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Valuation in Chapter 11 Bankruptcy

The Dangers of an Implicit Market Test

Large corporate debtors typically include broad legal disclaimers in their financial disclosures to the bankruptcy court, such that the valuation estimates they offer in support of a proposed plan of reorganization are essentially meaningless. Some bankruptcy courts, however, discourage parties from litigating valuation; instead, they encourage them to negotiate, trusting that to the extent the debtor’s estimates are woefully out of sync, the bargaining process will cause the debtor to pursue a restructuring that rests upon a more accurate value estimation. Meanwhile, these same courts interpret a lack of viable challenges to the debtor’s valuation estimates as evidence of their accuracy: if the value of the debtor’s assets truly exceeded the amount of its liabilities, then large and powerful investors would enter the fray. But this so-called “Implicit Market Test” is deeply flawed. This Article uses a timely case study—the Chapter 11 bankruptcy reorganization of Allied Nevada Gold Corp.—to demonstrate how these realities of modern commercial bankruptcy practice threaten to erode important safeguards in the Bankruptcy Code.

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