United States: Valuing Forbearance In Fraudulent Transfer Actions: An Introduction*

Last Updated: July 24 2013
Article by James H. Millar

Co-written by Neil Steinkamp, Stout Risius Ross Inc.; New York

As a business descends into financial distress, it commonly enters into discussions with its creditors concerning a viable path forward. As part of those discussions, creditors often agree to forbear from pursuing collection remedies against the company or the collateral for a period. In return, the company may transfer money or property to the creditors or incur additional debt. If, in a subsequent bankruptcy proceeding, the estate representative sues a given creditor for a fraudulent transfer based on the receipt of the money or property or a fraudulent incurrence of the additional obligation, then the creditor may well defend by claiming that the forbearance provided "value" to the debtor. Perhaps in conjunction with other benefits received by the debtor, the creditor will argue that it gave "reasonably equivalent value" and thus may defeat the fraudulent-transfer action. In the resolution to that litigation, the creditor's liability may turn on whether and to what extent a court ascribes value to the forbearance.

Legal Introduction to the Value of Forbearance
Section 548(a)(1)(B) of the Bankruptcy Code—the constructive fraudulent-transfer section—states in relevant part that a trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily ... received less than a reasonably equivalent value in exchange for such transfer or obligation and ... was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.[2]

Section 548(d)(2) defines "value" as "property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor." In addition, "[v]alue has been defined as that which provides an economic benefit, either direct or indirect, to the debtor."[3] However, whether the value provided in a given case rises to the level of "reasonably equivalent value" requires a more searching inquiry. "There is no fixed mathematical formula for determining reasonably equivalent value; rather, the determination depends on all the facts of each case."[4]

Courts have routinely recognized that forbearance can comprise a component of reasonably equivalent value with respect to a fraudulent-transfer analysis.[5] Two relatively recent cases, however, show that courts at times reach a summary conclusion with respect to valuing forbearance without readily providing significant detail around the attendant calculations.[6]

In In re Positive Health Management Inc., the court found that the creditor's forbearance provided value to the debtor because it allowed the debtor "to engage in ongoing business operations to generate continued cash flow."[7] Likewise, the court in In re Propex found that the agreement to forbear and the relaxing of the covenants constituted reasonably equivalent value as a matter of law for an increase in interest rate.[8]

These decisions demonstrate that forbearance provides legitimate benefits to the debtor but they do not set forth any underlying calculations or methodology as to how the court concluded that the forbearance provided reasonably equivalent value compared to the challenged payment. Other courts may not be as willing to reach such conclusions without more quantitative analysis on the relative valuations.[9]

Financial Introduction to the Value of Forbearance
Greek orator Antiphon noted more than 2,000 years ago that "the most costly outlay is time."[10] Benjamin Franklin later transformed this into its common form when he wrote "[r]emember that time is money. He that idly loses five shillings' worth of time loses five shillings, and might as prudently throw five shillings into the sea."[11] Indeed, perhaps in no time in history has the adage "time is money" been more true than today.

However, if time is money, can the two be equated mathematically? Fundamental to valuation theory is the concept that an asset's value must incorporate the risks inherent from the passage of time. Value is generally the present value of expected future cash flows. To arrive at that present value, one must apply reasonable financial theory to compensate for the passage of time and the expectation that there is risk in the outcomes that may be achieved in the future.

In the context of distressed businesses, there are often strategic risks that are faced and critical decision points. The results of these decisions may result in businesses surviving or failing. The efforts to restructure a business can involve many parties working together to preserve what value may exist in the business or can be realized from its liquidation or sale. For lenders, one common consideration is forbearance, which is simply defined as "a refraining from the enforcement of something (as a debt, right or obligation) that is due."[12] However, conceptually, if the lender provides a business with forbearance, it must receive something in exchange of reasonably equivalent value, which raises the following question: What is the value of forbearance? From the debtor's perspective, one could ponder "what would a buyer pay for this option in the market" or "what would the company pay to secure this option."[13] Of course, the answer involves a complex analysis of specific facts and circumstances. A complete review of the methods utilized and information considered for such an analysis is certainly beyond the scope of this article. However, certain concepts and calculations are worth considering.

One of the complexities in determining the value of forbearance is that one must consider several perspectives and several potential outcomes. Put simply, the value of forbearance could be conceptualized as the difference between the present value of expected future cash flows if forbearance is provided and the same in the circumstance where forbearance is not provided. One could certainly interpret the opinions of the courts in In re Positive Health Management Inc. and In re Propex Inc. as reflective of this perspective. While the courts did not offer a mathematical or financial method to determine this value, they suggested that had the forbearance not been extended, the circumstances would have been very different, suggesting that value could be measured by the difference. For these situations, valuation techniques can be employed that consider the decision-tree of reasonable outcomes, which are techniques that can be employed in various circumstances, each having certain similarities:

  • real options;[14]
  • valuation of claims arising out of litigation; and
  • valuation of contingent assets/liabilities.

For each of these, the valuation practitioner typically considers certain assumptions or inputs to the calculation of value. While the specifics of each methodology may include or exclude certain factors, generally, the practitioner considers the following:

  • the different events that are likely to occur under certain scenarios;
  • the time that it will take for these scenarios to develop;
  • the probability of the expected outcomes in each scenario;
  • the cash flow associated with each of the potential outcomes; and
  • the risks associated with the receipts of those cash flows.

