Tronox Inc. v. Kerr McGee Corp. (In re Tronox Inc.)
IN RE TRONOX INCORPORATED, Debtors. Tronox Incorporated v. Kerr McGee Corporation, Defendants The United States of America, Plaintiff-Intervenor v. Tronox, Inc.
Attorneys
Kirkland & Ellis LLP, Counsel to the Anadarko Litigation Trust, 300 North La-Salle, Chicago, Illinois 60654, By: David J. Zott, Esq., Andrew A. Kassof, Esq., Jeffrey J. Zeiger, Esq., Preet Bharara, United States Attorney, Counsel for the United States of America, 86 Chambers Street, New York, New York 10007, By: Robert William Yalen, Esq., Joseph A. Pantoja, Esq., Weil, Gotshal & Manges LLP, Co-Counsel to Anadarko Petroleum Corporation and the Kerr-McGee Corporation Defendants, 767 Fifth Avenue, New York, New York 10153, By: Richard A. Rothman, Esq., Bruce S. Meyer, Esq., Bingham McCutchen LLP, Co-Counsel to Anadarko Petroleum Corporation and the Kerr-McGee Corporation Defendants, 2020 K Street, NW, Washington, DC 20006, By: Thomas R. Lotterman, Esq., Duke K. McCall III, Esq., and 355 South Grand Avenue, Suite 4400, Los Angeles, California 90071, By: James J. Dragna, Esq., Klee, Tuehin, Bogdanoff & Stern LLP, Co-Counsel to Anadarko Petroleum Corporation and the Kerr-McGee Corporation Defendants, 1999 Avenue of the Stars, 39th Floor, Los Angeles, California 90067, By: Kenneth N. Klee, Esq., David M. Stern, Esq., Winston & Strawn LLP, Co-Counsel to Anadarko Petroleum Corporation and the Kerr-McGee Corporation Defendants, 1111 Louisiana Street, 25th Floor, Houston, TX 77002-5242, By: Melaine Gray, Esq., Lydia Protopapas, Esq., Jason W. Billeck, Esq.
Full Opinion (html_with_citations)
Chapter 11
MEMORANDUM OF OPINION, AFTER TRIAL
On January 12, 2009, Tronox Incorporated and 14 of its affiliates (the âDebtorsâ)
The amended complaint (the âComplaintâ) was initially filed by three of the Debtors: Tronox Incorporated, a holding company created in 2005 to hold the stock of the other members of the group; Tro-nox Worldwide LLC, which is the successor to Kerr-McGee Corporation, formed in 1929 and sometimes called hereafter âOld Kerr McGee;â and Tronox LLC, formerly known as Kerr-McGee Chemical LLC, which is the successor to Old Kerr-McGeeâs chemical business.
Not surprisingly, the litigation was hotly contested, consuming 34 trial days at which 28 witnesses testified, 14 of whom were qualified as experts. Over 6,100 exhibits and thousands of pages of the deposition testimony of 40 witnesses were also admitted into evidence.
FACTS
Background
Kerr-McGee Corporation, which later changed its name and business structure to become Tronox Worldwide LLC (and which is one of the Plaintiff Debtors), was founded in 1929 as an oil and gas exploration company. For purposes of clarity, it will sometimes be called Old Kerr-McGee hereafter. Old Kerr-McGee purchased its first refinery in 1945 and in 1955 acquired the refining, pipeline and marketing operations of Deep Rock Oil Corp., including more than 800 retail oil and gas outlets in 16 states. In 1952, Old Kerr-McGee entered the uranium business and began mining and milling uranium in the Luka-chukai Mountains on the Navajo Nation and elsewhere. In 1963, it acquired T.J. Moss Tie Co., which operated 15 wood-treating plants using the chemical creosote and was responsible for at least 18 other similar plants that had operated throughout the country.
In 1967, Old-Kerr McGee acquired American Potash & Chemical Corp. (âAPCâ), which owned (among other things) a facility in Henderson, Nevada that produced ammonium perchlorate for use in rocket fuel; a rare earth facility in West Chicago, Illinois that produced radioactive thorium; and a titanium dioxide pigment plant in Hamilton, Mississippi.
By November 2005, which (as discussed below) is a key date in the case, Old Kerr-McGee had terminated all of its historical businesses except two â the oil and gas exploration and production (âE & Pâ) business and the titanium dioxide business. By 2005, the E & P oil and gas business had become wholly dominant, producing operating profits that year of approximately $1.8 billion as compared to the 2005 operating profit of the titanium dioxide business of $106 million. (PX 1224 at 30; Tr. (Wohleber) 5/24/2012 at 1235:25-1236:5). During the five years prior to 2005, the E & P business had produced cumulative operating profits of $5.2 billion as compared to $312 million for the titanium dioxide business. (PX 1224 at 30).
Despite the success of its E & P business, Old Kerr-McGee was also burdened with enormous legacy environmental and tort liabilities. Its portfolio of environmental sites numbered more than 2,700 in 47 states, including federal Superfund sites in Jacksonville, FL; Columbus, MS; Man-ville, NJ; Soda Spring, ID; West Chicago, IL; Milwaukee, WI; and Wilmington, NC. It had incurred more than $1 billion in environmental response costs since 2000 and was spending an average of more than
Project Titan and Project Focus
As early as 2000 Old Kerr-McGee began to plan the transactions that restructured the companyâs E & P and chemical businesses and that are at the heart of the issues in this case. Starting in 2000, one of the companyâs investment bankers, Lehman Brothers, made a series of presentations, first, to the top management of the company,
Plaintiffs contend that these steps were part of a general plan to split the E & P assets from the remaining assets (the titanium dioxide business) that would be left behind in Old Kerr McGee together with all of the legacy environmental and tort liabilities. Defendants insist that the purpose of Project Titan and Project Focus was to rationalize the companiesâ two main businesses by organizing them in separate corporate groups. They contend, reasonably, that there were sound business reasons for the corporate reorganization and that they had concluded that the E & P and chemical businesses would do better as independent players in their respective markets than as a complex whole. In Defendantsâ words, âLehman and Kerr-McGee believed that Kerr-McGeeâs stock was trading at a discount because E & P analysts who covered Kerr-McGee did not understand how to value the Chemical Business properly.â (Watson Dep., 6/13/2012 at 455:22-456:09; JX 15 at 4, JX 17 at 19; JX 43 at 15; DX 340 at 6; Tr. (L. Corbett) 5/16/2012 at 404:12-405:12). Defendants insist that when the ownership of the E & P business was removed from Old Kerr-McGee, the company was not committed to a full separation and that there remained a range of alternatives, including âmaintaining the status quo, selling a minority stake in the Chemical Business, or divesting it outright.â (JX 14 at 7; JX 15 at 5, 7; JX 17 at 9-15; JX 22 at 14-17; JX 30 at 13-16; JX 33 at 16-20; JX 69 at 18-19; DX 1583; DX 620 at 2, 5,
Yet it is obvious that maintenance of the status quo and retention of the chemical business as a partially owned subsidiary of Old Kerr-McGee would still leave Kerr-McGee with a depressed stock price as a complex conglomerate, rather than a âpure playâ oil and gas business. There is no doubt on the record of this case that Defendants intended from the outset of Project Titan and Project Focus to divest the chemical business as soon as the market would permit it. It is also clear that Kerr-McGee management intended from the outset to free the valuable E & P assets from the legacy liabilities, especially as this burden precluded Kerr-McGee from being an attractive merger candidate. Management was well-aware of the consolidation of the E & P business that was taking place and the fact that from 1990 to 2004, almost 80% of the independent North American oil and gas firms had merged into larger companies. (PX 1205 at 2). The record contains evidence that Anadarko, which acquired the Kerr-McGee E & P business in 2006 only a few weeks after Kerr-McGee had divested the legacy liabilities, had considered the acquisition of Kerr-McGee in 2002 and performed due diligence on Kerr-McGeeâs environmental liabilities. The record is clear that in 2002 Anadarko had rejected an acquisition of Kerr-McGee, concluding that Kerr-McGee had more than 500 active pollution sites, had owned more than 1,000 such sites and that the annual cost of remediation âeats up most of [Kerr-McGeeâs] free cash flow.â (PX 391 at 1). According to Anadarkoâs findings, Kerr-McGeeâs future environmental liability was â$BILLIONSâ and there was âno end in sight for at least 30 more years.â (PX 391 at 1, 15, 18; Perkins Dep., 4/20/2011 at 191:24-192:23; 193:7-24; 194:6-195:2; PX 293 (D. Perkins e-mail, 8/2/2002); A. Richey Dep., 11/2/2010, at 54:3-6, 217:10-14). Defendants emphasize the limited nature of Anadarkoâs due diligence, but the foregoing is cited only for the proposition that the legacy liabilities disqualified Kerr-McGee from a lucrative merger with another E & P company and provided ample incentive for Defendants to make every effort to free the oil and gas assets from their burden.
In any event, the written record makes it clear that a complete separation was the goal from the outset of Project Titan in 2000. In one of the initial Lehman presentations in the fall of 2000, Lehman advised that the chemical business, which had recently been augmented by several acquisitions, had grown to âsufficient, critical massâ to separate from the E & P business altogether. (JX 15 at 16; Tr. (L. Corbett) 5/15/2012 at 179:18-23). Defendants cite voluminous testimony adduced on their behalf that the Kerr-McGee officers and employees who were assigned to the chemical business after the separation believed that the chemical company was sound. (Adams Dep., 6/9/2010 at 51:14-20; 304:15-305:5; 436:6-16 (âwe have a viable business going forwardâ); Romano Dep., 8/17/2010 at 223:7-19 (Tronox had âa viable businessâ); Foster Dep., 12/15/2010 at 103:8-18, (âa company"... that ... had longevityâ)). Nevertheless, there is no convincing testimony that once the separation process had begun, there was any likelihood that the result would not be a complete separation of the two businesses, provided that economic conditions were favorable for a divestiture.
The written record is also absolutely clear that freedom from Old Kerr-McGeeâs legacy liabilities was a central consideration in the decision to split the two businesses and in the structure that was devised. In January 2001, Lehman advised
The Separation of the Chemical Business from the E & P Business
The next steps in the separation of the chemical business from the E & P business came to be known as Project Focus. These were a series of 11 transactions that were approved by the Kerr McGee Board on September 10, 2002 and were deemed effective on December 31, 2002. In substance, a new holding company was formed, owned by New Kerr-McGee, called Kerr-McGee Worldwide Corporation. In step 8, the ownership interests in the E & P subsidiaries were transferred from Old Kerr-McGee to Kerr-McGee Worldwide Corporation.
The transfers of Project Focus were wholly controlled by Kerr-McGee, and since Kerr-McGeeâs public financial statements were reported on a consolidated basis, they were not meaningfully disclosed in the companyâs public financials. There was a brief but uninformative reference in the Kerr-McGee Form 10-K annual re
It is noteworthy, however, that one group of creditors was contractually protected against the transfer out of Old Kerr-McGee of the oil and gas assetsâ holders of approximately $2 billion in bonds that Old Kerr-McGee or a predecessor in interest had issued pursuant to three Indentures. (JX 23, JX 48). Old Kerr-McGee had covenanted with the bondholders in the Indentures that it would not divest itself of substantial assets unless the transfer involved âsubstantially allâ of its assets and the recipient of those assets assumed its obligations under the bonds. In order to induce the indenture trustees of the bonds to accede to the transfer, Kerr-McGee represented that Old Kerr-McGee had âdistributed substantially all of its assets to its parentâ through Project Focus. (PX 1; Tr. (Wohleber) 5/22/2012 at 757:18-759:16). This representation was backed up by an internal analysis showing that the assets transferred out accounted for 86.4 percent of Old Kerr-McGeeâs assets, 83.2 percent of its revenues and 112.6 percent of its net income as of December 2001. (JX 47 at 49).
Although some of the transactions regarding the severance of the chemical and oil and gas assets of the group were initiated at the end of December 2002, the split of the chemical and E & P business was not complete until 2005. In 2005, New Kerr McGee and Old Kerr-McGee entered into a series of agreements that documented the terms of the separation, including several 2005 transactions.
On November 28, 2005, Kerr-McGee, Tronox Worldwide,
In 2005, New Kerr-McGee also required Tronox to take responsibility for $442 million in pension obligations and $186 million in unfunded âother post-employment benefitsâ (âOPEB Benefitsâ) pursuant to an Employee Benefits Agreement dated November 28, 2005. (JX 330 at 262-63; DX 368 at 49; JX 330 at 255,263; Williams Direct, 6/22/2012 at ¶ 41; Balcombe Direct, 8/31/2012 at ¶ 41).
The Sale/Spin Alternative
As indicated above, although a step in the separation was taken at the end of 2002 when the stock of the E & P subsidiaries was transferred, the terms of the separation were not set until 2005. In the intervening years, Defendants also created the structure for the split, which was considered a continuation of âProject Titan.â Thus, in early 2003, only a few weeks after the stock of the E & P subsidiaries was transferred out of Old Kerr-McGee and into a new holding company, Kerr-McGeeâs management requested that Lehman Brothers update its analysis for âour Project Titan.â (PX 335; Tr. (Wohleber) 5/22/2012 at 763:4-17). On February 25, 2003, Lehman sent CFO Wohleber an updated Project Titan analysis. Lehman confirmed that there were two principal ways to separate the chemical and E & P businesses â a spinoff and a sale. Lehman observed that a spinoff would âalleviateâ the environmental âburdenâ on Kerr-McGee, while a sale might not result in the legacy liabilities being âcompletely separated.â (JX 69 at 19, 25). Kerr-McGeeâs top management also consulted their lawyers at the firm of Simpson Thacher & Bartlett, who produced a checklist for âProject Sâ that was virtually identical to a Project Titan checklist that had been prepared in April 2001. (Compare PX 15 (Project S) with PX 13 (Project Titan Spin-Off); see also Gordon Dep., 12/14/2010 at 275:8-276:6). CEO Corbett admitted that Project S was âa continuation of Project Titan.â (Tr. (L. Corbett) 5/15/2012 at 255:17-21; 261:11-17).
Notwithstanding the preparations for a possible split, economic conditions in 2003 and the first half of 2004 were not favorable for a spinoff or a sale of chemical.
The proposal that the Company proceed with a dual-track spin/sale process was taken to the Kerr-McGee Board of Directors at a meeting on March 8, 2005 and approved. Although the record is replete with reference to the legacy liabilities in correspondence between Kerr-McGeeâs top management and Lehman, and although the draft presentation to the Kerr-McGee Board that Lehman prepared stated that a âbenefitâ of a spinoff would be a âclean separationâ from the legacy liabilities, the final presentation given to the Board deleted reference to the legacy liabilities altogether. (Compare JX 136 at 12-13 with JX 150 at 14-15). A former Board member testified that he never knew that a âclean separationâ of the legacy liabilities would be a benefit of a spinoff. (Tr. (L. Richie) 7/26/2012 at 4263:18-4264:14).
The Board was also initially unaware that top management had instructed counsel to research the bankruptcy implications of a sale or a spin. Beginning in February 2005 lawyers at Covington & Burling, Kerr-McGeeâs new environmental and litigation lawyers, spent time over 96 days researching fraudulent conveyance litigation in other failed spinoffs. (PX 21 at KMTRX03393872, 879-81, 883-84, 904; Pilcher Dep., 1/19/2011 at 404:19-405:11). In July 2005 Lehman prepared a draft Board presentation that compared the advantages and disadvantages of a sale and a spin and concluded (i) an advantage of the spin would be a cleaner â[separation from legacy liabilitiesâ but (ii) this would be âComplicated under bankruptcy scenario.â (PX 8 at p. TRX-ENVTL0822790). Following a meeting with CEO Corbett and General Counsel Pilcher, Wohleber instructed Lehman to make one change in the presentation and to delete the words, âComplicated under bankruptcy scenario.â (Compare JX 219 at 5 (July 12, 2005) with PX 8 at p. TRX-ENVTL0822790 (July 8, 2012)). The Board was never told of this issue. (Tr. (Richie) 07/26/2012 at 4235:25-4236:9). In their testimony, CEO Corbett, General Counsel Pilcher and CFO Wohle-ber all professed to have no recollection of the reasons for this deletion or even of much of an understanding of what the issue was all about.
The Sale Side
The record does not indicate that Kerr-McGee was ever seriously interested in the
Eventually, three of these four finalists dropped out, largely because of reasons relating to the environmental liabilities. Bain Capital concluded that the liabilities were too expensive to diligence. (JX 271 at 8).
The fourth interested purchaser, Apollo, performed extensive due diligence on the chemical business and on the legacy liabilities. In June 2005 Apollo made a âfinal offerâ to purchase Kerr-McGee Chemical Worldwide, which provided for a purchase price of $1.6 billion âplus the assumption of certain environmental liabilities [then valued according to a] 3/31/2005 balance sheet at approximately $225 millionâ but excluded certain liabilities, including all âliabilities related to Wood Treatment facilities.â (JX 210 at 2-3). These terms were unacceptable to Kerr-McGee because it wanted a âcleanerâ separation from the liabilities. (Id. at 4). On the eve of Kerr-McGeeâs
The Spin Side
At the same time as prospective purchasers were performing their due diligence, Kerr-McGee was proceeding with preparations for an alternative transaction which would involve a spinoff and include an initial public offering (IPO) for Tronox. It was this transaction that eventually closed. It entailed a number of steps, leading to the final spinoff of the E & P and chemical businesses. First, as discussed above, the documentation for the separation of the chemical from the E & P business was completed, and top management of Kerr-McGee decided who would be employed by the respective businesses. Next, Kerr-McGee arranged for Tronoxâs financing. After considerable negotiation, Tronox became indebted for an advance of $200 million and a revolving line of credit of $250 million that was provided by a group of lenders on a secured basis. Tro-nox also issued unsecured notes of $350 million at an interest rate of 9.5 % (increased from 7% initially contemplated). The net cash proceeds were $537.1 million, after expenses. Eventually, Tronox was required to pay almost all of its cash over to New Kerr-McGee, keeping only $40 million.
The final step in the spin was an initial public offering (âIPOâ) of Tronoxâs stock to the public on November 28, 2005. An S-l prospectus was prepared; Lehman and JP Morgan were the lead underwriters.
The Class A Tronox stock issued to the public, however, had only 11.3% of the combined voting power of all outstanding issues. Kerr-McGee still held all of Tronoxâs Class B stock and 88.7 of the combined voting power. (DX 368 at 10; JX 358 at 4). Kerr-McGee CFO Wohleber was still chairman of Tronoxâs Board, and there does not seem to be any dispute that Kerr-McGee still had âcontrol over [Tro-noxâs] decisions to enter into significant transactionsâ and the âability to prevent any transactions it [did] not believe [were] in Kerr-McGeeâs best interests.â (DX 368 at 29-30 (amendment to Tronoxâs Form S-1 filed 11/21/2005)). Tronox continued to be controlled by Kerr-McGee until March 30, 2006, when Kerr-McGee distributed to its shareholders its holdings of Tronoxâs Class B stock, and Wohleber and the other New Kerr-McGee executives resigned from the Tronox Board. (Tr. (Wohleber) 983:10-17; JX 315; Tr. (Gibney) 9/5/2012 at 6114:2-12) The distribution of the Class B stock completed the spinoff and established Tronox as an independent company.
The Chemical Business
The business that was left behind when the E & P assets were divested entailed the manufacture and sale of titanium dioxide (Ti02), an industrial chemical used to whiten paints, paper, plastic and other products. Until the late 1990âs Kerr-McGee had owned one pigment plant in Mississippi and interests in two others. Starting in 1998 it acquired plants in Savannah, Georgia, Bostik, Netherlands, Antwerp, Belgium and Uerdingen, Germany and eventually became the second or third largest producer of Ti02 after DuPont. Plaintiffs charge that the Savannah and European acquisitions turned out to be economic disasters, and that they were pursued by Kerr-McGeeâs top management only for the purpose of bulking up the Ti02 business so that it could stand on its own once the E & P assets were divested. There is no question on the record of this case that the Savannah and Bostik plants turned out to be poor investments soon after they were acquired, and that the due diligence performed by Kerr-McGee was uncharacteristically perfunctory. The Savannah plant in particular was old and inefficient and burdened with envi
The parties hotly dispute whether the business that became Tronox was ever profitable after the acquisitions had taken place. Plaintiffs point out that on a net income basis the chemical business lost approximately $435 million from 2000-2004 (DX 368 at 40); they quote CEO Corbett who testified that âon a net income basis there were difficulties.â (Tr. (L. Corbett) 5/17/2012 at 519:7-11; see also, Tr. (L Corbett) 5/17/2012 at 578:9-14 (agreeing that net income is an âimportant figureâ)). Defendants counter with the claim that EBITDA (earnings before interest, taxes, depreciation and amortization) is a more meaningful number because it measures a companyâs ability to generate cash and excludes non-cash and non-operating expenses. (Defendantâs Post-trial Brief, 11/20/2012 at 138-139). Certainly, EBIT-DA is a metric on which financial analysts rely, and it is particularly important in determining the ability of a financially troubled company to generate cash flow. Nevertheless, the S-l filing that Kerr-McGee prepared in connection with the spinoff warned the market that âEBITDA and adjusted EBITDA have material limitations as performance measures because they exclude items that are necessary elements of our costs and operations.â (DX 368 at 41). In any event, the cash flow of the chemical business after the acquisitions described above was never robust; from January 1, 2002 to September 30, 2005, it was a negative $168 million. (Tr. (Rauh) 8/9/2012 at 4975:11-4983:7).
The titanium dioxide business also had limited potential. It was cyclical and dependent on the strength of the U.S. housing market, and in the years after 2000 was faced with increasing operating costs and stagnant prices, which resulted in thin margins at best. (Fisher Direct, 5/28/2012 at ¶ 17-23; PX 998 at 2). The possibility of Chinese competition became an increasingly important factor. (Fisher Direct, 5/28/2012 at ¶¶ 30-37; Tr. (Gibney) 9/5/2012 at 6258:22-6259:14; Tr. (Smith) 5/25/2012 at 1413:5-1414:12; PX 673 at TRX-ADV0341950, TRX-ADY0353723). The Defendantsâ industry expert conceded that in the early 2000âs the Ti02 industry was not covering its cost of capital. (Tr. (Cianfichi) 8/10/2012 at 5341:19-5344:14; 5345:17-5346:2; see also Fisher Direct, 5/28/2012 at ¶¶ 17-23).
Tronox as an Independent Company
Tronox began to struggle almost immediately after the March 30, 2006 spinoff.
As a consequence of Tronoxâs cash position, it began cutting costs almost immediately after the spinoff. It developed 40 cost-cutting programs within six weeks, and by 2008 it had undertaken more than 280 cost-cutting initiatives. (PX 943 at TRX-ADV0921412-13; Tr. (Smith) 5/25/2012 at 1428:9-1431:14; Tr. (Williams) 9/13/2012 at 7574:24-7576:17; DX 18 at 5; Tr. (Gibney) 9/5/2012 at 6154:11-6155:2). In June 2006, two months after Kerr-McGee distributed its Tronox stock to its shareholders, Tronox began drawing on its line of credit (PX 949; PX 1092 at 4); although it was able to pay back the lenders from time to time, it continued to draw on the revolver until its bankruptcy filing, when more than $212.8 million was outstanding to the secured lenders. Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.) (âTronox IIIâ), 464 B.R. 606, 610 (Bankr.S.D.N.Y.2012). Tronox had anticipated that its financial position would be substantially bolstered by the sale of land in Henderson, Nevada, and its draft long-range plan in September 2006 recognized that it required â[a]ggressive land sales to provide incremental âgapâ income for survival.â JX 398 at 6 It anticipated selling its interest in the Henderson land to a company known as Centex that, at the time of the spin, had a contract to purchase the Nevada' property for $515 million. JX 98. However, the land was a âkaleidoscopeâ of ponds of ammonium perchlorate waste which, according to the State of Nevada, endangered the Las Vegas water supply, and remediation had not even begun. (Tr. (Gibney) 9/5/2012 at 6279:5-6280:3; PX 864 at 1). Centex could in any event walk away from the contract for a mere $2 million. (JX 98 at 1, 21). In January 2007 Centex terminated what is more accurately described as an option to buy the land, leaving Tronox with no substantial cash proceeds and a potential environmental liability. (JX 403; Tr. (Gibney) 9/5/2012 at 6200:2-7, 6280:14-18).
At the same time as it was struggling with poor cash flow, Tronox was obligated to fund the legacy liabilities that Kerr-McGee had left behind. It was able to fund only approximately $90 million per year, net of reimbursements, which was significantly less than Kerr-McGee had been spending. (Tr. (Gibney) 9/5/2012 at 6292:24-6293:7). Defendants cite the reduction in expenditure as evidence that the cost of the legacy liabilities was decreasing. This issue is further discussed below; suffice it to say at this point that the record demonstrates that Tronox simply did not have the cash to spend any more. (Id. at 6293:8-17; Tr. (Snyder) 7/12/2012 at 7208:6-7210:5; Tr. (Smith) 5/25/2012 at
Tronoxâs cash position continued to deteriorate throughout 2006 and 2007. In March 2007 and February and July 2008, it obtained waivers of the covenants in its secured loan agreements so as to avoid a default. (Mikkelson Dep., 6/23/2010 at 566:7-23; PX 1017 at 135; JX 1016; JX 423; JS 437; PX 1143 at 3; PX 1286 at 58 (of 111); Haimes Dep., 1/27/2011 at 360:11-364:7). In September 2007 it entered into an accounts receivable securiti-zation facility, selling its receivables in return for immediate cash. (Klvae Dep., 5/24/2011 at 72:2-73:15; Tr. (Smith) 5/25/2012 at 1440:21-1441:9). In May 2008 it retained Rothschild Inc. as restructuring specialists, and shortly thereafter retained its current law firm, Kirkland & Ellis. (Adams Dep., 6/10/2010 at 432:17-433:25; DX 549; Tr. (Gibney) 5/16/2012 at 6290:20-6291:8; DX 683 at 1-2). It filed its chapter 11 petitions in January 2009.
Tronoxâs Chapter 11 Case
Tronoxâs chapter 11 filing took place during the time of a national financial collapse when it was impossible to obtain third-party debtor-in-possession financing. Tronox was dependent on its secured lenders to provide liquidity, and as a condition to providing short-term financing, they demanded a sale of its assets to a third party on an abbreviated timetable. Tronox as debtor in possession duly prepared such a sale to an Australian Ti02 producer but at a price that would satisfy only the secured lenders and provide no recovery or a mere pittance to the remaining creditors â both the commercial unsecured creditors and the holders of the legacy liabilities.
In order to avoid the loss of all the assets at a highly disadvantageous price, Tronox was able to convince certain holders of its unsecured notes to provide financing that would avoid an immediate sale, pay off the secured lenders and provide a platform for a reorganization if it could deal with the legacy liabilities. Deb-tholders provided such financing when, after months of negotiation, the environmental authorities and tort plaintiffs agreed to accept as their bankruptcy distribution the proceeds of this lawsuit (which Tronox as debtor in possession had already commenced) plus certain cash consideration for their claims. (See First Supplement to Plan Supplement for the First Amended Joint Plan of Reorganization (âPlan Supplementâ), Case No. 09-10156, Dkt. No. 2441). The debtholders providing financing and other commercial creditors took the stock of the reorganized company.
THE COMPLAINT AND PRETRIAL PROCEEDINGS
The Complaint
The Complaint in this case was filed on May 12, 2009. It set forth eleven claims for relief: (1) actual fraudulent transfers under the Oklahoma Uniform Fraudulent Transfer Act (the âOklahoma UFTAâ); (2) constructive fraudulent transfers under the Oklahoma UFTA; (3) fraudulent transfers under §§ 548 and 550(a) of the Bankruptcy Code; (4) civil conspiracy; (5) aiding and abetting a fraudulent conveyance; (6) breach of fiduciary duty as a promoter; (7) unjust enrichment; (8) equitable subordination; (9) equitable disallowance of claims; (10) disallowance of claims pursuant to § 502(d) of the Bankruptcy Code; and (11) disallowance of contingent indemnity claims pursuant to § 502(e)(1)(B) of the Code. Plaintiffs demanded compensatory damages in an amount to be proven at trial, including interest, plus punitive damages and costs and expenses, including attorneys and expert fees.
Defendants moved to dismiss on multiple grounds, and in a decision dated March 31, 2010 the Court held that they survived an Iqbal-Twombly challenge as âDefendants cannot reasonably assert that the allegations are not plausible on their face.â
As noted above, Plaintiffs were given leave to replead several of the counts, they did so, and the Defendants moved to dismiss these counts. On this motion the Court found that the Plaintiffs had adequately stated a claim that Defendants had breached their fiduciary duty as a promoter because during the period between the IPO and the distribution of Tronoxâs stock to Kerr-McGeeâs shareholders, Kerr-McGee was the parent of an allegedly insolvent subsidiary with minority shareholders, and that on the allegations of the amended complaint a breach took place within the applicable limitations period. Tronox II, 450 B.R. at 439-442. The Court further found that claims for (i) civil conspiracy and (ii) aiding and abetting a breach of fiduciary duty were not adequately repleaded and dismissed them. Tronox II, 450 B.R. at 442-444.
Pretrial Proceedings
The Complaint was initially filed during the course of Tronoxâs chapter 11 proceedings. Defendants, acting through Anadarko, took an active role in Tronoxâs chapter 11 case. They appeared at almost all hearings and filed proofs of claim which they amended. They sought recovery from the Debtors on many grounds, including the Debtorsâ alleged breach of their obligations under the Master Separation Agreement and the costs they had incurred in defending this suit. They also sought recovery based on the premise that if it or its Kerr-McGee subsidiaries were found liable to the Plaintiffs, they should be afforded a claim against the Debtors for the entire amount of any liability pursuant to general equitable principles as well as
[a]ll parties reserve the right to make any available arguments and assert any available claims and available defenses concerning the effect, if any, of the Plan Documents on the determination of liability or measure of damages (including, to the extent relevant, the value of the Tort Claims and the Environmental Claims) in the Anadarko Litigation, including under section 550 of the Bankruptcy Code.
Confirmation Order, Dkt. No. 2567 at ¶ 191. As indicated above, the Debtorsâ Plan also substituted a litigation trust for the Debtors as plaintiff and provided that any recovery would be for the benefit of the beneficiaries of the Trust and for the benefit of the United States, including any recovery for the United States under its separate complaint under FDCPA.
