TELL ME YOUR SECRETS: CHAPTER 11 DISCOVERY RISKS FOR INVESTOR VALUATION MATERIALS
In recent years, a number of major bankruptcy cases have featured battles over whether a party’s internal valuation of a debtor is a proper subject of discovery. Distressed investors, including hedge funds, are often the target of such requests in their roles as restructuring plan sponsors, bidders or creditors taking an active role in the restructuring. These parties may have created valuations of the debtor to inform investment strategy, and such valuations may well be different from what the debtor believes and is telling the bankruptcy court its assets are worth.
A party challenging the debtor’s valuation may find it useful to seek a creditor’s valuation in discovery to try to undermine the debtor’s valuation. In contested discovery hearings in New York, Delaware and Texas, bankruptcy courts have often, but not always, held that such material is off limits for discovery, at least where the creditor is not putting on its own valuation evidence.
In a world in which discovery is increasingly being used as a weapon in hotly contested bankruptcy cases, it is useful to review recent decisions in this area as a guide to the factors judges consider when this issue arises.
Parties seek discovery of valuation materials for a variety of strategic reasons. Such discovery requests are especially likely when the propounding party is disputing the valuation of the debtor in the context of opposing plan confirmation.
Apr-Jun 2023 issue
Davis Polk