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Highlights of this Valuable Resource Include:

• Real life case examples, case descriptions, and tables to demonstrate the applicable sections of the bankruptcy laws
• A review of the methods, applications, pros and cons of restructuring and the basic tools to understand it
• A description of the life cycle of a troubled company and the various stages of a restructuring
• An analysis of the valuation issues that confront practitioners in real world application of bankruptcy law

Business Valuation and Bankruptcy is written in terms that are common to bankruptcy professionals and is an essential, timely book for professionals in the bankruptcy and restructuring environment.

The UFTA, for instance, permits creditors to sue debtors as well as any other party who received property from the debtor in an allegedly fraudulent transfer, Schwartz explained to a packed session of attorneys and business appraisers at last week’s AICPA/AAML National Conference on Divorce in Las Vegas. The uniform laws also permit the creditor (an ex-spouse in divorce) to get an injunction against further disposition of the property by the transferor and/or the transferee, who should both be made parties to the suit. Since proving actual intent to defraud is difficult, UFTA also permits the creditor to show “badges” of fraud, such as a transfer for lack of reasonably equivalent value. “If there are any questions about reasonably equivalent value,” Schwartz told the audience, “get a certified expert.” A forensic accountant or BV expert is also going to be “far better at digging through the financial evidence to find the asset.”

Suggest UFTA to your attorney. In a subsequent session on divorce cases that turn into that dreaded “black hole” of cash and conflict, attorney Joy Feinberg (Feinberg & Barry) told of a recent suit in which the business-owning spouse stood in front of the judge and said, “If you make me pay that, I’m turning over my business to my girlfriend,” and “so help me, he did,” Feinberg said. Now that she knows more about UFTA remedies, she plans on using them to recover assets from “bad” spouses in the future.

Ultimately, the attorney’s plan called for the decedent to establish a family limited partnership (FLP) for each child, funded with an equal amount of assets, and a corporation to act as general partner (GP), for which it received a market-determined management fee. Importantly, the decedent retained sufficient funds to pay her personal expenses. Equally important: The children continued to actively manage the businesses and observe all partnership formalities, including crediting the decedent’s contributions to her capital account. When she died in 2005, the IRS asserted a deficiency of over $2.2 million, arguing that her gross estate should include the value of the FLP assets. The Tax Court disagreed. “The decedent’s primary motives were to ensure effective property management and equal distributions among the children—not minimization of tax consequences,” the court held. Further, the nature of the assets in this case “would lead any prudent person to manage [them] in the form of an entity.” Read the complete digest of Estate of Kelly v. Commissioner,T.C.Memo 2012-73 (March 19, 2012) in the nextBusiness Valuation Update; the Tax Court’s opinion will be posted soon at BVLaw.

According to a recent report by AdvisorOne, however, the DOL’s Employee Benefits Security Administration (EBSA) will not be releasing a “progress report” before it releases the fiduciary reproposal. “Our reproposal, when complete, will provide ample opportunity for public comment, both on the proposed rule itself and on our assessment of its likely effects,” a DOL spokesperson told AdvisorOne. According to the EBSA’s most recent (fall 2011) regulatory agenda, it planned to release its reproposed rule amending the definition of an ERISA fiduciary sometime this month.

that trial judges use their authority, including DAUBERT inquiries, to ascertain early in the case the approximate dollar value of the case. With some searching inquiry into the parties’ damages model, the trial judge can get a good idea of the worth of the contested technology and its implications in the marketplace. The parties also benefit from early damages discussions and disclosures because it can provide a realistic evaluation of both [the] defendant’s exposure and [the] plaintiff’s damages calculation and further promote early and effective mediation.

Further, by understanding a case’s “true worth,” Rader says, the trial judge would be in a better position to tailor cases to fit their size and significance. “In colloquial terms, the court may adjust timing and procedures of the case to make sure a billion-dollar case gets a ‘billion dollars’ worth’ of process, and a thousand-dollar case gets … well, less.” Read Judge Rader’s complete remarks on “The State of Patent Litigation,” posted last week by the Gibbons law firm and originally delivered to the E.D. Tex. Judicial Conference, here.

