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Calyon argued that the phrase meant "what one could buy or sell the assets for in the market place" and that the only relevant "determinants" are "those that provide evidence of the asset's market price, such as the price actually received in a sale, the price available from a generally recognized source, the most recent bid quotation from that source, or expert testimony regarding the market price." The Debtors countered that Calyon's definition was too narrow in light of the broad language used by Congress.
Moreover, by using the plural word "determinants", Congress clearly intended that "more than one valuation methodology may constitute a 'commercially reasonable determinant' of an asset's value." Further, Congress' use of the word "value" rather than "market value" suggests that Congress intended for the "use of multiple methodologies to determine value, including those that do not rely on the existence of a functional market." The bankruptcy court, after considering the sparse legislative history behind section 562 of the Bankruptcy Code and its apparent purpose, adopted the Debtor's view.
At issue were the timing and method of valuation of the mortgage loan portfolio subject to Calyon's repurchase agreements.
Section 562 of the Bankruptcy Code governs these issues.
The Debtor, however, asserted that a discounted cash flow valuation as of the termination date was commercially reasonable.
Unable to find a market for the assets on the termination date, the nondefaulting party submitted a claim based on a subsequent market valuation.
The court noted that Calyon had failed to demonstrate that the DCF valuation method, which actually had been used internally by the bank itself, was not commercially reasonable.
The court's ruling creates additional uncertainty in the calculation of bankruptcy claims relating to the termination of safe harbored contracts.In this respect, it bears emphasis that section 562 applies to all safe harbored contracts, not just repurchase agreements. First, Calyon chose to assert that commercially reasonable determinants of value were not available on the termination date.In most cases, parties liquidating a repurchase agreement for mortgage loans would conduct a commercially reasonable auction of the assets.It is not clear to what extent section 562 overrides these contractual provisions, that were freely entered into by sophisticated parties prior to the bankruptcy.Finally, the court's decision raises a question as to when a commercially reasonable determinant of value would not exist.