roberto h. castro jd, mst, mba, ava, cpva, series 63 and 79 1 © 2012 wasatch business valuation...

Roberto H. CastroJD, MST, MBA, AVA, CPVA, Series 63 and 79

1© 2012 Wasatch Business Valuation & Litigation Support Services, LLC and

National Association of Certified Valuators and Analysts

AROUND THE VALUATION WORLD

November 15, 2012Courtroom

IN 60 MINUTES™

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Chapter 11 Bankruptcy and Valuation Engagement Opportunities◦ When and Why is a valuation necessary in a Chapter 11◦ Leading Court Cases on the Subject

VFB L.L.C. v. Campbell Soup Co., 482 F.3d 624 (3d Cir, 2007) In re Iridium Operating, L.L.C., 478 F.3d 452( S.D.N.Y. 2007)

◦ Breaking into this Practice Area (Bankruptcy Valuation) U.S. Tax Court Cases – Estate and Gift (Update) –

an opportunity for estate law attorneys and perhaps BV … but in TX◦ Keller v US, (5th Circuit 2012)

© 2012 National Association of Certified Valuators and Analysts

Overview

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Chapter 11 Bankruptcy and Valuation Engagement Opportunities◦ Who files for Chapter 11? Why file for Chapter 11?

Company’s file for Chapter 11 to buy themselves time and file a plan of reorganization. This is an opportunity.

In essence, management claims a reorganized company is worth more worth more alive than dead. Usually the Liab>Assets (not solvent) But it is not strictly a Balance Sheet test. The DCF or

Market Approaches may show that the company is worth more than the liabilities in the long term under the plan.


Overview

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Bankruptcy and Valuation◦ Recent Trends – Chapter 11 filings are cyclical; in bad

times there is more business, in good times there is less business 2009 and 2010 – Uptick amongst Publicly Listed

Companies (211 and 106 respectively) Adelphia

2011 – Downtick amongst Publicly Listed Companies (86) AMR, Dynergy, Harry & David, Borders Group, Orchard

Brands, Robb & Stuckey, Syms 2012 – Downtick (overall, flat to slightly down!

Kodak, Tully’s Coffee, Dewey & LeBouef, Hawker Beechcraft Corp.


Overview

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Breaking into this Practice Area (Bankruptcy Valuation) Opportunities:

◦ Representing the company◦ Representing a secured party◦ Representing an unsecured party or shareholders

Training◦ Plug: CTI offers a 5-day program that is part of the CFFA

training◦ AIRA (Association of Insolvency & Restructuring Advisors)

offers two designations; the CIRA and CDBV (both are good but they seek individuals focused in this area)

◦ Certified Turnaround Professional (CTP), www.turnaround.org


Bankruptcy and Business Valuation

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Breaking into this Practice Area (Bankruptcy Valuation) Impressions

◦ Few accounting professionals with Turnaround Credentials … which in part reflects limited market opportunities for non-credentialed individuals. (I think the opportunities are in the sub $20M is sales or lower middle market. Bigger firms have the CF to pay attorneys and all others in the process)

◦ I suggest that two people—at a minimal—from the firm to get involved in these engagements.

◦ Networking is critical to develop your firm’s “turnaround” brand.

◦ U.S. Trustees and local bars are ideal sources to market to. Let them know you have training and expertise. Many US Trustees are credentialed.



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Bankruptcy and Valuation◦ When and Why is a valuation necessary in a Chapter 11

B/c management and others think a reorganized company is worth more alive than dead.

◦ One cornerstone of U.S. Chapter 11 is the absolute priority rule; this requires that unless junior creditors may not receive any value unless senior creditors are paid in full. In 1978 this was modified and relaxed. There is value to having continuity or history, so some participation is good.

◦ But is a “class” “paid in full”? Tricky! There are classes and priority levels; this something you would learn w/training.

◦ Valuation Experts duel over the value of the debtor.


Overview

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When and Why is a Business Valuation Necessary in a Bankruptcy?◦ There is criticism regarding the current process

and expert battles, since these result in costs and delays that ultimately are paid for by the debtor (which is possibly on “life support” (my term). See sec. 503(b)(3).

◦ The advent of claims trading and vulture investors has complicated the process and judges are expressing deep skepticism about the experts and process.



