Plenary Session - Amazon Web Servicesabi-educational-materials.s3.amazonaws.com/Valcon/2010/... ·...

Educ

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2010

D. Bobbitt Noel Jr. (Presiding Officer)Vinson & Elkins, LLP; Houston

Moderator: Jane Lee VrisVinson & Elkins LLP; New York

Martin J.BienenstockDewey & LeBoeuf LLP; New York

Evelyn H. BieryFulbright & Jaworski LLP; Houston

Plenary Session

Valuation Case Law Update: Legal and Financial Perspectives

2010 Valcon Text Print.indd 3572010 Valcon Text Print.indd 357 1/21/10 3:04 PM1/21/10 3:04 PM

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Valuation Case Law Update:Legal and Financial Perspectives

Moderated by: Jane Lee Vr is

Panelists: Mar tin BienenstockEvelyn H. Biery


American Bankruptcy Institute

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Restructurings, Reorganizations and Distressed Sales:Valuation Strategies and Opportunities

Four Seasons HotelLas Vegas, Nevada

February 24-26, 2010

VValuation Case Law Update:LLegal and Financial Perspectives

MModerated by: JJane LLee Vris

PPanelists: MMartin BienenstockEEvelyn H. Biery

Materials Prepared By:

Jane Lee Vris Robert D. Peters Martin Bienenstock Travis TorrencePartner Associate Dewey & LeBoeuf L.L.P. [email protected] [email protected] 1301 Avenue of the Americas Fulbright & Jaworski L.L.P.Vinson & Elkins LLP New York, NY 10019 1301 McKinney, Suite 5100666 Fifth Avenue, 26th Floor (212) 259-8530 Houston, TX 77010-3095New York, NY 10103-0040 [email protected] (713) 651-5151Tel.: (212) 237-2000 (713) 651-3558 (direct)Fax: (212) 237-0100 (713) 651-5246 (fax)

[email protected]


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Restructurings, Reorganizations and Distressed Sales: Valuation Strategies and Opportunities

Four Seasons Hotel Las Vegas, Nevada



Moderated by: Jane Lee Vris

Panelists: Martin Bienenstock Evelyn H. Biery


Jane Lee Vris Robert D. Peters Partner Associate [email protected] [email protected] Vinson & Elkins LLP 666 Fifth Avenue, 26th Floor New York, NY 10103-0040 Tel.: (212) 237-2000 Fax: (212) 237-0100


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HEADING

In re Hawaiian Telcom Communications, et. al., Case No. 08-02005 (Bankr.

D.Haw. November 13, 2009).1

I. Summary of the Facts

A. Overview of Debtors’ plan

Hawaiian Telcom Communications, Inc. and numerous affiliates (“Hawaiian

Telcom”) were debtors under chapter 11 in cases filed in the District of Hawaii. The

debtors’ proposed plan provided for a significantly deleveraged capital structure and

contemplated that the senior secured lenders under a prepetition credit agreement would

own the vast majority of the reorganized entity upon emergence from chapter 11, while

senior noteholders would obtain minority ownership through the issuance of new

warrants and a rights offering. See Proposed Disclosure Statement for the Joint Chapter

11 Plan of Reorganization of Hawaiian Telcom Communications, Inc. and Its Debtor

Affiliates [Docket No. 1103]. Under the debtors’ plan, general unsecured creditors were

to receive their pro rata share of cash distributions from an unsecured creditors fund,

which value would be significantly tied to the value of the debtors’ unencumbered assets,

as determined by the bankruptcy court or otherwise agreed upon by the debtors, senior

secured parties and the creditors committee but in no event was to exceed $500 million.

Id.

B. Objections to debtors’ plan

The creditors committee and various other claimants objected on different

grounds to the plan. Among such objections, the creditors committee argued, among

1 A written opinion has not been prepared by the bankruptcy court, as of the date this summary was prepared. The information provided herein is taken from the transcript of the confirmation hearing held on November 13, 2009, as well as the pleadings cited herein.


