Chapter 1 Introduction

• Jurisdiction: United States

Chapter 1 Introduction

Bankruptcy is, at its core, about valuation. The fundamental stakeholder concern in every bankruptcy is, "What will I get if I won't receive all I'm owed?" For secured lenders, the value entitlement is, at least initially, pegged at the value of their collateral. For unsecured creditors and stockholders thereafter, their value entitlement is the remainderman's share of the estate. For recipients of pre-petition paydowns, their value entitlement (i.e., the ability to keep what was transferred) typically depends on whether the debtor was or was not insolvent at the time of transfer.

In simple bankruptcy cases, the estate is a bundle of assets that can be readily liquidated (e.g., a house or a truck) and the proceeds thereof distributed to creditors. But many bankruptcy cases involve complex asset classes (e.g., equity in a business, intellectual property, causes of action) that cannot be readily liquidated and therefore must be valued to ensure a proper legal process. This is especially true in corporate chapter 11 cases, where (1) post-petition financing often calls into question the "adequate protection" of a secured lender's lien position, (2) the estate arguably includes incremental "good will" enterprise value that will be lost if the business is liquidated in pieces and (3) there is inconclusive data respecting insolvency during the pre-petition period.

The Bankruptcy Code has little to say about valuation ... and a lot. We begin, as does the Bankruptcy Code, with § 506(a), which provides:

(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.
(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such

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