The determination of a debtor’s enterprise value is a crucial component to the success of many Chapter 11 reorganizations. Often in the opening days of a Chapter 11 case, the debtor’s ability to use cash collateral, or obtain the benefit of the automatic stay, will depend on a valuation of the entity enterprise value. That value can also affect the ability of equity holders to retain ownership following the confirmation of a plan. Thus, valuation proceedings are often highly contested. At the center of any valuation contest are the competing opinions of hired experts, and often the party with the more persuasive expert prevails. To be successful, an expert must not only be persuasive but also demonstrate to the court that he or she is qualified to testify as an expert and has employed industry accepted valuation methods in forming his or her opinion. An expert that fails to make these demonstrations risks not only failing to effectively advocate on behalf of the client but also having testimony excluded from the evidence considered by the court.
Expert witnesses face two separate but often substantively entangled hurdles when giving opinion testimony with respect to a debtor’s enterprise value. First, the expert must demonstrate that his opinion testimony is admissible as evidence under the guidelines set forth in the U.S. Supreme Court’s decisions in Daubert v. Merrel Dox Pharmaceuticals1 and Kumho Tire v. Carmichael.2 This article will begin with a discussion of the Daubert standard and recent case law applying the standard. Second, assuming admissibility, an expert must convince the court to give more weight to his opinion than the opinion of a competing expert. A recent case from Texas demonstrates that a qualified expert can fail to be persuasive and even prejudice a court against his party by failing to apply widely accepted methodologies in an unbiased manner.
The ‘Daubert’ Standard
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