling contracts, obtaining loans using business assets as collateral, partial liquidation of assets, seeking creditor support for a reorganization plan, and showing that a Chapter 11 (reorganization) filing is preferred over a Chapter 7 (liquidation) filing are all common intended uses that will direct appraisers in their selection of the type and definition of value to be employed.

Only through clear communication with the client can the appraiser develop an understanding of the intended use of the appraisal and, subsequently, the type and definition of value to be developed.