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other things, (a) the debtors’ plan violated §§ 1129(a)(1) and 1129(b) of chapter 11 of

title 11 of the United States Code (the “Bankruptcy Code”) by undervaluing the debtors

and the unencumbered assets, and, by inappropriately allocating the debtors’ enterprise

value to secured lenders, the plan provides secured lenders a return in excess of their pro

rata share of the debtors’ assets; (b) the debtors’ plan unfairly discriminated against both

the senior noteholders and subordinated noteholders in violation of § 1129(b) of the

Bankruptcy Code; (c) the cap on the general unsecured creditors cash recovery

inappropriately limited the extent to which general unsecured creditors could share in the

debtors’ unencumbered value, contrary to the requirements of § 1129(b) of the

Bankruptcy Code; and (d) in violation of § 1129(a)(3) of the Bankruptcy Code, the plan

was not proposed in good faith because it was designed with the sole purpose of shifting

value to secured lenders and the debtors’ management at the expense of and to the

detriment of the unsecured creditors. See Objection of the Official Committee of

Unsecured Creditors of Hawaiian Telcom Communications, Inc., et al. to Confirmation

of the Joint Chapter 11 Plan of Reorganization of Hawaiian Telcom Communications,

Inc. and Its Debtor Affiliates [Docket No. 1336].

Specifically, the creditors committee argued that the debtors’ proposed framework

for distribution of value to creditors was inappropriate because the debtors’ plan

incorrectly determined that the secured lenders were entitled to the enterprise value of the

debtors less the value of the debtors’ unsecured assets on a stand-alone, asset-by-asset,

liquidation basis. Under the valuation analysis conducted by the creditors committee

financial advisors, general unsecured claimants were entitled to share an aggregate

amount equal to $139.3 million. The creditors committee’s value assumed the debtors



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had a net distributable value equal to $682.4 million and the net value of the secured

lenders’ collateral equaled approximately $529.7 million. The creditors committee

argued that the debtors’ valuation analysis vastly underestimated the estates’ enterprise

value, including the value of the debtors’ unencumbered assets, which the committee

contended were improperly valued on a liquidation basis rather than a going concern

basis. Id.

C. Debtors’ responses to objections to debtors’ plan

In response to the creditors committee’s objections, the debtors argued, among

other things, that (a) the creditors committee confused the concept of “enterprise value”

and “going concern” value and rather than allocate all of the debtors’ “enterprise value”

to secured lenders, as argued by the creditors committee, the debtors’ plan allocated all of

the “going concern” value of the debtors’ encumbered assets to secured lenders and all of

the “going concern” value of the debtors’ unencumbered assets to the general unsecured

creditors; (b) the creditors committee’s financial advisor use of a “development

approach” to value debtors’ easements was inappropriate because the debtors’ easements

did not generate income and, despite its inappropriateness, the creditors committee’s

financial advisor applied it incorrectly because he failed to calculate or discuss income in

his expert report; (c) distributing warrants as a form of consideration was “fair and

equitable” with respect to senior noteholders because they would receive their allocable

share of unencumbered assets and the warrants had immediate and substantial value; and

(d) the debtors’ plan was prepared in good faith because it was proposed with the

legitimate and honest purpose to reorganize and had a reasonable chance of success. See


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Omnibus Reply of Hawaiian Telcom Communications, Inc., et al. to Objections to Joint

Chapter 11 Plan of Reorganization [Docket No. 1439].

The debtors calculated the value of their unencumbered assets on an income

producing basis and liquidation basis (by applying a 15% to 30% discount range to the

individual values of each of the unencumbered assets) and determined that the maximum

value allocable to the unencumbered assets was $32.2 million. The debtors then

determined the going concern value of their encumbered assets was equal to

approximately $446.9 million, which the debtors calculated by subtracting $32.2 million

from an estimated estate total distributable value of $480 million. Id.

II. Holding

A. Court approves debtors’ plan under Bankruptcy Code § 1129

Following four days of extensive testimony from numerous financial experts who

represented competing interests of various parties, the bankruptcy court confirmed the

debtors’ plan and noted that the valuations supplied by the debtors were more persuasive

than those propounded by the Committee. The court ultimately rejected the Committee’s

objections and found that the debtors’ proved by a preponderance of the evidence that the

debtors’ plan satisfied the requirements of § 1129 of the Bankruptcy Code; in particular,

the debtors’ plan was “fair and equitable,” did not unfairly discriminate against any

holders of claims or interests and was proposed in good faith. The court noted that the

creditors committee’s valuations were far too high and did not relate to anything of

substance that related to the case at hand. Unfortunately, the court did not address which

specific aspects of the valuation analyses it did or did not agree with. The court,

however, emphasized the difficulty it had reconciling the creditor committee’s high



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valuation with reality and pointed out the enormous gap between the creditor committee’s

valuations and the indications of interest received by the debtors in their pre-confirmation

marketing efforts.

