what you need to know about fraudulent conveyance law in 2014 live webcast

Speaker Firms and Organization:

Alvarez & MarsalJoseph T. Gardemal III, CPA

Managing Director

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Presented By:

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Partner Firms:

Pepper Hamilton LLPWilliam R. Wagner

Partner

McGuireWoods LLPDion W. Hayes

Partner

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2

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Partner Firm:

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Since its founding in 1834, McGuireWoods LLP has been a leading and well-respected presence in the practice of law. For more than 175 years, the firm has enhanced our capabilities to keep pace with our clients’ needs — both in the United States, as well as in the global marketplace. Today, the firm has more than 900 lawyers in 19 offices in the United States, United Kingdom, Brussels and elsewhere in Europe.

Restructuring and Insolvency Department Overview

Our restructuring and insolvency practice has 40 attorneys and offers a balanced mixture of transactional strength and litigation experience. We represent corporate debtors, secured creditors and unsecured creditors' committees, as well as lenders and trustees in all types of debt restructuring, litigation and bankruptcy reorganization proceedings, including out-of-court workouts.

Representations range from large regional cases to those of national stature, and our practice extends across industry lines to include retail, transportation, real estate, manufacturing, telecommunications, and many other industries. Our clients include a variety of constituencies, including debtors in workouts and reorganizations, creditors’ committees, manufacturers and trade creditors, and financial institutions such as banks, hedge funds, private equity firms, bondholder committees and asset-based lenders. Major recent cases in which the firm has had either debtor or creditor engagements include Lehman Brothers, Inc., Circuit City, AMF Bowling, LandAmerica, MF Global, Enron, Adelphia, Tribune, ASARCO, and the Rothstein Ponzi scheme case.

Partner Firms:

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About Alvarez & Marsal

Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) when conventional approaches are not enough to activate change.

Privately-held since 1983, A&M is a leading global professional services firm that delivers performance improvement, turnaround management and business advisory services to organizations seeking to transform operations, catapult growth and accelerate results through decisive action. Our senior professionals are experienced operators, world-class consultants and industry veterans who draw upon the firm's restructuring heritage to help leaders turn change into a strategic business asset, manage risk and unlock value at every stage.

Global Forensics and Disputes Overview

Partner with the right expert team to navigate through a crisis or assist with a dispute. Alvarez & Marsal sets the standard for delivering results on critical matters. With an increase in the complexity of corporate investigations, regulatory enforcement actions, and high stakes litigation, that ability is more important than ever. From the boardroom to the court room, A&M professionals draw on their deep skills and experience in business investigations, litigation consulting, forensic technology, and expert testimony to provide clients with the solutions they seek to achieve their goals.

Pepper Hamilton LLP is a multi-practice law firm with more than 500 lawyers nationally. The firm provides corporate, litigation and regulatory legal services to leading businesses, governmental entities, nonprofit organizations and individuals throughout the nation and the world.

Our firm has grown from a two-person law office formed in 1890 in Philadelphia to a sophisticated, large law firm with a national and international practice. While much about Pepper Hamilton is new and different from its beginnings, we retain traditional values passed down through the decades: respect for the rule of law, pride in an excellent work product and commitment to the client's cause. Today, Pepper Hamilton is a diverse firm of men and women from a broad spectrum of backgrounds, united in these values.

Start closer to the right answer.®We use the breadth of our practices and the depth of our experience to help clients solve problems and realize business goals.

Brief Speaker Bios:

Dion W. Hayes

Dion serves as chair of McGuireWoods’ 40-attorney restructuring and insolvency department. Since 1992, he has focused his practice on insolvency law and financial restructuring, including bankruptcy, out-of-court workouts, distressed asset acquisitions and recapitalizations, and related litigation. He is experienced in representing corporate debtors, official and unofficial committees of creditors or equity holders, asset acquirers, post-confirmation plan administrators, liquidating trustees, indenture trustees, senior lenders, bond holders, and other stakeholders, in bankruptcy courts and other courts throughout the United States. He has recently appeared in bankruptcy courts and other federal courts in Delaware, Florida, New York, Texas, and Virginia. He also has substantial cross-border insolvency experience.

