Tronox Creditors Recover $14 Billion in Damages Reviewed by Momizat on . Spinoff deemed an attempt to hinder and delay debtor’s creditors In December 2012, Tronox Inc. creditors concluded their case to recover at least $14 billion in Spinoff deemed an attempt to hinder and delay debtor’s creditors In December 2012, Tronox Inc. creditors concluded their case to recover at least $14 billion in Rating: 0
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Tronox Creditors Recover $14 Billion in Damages

Spinoff deemed an attempt to hinder and delay debtor’s creditors

In December 2012, Tronox Inc. creditors concluded their case to recover at least $14 billion in damages from Anadarko Petroleum Corp’s Kerr-McGee unit over a spin off they claimed drove Tronox into bankruptcy. In 2006, Kerr-McGee spun off part of its business as Tronox before selling itself to Anadarko for $18.4 billion. Tronox, which was previously under bankruptcy protection, alleged that Anadarko’s Kerr-McGee unit made the company insolvent by stripping away valuable oil and natural-gas assets and saddling it with legacy costs for environmental remediation. Kerr-McGee alleged the suit was “sensational” and that Tronox was solvent, worth more than $1 billion and “poised to succeed.” On December 13, 2013, Judge Allan Groper of the Bankruptcy Court, Southern District of New York, found that the transfer was made with the intent to hinder and delay the creditors and, further, that it was not made for reasonably equivalent value.

Tronox Creditors Recover $14 Billion in Damages

Tronox Creditors Recover $14 Billion in Damages

On December 13, 2013, Judge Allan Gropper issued a 166-page opinion—almost one year after closing arguments were made.  Judge Gropper found that “[d]efendants acted with intent to ‘hinder and delay’ the debtors’ creditors when they transferred out and then spun off the oil and gas assets and that the transaction, which left the Debtors insolvent and undercapitalized, was not made for reasonably equivalent value.”  Further, it found that defendants—Tronox and 14 of its affiliates, as well as Kerr-McGee—“must respond in damages.”

The case offers an excellent overview of key bankruptcy issues—those being protections offered to creditors, the meaning of insolvency and fraudulent conveyances, and showcases what is an adversarial proceeding.  It is also fair warning to entities that attempt to saddle the spin-off unit with legacy costs.  This is a case that will cost Anadarko (who purchased Kerr-McGee after Tronox was spun off) some money.   This article  will provide some background information and briefly highlight the some critical issues. For further reading, the case is available here.

Brief Background

The factual background of this proceeding is set forth in the court’s prior decisions on the defendants’ motions to dismiss.  See Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.), 429 B.R. 73 (Bankr. S.D.N.Y. 2010) ; Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.), 450 B.R. 432 (Bankr. S.D.N.Y. 2011) . I n brief, Tronox filed for Chapter 11 relief on January 12, 2009 (the “petition date”).  The second amended complaint (the “complaint”) in the instant adversary proceeding alleges that through a multi-stage transaction completed in 2005, Tronox’s predecessor segregated valuable oil and gas exploration and production assets from billions of dollars of environmental, tort, and other liabilities.  The complaint claims that the subsequent spinoff of the “cleansed” oil and gas assets (which were acquired by Anadarko) was an intentional or constructive fraudulent conveyance, which left Tronox insolvent and undercapitalized, beset by massive legacy liabilities.

In the course of Tronox’s Chapter 11 proceedings, environmental and tort creditors filed proofs of claim for unliquidated amounts, but where quantified, totaled more than $6.9 billion. Disclosure Statement, Case No. 09-10156, Dkt. No. 2196, Ex. B at 30.  Tronox also had secured debt of $212.8 million under prepetition facilities and unsecured debt estimated at $445.6 million. Id. at 10, 23.  The secured debt was refinanced during the Chapter 11 case and was ultimately converted into exit financing. Id. at 23.  After months of negotiation, Tronox reached a settlement with the unsecured creditors and environmental and tort creditors that formed the basis of its second amended plan. Id. at 2.  The environmental and tort creditors agreed to satisfaction of their claims against Tronox in return for all proceeds from this adversary proceeding against Anadarko, as well certain cash consideration. Id. at 40-42; Plan of Reorganization, Case No. 09-10156, Dkt. No. 2567, Ex. A at Art. IV.C.2, C.4.  The agreement of the environmental and tort plaintiffs to take the bulk of their possible recovery in the form of a lawsuit, whose outcome was uncertain , made it possible for the debtors to distribute to their other unsecured creditors (the “general unsecured creditors”) all of the stock of the reorganized companies, now cleansed of legacy liabilities. The disclosure statement estimated that this would provide general unsecured creditors with a recovery of 58-78 percent on their claims. Disclosure Statement at 10 n.9.