The facts and circumstances often surrounding forbearance naturally lead to the use of the decision-tree valuation techniques due to the multiple potential outcomes and restructuring events that may arise with or without forbearance.

The first step in developing an analysis using decision-tree valuation techniques typically involves estimating the amounts and timing of the future cash flows estimated under multiple scenarios. These amounts are discounted to a present value utilizing a rate of return consistent with the risk inherent in the projected cash flows. The present value of the total cash flows in each scenario is then weighted based on the probability of each scenario occurring, as projected.[15]

The decision-tree framework provides for flexibility that is not typically found in the discounted cash flow method. However, decision-tree valuation techniques can also require additional assumptions that can be challenging to quantify. In addition, there are practical limitations to the number of possible scenarios that can either be modeled or reasonably estimated. As such, one must carefully weigh the benefits of additional flexibility with the challenges and complexity of the resultant financial models.

Courts have made it clear that forbearance has value. Further, they have stated that forbearance is an element of consideration when reviewing reasonably equivalent value for purposes of fraudulent transfers, and the published opinions have provided little guidance as to the specific factors considered in valuing forbearance or specific methods that are to be applied. However, the essential characteristics of forbearance are similar to other circumstances in which valuation theory is commonly applied. In these circumstances, such as the valuation of claims arising out of litigation (often considered a contingent asset or liability), decision-tree valuation methodologies are employed to assess the value of assets based on the probabilities, cash flows and risks of cash flows associated with certain expected outcomes. This analysis is certainly complex and requires a careful analysis of available facts in any matter, however, the value of forbearance can be determined if sensible inputs are applied reasonably.

* The authors provided a lengthier treatment of this subject in the Dec. 3, 2012, edition of the New York Law Journal.

2. 11 U.S.C. § 548(a)(1)(B) (emphasis added).

3. Barber v. Iverson (In re Iverson), 2008 WL 2796998, at *5 (Bankr. C.D. Ill. July 21, 2008) (citing Lisle v. John Wiley & Sons Inc. (In re Wilkinson), 319 B.R. 134, 138 (Bankr. E.D. Ky. 2004), aff'd, 196 Fed. Appx. 337, 2006 WL 2380887 (6th Cir. 2006)).

4. First State Bank of Red Bud v. Official Comm. of Unsecured Creditors (In re Schaefer), 2011 WL 1118666, at *4 (S.D. Ill. March 28, 2011) (citing Barber v. Golden Seed Co., 129 F.3d 382, 387 (7th Cir. 1997)).

5. See, e.g., In re Schaefer, 2011 WL 1118666, at *5. See also Geron v. Palladin Overseas Fund Ltd. (In re AppliedTheory Corp.), 330 B.R. 362, 363-64 (S.D.N.Y. 2005) (discussing Cuevas v. Hudson United Bank (In re M. Silverman Laces Inc.), 2002 WL 31412465 (S.D.N.Y. Oct 24, 2002), and holding that forbearance plus the transfer of a lien equates to reasonably equivalent value as a matter of law with respect to a creditor that provided a cash loan and reasoning that the fact-based analysis used by other courts in similar circumstances is unnecessary).

6. Williams v. BBVA Compass Bank (In re Positive Health Mgmt. Inc.), 2012 WL 3929900 (S.D. Tex. Sept. 7, 2012); Official Comm. of Unsecured Creditors of Propex Inc. v. BNP Paribas (In re Propex Inc.), 415 B.R. 321 (Bankr. E.D. Tenn. 2009).

7. In re Positive Health Mgmt. Inc., 2012 WL 3929900, at *3.

8. In re Propex Inc., 415 B.R. 321 at 324.

9. See, e.g., Official Comm. of Unsecured Creditors v. Credit Suisse First Boston (In re Exide Techs. Inc.), 299 B.R. 732, 748 (Bankr. D. Del. 2003) (denying motion to dismiss and stating that "[t]he value of the forbearance may constitute reasonably equivalent value, but only based on a showing of what the value of the forbearance was"); see also Stillwater Nat'l Bank and Trust Co. v. Kirtley, 299 B.R. 626, 638 n.50 (B.A.P. 10th Cir. 2003) (stating with respect to forbearance that "[i]ndirect benefits that cannot be quantified do not constitute value").

11. Benjamin Franklin, The autobiography and essays of Dr. Benjamin Franklin (Philadelphia: J.B. Lippincott & Co., 1864), page 131

12. "Forbearance," Merriam-Webster, Merriam-Webster.com (Nov. 16, 2012).

13. The value of this forbearance may be perceived differently by the creditor and debtor, depending on the circumstances.

14. This includes decisions such as expanding geographically, investing in a new manufacturing line or laying off employees to achieve greater capacity.

15. See generally Tom Copeland, Vladimir Antikarov, Real Options—A Practitioner's Guide (New York: Cengage Learning, 2003); Steven Kam, Annika Reinemann, Caroline Puiggali and Jason Ruiz, "The Valuation of Litigation," Valuation Strategies 2-11 (March/April 2006).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

James H. Millar
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.