During the course of Tronoxâs chapter 11 case, the parties to this litigation also began a very extensive discovery process. They agreed to a comprehensive pretrial order, leading up to a contemplated trial date of May 15, 2012. Prior to trial, the Defendants also filed two additional motions. First, they sought summary judgment dismissing Anadarko as a defendant on the ground that there was no evidence that Anadarko was a subsequent transferee of any of the allegedly fraudulent conveyances or that it had participated in any breach of fiduciary duty. In an oral decision read into the record on May 8, 2012, the Court found on the basis of the summary judgment record that there had been no material transfer of assets from the Kerr-McGee subsidiaries to Anadarko, that Anadarkoâs Kerr-McGee subsidiaries had been maintained as separate entities during the years subsequent to their acquisition by Anadarko, that Anadarko was accordingly not a âsubsequent transfereeâ of material assets of the Kerr-McGee entities, and that Anadarko should be dismissed as a separate defendant.
In a second motion, Defendants sought partial summary judgment limiting the Plaintiffsâ claim for damages. Defendants relied on a clause in § 550 of the Bank
DISCUSSION
Fraudulent Conveyance
Plaintiffsâ principal claim is that the transactions that âliberatedâ what Defendants had represented were âsubstantially allâ of Old Kerr-McGeeâs assets from 85 years of legacy liabilities constituted a fraudulent conveyance â either âactualâ (made with intent to hinder, delay or defraud creditors) or constructive (made for less than reasonably equivalent value at a time the transferor was or was rendered insolvent or undercapitalized). There is no dispute that the applicable fraudulent conveyance law is the Uniform Fraudulent Transfer Act (âUFTAâ) as adopted by Oklahoma, the State where Kerr-McGeeâs and Tronoxâs headquarters were located at all relevant times. Although the UFTA (like the Uniform Fraudulent Conveyance Act that preceded it) is very similar in substance to the Bankruptcy Codeâs provisions regarding fraudulent conveyances, codified principally at 11 U.S.C. §§ 548 and 550, Bankruptcy Code § 548(a)(1) provides for the avoidance of a conveyance only if it took place within two years prior to the date of the filing of the bankruptcy petition. A two-year statute would permit the Plaintiffs only to avoid, at most, a very few conveyances that took place after January 12, 2007, or two years before the filing of Tronoxâs chapter 11 petition. In order to use the longer statutes of limitations that are provided in State fraudulent conveyance laws, a debtor must rely on § 544(b) of the Bankruptcy Code, providing that âthe trustee [including a debtor in possession such as Tronox] may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim ...â
Statute of Limitations
The law of Oklahoma, which the parties agree is âapplicable lawâ for purposes of 11 U.S.C. § 544(b), provides a
First, the record in this ease demonstrates that the transfer of the oil and gas assets was not complete and not viewed by Kerr-McGee itself as complete until 2005, well within a four-year limitations period. For example, it was not until 2005 that Kerr-McGee completed the agreements that finalized the transfers of assets. (JX 66 at 1; PX 569 at TRX-ADV0905458; PX 572 at 1; Reichenberger Dep., 3/23/2011 at 212:13-217:19; JX 99; PX 20; DX 1276: Addison Dep., 7/14/2010 at 323:17-324:19; PX 312 at TRX-ENVTL0759115-116; Addison Dep., 7/14/2010 at 329:10-332:3; PX 579 at KM-TRX02855717, 719; PX 515; JX 163; PX 528; Addision Dep., 7/14/2010 at 345:2-23). Although the Assignment Agreement and the Assignment and Indemnity Agreement were both backdated to 2002, there is no dispute that they were not finalized or executed until the spring of 2005, within four years of Tronoxâs January 2009 chapter 11 filing. (Addison Dep., 7/13/2010 at 214:23-215:8; JX 66 at 1, PX 645, DX 1276). Kerr-McGeeâs Deputy General Counsel Reichenberger recognized that the assignment of the assets had not occurred until the Assignment Agreement was executed; he testified âthatâs what [the Assignment Agreement] was accomplishing.â (Reichenberger Dep., 3/23/2011 at 217:2-19).
Defendants assert that documents can properly be backdated to an earlier âas ofâ date when they merely memorialize an agreement that was final and conclusive at the earlier date. It is well-established that âparties to a contract cannot make it retroactively binding to the detriment of third persons.â In re Tronox I, 429 B.R. at 99, citing Debreceni v. Outlet Co., 784 F.2d 13, 18-19 (1st Cir.1986). Backdating cannot be used for an improper purpose, such as violating a law, or if it has an improper effect, such as compromising the rights of third parties. SEC v. Solucorp Industries, Ltd., 197 F.Supp.2d 4, 11 (S.D.N.Y.2002); see also Jeffrey Kwall & Stuart Duhl, Backdating, 63 Bus. Law. 1153, 1159, 1169-1171 (2008). In any event, the Assignment Agreement, which finalized the assignment out of assets, does not simply document a prior agreement, as the terms of the separation were not set
A second reason the statute of limitations did not start to run in 2002 is that Plaintiffs suffered no immediate injury from the stock transfers. As noted above, Defendants contend that after 2002 legacy liability creditors no longer had claims against the assets of the E & P subsidiaries. However, in order for a legacy creditor to have had recourse to the property transferred in 2002, the creditor would have had to obtain a judgment against Old Kerr-McGee, serve the judgment and have it be returned unsatisfied, and then execute on the stock of the subsidiaries.
This scenario would have been impossible until well within the four-year limitations period. There is no question on this record that Kerr-McGee continued to pay all the environmental expenses and claims out of its centralized cash management system until at least the date of the IPO in November 2005. The contention in Defendantsâ brief that âPlaintiffs [the Old Kerr-McGee entities] were responsible for and funded their own Legacy Liabilities both before and after Project Focusâ [the 2002 transfers] [Def. Br. at 28-29] has no basis in the factual record. Many if not most of the legacy liabilities derived from discontinued businesses, and when a discontinued business could not pay for an expenditure, Kerr-McGee recorded the net payable as an equity contribution or advance from the parent. (Tr. (Rauh) 8/9/2012 at 5016:4-13). Controller Rauh admitted that âKerr-McGee sometimes paid amounts from the central cash management system that it knew the subsidiaries couldnât repay.â (Tr. (Rauh) 8/9/2012 at 5013:12-17). Until Tronox was finally removed from the Kerr-McGee group, it would have been impossible for any legacy liability creditor to access any of the assets of any of the subsidiaries because all environmental expenses were paid out of a common fund long before a creditor could reach that point. The Oklahoma UFTA recognizes that a fraudulent conveyance takes effect when there is an actual effect on creditors and their rights.
In any event, the law is clear that for statute of limitations purposes fraudulent conveyances are examined for their substance, not their form. As the Second Circuit has held: â[w]here a transfer is only a step in a general plan, the plan must be viewed as a whole with all its composite implications.â Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir.1993) (internal quotations omitted). In In re HBE Leasing Corp., 48 F.3d 623, 638 (2d Cir.
There is no question on this record that Defendants devised, carried out and had complete knowledge that the âProject Focusâ transfers in 2002 were part of âa single integrated schemeâ to create a âpure playâ E & P business free and clear of the legacy liabilities. The facts that support this proposition are overwhelming. Project Focus came on the heels of Kerr-McGeeâs identification of the legacy liabilities as an âimpedimentâ to the acquisition of Kerr-McGee by a larger company. (Tr. (L. Corbett) 5/15/2012 at 191:24-192:12, 192-17-20). Lehman was instructed to consider the legacy Labilities of the chemical and discontinued businesses as a âStructural Considerationâ for the alternative restructuring possibilities. (Tr. (L. Corbett) 5/15/2012 at 178:9-12, 188:5-12; Watson Dep., 2/8/2011 at 51:6-52:19; 59:23-60:2; Tr. (Wohleber) 5/22/2012 at 649:20-650:2, 651:15-25). Lehmanâs presentation to management as early as January 5, 2001 proposed a spinoff as a solution to the legacy liability problem, advising that â[l]egacy environmental issues could possibly be left with Titan [Old Kerr-McGee, later Tronox] should KMG choose to spin off KMG-E & Pâ and â[i]f KMG-E & P is spunoff, potential exists to isolate E & P operations from historical Titan environmental liabilities.â (JX 17 at 13, 44). Alternatives would ânot isolate environmental liabilities to the Titan operations.â (Id. at 27).
Defendants also argue that there were valid business reasons for segregating the chemical and E & P lines of business, and the record contains Simpson Thacherâs advice that there had to be legitimate business reasons for the corporate reorganization â such as improved management âfocusâ and âincentivesâ â if the transaction was to qualify as a tax-free spinoff. (JX 24 at 4; PX 3; JX 77). Even so, the 2002 transactions were merely one step in a process, and it was not until 2005 that the ârationalizationâ was effected. Before, then, Kerr-McGee had chemical and E & P assets located in multiple subsidiaries. (Tr. (L. Corbett) 5/15/2012 at 250:14-20).
In any event, the question for statute of limitations purposes is not whether good business reasons existed for splitting the chemical and E & P businesses. The question is whether there was a single
The final and conclusive reason why the limitations period in this case cannot be measured from Defendantsâ internal reorganization in 2002 is one of policy. The environmental laws of the United States and many of the States are founded on the principle of strict liability. See United States v. Atlantic Res. Corp., 551 U.S. 128, 186, 127 S.Ct. 2331, 168 L.Ed.2d 28 (2007), quoting United States v. Alcan Aluminum Corp., 315 F.3d 179, 184 (2d Cir.2003) (âCERCLA § 9607 [providing liability for the owner or operator of a facility] is a strict liability statute.â). An entity that has had or has assumed an obligation to clean up a site or to contribute to a remediation cannot avoid that obligation, except perhaps in its own bankruptcy ease. Defendantsâ view of the law would permit a shrewd and unscrupulous enterprise to divest itself of âsubstantially all of its assets,â as Kerr-McGee represented it did, continue to satisfy environmental liabilities from the cash flow of the combined entity until the statute of limitations period had run and the divestiture was ready for completion, and then split the good assets from the bad. If the architects of such a scheme could claim that the statute of limitations had already run by virtue of the first step in the scheme, they would have free reign to hinder and delay creditors so long as they could do it in two steps several years apart (at least four years under Oklahoma law).
Moreover, there would be no recourse whatsoever for legacy creditors if, as in this ease, there was minimal disclosure of the first phase of the internal corporate reorganization and no disclosure whatsoever of its effect on creditors. Defendants assert that the 2002 transfers were disclosed in Kerr-McGeeâs 2002 Annual Report, published on March 27, 2003, but that report only contained an opaque reference, noting that â[a]t the end of 2002, another reorganization took place whereby among other changes, Kerr-McGee Operating Corporation distributed its investment in certain subsidiaries (primarily the oil and gas operating subsidiaries) to a newly formed intermediate holding company, Kerr-McGee Worldwide Corporation. Kerr-McGee Operating Corporation formed a new subsidiary, Kerr-McGee Chemical Worldwide LLC and merged into it.â (JX 75 at 3). There was no disclosure that this âreorganizationâ diverted substantially all of the assets of the parent to a new holding company that would eventually disclaim liability for the legacy liabilities. Indeed, it was impossible to determine the effect of the distribution to âa newly formed intermediate hold
The Claims of the United States under FDCPA
As noted above, the United States brought a complaint in intervention against the Defendants under the Federal Debt Collection Practices Act (âFDCPAâ), 28 U.S.C. § 3001 et seq., a fraudulent conveyance statute similar to the UFTA under which the United States can pursue its claims of a similar nature. The United States has represented that it will accept a recovery as a creditor in the Liquidating Trusteeâs case and not seek a separate recovery under the rubric of its separate complaint, and since the Court concludes that the Plaintiffsâ claims are timely and awards damages under the Liquidating Trusteeâs complaint, it does not appear that a separate determination of the governmentâs damages is necessary. It is necessary, however, to examine the governmentâs claims under the FDCPA because even if Plaintiffsâ claims are untimely under the Oklahoma four-year limitations period, the United States is not subject to a State statute of limitations
The FDCPA was enacted to establish âa comprehensive statutory framework for the collection of debts owed to the United States government,â with an effective date of May 29, 1991. United States v. Gelb, 783 F.Supp. 748, 751 (E.D.N.Y.1991), quoting H.R.Rep. No. 101-736, 101st Cong. 2d Sess., reprinted in 1990 U.S. Code Cong. & Admin. News 6630, 6631. The fraudulent conveyance provisions of the FDCPA are codified at 28 U.S.C. §§ 3301-3308. Section 3306(b) of the FDCPA provides, with certain exceptions, a six-year statute of limitations from the date of the challenged transfer for actual and constructive fraudulent transfer claims under the FDCPA. Admittedly, if the transfers of the E & P subsidiaries took place for limitations purposes on December 31, 2002, Tronoxâs chapter 11 filing on January 12, 2009 was still six years and 13 days later and untimely under a six-year period. Nevertheless, the United States and Kerr-McGee entered into a series of tolling agreements during the intervening period that tolled the FDCPAâs statute of limitations through August 29, 2008, thereby extending the limitations period and making it a viable claim in January 2009 when the bankruptcy petitions were filed. Therefore, even if the fraudulent conveyance action is governed by State law, the United States may avail itself of a longer limitation period, and there is no question that the claims of the United States under the FDCPA would not be barred.
The FDCPA as âApplicable Lawâ under § 544(b) of the Bankruptcy Code
As noted above, Plaintiffsâ ability to assert claims under the Oklahoma UFTA
Defendants dispute the use of the FDCPA as âapplicable lawâ within the meaning of § 544(b), relying almost exclusively on the recent decision in MC Asset Recovery LLC v. Commerzbank AG. (In re Mirant Corp.), 675 F.3d 530, 536 (5th Cir.2012). There the Fifth Circuit, citing § 3003(c) of the FDCPA, which provides that it âshall not be construed to supersede or modify the operation of ... title 11,â rejected a line of authority to the contrary and held that the FDCPA could not be applicable law for purposes of § 544(b). Id. While recognizing that the legislative history was ânot dispositiveâ on the issue, the Fifth Circuit found support for its view in the statement of a committee chairman to the effect âthat the Bankruptcy Code should be read as if the FDCPA did not exist.â Id. at 535-536 (citing, 136 Cong Rec. H13288 (daily ed. Oct. 27, 1990)). The Court concluded that âtreating the FDCPA as applicable law under § 544(b) would impermissibly modify the operation of Title 11â and run afoul of section 3003(c). Id at 535.
As noted, the Fifth Circuit in Mirant rejected a line of cases that have held that the FDCPA can be âapplicable lawâ for purposes of § 544(b), thereby affording the trustee use of the FDCPA statute of limitations. See In re Pfister, 2012 WL 1144540, at *5 (Bankr.D.S.C. Apr. 4, 2012) (holding transfers were avoidable pursuant to § 544(b)(1) and the FDCPA where the IRS was a creditor); In re Walter, 462 B.R. 698, 704-06, 712 (Bankr.N.D.Iowa 2011) (holding trustee sufficiently pled a claim under § 544(b)(1) and the FDCPA); In re Porter, 2009 WL 902662, at *20-21 (Bankr.D.S.D. Mar. 13, 2009) (holding that a trustee could step into the shoes of the Small Business Administration and assert fraudulent conveyance claims under the FDCPA and its six-year statute of limitations); In re Gurley, 222 B.R. 124, 132 (Bankr.W.D.Tenn.1998) (bankruptcy court applied FDCPA and its âreach-back periodâ). It is respectfully suggested that these cases are consistent with the use of the term âapplicable lawâ under the facts of this case. Treating the FDCPA as âapplicable lawâ does not âmodifyâ or âsuper-cedeâ the operation of the Bankruptcy Code, and a holding that the Code âshould be read as if the FDCPA did not existâ gives too much weight to a comment in the legislative history.
It is recognized that other cases have found that the FDCPA is not âapplicable lawâ under § 544(b) on the theory that only the United States can avail itself of the avoidance powers of the FDCPA and solely for its own benefit. This was the conclusion of the Bankruptcy and District Courts in Mirant, see MC Asset Recovery LLC v. Commerzbank AG (In re Mirant Corp), 2010 WL 8708772 at *11, * 18 (Bankr.N.D.Tex.2010), aff'd on this issue, MC Asset Recovery, LLC v. Commerzbank AG, 441 B.R. 791, 804 (N.D.Tex.2010) (âthe FDCPA does not contain a private right of action... [and] is a remedy for the exclu
Moreover, those courts that have found the FDCPA not to be âapplicable lawâ under § 544(b) have never found that the United States could not pursue its claims under State fraudulent conveyance law. Defendants have no support for their further argument that the United States can only recover through the medium of a FDCPA action.
The Triggering Creditor for Tronox, Inc.
As mentioned above, § 544(b) of the Bankruptcy Code requires a âtriggering creditorâ whose allowable, unsecured claim dates from the time of the challenged conveyance. Defendants dispute the existence of a triggering creditor for one of the three Debtors, Tronox, Inc. They do not contend that there are no creditors dating from 2002-2005 who hold allowable claims against Debtors Tronox Worldwide LLC or Tronox LLC. Nor could they. Tronox Worldwide is the corporate successor-in-interest to the parent company that was Old Kerr-McGee and the repository of many of the legacy liability claims. It has multiple environmental creditors holding allowable unsecured claims, such as Rio Algom Mining LLC, Claim No. 3617 (for liabilities going back to a December 1988 Purchase and Sale Agreement). Tronox LLC is the successor to some of the environmental liabilities of Kerr-McGee going back many years. For example, the City of West Chicago filed an allowable proof of claim (No. 3536) for the costs of remediation at a site that was historically one of the most expensive for Old Kerr-McGee; Nevada filed one (No. 2422) for claims relating to an agreement to remediate the Henderson, Nevada site that was central to Tronoxâs IPO cash flow projections. The United States has claims against both of these Debtors, such as claim no. 3535 against Tronox Worldwide for environmental liabilities going back long before 2002 and claim 2385 for environmental costs at former wood-treating sites in North Carolina, New Jersey and Wisconsin.
Defendantsâ key assumptions are in error. First, at the time of the filing of the chapter 11 petitions by the three Plaintiffs, there existed creditors of Tronox Inc. who were creditors holding allowable unsecured claims, including holders of $ 350 million in unsecured bonds that were issued in connection with the IPO in 2005. Defendants assert that the bondholders ratified the fraudulent conveyances, but the cases they cite disqualified parties as triggering creditors only if they actually participated in structuring the transaction that damaged creditors. See Miller v. CSFB (In re Refco, Inc. Securities Litigation), 2009 WL 7242548 (S.D.N.Y. Nov. 13, 2009), described by Defendants (Br. at 42) as holding that a âcreditor that was found to have structured the allegedly fraudulent transaction could not qualify as a triggering creditorâ. The bondholders did not structure the allegedly fraudulent transaction; they simply bought into it based on the information available to them. âRatification is the act of knowingly giving sanction or affirmance to an act which would otherwise be unauthorized and not binding.â In re Adelphia Recovery Trust, 634 F.3d 678, 691 (2d Cir.2011).
More generally, as discussed above, fraudulent conveyance law looks at substance, not form. Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir.1993) (âan allegedly fraudulent conveyance must be evaluated in contextâ); MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Services Co., 910 F.Supp. 913 (S.D.N.Y.1995) (generally courts âlook past the form of a transaction to its substanceâ). As further discussed below, Defendants cannot escape liability because they structured some of the challenged transactions to take place in a newly-created holding company.
Actual or Constructive Fraudulent Conveyance
We consider at this point the more fundamental question whether the transfers
We first consider whether there was an actual fraudulent conveyance and then whether there was a constructive fraudulent conveyance.
Actual Fraudulent Conveyance
Plaintiffs allege that the transfers of property that culminated in the spinoff were made âwith actual intent to hinder, delay, or defraudâ a creditor within the meaning of § 548(a)(1)(A) of the Bankruptcy Code and the Oklahoma Uniform Fraudulent Conveyance Act, OKLA. STAT. tit. 24, § 116, made applicable in this bankruptcy case by § 544(b) of the Bankruptcy Code.
In the present case, for their assertion that there was an actual fraudulent conveyance, Plaintiffs rest their case primarily on the provisions of the Oklahoma UFTA that proscribe actual intent to âhinder and delayâ creditors. Although there was no disclosure of the scheme in December 2002 and disclosure in March 2003 was minimal and ineffective, Defendants made it clear in the S-l Registration Statement that Tronox was being left with all of the legacy liabilities. This fact was also clear to the potential purchasers of Tronox â as discussed above, it was the reason most of the purchasers refused to bid. See supra text at n. 16-17.
By 2005, Defendantsâ plan to impose the legacy liabilities on Tronox was also known to the United States environmental authorities. In April 2005, the Environmental Protection Agency sent a demand letter to Kerr-McGee with respect to remediation at the Manville, New Jersey site. (JX 164). Kerr-McGee took no steps in response other than to deny liability and to insert a clause in the Assignment Agreement whereby Tronox was obligated to indemnify New Kerr-McGee for any environmental expenses that Tronox failed to satisfy and that was imposed on New Kerr-McGee. (See PX 515 (4/6/2005 draft without indemnification clause); JX 163
Obviously, Defendants did not disclose that Tronox would not be able to support the legacy liabilities that were imposed on it; in any event, even if Plaintiffs cannot prove fraud, disclosure of a scheme is no defense. âThe intent to defraud is something distinct from the mere intent to delay or hinderâ In re Braus, 248 F. 55, 64 (2d Cir.1917) (citation omitted); see also, In re Duncan & Forbes Dev., Inc., 368 B.R. 27, 34 (Bankr.C.D.Cal.2006). Liability is imposed for an âintentional fraudulent conveyanceâ where the fact and purpose of a conveyance may have been known to creditors in whole or in part, but the trans-feror intended to hinder or delay them. As the Supreme Court stated in Shapiro v. Wilgus, 287 U.S. 348, 354, 53 S.Ct. 142, 77 L.Ed. 355 (1932), âA conveyance is illegal if made with an intent to defraud the creditors of the grantor, but equally it is illegal if made with an intent to hinder and delay them.â The Supreme Court did not take issue with the contention there that debtor believed he could satisfy all creditors if given more time, nor with the fact that his scheme was widely disclosed, nor with the fact that most of his creditors went along. The Court concluded that the defendantâs conveyance of assets to a corporation was made âto divest the debtor of his title and put it in such a form and place that levies would be averted,â 287 U.S. at 353-354, 53 S.Ct. 142, and thus was avoidable as an actual fraudulent conveyance under the Pennsylvania Uniform Fraudulent Conveyance Act (UFCA) (predecessor to the UFTA).
Similarly, in Kelly v. Thomas Solvent Co., 725 F.Supp. 1446 (W.D.Mich.1988), the State of Michigan and the United States, among others, challenged the consequences of a spinoff where a company âreorganized its corporate structure and assets,â reducing the assets and retained earnings of the company that had serious environmental liabilities and transferring many of the assets into separate corporations. After the company with the legacy liabilities went into bankruptcy and liquidated, paying virtually nothing to its creditors, the environmental authorities sued under the Michigan UFTA, claiming that the corporate reorganization was an intentional fraudulent conveyance. The District Court agreed, stating, âEven if the company only intended to hinder or delay creditors, these purposes satisfy the intent element ... The Court concludes that there is no factual dispute among the parties that one reason Thomas Solvent Company created its spinoff corporations was to avoid potential liability related to existing groundwater contamination in Battle Creek.â 725 F.Supp. at 1455.
Again, in In re Blatstein, 192 F.3d 88, 97 (3d Cir.1999), the Third Circuit, quoting In re Adeeb, 787 F.2d 1339, 1343 (9th Cir.1986), stated that its inquiry under the Pennsylvania UFTA was whether the debtor âintended to hinder or delay a creditor. If he did, he had the intent penalized
The same principles have been recognized by the Oklahoma courts. In United States v. Spencer, 2012 WL 4577927 (N.D.Okla. Oct. 2, 2012), the defendant testified that he put funds in trust to delay his principal creditor and gain time so he could make enough money to pay the debt. The District Court concluded that the dispute before it was the ârare case in which the debtor has admitted his intent to delay collection of the debt.â Id. at *8.
Defendants contend, âPlaintiffs must also prove that âthe main or only purpose of the transferâ was defendantâs âactual intentâ to damage a creditor by âpreventing] [it] from collecting a debt.â â (Def. Br. at 157) But their principal citation for this proposition, In re Sentinel Mgmt. Group, 689 F.Bd 855, 861-62 (7th Cir.2012), was withdrawn, 704 F.3d 1009 (7th Cir.2012), and ultimately reversed by the Seventh Circuit, 728 F.3d 660, 667 (7th Cir.2013). In its authoritative decision, the Seventh Circuit concluded that the district court had âtoo narrowly construe[d] the concept of actual intent to hinder, delay, or defraud,â and that even though âSentinelâs primary purpose may not have been to render the funds permanently unavailable to these [creditors] ... [it] certainly should have seen this result as a natural consequence of its actions .... [because one can be] âpresumed to intend the natural consequences of his acts.â â Id. (citations omitted). See also, ASARCO LLC v. Americas Mining Corp., 396 B.R. 278, 386 (S.D.Tex.2008), where the District Court observed that while a few courts have held that âthe intent required must be an intent to harm creditors ... Other courts have held that a transfer may be made with fraudulent intent even though the debtor did not intend to harm creditors but knew that by entering the transaction, creditors would inevitably be hindered, delayed or defrauded.â The Court in ASARCO went on to conclude that âMany fraudulent transfer cases cite to the Restatement (Second) of Torts for the definition of âintentâ under the UFTA ... According to the Restatement, â[t]he word âintentâ is used ... to denote that the actor desires to cause consequences of his act, or that that he believes that the consequences are substantially certain to result from it.â â 396 B.R. at 387, citing In re Indep. Clearing House Co., 77 B.R. 843, 860 (D.Utah 1987); In re Taubman, 160 B.R. 964, 978 (Bankr.S.D.Ohio 1993). The ASARCO Court could also have cited Shapiro v. Wilgus, where the Supreme Court made it clear that the debtorâs scheme did not have to be undertaken for nefarious or malicious purposes but merely with the purpose of hindering or delaying creditors. 287 U.S. at 354, 53 S.Ct. 142.
The records from Lehmanâs files make clear the centrality of the liability issues to the transactions undertaken and that the effect on creditors was well understood. Lehman recognized that the environmental liabilities being left with Tronox were unique. As Lehmanâs principal witness, Watson, testified, âother chemical companies didnât have legacy liabilities of other businesses that were attached to a chemical business in addition to environmental liabilities which were attached to ... the ongoing operations.â (Watson Dep., 2/9/2011 at 310:7-15; See also PX 6, a Lehman e-mail sent by Watson concerning the IPO market and environmental liabilities, at 2 (observing that while â âall chemical companies have environmentalâ ... not like this they donâtâ); JX 271 at 16 (âLegacy liabilities presented a difficult due diligence item for bidders with over 300 legacy liability sites and over 27,000 documents in the on-line data room.â)). Lehmanâs documents disclose that the potential effect of the liabilities on Tronox and its creditors was also the subject of mordant humor. During the negotiations leading up to the spinoff, Watson more than once drew a picture of a pot containing a flower (the Tronox Ti02 business) and a weed (the legacy liabilities) strangling the flower. (Watson Dep., 2/8/2011 at 441:3-15). Watson explained that âthe problem is, there is a weed at the base of this flower and it is going to choke off the companyâs ability to be prosperous.â
The credibility of the denials by the principal witnesses for the Defendants is further undermined by the destruction of documents in violation of an agreement with the Justice Department and their cavalier attitude toward the issue. As noted above, in March 2006, after the IPO but before the final spinoff, Kerr-McGee Corporation and Kerr-McGee Worldwide Corp., who are defendants in this adversary proceeding, as well as the Debtors and the United States Department of Justice, agreed to toll claims that the government might be able to bring pursuant to FDCPA from March 28, 2006 through September 30, 2006; through subsequent amendments the tolling was extended to August 29, 2008. (GPX 4.001 at 1; GPX 4.007 at 1). The Agreement required the âCooperating Partiesâ to preserve and maintain all discoverable documents relating to the âTolled Claims,â which included potential fraudulent transfer claims. Corbett appears to have known about the tolling agreement. Tr. 5/16/2012 329:21-331:3.
On the basis of the record as a whole, even without the badges of fraud which will be considered next, Plaintiffs established by clear and convincing evidence
Badges of Fraud
Proof of actual intent to âhinder, delay or defraudâ creditors is not easy, and few defendants acknowledge this as the goal of a transaction. âDue to the difficulty of proving actual intent to hinder, delay, or defraud creditors, the pleader is allowed to rely on âbadges of fraudâ to support his case, i.e., circumstances so commonly associated with fraudulent
Although the Circuit Court in both Sharp and HBE Leasing I construed the New York UFCA, the law under the UFTA is no different, and in fact the UFTA identifies eleven specific âbadges of fraud.â UFTA § 116(B) (as adopted in Oklahoma) provides that â[i]n determining actual intent pursuant to the provisions of paragraph 1 of subsection A of this section, consideration may be given, among other factors,â to eleven stated factors. Okla. Stat. tit. 24, § 116(B). Four of the factors are not relevant in this case: the debtor did not abscond (Factor 6); the debtor did not conceal assets (Factor 7); the transfer did not occur shortly before or shortly after a substantial debt was incurred (Factor 10); and the debtor did not transfer assets through the medium of a third-party lienor (Factor 11). Id. Two of the UFTA statutory factors are discussed below in connection with the charge that the transfers were constructive fraudulent conveyances; they are whether the consideration received by the debtor was reasonably equivalent to the value of the property conveyed and whether the debtor was or became insolvent as a consequence of the transfer (Factors 8 and 9). Id. The remaining five factors support the conclusion that the Defendants acted with actual intent to hinder or delay creditors.
Factor 1. âThe transfer or obligation was to an insider.â
The transfers complained of transferred substantially all of Kerr-McGeeâs assets to a corporate affiliate in the 2002 transactions, and then transferred additional consideration to an affiliate in the IPO. Transfers to an affiliate are deemed transfers to insiders. Freeland v. Enodis Corp. 540 F.3d 721, 733 (7th Cir.2008); see also § 113(7)(d) of the Oklahoma UFTA (an insider is defined as including âan affiliate, or an insider of an affiliate as if the affiliate were the debtor.â)
Factor 2. âThe debtor retained possession or control of the property transferred after the transfer.â
Kerr-McGee retained complete possession and control of the property after the year-end 2002 transfers. After the IPO in November 2005, Kerr-McGee had exclusive control over the property transferred. Kerr-McGee also effectively controlled Tronox until the final spinoff in March 2006; even after that, Kerr-McGee had influence over the management it had installed to run the chemical business, all of
Factor 3. âThe transfer or obligation was disclosed or concealed.â
Disclosure of the 2002 transfers was ineffective and insubstantial. The 2005-2006 transfers were disclosed.