B. Testimony from Transcript

The testimony immediately preceding the holding is nevertheless informative.

The financial advisors for the creditors committee, secured lenders and debtors used the

same three standard methodologies for valuing the estates’ enterprise value – comparable

company, discounted cash flow and precedent transactions analyses. However, in

addition to these three commonly used valuation methodologies, the debtors and secured

lenders, whose valuations were significantly lower than that of the creditors committee,

rely on various market-based indicators to support valuations, including (a) indications of

interests the debtors received through marketing efforts, (b) the market price of the

company’s debt, (c) the secured lenders’ election not take additional equity under the

plan and (d) the unsecured bondholders’ rejection of an offer to invest in a valuation

significantly lower than the debtors’ proposed valuation. In particular, the debtors

received at least four indications of interest, through a marketing process that began prior

to the debtors’ filing under chapter 11 and continued for several months after such filing,

within the range of $300 million to $400 million, which was well below the $610 million

enterprise value and $682.4 million net distributable value espoused by the creditors

committee, for substantially of the debtors’ assets. This wide divergence between the

creditors committee’s valuations and the market-based indications of value appears to

have significantly influenced the court’s decision to accept the debtors’ proposed

valuation.


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Jane Lee Vris Robert D. Peters Partner Associate [email protected] [email protected] Vinson & Elkins LLP 666 Fifth Avenue, 26th Floor New York, NY 10103-0040 Tel.: (212) 237-2000 Fax: (212) 237-0100


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HEADING

JPMorgan Chase Bank, N.A. v. Charter Communs. Operating, LLC (In re Charter

Communs.), No. 09-01132-JMP, 2009 Bankr. LEXIS 3609 (Bankr. S.D.N.Y. Nov. 17, 2009).

I. Summary of the facts.

Charter Communications and numerous affiliates (“Charter”) were debtors under chapter

11 in cases filed in the Southern District of New York. The filings and proposed plans were

prearranged, involving approximately $22 billion in debt. The cases were, as noted by the

bankruptcy court, together one of the largest prearranged cases ever filed. Critical to the design

of the plan was the continued ownership of equity by Paul Allen, a very public figure well-

known as the co-founder of Microsoft. Equity holders generally were to receive nothing under

the plan on account of their equity interests; however, as a settlement, Mr. Allen received a cash

payment, releases and continued voting power for at least 35% of the equity of the reorganized

entities. These elements were key both to preserving the companies’ NOLs and to the ability to

reinstate the prepetition senior secured debt, which in turn were critical for achieving the

projections for the reorganized entities supporting feasibility. The prepetition senior secured

lenders and a group of noteholders objected on numerous grounds to the plan. Among the

various objections asserted by different claimants, the senior secured lenders argued their debt

could not be reinstated, and the noteholders argued their recovery was less than they would

receive in a liquidation. The objections required valuation of (1) the settlement with Mr. Allen,

(2) the companies at the time of a disputed intercompany dividend distribution, and (3) the

hypothetical liquidation value for purposes of the best interest test. In each case, the court found

the debtors’ evidence of valuation more persuasive and confirmed the plan.


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II. Valuation.

A. Settlement Valuation.

To reinstate the senior secured debt (and save hundreds of millions of dollars in annual

interest expense), Charter had to avoid tripping a change of control covenant in the debt

documents. This was also critical for preserving the NOLs. However, the Plan also had to

satisfy the cramdown standards of §1129(b). The Plan accomplished both by providing that Mr.

