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Valuation Experts, Beware the Gatekeeper!
Valuation issues come into play throughout Chapter 11 business reorganization cases. These issues are frequently at the heart of the reorganization process and involve a wide variety of different matters. Bankruptcy courts determine value on a case-by-case basis and in light of the purpose and circumstances of the valuation. Near the inception of the case, the court may be asked to determine whether equity security holders of the debtor are in the money and, therefore, may be entitled to the appointment of an official equity security holders' committee to be funded from the bankruptcy estate. As the pivotal, central issue in connection with the confirmation of a contested plan of reorganization, the court may be required to determine the enterprise value of the reorganized debtor. This determination dictates how interests in the reorganized debtor must be allocated to satisfy the 'absolute priority rule' and, in turn, how consideration is distributed pursuant to the reorganization plan. Since the value of the reorganized enterprise is allocated first to the satisfaction of senior claims and equity interests, a lower valuation will require a higher percentage of the reorganized enterprise be reserved for the satisfaction of the claims and equity interests with senior priority rights.
Although valuation experts generally apply essentially the same methodology in determining enterprise or going concern value in connection with a Chapter 11 plan, they frequently reach substantially different conclusions. In some instances, this has led courts to question the use of an adversarial legal process to determine value and/or the credibility of the proposed valuation experts and, in a few cases, to even disqualify the proposed experts from testifying and presenting their valuation reports. In particular, valuation experts may run into trouble where: 1) they may personally profit depending upon their conclusions regarding value; 2) their role appears to expand beyond that of an independent valuation expert and includes that of an advocate, strategist, adviser, and/or consultant with a broader stake in the process; or 3) the proposed expert's independence is otherwise undermined. Of course, a proposed expert must possess the education experience, expertise, credentials, and other qualifications appropriate and necessary to provide an admissible valuation opinion. If the proposed valuation expert is not qualified or presents a report and/or testimony that is not relevant or reliable, the court should act as a gatekeeper and disqualify the proposed expert and/or prevent the proposed expert evidence from being admitted.
Recognizing the Uncertainties Underlying Expert Valuation Conclusions
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