Fraudulent Transfer Analysis Turns Sour

The Third Circuit, on March 30, 2007, affirmed a district court judgment dismissing a $500 million fraudulent transfer and breach of fiduciary duty suit against Campbell Soup Co., the former parent of Vlasic Foods International ('VFI' or the 'debtor'). VFB, LLC v. Campbell Soup Co., 2007 WL 942360 (3d Cir. 3/30/07). VFI's creditors, acting through the reorganized entity, known as VFB, claimed that Campbell's March, 1998 $500 million stock sale (or 'leveraged Spin') of its Specialty Foods Division (including subsidiaries such as Vlasic (pickles) and Swanson (TV dinners)) to VFI, a newly formed, wholly owned subsidiary, was a fraudulent transfer because VFI did not receive reasonably equivalent value and because its $500 million payment rendered it insolvent and under-capitalized. [Note, the creditor body alleging injury consisted primarily of the holders of $200 million in unsecured bonds; a landlord; various former employees; and VFI's trade creditors.] The Third Circuit, however, held that the District Court had properly found the Division acquired by the debtor to be 'worth well in excess' of the $500 million purchase price, and that the debtor was solvent at the time of its 1998 purchase. Relying on the District Court's market capitalization valuation of VFI, the court thus found that the debtor had received reasonably equivalent value and that the debtor's pre-Spin directors had not breached their fiduciary duty to creditors. According to one practitioner, the court's 'reliance on the capital markets ' is a welcome development ' ' C. Ball, 'Court Relies on Markets for Proof of Spin-off's Value,' New York L. J., April 26, 2007, at 5 (hereinafter 'Ball').