LEGAL EYES Fair Market or Value in Use? — GM and the Valuation of Collateral BY OSCAR N. PINKAS AND RICHARD J. CORBI Although the Chapter 11 bankruptcy of General Motors has all but vanished from the headlines, it is still making waves with an interesting and deceptively simple decision on the valuation of a secured creditor’s collateral. A dispute arose among General Motors LLC (New the Commencement Date under §506 of the Bankruptcy GM), the purchaser of Motors Liquidation Corp. Code.” 5 In addition, as adequate protection for the f/k/a General Motors Corp.’s (Old GM and TPC lenders’ secured claim, New GM agreed to place collectively with its affiliate debtors, the debtors) assets $90.7 million of the §363 sale proceeds into an interest- in a July 2009 sale free and clear of liens (the §363 bearing escrow account. sale), and certain secured creditors (the TPC lenders). 1 Upon the closing of the §363 sale, New GM and the The TPC lenders held liens on two of Old GM’s assets TPC lenders tried, unsuccessfully, to resolve the dispute. (a plant and a warehouse) prior to the §363 sale and New GM obtained an appraisal for the TPC proper- sought a valuation of their collateral to determine the ties utilizing a “fair market value” standard of $30.75 OSCAR N. PINKAS RICHARD J. CORBI amount distributable from the sale proceeds on account million. 6 The TPC lenders valued the TPC properties at Associate, Counsel, of their secured claims. Years after the §363 sale closed, $42 million using the “fair market value” standard and SNR Denton Lowenstein Sandler New GM and the TPC lenders could not agree on which $64.9 million using the “value in use” standard. 7 valuation methodology to apply: “fair market value” or Court Analysis the “value in use.” 2 To resolve the dispute, the court started with a textual Included as part of the §363 sale was a transmission analysis of the sale order, focusing on three terms: 1.) manufacturing plant in White Marsh, MD, and a service “fair market value,” 2.) “on the Commencement Date” parts distribution center in Memphis, TN (collectively, and 3.) “under §506 of the Bankruptcy Code.” 8 The the TPC properties). 3 As of the petition date, the TPC court determined that the term “fair market value” lenders held liens on the TPC properties as collateral does not by itself determine the valuation methodology to secure $90.7 million in debt ($63.9 million as to the because it does not specify a market or a means for Maryland facility and $26.8 million as to the Tennessee determining value. 9 Therefore, other components of facility). 4 In order to resolve the TPC lenders’ prior the §363 sale order had to be examined. Looking to the objections to the §363 sale, a provision was inserted second component, “on the Commencement Date,” the into the sale order that provided that “the TPC Lenders court held that the language was sufficiently clear and shall have an allowed secured claim in a total amount required valuation as of the petition date. 10 The court equal to the fair market value of the TPC Propert[ies] on then held that the third component, “under §506 of the Bankruptcy Code,” incorporates the statutory language 1 The views expressed in this article do not refmect the views of Lowenstein Sandler PC, SNR Denton or any of their clients. and any case law interpreting it. 11 2 In re Motors Liquidation Co. , 482 B.R. 485, 486 (Bankr. S.D.N.Y. 2012). 3 Id. at 487. In determining the value of a secured claim, 4 Id. §506(a) provides that “[s]uch value shall be deter- mined in light of the purpose of the valuation and of To resolve the dispute, the court started with a textual analysis of the the proposed disposition or use of such property, and sale order, focusing on three terms: 1.) “fair market value,” 2.) “on the 5 Id. (emphasis added). 6 Id. at 488. 7 Id. Commencement Date” and 3.) “under §506 of the Bankruptcy Code.” 8 Id. at 489. 9 Id. 10 Id. 11 Id. APRIL 2013 • ab f J ournal • 63
