Battle of Appraisers May Shape Key Decision in Bankruptcy Case

In a variety of bankruptcy settings, the value of certain property, particularly real estate, may dominate the outcome of the case. These valuation disputes occur in Chapter 7 liquidations, Chapter 13 bankruptcies and Chapter 11 corporate reorganizations. Frequently, the question of the value of a secured or unsecured claim involving real property will affect the total value of assets the bankruptcy debtor’s estate may possess and the relative allocations of available funds to creditors vying often against each other for their “piece of the pie.”

A problematic factor, however, in determining the true value of a particular legal or equitable interest in real property derives from the fact that real estate appraisers utilize different methodologies to ascertain the value of certain real estate parcels. In a recent Texas bankruptcy case which addressed the value of an estate including a piece of real property in New Mexico, the federal bankruptcy court outlined the three traditional approaches to determining market value: the comparable sales method, the cost method and the income method. The court in In Re Diamond Beach VP, LP, 506 B.R. 701 (2014) discussed each of these different approaches:

1. Comparable Sales Approach – an appraiser analyzes sales of reasonably similar properties and then adjusts the purchase price for those properties to account for differences between the subject property and the comparable properties;

2. Cost Approach –  the appraiser determines the value of  property by estimating the current cost to construct a replacement for, or reproduction of, the existing structure, including an entrepreneurial incentive, deducting depreciation from the total cost and adding the estimated land value;

3. Income Approach – net income is determined by estimating future income, deducting for expenses and applying a capitalization rate to determine the present value of future income.

The bankruptcy opinion also reviewed a more modern approach known as the subdivision development method which values an undeveloped tract of land by calculating what a developer could expect to realize from sales of individual lots, taking into account the cost of development and discounting future revenues to present value.

Accordingly, bankruptcy courts in Chapter 7, Chapter 11 and Chapter 13 bankruptcy cases face questions of which traditional and novel approaches should be used to assess the values of property held in the estates of debtors.  And then, even when it becomes clear which valuation method should be used to appraise a particular parcel of land, there still exists the question of whether a particular appraiser uses that approach properly and arrives at credible conclusions. Ultimately, the “bankruptcy court is not bound by the expert reports or opinions of appraisers and may form its own opinion of value of the subject property.” In re Grind Coffee & Nosh, LLC, 2011 WL 1301357, at *6.  Accordingly, any party to a bankruptcy action, debtor or creditor, is well-advised to seek the experienced counsel of a knowledgeable bankruptcy attorney, one who understands the various approaches which different appraisers use and therefore, have the necessary capacity to effectively examine such appraisers and argue about the validity of their methodologies and conclusions of those appraisers.  

In Albuquerque, Giddens & Gatton Law, P.C. has bankruptcy attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases. The New Mexico firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, P.C. at (505) 633-6298 to set up an appointment or visit the firm’s website at giddenslaw.com. Giddens & Gatton Law, P.C. is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.