Valuation Uncertainty in Chapter 11 Reorganizations

Abstract

The value of even a healthy business enterprise is inherently uncertain, and a company’s pursuit of the bankruptcy reorganization process further amplifies this uncertainty. As a result, when the valuation of a distressed entity becomes necessary, opportunities for error and unintended financial consequences arise. The history of Exide Technologies’ Chapter 11 litigation and reorganization process, coupled with its subsequent performance, illustrates the problematic nature of valuing a bankrupt enterprise. While the Exide account invokes valuation only in the context of plan confirmation and cramdown, the Bankruptcy Code and related jurisprudence may require valuation assessments at multiple points in a bankruptcy proceeding. For example, the determination of a claimant’s secured status requires valuation of the underlying collateral, and the merit of an avoidance action depends upon whether a debtor was solvent at the time of the contested transaction. The resolution of such issues will clearly impact the ultimate recovery that any claimant receives. However, the focus of this Note is on valuation issues arising in the context of plan confirmation and cramdown, where neither the debtor nor the bulk of its assets are sold without contest to a third party for an ascertainable sum pursuant to the plan. In particular, this Note explores the factors that may have contributed to the observed outcome in Exide and the possibility of avoiding similar outcomes in future bankruptcy cases involving debtors of comparable size with comparable investor profiles. Finally, it presents potential methods for resolving the problems posed by valuation uncertainty.