Bankruptcy Turnarounds Menaced by Investor Valuation Fights, Lifland Says

Companies trying to rehabilitate themselves through bankruptcy are threatened by valuation fights among late-arriving investors, U.S. Bankruptcy Judge Burton Lifland told lawyers and judges at a conference in New York.

The recent Chapter 11 reorganizations of Calpine Corp. and Citadel Broadcasting Corp. have required judicial intervention in such disputes to help the companies exit bankruptcy, said Lifland, speaking today at the Seventh Annual Complex Financial Restructuring Program at Fordham University School of Law.

“We are troubled, we as judges, by those who use abusive tactics to undermine constructive negotiations,” Lifland said, addressing bankruptcy lawyers and Manhattan bankruptcy judges including Stuart Bernstein, Allan Gropper and Shelley Chapman.

“As evidenced by Calpine and Citadel, success rests on courts’ ability to tamp down on a dispute over valuation,” Lifland said. He said the “here today, gone tomorrow” attitude of investors who trade in a bankrupt company’s debt threatens the U.S. bankruptcy process, once a model emulated by other countries.

Lifland said that in recent years, the power balance in bankruptcy has tipped as the lending market has tightened, making debtors more beholden to creditors for financing.

“There will be a lot more valuation fights than sales,” in upcoming bankruptcies, said Christopher K. Wu, a managing director at distressed investor and adviser Carl Marks Advisory Group LLC, moderating a panel at the same conference today.

Chemtura Versus Shareholders

Chemical and plastic additives maker Chemtura Corp. is in the middle of a Manhattan court battle with shareholders over their claim that the bankrupt chemical maker’s enterprise value is more than its estimate of $2.05 billion.

The committee of shareholders, represented by law firm Skadden, Arps, Slate, Meagher & Flom LLP, could possibly boost their recovery if they show at the trial that Chemtura is worth more than its own estimate under its proposed Chapter 11 plan.

Such trials can prolong a company’s time in bankruptcy and also add to the expense of its reorganization.

“Skadden has made no secret that they have 100 lawyers working on challenging our valuation,” Natasha Labovitz, a lawyer for Chemtura with Kirkland & Ellis LLP, told U.S. Bankruptcy Judge Robert Gerber at a Sept. 16 hearing that kicked off the trial.

Innovative Resolution

Calpine, the biggest producer of power from natural gas and geothermal energy, exited bankruptcy in January 2008. Lifland said his appointment of a valuation expert, the now-deceased chief executive of Bridge Associates LLC, Anthony Schnelling, was an innovative way to resolve arguments that the company had vastly disparate values. According to court documents filed in the case, proposed values for the company ranged from $16.25 billion to $23.2 billion.

“To prevent the hijacking of confirmation, I did something without precedent,” Lifland said.

In the case of Citadel, one of the largest radio broadcasters in the U.S., Lifland said investors who bought into the company just weeks before it was supposed to exit bankruptcy came in with ill-informed valuation experts. His solution: “To prevent the case from spiraling into a charade, I fast-tracked confirmation.”

Hedge funds and other investors who trade in a company’s debt throughout its bankruptcy serve a purpose other than profiting for themselves, said lawyer Michael Friedman, partner in the bankruptcy group at Richards Kibbe & Orbe LLP, speaking in a phone interview.

“A valuation fight may disrupt a train toward confirmation of a plan, but that plan could unfairly contain a windfall to some of the more senior classes at the expense of the junior classes,” Friedman said.

Lifland said that while investors have a legal right to intervene in a case, “their motives for doing so can’t always be squared with the overall objectives of Chapter 11.”

To contact the reporter on this story: Tiffany Kary in New York at

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