VFB LLC v. Campbell Soup Co

Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
4-4-2007
VFB LLC v. Campbell Soup Co
Precedential or Non-Precedential: Precedential
Docket No. 05-4879
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 05-4879
VFB LLC, a Delaware limited liability company,
Appellant
v.
CAMPBELL SOUP COMPANY;
CAMPBELL INVESTMENT COMPANY;
CAMPBELL FOODSERVICE COMPANY;
CAMPBELL SALES COMPANY; CAMPBELL SOUP
COMPANY, LTD (Canada);
JOSEPH CAMPBELL COMPANY; CAMPBELL SOUP
SUPPLY COMPANY, L.L.C.;
PEPPERIDGE FARM, INCORPORATED
On Appeal from the United States District Court
for the District of Delaware
(D.C. No. 02-cv-00137)
District Judge: Hon. Kent Jordan
Argued January 18, 2007
Before: SLOVITER, RENDELL, and CUDAHY,*
Circuit Judges
*
Hon. Richard D. Cudahy, United States Senior Circuit
Judge for the United States Court of Appeals for the Seventh
Circuit, sitting by designation.
(Filed: March 30, 2007)
John A. Lee, Esquire
Robin Russel, Esquire
Andrews & Kurth LLP
600 Travis, Suite 4200
JP Morgan Chase Tower
Houston, TX 77002
Barbara W. Mather [ARGUED]
Robert L. Hickok
Benjamin P. Cooper
Pepper Hamilton LLP
18th & Arch Streets
3000 Two Logan Square
Philadelphia, PA 19103
Counsel for Appellant
Richard P. McElroy
Mary Ann Mullaney
Blank Rome LLP
130 North 18th Street
One Logan Square
Philadelphia, PA 19103
Michael W. Schwartz [ARGUED]
Harold S. Novikoff
David C. Bryan
Wachtell, Lipton, Rosen & Katz
51 West 52d Street
New York, NY 10019
Counsel for Appellees
____________
OPINION OF THE COURT
____________
CUDAHY, Circuit Judge.
2
In 1998, Campbell Soup Co. incorporated a wholly-
owned subsidiary, Vlasic Foods International, Inc., and sold it
several food companies in exchange for borrowed cash. Then it
issued the subsidiary’s stock to Campbell shareholders as an in-
kind dividend, making VFI an independent company. Within
three years of this transaction, VFI filed for bankruptcy and sold
the food companies for less than it had paid for them. VFI has
since reorganized into the bankruptcy creature VFB, LLC, and
acting on behalf of VFI’s disappointed creditors claims that the
transaction was a constructively fraudulent transfer and that
Campbell aided a breach of fiduciary duty by VFI’s directors.
The district court entered judgment for Campbell after a bench
trial. VFB appeals both from the judgment and from the district
court’s decision to strike a motion to amend the judgment. We
affirm.
I. Background
In 1996, Campbell Soup Co. (Campbell) decided to
improve its stock price by disposing of certain underperforming
subsidiaries and product lines, the largest and most prominent of
the lot being Vlasic, of pickle fame, and Swanson, the TV dinner
manufacturer. (The companies in question were eventually
organized into what Campbell called its “Specialty Foods
Division”; we will refer to the companies by that name or as “the
Division.”) The Division companies were not highly regarded
within Campbell. One consultant urged that all the relevant
businesses other than Vlasic and Swanson had basically no
growth potential and should be managed strictly for cash. (Op.
at 13.) Vlasic and Swanson were both troubled, but they were
historically strong brands that, it was thought, might be turned
around under new management. (Op. at 14-15.)
Campbell decided the best way to dispose of the Division
would be through a “leveraged spin” transaction. Campbell
would incorporate a new wholly-owned subsidiary and the
subsidiary would take on bank debt in order to purchase the
3
Division.1 Then Campbell would give the stock in the subsidiary
to Campbell shareholders as an in-kind dividend. Campbell
would remove underperforming businesses from its balance
sheet and get cash; Campbell shareholders would own roughly
the same assets as before, albeit in different corporate packages.2
The terms of the spin were negotiated between Campbell
and a group of high-ranking Campbell employees who sought to
manage the new subsidiary, named Vlasic Foods International,
Inc. (VFI), after the spin. Campbell declared several basic terms
of the agreement non-negotiable, among them the businesses to
be transferred to VFI and VFI’s initial debt level (that is, how
much it would pay Campbell for the Division). The future VFI
managers later testified that Campbell did not give them the
resources they needed to properly research the transaction. The
resulting bargain contained various additional terms unfavorable
to VFI.