Allen would continue to hold at least 35% of the voting power as part of a “settlement”, and not

on account of his existing equity interest. To authorize the settlement, the court examined, in

addition to the standards for settlements generally, the value of the consideration given on both

sides. The valuation does not appear to have been disputed. The court’s holding on the value of

the settlement is nevertheless interesting: included in the value of the benefit to the estates of the

settlement were (1) the benefit of the interest savings through reinstatement of the senior secured

debt, (2) the value of the NOL being preserved, (3) the stepped up tax basis (without a dollar

amount) and (4) the full amount of the proceeds to be realized through the $1.6 billion rights

offering. In other words, for purposes of valuing a settlement which is a necessary component of

a plan, this case supports inclusion of all the benefits under the plan which would not be possible

without the settlement.

B. Valuation at time of intercompany dividend distribution

The senior secured lenders had argued that the credit facilities were in default prior to the

commencement of the case, precluding any possibility of reinstatement through unimpairment.

In this context, the court was called upon to evaluate whether the company’s board believed

there would be sufficient surplus in one company to declare a dividend to another in order to

fund required debt payments. The alleged default appears to have been a possible



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misrepresentation in a borrowing certificate about the company’s ability to pay debts as they

become due. If, according to the lenders, the company knew it did not have sufficient surplus to

declare the dividend at the time the certificate was delivered, then there was a default. Ultimately

the court found the value of the company not controlling, the representation could be met in

theory regardless of the actual value. Nevertheless, the court did examine the valuation

testimony. In the court’s view, reiterating a view the Judge noted he had previously given in

another case, “valuation is a malleable concept . . . . When it comes to valuation, there is no

revealed, objectively verifiable truth.” In re Charter Communs. 2009 Bankr. LEXIS 3609, *22

(Bankr. S.D.N.Y. Nov. 17, 2009). In a footnote, referring to the earlier opinion, the court

recognized “the tendency of valuation litigation to become a battle of the experts in which the

‘hired guns’ for each function as advocates for a parochial value proposition.” Id. note 11. [The

Court's decision in Iridium recognized the importance of unbiased data derived from the public

markets and commented on the tendency of valuation litigation to become a battle of the experts

in which the "hired guns" for each side function as advocates for a parochial value proposition.

See Official Comm. of Unsecured Creditors v. Motorola, Inc. (In re Iridium Operating LLC), 373

B.R. 283 (Bankr. S.D.N.Y. 2007)]. Five internationally recognized expert firms provided

evidence. The court did not engage in a detailed valuation analysis, but looked at the conflicting

testimony Charter’s experts had given among themselves and also noted with skepticism that

Charter argued the value of the companies declined by billions of dollars during a period when

the markets had stabilized and no corporate event had occurred. The opinion does confirm, in a

somewhat unusual context, the value of obtaining financial advisors and experts to provide a

board with valuation advice. Here, one expert valued the company and the financial advisor to

the board confirmed the reasonableness of the valuation. The valuation advice included


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sensitivity analyses confirming sufficient surplus to declare a dividend under more than one set

of assumptions. The court found no showing of bad faith or fraud and no reason to find a

misrepresentation on the borrowing certificate.

C. Hypothetical Liquidation Analysis

The dissenting unsecured creditors objected that the best interests test could not be

satisfied and the plan confirmed over their objections. Their expert provided testimony as to the

liquidation value as well as the value of the preferred shares being issued under the plan. The

expert discounted the value of the shares by 20%, but the court did not find the discount credible.

Initially, the expert had proposed the discount because the securities would not be public. Once

Charter addressed this concern by increasing the marketability of the shares, the expert next

offered the same discount as a minority ownership discount. The court did not accept this “end’s

oriented analysis”. Id. at *103.

The expert’s liquidation analysis did not fare better. The court found that the lack of a

failure to perform his own liquidation valuation and the largely speculative possible additional

recoveries from litigation the expert relied on were not sufficient to overcome the credibility of

Charter’s expert testimony. The opinion thus serves as a reminder that those challenging

valuation must not only do so with their own experts, but they must also perform their own

analysis rather than just provide criticisms of the opposing analysis. As a final note, the court

agreed that in a liquidation, the NOLs could be valued at zero if the entity in question did not

contribute to the operating losses.



