Back in 1998, Campbell Soup spun-off its Vlasic Foods and other “specialty” (i.e., “dog”) businesses to its shareholders. Campbell also transferred a $500 million debt obligation to the spun-off entity (VFI). The spun-off entity didn’t perform too well thereafter, and filed for bankruptcy nearly three years later. A post-confirmation litigation trust (VFB) was created to pursue fraudulent transfer claims against Campbell. Nearly 96% of the VFB creditor interests arose from a $200 unsecured debenture offering fifteen months after the spin-off. Another VFB creditor interest was VFI’s landlord, who had a $1.66 million claim. Significantly, Campbell entered into this lease before the spin-off and VFI assumed it on the date of the spin-off. The rest of the creditors were small trade creditors.
On September 13, 2005, Judge Jordan from the United States District Court for the District of Delaware, issued this 74 page post-trial memorandum (parts 1, 2, and 3 here) containing its findings of fact and conclusions of law. In the end, the Court found that Campbell’s encumbering VFI with over $500 million in debt at the time of the spin-off did not constitute a constructive fraudulent transfer.
Students of bankruptcy litigation will learn much from delving into the details of this litigation, which pitted a litigation team from Andrews & Kurth led by John Lee against a litigation team from Wachtell Lipton led by Mike Schwartz. The amended complaint (which sought more than $500 million from Campbell), the entire nearly 4,900 page trial transcript (encompassing 10 days of fact witness testimony in March 2005 and 5 days of expert witness testimony in August 2005), and all post-trial submissions are available here.
The Court’s decision denying relief to the VFB litigation trust received little attention, and didn’t even earn a slip copy citation in the West Reporter System (though West did just report Judge Jordan’s decision denying VFB’s motion for a new trial [at 2005 WL 3293039] and the decision of a NJ appellate court upholding a decision that Campbell Soup’s insurer was not required to defend or indemnify Campbell in connection with the VFB litigation [at 885 A.2d 465]).
What’s also interesting about this case is how VFB almost avoided a $500 million transaction because its trustee could step into the shoes of a single remaining creditor (the corporate landlord owed only $1.66 million) whose claim was in existence at the time of the spin-off transaction in 1998. Under Moore v. Bay, this trustee standing in the shoes of this single creditor could accomplish in bankruptcy what all the creditors combined could not do outside of bankruptcy: that is, avoid the entire transaction by proving that VFI was rendered insolvent by the transaction.
As to this point, the Court matter of factly made the following conclusions of law (see Opinion pt. 2, at pp. 45-46):Continue Reading Moore v. Bay Nearly Sinks Campbell Soup in Fraudulent Transfer Litigation Challenging the 1998 Vlasic Spinoff

Self-proclaimed “true” (i.e., non-bankruptcy) litigators who find themselves having to litigate in bankruptcy’s free-wheeling arena often lament that “nothing’s inadmissible in bankruptcy; everything just goes to the weight of the evidence.” Obviously, this is a tremendous over-simplification, and Judge Barry Russell’s 1,800 page manifesto, the Bankruptcy Evidence Manual (2005 ed., Thomson/West), is a testament to the fact that everything is clearly not admissible in bankruptcy.
Still, one has to sit up and take note when Judge Stan Bernstein from the Eastern District of New York, in Chartwell Litigation Trust v. Addus Healthcare, Inc. (In re Med Diversified, Inc.), 2005 WL 3077228 (Bankr. E.D.N.Y., 11/14/05), not only bars an expert from testifying in a high-stakes fraudulent transfer case, but adds:

Since this particular issue has not been discussed by any other bankruptcy court, this Court has taken the pains to present a comprehensive analysis of the gatekeeper function in the hope that it may be useful to other bankruptcy judges, the business bankruptcy bar, and, tangentially, the bankruptcy law professoriat.