Factor 4. âBefore the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.â
Kerr-McGee of course had been in litigation for years regarding its environmental and tort liabilities. As one example, in April 2005, as it was preparing for the 2005 IPO, it received a demand from the EPA for $179 million in remediation costs at Manville, New Jersey. (JX 164).
Factor 5. âThe transfer was of substantially all of the debtorâs assets.â
As discussed above, Kerr-McGee represented that the property transferred in December 2002 represented substantially all of its assets. Even if this representation was false, the property represented more than 80% of the assets of the consolidated enterprise.
The Oklahoma courts have held that âAny one of these factors, which are called badges of fraud, may âstamp the transaction as fraudulent.â â U.S. v. Spencer, 2012 WL 4577927 at *7 (N.D.Okla. Oct. 2, 2012), quoting Land OâLakes v. Schaefer, 3 Fed.Appx. 769, 772 (10th Cir.2001). The Oklahoma courts are also clear that, contrary to Defendantsâ contention that the badges of fraud only create an inference of intent, a presumption is created that the defendant must rebut. Thus the Court in U.S. v. Spencer quoted the Tenth Circuit in Land OâLakes as stating, â âA single [badge of fraud] may stamp the transaction as fraudulent and, when several are found in combination, strong and clear evidence on the part of the upholder of the transaction will be required to repel the conclusion of fraud.â â U.S. v. Spencer, 2012 WL 4577927 at *7, quoting Land OâLakes v. Schaefer, 3 Fed.Appx. at 772. See also U.S. v. Jackson, 2012 WL 5292952 at *7 (WD.Okla. Aug. 21, 2012), quoting Hildebrand v. Harrison, 361 P.2d 498, 505 (Okla.1961); Miller v. Dow (In re Lexington Oil & Gas Ltd.), 423 B.R. 353, 372 (Bankr.E.D.Okla.2010); Mitchell v. Stringfellow (In re Sioux Redi-Mix, Inc.), 2007 WL 1114161, at *7 (Bankr.E.D.Okla. Jan. 11, 2007). In U.S. v. Spencer and U.S. v. Jackson, the Courts also quoted the following language from In re Lexington Oil & Gas Ltd., 423 B.R. at 372: âWhen a plaintiff establishes the presence of sufficient badges of fraud, he or she âis entitled to a presumption of fraudulent intent. Thereafter, the burden shifts to the transferee to show some legitimate supervening purpose for the transfers.â â (quoting in turn In re Honey Creek Entertainment, Inc., 246 B.R. 671, 685 (Bankr.E.D.Okla.2000), revâd on other grounds, 37 Fed.Appx. 442 (10th Cir.2002)).
We found above on the basis of the record as a whole, that Plaintiffs established by clear and convincing evidence that Defendants intended to hinder and delay the legacy creditors. The presence of âsufficient badges of fraudâ supports this finding. The next question is whether Defendants were able to rebut this evidence and (using the words of at least three Oklahoma courts) show a legitimate supervening purpose for the conveyances. Defendants put forward the following three âlegitimate supervening purposesâ as defenses to Plaintiffsâ contention that they acted with âactual intent to hinder or delay creditorsâ that is actionable under the UFTA. First, according to Defendants,
Belief in Tronoxâs Future
Defendants argue in their post-trial brief, âthe record is replete with direct evidence from Kerr-McGee and Tronox executives that Kerr-McGee intended and believed at all times that Tronox was and would be solvent and able to pay its debts and a successful independent company.â (Def. Br. at 165). Every one of the witnesses called by the Defendants so testified. Kerr-McGee CEO Luke Corbett stated his belief that Tronox would be a âpremier company capable of competingâ. (Tr. (L. Corbett) 5/16/2012 at 343:22-344:2). Defendants called one of the independent Kerr-McGee directors at the time, Ms. Walters, who testified, âthere was no plan by anyone and there was no indication that the company [Tronox] was not going to be a big success.â (Tr. (Walters) 8/16/2012 at 6030:21-6031:23). General counsel Pilcher at his deposition, introduced into evidence, asserted that Kerr-McGeeâs goal was to establish a business that was âwell capitalized, that was well staffed and that had a potential to be a substantial player in the chemical business with excellent long term prospects.â (Pilcher Dep., 1/20/2011 at 638:3-15).
If Defendants intention was to spin off a business that was âwell capitalized ... with excellent long term prospectsâ, the record does not so indicate. Defendants spun off Tronox with a capital structure that included $550 million in debt, a mere $40 million in cash and environmental liabilities that had cost Kerr-McGee more than $1 billion in the years prior to the IPO. As further discussed below, Tronoxâs projected cash flow was inadequate to service its debt without significant land sales that were not assured, and its prospects were clouded by a down-turn in the business cycle of its one product. In any event, the question is not whether Tronox was âdoomed to fail,â although Plaintiffs argue this point. Nor is the question whether Defendants wanted Tronox to be a âbig success.â There is no reason to believe that the Defendants wanted Tro-nox to fail and every reason to believe that they wanted it to survive, at least until the statute of limitations on a fraudulent conveyance action had run. The real question is whether Defendants had a good faith belief that Tronox would be able to support the environmental and other legacy liabilities that had been imposed on it.
The record on this point is extraordinary because it does not exist. A document survives in which General Counsel Pilcher raised the question whether Kerr-McGee should prepare âa commercial analysis of/conclusion re: impact of Project Focus on position of each creditor.â JX 53 at 2. However, if any such analysis was prepared, it has not been preserved. (See Tr. (Walters) 8/16/2012 at 6029:9-6032:12 (noting that the board of directors neither saw nor knew of the existence of any such analysis)). Thus, one of the most compelling facts in the enormous record of this case is the absence of any contemporane
Defendants dispute this and assert that âKerr-McGee and its advisors spent substantial time and effort and took multiple steps to ensure that Tronox would be a viable standalone and that creditors would not be adversely impacted by its separation.â (Def. Br. at 167). They cite three specific examples, of which only two are contemporaneous. First, Defendants claim, âMr. Rauh, Kerr-McGeeâs Controller and Chief Accounting Officer, worked closely with E & Y [Ernst & Young, Kerr-McGeeâs accountants], analyzing cash-flow models prepared by Tronoxâs management that projected Tronoxâs cash flow through 2011.â (Id.) The reference is to a meeting on November 21, 2005 between the Kerr-McGee Controller and Arlen Hechtner, the E & Y partner in charge of the audit in connection with Tronoxâs S-l Registration Statement. As Hechtner explained in his deposition, admitted into evidence, his concern was whether Tronox would survive for one year; if there were uncertainty on this point, it would have required disclosure in Ernst & Youngâs audit report. Ernst & Young concluded that there was no substantial doubt that Tronox would survive for one year: âOur conclusion was that an explanatory paragraph was not required in our report because we did not believe there was substantial doubt as to the companyâs ability to continue as a going concern for one year from the balance sheet date.â (Hechtner Dep., 4/6/2011 at 163:H).
Defendants also rely on the cash flow analysis that was discussed with Hechtner and that, according to Defendants, led Controller Rauh âto conclude that Tronox would have sufficient cash flows and bank credit availability to sustain operations for the foreseeable future ...â (Def. Finding of Fact ¶ 860 at p. 144, referencing JX 314, a four-page cash flow projection that apparently survives only as a part of Ernst & Youngâs work papers). This projection ostensibly goes through 2011 but makes no pretense at being thorough. For example, even though âProvision for Environmental Remediationâ was broken out on a pro forma basis for Tronox prior to 2005, it was apparently included in âOtherâ expenses in the JX 314 projections, leading to the absurd result of a zero âOtherâ expense in 2010 and 2011. Suffice it to say that there is no support in the record for the proposition that Tronoxâs environmental expenses would diminish to zero in 2010. Hechtnerâs cover memo to the audit files (p. 1 of JX 314) also states that he was informed that âKerr-McGee management believe ... Tronox should experience a much diminished level of environmental charges going forward, reducing the historical operating losses related to the discontinued operations as well as the related cash flow requirements.â This was a common refrain on the part of Kerr-McGee at the time, but as discussed below, it was anecdotal and not rooted in reality.
Furthermore, there is no evidence that Houlihan was even aware of the importance of the legacy liabilities to Tronoxâs solvency. In his deposition Collins confirmed that Houlihanâs concern from a fraudulent conveyance perspective was related to the incurrence of debt in the IPO and dividending of the proceeds to the parent. âQ What about the structure of the transaction could give rise to a fraudulent conveyance concern in connection with the Tronox spin-off? ... A. The entity that was taking on â Tronox Newco, the entity that was taking on the debt wasnât going to retain the proceeds from the debt issuance. They were dividending the proceeds up to its parent, Kerr-McGee.â (Collins Dep., 12/15/2010 at 32:9-19). This is the usual concern in a leveraged buy-out (âLBOâ). United States v. Gleneagles Inv. Co., 565 F.Supp. 556 (M.D.Pa.1983) (applying Pennsylvanias fraudulent conveyance act to an LBO transaction); aff'd., United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir.1986) (affirming that district court properly applied Pennsylvania UFCA to an LBO in Gleneagles); MFS/ Sun Life Trust-High Yield Series v. Van Dusen Airport Services Co., 910 F.Supp. 913, 933 (S.D.N.Y.1995) (concluding that âcourts now uniformly hold that fraudulent conveyance laws apply to LBOsâ); see also Raymond J. Blackwood, Applying Fraudulent CONVEYANCE LAW To LEVERAGED BuYouts, 42 Duke L.J. 340, 344 (1992). In this case, however, as further discussed below, the real issue is the amount and effect of the legacy liabilities.
Defendantsâ third and final reason for their asserted belief in Tronoxâs future is that âBoth Plaintiffsâ and Defendants REV [reasonably equivalent value] and damages experts corroborated this projection [that Tronox would continue as a going concern], finding that Tronox would be eash-
The lack of an internal analysis of this issue is particularly striking in light of the fact that Kerr-McGeeâs sophisticated management gave the closest attention to divesting the liabilities, and specifically to the fraudulent conveyance issue.
The âLegitimate Supervening Purposeâ
Defendantsâ second principal defense to Plaintiffsâ actual fraudulent conveyance claim is that there was a âlegitimate supervening purposeâ for the separation of the E & P and chemical businesses. Defendants argue, âThe clear and affirmative evidence at trial established that the decision to move forward with the IPO and Spinoff was motivated by a legitimate supervening purpose: to unlock the value inherent in each of Kerr-McGeeâs businesses by creating two successful standalone companies, and thereby maximize shareholder value.â (Def. Br. at 192). They assert, correctly, that â â[Affirmative
Notwithstanding Defendantsâ identification of a legitimate purpose for the separation of the two businesses, Defendants are not being sued because they made a business decision to spin off chemical from E & P or E & P from chemical. They are being sued because of their decision to spin off âsubstantially all the assetsâ of the enterprise (the E & P assets) and impose 85 years of the legacy liabilities on a fraction of the assets. Obviously, some of the liabilities had a relationship to the chemical business. However, as Kerr-McGeeâs investment banker observed, every chemical business has some environmental liabilities, but ânot like this they donât.â PX 6 at 2; Watson Dep., 5/23/2012 at 309:22-311; see fn. 16 above. The liabilities imposed on Tronox included those associated with every discontinued business that Kerr-McGee had ever engaged in. These businesses ranged from uranium mining (begun in 1952) to the treatment of wood with creosote (a business acquired in 1963). The liabilities imposed on Tronox even included those associated with the discontinued aspects of the petroleum business, such as the more than 800 retail oil and gas outlets acquired in 1955, and they included the OPEB retirement obligations to most of Kerr-McGeeâs former officers and employees.
In Lehmanâs April 6, 2001 presentation to Kerr-McGeeâs top management on a possible split of the E & P and chemical businesses, it proposed to allocate the legacy liabilities in a manner proportionate to the asset values of the two lines of business. (Tr. (L. Corbett) 5/17/2012 at 241:7-13; Watson Dep., 2/10/2011 at 711:4-713:9; JX 22 at 58, 68). The inner circle rejected this, and imposed every legacy liability on Tronox. (Tr. (L. Corbett) 5/15/2012 at 237:20-238:8; 241:7-242:6). To this day, notwithstanding post-trial briefs numbering more than 385 pages and Findings of Fact numbering more than 451 pages, Defendants have never articulated a legitimate business reason for imposing all of the legacy liabilities on Tronox. The record does, however, contain a reason. Before the spinoff of chemical and the âclean separationâ of the E & P business, Kerr-McGee was an unattractive merger candidate. For example, as noted above, Ana-darko had, prior to the spinoff, peremptorily rejected a merger with Kerr-McGee, concluding that Kerr-McGeeâs future environmental liability was â$BILLIONSâ and there was âno end in sight for at least 30 more years.â (PX 391 at 1 (D. Perkins email, Jan. 31, 2004 re Kerr McGee Fact Sheet)). After the divestiture, Anadarko acquired the E & P business for more than $18 billion.
In the ABARCO case, as here, the evidence of record of an intentional fraudulent conveyance was sufficiently compelling as to place the burden on the Defendants to prove a legitimate supervening purpose. But the burden was not to prove whether there were some legitimate business reason for the challenged transactions. The burden was to prove a legitimate supervening purpose for the âmanner in which the transfer was structured.â ABARCO, 396 B.R. at 392. Defendants have failed to bear this burden in this case.
Limitation of Liability
Defendantsâ final defense is that they merely attempted to limit the overall environmental liability of the group. They equate conveyances that separated âsubstantially allâ the assets of Kerr-McGee
Defendants quote Lippe v. Bairnco Corp., 249 F.Supp.2d 357 (S.D.N.Y.2003), for the proposition that â[E]ven assuming managementâs concern over [contingent liabilities] was a motivating factor, there was nothing inappropriate about a companyâs management looking for lawful ways to reduce the adverse impact.â (Def. Br. at 164). But the facts of Lippe point up the differences in that case. Thus, the Lippe Court found that the defendants there had presented extensive evidence, largely uncontradicted, that âdefendants engaged in the transactions in good faith; the purchasing defendants paid substantial consideration that constituted fair value; they relied on the advice of lawyers, including ARKO [Anderson, Russell, Kill & Olick] and Debevoise [Plimpton, Lyons & Gates]; they did not go forward with a no-consideration transaction that could have been viewed as a fraudulent conveyance; they relied on fairness opinions provided by Kidder [Peabody & Co.]; they relied on the existence of $380 million and more of insurance coverage; and they could not have known until much later that some 100,000 asbestos claims would be filed against Keene.â 249 F.Supp.2d at 381. On the basis of these findings, then District Judge Chin granted summary judgment dismissing challenges to Keene Corp.âs asset sales, approving a transaction where the consideration was paid to Keene and where âNo effort was made to put that cash out of the reach of creditors; no assets were secreted away.â 249 F.Supp.2d at 383.
Contrast the facts of this case. Substantially all of the assets of Kerr-McGee were placed out of the reach of the legacy liability creditors. No consideration was paid for the December 31, 2002 transfer of the stock of the E & P subsidiaries and, as discussed below, fair consideration or reasonably equivalent value was not paid in connection with the spinoff. Defendantsâ expert on reasonably equivalent value, Bal-combe, conceded this. (BaleĂłme Direct, 8/31/2012 at ¶ 6; Tr. (Balcombe) 9/6/2012 at 6373:5-23). Defendants were acutely aware of the legacy liabilities, and if they did not have a precise amount, the reason is they assiduously avoided performing the analysis necessary to obtain one. Defendants do not rely on fairness opinions; indeed Lehmanâs managing director Watson believed that the legacy liabilities would choke the flower that was Tronoxâs Ti02 business. Defendants have carefully preserved the attorney-client privilege as to the legal advice they received; while no adverse implication can be drawn from the preservation of the privilege, Defendants obviously cannot rely on an advice-of-counsel defense, as could the defendants in Lippe.
As noted above, the Court in Lippe also observed that Keene âdid not go forward with a no-consideration transaction that
The facts of this matter resemble, if any other case, the ASARCO decision, despite Defendantsâ contention at closing argument that the facts in the ASARCO decision âcould not be further from the present case.â (Tr. 12/12/2012 at 8077:24-8079:10). Certainly ASARCO was more obviously in extremis when the parent there transferred to itself its subsidiaryâs âcrown jewelâ assets and attempted to isolate them âfrom risk of exposure to the government and other creditors.â ASARCO, 396 B.R. at 375. Nevertheless, as the District Court found in ASARCO, the parent had acted with actual fraudulent intent to hinder, delay or defraud creditors even though it had paid reasonably equivalent value for the transferred assets. Here, as further discussed below, reasonably equivalent value was not paid.
In sum, Plaintiffs have proved by clear and convincing evidence that Defendants acted with actual intent to hinder or delay creditors, and Defendants have wholly failed to rebut the evidence.
Constructive Fraudulent Conveyance
Plaintiffs also charge that Defendants are liable on a charge of constructive fraudulent conveyance. In order to prevail on such claim, a plaintiff must prove that (i) there was a conveyance of an interest in property or the incurrence of an obligation; (ii) receipt of less than reasonably equivalent value; and (in) that the transferor was or was rendered by the conveyance insolvent, inadequately capitalized, or unable to pay its debts as they came due. Okla. Stat. tit. 24, §§ 116(A)(2), 117(A). There is no dispute in this case that there was a conveyance of an interest in property. (Def. Br. at 45). There is also no dispute that the burden of proof is a preponderance of the evidence standard. Id. We consider, first, the question whether reasonably equivalent value was paid and then whether the result was insolvency, inadequate capitalization, or inability to pay debts as they came due.
Reasonably Equivalent Value
There is limited dispute between the parties as to whether Tronox received reasonably equivalent value for the conveyance of the E & P assets and the other property distributed to Kerr-McGee in connection with the spinoff. We start by describing Plaintiffsâ analysis of the issue
Plaintiffsâ expert on the issue of reasonably equivalent value (âREVâ) was Prof. Jack Williams.
Williams then valued the property conveyed to New Kerr-McGee at the time of the IPO. He testified that Tronox transferred approximately $799 million in cash to Kerr-McGee ($224.7 million in net proceeds from the IPO, $537.1 million in net proceeds from borrowings under the term loan and unsecured notes, and approximately $37 million in operating cash). In addition, Tronox transferred out its interest in a chemical battery business (worth $78.9 million in Defendantsâ calculations) and assumed approximately $186 million in unfunded OPEB (retiree) benefits. Williams then calculated that Plaintiffs received in connection with the IPO property of a value of $2.6 billion. This consisted of $285 million in Ti02 assets in western Australia; approximately $2 billion in debt from which they were released (this was the financial debt that was assumed by New Kerr-McGee when Defendantsâ transferred out âsubstantially allâ of Kerr-McGeeâs assets); $100 million in environmental reimbursement under the MSA (largely illusory, as discussed above, but valued at face by Williams); approximately $140 million in pre-paid insurance policies; and a $41 million indemnity for environmental liabilities of the E & P business under the AA & I Agreement. (Williams Direct, 6/22/2012 at ¶¶ 44-50; Tr. (Williams) 6/27/2012 at 3511:23-3512:4).
Defendants do not quarrel with any of the foregoing calculations and
Defendantsâ only further contention on the subject of REV is that a REV and solvency analysis must be performed on a strict entity-by-entity basis. Defendants do not dispute that on such a basis two of the Plaintiffs, Tronox Worldwide (âOld Kerr-McGeeâ) and Tronox Inc. (the newly-created holding company) did not receive REV.
Defendants do not support their argument that a REV (and solvency) analysis
In any event, there was no contention that any creditor of any of the three Tro-nox entities that were Plaintiffs in this case relied on that entityâs separate identity. Like Kerr-McGee, Tronox operated its business and handled its environmental liabilities on a consolidated basis. Until the IPO in November, 2005, when a separate account for the newly independent Tronox was established, Kerr-McGee funded legacy liabilities, like all other liabilities, out of a central cash management system. (Tr. (Rauh) 8/9/2012 at 5002:7-5003:3; Mikkelson Dep., 6/22/2010 at 599:8-12, 599:15-600:3; Adams Dep., 6/9/2010 at 237:6-20, Tr. (Williams) 9/13/2012 at 7569:2-21). Although Kerr-McGee tracked expenditures through in-tercompany balances for operating businesses, the paid legacy liabilities of discontinued businesses that generated no revenue and recorded them as an equity contribution by the parent. (Tr. (Rauh) 8/9/2012 5008:13-25, 5011:23-5012:7, 5013:18-50150:13; Rauh Direct, 8/3/2012 at ¶ 58). In addition, Tronox was marketed as a consolidated entity in the IPO, and each of the Plaintiffs became hable on the debt issued as either a borrower or a guarantor. (Williams Direct, June 22, 2012 at ¶ 16; JX 323 at 1, 36; J. Balcombe Direct, 8/31/2012 at ¶¶ 25, 56). As further discussed below, Defendantsâ principal contention on the issue of solvency is that the market deemed Tronox solvent and that knowledgeable and sophisticated third parties were willing to purchase it or, alternatively, invest millions of dollars in its future. The âmarketâ did not deal with the three Tronox Plaintiffs or with their other affiliates as separate entities. The âmarketâ dealt with âTronoxâ on a consolidated basis.
Defendants also argue that the Oklahoma statute, like the Bankruptcy Code, speaks of avoiding the interest of a âdebt- orâ in property, and they conclude from this that the statute commands that all fraudulent conveyance analysis proceed on a single-entity basis. They forget that Oklahoma law has a statute in relation to the meaning of terms and construction of statutes, see Okla. Stat. tit. 25, § 25, providing that âwords used in the singular number include the plural, and the plural
In carrying out the intent of the fraudulent conveyance laws, courts disregard the form of a transaction and look âinstead to its substance.â In re HBE Leasing Corp. v. Frank, 48 F.3d 623, 638 (2d Cir.1995) (construing the New Yorkâs fraudulent conveyance statute); see also, Boyer v. Crown Stock Distrib., Inc., 587 F.3d 787, 793 (7th Cir.2009), quoted above. Fraudulent conveyance law is âdesigned to protect creditorsâ rightsâ and looks at transactions from âthe perspective of creditorsâ. In re Crowthers McCall Pattern, Inc., 129 B.R. 992, 998 (S.D.N.Y.1991). As a matter of substance, from the creditorsâ perspective, Kerr-McGee prior to the IPO through its cash management system reserved for, managed and paid all environmental obligations of all of its constituent units. After the IPO finally separated the E & P assets from the chemical assets, creditors could and did look only to the Debtors â consolidated âTronoxâ â as the entity responsible for the legacy liabilities. Plaintiffs satisfied their burden of proof when they demonstrated, easily and without substantial dispute, that Tronox as a consolidated entity received less than reasonably equivalent value when, at the conclusion of the IPO, $17 billion in assets had been spun off and only $2.6 billion had been transferred in.
The further and more hotly contested question is whether Plaintiffs satisfied their burden of showing that Tronox was, as a result of the transfers, insolvent, without sufficient capital or unable to pay its debts as they came due. We start with the issue of insolvency.
Insolvency
The Oklahoma UFTA defines insolvency as follows for a non-partnership debtor:
A. A debtor is insolvent if the sum of the debtorâs debts is greater than all of the debtorâs assets at a fair valuation.
B. A debtor who is generally not paying his debts as they become due is presumed to be insolvent....
D. Assets pursuant to the provisions of this section do not include property that has been transferred, concealed, or removed with intent to hinder, delay or defraud creditors or that has been transferred in a manner making the transfer voida*296 ble pursuant to the provisions of the Uniform Fraudulent Transfer Act. OKLA. Stat. tit. 24, § 114.
Under the Oklahoma UFTA, âdebtâ means âliability on a claimâ and âclaimâ means âa right to payment, whether or not the right is reduced to judgment, liquidated, unliqui-dated, fixed, contingent, matured, unma-tured, disputed, undisputed, legal, equitable, secured or unsecured.â Okla. Stat. tit. 24, § 113(5), (8). Cases under the Federal Bankruptcy Code are frequently used in the construction of parallel UFTA provisions, and it is relevant that the Bankruptcy Code definition of âinsolvencyâ is almost identical to that of the UFTA. The Bankruptcy Code in § 101(32) provides that âThe term âinsolventâ meansâ
(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entityâs debts is greater than all of such entityâs property, at a fair valuation, exclusive ofâ
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entityâs creditors; and
(ii) property that may be exempted from property of the estate under section 522 of this title.
The definitions of âdebtâ and âclaimâ under the Bankruptcy Code are substantially identical to those in the UFTA. Compare Okla. Stat. tit. 24, §§ 113(5), (3), with 11 U.S.C. §§ 101(12), 5(A).
The analysis of solvency for fraudulent conveyance purposes is a âbalance sheet test,â examining whether debts in the aggregate are greater than assets in the aggregate. Universal Church v. Geltzer, 463 F.3d at 226. Assets and debts must be determined âat a fair valuation.â Mellon Bank v. Official Committee of Unsecured Creditors (In re R.M.L., Inc.), 92 F.3d 139, 154-55 (3d Cir.1996); In re Solomon, 299 B.R. 626, 638 (10th Cir. BAP2003). In this case, like many others, these deceptively simple terms engendered days of testimony. As in many fraudulent conveyance cases, both parties relied on expert testimony, and both called witnesses with sterling credentials. Plaintiffsâ principal expert witness on the subject of solvency was Grant Newton, professor emeritus of accounting at Pepperdine University, executive director of the Association of Insolvency and Restructuring Advisors (AIRA) and a man with more than 35 years of experience in insolvency accounting and restructuring activities. Defendantsâ principal witness on the subject of solvency was Daniel Fischel, professor emeritus at the University of Chicago and former dean of the law school and director of the Law and Economics Program at the University. He has testified on valuation and related issues 250-300 times and is currently chairman of his own consulting company, Compass Lexicon. Although Prof. Fischel is particularly well-known for his view that âmarket prices typically are more reliable evidence of a companyâs value than ex post analyses prepared by experts in the context of litigationâ (DX 2800 at 7 (Fischel Expert Report)), he also prepared Defendantsâ only âex postâ solvency analysis.
Defendantsâ Market Defense
Defendantsâ first line of defense is that âThe Voluminous Market Evidence Overwhelmingly Establishes that Each of the Tronox Plaintiffs Was Solvent at the Time of the IPO and Spinoff and Not Rendered Insolvent By Reason of the IPO or Spinoff.â (Def. Br. at 47 (heading)). Citing three recent decisions on use of the âmarketâ to determine solvency in fraudulent conveyance cases, Defendants assert, âIn this trial, the enormous body of contemporaneous market evidence of solvency was far stronger than in VFB, Iridium and CarCo â all of which found for defendants on solvency.â (Def. Br. at 48, citing VFB LLC v. Campbell Soup Co., No. Civ. A 02-137, 2005 WL 2234606 at *31 (D.Del. Sept. 13, 2005), aff'd 482 F.3d 624, 632-34 (3d Cir.2007) (plaintiffs failed to prove insolvency); Iridium Operating LLC v. Motorola, Inc. (In re Iridium Operating LLC), 373 B.R. 283, 352 (Bankr.S.D.N.Y.2007) (same); In re Old CarCo LLC, 454 B.R. 38, 59-60 (Bankr.S.D.N.Y.2011) (granting motion to dismiss where âthe contemporaneous market information concerning the involvement of other sophisticated parties in the transactionâ rendered constructive fraudulent conveyance implausible)). Defendants continue: âThis is not simply a case built on the public market evidence of stock and bond pricesâ although those are key indicators of solvency and plainly demonstrate solvency here ... The evidence at trial also established two critical bookends to the public market. On the one hand is Apolloâs signed, fully-financed offer to purchase the Chemical Business, based on six months and millions of dollars in diligence ... On the other hand are the compelling, contemporaneous statements and actions of Tro-noxâs own officers and managers, including statements subject to the securities lawsâ all of which are consistent with the public market evidence of solvency.â Id. at 48-49.
We start with the evidence relating to the public market and then proceed to the so-called two âbookendsâ â Apollo and the other bidders and Tronoxâs own personnel.
The Public Market
Defendants appeal to cases such as VFB v. Campbell Soup Co. (the âVlasic Pickle easeâ), Iridium and Old CarCo (formerly known as Chrysler) as if this were a typical case where a division or subsidiary was spun off, survived for several years, and then went into chapter 11, commencing a fraudulent conveyance case and claiming that the business was insolvent at the time of the spinoff. In the Vlasic Pickle case, for example, the Third Circuit affirmed a district court decision that discounted the partiesâ expert opinions on solvency and relied almost exclusively on the âmarket.â The Circuit Court cited the district courtâs âmeticulous and well-considered opinion,â in which the trial court had concluded that the division spun off received reasonably equivalent value and was solvent at the time of the spin; the Circuit Court noted that the district courtâs primary reason for that conclusion was that âin light of VFIâs $1.1 billion market capitalization nine months after the spin, the Division businesses were worth indeed far more than $500 million.â 482 F.3d at 631. The Court of Appeals cautioned, âAll agree that if the market capitalization was inflated by Campbellâs manipulations it was not
In this ease the Debtor also survived for several years after the spin, and it maintained an ostensible market capitalization. Under the facts of this case, however, Defendantsâ reliance on the âmarketâ and the fact that lenders loaned $450 million in senior secured debt and that Tronox was also able to sell into the market $350 million in bonds and $224.7 million in stock is unavailing.
At the outset, Defendantsâ reliance on Tronoxâs ability to issue $450 million in debt does not deserve any weight in the solvency analysis. The debt that Tronox issued was secured by all of the assets of all of the Tronox companies, and the sophisticated lenders who bought this debt well knew they would come first in any bankruptcy or liquidation of the enterprise.
Plaintiffs attempted to overcome the evidence of Tronoxâs issuance of unsecured debt and stock in connection with the IPO by demonstrating that the financial statements on which the market relied were false and misleading. On this issue, Prof. Newton convincingly demonstrated that the projections on which the IPO was based were inflated, sell-side projections, and that key numbers were imposed at the direction of Kerr-McGeeâs chief financial officer, Wohleber. (Tr. (Gibney) 9/5/2012 at 6062:14-6063:12) For example, Kerr-McGee had previously forecast Ti02 pricing using a mean treadline based on more than 40 years of historical pricing data. (Romano Dep., 8/17/2010 at 74:15-75:3; Tr.