This earlier settlement agreement formed the “cornerstone” of Tronox’s proposed plan of reorganization. Confirmation Order, Case No. 09-10156, Dkt. No. 2567, at 37.  The Bankruptcy Court for the Southern District of New York approved the settlement and confirmed Tronox’s plan on November 30, 2010. Id. at 86.  The plan created a litigation trust to pursue the claims in this adversary proceeding, and although the rights of Tronox are asserted, the environmental and tort creditors are the real parties in interest as plaintiffs, and several appeared through counsel at the hearing on these motions.  Anadarko was an active party in interest throughout Tronox’s Chapter 11 proceedings and, although it did not object to the settlement or confirmation of the plan, it obtained a provision in the confirmation order regarding its rights in this adversary proceeding. The confirmation order provided, in part:

All 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 (“Liability of Transferee of Avoided Transfer”) of the Bankruptcy Code.

The plan also provided that if Anadarko was found liable for a fraudulent transfer, any claim under § 502(h), to which it may be entitled, could be applied as a direct offset against its liability.

Other Parties to the Action

The other parties to the adversarial proceeding included  beneficiaries of the trust that are public,  private entities that have claims against the debtors for damages for environmental response costs and tort liabilities.  The latter parties include the United States, eleven states, the Navajo Nation, four environmental response trusts, and a trust for the benefit of tort plaintiffs.  The trust beneficiaries reached an agreement regarding an allocation of the recovery in this lawsuit, if there was a recovery. (This avoided further litigation!)

Reason Provided for the Spin-Off 

As early as 2000, Old Kerr-McGee began to plan the transactions that restructured the company’s exploration and production (E&P)  and chemical businesses  that are at the heart of the issues in this case.  Starting in 2000, one of the company’s investment bankers, Lehman Brothers, made a series of presentations, first, to the top management of the company, and later to the board, regarding what came to be known as “Project Titan” and, later, “Project Focus.” These were names given to the corporate reorganization that included the transfer of the E&P business, specifically oil and gas assets, which were initially owned by subsidiaries of Old Kerr McGee, to a new holding company known as Kerr-McGee Corporation that is called hereafter “New Kerr-McGee,” and is one of the defendants in this litigation.  Since the E&P business was no longer owned by Old Kerr-McGee, which was responsible for the legacy liabilities, New Kerr-McGee, which owned the billions of dollars of equity in the E&P assets, was in a position to disclaim liability for the legacy liabilities.

“In effect, we converted the company to a consulting client, while we prepared them to be a higher caliber transactional client in the future.”

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 companies’ 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 defendants’ words, “Lehman and Kerr-McGee believed that Kerr-McGee’s stock was trading at a discount because E&P analysts who covered Kerr-McGee did not understand how to value the Chemical Business properly.” 

Economic conditions in 2003 and the first half of 2004 were not favorable for a spinoff or a sale of chemical.  This changed in September 2004, when Lehman advised CEO Corbett that there was a “window of opportunity” to separate the companies in light of a “hot” market for chemical companies and high demand and pricing for TiO₂.  In a presentation on January 4, 2005, Lehman advised that the company embark on a “dual-track [spin/sale] process”  to  “[c]apitalize on [the] open ‘window’ in [the] equity markets and chemicals sector.” (JX 122 at 14).  Lehman pointed out that a “100 percent Spin-Off/Split-Off” would permit Kerr-McGee to achieve the benefits of a “pure play” valuation of the businesses and a “cleaner separation of Titan liabilities.” (Id. at 7).  Once again Lehman warned that the “separation of [the] Titan liabilities” would have “to be negotiated” in a sale or leveraged buyout as opposed to a spinoff. (Id. at 8).

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-McGee’s top management and Lehman, and although the draft presentation to the Kerr-McGee Board that Lehman prepared stated that a “benefit” of a spinoff would be a “clean separation” 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 “clean separation” 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-McGee’s new environmental and litigation lawyers, spent time over 96 days researching fraudulent conveyance litigation in other failed spinoffs. (PX 21 at KM- TRX03393872, 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  first, an advantage of the spin would be a cleaner “[s]eparation from legacy liabilities” but, second,  this would be “complicated under bankruptcy scenario.” 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, “Complicated under bankruptcy scenario.” (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 Wohleber 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.

Why Chapter 11?

