Contributed by Andrea Saavedra
In light of the Third Circuit’s recent decision on valuation, we here at the Weil Bankruptcy Blog thought that a brief reflection on the Third Circuit’s last definitive statement on valuation in the context of fraudulent transfer actions – VFB LLC v. Campbell Soup Company, 482 F.3d 624 (3d Cir. 2007) – would be merited.
As many bankruptcy practitioners and buffs may recall, when VFB was issued, the principle it articulated – that, all else being equal, valuations based on contemporaneous market evidence, such as the trading stock price of a debtor at the time of a leveraged spin-off, is better evidence of value than expert testimony or even contemporaneous projections by management – sent shudders down the spine of trustees and creditor committees everywhere (not to mention expert witnesses!) trying to undo certain leveraged transactions that, with the benefit of hindsight, proved disastrous to the debtor’s business. What made VFB so noteworthy was that the Third Circuit found that evidence of market manipulation by Campbell Soup of VFB’s books prior to the spin-off was of no consequence to its holding that the debtor was solvent at the time of the spin-off because such manipulation had been revealed prior to the transaction and still the market capitalization of VFB was greater than the debt it was set to assume. Because the market knew of the manipulation – and still bought VFB stock – the Third Circuit did not find that such manipulation tainted the validity of the market as the best measure of value.
In the five years since VFB was decided, we have faced (and are still recovering from) the largest market crisis since the Great Depression. Given daily allegations of market manipulation due to purported asymmetry of information as between retail and individual investors, it may be valid to ask just how much longer a decision such as VFB can stand untested when the market is tainted by something less than fraud. In the interim, the decision continues to cast a long shadow on those looking to the laws of fraudulent transfer for assistance in recouping losses resulting from similarly leveraged transactions.