FORBES / October 14 /2016

Courts Looking Beyond Usual Standard

Recently, however, several bankruptcy judges have began to look beyond the typical, valuation-focused Pilgrim’s Pridefactors when confronted with a request to appoint an equity committee, including in cases such as Energy XXI and Horsehead Holdings, signaling that courts may be searching for ways to improve equity’s chance of gaining a seat at the negotiating table.

In the case of Energy XXI, Judge Marvin Isgur of the bankruptcy court for the Southern District of Texas appointed an equity committee in light of bad-faith allegations of insider dealing, a lack of disclosure and the CEO’s misconduct that were potentially implicated in Energy XXI’s downward valuation shift in the months leading to its bankruptcy filing.

In Horsehead Holdings, Judge Christopher Sontchi from the bankruptcy court for the District of Delaware appointed an equity committee after noting that he was “going out on a limb” since he was not directing the appointment based on a showing of a substantial likelihood of recovery for shareholders or the other typical legal requirements. Instead, referencing Horsehead’s plummeting value, Judge Sontchi said, “To put it bluntly, something doesn’t smell right.”

Unlike in Energy XXI, Judge Sontchi explicitly noted that he was appointing an equity committee not on the basis of a belief that inappropriate conduct by management had a hand in causing Horsehead’s financial troubles. Rather, Judge Sontchi stressed, “I don’t know what happened as I sit here today.” In his view, the “valuation scenario that existed” before the bankruptcy was “radically different” from the valuation scenario after the company filed for chapter 11, rendering the appointment of an equity committee “appropriate in this unique situation.”