The record is also clear that the financial statements omitted certain critical contingencies and potential liabilities. One of the most important involved the Federal Superfund site at Manville, New Jersey, a former wood-treating facility.
Similarly, Kerr-McGee omitted any disclosure in the IPO Registration Statement of contingencies related to the contract for the sale of land in Henderson, Nevada. At the time of the IPO, Centex Homes and the Landwell Company had an ostensible contract to purchase the Henderson site for a total of $515 million, $154 million of which would be payable to Tronox on account of its 30% interest in the property. (JX 158 at 129). The Henderson proceeds were included in Tronoxâs projections and were essential elements of its future cash flow.
There is thus much evidence in the record regarding the insufficiencies of the Tronox financials used in the IPO. Nevertheless, it is not necessary for Plaintiffs in this case to prove that the IPO financial statements were false and misleading.
Indeed, no party in the case even suggested that financial statements and the reserves taken for environmental and tort liabilities are useful in a determination of solvency under the UFTA. Plaintiffsâ expert submitted reports totaling over 2,600 pages to attempt to value the environmental liabilities. Defendants called two expert witnesses and adduced over 8,000 pages of reports to dispute Plaintiffsâ expert. Separate experts and reports were relied on in connection with the tort liabilities. None of these experts suggested that financial statement reserves for the liabilities were relevant to a determination of their size for solvency purposes. Prof. Fischel, whose career has been based on the principle of the supremacy of the market, admitted that reserves are not âthe final measure or even the most accurate contemporary measure of what environmental liabilities are likely to be.â (Tr. (Fischel 8/7/2012 at 4433:8-4434:6)). He relied for environmental liabilities on the study performed by Apollo, one of the suitors for Tronox, a matter which is discussed below.
A principal reason why financial statements are of little use in a solvency analysis is that generally accepted accounting principles (GAAP) require reserves only for claims that are âprobable and reasonably estimable.â (See FAS 5; Rock Direct, 6/11/2012 at ¶ 70; Tr. (Riley) 8/14/2012 at 5557:12-15). The record is replete with evidence that Kerr-McGee misapplied this standard and thereby understated its liabilities for GAAP purposes.
In any event, without considering the adequacy of Kerr-McGeeâs reserves, financial statement reserves for environmental liabilities are of no probative value in a solvency analysis because GAAP itself only requires reporting a limited subclass of environmental and tort liabilities. Probable and reasonably estimable liabilities are those that are probable as to liability and reasonably estimable as to amount. (Tr. (Williams) 9/13/2012 at 7507:5 - 7508:22). âAn environmental liability is considered probable when ... âit has been asserted (or it is probable that it will be asserted) [and] the entity is responsible for participating in a remediation process because of a past event,â and ... âit is probable that the outcome of such litigation, claim, or assessment will be unfavorable.â â (Rock Direct, 6/11/2012 at ¶ 24, quoting SOP 96-l).
In the W.R. Grace case, the fulcrum issue relating to insolvency was the size of its asbestos liability. In the instant case, it is the size of Tronoxâs environmental liability. In both cases, the market as a whole, no matter how efficient or inefficient, cannot be relied on to determine
The Allegedly Sophisticated Market Players
Before considering the solvency analyses that both parties presented, it is necessary to consider Defendantsâ reliance on other players in the market. Defendants rely on Apollo, which is described as a determinative âbookendâ for the market because it performed its own environmental analysis. Defendants also rely on the participants in the market who performed independent due diligence that extended well beyond public information. However, these âmarket participantsâ had interests which were unique and caused them to be hardly representative of âthe market.â Thus, at pp. 58-62 of their brief, Defendants list the other market participants on whose due diligence they rely as including: (i) JP Morgan, described by Defendants âas co-lead underwriter for the equity, and co-documentation agent for the Credit Facility, committing $50 million of its own funds to the Credit Facility, fully expecting to be repaidâ (citing JX 326 at 3; JX 324 at 1; Haimes Dep., 1/27/20122 at 87:9-20, 122:3-22; JX 298 at 5, 48); (ii) Credit Suisse First Boston, described âas joint bookrunner for the Unsecured Notes, co-manager for the IPO and joint lead arranger for the Credit Facility, committing $60 million of its own funds to the Credit Facility, fully expecting to be repaidâ (citing JX 326 at 3; JX 260 at 2; Newberry Dep., 1/17/2011 at 48:13-25, 85:17-86:3; JX 283 at 13); and (iii) Lehman Brothers, which, according to Defendants, âoffered stapled financing to potential bidders in the sale process, acted as joint bookrunner for the Unsecured Notes, co-lead underwriter for the IPO, and joint lead arranger for the Credit Facility ... Lehman committed $60 million of its own funds to the Credit Facility, fully expecting to be repaid.â (citing JX 168 at 7; JX 270 at 4; JX 326 at 3; Sehgal Dep. 5/25/2011 at 209:4-18; Watson Dep., 2/10/2011 at 620:5-14; Newberry Dep., 1/17/2011 at 49:2-4).
As Defendants admit in their description of the cash committed by these âmarket participants,â Morgan, CSFB and Lehman provided credit to Tronox through the Credit Facility and had every reason to expect to be fully repaid because the Credit Facility was secured by all of Tronoxâs assets. The Secured Lenders could be confident that they would be paid before any legacy liability claims â as was indeed the case in Tronoxâs bankruptcy.
The one âmarket participantâ who did separately value the legacy liabilities was Apollo, and Defendants characterize âApolloâs Efforts and Final Bid to Acquire the Chemical Business, After Thorough Due Diligence, [as] Unassailable Evidence of Solvency.â Def. Br. at 51 (heading). Defendants contend, âApollo along with its advisors accessed the vast [virtual data room] set up by Kerr-McGee more than 24,000 times, diligencing every aspect of the Chemical Business.... As a result, Apollo and its advisors, who also had access to the [virtual data room], became âintimately familiar with the issues facing the Companyâ and were well aware of the full extent of Tronoxâs environmental and tort liabilities (including the misnamed âsecretâ sites), as well as the Centex Contract for the Henderson Property, Tronoxâs financial performance and projections, and the Ti02 industryâs anticipated future performance.â Defs. Br. at 52 (emphasis in original). Defendants conclude, âApolloâs valuation of the Chemical Business was ultimately and powerfully manifested in its November 20, 2005 fully-funded, signed offer for $1.3 billion, which the record shows was final and binding.â Defs. Br. at 53.
Defendants overstate the nature and significance of the Apollo bid. Apollo did not make a âfinal and bindingâ offer for Tronox of $1.3 billion. JP Morgan, Kerr-McGeeâs investment banker on the deal, concluded that the Apollo bid contained open items and that critical parts of the contract remained to be negotiated. (See PX 840). Additional disclosures had to be made, triggering Apolloâs rights of termination if they were inaccurate. (PX 840; DX 542 at 140; Tr. (Williams) 9/13/2012 at 7491:15-22). Moreover, Apolloâs bid contained indemnities for environmental and tort liability totaling $504 million.
In any event, the record is inadequate to give Apolloâs analysis of Tronoxâs environmental and tort liabilities the weight that Defendants demand. There is no dispute that Apollo hired an environmental consulting firm, Environ, as well as lawyers from Morgan, Lewis & Bockius as environmental counsel, and that they performed â âsignificant diligence assessing the nature and potential cost implications of [the Chemical Business and its environmental] liabilities.â â (See Fischel Expert Report, DX 2800 at ¶ 22, quoting Confidential Apollo Memorandum from Matthew Con-stantino to Interested Parties dated June 18, 2005 at 9-10. (JX204)). Prof. Fischel, Defendantsâ principal solvency expert, in fact built his analysis of Tronoxâs solvency around Apolloâs calculations as to the legacy liabilities, asserting that the maximum liability found by Apollo and its experts (on which he relied) was $556.1 million on an undiscounted basis. (DX 2800 ¶23, referencing Ex. F).
Although Fischelâs Ex. F purports to calculate the Chemical Businessâ undis-counted environmental liability, it is unreliable. It consists of excerpts from other documents that do not even purport to represent Environâs analysis of the Chemical Businessâ total environmental exposure. Thus, the first of the three excerpts used in Ex. F is entitled âPer CSFB Presentation to Investment Banking Committee dated 6-21-2005â and purports to calculate âTotal Environmental Remediation Liabilitiesâ as $497.0 million. However, the individual items that supposedly add up to âTotal Liabilitiesâ are entitled, simply, âKnown Non-Woodâ treating sites and âKnown Woodâ treating sites and hardly purport to be comprehensive. The relationship of CSFB (Credit Suisse First Boston) to Apollo or to Environ is not ex
The second of the three excerpts in Fischelâs Ex. F is headed âPer ENVIRONâs Report âKerr-McGee Chemical â Environmental Reserve and Regulatory Compliance Summaryâ and references a UBS Memo on Project Blanco, Appendix A.â It is dated 8/11/05 and is also in evidence as DX 2132; a similar version dated 11/1/05 is DX 8940. It at least purports to constitute some of the work product of Environ, Apolloâs expert environmental consultants, and the version Fischel initially used was apparently included as an appendix to a memorandum prepared by UBS, which was a prospective lender to Apollo. However, the seven-page list of items does not purport to be a report or to be comprehensive. On the contrary, it lists certain environmental liabilities and by its own terms is limited to Kerr-McGeeâs âenvironmental reservesâ and âknown site contamination issues,â plus Manville, where the EPA had demanded $189 million for remediation. It adds up to an alleged âTotal Environmental Remediation and Tort Liabilitiesâ of $556.1 million.
The relationship of the third excerpt to Apollo is entirely unknown as it is headed, simply, âPer Undated Document (CSMTRX-JPM00015452).â Like the other documents referenced, this âundated documentâ does not even pretend to be comprehensive, and although some of the pages appear to have been produced by Environ, they are pages with names of sites and numbers but without a grand total. All of the documents purport to analyze liability only at âknown sites.â
Prof. Fischelâs excerpts from these miscellaneous documents, not shown to constitute a comprehensive analysis of Kerr-McGeeâs environmental liabilities, do not provide adequate support for Defendantsâ position that Apollo and its experts concluded after massive study that the legacy liabilities were fairly valued at $556.1 million. Indeed, not only do the documents listed on Prof. Fischelâs Ex. F indicate that Apollo only considered âknown environmental sites,â where a claim had been made by a third party, but Prof. Fischel on cross-examination confirmed this. He testified that in his opinion Environâs analysis was limited to sites for which Kerr-McGee had existing reserves, plus Manville (where it had received a claim from the EPA), and that it did not study Kerr-McGeeâs total environmental footprint. (Tr. (Fischel) 8/8/2012 at 4867:11-4869:12). On the record we have, the Environ study â whatever it might have been â materially underestimated Kerr-McGeeâs total exposure for the purposes of a valid solvency analysis.
Moreover, although Apollo was subject to subpoena in New York, no party called an Apollo witness to the stand, and the record evidence on Apolloâs bid is limited to the documents that Apollo produced, a few of which were admitted in evidence, and to the evidence of the Kerr-McGee officers who ultimately rejected the Apollo bid. The few Apollo documents in evidence do not support Defendantsâ contention that the Apollo bid is âunassailableâ evidence of Tronoxâs solvency. For example, an Apollo Confidential Memorandum on which Prof. Fischel relied refers to âour investment horizonâ, but it does not disclose how long Apollo intended to hold on to the Chemical Business before disposing of it through an IPO or other transaction. (See JX 204 at p. 1, an Apollo Confidential Memorandum dated June 18, 2005). Indeed, we know from the âConfidential
The other âbookendâ that Defendants propound as evidence of Tronoxâs solvency is the confidence of its officers and directors in its future. All of the witnesses who were employed by Tronox testified that at the time of the spinoff they believed Tronox was âsolventâ and not doomed to fail. However, Plaintiffs do not have to prove that Tronoxâs management acted in bad faith or failed to make reasonable efforts to achieve success. They had no choice but to do their best under the circumstances. (Tr. (Gibney) 9/5/2012 at 6255:6-14; P. Corbett Dep., 12/16/2010 at 378:13-379:4). Moreover, while many in Tronoxâs management were âhopefulâ about Tronoxâs prospects, others saw disaster on the horizon at a very early stage. (Tr. (Gibney) 9/5/2012 at 6059:20-6060:2, 6079:13-21; P. Corbett Dep., 12/16/2010 at 378:21-379:4, 427:15-428:2, 492:16-498:6, 498:21-499:21; Brown Dep., 5/11/2011 at 271:8-274:13; Logan Dep., 9/28/2010 at 130:24-132:13; Lux Dep., 9/27/2010 at 115:4-116:1). Within three weeks of the spinoff Tronox had developed a âgap closure planâ to address the shortfall between its budget and its deteriorating financial condition. (PX 931 at 1; Brown Dep., 5/11/2011 at 251:18-22, 252:1-253:22). Brown, Tronoxâs vice president of financial planning, testified that âthe magnitude of what we needed to address warranted immediate action, and we didnât have a month to waste.â (Brown Dep., 5/11/2011 at 253:15-22). Within six weeks of the spinoff, Tronox had developed a list of 40 different cost-cutting initiatives, some of which were termed âdraconianâ by its
The point is not that Tronoxâs need to cut costs is proof of balance sheet insolvency or that a cash crunch caused its insolvency. The point is that in this case its managementâs good faith efforts to keep the enterprise going and their belief that this was possible do not constitute a âbookendâ that proves or disproves Tronoxâs solvency. As emphasized throughout this decision, if Tronox was insolvent, as defined in the UFTA, the principal cause was the legacy liabilities. Some of the managers believed the liabilities would be fatal; shortly after the spinoff, Tronoxâs newly-appointed head of environmental remediation, Pat Corbett, began advocating that Tronox sue Kerr-McGee, a statement that he repeated frequently. (P. Corbett Dep., 12/16/2010 at 452:4-453:23; Tr. (Gibney) 9/5/2012 at 6058:15-6059:2; Brown Dep., 5/11/2011 at 177:10-15; Adams Dep., 6/10/2010 at 551:8-24). All of Tronoxâs management attempted to manage the liabilities, as Kerr-McGee had, and indeed they were bound under the Master Separation Agreement to maintain Kerr-McGeeâs policies for at least seven years. (JX 329 at 10-12 (§ 2.5(d) and (f))). There is no question that Tronoxâs cash-starved position made it increasingly difficult to pay any expenses relating to the liabilities (and also prevented Tronox from accessing the indemnification provided by Kerr-McGee in the Master Separation Agreement). In any event, the optimism of some of Tronoxâs management is no better proof of solvency than the despair of others.
Thus, under the UFTA, there is no substitute for performing an analysis of Tro-noxâs assets as at the date of the IPO and measuring them against its liabilities, both at a fair value. Both parties presented extensive and detailed expert testimony analyzing Tronoxâs assets and liabilities as at the IPO date. We start with their analysis of the liability side of the balance sheet because, as stated previously, this case is about environmental liabilities. Even if we assume that Defendants are correct in their valuation of Tronoxâs assets, it was insolvent on Defendantsâ own numbers if Plaintiffsâ valuation of the environmental liabilities is persuasive. Thus, Prof. Fischel, who presented Defendantsâ solvency analysis, used $278.1 million as the present value of Tronoxâs âenvironmental/tort liabilities (post-tax)â. (DX 2800.1 at 9, ll).
Debts at the Date of the IPO âat a Fair Valuationâ
In order to perform a UFTA solvency analysis appropriate to the facts of this case, it is necessary to determine the amount of Tronoxâs âdebtsâ as at the date of the IPO. As noted above, the term âdebtâ is defined in the Oklahoma UFTA as âliabilityâ on a claim, and âclaimâ is in turn defined broadly to include those that are unmatured, contingent, and unliquidat-ed.
The parties did not differ materially as to the value of many of Tronoxâs liabilities, such as its financial debt, tax liabilities, liabilities for discontinued operations, and unfunded retiree liability. Their substantial dispute was the amount of Tronoxâs environmental and tort liabilities â which, again, is what this case is all about. We start with Tronoxâs environmental liability, which is vastly larger.
Environmental Liability
Plaintiffsâ expert witness on the subject of environmental liability was Neil Ram of Roux Associates. Ram has a PhD in Environmental Engineering, with more than 30 years of experience in environmental engineering, site remediation and cost accounting, and although he has testified frequently, most of his work has been on remediating environmental cites, including as a licensed site professional on more than 20 Superfund sites. (Ram Direct, 6/8/2012 at ¶¶ 9-11). Ram and his firm spent more than 40,000 hours preparing a comprehensive report that was designed to calculate the cost of remediation at the 2,746 sites that were formerly owned, operated or used for waste disposal by Kerr-McGee, or where Kerr-McGee was a corporate successor to such an entity, and where the site was left with Tronox after the IPO. In his 2,042-page report and 580-page Rebuttal Report, Ram assigned costs to only 372 of the 2,746 sites. 214 of the sites he chose were being remediated in 2005 or the subject of existing Kerr-McGee reserves, and therefore included on Schedule 2.5(a) of the Master Separation Agreement between New Kerr-McGee and the entity that became Tronox. Ram included 157 additional sites on the ground that they were similar to the âlistedâ sites, in that toxic or carcinogenic chemicals (such as uranium, creosote, perchloric or
Ram concluded that the present value of the future response costs of environmental remediation at the sites, as of November 2005, was between $1,499 billion and $1,684 billion. In deriving this amount, Ram netted reimbursement from third parties, including the United States and certain States, and he apportioned costs based on the number of PRPs, the duration that Kerr-McGee or its predecessor had owned or operated the facility and, with respect to mining sites, the amount of ore mined relative to others. He did not reduce his estimates for insurance, reimbursement under the Master Separation Agreement (which was largely illusory), or an adjustment for the net tax impact because Newton had addressed these as contingent assets in his solvency analysis. These amounts total at most $484.4 million.
It is significant that Ramâs analysis is the only comprehensive valuation in the vast record of this case of Tronoxâs environmental liabilities. As mentioned above, Kerr-McGee never performed such an analysis, either in connection with the IPO or otherwise, and there is no dispute that accounting reserves for environmental costs do not purport to be useful in a UFTA solvency analysis. As discussed above, Fischel relied on Environ, Apolloâs expert, but the evidence he used demonstrates that Environâs analysis was certainly not comprehensive. Defendants also called their own expert witnesses on environmental costs, Neil Shifrin and Richard Lane White of Gnarus Advisors LLC., and the Court qualified them as experts and recognizes that Shifrin has spent a good part of his career in court testifying on environmental matters.
In any event, the only conclusion on this record is that it is Defendantsâ position that the net present value of the remediation costs of Tronox as of November 2005 was $278.1 million or, at most, $376.2 million. In comparing this amount to Ramâs $1.0 to $1.2 billion, it bears recalling that Kerr-McGeeâs environmental expenditures during the five years prior to the IPO had averaged $160 million per year, that it had spent $580 million just at the West Chicago site, that it had received a demand from the EPA for $179 million for cleanup at a Superfund site in Manville, New Jersey, and that Tronox succeeded to virtually all of the Kerr-McGee sites. It was a common refrain of Defendants that Kerr-McGeeâs environmental costs were diminishing, but as discussed elsewhere, this contention is not supported by the record. See n. 56, supra. Defendants also denied that Kerr-McGee-Tronox had any liability for remediation at Manville, but that could not be assumed in 2005, and the issue was still unresolved at the time of trial. The conclusion of Shifrin and White that Ram should have valued Tronoxâs future environmental liabilities as approximately the amount that Kerr-McGee had recently paid over a two-year period does not pass the common sense test. See Johnson Elec. N. Am., Inc. v. Mabuchi Motor Am. Corp., 103 F.Supp.2d 268, 286 (S.D.N.Y.2000) (noting that â(i)n assessing the reliability of an expert opinion, a resort to common sense is not inappropriateâ).
Nor does the Shifrin/White study withstand detailed analysis. Shifrin and White estimated the present value of remediation at the sites that Ram had chosen by using what they termed a âconceptual probabilityâ matrix, assigning a 10% probability to response actions that Shifrin deemed âunlikely but possible,â a 30% probability to response actions that were âpossible,â a 50% probability to response actions that were âequally likely,â a 70% probability to response actions that were âmore likely than notâ, and a 90% probability to response actions that were highly likely. (Shifrin/White Direct, 9/4/2012 at ¶ 60) Such a matrix provides an aura of scientific precision but is of course dependent on the judgment of those who use it. Plaintiffs established that Shifrin did not support his allocations of probabilities fairly. To take several examples, both parties adduced testimony regarding a former Kerr-McGee wood-treating facility in Wilmington, North Carolina, a Superfund site. Shifrin claimed his choice of a remedy, in situ solidification, was the most likely approach and assigned it a conceptual probability of 50%. (Tr. (Shifrin) 9/10/2012 at 7016:9-7017:10). He claimed at trial that his decision was based on project documents, site-specific information, and site-specific technical analysis, but Plaintiffs established that at deposition he had testified to the contrary. (Id. at 7017:23-7020:25). He conceded that in situ solidification had never been used at any other Kerr-McGee wood-treating site, and such assumption materially understated the
Both partiesâ experts recognized as authoritative and relied on the cost-estimating principles in the Standard Guide for Disclosure of Environmental Liabilities published by ASTM International, formerly the American Society for Testing and Materials. The 2005 ASTM Guide, in effect in November 2005, described four cost estimating approaches: expected value; most likely value; range of values; and known minimum values. The âexpected valueâ approach is a probabilistic approach and, as Defendants assert, it was the âpreferred methodologyâ for estimating future environmental costs. (Shifrin/White Direct, 9/4/2012 at ¶¶24, 44; PX 1281 at pdf p. 3, § 5.2.2 fig. 1). Defendantsâ principal criticism of Ramâs study is that he should have used a probabilistic approach, as they claim they did. However, the ASTM Guide recognizes that a probabilistic approach may not always provide the â âbestâ estimate for a given set of circumstancesâ and that the choice of approach should be based on the ânumber of events and quality of information available or obtainable.â (PX 1281 at pdf. pp. 3-4 §§ 5.5.5-5.2.3). Ram adequately explained that he did not use an expected value approach because he concluded that sites were either sufficiently well-developed to conclude that one remedy was likely or information was insufficient to assign reliable probabilities to remedial outcomes. (Ram Direct, 6/8/2012 at ¶ 27). Accordingly, Ram exercised his judgment and used another approach recognized as valid by the ASTM Guide, the âmost likely valueâ approach.
Moreover, Shifrin/White did not adhere strictly to an âexpected valueâ approach but used what they called a âconceptual probabilityâ approach. They only included âseveral different response scenariosâ rather than a âprobability-weighted average over the range of all possible values.â (JX 404 at 4, § 5.4.2.1; DX 2227 at 11). They could not identify any other case in which their âconceptual probabilityâ approach has been used, and Shifrin also admitted he used a âpivotal element approachâ to assign some of his probabilities. (Tr. (Shifrin) 9/7/2012 at 6832:7-6834:14). The âpivotal element approachâ sounds very much like Ramâs âmost likely valueâ approach. There is no question that Defendants were able to challenge some of Ramâs conclusions as to likely liability, such as the conclusion that there would be remediation required at a Wendyâs restaurant in Los Angeles. On balance, however, it should be recalled that Ram assigned values only to 372 of 2746 possible sites, and that he took account of uncertainty regarding whether a claim would be made at every site costed.
Defendants finally contend that Ramâs âmost likely valueâ approach itself fails to address future uncertainty, particularly the question whether any environmental response action would be required at a site. (Shifrin/White Direct, 9/4/2012
In In re W.R. Grace & Co., 281 B.R. 852 (Bankr.D.Del.2002), District Judge Wolin assessed the proper methodology to use in valuing asbestos claims held by creditors who had not yet asserted them. The Court acknowledged that it is necessary to discount contingent claims by the probability that the contingency will never occur, quoting Judge Posner, who wrote that the contrary proposition âis absurd; it would mean that every individual or firm that had contingent liabilities greater than his or its net assets was insolvent â something no one believes.â In re Xonics Photochemical, Inc., 841 F.2d 198, 199 (7th Cir.1988); see also Covey v. Commercial Natl. Bank of Peoria, 960 F.2d 657, 660 (7th Cir.1992). Nevertheless, as Judge Wolin points out, tort liability, like the environmental liability in this case, is not a contingent liability. W.R. Grace, 281 B.R. at 862. The asbestos claims, like the environmental claims here, would be accelerated by the bankruptcy filing, and the holders would be aware of the fact that they would lose the claims forever if they did not file and pursue them. Ramâs decision to assign remediation costs to only 372 of Tronoxâs 2,746 sites amply accounted for the fact that some potential remediation would never be pursued notwithstanding the fact that an insolvency case would accelerate them.
The final step in valuing the environmental liabilities as of the date of the IPO is to reduce the future costs to present value. Prof. Newton used a rate of 2.5% as a risk-free rate, based on the yields of U.S. treasury obligations and high-grade corporate bonds. Mr. Shifrinâs colleague, Mr. White, advocated the use of a 5% discount rate on the ground there should be an element of risk built into the rate. There is no question that a risk element is built into an analysis of income to be received in the future, on the ground that the expected income may never be received. However, a valuation of environmental and similar liabilities does not take into account the possibility that the debtor may not be able to pay the obligation; it attempts to arrive at a âfair valuationâ of the liability regardless of ability to pay. Accordingly, Newtonâs discount rate is appropriate, and Defendants 5% rate results
Tort Liabilities
The parties also presented expert testimony on the tort liability that Tronox faced as of the date of the IPO, almost all of which involved damages from exposure to creosote, a chemical used in wood treatment.
Plaintiffsâ tort expert was Dr. Denise Martin of NERA Economic Consulting, who has 20-yearsâ experience in preparing personal injury and property damage studies and is the coauthor of a text, âEstimating Future Claims: Case Studies from Mass Torts and Product Liability.â (Martin Direct, 6/11/2012 at ¶¶ 28-30; Tr. (Martin) 6/13/2012 at 2465:14-2446:20). She studied the 31 wood treatment sites which were similar to the five sites from which claims had been brought in that they had undergone remediation or had remedial activity planned, and were at or near residential areas. She concluded that 26 of the 31 remaining sites would be likely targets for future claims, estimated the number of exposed individuals who lived within a two-mile radius and determined a âpropensity to sueâ rate of 12.5% of the target population. She estimated the cost of future claims based on Kerr-McGeeâs historic cost of $5,110 per resolved claim and added 37% for defense costs based on historic averages. She allocated the expenses to future years by using a so-called âMonte Carlo simulationâ and concluded that the present value (using a 2.5% discount rate) of Tronoxâs future creosote liability was approximately $356.7 million.
Defendants did not prepare a separate analysis of the tort liability; their expert, Dr. Thomas Vasquez, limited his testimony to a critique of Dr. Martinâs report. He made some telling points, demonstrating that many of the sites from which Plaintiffs projected liability had been closed for many years, much longer than the five sites from which claims had been asserted pre-IPO. His exclusion of sites that had been closed for 13 years or longer allowed
The Courtâs conclusions based on this diametrically opposite expert testimony are the following. Dr. Vazquez wholly undermined his credibility by testifying that as of November 2005 Tronox had no future creosote liability. There were at least 9450 claims pending at the time of the IPO â these obviously represented a liability. Nor was Vazquezâ credibility rehabilitated by defense counselâs elicitation of testimony that relatively few new claims had been brought against Tronox during the period between the IPO and Tronoxâs bankruptcy. Personal injury counsel were well aware of Tronoxâs deteriorating financial condition; one had to garnish a Tronox bank account to recover an arbitration award. (Powell Dep., 8/15/2011 at 115:2-25) The more relevant testimony is that between the IPO date and the chapter 11 filing, the few awards that were made were far larger than those that had prevailed pre-IPO, averaging $26,000 per precancerous skin lesion claim and $117,000 per skin cancer claim. (Tr. (Martin) 6/13/2012 at 2654:13-2656:14). There is testimony in the record from personal injury counsel that notwithstanding Tronoxâs financial condition, counsel planned a new wave of creosote lawsuits in Avoca, Pennsylvania, Columbus, Mississippi and other sites. (Powell Dep., 8/25/2011 at 116:18â 23, 117:20-22; Tollison Dep., 9/13/2011 at 10:12-14; 16:13-22; 99:24-100:15).
Defendants established through the Vazquez testimony that some of Dr. Martinâs analysis was flawed, in that she overestimated the likelihood of liability at certain locations. However, on the record as a whole, her conclusions as to liability were far more credible than those of Dr. Vazquez. Moreover, there was no dispute that 2.5% was an appropriate discount rate. The Court will reduce her estimate of a present value of the tort claims by $100 million to account for her overestimation of liability at some of the sites. This results in a present value of tort claims of $257 million as of the date of the IPO. Adding this liability to the lowest estimation of liability of Dr. Ram, Tronoxâs legacy liabilities from environmental and tort claims as of the IPO date totaled $1.757 billion, or $1.27 billion (rounded) net of reimbursements of $484.4 million.
Plaintiffsâ insolvency expert, Prof. Newton, determined Tronoxâs business enterprise value (âBEVâ) as of the date of the IPO, November 28, 2005, to be $1.03 billion. Prof. Fischel, Defendantsâ expert, used the same three valuation approaches to obtain a BEV of $1.7 billion. The three approaches are: (i) a discounted cash flow analysis; (ii) a comparable company analysis; and (iii) a comparable transaction analysis. These are standard approaches that have been used in many cases, and they follow certain well-trod paths. In re Granite Broadcasting Corp., 369 B.R. 120, 143 (Bankr.S.D.N.Y.2010) citing, inter alia, Peter V. Pantaleo and Barry W. Ridings, Reorganization Value, 51 Bus. Law 419 (1996). We will first analyze the respective expert opinions, and then their conclusions.