The deal closed on March 30, 1998. On VFI’s end, the
spin was approved by VFI’s “pre-Spin directors,” also major
Campbell officers, who understood their sole task to be
approving the spin and resigning. They did not investigate the
deal and made no effort to protect VFI’s interests as against
Campbell’s.
The district court called the bargain struck in the spin
“particularly hard” for VFI, but further concluded that it was
even harder than the public knew at the time. For two years
before the spin, Campbell massaged the Specialty Foods
Division’s operating results, ostensibly misleading the public
about its operating record and prospects. The spin took place
1
Technically, what happened in the present case was that the
banks extended Campbell credit under a loan agreement that
provided that the rights and obligations under the agreement would
be assumed by the subsidiary upon transfer of the Division. (Op. at
27.) This transaction is, for our purposes, functionally identical to
the transaction described above.
2
No one claims that the spin harmed Campbell shareholders.
4
midway through Campbell’s 1998 fiscal year (FY1998);
Division managers used a number of techniques in FY1997 and
FY1998 to increase short term sales and earnings (and to secure
salary bonuses tied to meeting operating targets). But none of
the techniques changed the companies’ longer-term prospects.
For instance, VFB focuses on “product loading” as the chief tool
used to prop up sales and earnings. This term refers to using
bulk discounts and other promotional tools to encourage retailers
to increase their inventory. While this technique increases sales
in the short term, there is a corresponding decrease in sales in a
later period as retailers allow their inventories to decline to
normal levels. Product loading and similar tactics3 in FY1997
and early FY1998 left VFI facing an imminent corrective
decrease in its sales and earnings at the time of the spin.
VFB now urges (and Campbell does not argue the point)
that because of these tactics, Campbell’s SEC disclosures in the
years leading up to the spin, and in particular the FY1997 and
FY1998 earnings figures on the Form 10 SEC filing describing
the spin transaction itself, were unreliable. (Op. at 16, 22-23.)
The filings misled not only the public securities markets, but also
the banks providing the leverage for the transaction, which did
not independently investigate the performance of the Specialty
Foods Division but instead “relied heavily on ‘pro forma’
financial statements and projections supplied by Campbell.”
(Op. at 27.)
After the spin, the Specialty Foods Division’s inflated
sales and earnings figures quickly corrected themselves. By
June, VFI had lowered its FY1998 earnings estimates from $143
million to $70 million. VFI feared that this would soon lead to a
default of its loan agreement with the banks, so it sought to
renegotiate the agreement. The banks, after thoroughly
examining VFI’s finances, agreed to a new loan agreement on
3
Among the other devices Campbell is said to have used are
reducing inventory to create “last in first out” gains, delaying
scheduled maintenance, using corporate reserves, changing its
deduction assumptions and underestimating trade spending.
5
September 30, 1998. Among other things, the agreement
required VFI to reduce the banks’ exposure by issuing new
bonds contractually subordinated to the bank debt.
Despite these very public problems, VFI did not fold.
The price of its shares on the New York Stock Exchange
remained essentially steady. Indeed, VFI outperformed the S&P
mid-cap food index from the time of the spin, March 30, 1998,
through January 1, 1999. (Op. at 30.) More than a year after the
spin, in June 1999, VFI successfully completed its required issue
of $200 million in unsecured debt to institutional investors,
despite disclosing discouraging financial data for the first nine
months of FY1999, declining sales, limited advertising and
product innovation, and other worrisome news. (Op. at 34-36.)
VFI’s market capitalization never dropped below $1.1 billion
until January 1999.
While VFI did not suddenly collapse, it nonetheless
slowly declined, presumably because of basic problems in its
business (declining sales, for example, a problem shared by most
food companies during the period in question). (Op. at 58.)
VFI’s managers had hoped to reinvigorate the Vlasic and
Swanson brands with aggressive advertising and expansion
campaigns, but they lacked the cash for such an ambitious
project after renegotiating VFI’s loan agreement with the banks.
VFI needed all its available cash to service its debt. (Op. at 40.)
In January 2000, VFI discovered that it had
underestimated its accrued trade spending in FY1999 and
earlier–that is, its salesmen had granted discounts to various bulk
purchasers throughout FY1999, but although FY1999 ended in
September 1999, VFI did not accurately calculate the effect of
those discounts until January 2000. The discovery drove down
VFI’s FY2000 earnings, triggered a default under the new loan
agreement and sent the public price of VFI’s unsecured debt
below par value. (Op. at 40-41.) One year later, VFI filed for
bankruptcy. (Op. at 42.)
VFI sold off the former Specialty Foods Division
piecemeal both before and during bankruptcy, in a period from
6
roughly January 1999 to May 2001. These sales brought in $504
million, which discounts back to $385 million at the time of the
spin, $115 million less than VFI paid for the Division at that
time.
