Insider’s Scoop: Bankruptcy Court Grants Motions to Form an Official Equity Committee Due to Dramatic Adjustments to Valuation Over a Short Period of Time

In re Horsehead Corp., No. 16-10287 (Bankr. D. Del. May 2, 2016) (CSS) [Transcript Ruling]

In a packed courtroom, full of shareholders appearing pro se, Judge Sontchi granted motions to appoint an official equity committee.  Acknowledging that he was going “out on a limb here from the standpoint on where the law puts me”, Judge Sontchi cautioned that “something doesn’t smell right to the Court.”  Hr’g Tr. 100:17-19, 100:25-101:1.  The Court based its ruling on His Honor’s experience and the “unusual circumstances” attendant to the Debtor’s valuation, which had decreased drastically since shortly before the filing of the bankruptcy case.  Horsehead Corporation and four affiliates (the “Debtors”) filed bankruptcy petitions on February 2, 2016.

The Court took issue with case law that holds that equity committees should not be appointed solely to test valuation because, under certain circumstances, “appointing a committee to be able to contest a valuation thesis is appropriate[] because the entire plan rises or falls[sic] on that valuation thesis.”  Hr’g Tr. 101:22-25.  During a colloquy with Debtors’ counsel on the valuation issue, Judge Sontchi rhetorically asked “how do I make a determination today as to whether there’s a reasonable likelihood of return to equity, if I don’t know what the value is?”  Hr’g Tr. 88:4-7.  The Court went on:

“And if there’s enough uncertainty as to what value is and to not act is to act by disenfranchising the shareholders, for practical purposes, shouldn’t the Court act to preserve the potential value to equity in this unusual circumstance? And I don’t just mean a situation where there’s been a long trend towards insolvency.  This company was making statements as late as November of 2015 that it was clearly solvent to the tunes of tens of millions of dollars.”

Hr’g Tr. 88:10-16.

The Court cautioned that professional fees for the equity committee will be scrutinized carefully by the Court, and that His Honor’s ruling was not an invitation for the equity committee to request a six-month extension of the confirmation schedule.  See Hr’g Tr. 102:1-8.  However, the Court left open the possibility of a shorter extension “as we go forward” on plan confirmation to allow the equity committee to get up to speed.  Hr’g Tr. 102:8-13.