Discounted Cash Flow Analysis
The most commonly used approach is the discounted cash flow analysis, which determines BEV by examining the earning capacity of the enterprise over a reasonable period of time, adds a residual or terminal value to extend the analysis beyond the chosen period, and then discounts the result to present value. Unlike Fischel, Newton did not start his discounted cash flow analysis with the companyâs internal projections. He adjusted them downwards for several reasons well supported by the record. The record is clear that the financial projections in Tronoxâs S-l were inflated âsell-sideâ projections based on overly optimistic assumptions, and that key numbers had been imposed at the direction of Kerr-McGeeâs chief finan-eial officer, Wohleber. (Tr. (Gibney) 9/5/2012 at 6062:14-6063:12). As discussed above (see p. 87, supra), at Wohleberâs direction, Kerr-McGee abandoned its historical forecasting methodology, used in a February 2005 forecast, with the result that the March 2005 forecast (from which the IPO numbers were derived) increased dramatically; for instance, projected results increased by $99 million in 2008 (to a total of $288 million) and $128 million in 2009 (to a total of $325 million). The IPO projections were unrealistic when compared with Tronoxâs historical performance and far exceeded even the chemical businessâ âpeakâ and âvery strongâ years of 2000 ($231 million) and 2005 ($232 million). (JX 93 at 6; Tr. (Cianfichi) 8/10/2012 at 5449:3-17; see also Tr. (Balcombe) 9/6/2012 at 6427:6-6429:5; 6429:22-6433:7). They were particularly unreasonable on the basis of uncontroverted evidence in the record that Tronox Ti02 business peaked early in 2005 and was on the downturn by the time of the IPO in November.
Fischelâs calculation of BEV as $1.7 billion, based on discounted cash flow, was particularly unreasonable in that Fischel simply used the management projections discussed above without subjecting them to any analysis or considering the chemical businessâ historical performance. (DX 2800 at ¶ 67; Tr. (Fischel) 8/8/2012 at 4776:12-4781:20). Nor did he rehabilitate his BEV of $1.7 billion by comparing it to the BEV that would be calculated using the projections of future cash flow of Apol
The final steps in the discounted cash method are to discount the projections to present value and then extend them into the future beyond the projection period. There was little dispute between the parties. Newton used 11 % as an appropriate weighted average cost of capital as the discount rate. Balcombe, one of Defendantsâ valuation experts, used the same rate, and Fisehelâs was only slightly lower (resulting in a higher BEV). Newton then calculated terminal values using the Gordon Growth/perpetuity model and applying a constant growth rate in perpetuity of 2.5%. This is the same method and rate Balcombe used; Fisehel recognized it as an accepted methodology but used a slightly higher rate of 2.87% based, in his view, on a market approach. (Tr. (Fisehel) 8/8/2012 at 4816:11-4817:6; DX 2800, Ex. AI (p. 178 of 246)).
Using the discounted cash flow method, Newton reasonably calculated Tronoxâs BEV as of the IPO to be $1.01 billion. Fischelâs comparable calculation of $1.7 billion was not persuasive.
Comparable Company Analysis
As noted above, in addition to a discounted cash flow analysis, both Newton and Fisehel calculated BEV by a comparable company analysis. The comparable company analysis attempts to determine value by reference to the value of companies in the same line of business. Newton selected ten commodity chemical companies, calculated EBIT and EBITDA multiples for each and added a reasonable control premium of 5%; Balcombe used a similar 6.8% premium and Balcombe and Fisehel both agreed that use of both EBIT and EBITDA multiples are acceptable. (DX 2801 Appendix D at p. 136 (of 384); Tr. (Balcombe) 9/6/2012 at 6481:16-6486:8; Tr. (Fisehel) 8/8/2012 at 4831:20-25, 4832:7-4833:3). Based on his comparable company analysis, Newton concluded that Tronoxâs value as of the IPO was between $770 million and $1.23 billion, with a midpoint value of $1.0 billion. (Newton Direct, 6/22/2012 at ¶37, Ex. 6; PX 1263 Appendix E at p. 52-53 (of 136)).
Comparable Transactions
Finally, both Newton and Fischel valued Tronox based on comparable transactions in the marketplace, also an established approach. Newton identified seven comparable transactions, derived EBITDA and EBIT multiples for each, and applied the resulting median to Tronoxâs adjusted LTM September 2005 operating results. (PX 1263 at 54 (of 136)). He concluded, based on this approach, that Tronoxâs BEV as of the IPO was between $960 million and $1.24 billion, with a mid-point of $1.1 billion. (Id. at 55 (of 136)). Fischelâs analysis, again, purported to be market-based and neutral but led to less reliable results based on his failure to analyze the allegedly comparable transactions. Thus, for his comparable companies, he used three data sources (Capital IQ, FactSet and Thomson SDC) and included a transaction if it involved chemicals, took place during the three years prior to the IPO and had a value greater than $50 million. (Tr. (Fischel) 8/8/2012 at 4839:16-4840:22). This led to the inclusion of transactions involving an Indian fertilizer company, a Swiss company making waterproofing materials and parts for car manufacturers, and a company making foam-related products for diapers and adult incontinence products. (Tr. (Fischel) 8/8/2012 at 4844:8-4847:24). Fischelâs resulting LTM EBITDA multiple was 8.0x, which was significantly higher than the corresponding multiples calculated by Newton (6.6x) and Balcombe (6.9x). Fischel then applied these multiples to Tronoxâs projections of future performance in the IPO (overstated, as set forth above), resulting in a BEV of $1.7 billion. As noted above, Fischel purported to confirm his results by using what he calculated as âthird-party projectionsâ of Tronoxâs future income instead of Tronoxâs internal projections, resulting in a BEV of $1.5 billion, but this analysis was flawed by weaknesses in the third partiesâ projections. (See DX 2800 ¶ 67 and pp. 116-117, supra).
In conclusion, Newton averaged BEV calculated by the discounted cash flow method ($1.01 billion), the comparable
Based on Newtonâs calculation of the value of Tronoxâs assets as $1,223,000,000 at the time of the IPO, and his valuation of its liabilities as $2,073,000,000 at the same date, Tronox was insolvent by $850,000,000. Based on Newtonâs valuation of Tronoxâs assets, Tronox was insolvent by $55 million, even if its environmental liabilities were valued at the minimal amount calculated by Defendantsâ environmental expert, Dr. Shifrin, provided Shif-rinâs projected amounts are discounted by 2.5% rather than the 5% discount rate he and his colleague White used. (Newton Direct, 6/22/2012 at ¶¶ 117-119; Tr. (Newton) 6/27/2012 at 3481:21-3482:25). However, it is not reasonable, as discussed above, to use Shifrinâs minimal liability of $376 million. Using the far more reasonable expert testimony of Dr. Ram, and adding the tort liability in an amount reduced from Dr. Martinâs analysis, Tronoxâs insolvency can be calculated as $850,000,000 as of the IPO.
It is recognized that the precise degree of insolvency remains uncertain. In a fraudulent conveyance case of this nature, where insolvency is based on the value of unliquidated claims, the extent of insolvency need not be calculated to the dollar. As the District Court said in In re W.R. Grace & Co., 281 B.R. at 866, an asbestos case where the value of thousands of pending and future asbestos claims had to be determined,
The Court need not determine the exact value of the post-1998 [unliquidated] claims. All that must be determined is whether they exceeded the debtorâs assets. If the debtor is found to be insolvent, a post judgment fluctuation in the claiming rate can only make the debtor more insolvent....
Defendants characterize the view adopted by the Court as a strict liability test, inequitable and unsettling to commercial expectations. In fact, the equities run the other way. The assumed facts in this Opinion picture W.R. Grace sitting in unwitting comfort on the surface at ground zero. The company has debts, very substantial debts, including debts that the company knows it can only estimate, but it reasonably believes it is solvent. The truth, however, is that a subterranean cavern of liability lies just beneath the companyâs feet. It is at this moment, so plaintiffs allege, that W.R. Grace chooses to transfer away its most profitable division for far less than the division was worth.
This Court does not posit a regime in which any transaction is at the peril of the transferorâs insolvency. The rule is that an entity with creditors gives*320 away its assets for less than fair value at the peril that it may be insolvent. The fundamental inquiry in a constructive fraudulent conveyance action is whether the transfer diminished the transferorâs estate. In re Sunset Sales, Inc., 220 B.R. 1005, 1013 (10th Cir. BAP 1998). If the transferor is solvent, it may diminish its estate without interference from the law. If the transferor is not solvent, the diminishment unfairly harms the transferorâs creditors. This is true regardless of the transferorâs intent and regardless of whether the transferor knew or should have known of its insolvency.
It is the purpose of the fraudulent conveyance statute to prevent this result. The settled commercial expectations that should be protected are those of the existing creditors, not those of less-than-full-value transferees. Creditors size up the financial responsibility of prospective debtors on the assumption that they will not simply give their assets away, or at least that there will be enough left over for the prospective debtor to satisfy prior liabilities. These considerations have only more force with respect to tort creditors whose choice of debtor is involuntary.
Where later information is unknowable, plaintiffs argue that the burden of guessing wrong should be placed upon the debtor and its transferee. Defendantsâ response to this argument can be deduced from their established position. Defendants would contend that the more imponderable the complexities of future asbestos claims, the less likely it is that plaintiffs can sustain their burden of showing that the debtorâs date-of-transfer estimate was unreasonable.
Accepting plaintiffsâ argument would represent a holding in the alternative by this Court, but the thrust of this argument is consistent with what the Court has said already. Assuming for the moment that it matters that the future claiming rate is unknowable, it is still the case that these unknown post-transfer claims are existing ârights to paymentâ on the transfer date.
Unreasonably Small Capital
In addition to insolvency, the Oklahoma UFTA provides liability for a constructive fraudulent transfer where property is transferred for less than reasonably equivalent value and (i) the debtor âwas engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.â Okla. Stat. tit. 24, § 1 16(A)(2)(a). As Plaintiffs contend, cases under the UFTA define âunreasonably small capitalizationâ as âa general inability to generate enough cash flow to sustain operations.â In re Sheffield Steel Corp., 320 B.R. 423, 445 (Bankr.N.D.Okla.2004) (Oklahoma UFTA case), quoting Pioneer Home Builders, Inc. v. Inti. Bank of Commerce (In re Pioneer Home Builders Inc.), 147 B.R. 889, 894 (Bankr.W.D.Tex.1992); see also, Moody v. Sec. Pac. Bus. Credit, Inc., 971 F.2d 1056, 1070 (3d Cir.1992).
Prof. Newton, Plaintiffsâ solvency expert, provided convincing evidence of its lack of adequate capital. He convincingly demonstrated that its projections of future results were unreasonable and based on sell-side optimism. He demonstrated that at the time of the IPO, Kerr-McGee caused Tronox to borrow $550 million in debt and to issue stock, and that Kerr-McGee upstreamed all of the proceeds and left behind a mere $40 million in cash. Kerr-McGee thrust Tronox into a declining market with poor plants, high ongoing capital expenditure requirements, and no comprehensive business plan. (See JX 325 at 36; JX 329 at 1-2; Tr. (L Corbett) 5/17/2012 at 560:13-24; Tr. (Wohleber) 5/22/2012 at 916:3-9; PX 767; PX 580; Adams Dep., 6/9/2010 at 265:2-21; Tr. (Gibney) 9/5/2012 at 6260:2-16; PX 693 at 1,4; PX 738 at pdf. 3; PX 1248 at 2; JX 182; JX 272 at 5; Tr. (Smith) 5/25/2012 at 1448:18-24). It was struggling almost immediately to cut costs and survive within its limited cash flow. See supra, p. 307-OS.
Defendants rely on Prof. Fischelâs capital adequacy analysis, which according to Defendants was âbased on the downside and worst case projections prepared by independent third parties conducting due diligence of Tronox during the sale and IPO process.â (Def. Br. at 130, citing inter alia Fischelâs Report and Updated Report, DX 2800 at 38, DX 2800.1 at 32). Based on Fischelâs analysis, Defendants assert, âTronox would have been able to meet its environmental, tort and pension liabilities, pay off its $200 million Term Loan and generate $213 million in cash to pay off a portion of its $350 million Unsecured Notes ... Because Tronox was undoubtedly solvent at the IPO and for a significant period thereafter, Tronox would have been able to refinance its debt under both the ability to pay and adequate capitalization tests ... Moreover, Tronox could have been able to monetize its assets â specifically, its land assets and the Uerdingen plant â to generate additional cash.â Id. Defendantsâ position is demonstrably wrong. First, as discussed above, the third-party analyses on which Fischel relied are based, inter alia, on Kerr-McGeeâs overly optimistic projections of cash flow. See supra, pp. 316-17. Hypothetical land sales in Nevada could not make up the difference. See supra, pp. 261-62; 300 n. 76 and text. Defendants cite no authority for the proposition that capital adequacy is shown by a debtorâs ability to cannibalize itself and sell off assets piece by piece, until nothing is left.
Defendants contend, âFor good reason, âcourts will not find that a company had unreasonably low capital if the company survives for an extended period after the subject transaction,â â (Def. Br. at 130,
In ASARCO, the debtor was, at the time of the alleged fraudulent conveyance, in far worse immediate financial condition than Tronox. Defendants accordingly dismiss it as a precedent. However, although ASARCO was in a worse cash squeeze at the time of the fraudulent conveyance, Tronox was no better capitalized, as capital adequacy looks at the long-term ability of an enterprise to sustain its liabilities. The weed that would ultimately choke Tronox, as Watson, Lehmanâs managing director recognized, was its legacy liabilities. Tro-nox doubtless could and did put off the day of reckoning by âmanaging the liabilities.â
I described for you my view that the operating challenges link back to the*323 legacy liabilities through the ability to reasonably respond to them. The fact that those responses are generally available and relatively reasonable I think is borne out by the fact that [Tronoxâs] competitors all worked their way through this period, all managed to achieve enough liquidity ... when necessary and the like notwithstanding the same challenges in the market that Tro-nox faced. I think the significant difference was that [Tronox] had a millstone tied around [it] that kept [Tronox] from adequately addressing the rising tide of difficulties that did in fact I think affect [its] competitors ... but they did not have the same millstone borne, I believe, of the spin-off transaction.
(Tr. (Snyder) 9/12/2012 at 7231:17-7232:17).
Defendants quote at length the following testimony of Prof. Fischel and assert that he explained why Tronox was âable to pay its debts and was adequately capitalized at the time it was separated from Kerr-McGee.â (Def. Br. at 128):
If you have a well-capitalized company, a company that is in no danger of becoming insolvent it would take the most extraordinary circumstances to conclude even though the company was balance sheet solvent there would be any issue with the other two solvency tests about ability to pay debts when they became due or adequate capitalization because a company that has a strong market capitalization has various ways of raising capital. You can access capital markets, it can sell assets, it can joint venture. You can attract private equity ... and again obviously you can see from the actions for example of the lenders who themselves overcommitted, not just committed but overcommitted to participate in the companyâs $450 million credit facility, purchase the unsecured notes, by those actions as well as the companyâs actions in paying the dividends and not selling assets for cash when they had the opportunity, all of that market evidence, in my opinion, is not just relevant to the balance sheet test but also to the ability to pay debts when they became due test and the capital adequacy test.
(Def. Brief, pp. 128-129, quoting Tr. (Fischel) 8/7/2012 at 4389:5-4390:10).
In fact, Prof. Fischel confirms that Tronox was undercapitalized in light of the legacy liabilities. Contrary to Prof. Fischelâs testimony, the record establishes that Tronox did not have âvarious ways of raising capitalâ because its legacy liabilities simply disqualified it from raising additional capital. It certainly could not merge with another entity. It could not âjoint venture.â It could not âattract private equity.â As events proved, it could not âaccess capital markets.â It might be able to âsell assets,â as Prof. Fischel asserted, but that is a losing game in the long run. Admittedly, Tronoxâs bankruptcy took place in connection with a global financial crisis and a sharp down-turn in the market for its principal product. Nevertheless, all of Tronoxâs Ti02 competitors were able to survive the challenging economic conditions. (Tr. (Gibney) 9/5/2012 at 6292:21-6293:17; Tr. (Cianfichi) 8/10/2012 at 5382:14-21; Adams Dep., 6/10/2010 at 440:2-441:2). It was not. On the record as a whole, Tronoxâs capital was inadequate, burdened as it was by the legacy liabilities.
Inability to Pay Debts as They Come Due
The second prong of § 116 of the Oklahoma UFTA is that the debtor âintended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.â Okla. Stat. tit. 24, § 1 16(A)(2)(b). This test has a subjective and
Although these conclusions with respect to Tronoxâs cash deficiency are reasonable, it is not clear that Plaintiffs proved that Tronox had insufficient funds to pay its debts, at least in the short run. Although there is a dearth of authority, most of the cases on âability to pay debts as they come dueâ under both the UFTA and the similar provisions of the Bankruptcy Code view the objective test as more short-term than the âunreasonably small capitalâ test. See In re Suburban Motor Freight, Inc., 124 B.R. 984, 1000 n. 14 (Bankr.S.D.Ohio 1990) (noting that there are few rulings concerning the prong of § 548(b) dealing with inability to pay debts as they come due); ASARCO, 396 B.R. at 399 n. 140 (noting that there is relatively little case law concerning this test under the UFTA). The ASARCO decision contains a thorough analysis, the District Court finding that the debtor there had many unpaid debts at the time of the challenged fraudulent transfer and continued to have tens of millions of dollars of unpaid debts and extensive âhold listsâ of unpaid creditors during the entire post-transfer period. 396 B.R. at 399-401. There is no evidence that Kerr-McGee left any trade creditors unpaid at the time of the IPO, and thereafter for several years the principal unpaid creditors were those holding legacy liability claims that were in large part unliqui-dated and kicked down the road. The record does not establish that Tronox could not pay its debts as they matured in the short run after the IPO.
On the other hand, Plaintiffs proved the subjective prong of this test, that Defendants âreasonably should have believed that the debtor would incurâ debts beyond its ability to pay. As discussed above, Defendants never even performed an analysis of Tronoxâs ability to satisfy the legacy liabilities. They should have been aware that Tronox could not satisfy the legacy liabilities even if many could be âmanaged.â Plaintiffs, therefore, satisfied their burden of proof that Defendants reasonably should have believed that the debtor would incur debts beyond the debt- orâs ability to pay as they became due.
Breach of Fiduciary Duty
Count IV of the Amended Complaint does not seek relief on account of an alleged fraudulent conveyance. It is predicated on allegations that Defendants breached their fiduciary duty to Tronox and its creditors. In its decision on Defendantsâ motion to dismiss the original complaint, the Court found that under applicable Delaware law (all the Kerr-McGee entities had been formed under Delaware law), the allegations of breach of fiduciary duty were insufficient, but it gave Plaintiffs leave to replead. 429 B.R. at 104-108. The amended complaint based its breach of fiduciary duty claim on three theories: (i) that Defendants owed a fiduciary duty to Tronox after it acquired minority shareholders in the IPO in November 2005 and until the spinoff was
Based on the facts proved at trial and the record as a whole, the Court finds that Defendants have sustained their defense that certain of Plaintiffsâ allegations of breach of fiduciary duty are untimely and that Plaintiffs have not proved the narrow class of timely claims.
The first of Plaintiffsâ theories is that Defendants breached a fiduciary duty owed to Tronox at a time it had minority shareholders â after the IPO in November 2005 and prior to the final spinoff in March 2006. It is well accepted that under Delaware law a parent corporation does not ordinarily owe fiduciary duties to a wholly-owned subsidiary. Trenwick Am. Litig. Trust v. Ernst & Young, 906 A.2d 168, 191-92 (Dd.Ch.2006), citing Anadarko Petroleum Corp.v. Panhandle E. Corp., 545 A.2d 1171, 1174 (Del. 1988). Nevertheless, it is also well established under Delaware law that a parent company owes fiduciary duties to a subsidiary that has minority shareholders. Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del.1971); Burton v. Exxon Corp., 583 F.Supp. 405, 414 (S.D.N.Y.1984) (Delaware law). Plaintiffs attempt to bring themselves within this latter rule by asserting a breach of duty between the IPO in November 2005 and the distribution by New Kerr-McGee of its Tronox stock in March 2006, when Defendants remained in a position of control of an entity with minority shareholders. This claim would also be concededly timely for breaches of duty after January 12, 2006, within three years of Tronoxâs petition on January 12, 2009.
Despite possible timeliness, there was a failure of proof that there was a breach of duty during the four-month period between November 2005 and March 30, 2006 or within the period between January 12, 2006 and March 30, 2006. For one thing, there is little evidence in the massive record of this case as to Tronoxâs governance immediately after the IPO. Although it is clear that Kerr-McGee still retained control over Tronox between the dates of the IPO and the final distribution of Tronox shares held by Kerr-McGee in 2006 â for example, Kerr-McGeeâs CFO, Wohleber, was Tronoxâs Board chairman â there is no allegation that Wohleber breached any duty by specific action or inaction during the post-IPO period. Tronox took on responsibility during this period for some of the OPEB obligations, but Tronoxâs liability for these obligations had been fixed in the Master Separation Agreement signed in 2005. (JX 330 at 262-63 (Employee Benefits Agreement, ancillary document to MSA); Williams Direct, 6/22/2012 at ¶ 41). Defendants completed the spinoff during the post-IPO period, and it is clear that they could have chosen not to complete the transaction. But Plaintiffs do not seek to disturb the final distribution of shares to the Kerr-McGee shareholders, and they did not assert that this distribution, by itself, caused harm to Tronox. See Sin
As to the statute of limitations, the Courtâs prior decisions on the motions to dismiss the complaint and the amended complaint discuss at length Defendantsâ assertion that any breach of fiduciary duty claims were barred by the statute of limitations. As discussed in the first opinion, there is no dispute that the governing statute is that of Oklahoma, that Oklahoma has a three-year statute of limitations that has been applied to breach of fiduciary claims, and a two-year statute that is applied to such claims if they are based on fraud.
On the prior motions to dismiss, Plaintiffs also relied on the premise that the statute of limitations was tolled (i) due to Defendantsâ âadverse dominationâ of Tronox, (ii) fraudulent concealment of the facts by the Defendants, and (iii) under the rule recognized in Oklahoma that the statute of limitations for a fraud claim runs from discovery of the fraud. Although it was not necessary to reach these issues on the motion to dismiss the amended complaint, the facts at trial establish that Plaintiffs cannot use any of these doctrines to preserve their breach of fiduciary duty claims. Although the Oklahoma courts have recognized the principle that a limitations period can be tolled while a company is under âadverse domination,â they only allow that theory where fraud is alleged. Resolution Trust Corp. v. Greer, 911 P.2d 257, 261-62 (Okla.1995). A breach of fiduciary duty claim grounded in fraud would be governed by a two-year statute of limitations, and Tronox was free of Kerr-
The same result prevails for Plaintiffsâ breach of duty claims on their other two theories, which encompass claims from the date of the IPO and earlier. Delaware, whose law governs Defendantsâ fiduciary duties, recognizes that an insolvent corporation can bring a claim for breach of fiduciary duty on behalf of creditors. N. Am. Catholic Educ. Programming Found. Inc. v. Gheewalla, 930 A.2d 92, 101-102 (Del.2007). However, the claims in this case would be barred by the Oklahoma limitations periods discussed above, as they all accrued more than three years prior to Tronoxâs chapter 11 filing.
Measure of Damages
We come to what may be the most complex issue in this case, the measure of damages on the fraudulent conveyance counts. Plaintiffsâ damages expert, Prof. Williams, calculated the value of the property that was transferred out of Old Kerr-McGee at the time of the transfer of the E & P assets in 2002 and at the time of the IPO in 2005. For the E & P properties he used a fair market value approach and the so-called Guideline Publicly Traded Company Method to calculate a value of approximately $6.6 billion as of the 2002 transfer and $12.5 billion as of the IPO date in November, 2005, the increase being attributable to the growth in the value of the assets in the interim.
Defendantsâ principal objections to Williamsâ calculations, introduced through their damages expert, Balcombe, center on the calculations that bring forward the 2002 value of the E & P assets on the basis of an âassumed appreciation rateâ based on energy indices. According to Defendants, using Prof. Williamsâ âmethodology, but correcting for his errors, results in a valuation of the E & P Equity Interests as of November 28, 2005 of $10.7 billion, not of $15.9 billion, assuming the Court finds that the Project Focus Transfers were effective on November 28, 2005, which it should not.â Def. Br. at 256. They also contest the control premium Williams used. Yet Prof. Williamsâ bottom line, that the total value of the E & P transfers as of
There was relatively little dispute regarding the value of the other property transferred in and out of Tronox as of the IPO date. Defendants transferred out an interest in a battery company, and cash that derived, inter alia, from the stock and debt issued in connection with the IPO; and Tronox was required to take on the OPEB liabilities.
Plaintiffsâ position regarding damages, based on these numbers, is straightforward. The Bankruptcy Code separately treats (i) the avoidance of a transfer (for example, as a preference under § 547, or a fraudulent conveyance under § 544(b) or § 548) and (ii) the liability of the transferee, which is governed by § 550. Section 550(a) of the Bankruptcy Code provides that to the extent that a transfer is avoided under § 544 of the Code (among other sections), âthe trustee may recover, for the benefit of the estate, the property transferred or, if the court so orders, the value of the property ...â There has never been any question that the Plaintiffsâ remedy in this case would be recovery of the value of the property transferred, rather than a physical reconveyance of the property itself.
In a motion for partial summary judgment, Defendants argued that the âfor the benefit of the estateâ clause in § 550(a) caps âTronoxâs recovery on its fraudulent transfer claims at the amount of âunpaid creditor claims.â â In a written decision, In re Tronox, Inc., 464 B.R. 606, 609 (Bankr.S.D.N.Y.2012), the Court rejected the proposed limitation, concluding that it had ânot been able to find any case that has accepted Anadarkoâs ... limitation of avoidance liability to the deficiency in payment.â 464 B.R. at 617. It cited a line of cases, including In re Acequia, Inc., 34 F.3d 800, 811 (9th Cir.1994), that have rejected the imposition of a flat ceiling. 464 B.R. at 614. It concluded, among other things, that such a ceiling would unfairly value Plaintiffsâ agreement to give up their rights to a pro rata distribution of estate property and instead take limited cash and an uncertain litigation recovery,
Nevertheless, although the Courtâs decision on limitation of damages rejected Defendantsâ cap on damages based on the âfor the benefit of the estateâ clause in § 550(a), it did suggest in dicta that a limitation on the scope of the damages in this case might possibly be found in (i) other provisions of § 550, (ii) other sections of the Bankruptcy Code, or (iii) in the Courtâs equitable powers. 464 B.R. at 617-18. Defendants rely on all three bases to assert that the recovery of $14.5 billion by Plaintiffs must be limited as a matter of law and equity and that any recovery above the actual value of the legacy liability claims would constitute an unconscionable windfall to Plaintiffs.
Limitations on Liability
As to the first basis for a limitation on liability, Defendants can find little support for a limitation on their liability in the provisions of § 550. Section 550(e) provides that a âgood faith transfereeâ of a fraudulent conveyance has a lien on the property recovered to secure the lesser of (i) any improvement made after the transfer, less any profit to the transferee from the property, and (ii) any increase in value of the property resulting from the improvement. Putting aside the question whether Defendants are good faith transferees, there is no dispute in this case that this provision does not apply. Section 550(b) also provides certain defenses to subsequent transferees of a fraudulent conveyance that are not available to initial transferees, but the Defendants are initial transferees and cannot assert these defenses.
As for the second of the three bases mentioned above for limiting Defendantsâ liability, other sections of the Bankruptcy Code or other applicable law, there are two that are potentially relevant. One is § 120(D) of the Oklahoma Uniform Fraudulent Conveyance Act, which is almost identical to § 548(c) of the Bankruptcy Code and gives a âgood faith transferee or obligeeâ protection against fraudulent conveyance damages âto the extent of the value given to the debtor for the transfer or obligation.â Okla Stat. tit. 24, § 120(D).
Two other sections of the Bankruptcy Code are potentially relevant. Section 502(d) provides that âthe court shall disallow any claimâ of the recipient of a fraudulent conveyance âunless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable ...â Such provision, of course, merely sets a bar to a
The second relevant provision is § 502(h) of the Code, which provides:
A claim arising from the recovery of property under section 522, 550, or 553 of this title shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition.
Like § 502(d), § 502(h) does not create a âclaim arising from the recovery of propertyâ under § 550 and merely provides that any such claim is a prepetition claim entitled to a share of recovery from the estate on the same basis as all other prepetition claims. In re Tronox, 464 B.R. at 611 n. 8, citing In re Best Products Co., 168 B.R. 35, 58 (Bankr.S.D.N.Y.1994). Nevertheless, its language recognizes the existence of a possible claim against the estate âarising from the recovery of propertyâ under § 550. It is applied routinely in connection with the reinstatement of the claim of a creditor whose antecedent debt was paid and then avoided by the debtor or trustee as a preference. By definition, a preference involves a transfer on account of an antecedent debt, and there is no question as to the reinstatement of the debt if there is a recovery by the trustee or debtor.
There is much less authority regarding application of § 502(h) and its statutory predecessor, § 57g of the Bankruptcy Act, in the context of the recovery of a fraudulent conveyance. In Buffum v. Peter Barceloux Co., 289 U.S. 227, 53 S.Ct. 539, 77 L.Ed. 1140 (1933), the Supreme Court reinstated the finding of a District Court that a pledge of stock to the defendant was in fraud of creditors under § 70e of the Bankruptcy Act. It held that âThe defendant may participate on the same basis with other creditors in the distribution of the assetsâ, 289 U.S. at 237, 53 S.Ct. 539; it did not otherwise provide guidance as to the measure of the defendantâs claim, except that it reversed the decree of the District Court to the extent it had subordinated the defendantâs claim to the claims of all other creditors. Id. Many of the other cases construing § 502(h), as well as § 57g of the former Bankruptcy Act, have concerned the question whether the transferee of an intentional fraudulent conveyance can recover on a proof of claim, and they seem to have uniformly answered this question in the affirmative. See, e.g., Barber v. Coit, 144 F. 381, 383 (6th Cir.1906) (the primary consideration is not the partiesâ relative fault but whether the debtorâs creditors would be adequately protected); First Trust & Deposit Co. v. Receiver of Salt Springs Natl. Bank (In re Onondaga Litholite Co.), 218 F.2d 671, 673 (2d Cir.), cert. denied, 349 U.S. 944, 75 S.Ct. 872, 99 L.Ed. 1271 (1955), where the Court held that § 57g of the former Bankruptcy Act, predecessor to § 502(h), âwas not designed to punish a creditor who had sought to withhold the debtorâs assets from the bankruptcy estate ... If after adjudication he surrenders the assets thus acquired to the court, he may share on a parity with other creditors.â; see also, Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1257 (1st Cir.1991); Misty Mgmt. Corp. v. Lockwood, 539 F.2d 1205, 1214 (9th Cir.1976); In re Verco Industries, 704 F.2d 1134, 1138 (9th Cir.1983) (avoidance of a bulk transfer); Glenn on Fraudulent Conveyanoes § 260a
Quantification of a § 502(h) Claim
The principal issue in the application of § 502(h) to the facts of this case is the measure of the claim Defendants can assert under that section. In virtually all of the § 502(h) eases under the Bankruptcy Code, the transferee of a fraudulent conveyance has been awarded a claim for the consideration it paid for the transferred property. See, e.g., In re Calpine Corp., 377 B.R. 808, 815 (Bankr.S.D.N.Y.2007); In re Best Products Co., 168 B.R. at 58. In Cowan v. HSBC Mortgage Corp. (In re Dreier LLP), 2012 WL 4867376, at *3 (Bankr.S.D.N.Y. Oct. 12, 2012), the Court rejected the contention that a § 502(h) claim encompasses the totality of the avoided transfer and held that such a claim is limited to the consideration given for the transfer, stating, âIf the transferee did not give any consideration for the fraudulent transfer, there is nothing to reinstate, and the return of the fraudulently transferred funds does not give rise to an allowable claim.â It cited a leading text, 4 Collier on Bankruptcy ¶ 502.09[2] at 502-72 (16th ed. 2012), which in turn cites In re Best Prods. Co. and states, âThe amount of the claim allowable under this section is not the value of the property recovered but rather the value of the consideration paid by the transferee for the property recovered.â See also Onodaga Litholite, cited above, where the claim under § 502(h) was for the consideration the defendant actually paid for the property, the fraudulent conveyance being based on the fact that the property was far more valuable than the amount paid.