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When and Why is a Business Valuation Necessary in a Bankruptcy?◦ Competing Motivations and Dysfunction is the Norm.

Senior Lenders – want low valuations so they can claim more of the debtor’s ownership or assets. Example: Firm worth $100; sec’d creditors claim $95. If they

argue firm is worth $45, the incentive is to “kill it” (sell the assets and reap gains. If valued at $90, they get all and operate it, as opposed to $100 where they have to share with unsecured debtors and shareholders.

Junior Creditors – seek the opposite (they want something!). Ex. If the above comp. is worth $125, they get something as opposed to nothing.

There is a also a battle taking place to be deemed part of a class likely to get something.



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When and Why is a Business Valuation Necessary in a Bankruptcy?◦ The Debtor – effectively management (a fiduciary to

all parties) develops the projections as to the future performance that guides the initial valuation.

◦ Questions can arise regarding management’s alignment. Some managers may have an interest in continued employment. See Browning v. Prostok, 165 S.W.3d 336 (Tex. 2005) and National Gypsum (TX case where jr. creditors alleged management intentionally undervalued the debtor by hiding $30 to $40 million, so as to benefit senior note holders in exchange for retaining their jobs).



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◦ The cases that follow provide an overview of the process and issues you will need to know to break-in.

◦ What do you need to know: Business Valuation Legal “stuff”, such as 1) fraudulent transfer law, 2)

Solvency (these two are state specific), and 3) Bankruptcy law.



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Leading Court Cases◦ VFB L.L.C. v. Campbell Soup Co., 482 F.3d 624 (3d

Cir, 2007) It is a good recent example of why a company goes

into bankruptcy and the ensuing litigation. Case is available for down load.

◦ Facts Campbell’s management was under pressure;

shareholders felt the stock was trading too low. Campbell decided to spin-off two of its subs Vlasic

(pickles) and Swanson Foods (TV dinners). They created a “Specialty Foods Division”.



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Cir, 2007) (continued) ◦ Facts

Strategy: One new sub was Vlassic Foods International (VFI). Campbell structured the deal terms. This new sub. would take on new debt to pay Campbell and Campbell shareholders would give stock in the sub to Campbell shareholders as an in-kind dividend.

This new company would be managed by a group of high-ranking Campbell executives. There was little negotiation between Campbell and VFI; it was more of a take-it-or-leave it deal.



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The deal closed at the end of the 1st Q of 1998. Earnings quality was a problem before and after the

spin-off. Revenue recognition was a problem, as well as the level of bulk sales discounts.

Sales and Earnings did not materialize and there was an effort to renegotiate the loan agreement w/secured lenders.



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In Sept 1998 the new loan agreement was reached and VFI issued new bonds contractually subordinated to the bank debt.

The stock Price remained stable despite the publicity. The discounts granted to purchasers led to a

triggered default and bankruptcy.



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Valuation experts. Campbell called one expert that valued VFI’s post-spin-off using the comparable transaction method to six other companies considered comparable and arrived at a $1.5 to $1.8 billion dollar value.

VFI sold its legal claim to VFB which called three experts. They used the DCF and the market approach. The respective values arrived at were $270-360 M and $569M.



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Cir, 2007) (continued) ◦ Issue bfr. the D. Ct and Holding

Whether Campbell’s valuation was correct? (VFB contended that the market price reflected misleadingly high pre-spin figures.)

The D.Court deemed Campbell’s expert’s report good and VFB’s experts reports as flawed. The spin-off was not fraudulent and that VFI was solvent at the time of the spin-off and owed no fiduciary duty to future creditors.



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Cir, 2007) (continued) ◦ Issue bfr. the Court of Appeals and Holding

Whether the spin-off constituted a fraudulent transfer? Campbell’s valuation was correct? (a reasonable equivalent argument) Whether the D.Ct erred holding that VFI’s market capitalization measured the value of its assets?

Held: 1) No fraudulent transfer. 2) The value of a business is a mixed question of fact and law requiring a review for clear error. No clear error.



