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District Court Finds in Favor of Alleged Alter Ego Predecessor to Bankrupt Corporation

Posted In Class Actions

VFB LLC v. Campbell Soup Co., 2005 WL 2234606 (D.Del., September 13, 2005). Plaintiff brought an action alleging that Defendant engineered a fraudulent transfer of over $600 million from Plaintiff's predecessor in interest, Vlasic Foods International, Inc., ("VFI"), to Defendant, that Defendant controlled VFI's directors and caused them to breach their fiduciary duties, that VFI paid illegal dividends to Defendant, that Defendant was VFI's alter ego, and that Defendant's Proof of Claim against VFI's bankruptcy estate was either voidable or should be equitably subordinated. The Court dismissed the action in its entirety and found in favor of Defendant and against Plaintiff on all counts.

On March 30, 1998, Campbell Soup Co. ("Campbell") effected a spinoff of several of its businesses to Vlasic Foods International Inc. ("VFI"). At the same time, Campbell transferred a $500 million debt to VFI when it transferred to VFI a group of businesses which had been grouped together within Campbell prior to the spinoff. Through the spin-off, Campbell transferred its shares of VFI stock to its shareholders, so that Campbell's shareholders then owned shares of Campbell and, separately, shares of VFI. Approximately three years later, VFI was officially a failure and the entity filed for bankruptcy. Through the plan of reorganization, VFB, a successor in interest to VFI was created to prosecute claims, including VFI's claims against Campbell. In structuring the spinoff, Campbell had arranged with certain lenders to establish a $750 million line of credit for VFI. Campbell took $500 million in cash from the credit facility and assigned VFI the burden of that debt as part of the VFI capital structure. The $500 million thus became payment to Campbell in exchange for the transferred business assets. The crux of Plaintiff's argument was that VFI fraudulently transferred $500 million to Campbell by assuming the $500 million debt obligation. Plaintiff argued that the transfer was illegal because it was constructively fraudulent and, in the alternative, that it was made with actual intent to "hinder, delay or defraud" VFI's creditors. Plaintiff relied upon the New Jersey Uniform Fraudulent Transfer Act to support its contentions. The Court found that the spinoff did not comprise a fraudulent transfer for three reasons. First, the court found, the spinoff was a matter of business strategy of "strategic divestiture." Second, the Court found that the spinoff created an enormous tax benefit to Campbell because the payment it received from VFI was tax free. Finally, the court found that the spinoff presented an opportunity for Campbell to take "a healthy piece of cash out of the VFI Businesses." In light of the facts that, by all accounts, VFI received at least $500 million in value for the debts it assumes, the court concluded that the $500 million obligation VFI incurred was reasonably equivalent to the businesses it received and that VFI was solvent at the time of the spinoff. The court further found that the conduct of VFI and Campbell simply did not suggest an intent to hinder, delay, or defraud any creditor, and that "any aggressive accounting or any gloss put on information provided to the investing public was done with the intent to increase VFI and Campbell's stock price, and was not an effort to hinder, delay, or defraud creditors." The court concluded that at the time of the spinoff, VFI and Campbell's employees believed that VFI was going to be a viable company. Accordingly, the court found inadequate plaintiff's evidence that anyone had an intent to hinder, delay, or defraud any creditor in connection with the spinoff. Plaintiff also alleged breaches of fiduciary duties by VFI's pre-spinoff directors to VFI's foreseeable creditors. The court found this claim to have "numerous short comings" [sic], but most significant was the fact that the pre-spinoff directors did not owe any fiduciary duty to future creditors of VFI, because VFI was not insolvent at the time of the spinoff. Accordingly, the Court dismissed the action in its entirety and found in favor of Defendant and against Plaintiff on all counts. Plaintiff later filed an untimely Motion for a New Trial and to Alter and Amend the Court's Findings and Judgment, which Campbell opposed. The court denied plaintiff's motion. See VFB LLC v. Campbell Soup Co., 336 B.R. 81 (D.Del., 2005).

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