The Court described the “narrow issue” under submission as whether, in litigation to recover an alleged $7.5 million constructive fraudulent transfer, “the Defendants’ proposed expert witness, Scott P. Peltz (Peltz) is qualified and whether his purported expertise satisfies the standards of relevance and reliability under Daubert.”
The subject matter of his testimony was “the value of 100% of the shares of the defendant, Addus Healthcare, Inc. (Addus),” a privately held healthcare concern, and “the reasonably equivalent value of an alleged option payment of $7.5 million paid by the Plaintiffs’ predecessor in interest, Med Diversified, Inc. (Med D), for a 6 1/2 month extension to close its purchase of these shares.”
Mr. Peltz was the Defendants’ sole expert on all issues of business valuation. After three full days of intense voir dire on his qualifications, the Court barred his testimony and report and issued a lengthy opinion explaining its reasoning, significant portions of which are set forth below. Obviously, not a good day for the defense.
For anyone interested in bankruptcy litigation, and particularly in issues of business valuation (which invariably require expert testimony), this case is mandatory reading. The Court wrote:Continue Reading NY Bankruptcy Judge Stan Bernstein Tosses Expert’s Business Valuation Opinion in a “Must Read” Decision

The Bankruptcy Court for the District of Columbia has released about 16 opinions for publication this year, and five of them have related to the litigation spawned by the Greater Southwest Community Hospital Corp. (“GSCH”) bankruptcy. GSCH’s bankruptcy case commenced in November 2002, and its reorganization plan was confirmed in April, 2004. Under the plan, the debtor’s operations vested in the “Reorganized Debtors,” and the debtor’s litigation assets vested for the benefit of pre-confirmation creditors in the “DCHC Liquidating Trust” (the “Trust”). Sam J. Alberts was named Trustee, and the Trust was funded with $1 million to cover some of the litigation expense.
Judge Teel, the bankruptcy judge assigned to the case, recently issued a lengthy opinion in the case, Alberts v. Tuft (In re Greater Southeast Community Hospital Corp.), 2005 WL 3036507 (Bankr. D.D.C., 10/31/05), in which he addressed the defendants’ Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted.
The Court summarized the complaint’s allegations as follows:

The Trust alleges that DCHC’s former directors and officers (the “D & O Defendants”), with assistance from two law firms (collectively the “Law Firm Defendants”), Epstein Becker & Green P.C. (“Epstein Becker”) and Kutak Rock LLP (“Kutak Rock”), negligently and in some instances intentionally drove the Debtors further into debt in furtherance of a Ponzi scheme perpetrated by the Debtors’ primary if not sole lender, National Century Financial Enterprises (“NCFE”), and its subsidiary and affiliated lenders (collectively the “NCFE Entities”). It seeks recovery not only for assets actually drained out of the Debtors’ estates prior to their bankruptcy filings, but also for the debt accumulated by the Debtors in the years leading up to DCHC’s bankruptcy filing–an amount totaling $242 million.

The Trust’s Complaint contained a total of twenty-one counts, broken down as follows as to the various defendants:

As Against All Defendants: (A) Deepening insolvency claims (Counts X-XII); (B) Claims as a hypothetical judgment lien creditor under § 544(a) (which, according to the complaint, “permits it to (1) to pursue claims that such creditors would hold for breach of fiduciary duty and (2) garnish or ‘seize’ the Trust’s own claims and prosecute those claims as a creditor rather than as a representative of the estate”) (Count XV)
As Against the D&O Defendants: (A) Breach of fiduciary duty (Counts I-V); (B) Corporate waste (Counts V-IX)
As Against the Law Firm Defendants: (A) Aiding and abetting fiduciary duty (Count XIII); (B) Malpractice (Count XIV); (C) Aiding and abetting “deepening insolvency” (Count XI); (D) Fraudulent conveyance (Counts XVI-XXI)