Plaintiffs adopt this construction of § 502(h) and assert, correctly, that Prof. Williamsâ calculation of damages in the amount of $14.459 billion gives Defendants full value for the âinbound considerationâ paid to Tronox in connection with the conveyances, including the value of an Australian Ti02 plant and the $2 billion in debt obligations assumed by New Kerr-McGee in 2002. According to Plaintiffs, this is, if anything, overly favorable to Defendants - they receive a full offset for the âconsideration paid,â not just a prepetition claim under § 502(h).
Nevertheless, cases have construed § 502(h) more broadly than Plaintiffs concede and have recognized that a claim thereunder can include more than the consideration paid by the defendant for the transferred assets. For example, in Verco Industries the claim under § 502(h) was for the loss the defendant suffered when the transfer (the purchase of a portion of the debtorâs business operations) was set aside. 704 F.2d at 1138. In Misty Mgmt. Corp. v. Lockwood, 539 F.2d at 1215, the majority measured damages by the consideration paid by the defendant for the fraudulently conveyed property but stated, more broadly, that the defendant âshould be allowed to prove whatever claim it would have had in the absence of its fraudulent behavior.â In the ASARCO case, after the fraudulent conveyance there was avoided, the Court found that the defendant was entitled to an âoffsetâ to the fraudulent conveyance judgment ârepresenting the amount of consideration it ulti
Applying these principles, Defendants reasonably argue that a claim under § 502(h) should not be limited to the consideration paid for the property conveyed. They point out that Plaintiffs have asked the Court to use its equitable powers to collapse the 2002 and 2005 transactions, and they argue in essence that if the Court does so, the parties should be placed in their positions had the 2002 conveyances been avoided at that time â with the residual value after payment of all legacy liabilities available to the owner, New Kerr-McGee, and not to the Plaintiffs. They call this the ârestorativeâ principle and base it on the decision in Bangor Punta Operations, Inc. v. Bangor & Aroostook R.R. Co., 417 U.S. 703, 94 S.Ct. 2578, 41 L.Ed.2d 418 (1974). There, the Supreme Court ruled that shareholders who had bought into a corporation at what they conceded was a fair price did not have standing to bring an action for corporate waste against the former shareholders from whom they had acquired their shares. The Court said, âThis principle has been invoked with substantial force where a shareholder purchases all or substantially all of the shares of a corporation from a vendor at a fair price, and then seeks to have the corporation recover against that vendor for prior corporate mismanagement.â 417 U.S. at 710, 94 S.Ct. 2578. Defendants assert that the ârecovery limitation articulated in Bangor Punta applies to any recovery under § 550(a)â and that such a bar should be applied here. (Def. Br. at 260). Alternatively, they state, the âCourt might apply the same economic principle under § 502(h).â Def. Br. at 265, n. 167.
Plaintiffs dismiss âthe restorative principle,â claiming that it is simply another version of Defendantsâ rejected argument that Plaintiffsâ claims should be limited to the value of the legacy liabilities. No authority provides direct support for the proposition that the Bangor Punta principle, which relates to shareholder standing to sue for corporate waste, limits damages in a fraudulent conveyance action. The Supreme Court majority in Bangor Punta recognized that the action there had not been brought âon behalf of any creditorsâ and that âthe financial health of the railroad is excellent.â 417 U.S. at 718, n. 15, 94 S.Ct. 2578. Subsequent cases have found Bangor Punta not to be relevant in an action on behalf of creditors. In re Kaiser Merger Litig., 168 B.R. 991, 1004 (D.Colo.1994); In re Healthco Intâl. Inc., 195 B.R. 971, 986 (Bankr.D.Mass.1996). On the other hand, several cases also recognize that § 502(h) and its predecessors are fundamentally based on a type of ârestorative principle.â Thus, the Court in Best Products stated that § 502(h) is
The measurement of damages under § 502(h), so as to provide Defendants with a claim for the value of the E & P assets to which they would have been entitled after payment of the legacy liabilities, is not an easy task. This is especially true because, as Plaintiffs argue, all distributions in a chapter 11 case are governed by the plan of reorganization and not by general principles of law or the principles that govern chapter 7 liquidations, such as two Seventh Circuit cases relied on by Defendants. See Boyer v. Crown Distribution, Inc., 587 F.3d 787, 797 (7th Cir.2009); In re FBN Food Services, Inc., 82 F.3d 1387, 1396 (7th Cir.1996). In chapter 11, even if there is a windfall after the confirmation of the plan, the plan provisions control. Kipperman v. Onex Corp., 411 B.R. 805, 876 (N.D.Ga.2009); MC Asset Recovery, LLC v. Southern Co., 2006 WL 5112612 at *6 & n. 12 (N.D.Ga. Dec. 11, 2006). See also, In re Rickel & Assocs., Inc., 260 B.R. 673, 677 (Bankr.S.D.N.Y.2001) (court has no power to modify a consummated chapter 11 plan).
However, the Plan has several provisions that bear directly on Defendantsâ § 502(h) claim. Tronox filed its initial Joint Plan of Reorganization and proposed Disclosure Statement on July 7, 2010. Dkt. No. 1710. Defendants objected to the Disclosure Statement, contending inter alia that Tronox had failed to disclose the value of Defendantsâ claims, including their potential § 502(h) claim, or the potential impact of these claims on distributions to unsecured creditors, in that there was a possibility that Tronox would have to reserve a very substantial percentage of its stock for possible distribution to Defendants. After negotiations, the Debtors and Defendants acknowledged that âany § 502(h) claim to which Anadarko may be entitled could be applied as a direct offset [to a judgment against Defendants] rather than an independent claim, and that agreement became part of Tronoxâs confirmed plan.â Tronox III, 464 B.R. at 611 n. 8, citing Plan of Reorganization, at Art. III.D. This principle was retained in Tro-noxâs amended plan, which also recited that Defendantsâ agreement that their § 502(h) claim would be applied as a direct offset did not imply a waiver by defendants of their right to be treated in the
The parties also agreed to the following provision contained in Article IV. C.5 of the Plan, entitled âCreation of Anadarko Litigation Trustâ:
Notwithstanding any contrary provision contained herein or in any documents executed in connection herewith (including the Anadarko Litigation Trust Agreement), if the Anadarko Section 502(h) Claim is Allowed, Anadarko124 will be entitled to discount and/or otherwise reduce any judgment in the Ana-darko Litigation by the amount of any Allowed Anadarko Section 502(h) Claim multiplied by the percentage recovery to Allowed Class 3 General Unsecured Claims (which percentage recovery may or may not be computed on a claims base including such Allowed Anadarko Section 502(h) Claim) and Anadarko shall be obligated to pay only the reduced amount of such judgment; provided, however, that the percentage by which any such Allowed Anadarko Section 502(h) Claim may be multiplied shall be determined by the Bankruptcy Court and the parties reserve their rights with respect to the extent of the dilutive effect of the Allowed Anadarko Section 502(h) Claim on Anadarkoâs ability to reduce any judgment in the Ana-darko Litigation. Anadarko has agreed that the foregoing discount or reduction in amount payable with respect to any judgment in the Anadarko Litigation shall be its sole and exclusive remedy on account of any Allowed Anadarko Section 502(h) Claim and that it shall have no recourse against Tronox or Reorganized Tronox on account of such Anadar-ko 502(h) Claim, (other footnotes omitted).
The parties thus agreed that if the âAnadarko Section 502(h) Claim is Allowed,â (i) Defendants would be entitled âto discount and/or otherwise reduce any judgment in the Anadarko Litigation by the amount of any Allowed Anadarko Section 502(h) Claim multiplied by the percentage recovery to Allowed Class 3 General Unsecured Claimsâ; (ii) the percentage recovery might or might not be computed on a claims base including the Allowed Anadarko Section 502(h) Claim; (iii) the percentage by which any Allowed Anadarko Section 502(h) Claim would be multiplied would be determined by the
Although the parties did not agree that Defendants would have a § 502(h) Claim, they did agree that any such Claim would be multiplied by âthe percentage recoveryâ of an Allowed Class 3 General Unsecured Claim. It follows that the Claim itself should be calculated in the same manner as if it were a claim allowed in the Plan. At the time the Plan and Disclosure Statement were disseminated in 2010, it was Tronoxâs position that the legacy liabilities were estimated at a mid-point value of approximately $4 billion. As Plaintiffs state in their main brief in this case, citing Tronoxâs Disclosure Statement, âAt confirmation of Tronoxâs plan, the environmental and tort creditors relinquished claims with an estimated mid-point value of $4 billion (Disc. Stmt. (Main Case Dkt. No. 2196, Ex. B) at 11) and received a contingent assetâ the right to any recovery in this case.â PI. Br. at 109 (emphasis in original), referencing the First Amended Disclosure Statement, dated October 1, 2010. If we accept Plaintiffsâ valuation of the legacy liabilities for purposes of confirmation of the plan as $4 billion, the residual value of the E & P assets after satisfaction of the legacy liabilities was $10.459 billion ($14.459 billion less the $4 billion value of the legacy liabilities).
The next step to effectuate the partiesâ agreement as set forth in Tronoxâs Plan is to determine the percentage recovery of such a claim under the Plan. The parties expressly agreed that this Court would determine the appropriate percentage, and the Court can do so based on the Disclo
As noted above, the parties reserved the issue of âthe extent of the dilutive effect of the Allowed Anadarko Section 502(h) Claim on Anadarkoâs ability to reduce any judgment in the Anadarko Litigation.â In other words, the parties recognized that the size of Defendantsâ § 502(h) claim might dwarf all other Allowed Claims against Tronox. They did not provide any principles to inform the Courtâs discretion on this particular question, and they have not separately briefed the issue. According to the Tronox Disclosure Statement, general unsecured creditors held claims totaling $445.6 million (including the one-half of the Indirect Environmental Claims who participated in Class 3 recoveries). (DX 2522 at 10) Adding this amount to Defendantsâ § 502(h) Claim of $10,459 billion would bring the total of all general unsecured claims to $10,904,600,000. The value of the stock allocated to general unsecured creditors was $302,855,000. If all general unsecured claims, including Defendantsâ § 502(h) claim, shared in this value, the recovery of a general unsecured creditor would be only 2.8 cents on the dollar, and Defendantsâ § 502(h) claim would be worth only $292,852,000. Offsetting this against Plaintiffsâ recovery would result in a damages award to Plaintiffs, not including attorneysâ fees or costs, of $14,166,148,000.
As noted, the parties have not separately briefed the issue of the dilutive effect of Defendantsâ claim on the calculation of that claim under § 502(h), and Defendants have reserved the right to file a § 502(h) claim, if necessary, once a decision on liability was rendered by this Court. Accordingly, before making a final determi
Defendants nevertheless have one final contention on the subject of damages that can be dealt with on the present record. They argue that general unsecured creditors recovered 387% of their claims against Tronox and that their § 502(h) claim should be valued accordingly. They base this argument on excerpts from the post-confirmation record, such as the position Tronox took on certain tax issues post-confirmation. Whatever the merits of their contentions factually, these recoveries could not have been anticipated at the time of confirmation and were wholly inconsistent with the Plan itself. Although all classes of creditors voted in favor of the Plan, the equity class rejected it. Ultimately, the Plan was confirmed over the objection of the equity class under the provisions of the absolute priority rule (Bankruptcy Code § 1129(b)), on the ground there was no value for equity and creditors were not receiving more than 100% of the value of their claims.
It is well accepted, as a corollary to the absolute priority rule, that creditors cannot receive more than 100% of the value of their claims. See In re Granite Broad. Corp., 369 B.R. 120, 140 (Bankr.S.D.N.Y.2007). The Confirmation Order finds that the Plan satisfies the cram-down requirements of Bankruptcy Code § 1129(b), and that Tronoxâs evidence in support was reasonable and credible. Confirmation Order, Nov. 30, 2010, Docket No. 2567, para. 67, 73-75.
Two final issues must be dealt with. First, years after this case was filed and as trial approached, Defendants attempted to add a new affirmative defense, asserting that § 546(e) of the Bankruptcy Code immunizes them from any liability. Second, Defendants asserted that although this Court could hear the case, it could enter only findings of fact and conclusions of law for review by the District Court. These issues will be dealt with seriatim.
Section 546(e) provides that notwithstanding § 544 and § 548(a)(1)(B) of the Bankruptcy Code, the trustee (or debtor in possession) may not avoid certain transactions.
Timeliness and Waiver
This adversary proceeding was filed on May 12, 2009. After moving to dismiss and obtaining dismissal of several counts, Tronox I, 429 B.R. 73, Defendants answered the complaint on May 19, 2010, asserting 22 affirmative defenses but not § 546(e). After Plaintiffs filed an amended complaint, Defendants again moved to dismiss, and after this Courtâs decision, Tronox II, 450 B.R. 432, Defendants answered the second amended complaint, asserting substantially the same defenses, but not § 546(e). The parties proceeded under a Case Management Order, which was amended four times but ultimately provided that the deadline for seeking to amend a pleading was April 25, 2011, or 60 days prior to the completion of fact discovery. No amendments were sought, and the parties proceeded to spend tens of millions of dollars in preparation for trial.
In the meantime, the United States had filed its complaint under FDCPA but had not pursued it; instead the United States participated in this adversary proceeding and agreed to take a proportionate share of any recovery herein. See inter alia,
On February 21, 2012, long after the foregoing developments, and two days before a conference on Defendantsâ proposed motions for summary judgment (which did not initially include any issue under § 546(e), Defendants raised for the first time the issue of a § 546(e) defense). The Court gave Defendants leave to proceed in an orderly fashion and to seek to amend their answer, and the instant motion followed. Defendants asserted, among other things, that § 546(e) is not an affirmative defense and that it had, in any event, been properly preserved under Rule 12(h)(2) and by the fact that Defendants had asserted âfailure to state a claimâ as a defense in their answer.
There is no merit whatsoever to these contentions. Rule 8(c)(1) provides that a party responding to a pleading must affirmatively state any avoidance or affirmative defense. An affirmative defense does not merely negate an element of a plaintiffs prima facie case; instead, it intervenes to defeat the claim even if plaintiff proves every element of its case. See United States v. Continental Ill. Natl. Bank & Trust Co. of Chicago, 889 F.2d 1248, 1253 (2d Cir.1989). As the Court said in DeGirolamo v. Truck World, Inc. (In re Laurel Valley Oil Co.), No. 07-6109, 2009 WL 1758741 at *3 (Bankr.N.D.Ohio June 16, 2009), § 546(e) is a classic affirmative defense: even if the plaintiff successfully proves âthe elements of a case in chief under any of the enumerated avoidance provisions, § 546(e) intervenes to shield the transfer from avoidance, except in cases where § 548(a)(1)(A) (actual fraud) applies.â Cases construing § 546(e) have uniformly treated it as an affirmative defense. In re Bernard L. Madoff Inv. Sec. LLC, 2011 WL 3897970 at *12 (S.D.N.Y. Aug. 31, 2011); Adelphia Commcâns Corp., 452 B.R. 484, 488-89 (Bankr.S.D.N.Y.2011).
An affirmative defense is not preserved by a general pleading of âfailure to state a claim upon which relief may be grantedâ or by Rule 12(h)(2), which provides that such a defense may be asserted âat trial.â âA general assertion that the plaintiffs complaint fails to state a claim is insufficient to protect the plaintiff from being ambushed with an affirmative defense.â Saks v. Franklin Covey Co., 316 F.3d 337, 350 (2d Cir.2003); see also 5C Wright & Miller, Feb. Prac. & Proc. § 1392 (3d ed.2012) (under Rule 12(h)(2) âdefenses cannot be interposed simply as a mechanism for relieving the movant from the consequences of a default.â).
Since Defendants did not timely raise an issue under § 546(e), it was waived, Alster v. Coord, 745 F.Supp.2d 317, 332 (S.D.N.Y.2010), unless Defendants can establish grounds to amend their answer and assert the issue. Defendants must also be able to establish âgood causeâ for the modification of the scheduling order entered in this case under Fed.R.Civ.P. 16(b)(4), made applicable by Bankruptcy Rule 7016. Parker v. Columbia Pictures Indus., 204 F.3d 326, 339-40 (2d Cir.2000).
A court may exercise its discretion to deny a motion to amend a pleading (i) if there has been undue delay, bad faith or a dilatory motive on the part of the movant; (ii) if there has been repeated failure to cure a deficient pleading; (iii) if there would be undue prejudice to the opposing party; or (iv) if the amendment would be futile. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). Three of these four elements are present in this case.
As discussed above, there has not only been undue delay on the part of the Defendants in raising the issue, but severe prejudice to Plaintiffs. Assuming arguen-do that it is a real issue, and Defendants now assert that it is, the following transpired after Defendantsâ answer was interposed. Both parties spent millions of dollars preparing for trial (and a 34-day trial was held). No discovery was taken on the § 546(e) issue, and the 14 experts called by the parties, respectively, testified on every conceivable issue in the case other than those relevant to § 546(e). Plaintiffs proved their case under the rubric of the Second Amended Complaint, and the United States did not separately prove its right to relief and the amount of its damages under its FDCPA complaint, where § 546(e) is not an issue. Moreover, it is accepted that § 546(e) applies only to transfers of property, not to the incurrence of obligations. In re MacMenaminâs Grill Ltd., 450 B.R. 414, 431 (Bankr.S.D.N.Y.2011); In re Lehman Brothers Holdings Inc., 469 B.R. 415, 445-46 (Bankr.S.D.N.Y.2012). If § 546(e) had been timely raised as an issue, Plaintiffs would have been able to consider reformulating their complaint to characterize Defendantsâ actions as causing Tronox to take on the legacy liabilities as the sale obligor.
Defendantsâ only excuse for not having timely raised a § 546(e) defense, and their proffered âgood causeâ for the delay, is what they call âthe Second Circuitâs recent expansion of applicable law.â Brief for Defs. dated March 6, 2012 at p. 26, referring to Enron Creditors Recovery Corp. v. Alfa S.A.B. de C.V., 651 F.3d 329 (2d Cir.2011). However, the Second Circuitâs decision, which was issued eight months before Defendants first raised the § 546(e) issue, did not change the law. It affirmed a District Court decision that was issued 18 months before Defendants filed their answer. See 422 B.R. 423 (S.D.N.Y.2009). It was also hardly on point, although it did involve the âaffirmative defenseâ of § 546(e).
Futility
Despite the admittedly broad construction given to the term âsettlement paymentâ in Enron and several other cases, Defendants were correct when they initially determined not to raise a § 546(e) defense, and their motion to amend should also be rejected on the fourth ground cited by the Supreme Court in Foman v. Davis, that the proposed amendment would be
There may have been a securities settlement in connection with the final distribution of the Tronox stock by Kerr-McGee in March 2006. However, Plaintiffs do not challenge that transaction directly or indirectly. Nor do Plaintiffs seek to disturb the distribution of Tronoxâs stock or debt in the November 2005 IPO. On the record of this case, the transfers in November 2005 of Tronoxâs cash in excess of $40 million was a simple intercompany transfer of cash. The managing director of Houli-han Lokey, who studied the transaction, called it a dividend in his testimony (See, supra at p. 287-88, Collins Dep., 12/15/2010 at 32:9-19). The Enron court explained its decision by noting that other circuits had applied § 546(e) in the context of leveraged buyouts, on the premise that âundoing long-settled leveraged buyouts would have a substantial impact on the stability of the financial markets, even though only private securities were involved and no financial intermediary took a beneficial interest in the exchanged securities during the course of the transaction.â 651 F.3d at 338 (footnote omitted). Judgment for Plaintiffs in this case would not undue a long-settled leveraged buyout.
Defendants also failed to adduce any evidence that the change of ownership of the stock of the E & P subsidiaries from Old Kerr-McGee to New Kerr-McGee constituted a settlement payment. Defendants themselves characterized this transaction in their financial statements as a reorganization âwhereby among other changes, Kerr-McGee Operating Corporation distributed its investment in certain subsidiaries (primarily the oil and gas operating subsidiaries) to a newly formed intermediate holding company, Kerr-McGee Operating Company.â In any event, a âone-way paymentâ is not a âsettlement payment.â In re Appleseedâs Intermediate Holdings, Inc., 470 B.R. 289, 302 (D.Del.2012); In re Integra Realty Res., Inc., 198 B.R. 352, 360 (Bankr.D.Colo.1996).
Defendantsâ further claim that Kerr-McGee was a âfinancial participantâ within
Stern v. Marshall
The final issue is âDefendantsâ Notification of Lack of Consent to Final Adjudication of Fraudulent Transfer Claims and Motion for Leave Regarding Fiduciary Duty Claim.â In their answer, Defendants had stated explicitly and without qualification that they âconsent to the entry of final orders or judgment by this Court pursuant to Rule 7012(b).â Answer to Second Amended Complaint, dated 6/10/11, ¶ 13 (Dkt. No. 235).
Defendantsâ Notification and Motion was predicated on the assertion that prior to
At the outset, it should be stressed that the issue of consent with regard to this Courtâs resolution of the fraudulent conveyance claims is not a real issue in this case. There is authority that a fraudulent conveyance action against a party who did not file a claim against the estate is a non-core proceeding that the bankruptcy court cannot decide by final judgment; Defendants repeatedly cite one such case in the Southern District of New York, where the Court said, âWhere a âtrustee has brought a fraudulent conveyance action against a third party non-creditor of the estate, in order to recover assets allegedly belonging to the estate,â that action âlies beyond the final adjudicative power of the Bankruptcy Court.â â Def. Motion to Amend, Notification of Lack of Consent, dated March 2, 2012 at 6, quoting Dev. Specialists, Inc. v. Orrick, Herrington & Sutcliffe, LLP, No. 11 Civ. 6337 CM, 2011 WL 6780600 at *2-3 (S.D.N.Y. Dec. 23, 2011).
However, Defendants are hardly âthird party non-creditors of the estate.â The Supreme Court stated in Stem that the counterclaim filed by the estate there was non-core because it was unrelated to the proof of claim that the creditor, Marshall, had filed. By contrast, where it is ânot possible ... to rule on [the creditorâs] proof of claim without first resolving the fraudulent-transfer issue,â the estateâs claim against the creditor is a core matter. Stern v. Marshall, 131 S.Ct. at 2616; see also, Onkyo Europe Electronics GMBH v. Global Technovations Inc. (In re Global Technovations Inc.), 694 F.3d 705, 722 (6th Cir.2012), where the Court held it was âcrystal clear that the bankruptcy court had constitutional jurisdiction under Stem to adjudicate whether the sale of GTI was a fraudulent transfer.â As the Ninth Circuit commented in Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553, 562 n. 7 (9th Cir.2012), cert. granted sub nom. Executive Benefits Ins. Agency v. Arkison, â U.S.-, 133 S.Ct. 2880, 186 L.Ed.2d 908 (2013), âit was âcrystal clearâ â because of the creditorâs filing of a proof of claim.
The Supreme Court in Stem did not question the continuing validity of its decisions in Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), and Langenkamp v. Culp, 498 U.S. 42, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990). It quoted its decision in Katchen as stating, â âhe who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide the consequences of that procedure.â â Stern, 131 S.Ct. at 2616, quoting [382 U.S.] at 333-34, n. 9, 86 S.Ct. 467, and continued, âIn Katchen one of those consequences was resolution of the preference issue as
In the instant case Defendants filed proofs of claim against the Debtors for damages they now value in the billions of dollars. Among other things, they sought damages for the Debtorsâ failure to abide by the terms of the spinoff generally, and the Master Separation Agreement in particular, such as failure to assume the defense of environmental litigation allocated to Tronox. When the Debtors failed to take formal action regarding the MSA, Defendants filed a motion to compel the Debtors to assume or reject the MSA by a date certain. See Motion dated June 29, 2010 (Case No. 09-10156, Dkt. No. 1676). Defendants also asserted in their proofs of claim a right of recovery against the Debtors under § 502(h) of the Bankruptcy Code for the entirety of any judgment against them and reserved the right to file a § 502(h) claim in the event of an adverse decision. Defendantsâ right to any recovery on their claims against the Debtors was also at all times subject to § 502(d) of the Bankruptcy Code, which disallows the claim of any entity âfrom which property is recoverableâ under § 550 âor that is a transferee of a transfer avoidable underâ §§ 544 or 548, unless the transferee âhas paid the amountâ of its liability. Although the parties were eventually able to agree on a treatment of Defendantsâ claims (other than its § 502(h) claim) that permitted Tronox to confirm a plan of reorganization without first resolving this adversary proceeding, there was no question that âthe process of adjudicatingâ Defendantsâ proofs of claim required resolution of Plaintiffsâ fraudulent conveyance and other claims against the Defendants.
In any event, there is no substance to Defendantsâ argument that they only consented to bankruptcy court adjudication because they could not contemplate a class of claims that was statutorily core but beyond the bankruptcy judgesâ constitutional power to finally resolve. At the time they filed their Answer in June, 2011, the Ninth Circuit had held that a counterclaim to a proof of claim might not be a âcoreâ matter, even though it was defined as core in 28 U.S.C. § 157(b)(2)(C), and that a bankruptcy judge could not enter final judgment on the counterclaim. In re Marshall, 600 F.3d 1037, 1057 (9th Cir.2010). The Supreme Court had granted certiorari, â U.S.-, 131 S.Ct. 63, 177 L.Ed.2d 1152 (2010), and a decision was expected imminently, before the end of the term in June, 2011.
The Court is well aware of the recent Circuit Court cases that have been broadly construed to hold that consent may be insufficient to empower a bankruptcy judge to enter a final judgment against an entity that has not filed a claim against the estate. See Waldman v. Stone, 698 F.3d 910 (6th Cir.2012); Wellness Int'l. Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir.2013); Frazin v. Haynes & Boone L.L.P. (In re Frazin), 732 F.3d 313 (5th Cir.2013); In re BP RE, L.P., 735 F.3d 279 (5th Cir.2013). The Supreme Court has before it on certiorari the Ninth Circuitâs decision in In re Bellingham Ins. Agency, Inc., which held to the contrary, and the Supreme Courtâs ruling will presumably clarify this issue. However, it is worth noting that none of the above cases involved defendants who had filed proofs of claim, and all involved one form or another of implied consent, based on the defendantâs participation in litigation, default, or other form of action or inaction. In any event, the leading authority on implied consent in this Circuit remains In re Menâs Sportswear, Inc., 834 F.2d 1134, 1138 (2d Cir.1987), where the Court held that the defendant impliedly consented to the bankruptcy courtâs adjudication of allegedly non-core claims. The Supreme Court has also held that parties may consent to adjudication of non-core issues by the bankruptcy court, including in Stem itself, 131 S.Ct. at 2606, 2607, where the Court acknowledged that âparties may consent to entry of [a] final judgment by [a] bankruptcy judge in [a] non-core case.â (citing 28 U.S.C. § 157(c)(2)); see also, Commodity Futures Trading Commân. v. Schor, 478 U.S. 833, 849, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986) (Schor âeffectively agreed to an adjudication by the [Commodity Futures Trading Commission] of the entire controversyâ); Roell v. Withrow, 538 U.S. 580, 586-87, 123 S.Ct. 1696, 155 L.Ed.2d 775 (2003) (implied consent to adjudication by a magistrate judge).
Moreover, the law on consent in the other circuits is not as clear as the Defendants would have it. On September 6, 2013, the Seventh Circuit issued its opinion in Peterson v. Somers Dublin Ltd., 729 F.3d 741 (7th Cir.2013). It held that a waiver of the right to a decision by an Article III court was enforceable, and that the Courtâs decision in Wellness Int'l., issued only about two weeks before, had involved the issue of âforfeitureâ rather than âwaiverâ or âa belated objection rather than unanimous consent.â 729 F.3d at 746-47. The Circuit Court also stated the following about the effect of the defendantâs filing of a proof of claim:
The current dispute comes within a bankruptcy judgeâs authority, notwithstanding Stern, because all of the defendants submitted proofs of claim as the Fundsâ creditors and thus subjected*347 themselves to preference-recovery and fraudulent-conveyance claims by the Trustee. See 11 U.S.C. § 502(d). The Supreme Court held in [Katchen v. Landy and Langenkamp v. Culp ] that Article III authorizes bankruptcy judges to handle avoidance actions against claimants. Stem stated that its outcome is consistent with those decisions. [Wellness Intâl ] likewise observes ... that there is no constitutional problem when a bankruptcy judge adjudicates a trusteeâs avoidance actions against creditors who have submitted claims. The bankruptcy judge thus acted within her authority. ...
Peterson, 729 F.3d at 747 (citations omitted).
The only claim of the Plaintiffs which might not be fully adjudicated in connection with Defendantsâ proof of claim is the claim of breach of fiduciary duty, which the Court has dismissed in any event. However, the fiduciary duty claim was unquestionably non-core before Stem, and it remains non-core today. Defendantsâ answer constituted unconditional consent to the entry of a final order by the bankruptcy court on the non-core fiduciary duty claim as well as the fraudulent conveyance claims. Defendants have never adequately explained why they did not knowingly and validly consent to this Courtâs adjudication of the non-core fiduciary duty claim, as to which there could be no confusion.
