How do you value a Chapter 13 debtor’s business for purposes of the best interests of creditors test?

In a recent Michigan bankruptcy court decision, the court used the “going concern forced sale value” to value Chapter 13 debtor’s business for purpose of best interests of creditors test in Code § 1325(a)(4).

The court was faced with determining the proper valuation methodology for the Chapter 13 debtor’s interest in a hair salon; the valuation was necessary for purposes of a liquidation analysis under the best interests of creditors test in Code § 1325(a)(4).

The court rejected both the debtor’s “non-going concern” liquidation value of $29,087 and certain creditors’ “going concern” fair market value of $239,000. The court said it would determine the business’s going concern forced sale value, because:

1.         The debtor’s plan of reorganization was premised on the business’s viability as a going concern, and the plan proposed to use at least a portion of the business’s net revenue to fund the plan;

2.         A hypothetical Chapter 7 trustee would likely obtain approval to operate the viable business for a limited period to obtain a quick sale, where the going concern value greatly exceeded its non-going concern liquidation value; and,

3.         A hypothetical Chapter 7 trustee would not have time to obtain a fair market value price.

In re Webster, 2017 WL 5989170 (Bankr. E.D. Mich., Dec. 1, 2017)

(Case No. 2:17-bk-43099) (Bankruptcy Judge Mark A. Randon)

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