As to the defendants’ motion to dismiss, the Court’s holdings are summarized as follows:
(1) The Court dismissed the “deepening insolvency” claims (Counts X-XII), stating that they were a mere “re-packaging” of the breach of fiduciary claims with respect to the D&O Defendants and the malpractice claims with respect to the Law Firm Defendants.
(2) The Court further dismissed the Section 544(a) claim (Count XV), stating that “the Trust cannot use § 544(a) to bring claims separate from those of the estate or to constructively “seize” the estate’s claim in the guise of a creditor.”
(3) The Court dismissed the breach of fiduciary duty claims with respect to the D&O Defendants relating to the NCFE Entities’ lending practices (Counts I and I-V), as well as the claims alleging corporate waste (Counts V-VII and IX).
(4) The Court did not dismiss Count VIII with respect to loans made to officers for which no consideration was provided in exchange.
(5) The legal malpractice claim (Count XIV), which challenged the sufficiency of the opinion letters that the Law Firm Defendants prepared, survived the motion to dismiss. The Court stated that the allegations regarding these opinion letters were “far from precise,” but that they were sufficient at this stage of litigation to state a claim for malpractice.
(6) Finally, the Court rejected the Law Firm Defendants’ res judicata and judicial estoppel arguments, as well as the statute of limitations and in pari delicto affirmative defenses that were common to all Defendants.
Excerpts from the Court’s opinion on the Court’s dismissal of the “deepening insolvency” and section 544 claims follow:Continue Reading DC Bankruptcy Court Rejects Deepening Insolvency Claims as Duplicative, But Allows Other Related Counts in Trustee’s Serpentine Complaint Against Debtors’ Former D&O’s and Lawyers

Recently, I pointed to a case where a law firm got tripped up on language in a retention order stating “compensation will be [insert approved terms], or as otherwise may be allowed by the Court upon proper application thereof.” See In re Toohey, 2005 WL 2850417 (Bankr. W.D. Ky., 10/27/05).
Along these lines, the 10th Circuit in In re Commercial Financial Services, Inc.,, (2005 WL 274669) (10th Cir., 10/25/05), cut a $1.9 million fee request by Houlihan, Lokey, Howard & Zukin Capital (“Houlihan”). Here, among other things, the Court focused on boilerplate-type language in the retention application stating that Houlihan’s fee request would be “[s]ubject to the approval of the court” as well as to “final review by the Bankruptcy court as to the relative fairness” of the proposed fee.
The case provides a rare glimpse into high-stakes contested fee hearings, with the Court noting:

In its brief, Houlihan goes to great pains to distinguish the quality and nature of its work from all of the other financial advisors present in the case in an apparent effort to demonstrate that its employees were of an entirely superior class and should not be compared with the other financial advisors [like DSI, Intecap, Policano, and ABS LLC]…. Even if we were to assume Houlihan was more skilled than the other financial advisors in this case, we note the bankruptcy court awarded Houlihan’s employees a fee at the “high end” of the pay scale for comparable financial advisors. Houlihan, however, has provided no legitimate basis for concluding it is a categorically superior financial firm.

Significant chunks of the Court’s opinion follow for those interested in the juicy details supporting this judicial slam:Continue Reading 10th Circuit Rules that a Professional’s Flat Monthly Fee Payments Must Be Reasonable, and that Houlihan Lokey “Isn’t a Categorically Superior Financial Firm”

Bankruptcy Code section 1109(b) gives a “party in interest” the right to raise, and appear and be heard on, any issue in a chapter 11 case. Two recent cases involving insurers of debtors in mass tort asbestos-related bankruptcies came to different conclusions as to whether insurers have standing to object to issues arising in the bankruptcies of their insureds. In In re Congoleum Corp., (2005 WL 2559715) (3d Cir., 10/13/05),the Third Circuit held that a debtor asbestos-manufacturer’s insurers had standing to challenge the retention of Gilbert, Heintz & Randolph, LLP as special insurance counsel under Bankruptcy Code section 327(e). Conversely, in In re A.P.I., Inc., (2005 WL 2630662) (Bankr. D. Minn., 10/15/05), the Bankruptcy Court found that the insurers lacked standing to object to confirmation of the debtor-insured’s asbestos-related plan because plan confirmation would not have any material collateral impact on pending state court insurance coverage litigation between the insurer and the debtor-insured.
It’s not easy to reconcile these two cases: the insurers in Congoleum are granted standing; the insurers in A.P.I. are not. Still, both opinions seemingly yielded the “better” result. In A.P.I., by denying standing to the insurers, 83 thorny objections to the plan were eliminated, thus clearing the way to confirmation. Conversely, in Congoleum, granting the insurers standing enabled them to expose cozy relationships among law firms on opposite sides of the table, thus giving the Third Circuit an opportunity to deliver a stern message regarding professional responsibilities in bankruptcy. Still, the A.P.I. case is so strong for asbestos debtors trying to prevent insurers from gaining standing in bankruptcy that one has to wonder whether this case will lead to Minnesota’s bankruptcy court becoming the “Delaware” (i.e., the preferred venue) of asbestos bankruptcies.
Summaries of these two cases follow:Continue Reading An Insurer’s Standing in Mass Tort Bankruptcy Cases: Finding the Right Rule and/or Reaching the Right Result