When asked to derive “the most likely figure” for the plaintiff’s 38% interest in the project, the plaintiff’s valuation expert gave an adept answer. Rather than specify a number, he indicated that the jury could consider “all of the evidence” and come to its own conclusion of FMV. Indeed, the jury returned a verdict of $66.5 million—or more than twice the value of the expert’s “cash flow” model, and far more than the $8.5 million that the defendant had agreed to pay for a 10% interest. The trial court reduced the award to $31 million, but on review, the appellate court reinstated the entire amount, finding it supported by sufficient evidence. In particular, the court commended the plaintiff’s valuation expert for “appropriately deferring to the jury, in its role as fact finder, to make its own assessment of fair market value.” Read the complete digest of Carlton Energy Group, LLC v. Phillips, 2012 Tex. App. LEXIS 1299 (Feb. 14, 2012) in the upcoming Business Valuation Update; the digest and court’s opinion are available at BVLaw.

The case concerned a wealthy Colorado couple, who set up a family LLC with cash and marketable securities to continue a gift-giving plan for their children and grandchildren; specifically, they executed gift documents that transferred a “sufficient number” of LLC units to each recipient “such that the fair market value for federal tax purposes” would equal the amount of the then-current annual gift tax exclusion. If the IRS later determined a different value, then the number of gifted units would adjust accordingly. The taxpayers retained an independent appraiser to value the LLC assets, made appropriate adjustments in the LLC’s capital accounts to reflect the transfers, and then reported their value on their gift tax returns, based on the appraisal as well as the descriptions in the operative documents.

The IRS challenged the valuation of the gifts as well as the validity of the defined value clause. Importantly, the taxpayers stipulated to the IRS’s valuation, thus “closing the door” to the IRS’s first argument, that they intended to transfer fixed percentage interests rather than a specific dollar amount. This amount—and the recipients’ right to receive it—was always fixed and certain, the Tax Court held, in defeating the IRS’s second argument. Just because the precise number of LLC units necessary to fulfill the gifts might be uncertain did not create a condition subsequent to which the taxpayers could “take the property back.” Finally, that the gifts had no charitable component was “inconsequential,” the court held, in overruling the IRS’s final argument, that the formula clauses were void for public policy reasons. It then cited four provisions in the gifting documents that preserved their operation in this and possibly future cases.

Read the complete digest of Wandry v. Commissioner, T.C. Memo. 2012-88 (March 26, 2012) in the May Business Valuation Update; the digest and the Tax Court’s opinion is available at BVLaw.

The new guidance from Pratt coincides with the current update to the Economic Outlook Update (EOU). A significant number of business appraisers use EOU as the basis for capturing the most significant trends impacting the future benefits streams of a business. The complete article is available on the EOU FAQs page; scroll down through the questions to: “Can I use the EOU in a litigation setting?” and click on the article link.

In a recent case, a wife tried to carve out an exception for her minority holding (24%) of highly restricted shares in a family-owned corporation. Although the business was not under any threat of sale, as a “practical matter,” the wife could not “sell, transfer, or pledge her shares”; nor could she convert them into cash.  These facts warranted her expert’s application of a 15% minority discount and 30% marketability discount, she argued

The facts of this case were different, the Massachusetts Court of Appeals agreed, but theBernier principles still applied. That is, because the wife’s businesses were not about to be sold or converted to cash, “liquidity, a hallmark of the marketability discount, is of little consequence,” the court said, and no DLOM applied. Further, although Bernier did not squarely address the application of a minority discount, dictum “made clear that such a discount should not be applied absent extraordinary circumstances,” the court held. Read the complete digest of Caveny v.Caveney, 2012 Mass. App. LEXIS 32 (Jan. 12, 2012), in the current Business Valuation Update; the court’s opinion is posted at BVLaw.