As the power balance in Chapter 11 bankruptcy has tipped due to tightening lending practices, many corporate debtors are finding themselves at the mercy of new creditors or “bankruptcy debt buyers.” Chapter 11 bankruptcy cases such as Calpine Corp and Citadel Broadcasting became so embroiled in valuation disputes between debtors and creditors that they required judicial intervention just to usher the companies through the bankruptcy exit process. But some bankruptcy judges fear that the increase of valuation wars is endangering the bankruptcy process.
“We are troubled, we as judges, by those who use abusive tactics to undermine constructive negotiations,” U.S. Bankruptcy Judge Burton Lifland said, addressing bankruptcy lawyers and Manhattan bankruptcy judges.
What’s happening now is that there are gangs of bankruptcy debt buyers who hop onto the Chapter 11 bankruptcy “bandwagon” of a company and at the last minute and then swoop in to challenge the valuation of the company. They always come with the same story, “the company is being undervalued by the debtor” and new valuation presented by investors as the “legitimate” valuation. But what is often happening is that these “investors” are really debt vultures who have no long-term interest in the company and offer flawed valuations. The truth is that, the late-comer investors bought the debt with the intention of maximizing the debt’s value and then dumping it right after the company exits bankruptcy.
Some bankruptcy judges are saying that these tactics are abusive and that bankruptcy courts must treat them as abusive tactics or we could see the bankruptcy system eroded by these so-called investors. Bankruptcy Judge Liftland has taken some unprecedented and unique actions to combat the problem of valuation wars and one of them, appointing valuation experts to cases, can be used in bankruptcy courts across the nation.