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):

This ability to avoid transfers requires that there be at least one unsecured creditor that has standing to bring the cause of action. In re Cybergenics Corp., 226 F.3d at 243. “Yet once avoidable pursuant to this provision, the transfer is avoided in its entirety for the benefit of all creditors, not just to the extent necessary to satisfy the individual creditor actually holding the avoidance claim. Id….
Campbell does, however, contend that VFB cannot bring a claim under [N.J. Uniform Fraudulent Transfer Act] Section 25:2-27 [which avoids a transfer lacking reasonably equivalent value if the debtor was insolvent or rendered insolvent as a result of the transaction] because it has not identified a single creditor with a claim that arose before the challenged $500 million transfer, in other words, with a pre-Spin[-off] claim. However, Campbell is mistaken….
It appears the VFB has identified at least one creditor with a pre-Spin claim, specifically the landlord for VFI’s corporate headquarters. Although VFI did not become the tenant of record under the lease for that property until after the Spin-off, the lease was created in such a manner that VFI agreed to liability under the lease prior to the Spin-off. Specifically, the lease stated that, after the Spin-off was complete, VFI would become the tenant of record and Campbell would be released from all liability under the agreement. Consequently, prior to the Spin-off, VFI had agreed to be liable for paying rent on that property.

I’ve railed against Moore v. Bay‘s inequitable results on a number of occasions (here, here, here, and here). Here’s a great example of how a bankruptcy litigation trustee, relying on Moore v. Bay, nearly avoided a transaction worth about 300 times the value of the claims of all creditors who could have avoided the transaction under New Jersey’s UFTA based on VFI’s alleged insolvency on the date of the spin-off.
I wonder which will come first, Moore v. Bay’s being overturned or the Cubs winning the World Series. For Chicago’s sake, I hope the latter.
© Steve Jakubowski 2005