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Leading Court Cases◦ In re Iridium Operating, L.L.C., 478 F.3d

452( S.D.N.Y. 2007) ◦ Facts

This case features now Justice Sotomayor! Iridium filed for Chapter 11 relief. A consortium of

lenders represented by J Morgan Chase asserted liens over what was left of Iridium. The Official Committee of Unsecured lenders contested those liens. This Committee also pursued claims against Motorola, Iridium’s former parent company.



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452( S.D.N.Y. 2007) ◦ Facts

The Committee and Lenders ultimately decided to settle their dispute and sought court approval of their settlement under Bank Rule 9019.

This Settlement conceded liens, distributed the Estate’s cash to the Lenders and established a vehicle to pursue litigation against Motorola.



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Leading Court Cases◦ In re Iridium Operating, L.L.C., 478 F.3d 452( S.D.N.Y.

2007) The valuation issue is not obvious. The gist is that

shareholders may get something if the planned lawsuit against Motorola is filed, and if it succeeds. The “regular BV work” shows there is no value to this company.

◦ Facts The gist of the shareholders complaint against Motorola is

that it breached its fiduciary duty and that Motorola dominated and controlled all critical aspects of Iridium’s operations, finance and corporate governance.

Motorola did not object in the case, except when approval sought of the liquidation.



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452( S.D.N.Y. 2007) ◦ Facts

Motorola appealed to the district court, which affirmed the Bankruptcy Court’s settlement agreement.

◦ Issue. Could lenders “share” or “gift” some of the proceeds

to a junior, unsecured creditor, even though a priority creditor will go unpaid? (allowed then in a Ch 7. expand to Ch. 11?



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452( S.D.N.Y. 2007) ◦ Held

D. Ct reversed. Motorola prevailed. Motorola argued that the Settlement should not have

been approved because it provided for the transfer of money from the estate to a third entity (ILLLC), and from ILLC to the unsecured creditors after the Motorola-related litigation. Motorola claimed that a settlement can never be fair and equitable if junior creditors’ claims are satisfied before those of more senior creditors.




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Bankruptcy Valuation and Litigation Recent FLP case – a limited BV opportunity (good

for TX attorneys and BV practitioners, may be ok outside of TX is state your in is similar to TX)◦ Keller v U.S. (5th Circuit 2012) (Sept 25, 2012)

Facts: Widow passed away in 2000 and left a substantial fortune and

incomplete estate planning documents. Her estate borrowed and paid $147 million in estate taxes

thinking they could not claim property that was not transferred to a Limited Partnership (TX).

The lawyers that prepared the estate later discovered that authorities thought enough had been done to fund the LP.

The Estate sought a refund.

November 2012 Around the Valuation World in 60 Minutes™


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Bankruptcy Valuation and Litigation Recent FLP case

◦ Keller v U.S. (5th Circuit 2012) (Sept 25, 2012) Facts:

D. Ct. affirmed for taxpayer/estate. The Appellate Court affirmed the D. Court.

Standard of Review: De Novo.

Issue: Whether community property bonds were effectively

transferred to the FLP?



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Bankruptcy Valuation and Litigation Recent FLP case

◦ Keller v U.S. (5th Circuit 2012) (Sept 25, 2012) Holding:

In TX, the law holds that the intent of a party/owner to make an asset partnership property will cause the asset to be property of the partnership. (Here, state law says intent is enough!!)

Did title to property pass contemporaneously to the FLP with its formation? (The Service contended that the above applied with respect to partnerships not under TX limited partnership’s statute!)

Church case cited as authority in favor of the estate. A 47.5% discount allowed! The 5th Cir also allowed the estate to deduct interest on a loan

extended to the estate to pay the tax.



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Summary There are practice opportunities in the turnaround and

bankruptcy area but additional training is important. The company, the secured lenders, and unsecured members need a valuation.

I think the opportunity is in the lower middle market; revenues less than $20M with the company/management. Harder at this level without the specialized credentials and even harder when the company is larger.

The work is cyclical in nature and pays well. Estate work. I view Keller as a good opportunity to get some

BV work in this area (in TX and perhaps outside of TX, if your state law is similar to TX).

If you have any questions, please contact me! [email protected]. Thank you!


mailto:[email protected]

roberto h. castro jd, mst, mba, ava, cpva, series 63 and 79 1 © 2012 wasatch business valuation...

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