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June 2017 | Issue 86 Background Constellis Group,  Inc. is a private security firm.  In December 2013, the Company formed an Employee Stock Ownership Plan (“ESOP”), which purchased 100% of Constellis’s voting stock.  Wilmington Trust NA was named Trustee of the ESOP.  Less than a year after the ESOP was created, the ESOP sold all […] More...


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Court Rules Out Cost Method For Valuing Technology

August 2012 | Issue 59


The U S Bankruptcy Court for the Eastern District of Pennsylvania was confronted with the need to determine the value of certain intellectual property in a fraudulent transfer case (Holber v. M & T Bank, et al. (In re: Scheffler)), 2012 Bankr. LEXIS 2568 (June 5, 2012).  The property in question was the technology for an automated system for use in the high-speed printing industry.  The system was called the Commander 140 Vertical Stacker.  It had been developed by Penn Graphics Equipment, Inc. (“PGE”). The Debtor had set up a company, Scheffler Automated Systems, Inc. (“ SAS”), for the purpose of manufacturing and selling the Stacker system.

The Fraudulent Transfer

The Trustee in this Chapter 7 proceeding had sought to avoid two mortgages aggregating $650,000 on the Debtor’s home on the grounds that they had arisen as the result of fraudulent transfers.  The holder of the mortgages,  M & T Bank, contended that the Debtor had received the Stacker technology from PGE in exchange for the mortgages, and thus had received “reasonably equivalent value,” and therefore that no fraudulent transfer had taken place.  The court (Richard Fehling) was thus confronted with the task of determining the value of the Stacker technology.

The Appraisers

The Trustee and the Bank each presented valuation experts who tendered their opinions as to the value of the Stacker technology.

The Trustee’s valuation expert reviewed tax returns and other financial information about SAS.  He concluded that SAS had no value.  Its financial difficulties were created by selling the Stacker for prices less than the cost of its raw materials.  No matter how many stackers SAS sold, it had historically made no profit, and in the future would enjoy no profit.  In his opinion the company’s value was zero, and the value of the technology was zero.

The Bank’s expert, an intellectual property attorney, used a cost approach and a capitalization of income approach to value the technology.  Using the cost approach, he arrived at a value of $440,000.  This was based on the fact that it had cost PGE at least $440,000 to develop the technology.

The capitalization of income approach was based on an assumed profit margin of 8% and a useful life for the technology of ten years.  This approach produced a value of $793,000.

The Court’s Opinion of Value

The court agreed with the value conclusion of the Trustee’s expert.  The court pointed out, as confirmation, that SAS continued to lose money in the year-and-a-half period following the mid-2007 valuation date.

The court took a very dim view of the valuation case presented by the Bank.  He said that the Bank’s expert “made serious leaps of faith and failed analyses to arrive at his two very different valuations.”  Regarding the expert’s statement that the value of the technology was equal to its development cost, the court said “[t]he absurdity of this statement is stunning.”  He went on to say that the cost method was a strikingly inappropriate method with which to determine the market value of a unique technology.

The court was also unimpressed with the Bank expert’s capitalization of hypothetical income approach.  He pointed out that the expert looked at the economics of an unrelated industry and ignored the actual huge losses that came from selling the Stackers.


The court concluded that the Stacker technology had no value and therefore did not constitute reasonably equivalent value for the M & T Bank mortgages.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction(s) or tax-related matter(s) addressed herein.