Tronox’s 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’s remaining creditors included 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.  Debt holders 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 (“Plan Supplement”), Case No. 09–10156, Dkt. No. 2441).  The debt holders providing financing and other commercial creditors took the stock of the reorganized company.  The disclosure statement for Tronox’s plan of reorganization estimated that the recovery of the commercial creditors would be 58-78 percent (78-100 percent  if they participated in a proposed rights offering).  (See Disclosure Statement, Case No. 09-10156, Dkt. No. 2196, Ex. B at 10 n.9).  There was no estimate as to the projected recovery for the environmental and tort creditors.  Tronox’s Chapter 11 plan was confirmed on November 30, 2010 (See Findings of Fact and Conclusions of Law Confirming the First Amended Joint Plan of Reorganization of Tronox Inc., et al. (“Confirmation Order”), Case No. 09–10156, Dkt. No. 2567).  The plan became effective on February 14, 2011. Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.) (“Tronox II”), 450 B.R. 432, 436 (Bankr. S.D.N.Y. 2011).

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 ‘‘Oklahoma UFTA’’); (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 “Defendants cannot reasonably assert that the allegations are not plausible on their face.”  Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox Inc.), (Tronox I) 429 B.R. 73, 90 (Bankr. S.D.N.Y. 2010).  It held further that (1) the counts charging intentional fraudulent conveyance under Bankruptcy Code § 548(a)(1) and the Oklahoma UFTA, made applicable by Bankruptcy Code § 544(b),were stated with sufficient particularity within the meaning of Fed. R. Civ. P. 9(b) and Bankruptcy Rule 7009;  (2) the intentional fraudulent conveyance counts and the counts asserting a constructive fraudulent conveyance under Bankruptcy Code § 548(a)(2) and the Oklahoma UFTA adequately stated a claim for relief; (3) on the well-pleaded allegations of the complaint, the fraudulent conveyance claims were not time-barred under applicable Oklahoma law;   (4) the counts seeking damages for civil conspiracy and aiding and abetting a fraudulent conveyance would be dismissed without prejudice, primarily on the ground that avoidance of a fraudulent conveyance under the Bankruptcy Code leads to the relief set forth in § 550 of the Bankruptcy Code, not to an award of damages for conspiracy or aiding and abetting, and the plaintiffs had not otherwise stated a claim for actionable damages for either civil conspiracy or aiding and abetting; (5) the count charging defendants with breach of fiduciary duty as a promoter were not adequately pleaded and would be dismissed without prejudice; (6) the count claiming unjust enrichment would be dismissed, as plaintiffs had relied on express contracts in their complaint;  (7) the counts asserting that defendants’ proofs of claim should be equitably subordinated or disallowed were premature and should be dismissed without prejudice, as defendants had not yet filed proofs of claim; (8) Anadarko would not be dismissed as a defendant as the complaint adequately pleaded that it was a subsequent transferee of the alleged fraudulent conveyances; and (9) the punitive damage claim would be dismissed as beyond the purview of relief in a fraudulent conveyance case under § 550 of the Bankruptcy Code.  See Tronox I, 429 B.R. 73.

Some Key Legal Issues: 

1) The Statute of Limitations

The law of Oklahoma, which the parties agreed was “applicable law” for purposes of 11 U.S.C. § 544(b), provided a four-year limitations period for claims of actual fraudulent conveyance and constructive fraudulent conveyance.  OKLA. STAT. tit. 24, § 121(1)-(2).    “A four-year look-back period from the date of Tronox’s Chapter 11 petition in January 2009 would encompass the IPO in November 2005 and the final spinoff in March 2006, but not the 2002 transfers if they are considered as separate, complete transactions.”   Defendants argued that plaintiffs were damaged by the transfer of the stock of the E&P subsidiaries from Old Kerr-McGee to a new holding company, New Kerr-McGee, which they assert was complete and perfected at the end of 2002.  After the 2002 transactions, they contended, the value and assets of the E&P subsidiaries were no longer available to creditors of Old Kerr-McGee, and any damage to the legacy creditors had been accomplished more than six years before Tronox’s chapter 11 filing.  The Bankruptcy Court found that defendants were wrong for a number of reasons:

First, the record in this case 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.  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 Tronox’s January 2009 chapter 11 filing. (Addison Dep., 7/13/2010 at 214:23-215:8; JX 66 at 1, PX 645, DX 1276).  Kerr-McGee’s Deputy General Counsel Reichenberger recognized that the assignment of the assets had not occurred until the Assignment Agreement was executed; he testified “that’s what [the Assignment Agreement] was accomplishing.” (Reichenberger Dep., 3/23/2011 at 217:2-19). 

