28 Feb Valuing Assets in Bankruptcy–A Cautionary Tale (In re: Worley, 4th Circuit)
Today, the Fourth Circuit Court of Appeals ruled that undervaluing your assets in a bankruptcy case can be grounds to deny a debtor a discharge of his debts. The case is In re: Worley (link here).
To recap, when a debtor files for bankruptcy, he must disclose all of his assets and all of his liabilities. The debtor must fairly value the assets so as to put the trustee and creditors on notice as to a full picture of the debtor’s financial situation. In Worley, the debtor owned a minority interest in a land development company. The debtor paid $65,000 for his 49% interest in the company. This company then held a minority interest in another company that owned over 589 acres of real estate. The debtor said on his schedules that his interest in was only worth $2,500.00.
The Fourth Circuit agreed that the bankruptcy court was correct in denying Mr. Worley his discharge. Essentially, the Court of Appeals acknowledged that with certain assets that are hard to sell, a range of values is certainly reasonable. However, in looking at Mr. Worley as the debtor, the court noted that he was an experienced financial professional with ten years’ experience in the industry. Mr. Worley used a valuation method that was singularly inappropriate for the asset being valued and because of his experience in finance, he would have known that.
The court then concluded that Mr. Worley had made a false statement under oath (the information contained in the bankruptcy schedules are set forth under oath). This was sufficient to deny Mr. Worley his discharge of debts.
The court wished to make clear that valuing assets can be more art than science and there may be a range of acceptable values. However, there are some methods that fall outside the range of reasonableness to constitute a “false oath” and this was one of those cases.
The take-away from this and hence the “cautionary tale” is to be candid with the bankruptcy court. Never forget the deal the bankruptcy court is offering you. In exchange for truthful and candid information about your finances and allowing any “non-exempt” assets to be liquidated to pay your creditors, you will be discharged from your debts. But, if you play fast and loose with the rules, the bankruptcy court may deny your a discharge which is the whole reason for seeking bankruptcy protection in the first place.
Adrian Lapas, Esq.
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