Wednesday, June 10, 2009

Lack of Key Non-Compete Can Hurt Secured Creditors In Chapter 11 Valuation (In re Olio Dental)

In a Chapter 11 proceeding, a secured creditor may file a proof of claim valuing the business well above what the debtor believes is accurate. If the debtor intends to carry on the business in the normal course, the court must not look to liquidation value of the business' assets, but rather must examine the use value or fair market value of secured property.

In a recent bankruptcy case involving dental equipment business, HSBC took a security interest in the debtor's "general intangibles of every kind." When assessing the debtor's objection to the proof of claim it filed, the bankruptcy court noted that "the valuation must take into account the value of the business going forward."

However, the debtor's principal had no employment or non-compete agreement, and in the words of the court, "could walk away from this practice and open a new business across the street taking many of debtor's customers with him." Accordingly, the court had to examine fair market value considering the absence of any non-compete binding the debtor's principal.

The result: HSBC's proof of claim estimated the value of its collateral between $375,000 and $500,000. The court valued the secured collateral at just over $100,000 and held HSBC was unsecured as to the balance of its claim.

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Court: United States Bankruptcy Court for the Southern District of Indiana
Opinion Date: 5/26/09
Cite: In re Olio Dental, Inc., 2009 Bankr. LEXIS 1248 (S.D. Ind. May 26, 2009)
Favors: N/A
Law: Federal

1 comment:

  1. I have used the threat of bankruptcy to convince the bank to renegotiate a client's practice purchase loan, since the bank would get none of the goodwill value out of the practice on bankruptcy in the absence of a non-competition agreement.

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