VFI assigned all of its legal claims against Campbell to
the plaintiff VFB, LLC, a Delaware limited liability company
whose members are VFI’s impaired creditors. (The banks are
not members; they have already been made whole because of
security interests and other protection granted by the
renegotiated loan agreement. VFB’s members are the holders of
the unsecured bonds issued in 1999, the landlord of VFI’s
headquarters and certain of VFI’s employees and trade
creditors.) VFB then brought the present action against
Campbell, seeking to set aside the spin as a constructively
fraudulent transfer and claiming that Campbell aided and abetted
a breach of VFI’s pre-spin directors’ duty of loyalty to VFI.
The district court held a lengthy bench trial. The chief
factual dispute concerned the value of the Specialty Foods
Division on March 30, 1998, and specifically whether it was
worth the $500 million VFI paid for it. The parties offered three
chief types of evidence on this point. First, there was the price
of VFI’s publicly traded stock and bonds. The 45 million
outstanding shares of VFI stock traded at $25.31 on the New
York Stock Exchange at the close of trading on March 30, 1998.
This put VFI’s equity market capitalization at $1.1 billion,
which, considering VFI’s $500 million debt obligation, put the
value of the Specialty Foods Division at $1.6 billion. VFB
argued that the market price reflected the misleadingly high pre-
spin earnings figures in Campbell’s SEC reports rather than the
true value of the Division, but the district court noted that VFI’s
market capitalization did not even drop below $1.1 billion until
1999, despite the market’s quickly learning the truth about VFI’s
earnings prospects in 1998.
Second, the parties submitted various valuations of the
Specialty Foods Division and VFI, prepared before and after the
spin for use by Campbell and VFI. The estimated values of the
Division businesses were uniformly above $500 million.
7
Third and finally, the parties hired economic expert
witnesses and had them estimate the value of the Division.
Campbell presented Timothy Leuhrman, who estimated VFI’s
post-spin value by comparing it to that of six other companies he
considered comparable to VFI; he guessed that the Division
businesses were worth $1.5-1.8 billion at the time of the spin.
VFB called three experts. Henry Owsley, comparing VFI to a
different set of companies and performing a discounted cash
flow analysis, estimated the Division’s worth at $569 million
and $270-360 million, respectively. Sheridan Titman and Greg
Hallman performed a discounted cash flow analysis that
produced a value for the Division of $377 million.
The district court concluded that the Specialty Foods
Division was worth well in excess of the $500 million VFI paid
for it on March 30, 1998. It relied primarily on the price of
VFI’s stock, reasoning that as private traders seek to pay no
more for an asset (and sell an asset for no less) than it is worth,
the market price was a rational valuation of VFI in light of all
the information available to market participants. Although the
price was infected by Campbell’s manipulation of the Division’s
earnings at the time of the spin, VFI’s stock price remained high
even after the truth about VFI’s prospects had been fully
exposed. The district court concluded that the post-exposure
market capitalization was based on an accurate picture of VFI’s
position as of March 30, 1998, indicating a value of well over
$500 million at that time.
The district court also addressed the expert witnesses’
valuations in some detail, finding Leuhrman’s analysis
convincing and Owsley, Titman and Hallman’s analyses flawed,
primarily due to hindsight bias, that is, their use of assumptions
about VFI that were not shared by the informed public markets
at the time of and after the spin. (Op. at 62-68.) But basically
the district court regarded the hired expert valuations as a side-
show to the disinterested evidence of VFI’s capitalization in
“one of the most efficient capital markets in the world.”
VFB does not even attempt to show any market valuation
of VFI contemporaneous with the Spin-off that is
8
anywhere close to the figures urged by VFB’s experts.
There is simply no credible evidence to justify setting
aside VFI’s stock price and the other contemporaneous
market evidence of VFI’s worth. Even if, as VFB
implies, the market was suffering from some “irrational
exuberance” in establishing VFI’s stock price, that gives
me no basis for second-guessing the value that was fairly
established in open and informed trading. (Op. at 58.)
In light of that conclusion, the court determined both that
the spin was not a fraudulent transfer and that, because VFI had
been solvent at the time of the spin, it owed no “fiduciary duty to
future creditors of VFI.”
In the district court, Campbell also brought certain
bankruptcy claims against VFB (successor in interest to VFI).
VFB asked the court to disallow the claims because Campbell
did not offer any proof for them, but the court held that once
Campbell had submitted a facially valid claim, the burden fell to
VFB to offer some evidence to rebut it. VFB had offered no
such evidence into the record, so the district court allowed the
claim. VFB then moved to amend the judgment under
Bankruptcy Rule 9023, which motion the district court struck as
untimely.