The Court thus concludes that it has authority to enter a final judgment in this adversary proceeding. If an appellate court should disagree, it is respectfully requested that this decision be deemed proposed findings of fact and conclusions of law for final entry by the District Court. See Amended Standing Order of Reference of Chief Judge Loretta A. Preska, dated January 31, 2012 (Order M-431).
CONCLUSION
Defendants may have 30 days from the entry of this Opinion to file a proof of claim under § 502(h) of the Bankruptcy Code together with any supporting materials, as well as to brief the one open issue, namely, the dilutive effect of the damages assessed against Defendants on their § 502(h) claim. Plaintiffs may have 30 days to respond to Defendantsâ proofs of claim and papers on this issue, as well as to settle a proposed judgment consistent with their position on the issue. The judgment should provide for the relief granted in this decision and should also provide for dismissal of the Anadarko defendants, in accordance with the Courtâs decision prior to trial granting the Anadarko defendants summary judgment.
. In addition to the complaint pursued by the Trust, the United States filed a complaint-in-intervention against Kerr McGee in its own name under the Federal Debt Procedure Act C'FDCPAâ). 28 U.S.C. §§ 3304 and 3306. Since the claims in both complaints are substantially identical, and since the United States is a plaintiff in the Trust's action and has agreed to a distribution of any proceeds recovered on the Trust's complaint, the FDCPA complaint will be referred to hereafter only where the rights of the United States may be materially different from those of the other Plaintiffs. The term 'âPlaintiffsâ will include the Trust, suing on behalf of the Debtorsâ estates and seeking a recovery on behalf of a subset of creditors, and the United States.
. Anadarko was originally a defendant but was dismissed on a motion for summary judgment in an oral decision by this Court on May 8, 2012, see Transcript of hearing on May 8, 2012, Docket no. 395 at 26:16-30:23. As discussed below, notwithstanding their success on the motion, Defendants asserted that this Court could not dismiss any of the Defendants by a final order but could only propose findings and conclusions to the District Court. All parties nevertheless agreed that the Court should proceed with the long-scheduled trial against the remaining Defendants. In order to prevent multiple submissions to the District Court, on appeal or through findings and conclusions, an order of dismissal was not entered on Anadarko's behalf, and will be included at the conclusion of the case in this Court. The jurisdictional issue is discussed further at pp. 159-166, infra.
.This includes the additional deposition testimony of two videotaped witnesses.
. Titanium dioxide is an industrial pigment used to whiten products such as paints, paper and plastics.
. Creosote is a chemical that has been identified as a possible human carcinogen. It was used as a preservative at the Kerr-McGee wood treatment facilities.
. Top management included the CEO, Luke Corbett; the CFO, Robert Wohleber; and the general counsel, Gregory Pilcher. These three individuals were known within the company as "the inner circle.â (Tr. (Rauh) 8/9/2012 at 4999:11-19, 5000:8-12; Adams Dep., 6/9/2010 at 208:3-19).
. Specifically in step 8, ownership interests in the following oil and gas subsidiaries were transferred out of Old Kerr-McGee and into Kerr-McGee Worldwide Corporation, the new holding company that was owned by New Kerr-McGee: Kerr-McGee Oil & Gas Corporation, Atlantic Exploration & Production, Ltd., Benedum-Trees Oil Company, Kerr-McGee (Thailand) Ltd., Kerr-McGee Americas Ltd., Kerr-McGee Anton Ltd., Kerr-McGee Astrid Ltd., Kerr-McGee Bahamas Ltd., Kerr-McGee Benin Ltd., Kerr-McGee du Maroc Ltd., Kerr-McGee Eire Exploration Ltd., Kerr-McGee Hazar Ltd., Kerr-McGee Natural Gas, Inc., Kerr-McGee Offshore Canada Ltd., KerrMcGee Olonga Ltd., Kerr-McGee West Africa Investment Ltd., Kerr-McGee Yemen Ltd., Mediterranean Exploration Ltd., Oryx Crude Trading & Transportation Inc., Oryx Energy Payroll Company, Oryx Gas Marketing Company, Oryx Pipe Line Company, Oryx Services Company, Sun Offshore Gathering Company, and Sunningdale Abu Dhabi Ltd.
. The Form 10-K, which represented the annual report for the period ending December 31, 2002, referred briefly and without elaboration to a reorganization that occurred at the end of 2002 "whereby among other changes, Kerr-McGee Operating Corporation distributed its investment in certain subsidiaries (primarily the oil and gas operating subsidiaries) to a newly formed intermediate holding company, Kerr-McGee Worldwide Corporation. Kerr-McGee Operating Corporation formed a new subsidiary, Kerr-McGee Chemical Worldwide LLC and merged into it.â
. It was Defendants' position throughout this case that the chemical business was worth in excess of $ 1 billion, and that Old Kerr-McGee was not rendered insolvent or undercapital-ized by the transfer out of the E & P assets. If it is true that the chemical business was worth $1 billion or more, and Defendants proved that the chemical assets had value, Kerr-McGee's representation to the indenture trustees was false and bears on the Defendants' credibility with respect to many of the issues in this case.
.For example, between April and June 2005 the ownership of Kerr-McGee Canada Northwest, Kerr-McGee Australia Exploration, and Production Pty. and P & P Land Co. was transferred out of Old Kerr-McGee and into New Kerr-McGee.
. A few days before these agreements were finalized, Kerr-McGee had received a formal demand from the Federal Environmental Protection Administration (âEPAâ) for $179 million in clean-up costs in connection with a Kerr-McGee legacy site in Manville, New Jersey. (JX 163). The A, A & I Agreement was amended to include a clause under which the chemical business (Tronox) was required to indemnify New Kerr-McGee for all legacy liabilities that Tronox had been required to assume. (PX 528 (4/18/2005 draft of agreement with indemnification clause); compare with PX 515 (4/6/2005 draft of agreement without provision for indemnification)).
. Tronox Worldwide LLC (formerly Kerr-McGee Chemical Worldwide LLC) was Old Kerr McGee and the parent company of Tro-nox LLC, formerly known as Kerr-McGee Chemical LLC, successor to the Old-Kerr-McGee chemical business.
. To effect the separation, Tronox Incorporated was formed as a new holding company to hold the limited liability company membership interests in Tronox Worldwide LLC.
. At some point during the drafting of the documents, Kerr-McGeeâs associate general counsel, Roger Addison (slated to become general counsel of the spun-off chemical business), expressed concern that he might have a conflict of interest representing only the interests of the parent. Toward the conclusion of the drafting of the documents a lawyer was retained to represent the interest of the chemical business, but there is no evidence that he had any substantial input or that any of the terms of the separation were revised to Tro-nox's benefit as a result of his efforts.
. The pension obligations were apparently fully funded at the time of the spinoff but subsequently became underfunded when Tro-nox proved unable to handle them. (Tr. (Gib-ney) 9/5/2012 at 6272:22-6273:21). The retirement benefits were unfunded.
. Corbett and Wohleber both testified at trial. Pilcher's deposition testimony was introduced as he was unavailable as a witness.
. Lehman itself recognized that the environmental liabilities were extremely difficult to diligence. (See PX 6 at 2 (email from Watson, Lehmanâs director managing the transaction, to another Lehman employee, asserting that while â 'all chemical companies have environmentalâ ... not like this they donâtâ)). Watson testified that "other chemical companies didnât have legacy liabilities of other businesses that were attached to a chemical business in addition to environmental liabilities which were attached to the business that were of the ongoing operations.â (Watson Dep., 5/23/2012 at 309:22-311:5).
. One of the representatives of JP Morgan Partners told a future Tronox executive that, in his opinion, what Kerr-McGeeâs top management "is trying to do to you is criminal.â (Tr. (Gibney) 9/15/2012 at 6058:15-6059:2).
. Kerr-McGee deemed $40 million as adequate cash for the new company; the record is not clear as to how it arrived at this amount. The chemical company had previously possessed no cash of its own, as all cash in the Kerr-McGee group of companies was held and administered by one of the groupâs subsidiaries and disbursed throughout the group as necessary. The Kerr-McGee employees who were slated for the chemical business initially sought more than $40 million, but Kerr-McGee CFO Wohleber decided that $40 million was enough and his decision could not be challenged. Defendants rely on the fact that Tronox was able to draw down on its line of credit for cash and on the statement of Tronoxâs future CFO Mary Mik-kelson that even less than $40 million would have been enough in view of the line of credit, but it does not appear that Ms. Mikkelson's statement was anything other than a flippant comment. In any event, the record does not contain any evidence of an analysis of the cash flow needs of the new business, and Wohleber did not provide a rationale for the $40 million number when he testified at trial.
. Morganâs head of North American mergers and acquisitions observed at the time of the IPO that Morgan probably should "not sup
. Part of the plant was shut down in 2004. and the rest was closed during the Tronox chapter 11 case. In addition, the seller was successfully sued for failure to disclose material defects and substantial damages were recovered.
. Defendants contend that Plaintiffsâ demonstrative on cash flow, used in oral argument, was not based on admissible evidence. (Tr. (Summation) 12/12/2012 at 8053:20-8054:10). Plaintiffs have adequately tied the exhibit to Tronoxâs S-l, which was admitted into evidence. (DX 368 at 65-66, 149, 199). The numbers were not disputed by Kerr-McGee's controller at the time, Rauh. (Tr. (Rauh) 8/9/12 at 4982:8-4975:11-4983:13).
. The Environmental Settlement Agreement was filed as a supplement to the Plan. Plan Supplement, Case No. 09- 10156, Dkt. No. 2441.
. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
. Bankruptcy Code § 544(b) provides that a trustee in a bankruptcy case, which includes a debtor in possession in a chapter 11 proceeding, "may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim....â There is no dispute that the "applicable lawâ in this case includes the law of Oklahoma. There is a dispute as to whether that law also includes Federal law under the FDCPA, the act under which the United States has filed its complaint-in-intervention. That issue is relevant with regard to the statute of limitations defense raised by the Defendants and is discussed below. For purposes of the motion to dismiss, the provisions of the Oklahoma UFTA were deemed the âapplicable law.â
. The statute of limitations issues are discussed below, as Defendants continue to seek dismissal on the ground that the claims in the Complaint are time-barred under Oklahoma law. There is no substantial dispute that Plaintiffs must rely on either the Oklahoma UFTA or the FDCPA to survive a limitations defense, as the limitations period under the Bankruptcy Code is only two years from the challenged transfer to the petition date, and only minor transfers took place during the two years preceding the Debtors' filing under chapter 11 on January 12, 2009.
. Section 502(h) provides that "[a] claim arising from the recovery of property under section 522, 550, or 553 of this title shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition.â Section 550 is the provision of the Code that sets forth the remedies available to the plaintiff in an avoidance case, including a fraudulent conveyance action.
. As noted above, an order of dismissal has not been entered but should be entered in connection with this Decision.
. There has never been a dispute in this case that if Plaintiffs are entitled to relief, such relief should be in the form of damages rather than a reconveyance of the property transferred.
. Damages are discussed extensively, infra.
. Defendants have raised an issue as to whether Plaintiffs have identified a "creditor holding an unsecured claim ....ââ and this issue is dealt with below. Assuming Plaintiffs have met this condition, there is no question that the drafters of the Bankruptcy Code adopted the rule of Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931), and that a debtor such as Tronox can avoid the transaction on behalf of the estate and all of its creditors. Tronox III, 464 B.R. at 616.
. As noted above, Plaintiffs further contend that the statute of limitations is longer by virtue of the law that governs the cause of action of the United States under FDCPA. That issue is discussed below.
. The look-back period under the Bankruptcy Code is based on the operation of § 108(a), which preserves for the benefit of the estate all claims that were not time-barred on the date of commencement of the bankruptcy case. Section 546(a) then gives a trustee or debtor in possession two years to commence the avoidance action.
. Section 118(l)(b) of the Oklahoma UFTA provides that a transfer of an asset that is not real property or a fixture takes place when a creditor on a single contract can no longer acquire a judicial lien on that asset superior to the interest of the transferee. An obligation is incurred, if evidenced by a writing, "when the writing executed by the obligor is delivered to or for the benefit of the obligee.â Okla. Stat. tit. 24, § 118(5)(b).
. The Circuit Court was there construing the New York Uniform Fraudulent Conveyance Act (âUFCAâ), but there is no substantive difference from the subsequent UFTA for purposes of the "collapsingâ doctrine.
. The Best Court was there quoting its own prior opinion in the same case, 157 B.R. 222, 229 (Bankr.S.D.N.Y.1993).
. The inner circle, however, never told the Board at the time that a benefit of the separation and a later spinoff would be that "E & P goes free of legacy liabilities.â Lehman inserted this fact in its draft of the May 8, 2001, Board presentation, but all references to the legacy liabilities had been deleted from the presentation by the time it was given to the Board. (Compare JX 25 at 21 with JX 27 at 21).
. CFO Wohleber referred to the structure as "our new 'octopus' corporate structure.â (JX 54 at 4; Tr. (Wohleber) 5/22/2012 at 732:6-11).
. Involuntary creditors such as environmental and tort claimants do not have such covenants and must rely, for the most part, on the protection of the fraudulent conveyance laws. In re W.R. Grace & Co., 281 B.R. 852, 867 (Bankr.D.Del.2002).
. The United States is not generally bound by a state statute of limitations. United States v. Moore, 968 F.2d 1099, 1101 (11th Cir.1992), citing United States v. Summerlin, 310 U.S. 414, 416, 60 S.Ct. 1019, 84 L.Ed. 1283 (1940).
. Defendants assert (Br. 198-199) that the United Statesâ exclusive remedy is an action under FDCPA, citing § 3001(a), which provides, "Except as provided in subsection (b), the [FDCPA] provides the exclusive civil procedures for the United Statesâ (1) to recover a judgment on a debt; or (2) to obtain, before judgment on a claim for a debt, a remedy in connection with such claim.ââ The United States does not here simply attempt to collect a judgment on a debt. Defendants cite Export-Import Bank of US. v. Asia Pulp & Paper Co., Ltd.., 609 F.3d 111, 116 (2d Cir.2010), for the proposition that the FDCPA was enacted " 'to create a comprehensive statutory framework for the collection of debts owed to the United States governmentâ and 'to improve the efficiency and speed in collecting, those debts.â â (citation omitted). The fact that the FDCPA creates a uniform procedural framework for the benefit of the government and a "comprehensive statutory frameworkâ does not establish that the United States cannot be a proper plaintiff or a triggering creditor for § 544(b) purposes. Many cases hold that it can be. Pfister, 2012 WL 1144540, at *5; Walter, 462 B.R. at 704-06, 712; Porter, 2009 WL 902662, at *20-21; Gurley, 222 B.R. at 132. In any event, Defendants argue directly to the contrary when they assert that the governmentâs claims in the FDCPA case cannot be separately pled in a FDCPA complaint: "Because the United States alleges an injury common to other creditors and its fraudulent transfer claims are âso similar in object and purpose' to Plaintiffsâ fraudulent transfer claims, the United States must yield its right to prosecute such claims to Plaintiffs, just as any other creditor must do. Accordingly, the United States lacks standing to prosecute its fraudulent transfer claims against the FDCPA Defendants.â (Def. Post-Trial Brief Regarding the United Statesâ FDCPA Claims at p. 12).
. 28 U.S.C. § 2415( a) provides:
Subject to the provisions of section 2416 of this title, and except as otherwise provided by Congress, every action for money damages brought by the United States or an officer or agency thereof which is founded upon any contract express or implied in law or fact, shall be barred unless the complaint is filed within six years after the right of action accrues or within one year after final decisions have been rendered in applicable administrative proceedings required by contract or by law, whichever is later ...
28 U.S.C. § 2416(c) provides:
For the purpose of computing the limitations periods established in section 2415, there shall be excluded all periods during whichâ
(c) facts material to the right of action are not known and reasonably could not be known by an official of the United States charged with the responsibility to act in the circumstances.
. 28 U.S.C. § 2415(a) is expressly made "[s]ubject to the provisions of [§ 2416]â, and § 2416(c) provides that the limitations period is tolled while âfacts material to the right of action are not known and reasonably could not be known by an official of the United States charged with the responsibility to act in the circumstances.â 28 U.S.C. § 2416(c). The limitations period was thus tolled by virtue of the agreement entered into by Kerr-McGee in 2005. See supra, pp. 272-73. It was also tolled because a responsible official of the United States â or any third partyâ could not have known anything about the 2002 corporate reorganization until â at the earliest â March 27, 2003, when there was a brief reference to it in Kerr-McGeeâs published 2002 Report on Form 10-K. We conclude above that the disclosure in this document was insufficient to put a creditor on notice that the reorganization might affect its rights. In any case, even if the limitations period were measured from March 27, 2003, that date is within six years of the filing of Tro-noxâs chapter 11 case on January 12, 2009.
. Although it is not necessary to reach the issue, Defendantsâ contention that the United States cannot be a triggering creditor is also without substance. First, as discussed above, an action under the FDCPA is not the governmentâs exclusive remedy. Second, if the United States as an unsecured creditor could not act as a triggering creditor, that result would violate the mandate contained in the FDCPA that it ânot be construed to supersede or
. Adelphia Recovery Trust reversed one of the cases that Defendants relied on for their ratification argument, HSBC Bank USA, N.A. v. Adelphia Common Corp., 2009 WL 385474 (W.D.N.Y. Feb. 12, 2009). The Second Circuit held that defendants did "not point to anything in the record suggestingâ that there was an intent to ratify. Adelphia Recovery Trust, 634 F.3d at 694.
. It will be recalled that Kerr-McGee represented to the Indenture trustees representing its major creditor group, bondholders with over $2 billion in debt, that the oil and gas properties being transferred constituted "substantially allâ of its assets. Even if this was not true, counsel calculated that the assets constituted 86.4 percent of Old Kerr-McGee's assets and accounted for 83.2 percent of its revenue and 112.6 percent of its net income as of December 2001. (JX 47 at 49).
. Section 548(a)(1)(A) provides for the avoidance of a transfer if the debtor "voluntarily or involuntarily â (A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted.â The Oklahoma UFTA speaks of intent to hinder, delay or defraud "any creditor of the debtor.â Okla. Stat. tit. 24, § 116(A)(1).
. In support of their contention that Plaintiffs must prove an âintentional deception to frustrate legal rights,â Defendants also cite Golden Budha Corp. v. Canadian Land Co. of America, N.V., 931 F.2d 196, 201 (2d Cir.1991). (See Def. Br. at 157) The cited case, however, was pleaded solely on the proposition that a fraud was perpetrated, and the Circuit Court never considered that part of the New York UFCA that imposes liability for actual intent to hinder or delay creditors.
. The words are from the testimony of Robert Gibney (Tr. (Gibney) 9/5/12 at 6252:17-6253:17, 6254:8-11; see also Adams Dep., 6/10/2010 at 542:25-543:15, quoting Watson). Watson did not deny that he said words to this effect. (Watson Dep., 2/10/2011 at 688:6-688:13, 689-: 18-690:1). The treatment of the legacy liabilities was obviously trouble
. His testimony on this point varied from "I donât remember the tolling agreement ...â to "I remember a tolling agreement.â (Tr. (L. Corbett) 330:3-331:3).
. Corbett retired soon after the Anadarko acquisition of Kerr-McGee in August 2006. (Tr. (L. Corbett) 5/16/2012 at 323:7-10). The acquisition netted him $60 million in stock price appreciation and options. (Tr. (L. Corbett) 5/16/2012 at 319:15-320:22).
. There is a split among the States that have adopted the UFTA concerning the appropriate burden of proof to apply to establish actual intent, with the standard varying in many cases depending on the Stateâs pre-UFTA fraudulent conveyance law. See ASARCO LLC v. Americas Mining Corp., 396 B.R. 278, 365 (S.D.Tex.2008) (after concluding that Delaware law was unsettled, applying preponderance of the evidence standard); see also, General Trading, Inc. v. Yale Materials Handling Corp., 119 F.3d 1485 (11th Cir.1997) (applying preponderance of evidence standard under Florida law); Epperson v. Entm't Exp., Inc., 159 Fed.Appx. 249, 252-52 (2d Cir.2005) (applying clear and convincing standard under Connecticut law). See also, ASARCO, 396 B.R. at 365 n. 97 (listing cases from additional jurisdictions). The bankruptcy court in In re Solomon, 300 B.R. 57, 63 (Bankr.N.D.Okla.2003), concluded that because "Oklahoma law is silent regarding the standard of proof required,â and because "many statesâ had determined that preponderance of the evidence was the proper standard, it was "reasonable to presume that Oklahoma would follow their lead.â In Scottsdale Ins. Co. v. Tolliver, 2012 WL 1581109 at *11 (N.D.Okla.2012), while not specifying the applicable Oklahoma standard under the UFTA, the court required proof by clear and convincing evidence out of an abundance of caution. In taking that step, the Tolliver court referenced a pre-UFTA case cited by the defendants for the proposition that the standard under Oklahoma law was clear and convincing evidence. That case â Levinson v. Glidden, 169 Okla. 546, 37 P.2d 924 (1934) â actually said that the standard was a preponderance of the evidence. 37 P.2d at 926. There was some earlier language in the decision that fraud "must be clearly established in the record by testimony and it must appear affirmatively to a reasonable certainty that ... the conveyance was made with intent in fact to defraud.â However, the Levinson court ultimately concluded that under the authorities it had cited, "the burden of proof was upon the plaintiff in this case to establish by the preponderance of the evidence that ... the [conveyances] were fraudulent and made with intent to hinder and delay her creditors.â Id. Although the use of language, such as "clearly establishedâ and "to a reasonable certaintyâ are present in the opinion, the Lev-inson court did not expressly adopt the clear and convincing evidence standard. In any event, Plaintiffs have satisfied the "clear and convincingâ standard if such standard applies under Oklahoma law.
. Section § 113(a)(1), (c) and (d) of the Oklahoma UFTA provides, in relevant part, that an affiliate means "a person who directly or indirectly owns, controls or holds with power to vote, twenty percent (20%) or more of the outstanding voting securities of the debtor, ... a person substantially all of whose assets are controlled by the debtor; or a person who ... controls substantially all of the debtor's assets.â
. This issue is considered further below in connection with the solvency of Tronox.
. This was reiterated in the next question and answer: "Q. Itâs my understanding that a going concern is a one-year look, is that right? A. Thatâs correct.â Id. at 163: 5-8.
.It would have been more reasonable for Kerr-McGee to anticipate paying more for environmental expenditures in the future. From 2002 to 2005, Kerr-McGee added more to environmental reserves than the amount spent in each of those years. (Tr. (Christiansen) 7/25/2012 at 3962:23-3963:25). The amount reserved for expected future expenses
. "[M]anagement here is extremely sophisticated. This sophistication colors interpretation of their actions.â In re Sharon Steel Corp., 871 F.2d 1217, 1227 (3d Cir.1989).
. Richie learned of the deletion of the phrase in preparation for his deposition, not earlier. (Tr. (L. Richie) 7/26/2012 at 4268:18-4270:24).
. The Safety and Environmental Affairs â Group employed more than 40 professionals to manage the active environmental sites. See text at p. 249-50, supra.
. Williams is a professor at Georgia State Univ. College of Law, where he teaches (among other things) bankruptcy accounting and finance, and a national practice co-leader at Mesirow Financial Consulting LLC, a leading consultant on restructurings. He has twice been a scholar in residence at the American Bankruptcy Institute, has been appointed as an examiner in chapter 11 cases and as the financial advisor to an examiner, has testified frequently and has written numerous articles on subjects relevant to this litigation.
. These values are based on market values, which Williams said was the preferred approach. He also testified that on a book value approach, Plaintiffs transferred property valued at $7.5 billion and received $2.7 billion in return, for a diminution in value of $4.8 billion as of the IPO date. Defendantsâ expert on REV concurred that market value is the preferred valuation methodology. (Tr. (Balcombe) 9/6/2012 at 6504:14-6505:12; see also Williams Direct, 6/22/2012 at ¶ 64). The Court adopts it here.
. Anadarko actually acquired New Kerr-McGee for approximately $19 billion in May 2006, but the purchase included some properties other than the E & P assets at issue in this case. Williams subtracted the value of these assets in his calculations. Anadarko paid a control premium of 37.3-42% over the Kerr-McGee stock price at or near the date of the buyout, which compares to the 30% control premium that Williams used.
. Balcombe is a young M.A. in Accounting and was testifying for the first time in a fraudulent conveyance suit. He has no writings on the subject and no writings of any consequence on any subject.
. There was no dispute that Tronox Worldwide did not receive REV. Defendants REV expert, Balcombe, asserted that the new holding company, Tronox Inc., received REV because its transfers out (including the proceeds of the IPO and other borrowings in connection therewith) were smaller than the value of the stock of Tronox Worldwide ("Old Kerr-McGeeâ) that it received in the spinoff. However, Balcombe conceded that if Tronox Worldwide were found to be insolvent, Tronox Inc. suffered a diminution in value of $984 million, the undisputed value of the outbound IPO transfers. (Balcombe Direct, 8/31/2012 at ¶¶ 40-41; Tr. (Balcombe) 9/6/2012 at 6375:21-6376:21, 6377:20-6380:12). As shown below, Tronox Worldwide, like all of the Plaintiffs, was insolvent or rendered insolvent at the time.
. Nor did the parties litigate this case on an entity-by-entity basis. Defendants contend, "Plaintiffs' [solvency] expert Dr. Newton did not set forth any analysis of solvency on an entity by entity basis in his initial report, and then made only a rudimentary effort to back-fill this analysis ... For instance, he makes unfounded assumptions about allocations of environmental liabilities.â (Def. Br. at 45). Moreover, Defendants did not raise their "entity by entityâ argument until late in the day, and also that the parties found it impossible to allocate many of the environmental liabilities between Tronox Worldwide (Old Kerr-McGee) and Tronox LLC (old Tronox Chemical). Moreover, Defendants do not put forward any such allocation other than to call Dr. Newtonâs analysis a "rudimentary effortâ based on "unfounded assumptions.â Id. In any event, as further discussed below, their solvency defense is based primarily on a consolidated âmarketâ argument.
. The Bankruptcy Code also includes under the definition of "claimâ the "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment ....⧠101(5)(B).
. Unlike Prof. Newton, who relied on the conclusions of Plaintiffs' other experts, Prof. Fischel relied in forming his opinion solely on what he calls objective contemporaneous evidence and avoided relying on any of the Defendants' other experts. As he put it, âI wanted my opinion to be a completely self-contained analysis of what I consider to be the relevant economic evidence and I â my
. In fact, in Tronoxâs chapter 11 proceedings, the debt was paid in full prior to the receipt of proceeds by any other creditor constituency.
. The record on this point is voluminous. (JX 349 at 21 (smaller proceeds and fewer shares sold than expected); Tr. (Gibney) 9/5/2010 at 6265:7-17 (IPO closed at $14 per share compared to Kerr-McGeeâs targeted $20-22 per share); Compare PX 847 at 1 with PX 1305 at 3; Tr. (Wohleber) 5/23/2012 at 948:13-16; Newberry Dep., 2/15/2011 (markets werenât as "receptiveâ as had been hoped); PX 834 (there was little institutional demand); see also, Warm Dep., 2/15/2011 at 41:2-15, 45:15-46:4 (to generate demand, interest rate on unsecured bonds was increased from 7 to 9.5%); Newberry Dep., 2/15/2011 at 245:7-10; DX 76 at 2: JX 323 at 1; see also PX 845; Tr. (Wohleber) 5/23/2012 at 949:23-951:5 (lead underwriters of IPO each held 1.5 million shares they could not sell and bought shares in secondary market to stabilize price); Tr. (Gibney) 9/5/2012 at 6265:18-25 (Lehman was the largest trader in Tronox stock)).
.See e.g., The Financial Crisis and the Role of Federal Regulators : Hearings Before the Comm, on Oversight and Government Reform, 110th Cong., Second Sess. (2008) (statement of Alan Greenspan, former chairman of the Federal Reserve Board) (available at https://house.resource.Org/l 10/org.c-span. 281958-1.pdf).
. Newton used the February 2005 numbers in his discounted cash flow analysis. See pp. 316-17, infra.
. It is recognized that there was testimony that it was âconceivableâ that Kerr-McGee Chemical (later Tronox) could have made the 2005 projected income number of $245 million. One witness put the probability at 15%; this possibility gave the future managers comfort that their projections were not false. (Tr. (Smith) 5/25/2012 at 1393:21-1394:4; 1390:23-1391:11).
. After operations closed in 1956 a developer had purchased the site and built 137 single-family homes, which were abandoned after a sinkhole developed and contaminants were identified consistent with creosote, a probable human carcinogen. (Ram Direct, 6/8/2012 at ¶¶ 66-69; Tr. (Shifrin) 9/10/2012 at 6949:4-7). Beginning in 1998 the U.S. Environmental Protection Administration had demanded that Kerr-McGee clean up the site, and when Kerr-McGee refused, spent $298 million itself in remediation. (Puvogel Direct, 5/30/2012 at ¶ 69; JX 10 at 2; PX 208 at 2; DX 406 at 2; Tr. (Shifrin) 9/10/2012 at 6950:18-6951:2).
.Plaintiffs quote four legal memoranda from Kerr-McGee's counsel at Covington & Burling concluding that it was likely that Kerr-McGee had liability as the successor to American Creosoting Corp. (PX 306 at TRX-INVTL1167970; PX 336 at TRX-INVTL 1168043; PX 344 at TRX-ENVTL 1168103-109). Defendants quote auditorsâ letters and comments from the partner in charge at Cov-ington that Kerr-McGee had âsubstantial defensesâ to liability at Manville. (DX 346 at 5). The real "bone of contentionâ was that the 1959 Plan of Liquidation between the American Creosoting Company and a subsidiary, Federal Creosoting Company, was unsigned and whether the EPA would be able to prove an assumption of liabilities by the former. (Reichenberger Dep., 44:13-21).
. Kerr-McGeeâs counsel also instructed its environmental experts who testified at trial to value Manville at zero, apparently on the same ground.
. Even under Kerr-McGeeâs inflated "sell-sideâ projections of future cash flow, Tronox was projected to lose $15.4 million in 2006, have cumulative losses of $33.7 million through 2007, and earn only $18.3 million total from 2005-2008 without the Henderson sale proceeds. (Tr. (Williams) 9/13/2012 at 7531:8-7532:18; Mikkelson Dep., 6/23/2010 at 364:21-366:11; Tr. (Wohleber) 5/22/2102 at 885:7-19; see also Brown Dep., 5/11/2012 at 238:16-240:11 (the testimony of Kerr-McGee's vice president for strategic planning, who warned Wohleber and Pilcher that âthere would probably be no IPOâ if Tronox were not able to forecast receipt of the proceeds from the Nevada land sales)).