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Joseph T. Gardemal III, CPA

Joe Gardemal is a Managing Director with Alvarez & Marsal Global Forensic and Dispute Services in Washington, D.C. He is a Certified Public Accountant/Accredited in Business Valuation, a Certified Valuation Analyst, and is Certified in Distressed Business Valuation by the Association of Insolvency and Restructuring Advisors. Mr. Gardemal has over 25 years of experience in forensic accounting, auditing, investigations, and valuation and damages estimation in commercial litigation and bankruptcy matters. He has worked with clients in a wide variety of industries, including insurance and investments; auto manufacturing, distribution and retailing; defense and aerospace; satellite and cable television; financial institutions; education; and pharmaceuticals. He has provided expert testimony in these areas in U.S. State and Federal Courts and in international matters, and has worked on a large number of prominent bankruptcy-related matters, including Lehman Brothers.

Brief Speaker Bios:

William R. Wagner

William R. Wagner is a partner in the Financial Services Practice Group of Pepper Hamilton LLP, resident in the New York office.

Mr. Wagner focuses his practice on complex international and domestic loan workouts, financial restructurings and distressed investments. He has extensive secured and unsecured bank financing experience, including real estate, aircraft, sports lending, acquisition finance, leasing, securitization, structured finance, swaps and derivatives.

Mr. Wagner also represents investment and commercial banks, asset managers, funds and other strategic investors in trades of distressed and par-value loan obligations. He has extensive experience in both foreign and domestic trading markets ranging from individual loan trades to complex portfolio acquisitions and sales.

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► For more information about the speakers, you can visit: http://theknowledgegroup.org/event_name/what-you-need-to-know-about-fraudulent-conveyance-law-in-2014-live-webcast/

http://theknowledgegroup.org/event_name/what-you-need-to-know-about-fraudulent-conveyance-law-in-2014-live-webcast/

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Our panel of key thought leaders and practitioners will offer a discussion of the fundamentals as well as updates regarding the latest and significant issues surrounding this topic. This LIVE webcast aims to help you to avoid common pitfalls and risk issues surrounding Fraudulent Conveyance Law in 2014.

This 2-hour webcast will discuss the following key topics:• New developments in fraudulent conveyance law in 2014• Emerging trends and recent cases• Financial expert aspects of insolvency and valuation issues in fraudulent

conveyance litigation

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Featured Speakers:

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SEGMENT 1:

Dion W. HayesPartnerMcGuireWoods LLP

SEGMENT 2:

SEGMENT 3:

William R. WagnerPartnerPepper Hamilton LLP

Joe GardemalManaging DirectorAlvarez & Marsal

Introduction

Dion serves as chair of McGuireWoods’ 40-attorney restructuring and insolvency department. Since 1992, he has focused

his practice on insolvency law and financial restructuring, including bankruptcy, out-of-court workouts, distressed asset

acquisitions and recapitalizations, and related litigation. He is experienced in representing corporate debtors, official and

unofficial committees of creditors or equity holders, asset acquirers, post-confirmation plan administrators, liquidating

trustees, indenture trustees, senior lenders, bond holders, and other stakeholders, in bankruptcy courts and other courts

throughout the United States. He has recently appeared in bankruptcy courts and other federal courts in Delaware, Florida,

New York, Texas, and Virginia. He also has substantial cross-border insolvency experience.

Dion received his JD from William & Mary Law School and his BA from the University of Virginia. He has been selected for

inclusion in The Best Lawyers in America for Bankruptcy and Creditor/Debtor Rights, “Super Lawyers” for Bankruptcy &

Creditor/Debtor Rights, Banking, Business Litigation, and the "Legal Elite" for Bankruptcy Law.

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SEGMENT 1:


Gold v. First Tennessee Bank Nat’l Assn. (In re Taneja), 743 F.3d 423 (4th Cir. 2014)

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SEGMENT 1:


Taneja – Background

• Vijay Taneja operated FMI, which originated home loans and sold them to investors (secondary purchasers)

• FMI drew on lines of credit extended by ware-house lenders to fund the loans, which line of credit was replenished when FMI sold the loan

• Beginning in 1999, FMI had difficulty selling the loans and began engaging in fraud – selling the same mortgage to several secondary purchasers– having other businesses controlled by Taneja serve as intermediaries

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SEGMENT 1:


Taneja – Background (cont’d)

• First Tennessee Bank provided FMI with a $15mm line of credit in July 2007

• By Oct. 2007, FMI had drawn $12mm on the line of credit, and the bank suspended advances