II. Discussion
VFB appeals from the district court’s judgment and the
striking of its motion to amend the judgment. We review the
district court’s legal determinations de novo, Jean Alexander
Cosmetics, Inc. v. L’Oreal, USA, Inc., 458 F.3d 244, 248 (3d Cir.
2006), but its findings of fact “shall not be set aside unless
clearly erroneous.” Fed. R. Civ. P. 52(a); In re Fruehauf Trailer
Corp., 444 F.3d 203, 209-10 (3d Cir. 2006).
A. Constructive Fraudulent Transfer
VFB seeks to set aside the spin as a fraudulent transfer.
The parties do not dispute whether VFB, as VFI’s successor, has
the right to “avoid any transfer of an interest of [VFI] in property
9
or any obligation incurred by [VFI] that is avoidable under
applicable law by a creditor holding an unsecured claim that is
allowable.” 11 U.S.C. § 544(b)(1).
Both parties agree that New Jersey law applies. Under
New Jersey’s version of the Uniform Fraudulent Transfer Act:
A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor whose claim arose before the
transfer was made or the obligation was incurred if the
debtor made the transfer or incurred the obligation
without receiving a reasonably equivalent value in
exchange for the transfer or obligation and the debtor was
insolvent at that time or the debtor became insolvent as a
result of the transfer or obligation. N.J. Stat. Ann. § 25:2-
27(a).
Alternatively,
A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor, whether the creditor’s claim
arose before or after the transfer was made or the
obligation was incurred, if the debtor made the transfer or
incurred the obligation . . . [w]ithout receiving reasonably
equivalent value in exchange for the transfer or
obligation, and the debtor:
(1) Was 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; or
(2) Intended to incur, or believed or reasonably
should have believed that the debtor would incur,
debts beyond the debtor’s ability to pay as they
become due.
Id. § 25:2-25(b)
To succeed under either of these provisions, VFB must at
least show that the Specialty Foods Division was not “reasonably
equivalent value” for the $500 million provided to Campbell.
The district court concluded that it was reasonably equivalent.
10
New Jersey law does not offer a universal definition of
“reasonably equivalent value,” cf. N.J. Stat. Ann. § 25:2-24(b)
(addressing foreclosure sales), and neither does the case law,
see, e.g., Flood v. Caro Corp., 640 A.2d 306, 310 (N.J. Super.
App. Div. 1994). This is probably as it should be, since
reasonably equivalent value is not an esoteric concept: a party
receives reasonably equivalent value for what it gives up if it
gets “roughly the value it gave.” In re Fruehauf Trailer Corp.,
444 F.3d 203, 213 (3d Cir. 2006); Mellon Bank, N.A. v. Metro
Comms., Inc., 945 F.2d 635, 647 (3d Cir. 1991). We think the
New Jersey Supreme Court would agree with the “common
sense” approach we have used to determine “reasonably
equivalent value” under the bankruptcy code’s similar fraudulent
transfer provision, 11 U.S.C. § 548(a)(1)(B)(I). Fruehauf
Trailer, 444 F.3d at 214; see also Highlands Ins. Co. v. Hobbs
Group, LLC, 373 F.3d 347, 351 (3d Cir. 2004) (“[W]here the
state’s highest court has not spoken definitively on a particular
issue, the federal court must make an informed prediction as to
how the highest state court would decide the issue.”).
Clearly the Division and VFI’s cash were both valuable
assets, but was the Division worth roughly the $500 million that
VFI paid for it? In a meticulous and well-considered opinion the
district court concluded that it was, reasoning primarily that in
light of VFI’s $1.1 billion market capitalization nine months
after the spin, the Division businesses were worth indeed far
more than $500 million. Because the court focused on VFI’s
market capitalization as evidence of its value, VFB now
concentrates on attacking this approach.
Some portions of VFB’s brief seem to argue that courts
should never measure the value of a business by its market
capitalization because the market price of a corporation’s stock
“is based on expectations (projections) of future income,” which
may turn out to be inaccurate. (Reply Br. for Appellant at 11.)