As for backdating the documents, the Bankruptcy Court held that: 

Defendants assert that documents can properly be backdated to an earlier “as of” date when they merely memorialize an agreement that was final and conclusive at the earlier date.    It is well-established that “parties to a contract cannot make it retroactively binding to the detriment of third persons.” 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 until 2005. For example, in 2005, Kerr-McGee Canada Northwest and other companies were transferred from Old to New Kerr-McGee.  See n. 10, supra.  In 2005, Tronox was forced to assume $186 million in unfunded [other post-employment benefits]OPEB obligations to retirees and other employees, whether or not the employees had any prior connection to the chemical business, as well as $442 million of pension obligations.

Second,  the plaintiffs suffered no immediate injury from the stock transfers (the statute of limitations did not start to run in 2002).  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.

The Bankruptcy Court observed that: 

[t]his 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 Defendants’ brief that “Plaintiffs [the Old Kerr-McGee entities] were responsible for and funded their own Legacy Liabilities both before and after Project Focus” [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 “Kerr-McGee sometimes paid amounts from the central cash management system that it knew the subsidiaries couldn’t repay.”  (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.

It added further added that: 

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: “[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.”  Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir. 1993) (internal quotations omitted).   In re HBE Leasing Corp., 48 F.3d 623, 638 (2d Cir. 1995) (“HBE Leasing I”), the Circuit Court further held that the District Court had “correctly disregarded the form of this transaction and looked instead to [the] substance.”  It explained: “It is well established that multilateral transactions may under appropriate circumstances be ‘collapsed’ and treated as phases of a single transaction under the UFCA.”   As the Court continued, quoting In re Best Products, 168 B.R. 35, 56-57 (Bankr. S.D.N.Y. 1994): “‘In deciding whether to collapse the transaction and impose liability on particular defendants, the courts have looked frequently to the knowledge of the defendants of the structure of the entire transaction and to whether its components were part of a single scheme.’”   HBE Leasing I, 48 F.3d at 635-36; see also Boyerv. Crown Stock Distrib., Inc., 587 F.3d 787, 793 (7th Cir. 2009) (“fraudulent conveyance doctrine … is a flexible principle that looks to substance, rather than form, and protects creditors from any transactions the debtor engages in that have the effect of impairing their rights….”) (citation omitted); In re Sunbeam Corp., 284 B.R. 355, 370 (Bankr. S.D.N.Y. 2011) (“Courts have ‘collapsed’ a series of transactions into one transaction when it appears that despite the formal structure erected and the labels attached, the segments, in reality, comprise a single integrated scheme when evaluated focusing on the knowledge and intent of the parties in the transaction”).  Most recently, in its summary order affirming the lower court in Buchwald Capital Advisors LLC v . JP Morgan Chase Bank, N.A. (In re M. Fabrikant & Sons, Inc.), 447 B.R. 170, 186 (Bankr.S.D.N.Y. 2011), aff’d, 480 B.R. 480 (S.D.N.Y. 2012), aff’d,__ Fed.        Appx __, 2013 WL 5614238 (2d Cir. Oct. 15, 2013) (summary order), the Second Circuit concluded that the collapsing doctrine may be applied, inter alia, based on the transferee’s “actual…knowledge of the entire scheme.

There is no question on this record that defendants devised, carried out and had complete knowledge that the “Project Focus” transfers in 2002 were part of “a single integrated scheme” to create a “pure play” E&P business free and clear of the legacy liabilities.  The facts that support this proposition are overwhelming. 

2) Fraudulent Conveyance—Applicable Here?

Plaintiffs’ asserted that the Uniform Fraudulent Transfer Act (UFTA) applied.  Their ability to assert claims under the Oklahoma UFTA derives from § 544(b) of the Bankruptcy Code, which permits a debtor to avoid transactions that are voidable under applicable law by a creditor holding an unsecured claim that is allowable under § 502 of the Bankruptcy Code or that is not allowable only under § 502(e) of the code.          There is no dispute that the Oklahoma UFTA is “applicable law” within the meaning of § 544(b), but as discussed above, the Oklahoma UFTA has a four-year limitations period for certain fraudulent conveyance actions.  If a longer period were needed to reach back to the December 2002 transfers, plaintiffs contend that they can rely on the six-year limitations period in the FDCPA as “applicable law,” together with the tolling of that period agreed to by Kerr-McGee.