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Martin J. Bienenstock Dewey & LeBoeuf L.L.P. 1301 Avenue of the Americas New York, N.Y. 10019 (212) 259-8530

[email protected]


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1) In re DBSD North America, Inc., 2009 Bankr. LEXIS 3341 (Bankr. S.D.N.Y., filed Oct. 26, 2009)

a) Facts

The debtors were developing a satellite communication system having terrestrial components to avoid the problem of pure satellite systems having signal blockages from buildings and other terrain. The debt structure included $51 million of fully secured debt encumbering most all assets including auction rate securities, $752 million of undersecured second lien debt, and unsecured debt in excess of $211 million. The first lien debt originally had a 13 month maturity to occur before maturity of the second lien debt, and was to be amortized from sale proceeds of any collateral.

The debtors proposed a chapter 11 plan contemplating an exit facility of $57.25 million carrying a 20% interest rate, 2% commitment fee, and 2% closing fee, with warrants to acquire 20% of the common stock and a lien junior to the first lien debt. The first lien debt would receive a new debt instrument for the principal and interest accrued through the effective date and would lose its lien against the equity in the debtors and the auction rate securities. Its 12.5% interest would be payable in kind (PIK) for 4 years, and all principal and interest would be payable in cash in 48 months. The default rate had been 14.5% and the rate during the chapter 11 case was 16%. The second lien debt would be converted into 95% of the common stock not issued to the exit facility lender or other unsecured claimholders. Unsecured claims of $50,000 or less would receive 40% of their allowed claims in cash. The equity would receive 5% of the common stock plus warrants. Distributions to the unsecured claimholders and equity were made from a ‘gift’ by the second lien debt holders who were undersecured.

The holder of the first lien debt (DISH) purchased the debt at par after the chapter 11 plan was proposed and it rejected the plan, but the entity was designated pursuant to 11 U.S.C. § 1126(e), so the vote was not counted pursuant to 11 U.S.C. § 1126(d). The decision designating the entity was filed under seal.

The class of second lien debt accepted the plan by 85% in number and 78% in amount. DISH also held some second lien debt and opposed confirmation.Sprint held an unsecured claim against one debtor and also opposed confirmation.


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The reorganized debtor had committed financing of $52.75 million for the first two of the four years before the first lien debt would be repayable. Confirmation would eliminate $600 million of debt, so the reorganized debtor would start with $81 million debt on the effective date and subsequently have $260 million debt when the first lien debt becomes due in the amount of $82.6 million. The reorganized debtors’ two competitors each have $900 million debt or more.

Both DISH and the debtors’ respective valuation experts used Trading Comparables Analysis, Spectrum Transactions Analysis, and Discounted Cash Flow, but weighted them differently. The debtors assigned a 90% weight to the Trading Comparables Analysis (and a 5% weight to each of the other two measures), while DISH assigned it a 20% weight while weighting the other two measures 40% apiece.

Based on two public company competitors, the debtors’ expert calculated the Trading Comparables Valuation using total enterprise value per megahertz-population, then weighted book and market values, and concluded the Trading Comparables Analysis produced a valuation of the debtors between $380 million and $650 million. DISH’ expert only used the market values and calculated a valuation range of $530 million to $590 million.

To compute the Spectrum Transaction Valuation, the debtors’ expert determined the mean and median transaction price paid per MHz population for spectrum auction transactions he considered most comparable. Then, he deducted the cost of a new satellite the debtors would have to produce. The debtors’ expert concluded this method produced a valuation range of $850 million to $3.1 billion. DISH’ expert used one auction from which he deduced the price per MHz population; then he reduced the price by 85% because the stock prices of the debtors’ competitors fell by 85% since the auction, and he deducted the cost of producing another satellite and additional funding requirements, to conclude the valuation range was $140 million to $215 million.

To compute the discounted cash flow value the debtors’ expert used a business plan contemplating the production of another satellite, and to compute the terminal value at the end of the forecasted period he used an EBITDA multiple between 6 and 6.5 (the midpoint between the median 2009 and 2010 Total Enterprise Value/EBITDA of wireless, satellite, and competitive local exchange industries). He used discount rates of 22% and 24%, and concluded the dcf method produced a valuation range of $570 million to $900 million. DISH’ expert used the debtors’ financial projections in its disclosure statement from 2010 to 2013, and for the terminal value used the average TEV/MHz POP derived in the trading comparables and precedent spectrum transactions analyses. He applied



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a 25% discount rate to the terminal value and discounted the projected cash flows at the risk free rate in one scenario and 25% in a second scenario. His conclusion was a valuation range of $70 million to $100 million.

b) Valuation Issue

What is the correct valuation and valuation method?

c) Holding

The court adopted the debtors’ expert’s valuation, supplemented to omit any weighting of the dcf method. It yielded a valuation range of $492 million to $692 million.