That contention is clearly wrong. Equity markets allow
participants to voluntarily take on or transfer among themselves
the risk that their projections will be inaccurate; fraudulent
transfer law cannot rationally be invoked to undermine that
function. In re R.M.L., Inc., 92 F.3d 139, 151 (3d Cir. 1996)
11
(“Presumably the creditors . . . want a debtor to take some risks
that could generate value.”). True, earnings projections “must be
tested by an objective standard anchored in [a] company’s actual
performance,” but such a test applies to information about a
company’s performance available “when [the projection is]
made.” Moody v. Security Pacific Bus. Credit, Inc., 971 F.2d
1056, 1073 (3d Cir. 1992). Market capitalization is a classic
example of such an anchored projection, as it reflects all the
information that is publicly available about a company at the
relevant time of valuation. Basic Inc. v. Levinson, 485 U.S. 224,
243 (1988) (plurality); Peil v. Speiser, 806 F.2d 1154, 1160-61
(3d Cir. 1986). A company’s actual subsequent performance is
something to consider when determining ex post the
reasonableness of a valuation, see Moody, 971 F.2d at 1074, but
it is not, by definition, the basis of a substitute benchmark,
R.M.L., 92 F.3d at 155 (criticizing “[t]he use of hindsight to
evaluate a debtor’s financial condition”).
We therefore move on to VFB’s chief argument, that the
district court erred in holding that VFI’s market capitalization
measured the value of its assets because Campbell manipulated
the Specialty Foods Division’s sales and earnings prior to the
spin.4 The value of a business is a mixed question of fact and
4
We find it difficult to understand how Campbell’s sales and
earnings manipulation could have seriously misled the public
markets about the Division’s prospects, especially its “product
loading.” Product loading involves highly public sales campaigns
using devices like sweepstakes and coupons to encourage retailers
to take on a larger inventory than usual. (See, e.g., Op. at 17.) We
suspect that it would be easy for interested observers to take the
effect of this behavior into account when evaluating Campbell’s
reports and projections. We also find the banks’ failure to
independently investigate the Division to be somewhat unusual
conduct for an institution lending half a billion dollars with a
further quarter-billion credit line in reserve. But, in any event, the
district court assumed, and took into account, some misleading of
the public. (See, e.g., Op. at 16, 22-23, 27.) Our difficulties are
irrelevant to the result of this appeal.
12
law, with the underlying factual findings reviewed for clear error
and the court’s choice of legal precepts and application of those
precepts to the facts reviewed de novo. In re Fruehauf Trailer
Corp., 444 F.3d 203, 209-10 (3d Cir. 2006); R.M.L., 92 F.3d at
147; Mellon Bank, N.A. v. Metro Communications, Inc., 945
F.2d 635, 641-42 (3d Cir. 1991).
VFB argues that whether VFI’s market capitalization
reflected its value is a purely legal question because it concerns
the proper “method of valuation” of VFI’s businesses, and
should therefore be reviewed de novo, citing Amerada Hess
Corp. v. Commissioner of Internal Revenue, 517 F.2d 75, 82 (3d
Cir. 1975). VFB misreads Amerada Hess. We held in that case
that the proper method of valuation in a particular factual
context is a legal question. Id. (citing Richardson v. Commr. of
Internal Revenue, 151 F.2d 102, 103 (2d Cir. 1945)); see also
Moody v. Security Pacific Bus. Credit, Inc., 971 F.2d 1056, 1063
(3d Cir. 1992). But the factual context is, naturally enough, a
question of fact, and it is the context that the parties dispute in
the present case. All agree that if the market capitalization was
inflated by Campbell’s manipulations it was not good evidence
of value; the question is whether it was so inflated. We review
the court’s resolution of that question for clear error. See
Moody, 971 F.2d at 1063; Amerada Hess, 517 F.2d at 83.
Were the market capitalization numbers on which the
district court relied inflated? VFB often attempts to confuse the
nature of the district court’s reasoning on this point, for instance
by stating that the court relied on “VFI’s market capitalization at
the time of the Spin” despite finding that investors were at that
time misled by Campbell’s manipulation. (Br. of Appellant at
46-47.) That is not what the court did. It explicitly chose not to
rely on VFI’s market capitalization at the time of the spin,
precisely because of Campbell’s manipulation, and instead
looked at market capitalization several months later, when the
truth of VFI’s situation had become clear. (Op. at 54-56.)
Nobody contends that VFI was worth more in September 1998
than at the end of March 1998. Consequently, if VFI’s
September 1998 market capitalization reflected a value for the
Division businesses of at least $500 million, despite no longer
13
being affected by Campbell’s pre-spin operations, then the
Division must have been worth more than $500 million at the
time of the spin.
VFB’s fraudulent conveyance claim therefore fails unless
VFB can show that the district court clearly erred in concluding
that the market price of VFI’s stocks and bonds were no longer
affected by Campbell’s pre-spin manipulations as of September
1998, an issue that VFB seems reluctant to squarely address. Its
only argument is to point out that in January 2000, during VFI’s
FY2000, VFI discovered a $15 million underestimation of
FY1999 trade spending that, when figured into FY2000
earnings, triggered a default under VFI’s new loan agreement
and caused its unsecured debt to trade below par value. VFB
urges that this demonstrates that VFI was in fact insolvent in
FY1999, when the underestimated trade spending was actually
occurring.
