Feb. 20, 2009 – On February 12, 2009, another volley was fired in the onging Cadence Innovation LLC (“Cadence”) battle with GM.  This time Cadence fired the volley.  In an adversarial “Complaint to recover Money and to Enforce Accomodation Agreement and Stipulation and Consent Order”, Cadence alleges that GM is refusing to pay Cadence more than $4,914,075, including amounts due for equipment and raw material that GM purchased from Cadence.  The purchase price was to be determined as a post-sale matter by an agreed appraiser.  The designated appraiser firm was Hilco Appraisal Services, LLC. (“Hilco”).

The story is not the latest GM/Cadence fight.  The story is the results of the appraisal, which was released on January 13, 2009 and attached to the February 12, 2009 Cadence complaint.  This appraisal shows that the orderly liquidation value is $.10 on the dollar of fair market value.

Hilco reached two valuations using two valuation methodologies – orderly liquidation value and fair market value.  Hilco concluded that the orderly liquidation value was $465,275 and the fair market value was $3,940,175.  While a substantial discount from fair market value is expected in a liquidation, 10 cents on the dollar is truly frightening.

We can argue that this appraisal is not indicative of the liquidation value of standard machining equipment.   The appraisal explains that most of the appraised equipment was “custom designed and build product specific assemply machines.”  Hilco noted:

Due to the equipment’s special size, configuration and design, it is the appraisers’ opinion that this equipment would have little or no value in today’s resale market unless it was sold as part of a product line along with certain intangible assets. Since an analysis of the product lines and intangible assets is beyond the scope of this appraisal, much of the custom designed equipment has been valued for its salvageable component parts such as motors, electronics, pumps, standard machine components and stainless steel or aluminum content.  For other machines or lines, it is the appraisers’ opinion that the equipment has no value due to the cost of removal exceeding the scrap value of the metal components.

Cadence argues that GM agreed to pay the “fair market value” as determined by the appraisal.  GM now says that it never agreed to buy all the appraised equipment.  GM argues that whether GM is required to buy the equipment “depends on whether it comes into contact with GM’s component parts.”  We guess that GM is not happy about paying 10x the liquidation value of the equipment.

GM also argues that the Hilco appraisal did not use a fair market value approach but instead used a “cost approach.”

Reading the back and forth between Cadence and GM, two things can be implied:  (1) everyone is supprised by the appraisal of the equipment; and (2) the players in the Cadence bankruptcy are getting concerned about paying the administrative costs of the case much less being able to make any distribution to the unsecured creditors.