LEGAL EYES GM despite the fact that higher and better bids could have been submitted. 17 The TPC lenders argued that New GM’s appraisals were artificially low because they were based on the fiction that New GM did not retain and continue to operate the TPC properties, but instead abandoned them and attempted to sell the TPC properties as non-operating facilities. Because of Old GM’s relationship with New GM, the TPC lenders argued that the court should acknowl- edge the “continued use and operation [of the TPC properties] as part of the General Motors business, first under Old GM and then under New GM.” 18 The court disagreed with the TPC lenders’ arguments because the §363 sale was structured like many other traditional bankruptcy sales where Old GM offered to sell the TPC properties to anyone with a higher and better offer, and therefore, a sale to New GM was not the only potential outcome and Old GM would not continue to operate the properties. 19 The court thus chose the “fair market value” standard, as opposed to the “value in use” standard, which the court felt was inappropriate for a §363 sale. 20 The court did not, however, determine the value of the TPC properties. Consequently, the TPC lenders have sought to appeal the decision. Discussion As the court noted, the decision can be viewed as “simply what normal valuation analyses would yield” 21 in accordance with Collier’s on Bankruptcy : Once the court has identified the creditor’s interest in the estate’s interest in the collateral, the court must then determine the valu- ation standard to be applied in valuing the creditor’s interest. In general, the courts agree that the standard is one of fair market value. By itself, however, this reveals relatively little. In virtually Dan Akerson, chief executive officer of General Motors Co., speaks at GM’s Grand River Assembly Plant in Lansing, Michigan, U.S., on Thursday, Oct. 28, 2010. General Motors Co., the automaker 61 percent owned by the U.S. Treasury, will invest $190 million in every case, the determination of fair market value will depend on the plant to make a small Cadillac model, Akerson said at the facility. (Photo by Jeff Kowalsky/Bloomberg via Getty Images) the particular market and means selected to gauge the value of the item in question. in conjunction with any hearing on such disposition … or use or on a plan affecting such creditor’s interest.” 12 The question becomes which market and means establish the Looking to this statutory language, the court deter- most appropriate benchmarks for bankruptcy purposes. As mined that the “key considerations are 1.) the purpose §506(a) instructs, the answer depends in the first instance on of the valuation and 2.) the proposed disposition or (i) the purpose of the valuation and (ii) the proposed disposition use of the collateral.” 13 of the collateral. 22 Both New GM and the TPC lenders agreed that That is an oversimplification, however. The court made it clear that the purpose was to determine the value of the TPC parties are free to stipulate their own valuation techniques and timing, properties so that an amount of cash equal to the despite §506 and the case law applicable under it. As to valuation tech- TPC lenders’ secured claims can be released from the niques, the court started by looking to the text of the “contractual” escrow account and paid to the TPC lenders. 14 Looking provisions of the sale order to determine whether the valuation meth- to the second factor, “the proposed disposition or use odology was clearly set forth, and later commented that “[t]he parties of the collateral,” although the TPC lenders correctly presumably could have agreed that if New GM were the winning noted that Old GM was operating both TPC properties bidder, the TPC Properties would be valued using the ‘value in use’ on the petition date, the court determined that §506 mechanism, but they did not do so.” 23 As to timing, the court accepted does not refer to the “existing” disposition or use of the the parties’ agreement in the “contractual” provisions of the sale order property; rather, it refers to the “proposed” disposition that valuation was to be determined as of the petition date, contrary to or use of the property at the time of valuation. 15 On the date proposed by Collier’s : “If the collateral is actually sold during the petition date, Old GM had already announced its the pendency of the case, the determinative date should be the time of intention to sell the TPC properties to New GM. 16 disposition for the purposes of measuring entitlements to the proceeds New GM argued that the §363 sale constituted a of the disposition.” 24 “disposition” for §506 purposes because Old GM and 17 Id. New GM were two distinct legal entities and because 18 Id. Old GM did in fact sell the TPC properties to New 19 Id. at 491-94. 20 Id. at 494-95. 21 Id. at 495 n.46. 12 11 U.S.C. §506(a). 22 4 Collier’s on Bankruptcy ¶506.03 (Matthew Bender & Company Inc., Alan N. Resnick and Henry 13 Motors Liquidation , 482 B.R. at 490. J. Sommer eds., 16th ed.). 14 Id. 23 Id. at 496 n.46. 15 Id. at 490-91. 24 4 Collier’s on Bankruptcy ¶506.03 (Matthew Bender & Company Inc., Alan N. Resnick and Henry 16 Id. J. Sommer eds., 16th ed.). 64 • ab f J ournal • APRIL 2013
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