Only the debtors’ expert provided a liquidation value analysis, and the court adopted its range of $113 million to $152 million.

d) Rationale

The court opined it had serious problems with the dcf method because the debtor’s expert used projections assuming major capital expenditures of $1.5 billion, while DISH’ expert used a stream of largely negative cash flows, which the court observed would mean the buyer would have a reason other than cash flow for buying the company.

The court found the Trading Comparables Analysis resulted in the most reliable valuation of the debtors’ business because it was based on two companies with directly comparable assets operating in the same segment of the industry. The experts also differed the least using this methodology. The court sided with the debtors’ expert’s use of both the book values and market values “because the stock of the comparable companies was trading at a significant discount at the time of the valuation, and because of the uncertainty in the markets, it was prudent to weight the book and market value equally.” 2009 LEXIS 3341 *42.

The court found the Spectrum Transactions Analysis less reliable than the Trading Comparables Analysis. To the extent it is considered, the court sided with the debtors’ expert’s analysis “because the relatively large range of values reached by Mr. Henkin [debtors’ expert] was tempered by his low weighting of this method…” 2009 LEXIS 3341 *43. The court observed that DISH’ expert’s finding that there was only one comparable transaction necessitates placing less than a 40% weighting on that figure.

Using only the Trading Comparables Analysis and Spectrum Transactions Analysis, weighted 94.7% and 5.3%, the debtors’ expert’s range became $492


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million to $692 million. DISH’ expert’s new weighting would be 33.3% and 66.7%, yielding a range of $270 million to $340 million.

e) Confirmation

i) The court held that although there was no accepting vote in the first lienholder class, it would be deemed an accepting class because the sole voter was designated and there was authority under Heins v. Ruti-Sweetwater, Inc. (In re Ruti-Sweetwater), 836 F.2d 1263 (10th Cir. 1988), to do so. Notably, in Sweetwater, the court emphasized there was no objection to deeming the class to accept, as there is in DBSD.

ii) The court ruled, however, that in any event, the plan’s treatment of the first lien debt satisfied the indubitable equivalent treatment required for cramdown under 11 U.S.C. § 1129(b)(2)(a)(iii). The rationale was that the claim is sufficiently oversecured by at least 6 times, comparing the first lien debt of $82.6 million in 4 years to the lowest going concern valuation of $492 million. The court did not discuss, however, that if the first lienholder had to resort to enforcement, the liquidation value of $113 million may be more relevant.Moreover, by rendering the first lien debt nonpayable in cash for interest or principal for 4 years, it was effectively subordinated to the exit facility and lost collateral coverage of the auction rate securities, with covenants that had been softened just before bankruptcy.

iii) The court held that the equity going to unsecured claimholders and old equity from the class of second lien debt was not a violation of the absolute priority rule, on the authority of Official Unsecured Creditors Comm. v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305 (1st Cir. 1993), and its progeny (e.g., In re Journal Register Co., 407 B.R. 520, 533 (Bankr. S.D.N.Y. 2009); In re World Health Alternatives, Inc., 344 B.R. 291, 298-299 (Bankr. D. Del. 2006)). It reasoned that “the gifting here does not injure any junior creditor. In fact, the only class that receives less than its entitlement is the one agreeing to provide the gift.” 2009 Bankr. LEXIS 3341 *91. But, that is the fatal flaw here. The class did not vote unanimously to make the gift. Therefore, a portion of the gift is coming from class members who either voted to reject or who did not vote. There is no known authority to support that exception to the absolute priority rule and one circuit court expressly held it is illegal:

“…In turn, Class 7 automatically waived the warrants in favor of Class 12, without any means for dissenting members of Class 7 to protest. Allowing this particular type of transfer would encourage parties to impermissibly sidestep the carefully crafted strictures of the Bankruptcy Code, and would undermine Congress’s intention to give



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unsecured creditors bargaining power in this context. See H.R. Rep. No. 95-595, at 416, reprinted in 1978 U.S.C.C.A.N. 5963, 6372 (‘ [Section 1129(b)(2)(B)(ii)] gives intermediate creditors a great deal of leverage in negotiating with senior or secured creditors who wish to have a plan that gives value to equity.’).”