This argument shows that VFI was insolvent in FY2000;
if the bondholders thought VFI solvent, they wouldn’t have sold
their debt so cheaply. This argument might also suggest that VFI
was insolvent in FY1999, although that conclusion is
speculative. Additional trade spending alone might not have
been enough to render VFI unable to pay its debts; declining
sales or some other worsening aspect of VFI’s condition
between FY1999 and FY2000 might have contributed.
But what the argument clearly does not show is that VFI
was insolvent in FY1998, at the time of the spin. Even if the
bondholders were unaware of the current state of VFI when
trading bonds at par value in FY1999, they were still aware of
everything Campbell reportedly concealed about the Specialty
Foods Division prior to the spin. (VFB cites to testimony
indicating that some of the underestimated trade spending may
have occurred before FY1999 (App. at 1221), but it makes no
effort to quantify how much, and both the evidence and the
arguments suggest that the lion’s share occurred in FY1999 (see,
e.g., App. at 1662).) Again, nobody claims that VFI’s fortunes
were improving, so the market’s valuation of VFI as solvent in
FY1999 was strong evidence that VFI was solvent at the time of
14
the spin, and therefore received reasonably equivalent value for
its $500 million.
VFB makes additional arguments concerning its expert
witnesses’ valuations, urging that it was clear error to dismiss
them in favor of the market figures, but we do not think that the
district court erred in choosing to rely on the objective evidence
from the public equity and debt markets. To the extent that the
experts purport to measure actual post-spin performance, as by,
for example, discounted cash flow analysis, they are measuring
the wrong thing. To the extent they purport to reconstruct a
reasonable valuation of the company in light of uncertain future
performance, they are using inapt tools. Kool, Mann, Coffee &
Co. v. Coffey, 300 F.3d 340, 362 (3d Cir. 2002) (noting that
discounted cash flow analyses are imprecise and have value only
“in certain limited situations”). Absent some reason to distrust
it, the market price is “a more reliable measure of the stock’s
value than the subjective estimates of one or two expert
witnesses.” In re Prince, 85 F.3d 314, 320 (7th Cir. 1996); see
also In re Hechinger Investment Co. of Del., 327 B.R. 537, 548
(D. Del. 2005); Peltz v. Hatten, 279 B.R. 710, 738 (D. Del.
2002); Metlyn Realty Corp. v. Esmark, Inc., 763 F.2d 826, 835
(7th Cir. 1985) (“[T]he price of stock in a liquid market is
presumptively the one to use in judicial proceedings.”).
VFB has consequently not shown clear error in the district
court’s finding that the Specialty Foods Division was worth far
more than its $500 million in debt acquired at the time of the
spin. We stress that, given the arguments VFB has made, the
question is not even close. Valuing an asset is a difficult task
that depends upon detailed factual determinations, which may be
overturned only if they are “completely devoid of a credible
evidentiary basis or bear[] no rational relationship to the
supporting data.” In re Fruehauf Trailer Corp., 444 F.3d 203,
210 (3d Cir. 2006) (quoting Citicorp Venture Capital, Ltd. v.
Comm. of Creditors, 323 F.3d 228, 232 (3d Cir. 2003)). Where
the asset being valued is a speculative investment, a trial court’s
factual determinations will be “largely immune from attack on
appeal.” In re R.M.L., Inc., 92 F.3d 139, 154 (3d Cir. 1996).
15
For its appeal to succeed, VFB must show that on March
30, 1998, the Specialty Foods Division was clearly worth less
than $500 million. Yet it never engages with the relevant
numbers in any detail, explaining by how much Campbell’s
various manipulation techniques affected its statistics, or by how
much the statistical inflation affected VFI’s market
capitalization. Its approach is simply to note that Campbell
played with its operations and suggest that the market
capitalization numbers may have been wrong to some
undetermined degree.
They may have been, but only to the extent that the
market was in the dark about the Division’s operational
prospects. VFB’s theory is that the potential for new
management to turn around Vlasic’s and Swanson’s slow slide
depended on ready access to sufficient capital to launch brand-
expansion programs, and that in light of the early renegotiation
of VFI’s loan agreement Campbell never gave it a reasonable
chance of having access to that capital, dooming it to eventual
insolvency and bankruptcy. But the participants in the 1998
equity market were familiar with VFI’s business plan, knew
about the renegotiated loan agreement and the likely trouble VFI
would have getting access to capital, and still nonetheless valued
the company at well more than $500 million, apparently
concluding that the company’s chances of success were good.
