Following a divorce proceeding, the husband filed a Chapter 13 bankruptcy petition and asked for confirmation of his plan. The Bankruptcy Court said its decision depended on the value of the husband’s minority share in his dental practice (i.e., whether they adopted the valuation in the divorce proceeding or found a separate indicator of value).
In In Re Cole, the husband owned a 25% interest in a dental practice. In a divorce proceeding between the husband and his wife, the wife’s expert opined that the value of the husband’s interest was $212,000. The husband’s expert opined that the husband’s interest was only $15,800. The divorce court adopted the wife’s expert’s valuation of the husband’s interest.
In a Chapter 13 bankruptcy proceeding, creditors receive present value payments that are at least equal to the amount the creditors would receive in a Chapter 7 liquidation. The issue was whether the husband’s confirmation plan met the liquidation test under the Bankruptcy Code’s section 1325(a)(4). In a Chapter 7 liquidation, if the divorce valuation was utilized, the creditors would have received much greater payments than under the husband’s Chapter 13 plan.
The Bankruptcy Court said that the divorce valuation was not determinative. In a Chapter 7 liquidation, a trustee is asked to “reduce to money the property of the bankruptcy estate” by selling or disposing the property in other ways. This is different from determining the intrinsic value in a divorce proceeding. However, the Bankruptcy Court rejected that the husband’s interest was worth “zero”. It determined that the husband’s interest would have significant value in a Chapter 7 liquidation. The husband’s plan failed to satisfy the liquidation test.
The court declined to adopt the divorce valuation because it required a different line of examination than was applicable in a Chapter 7 liquidation. The indicator of value that the court believed to be the most reliable was the amount based on the shareholder agreement formula.
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