Preferences Burden of Persuasion on Debtor to Show Solvency

In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Lids Corp.,</i> 281 B.R. 535 (Bankr. D. Del. 2002)</a>, 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.

</p><h3>Modifying Chapter 13 to Surrender Collateral</h3>

<p>In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Hernandez,</i> 282 B.R. 200 (Bankr. S.D. Tex. 2002)</a>, Bankruptcy Judge <b>Wesley W. Steen</b>

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 <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Coffman,</i> 271 B.R. 492 (Bankr. N.D. Tex. 2002</a>), and <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re
Cameron,</i> 274 B.R. 457 (Bankr. N.D. Tex. 2002</a>), 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 <i>per se</i> prohibition against modifying a chapter 13 plan to surrender collateral to secure
creditor in payment of a secured claim.

</p><h3>Waiver of Automatic Stay, Successive Chapter 11 Filings</h3>

<p>In <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Desai,</i> 282 B.R. 527 (Bankr. M.D. Ga. 2002</a>), Bankruptcy Judge <b>John T. Laney III</b>

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.

</p><h3>Miscellaneous</h3>

<ul>
<li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Olympic Natural Gas Co.,</i> 294 F.3d 737 (5th Cir. 2002</a>) (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);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Contempori Homes Inc.,</i> 281 B.R. 557 (Bankr. N.D. Pa. 2002</a>) (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. §1961);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Duvall,</i> 281 B.R. 646 (Bankr. W.D. Ky. 2002</a>) (as the refunded portion of an earned income tax
credit is considered "an overpayment," it cannot be exempted as public assistance);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Centura Software Corp.,</i> 281 B.R. 660 (Bankr. N.D. Cal. 2002</a>) (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);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Grant,</i> 281 B.R. 721 (Bankr. S.D. Ala. 2000</a>) (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);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Gulf City Seafoods Inc.,</i> 296 F.3d 363 (5th Cir. 2002</a>) (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);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Centennial Coal Inc.,</i> 282 B.R. 140 (Bankr. D. Del. 2002</a>) (convenience of counsel is generally
not relevant to determination of whether to transfer venue of a proceeding);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Lambert,</i> 283 B.R. 16 (B.A.P. 9th Cir. 2002</a>) (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);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Lobherr,</i> 282 B.R. 912 (Bankr. C.D. Cal. 2002</a>) (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);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=3… re Till,</i> 301 F.3d 583 (7th Cir. 2002</a>) (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);

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Monroe,</i> 282 B.R. 219 (Bankr. D. Ariz. 2002</a>) (community debt that could be enforced against
debtors had to be included with other debts in assessing eligibility for chapter 13 release); and

</li><li><a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&amp;vr=2.0&amp;cite=2… re Hanson,</i> 282 B.R. 240 (Bankr. D. Colo. 2002</a>) (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).