23 / October 2014

Expert’s prior statements undercut valuation in bankruptcy case

Posted in: Business Valuation Law News Written by: Sylvia Golden
Categories: bankruptcy case law analysis expert testimony going-concern value valuation experts
Tags: collateral comparable companies analysis discounted cash flow (DCF) dry bulk shipper expert testimony federal bankruptcy court net asset value approach (NAV) reorganization

In re Genco Shipping & Trading Ltd., 2014 Bankr. LEXIS 2854 (July 2, 2014) 

Expert beware of your paper trail!  A recent bankruptcy decision shows just how closely courts scrutinize an expert’s prior record for contradictions and how inconsistent positions on valuation methodology can undermine an expert’s credibility.

In a prepackaged Chapter 11 case, the flashpoint was the debtors’ proposed reorganization plan. The dissenting equity committee objected to the debtors’ use of the net asset value (NAV) for determining the value of the debtor dry bulk shipping company, claiming NAV undervalued the going-concern company and left equity holders without adequate recovery. Instead, the committee’s expert urged the court to give the most weight to the valuation resulting from a discounted cash flow analysis (DCF). Not surprisingly, the DCF results were significantly higher than those resulting from the use of the other standard valuation methods and would result in considerable recovery for the equity note holders.

The court found there were technical reasons for rejecting the DCF in this circumstance—lack of accurate projections—but, above all, it questioned the motivations behind the expert’s insistence on the DFC. It noted that, prior to the debtor’s bankruptcy, the expert’s appraisal firm had made an unsuccessful pitch to serve as the debtor’s financial advisor. The pitch materials contradicted the appraiser’s position at trial in that they reflected a collateral shortfall and thus no money for recovery by the equity holders. Once retained by the other side, the equity committee, the appraiser changed its tune. According to the court, the appraiser “volunteered the earlier opinion on valuation to [the debtor], despite being under no obligation to do so,” which means the debtor could use the material at trial to show the appraiser’s willingness to adopt whatever stance bolstered the current client’s position.

To find out about the court’s ruling on the plan, click here.

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