Many lawyers and clients unfamiliar with the upside-down world of avoidance litigation tend to think that traditional rules of setoff should govern the resolution of avoidance action litigation: “the debtor’s entitled to “x”; the creditor’s entitled to “y”; net-net….” As the Fourth Circuit reminds us in In re Coleman, (2005 WL 2665798) (4th Cir., 10/20/05), avoidance litigation often starts with a more “all or nothing” approach.
The case reminds me of another classic “all or nothing” type case that often trips people up: Moore v. Bay, 284 U.S. 4 (1931). Unlike today’s weighty US Supreme Court opinions, Moore v. Bay is only one page. Apparently that’s all Justice Oliver Wendell Holmes (then about 90 and one year from retirement) had the strength to say about the topic. Subject to some important nuances, that case is generally understood to mean that a transfer avoidable by a bankruptcy trustee as to a single creditor (even as to just a nickel), is avoidable to the entire extent of the transaction (even if the transaction is worth millions). This is as inequitable a result as one gets in bankruptcy, and if any bankruptcy case deserves to be reviewed again by the US Supreme Court it’s Moore v. Bay, but that’s a discussion for another day.
In the Fourth Circuit’s Coleman case, a bank initiated foreclosure proceedings against a debtor’s home, which was stayed by the debtor’s chapter 11 filing on the day before the planned foreclosure sale. The Fourth Circuit described the interesting procedural posture of the case as follows:Continue Reading Avoidance Actions Are All or Nothing, the Fourth Circuit Rules

Summers v. UAL Corporation, et al., (2005 WL 2648670) (N.D. Ill., 10/12/05), pitted the United Airlines ESOP participants against the plan trustee, State Street Bank and Trust Company, among others. In their complaint, the plaintiffs claimed that when UAL’s stock prices declined prior to UAL’s filing for bankruptcy, the UAL ESOP Committee, State Street Bank (the plan trustee), and others failed to take appropriate action to protect plan assets (e.g., by diversifying the ESOP’s stockholdings and shedding UAL shares). All defendants except State Street Bank settled.
Plaintiffs and State Street filed cross-motions for summary judgment, and State Street Bank moved to strike or exclude the opinions and testimony of Plaintiffs’ expert witness, Lucian Morrison (“Morrison”), who opined that “UAL’s bankruptcy was imminent in October 2001, and that Defendants failed to act prudently by neglecting to sell the UAL stock to protect the interests of the Plan participants.” United’s bankruptcy imminent in October, 2001? Doesn’t sound too unreasonable if you were in the bankruptcy or turnaround business at the time, does it? Now just try and prove it!
In granting State Street’s motion to exclude the Morrison’s opinion, Judge Deryeghiayan reminded us that “the district court acts as a ‘gatekeeper with respect to testimony proffered under Rule 702 to ensure that the testimony is sufficiently reliable to qualify for admission,’ ” and opined:Continue Reading Expert’s “Half-Baked” Opinions Thrown Out in Action Against UAL’s ESOP Trustee

As people in the oil & gas business know, some wells never go dry. The IPO allocation shareholder litigation, which spawned hundreds of shareholder suits against investment banks who had improperly allocated shares in hot IPO’s to favored investors, is one such well that is now yielding tangible benefits for bankruptcy estates. In In re…