Naturally, Defendants disputed the use of the FDCPA as “applicable law” within the meaning of

§ 544(b), relying almost exclusively on the recent decision in MC Asset Recovery LLC v. Commerzbank A.G. (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 “shall not be construed to supersede or modify the operation of . . . title 11,” 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 “not dispositive” on the issue, the Fifth Circuit found support for its view in the statement of a committee chairman to the effect “that the Bankruptcy Code should be read as if the FDCPA did not exist.” Id. at 535-536 (citing, 136 Cong Rec. H13288 [daily ed. Oct. 27, 1990]). The court concluded that “treating the FDCPA as applicable law under § 544(b) would impermissibly modify the operation of Title 11” and run afoul of section 3003(c).  Id. at 535.

  1. The Role of Valuation in an Insolvency Analysis

In order to perform a UFTA solvency analysis appropriate to the facts of this case, it is necessary to determine the amount of Tronox’s “debts” as at the date of the IPO.  As noted above, the term “debt” is defined in the Oklahoma UFTA as “liability” on a claim, and “claim” is, in turn, defined broadly to include those that are unmatured, contingent, and unliquidated. Under the Bankruptcy Code, the courts have noted that the term “claim” has been defined as broadly as possible, Corbett v. MacDonald Moving Servs., Inc., 124 F.3d 62, 91 (2d Cir. 1997).  Cases under the UFTA has adopted this same principle.  In re Fabbro, 411 B.R. 407, 423  (Bankr. D. Utah 2009) (applying the Utah UFTA, which has the same definition of claim as Oklahoma).

The parties did not differ materially as to the value of many of Tronox’s liabilities, such as its financial debt, tax liabilities, liabilities for discontinued operations, and unfunded retiree liability.  Their substantial dispute was the amount of Tronox’s environmental and tort liabilities—which, again, is what this case is all about. 

The Bankruptcy Court started with Tronox’s environmental liability, which is vastly larger.  The decision highlights the deficiencies of the experts called to testify on the value of the environmental claims, fairness opinions issued and valuation of the firm in connection with the IPO; the experts employed and discussed include Prof. Grant Newton of AIRA, Dr. Denise Martin of NERA Economic Consulting, Dr. Thomas Vasquez (tort expert for defendants),  Kevin P. Collins of Houlihan Lokey.1

3) Conclusion

This is a lengthy case that highlights the hurdles that parties will encounter determining whether a fraudulent conveyance was constructive or actual, when a valuation is needed, and what constitutes credible witness and evidence.  It also serves to reiterate that experts need to “dig deeper” and not  just accept the representations made by the party paying the retainer fee.  Last, it underscores the Bankruptcy Court’s resolve to hold experts to a higher level of professionalism.


Roberto Castro, Esq., MST, MBA, CVA, CPVA, is a managing member of North Central Washington Economic, Forensic and Business Valuation Advisors, LLC, and The Law Office of Roberto Castro, PC, which serves the Douglas, Chelan, Grant, Okanogan, Kittitas, and Yakima Counties. Both are new firms that  opened in January 2014. Mr. Castro is also Technical Editor of NACVA’s QuickRead..

When he resided in Utah, he managed Wasatch Business Valuation & Litigation Support Services, LLC,  Mr. Castro is a Washington State attorney, CV, and is available to handle commercial and personal economic damages analysis, valuation advisory services and bankruptcy/turnaround work.  His legal practice focuses on bankruptcy (commercial, creditors, and consumer), estate and gift, and succession and exit planning.  Roberto can be reached at either or

1 See p. 67 where the court noted that Houlihan’s opinion was that “the fair value and present fair saleable value of the company’s assets would exceed the company’s stated liabilities and identified contingent liabilities.” ( JX 322 at 5).  However, as to the critical issue in this case—the amount of Tronox’s contingent liabilities—Houlihan simply took Kerr-McGee’s number and used it.  As stated in the Houlihan “solvency opinion,” “The term ‘identified contingent liabilities’ is defined to mean ‘the stated amount of contingent liabilities identified to us and valued by responsible officers of the Company, upon whom we have relied without independent verification; no other contingent liabilities have been considered.’”  (Id. at 2).  Houlihan’s managing director, Kevin P. Collins, confirmed in his deposition that Houlihan used as Tronox’s anticipated contingent liabilities the reserve in Tronox’s financial statements.  (See Collins Dep., 12/15/2010 at 134:13 to 135:15, referencing JX 316 at 2, 6).  As discussed below, there was no dispute at trial that a reserve for contingent liabilities in a financial statement has no probative value in determining liabilities or solvency for fraudulent conveyance purposes.) [emphasis added]

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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