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Post-Sale Data May Be Useful to Confirm the Reasonableness of Pre-Sale Projections and Valuations But It is of No Relevance In a Breach of Fiduciary Duty Action
Miller v. Am. Capital, Ltd. (In re NewStarcom Holdings, Inc.), Adv. No. 10-50063 (CSS), 2014 WL 3865822 (Bankr. D. Del. Aug. 6, 2014)
In this breach of fiduciary duty action arising from the prepetition “fire” sale of the debtors’ subsidiary (“Old Matco”) to insiders, the chapter 7 trustee sought to compel defendants to produce post-sale financial information of the sold-subsidiary so that the reasonableness of any valuation performed as of the sale date could be determined. The defendants objected to the production on the grounds that the request was, among other things, irrelevant to the fiduciary claims, arguing that the Court’s decision on the claims should be informed only by the decision-making process performed, and the information available, at the time of the sale. The Court agreed with the defendants and found the request irrelevant.
In reaching his conclusion, Judge Sontchi noted that valuation methodology comes in various forms, including asset valuations, discounted cash flow valuations, and comparable-transactions valuations, and determined that the Trustee sought to compare the actual cash flow of Old Matco post-sale with its predicted cash flow, used to form a discounted cash flow valuation. According to the Trustee, this information was relevant to his fiduciary claims as it could be used by the Court and valuators to confirm the value of Old Matco on its sale date. While Judge Sontchi did not disagree that, in certain circumstances, actual subsequent performance of a business could be considered by courts when determining ex post the reasonableness of a valuation, he did not find such consideration relevant to the matter at hand. Indeed, a breach of fiduciary duty can be found where sale-time projections prove to be accurate and the purchase price fair market value. Likewise, a breach may not be found where sale-time projections prove inaccurate. With respect to breach of fiduciary duty claims, the focus, as the Court highlighted, should be on “the decision-making process of a sale, rather than the accuracy of a valuation which has been relied upon.” Unlike valuations, which are “subjective and uncertain,” a defendant’s reasonable care in decision-marking, active and direct oversight in the sale process, and underlying motives are a few of the relevant evidentiary considerations that should be examined.