Winter 2020


Thought Leadership in Valuation for Bankruptcy Purposes

Editors for This Issue: Nathan P. Novak and Jeffrey A. Jensen, CPA

Fraudulent Transfer and Solvency Analyses Thought Leadership

The Balance Sheet Test in Fraudulent Transfer Cases: Is It Appropriate to Fair Value Liabilities?
Cory D. Kandestin, Esq.
Proving insolvency is an important element of a fraudulent transfer claim. Therefore, it is surprising that courts diverge on how they interpret the most basic of the solvency tests, the balance sheet test. Some courts hold that the balance sheet test compares the recorded amount of liabilities to the fair value of assets. Other courts hold that the balance sheet test compares the fair value of liabilities to the fair value of assets. This discussion examines these differing interpretations of the balance sheet test and recommends a unifying principle to reconcile these differing interpretations.

Solvency Opinions and Concerns about Fraudulent Conveyance in Leveraged Transactions
C. Ryan Stewart
The many considerations related to solvency opinions can be quite complicated. Yet these analyses are often required as a condition for consummating sizeable recapitalizations and other risky corporate transactions. A solvency opinion may serve as the means (1) to address the possibility that the transaction could be alleged to be a fraudulent conveyance at some point in the future and (2) to provide comfort to fiduciaries responsible for approving such transactions. This discussion describes each of the three financial tests that are the components of the fraudulent transfer analysis. And, this discussion presents considerations and procedures that (1) enhance the analytical support for the solvency opinion and (2) bolster its usefulness to the intended user.

Insolvency Considerations in Commercial Litigation
Andrea Levin Kim, Esq.
Whether as a company’s general counsel or as a client’s litigation counsel, it may be foreign to your daily practice to think about the law that governs insolvency and the tools of that practice. However, when a client’s company discovers a corporate fraud or theft or it finds itself headed into a bet-your-company dispute, it is worth thinking outside the box. This discussion describes how the law defines insolvency, the way the tools of insolvency law work in these unexpected circumstances, and some areas to think about when determining the strategic importance of insolvency considerations.

A Primer on Valuation Considerations in Bankruptcy
Fady F. Bebawy
This discussion summarizes some of the fundamental elements that go into valuations performed with regard to a bankruptcy proceeding. This discussion is important because bankruptcy law is complex and valuation is also complex. Moreover, conducting a business valuation of a distressed company in the many stages of a bankruptcy proceeding may be a complex process. Understanding the inherent challenges of a bankruptcy valuation analysis and how these challenges affect the valuation conclusions is important. This discussion clarifies some of the complexities of bankruptcy valuation. This discussion provides considerations and observations that (1) aid in the valuation analysis itself and (2) assist the many constituents to the bankruptcy proceeding to better evaluate, understand, and apply valuations.

Best Practices Thought Leadership

Application of the Asset-Based Approach to Conclude a Going-Concern Value
Connor J. Thurman
Valuation analysts (“analysts”) are often retained by legal counsel to provide valuation services to industrial or commercial companies, including services related to bankruptcy proceedings. One of the services that analysts may provide in a bankruptcy context is the valuation of the debtor company equity or the debtor company assets. When valuing the debtor company equity or the debtor company assets, the analyst may develop the valuation based on the going-concern premise of value. One generally accepted valuation approach that may be applied to value the debtor company is the asset-based approach. An analyst may apply the asset-based approach to conclude the going-concern premise of value related to the debtor company. This discussion provides guidance with regard to (1) the generally accepted debtor company valuation approaches and methods and (2) the application of the asset-based approach to value a debtor company based on the goingconcern premise of value.

Domestic and International Bankruptcy Thought Leadership

Best Practices Discussion:
Due Diligence Procedures regarding Management-Prepared Financial Projections
Justin M. Nielsen and Tia Hutton
In commercial bankruptcy matters, there are many issues that a valuation analyst (“analyst”) may face when performing valuation services. These issues may relate to corporate solvency, transactional fairness, or reasonableness of a reorganization plan. One issue in which an analyst may be asked to provide valuation services relates to claims of fraudulent transfer. When analyzing fraudulent transfers, the analyst typically performs three tests in order to determine if a fraudulent transfer has occurred: (1) the balance sheet (or solvency) test, (2) the cash flow test, and (3) the capital adequacy test. In performing the three tests for a fraudulent transfer, the analyst may rely on management-prepared financial projections. This discussion summarizes the three tests involved in a fraudulent transfer analysis. And, this discussion addresses the diligence procedures that the analyst may apply when relying on management-prepared financial projections, including (1) the comparison of the financial projections to relevant industry data and (2) the comparison of management interview data to relevant company and industry data.

Bankruptcy Trends and Developments in the Retail Industry
George H. Haramaras
The retail industry is dynamic and changes quickly. Although dramatic headlines referring to retailers in bankruptcy (e.g., “retail apocalypse”) may be overstated, the retail industry is at an important stage in its history. Retail bankruptcies are frequent and they experienced an increase in volume in 2018. Big changes are occurring in the retail industry. Accordingly, this discussion examines bankruptcy in the context of the retail industry. This discussion broadly examines the retail industry. This discussion identifies current developments and important indicators associated with the retail industry. This discussion summarizes important operational attributes of retail operators. This discussion examines how the unique attributes of retail affect industry debtors in bankruptcy. Finally, this discussion describes several specific areas of the bankruptcy process relevant to retail debtors and identifies trends in retail bankruptcies.

Overview of the New Saudi Arabia Bankruptcy Law
Andrew W. Duncan and F. Dean Driskell III, CPA
The new bankruptcy laws in the Kingdom of Saudi Arabia represent a significant departure from the antiquated solvency rules of the past. These new laws may attract additional foreign investment from the West. This discussion summarizes the new laws, compares the new laws to U.S. bankruptcy laws, and considers some recent, and interesting, bankruptcy cases currently working through the court system in the Kingdom of Saudi Arabia.

Pass-Through Entity Valuation Thought Leadership

Thought Leadership Discussion:

Estate of Aaron U. Jones v. Commissioner of Internal Revenue: Increasing Acceptance of Tax-Affecting
Scott R. Miller and Curtis R. Kimball
The U.S. Tax Court has issued many judicial decisions throughout the past decades that involve the business valuation of a tax pass-through entity. However, there is ongoing debate with regard to how best to apply income tax in a valuation analysis of a tax passthrough entity. The recent Estate of Aaron U. Jones v. Commissioner of Internal Revenue decision was an important judicial decision that affirmed that the federal court system is increasingly willing to consider tax-affecting in a valuation analysis of a tax pass-through entity. This discussion summarizes the Jones case, the important valuation issues involved, and the ultimate impact that case may have moving forward.