. In January 2007 the purchasers in fact terminated the contract and walked away, citing concerns that the polluted property "may not be remediated for several additional years.â (JX 403; Tr. (Gibney) 9/5/2012 at 6200:2-7; JX 98 at 1). At the time of trial in 2012, the Henderson land still had not been remediated or sold, and the required letters for three of the four parcels had not been obtained from the Nevada authorities. (Tr. (Gibney) 9/5/2012 at 6278:12-6279:15-19; Tr. (Smith) 5/25/2012 at 1422:8-12).
.At the conclusion of the trial, there was still ongoing litigation in the District Court as to whether Tronoxâs Registration Statement was false and misleading and in violation of the securities laws. On November 26, 2012, a Final Judgment Approving Class Action Settlement was entered in all of the related class actions by the District Court resolving those lawsuits. See In re Tronox, Inc. Securities Litigation, Case Nos. 09 Civ. 06220(SAS); 09 Civ. 06490(SAS); and 09 Civ. 07116(SAS). On September 19, 2013, the District Court entered an order approving the motion for distribution of a net settlement fund to authorized claimants, and the cases were closed.
. For example, the personnel in Kerr-McGeeâs S & EA Department, which was in charge of remediation, prepared internal Sar-banes-Oxley certifications to document the controls in place to comply with reporting requirements, including GAAP. These certifications routinely covered only "known and reasonably estimable liabilities.â (Tr. (Christiansen) 7/25/12 at 3996:24-3997:2). The law department's control documentation similarly misstated the standard, providing that reserves should be established "where a judgment or loss [was] considered probable and measurable.â (JX 107 at 1; DX 444 at 1).
. It will be recalled that the Master Separation Agreement required Tronox to continue to use Kerr-McGeeâs reserve setting methodology, and after the spinoff, Tronox continued to do so. (P. Corbett Dep., 12/15/2010 at 191:24-192:3; Logan Dep., 9/28/2010 at 103:13-104:6; PX 1277 at 13). As early as January 2007, Tronoxâs new controller and chief accounting officer raised concerns about the practice, carried over from Kerr-McGee, of reserving for environmental liabilities only after a demand was received from a third party. (Klvac Dep., 5/24/2011 at 5:12-6:9, 18:6-19-7, 22:15-23:14). Others raised similar questions. (Brown Dep., 5/11/2011 at 290:23-291:9). After a review of the 2008 reserves for 11 sites, Tronox concluded that the 2008 reserves were understated by $68.5 million (JX 455 at 2), and the financials were withdrawn. In October 2011 Tronox issued revised financial statements for the years ended December 31, 2010, 2009 and 2008 and concluded that its $189 million environmental reserve was understated by $303.2 million. (PX 1277 at 3; JX 425 at 6).
. Moreover, âwhen the first prong of this probability test is satisfied (t.e., a claim has been asserted or it is probable that it will be asserted) and the entity is or was associated with the environmental site at issue, there is a presumption that the second prong is also satisfied (i.e., the outcome will be unfavorable).â Id. (emphasis in the original).
. This is not to conclude that these entities had no interest whether Tronoxâs could repay them absent a bankruptcy or that they expected the Credit Facility to default. On the other hand, there is ample evidence in the record that Morgan, CSFB and Lehman all took account of the obvious fact that if Tronox failed, whether because of the legacy liabilities or otherwise, their debt would be protected. (PX 1286 at 42-43; Haimes Dep., 1/27/2011 at 213:22-214:4, 217:6-16, 248:9-19, 264:16-265:16; Newberry Dep., 2/15/2011 at 213:23-214:9; 215:18-216:15; Tr. (Newton) 6/27/2012 at 3460:8-3463:11; Tr. (Fischel) 8/8/2012 at 4632:24-4633:13, 4694:12-19). Defendants do not contend that these entities bought Tronox unsecured debt or stock, and if they ended up with some of these securities, it was because of their position as underwriters, where they earned enormous fees and agreed to take up those securities that they could not sell to the general public. (Tr. (Wohleber) 5/23/2012 at 949:23-951:5; Tr. (Gibney) 9/5/2012 at 6265:18-25; DX 247).
. If the market is defined as the group of sophisticated bidders who considered an acquisition of Tronox, it is worth recalling that the "market,â except for Apollo, refused to bid on Tronox with all of the legacy liabilities included in the deal. As noted above, Lehman identified 60 potential bidders, and contacted 16, and 13 signed confidentiality agreements. The field was narrowed to four final bidders, who were given access to a virtual data room to perform due diligence. Only Apollo was willing to accept the legacy liabilities. Bain Capital, JP Morgan Partners and Madison Dearborn Partners eventually dropped out. Bain Capital chose not to make a final bid in part because of the cost to diligence the legacy liabilities, JP Morgan made a bid only for the assets of the chemical business, and the bid submitted by Madison Dearborn Partners excluded the assumption of any legacy liabilities. (JX 271 at 8, 40; see also Souleles Dep., 5/4/2011 at 51:16-52:5, 71:10-21, 72:6-73:3). One potential bidder, Ineos, was willing to bid $1,200,000,000 without the legacy liabilities and only $300 million with them, a $900 million swing. (JX 271 at 50).
. In addition, under the proposed transaction with Apollo, Kerr-McGee would be required to retain medical coverage for personnel who retired prior to the closing date of the transaction, a continued liability valued at $110 million; in the spinoff that cost was transferred to Tronox. (PX 1286 at 38).
. Kerr-McGee was wise to doubt Apolloâs commitment even to a signed agreement. The record shows that after Kerr-McGee terminated its negotiations with Apollo, Apollo executed an agreement to purchase another Ti02 business but then reneged. The other party sued and after years of litigation obtained a declaratory judgment that any damages awarded would not be capped by the liquidated damages clause of the agreement. The Delaware Chancery court concluded that Apollo had followed "a carefully designed planâ to avoid closing and had engaged in a "knowing and intentional breachâ of contract. Hexion Specialty Chem., Inc. v. Huntsman Corp., 965 A.2d 715, 722, 725, 746, 756-57 (Del.Ch.2008).
. Courts give little weight to unaccepted offers, especially where they lack finality. Expert testimony based on such evidence is excluded as inadmissible to establish value. See In re Perry County Foods, Inc., 313 B.R. 875, 915 (Bankr.N.D.Ala.2004); In re Six, 220 B.R. 479, 484 (Bankr.M.D.Fla.1994) ("such offers âare too speculative to form any solid determination of â value); In re Pullman Const. Indus., Inc., 103 B.R. 983, 986-87 (Bankr.N.D.Ill.1989). As the Court said in United States v. Smith, 355 F.2d 807, 811 (5th Cir.1966). "It is well settled that a mere offer, unaccepted, to buy or sell is inadmissible to establish market value.â
.By the time Prof. Fischel testified he had updated Ex. 2800 as Ex. 2800.1. Exhibit F attached to Ex. 2800.1 is longer, with additional notes and material included, but it is not materially different for purposes of this Decision.
. We know from other evidence in the record that CSFB served as joint bookrunner for the Unsecured Notes, comanager for the IPO, and joint lead arranger for the Credit Facility. It also competed unsuccessfully to finance Apolloâs acquisition of Kerr-McGee Chemical.
. The Confidential Memorandum also discloses Apolloâs intentions regarding Tronox: "we continue to believe it is significantly under-managed and have identified over $100 million in annual cost savings and over $200 million in working capital reduction opportunities .... Operated as an orphan business within the $15 billion TEV parent company, Chemicals exhibits a stagnant, large corporation culture mostly populated by former executives that were passed up in the succession ranks of the oil and gas business. Over the course of our diligence we have become comfortable that the room for cost saving opportunities and increased cash flow management efficiencies is large.â (JX 204 at pp. 1-2). A subsequent Confidential Memorandum to Apollo CEO Leon Black, dated October 4, 2005, recognized that the environmental liabilities had effectively eliminated competition for the Chemical Business. The authors wrote: "The deal team views this investment as essentially 2 businesses: (1) an attractive, but undermanaged Ti02 business with good underlying industry fundamentals, and (2) an unrelated environmental liability entity which requires significant management attention near term but over time can be significantly reduced and eventually tucked in to the more prominent Ti02 business. The fact that the two are packaged together has eliminated competition and afforded us an opportunity to buy TiOg at an attractive price provided we are comfortable working through the complexity of the environmental liabilities.â (DX 7477GD at 1).
. These amounts were net of all reimbursements, such as insurance and claims against other "potentially responsible partiesâ under the environmental laws ("PRPsâ). For example, he assumed that Kerr-McGee would reimburse Tronox for $61.8-65 million in costs under the Master Separation Agreement. As noted above, he based this number on his view of Apollo's conclusions on the subject of environmental liability, and it is the lowest of any of the valuations in the record.
. Plaintiffs' valuation was actually between $1,499 and $1,684 billion but this amount is not comparable to Fischelâs $278.1 million. There is no dispute that the legacy liabilities were subject to reduction for recoveries against other potentially responsible parties, insurance proceeds and claims against the governments involved. The parties applied these offsets at different points, with the result that Fischel's $278.1 million is net of certain reductions that Plaintiffs did not take or that Plaintiffs treated as contingent assets in their
. Claim is defined in the Oklahoma UFTA as a right to payment, whether or not the right is reduced to judgment, liquidated, unliqui-dated, fixed, contingent, matured, unma-tured, disputed, undisputed, legal, equitable, secured or unsecured.
Okla. Stat. tit. 24 § 113(3).
. Section 101(5) of the Bankruptcy Code provides that "claimâ meansâ
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, un-matured, disputed, undisputed, secured, or unsecured.
. The net adjustments totaling $484.4 million are derived from Newton's Direct. Although the figure would have to be further refined because the net adjustment of the tax impact includes an amount attributable to tort liabilities, the impact appears small as environmental liabilities vastly exceeded tort liabilities. (Newton Direct, 6/22/2012 at p. 21 (table)).
. Shifrin has testified more than 100 times, including at 28 trials. (Tr. (Shifrin) 9/7/2012 at 6792:23-6793:25). It is not surprising that during the course of his long career, some courts have accepted his opinions and others have rejected them. The vehemence with which some courts have spoken is, however, relevant. One questioned his opinions as ânaked guessesâ or âfar too speculativeâ and having âno firm grounding in science.â Aflanta Gas Light Co. v. UGI Util., Inc., 2005 WL 5660476 at *19 (M.D.Fla. March 22, 2005); see also City of Bangor v. Citizens Communications Co., 437 F.Supp.2d 180, 189 (D.Me.2006); S. Carolina Elec. & Gas Co v. UGI Util., 2012 WL 1432543 at *45 (D.S.C. April 11, 2012). Another judge rejected his responses in answer to the Court's questions as ârank speculation,â concluding, â[tjhere is simply no evidence to support [his] view,â and rejected Shifrin's âsuppositions ... as unfounded and lacking all credibility.â Yankee Gas Servs. Co. v. UGI Util., Inc., 616 F.Supp.2d 228, 252 (D.Conn.2009).
. Shifrin and White each submitted individual written direct testimony and a combined written direct. The citations are to the combined written direct.
. Fischelâs number, comparable to the $376.2 million calculated by Shifrin, was $278.1 million. As noted above, it was based on the analysis performed by Apolloâs experts.
. Defendants adduced the fact that Ram had used a 7% discount rate based on OMB guidance from 1992, which was subsequently adopted in an EPA publication. (PX 1284, App. B at 6-7). Defendants' expert White agreed that a 7% rate would not be appropriate based on economic conditions as of 2005. (Tr. (White) 9/17/2012 at 6758:14-6759:3). The EPA guidance also makes it clear that it is intended for âbenefit-cost analyses of public investments and regulatory programs that provide benefits and costs to the general publicâ (PX 105 at 7-8) and not for the analysis of contingent liabilities. The EPA publication supports using a risk-free rate for analyses that involve only costs. (Id.; PX 1284, App. B at 6-7; Tr. (Newton) 6/27/2012 at 3478:19-3480:3).
. There was no dispute that there was about $10 million in asbestos and benzene-related claims pending against Tronox at the time of the IPO, or that this amount is immaterial to the solvency analysis in this case.
. See text at n. 94.
. There was little dispute about the size of Tronoxâs âOther Liabilities,â which Fischel calculated as $803 million. These included the Term Loan and Senior Subordinated Notes ($550 million), Unfunded and Underfunded Pension and OPEB liabilities (Fischel used the amount of $185.5 million), and Tax, Restructuring Reserve and Workers Compensation and "Other" Liabilities (Fischel used a total of $67.5 million). Fischel Updated Report Ex 2800. 1, Ex. M, p. 9 of 44.
. As will be seen hereafter, in addition to Prof. Fischel who was Defendantsâ principal expert witness on solvency, Defendants also relied on the expert testimony of Mr. Balcom-be. Balcombe's testimony was principally in the area of REV but he also expressed opinions on other valuation issues.
. There is no dispute that, as a consequence, this decline in the price and market for Ti02 caused Apollo to reduce its offer several times.
. (Newton Direct, 6/22/2012 at ¶ 22; Tr. (Fisehel) 8/8/2012 at 4710:24-4711:5, 4792:5-14). CSFB (Credit Suisse) and JPM (JP Morgan) simply adopted them without adjustment. (Tr. (Fisehel) 8/8/2012 at 4806:3-4808:7; DX 2800 at 96-97). UBS and Citigroup used outdated cost projections. (DX 2800 at 96-97; Tr. (Fisehel) 8/8/2012 at 4806:3-4808:7).
. In fact, Tronox estimated at the time that as an independent entity, unable to rely on Kerr-McGee for many corporate and similar functions, its overhead costs would increase $20-25 million annually, resulting in an annual EBITDA $50 million lower than the Apollo projections. (Tr. (Fisehel) 8/8/2012 at 4812:22-4813:11).
. There was much testimony that Lehman attempted to market Tronox as a specialty chemical company but that the market viewed it as a less valuable commodity chemical company.
. LTM EBITDA refers to the "last twelve monthsâ of EBITDA.
. For example, Fischel discounted the value of the Henderson land contract only minimally in his updated report. (DX 2800.1, Ex. M at pp. 11-13; Tr. (Fischel) 8/8/2012 at 4892:9-4894:10). Newton's discount of 25% (the same as Apolloâs) was reasonable. If anything, it was low, as subsequent events proved and as could have been anticipated. (Newton Direct, 6/22/2012 at ¶ 55, JX 204 at 11).
. Moody was decided under Pennsylvania law and the Uniform Fraudulent Conveyance Act, which was a predecessor to the UFTA; other cases cited herein have construed the UFTA of states other than Oklahoma. However, the Moody formulation has been adopted by many other courts construing the similar provisions of the UFTA and the Bankruptcy Code, and the parties have not cited any Oklahoma decisions on point.
. The ASARCO Court distinguished cases such as In re Joy Recovery Tech. Corp., 286 B.R. 54 (Bankr.N.D.Ill.2002), relied on by Defendants. In Joy Recovery, the Court said that "courts will not find that a company had unreasonably low capital if the company survives for an extended period after the subject transaction ...â 286 B.R. at 76. However, as noted in ASARCO, all of the cases cited in Joy Recovery in support of this proposition involved companies that were paying its creditors in the interim. "ASARCO, in contrast, was cannibalizing itself and was, at best, limping along during the interim period and not paying many of its creditors.â 396 B.R. at 398. The same was true for Tronox, except that the unpaid creditors were those holding the legacy liabilities.
. For example, Tronox needed to obtain covenant amendments from its lenders in 2008 in order to avoid default. The lead lender to Tronox recommended that the lending group accede to Tronoxâs request because, among other things, Tronoxâs net environmental expense for 2007 was even less that it had projected when it made its first request for covenant relief. (DX 322 at 32 (Jan. 24, 2008 Tronox Lendersâ Presentation); compare DX 321 (March 2, 2007 communication from Mary Mikkelson, Tronox's chief financial officer)). The record demonstrates that Tronox's environmental liabilities had not disappeared but that it did not have the cash to spend on necessary remediation and was able to manage the liabilities and "kick the can down the road.â
.This is not to say that the legacy liabilities âcausedâ Tronox's bankruptcy. There were numerous causes. Defendants raise a red herring when they say, "Plaintiffsâ experts also failed to prove that the Legacy Liabilities or alleged misrepresentations to the market caused Tronox to fail.â (Def. Br. at 145). Plaintiffs were under no obligation to provide proof of causation of the bankruptcy.
. As discussed below, the breach of fiduciary claims have, at most, a three-year limitations period.
. The three-year statute is for âAn action upon a contract express or implied not in writing; an action upon a liability created by statute other than a forfeiture or penalty,â Okla Stat. tit. 12, § 95(A)(2). The two-year statute is for "injury to the rights of another, not arising on contract, and not hereinafter enumerated,â provided that in actions âfor relief on the ground of fraud the cause of action in such case shall not be deemed to have accrued until the discovery of the fraud.â Okla Stat. tit. 12, § 95(A)(3).
. Under § 108(a)(2) of the Bankruptcy Code, a debtor can bring an action whose limitations period had not expired as of the petition date.
. Under the Guideline Publicly Traded Company Method, Williams selected seven companies in the E & P business comparable to New Kerr-McGee and calculated values based on these comparables. Defendantsâ damages expert, Balcombe, did not dispute the use of a fair market value approach. (Tr. (Balcombe) 9/6/2012 at 6504:14-6505:12). He also did not provide an opinion regarding the value of the E & P assets to contradict this testimony. (Tr. (Balcombe) 9/13/2012 at 6337:22-6338:13).
. The cash transfers included $224.7 million in net proceeds from the IPO, $537.1 million in net proceeds from the term loan and unsecured notes, and $37 million in operating cash. The unfunded OPEB obligations totaled approximately $186 million.
. On a separate entity basis, virtually all of this loss was suffered by Tronox Worldwide LLC ($14.441 billion).
. As noted above, Plaintiffs asserted that Anadarko was liable as a subsequent transferee, but Anadarkoâs motion for summary judgment on this issue was granted prior to trial. The Court found, on the basis of the summary judgment record, that Anadarko was not a subsequent transferee because there was no conveyance to it of the material assets of its Kerr-McGee subsidiaries.
. The UFTA provides that the protection of the transferee or obligee can take the form of a "lien on or a right to retain any interest in the asset transferredâ; "enforcement of any obligation incurredâ; or âreduction in the amount of the liability on the judgment.â The analogous provision under the Bankruptcy Code, § 548(c), is similar.
. The Court could only apply the economic principle under § 502(h). A bankruptcy court's equitable powers âmust and can only be exercised within the confines of the Bankruptcy Code.â Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). If there is to be a limitation of damages in this fraudulent conveyance case, it must be statutorily based and found in the application of § 502(h). Damages cannot be limited in this case solely on the ground that it is âequitableâ to do so, especially in light of those cases that find no limitation on damages in the plain words of the fraudulent conveyance statutes. See, e.g., Nostalgia Network, Inc. v. Lockwood, 315 F.3d 717, 720 (7th Cir.2002), where the Seventh Circuit affirmed the grant of full recovery to the creditor, holding it irrelevant âthat some or for that matter all of [the property conveyed] may later have seeped back to the debtor.â See also, Stanley v. U.S. Bank, N.A. (In re TransTexas Gas Corp.), 597 F.3d 298, 310 (5th Cir.2010), where the Fifth Circuit said, "The parties have cited neither to a provision in the Code nor to precedent to support that making more than a reasonably equivalent exchange is fraudulent only for the excess amount.â
. The plan governed in the ASARCO chapter 11 bankruptcy, where the defendants in the fraudulent conveyance case ultimately contributed more than $2 billion to become the new equity owners of ASARCO. This was a consensual resolution that allowed the defendants to enjoy the residual value of the assets returned to the estate. In re ASARCO LLC, 420 B.R. 314, 325, 333 (Bankr.S.D.Tex.2009).
. There are a series of claims in Anadarko's third amended proof of claim. The largest liquidated amount is approximately $59 million for costs already incurred in defense of this proceeding. Most of the other claims are unliquidated in amount and include remediation and litigation costs at one location ("Oryx costsâ are said to be unliquidated but at least $199 million), Brine site contribution costs (unliquidated but said to be up to $24 million), claims for subrogation, and claims under § 502(h). All of the claims other than the contingent § 502(h) claim (and Tronoxâs § 502(d) defense) were resolved in a stipulation, dated January 26, 2011 (DX 2720). Therefore, on the record, the only remaining portion of Anadarkoâs proof of claim that must be liquidated and offset is its claim under § 502(h) of the Bankruptcy Code.
. For purposes of this plan provision, all references to "Anadarkoâ shall mean Anadar-ko Petroleum Corporation and its affiliates and subsidiaries, including the entity now known as Kerr-McGee Corporation, which was formed in May 2001.
. A footnote reserved all partiesâ rights and defenses with respect to âany and all matters not expressly addressed herein, including, ... Tronoxâs or the Litigation Trusteeâs ability to seek to subordinate or disallow the Anadarko Section 502(h) Claim.â
. The net value of the assets transferred out of Tronox ($14.459 billion) was calculated as of the date of the IPO in November 2005. The $4 billion value of the legacy liabilities was contained in Tronox's 2010 Disclosure Statement, but Plaintiffs have not contended that it changed substantially from 2005 or that it is substantially different today. It is recognized that Plaintiffsâ position is that they calculated the âinbound considerationâ as an offset to Defendantsâ liability rather than as a part of Defendantsâ § 502(h) claim, and that this is overly favorable to Defendants. See Plaintiffs' Reply Br. at 35. There is no reason to disturb this concession, however, as Plaintiffs did not argue that Defendants were not entitled to an offset under § 120(D) of the Oklahoma UFTA for consideration paid directly to Tronox. Similarly, there is no occasion to revisit Defendantsâ concession in the analysis of their expert on damages, Balcom-be, that the obligation to pay OPEB benefits that Defendants imposed on Tronox is properly considered as a part of the damages analysis, even though the payments were intended to be made to third parties. See also In re Allegheny Health, Educ. & Research Found., 253 B.R. 157, 167 (Bankr.W.D.Pa.2000).
. This percentage can be confirmed by the following calculation derived from the Disclosure Statement. Class 3 general unsecured creditors held claims totaling $445.6 million (including the one-half of the Indirect Environmental Claims who participated in Class 3 recoveries). (DX 2522 at 10). Under Tronox's plan, these creditors received 50.9 percent of Tronox's outstanding stock. (Id. at 15) In the Disclosure Statement the total enterprise value of the reorganized company was estimated at $1,063 billion, less exit financing of $468 million, or a net value of $595 -million. 50.9% of this value (allocated to general unsecured creditors) is $302,855,000.. Thus, the recovery of general unsecured creditors is reasonably estimated at about 68 percent of their claims. This is the representation in the Disclosure Statement, which estimated Class 3 creditor recoveries for creditors who did not participate in the rights offering at between 58% and 78% of their claims. (DX 2522 at 82).
. Class 3 creditors were the General Unsecured Creditors. Class 6 creditors were holders of Indirect Environmental Claims, one half of whom participated in the general unsecured recovery.
. There was an active and well-represented equity committee in the Tronox case, with the goal of obtaining a recovery for the Tronox stockholders. One of their contentions, prior to confirmation, was that creditors were receiving more than 100% of their claims, but on the eve of confirmation they essentially gave up their pretentions and settled for the distribution of warrants that had been proposed in the plan.
. Valuation of a claim on the basis of subsequent information unknown at the time of confirmation of Tronoxâs plan would also appear inconsistent with the argument that Defendantsâ § 502(h) claim should be valued without inclusion of its claim included in the creditor base, or stated differently, that it should have the benefit of the facts known and relied on at the time of confirmation, and not as they developed subsequently.
. Inexplicably, although the section explicitly exempts intentional fraudulent conveyances under § 548(a)(1)(A) of the Bankruptcy Code, it does not exempt the same conveyance under State law, which can generally be avoided in a bankruptcy case only through application of § 544(b) of the Bankruptcy Code.
. Section 546(e) reads as follows:
Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may not avoid a transfer that is a margin payment, as defined in section 101, 741, or 761 of this title, or settlement payment as defined in section 101 or 741 of this title, made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract, as defined in section 741(7), commodity contract, as defined in section 761(4), or forward contract, that is made before the commencement of the case, except under section 548(a)(1)(A) of this title.
.Defendantsâ proof of claim, discussed above, asserts a claim against each of the three Plaintiff debtors of $59,156,981 for "costs incurred in defending themselves from the Petition Date through July/August 2010 in connection with the Adversary Proceeding" plus a contingent claim of $47,568,991 for future costs. Amended Proof of Claim dated Sept. 10, 2010 and Ex. E thereto.
. Rule 16(b)(4) provides that a "schedule may be modified only for good cause and with the judgeâs consent.â
. In Enron, the District and the Circuit Court majority held that redemption of commercial paper paid to hundreds of holders of Enronâs stock was a settlement payment within the meaning of § 546(e), despite the absence of a financial intermediary that acted as other than a conduit. Enron, 422 B.R. at 442; 651 F.3d at 335-39.
. If the November 2005 transfers of the proceeds of Tronoxâs initial stock and debt offerings were somehow deemed settlement payments immune from challenge in this lawsuit, the damages award against Defendants would be reduced by approximately $761.8 million. See n. 117, supra, and accompanying text. Defendants' ability to avoid liability for part of their wrongdoing would not immunize all elements of the transaction. In re Appleseed's Intermediate Holdings, Inc., 470 B.R. 289, 302 (D.Del.2012).
. The term "financial participantâ is defined in § 101(22A) as
(A) an entity that, at the time it enters into a securities contract, commodity contract, swap agreement, repurchase agreement, or forward contract, or at the time of the date of the filing of the petition, has one or more agreements or transactions described in paragraph (1), (2), (3), (4), (5), or (6) of section 561(a) with the debtor or any other entity (other than an affiliate) of a total gross dollar value of not less than $1,000,000,000 in notional or actual principal amount outstanding (aggregated across counterparties) at such time or on any day during the 15-month period preceding the date of the filing of the petition, or has gross mark-to-market positions of not less than $100,000,000 (aggregated across counterparties) in one or more such agreements or transactions with the debtor or any other entity (other than an affiliate) at such time or on any day during the 15-month period preceding the date of the filing of the petition; or
(B) a clearing organization (as defined in section 402 of the Federal Deposit Insurance Corporation Improvement Act of 1991).
. Section 741(7) provides that a "securities contractââ
(A) meansâ
(i) a contract for the purchase, sale, or loan of a security, a certificate of deposit, a mortgage loan, any interest in a mortgage loan, a group or index of securities, certificates of deposit, or mortgage loans or interests therein (including an interest therein or based on the value thereof), or option on any of the foregoing, including an option to purchase or sell any such security, certificate of deposit, mortgage loan, interest, group or index, or option, and including any repurchase or reverse repurchase transaction on any such security, certificate of deposit, mortgage loan, interest, group or index, or option (whether or not such repurchase or reverse repurchase transaction is a "repurchase agreementâ, as defined in section 101);
(ii) any option entered into on a national securities exchange relating to foreign currencies;
(iii) the guarantee (including by novation) by or to any securities clearing agency of a settlement of cash, securities, certificates of deposit, mortgage loans or interests therein, group or index of securities, or mortgage loans or interests therein (including any interest therein or based on the value thereof), or option on any of the foregoing, including an option to purchase or sell any such security, certificate of deposit, mortgage loan, interest, group or index, or option (whether or not such settlement is in connection with any agreement or transaction referred to in clauses (i) through (xi));
(iv) any margin loan;
(v) any extension of credit for the clearance or settlement of securities transactions;
(vi) any loan transaction coupled with a securities collar transaction, any prepaid forward securities transaction, or any total return swap transaction coupled with a securities sale transaction;
(vii) any other agreement or transaction that is similar to an agreement or transaction referred to in this subparagraph;
(viii) any combination of the agreements or transactions referred to in this subparagraph;
(ix) any option to enter into any agreement or transaction referred to in this subpara-graph;
(x) a master agreement that provides for an agreement or transaction referred to in clause (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), or (ix), together with all supplements to any such master agreement, without regard to whether the master agreement provides for an agreement or transaction that is not a securities contract under this subparagraph, except that such master agreement shall be considered to be a securities contract under this subpara-graph only with respect to each agreement or transaction under such master agreement that is referred to in clause (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), or (ix); or
(xi) any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in this subparagraph, including any guarantee or reimbursement obligation by or to a stockbroker, securities clearing agency, financial institution, or financial participant in connection with any agreement or transaction referred to in this subparagraph, but not to exceed the damages in connection with any such agreement or transaction, measured in accordance with section 562; and
*343 (B) does not include any purchase, sale, or repurchase obligation under a participation in a commercial mortgage loan.
. Defendantsâ original Answer had the same consent. (Answer, dated 5/19/10, ¶ 13 (Dkt. No. 130)).
. Generally, bankruptcy judges can only issue final orders and judgments in core matters.
. 28 U.S.C. § 157(b)(2)(H) designates as âcoreâ matters, "proceedings to determine, avoid, or recover fraudulent conveyances.â
. Katchen and Langenkamp involved preference claims by the estate representative. The Supreme Court has not treated preference and fraudulent conveyance claims differently in its Article III decisions. See, e.g., Granfinanciera S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989).
. The decision in Stern v. Marshall was in fact issued on June 23, 2011, only 11 days after Defendantsâ answer was filed and within the 21-day period for filing amended answers in Bankruptcy Rule 7015, incorporating Fed.R.Civ.P. 15. Within a day after Stem was decided, one of Defendantsâ law firms issued an article on its "Bankruptcy Blogâ website discussing the implications of the decision. See Ex. B to Plaintiffsâ 4/2/2012 Opposition to Defendantsâ Motion. This Court, in a hearing on an adversary proceeding in the Tronox case unrelated to the instant matter, stated
. The parties have disputed whether the dismissal of Anadarko should be with or without prejudice, Plaintiffs taking the position that the dismissal should be without prejudice because it might be discovered that Kerr-McGee had transferred assets to Anadarko subsequent to Anadarkoâs summary judgment motion (in order to avoid the judgment provided for herein). See letters dated May 21 and 24, 2012, respectively. There is no reason to engage in this type of speculation to deny Anadarko dismissal of the claims against it with prejudice, as Plaintiffs would undoubtedly be entitled to relief if Defendants engaged in such tactics.