Foreword

• Jurisdiction: United States

Bankruptcy valuation is tricky work. The law at times compels estate assets to be valued under a "fair market" standard, contemplating a hypothetical sale among hypothetical parties transacting in a hypothetical, unpressured environment bearing little resemblance to the debtor's actual reality. Other times, assets must be valued using a "replacement" value standard, which is remarkably unaccommodating when the assets in question are unconventional, like a specially outfitted manufacturing plant, unique intellectual property or fact-specific causes of action.

But perhaps the most uncertain valuation assignment in bankruptcy is ascertaining the worth of a complex business enterprise, such as in connection with the avoidance of a pre-petition transfer or contested confirmation of a chapter 11 plan of reorganization. In this context, GAAP reporting is largely irrelevant. The law instead searches for the business's true "intrinsic" value, predicated on its capacity to generate capital in the future. The raw data includes earnings projections, but those projections are usually prepared while the company is in the throes of financial distress and/or fundamental change. Moreover, those projections are typically created by the same individuals who managed the company to financial collapse (questioning reliability), just arrived as replacements (questioning the capacity to know) and/or have mixed incentives or motives (questioning credibility). Other raw data comes from "comparable" companies that often bear little resemblance to the debtor in question. The raw data is then put through a variety of analytical models, generating what is frequently only a hazy indication of business worth.

Bankruptcy valuation contests are commonly characterized as "battles of the experts," but that may be too simply stated. Experts do not shoulder the burden alone; trial counsel also plays a critical supporting role. Moreover, circumstance matters in valuation trials before bankruptcy courts, and considerable pre-trial work goes into contextualizing expert...