VFB’s arguments may create some very meager doubt, but the
district court’s task is to resolve doubts by a preponderance of
the evidence. VFB’s arguments do not shake our belief that it
performed this task meticulously and accurately; the district
court carefully considered both the evolving facts and
Campbell’s duty not to constructively defraud VFI’s present and
future creditors.
Because the district court did not err in concluding that
VFI received reasonably equivalent value in the spin, we need
not discuss the fine distinctions between balance-sheet
insolvency, equitable insolvency and unreasonable
undercapitalization. Judgment against VFB on its fraudulent
transfer claim must be affirmed.
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B. Aiding and Abetting a Breach of Corporate Fiduciary
Duty
VFB’s second claim against Campbell is that Campbell
aided and abetted a breach of the VFI directors’ duty of loyalty
to VFI when it entered into the spin transaction knowing that the
VFI directors were simultaneously serving as officers of
Campbell. New Jersey imposes civil liability for knowingly
aiding and abetting an agent’s breach of a duty of loyalty to its
principal. Franklin Med. Assocs. v. Newark Public Schs., 828
A.2d 966, 974-76 (N.J. Super. Ct. App. Div. 2003); Hirsch v.
Schwartz, 209 A.2d 635, 640 (N.J. Super. Ct. App. Div. 1965)
(citing Restatement 2d of Agency § 312). To hold Campbell
liable, VFI must of course show, among other things, that the
VFI directors did in fact breach a duty of loyalty to VFI.
Franklin Med. Assocs. 828 A.2d at 975; see also Gotham
Partners, L.P. v. Hallwood Realty Partners, L..P., 817 A.2d 160,
172 (Del. 2002) (setting forth the elements of aiding and abetting
a breach of fiduciary duty). It is here that the district court
rejected VFB’s claim, holding that VFI’s directors breached no
fiduciary duty because VFI was solvent at the time of the spin.
Corporate directors must act in their shareholders’ best
interests and not enrich themselves at its expense. Cede & Co v.
Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993), modified, 636
A.2d 956 (Del. 1994); AYR Composition, Inc. v. Rosenberg, 619
A.2d 592, 595 (N.J. Super. App. Div. 1993). The law enforces
this duty of loyalty by subjecting certain actions to unusual
scrutiny. Where a director acts while under an incentive to
disregard the corporation’s interests, she must show her “utmost
good faith and the most scrupulous inherent fairness of the
bargain.” In re PSE & G Shareholder Litigation, 801 A.2d 295,
307-308 (N.J. 2002) (quoting Weinberger v. UOP, Inc., 457
A.2d 701, 710 (Del. 1983)); Brundage v. New Jersey Zinc Co.,
226 A.2d 585, 598-99 (N.J. 1967).
VFB urges that VFI’s pre-spin directors had an incentive
to and admittedly did disregard VFI’s best interests in the
context of the spin because they were simultaneously officers of
Campbell. Normally, simultaneously serving two transacting
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companies will trigger heightened scrutiny. Summa Corp. v.
Trans World Airlines, Inc., 540 A.2d 403, 406 (Del. 1988);
Brundage, 226 A.2d at 598. However, scrutiny is unnecessary
when the two companies are a parent and its wholly-owned,
solvent corporate subsidiary. Anadarko Petroleum Corp. v.
Panhandle Eastern Corp., 545 A.2d 1171, 1174 (Del. 1988);
Bresnick v. Franklin Capital Corp., 77 A.2d 53, 56 (N.J. Super.
App. Div. 1951), aff’d, 81 A.2d 6 (1951) (per curiam). Directors
must act in the best interests of a corporation’s shareholders, but
a wholly-owned subsidiary has only one shareholder: the parent.
There is only one substantive interest to be protected, and hence
“no divided loyalty” of the subsidiary’s directors and no need for
special scrutiny of their actions. Bresnick, 77 A.2d at 56; see
also Anadarko Petroleum, 545 A.2d at 1174. The VFI directors
looked out only for Campbell’s interest because, substantively,
that was their duty; whether they thought they were acting in the
interest of VFI or Campbell “seems inconsequential.” Bresnick,
77 A.2d at 57.
VFB argues that Bresnick and Anadarko have not been
followed and are bad law, urging that they would deny a wholly-
owned subsidiary standing to sue its directors for a breach of
fiduciary duty. But the two cases do not address the subsidiary’s
distinct legal existence and standing to enforce its directors’
duties, a bedrock principle of corporate law. Rather, they
address the distinct question of what duties a director owes the
subsidiary. See In re Scott Acquisition Corp., 344 B.R. 283, 287
(Bankr. D. Del. 2006); First Am. Corp. v. Al-Nahyan, 17 F.