In re Armstrong World Industries, 432 F.3d 507, 514-515 (3d Cir. 2005).

2) In re G-1 Holdings, Inc., 2009 U.S. Dist. LEXIS 108339 (District Court and Bankr. Ct. D.N.J., filed Nov. 12, 2009).

a) Facts

This decision confirms a chapter 11 plan for a debtor that needed to resolve hundreds of thousands of present and future asbestos claims.The debtor owns Building Materials Company of America, which is the leading manufacturer of residential roofing and building products in the United States. At the confirmation hearing, the statutory committee of asbestos claimants supported confirmation, but the IRS opposed. The plan was jointly proposed by the debtors, the statutory committee of asbestos claimants, and the legal representative for present and future holders of demands under 11 U.S.C. § 524(g).

Pursuant to the plan, the plan sponsor was the old equity owner of the debtors. He would provide new value under the plan equaling approximately $215 million cash plus letters of credit supporting an additional payment to the asbestos trust of $560 million. In exchange, the plan sponsor would retain ownership of the reorganized debtor and procure releases of actions for fraudulent transfers against him, primarily for the transfer of ISP. The debtor would also release claims against certain asbestos attorneys.

The lead lawyer for the statutory committee of asbestos claimants testified that the committee hired a number of experts and negotiated with the debtors’ owner in negotiations “at least as contentious as any of the negotiations in which I was ever engaged.” 2009 U.S. Dist. LEXIS 108339, * 80. He observed that it was not uncommon for third party investors to contact the other asbestos committees in other cases to express interest in buying the debtors, but it did not happen here.The IRS propounded a valuation expert who valued the debtors at


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$3.466 billion based on the income approach and $3.585 billion under the market approach. The debtors submitted a rebuttal by the debtor’s expert resulting in a valuation of $2.195 billion that the IRS expert asserted did not follow appropriate appraisal practices. [After deducting the debt at BMCA and the amounts to be paid by the Plan Sponsor, the IRS valuation concluded the Plan Sponsor was paying much too little and the debtors’ experts concluded the Plan Sponsor was paying fair value.]

The IRS asserted a priority tax claim approximating $315 million plus nonpriority penalties of $68 million if the tax arose in 1990, or $131 million plus nonpriority penalties of $26 million if the tax arose in 1999. The IRS had entered into a tolling agreement with the debtors under which the IRS would not assess the tax against G-I’s nondebtor affiliates in the consolidated tax group before it could assess it against G-I, and the IRS would “not assess any amount against the nonbankrupt corporations with respect to said tax liability that is greater than the amount of the liability that [the IRS] may assess against the Taxpayer.” The plan provided for the nonpriority claim to be paid in full when allowed (i.e., when the tax litigation is resolved on a final basis).It provided for the priority claim to be paid pursuant to a six year note at a rate of interest equal to LIBOR plus 1% on the date of confirmation, with all the interest and principal payable only at maturity of the note.

b) Is the interest rate legal?

Yes. Using LIBO plus 1% “comports with the standard adopted by the Supreme Court in Till, 541 U.S. 465….” The court was satisfied that “no efficient market for credit exists under these circumstances. Thus, the Court concludes that the ‘formula approach’ that was adopted by the Court in Till should be used to determine the proper rate of interest for the treatment of the IRS’ Priority Tax Claim. As such, the Court is satisfied from the evidence and testimony that LIBOR is an appropriate reference rate to use. Additionally, the Court is satisfied from the record that a risk adjustment to the LIBOR rate of one percent is proper under these facts….” 2009 U.S. Dist. LEXIS 108339 *130.

c) Was the amount paid by the Plan Sponsor market tested?



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The court concluded the amount paid by the Plan Sponsor as new value was market tested because the committee of asbestos claimants held a veto power over the plan due to the requirement that it provide a 75% vote under 11 U.S.C. § 524(g)(2)(B)(ii)(IV)(bb) for the reorganized debtor to receive the irrevocable supplemental injunction protecting it against future asbestos liabilities.


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