Supp. 2d 10, 26 (D.D.C. 1998). Corporate duties should be as
broad as their purpose requires, but it makes no sense to impose
a duty on the director of a solvent, wholly-owned subsidiary to
be loyal to the subsidiary as against the parent company. None
of the cases VFB cites convinces us that the New Jersey
Supreme Court would impose such a duty.
A duty of loyalty against the parent should arise whenever
the subsidiary represents some minority interest in addition to
the parent. That could happen if the subsidiary were not wholly-
owned, see Summa Corp., 540 A.2d at 407, but VFB concedes
that Campbell was VFI’s sole stockholder at the time of the spin.
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It could also happen if the subsidiary were insolvent. Directors
normally owe no duty to corporate creditors, but when the
corporation becomes insolvent the creditors’ investment is at
risk, and the directors should manage the corporation in their
interests as well as that of the shareholders. Bd. of Trustees of
Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d
164, 173 (3d Cir. 2002); AYR Composition, Inc. v. Rosenberg,
619 A.2d 592, 597 (N.J. Super. App. Div. 1993); Francis v.
United Jersey Bank, 432 A.2d 814, 824 (N.J. 1981); Whitfield v.
Kern, 192 A. 48, 54-55 (N.J. 1937). In such a situation, the
loyalties of the VFI directors would be divided between
Campbell and the banks that loaned money to VFI as part of the
spin transaction, and the spin would be subject to heightened
scrutiny. See, e.g., Scott Acquisition, 344 B.R. at 288 (“There is
no basis for the principle . . . that the directors of an insolvent
subsidiary can, with impunity, permit it to be plundered for the
benefit of its parent corporation”); In re Sabine, Inc., No. 05-
1019-JNF, 2006 WL 1045712 (Bankr. D. Mass. Feb. 27, 2006)
(refusing to dismiss a complaint alleging that a company looted
its insolvent, wholly-owned subsidiary of cash).
VFB contends that VFI was rendered insolvent by the
spin, but this argument should sound familiar. VFI’s pre-spin
balance sheet contained nothing; its post-spin balance sheet
contained $500 million in debt and the Specialty Foods Division.
As noted above, the district court did not clearly err in valuing
the division at well over $500 million, meaning that VFI’s assets
were easily greater than its debts. In Whitfield v. Kern, the New
Jersey Supreme Court held that corporate duties to creditors arise
in the context of equitable insolvency, “the general inability of
the corporate debtor to meet its pecuniary liabilities as they
mature, by means of either available assets or an honest use of
credit.” 192 A. at 55. The district court did not err under this
test, either, given the market price of VFI’s debt over time. In
June 1999, well after the markets were aware of all information
that might have been concealed about VFI’s condition at the
time of the spin, VFI was able to sell $200 million in unsecured
debt. That debt continued to sell at par value until January of
2000, indicating that until that point VFI’s creditors believed that
VFI would pay its unsecured debt as it came due. The district
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court did not clearly err in concluding that VFI was solvent, and
for that reason VFI’s claim for aiding and abetting a breach of
fiduciary duty must fall.
C. Campbell’s Claims Against the VFI Estate
Finally, we reach VFB’s appeal from the district court’s
allowance of Campbell’s bankruptcy claims. Once a creditor
alleges facts sufficient to support a claim, the claim is prima
facie valid. 11 U.S.C. § 502(a); In re Allegheny Int’l, Inc., 954
F.2d 167, 173 (3d Cir. 1992). Once such a claim is alleged, the
burden shifts to the debtor to produce evidence sufficient to
negate the prima facie valid claim, that is, “evidence equal in
force to the prima facie case.” Allegheny Int’l, 954 F.2d at 173.
Here, VFB says that it objected to Campbell’s claims in its
complaint, but an unverified complaint is not evidence. VFB
also claims that its own sworn answers to Campbell’s
interrogatories explain in detail why each of Campbell’s claims
is not allowable, but it admits that no one put these
interrogatories into the record. The district court could not
consider evidence that was not before it. Its decision to allow
Campbell’s claims was correct.
VFB’s motion to amend the judgment included, in part, a
request to reopen the record to permit it to introduce the verified
interrogatory answers it had failed to submit before. Several
potential problems prevented the relief VFB requested, but we
need only discuss one: VFB filed its notice of appeal on
November 1, 2005, depriving the district court of jurisdiction to
grant its motion. Venen v. Sweet, 758 F.2d 117, 123 (3d Cir.
1985) (holding that the filing of a notice of appeal deprives the
district court of jurisdiction to grant a motion to amend the
appealed judgment). The striking of the motion to amend the
judgment was not in error.
III. Conclusion
For the foregoing reasons, we affirm both the district
court’s judgment and its decision to strike the motion to amend
the judgment.
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