• In Nov. 2007, FMI explained it couldn’t sell the loans due to inadequate documentation resulting from the unexpected departure of its loan processor

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SEGMENT 1:


Taneja – Background (cont’d)

• In Jan. 2008, FMI stated it wanted to hold the loans until their value increased, suggested a “collateral swap,” and denied that any fraud was involved; the bank agreed to forbear

• In April 2008, the bank learned the deeds securing its notes were not valid

• In June 2008, Taneja and FMI filed for bankruptcy

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SEGMENT 1:


Taneja – Good Faith Defense

• The trustee brought suit under 11 U.S.C. § 548 seeking return of $4mm in allegedly fraudulent transfers

• First Tennessee pled good faith as an affirmative defense

• Sec. 548(c) provides: “a transferee… of such a transfer…that takes for value and in good faith… may retain any interest transferred… to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.”

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SEGMENT 1:


Taneja – Good Faith Standard

HELD: The bankruptcy court correctly applied the good faith standard from In re Nieves, 648 F.3d 232 (4th Cir. 2011):

• Under the subjective prong, “the honesty” and “state of mind” of the transferee are considered

• Under the objective prong, the court is required to determine what the transferee knew or should have known taking into consideration the customary practices of the relevant industry

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SEGMENT 1:


Introduction

HELD: The bankruptcy court did not clearly err in finding that the bank was entitled to the good faith defense

• Expert testimony was not required on the objective component of the defense; the evidentiary standard was satisfied with testimony from the bank’s employees

• Delay in providing collateral documents was not a red flag—delays are typical in new relationships and the most vital document, the note, was always provided

• Failure to sell the loans in the secondary market was not a red flag given that 2007-2008 was an “extraordinary time” for the warehouse lending industry

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SEGMENT 1:


Taneja – Good Faith Outside the 4th Circuit

The majority of courts apply an objective standard, looking to what the transferee objectively “knew or should have known” regarding the fraud

• Hayes v. Palm Seedlings Partners-A (In re Agric. Research & Tech. Group, Inc.), 916 F.2d 528 (9th Cir. 1990); Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348 (8th Cir. 1995)

Some courts apply the objective standard to a two-part test, examining:– whether the transferee had information that put it on inquiry notice of the transferor’s insolvency

or of the fraudulent purpose behind the transfer; – If inquiry notice existed, whether the transferee demonstrated that a diligent investigation would

not have led to discovery of the fraud

• Christian Bros. High School Endowment v. Bayou No Leverage Fund LLC (In re Bayou Group, LLC), 439 B.R. 284 (S.D.N.Y. 2010); Horton v. O’Cheskey (In re Am. Hous. Found.), 544 Fed. Appx. 516 (5th Cir. 2013)

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SEGMENT 1:


Tronox Inc., et al. v. Kerr McGee Corp. (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. 2013)

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SEGMENT 1:


Tronox – Background

• Oil and gas exploration company founded in 1929

• By November 2005, Old Kerr-McGee had two businesses:

(1) oil and gas exploration (“E&P”)

($1.8B annual profit)

(2) titanium dioxide ($108mm annual profit)

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SEGMENT 1:


Tronox – Background (cont’d)

• Burdened by enormous legacy environmental and tort liabilities – 2,700 environmental sites – $160mm/yr on remediation

• In 2000, Old Kerr-McGee began to plan transactions that would separate the E&P business from the legacy liabilities

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SEGMENT 1:


Tronox – Separation of the E&P Business

• Effective Dec. 31, 2002: – New holding company formed (New Kerr-McGee)– Ownership interests in the E&P business transferred to new holding company – Old Kerr-McGee (which became Tronox) left with titanium dioxide business and all legacy

liabilities

• Separation finalized Nov. 28, 2005 through spinoff

• Until separation, companies were consolidated and operations funded through centralized cash system

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SEGMENT 1:


Tronox – Chapter 11 Filing

• Tronox filed for bankruptcy in Jan. 2009

• Tronox filed a suit against New Kerr-McGee asserting, inter alia, claims for actual and constructive fraudulent transfers under the Okla. Uniform Fraudulent Transfer Act (UFTA)

• Environmental authorities and tort plaintiffs agreed to accept as their bankruptcy distribution the proceeds from Tronox’s suit

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SEGMENT 1:


Tronox – Statute of Limitations Had Not Expired

The Court rejected Defendants’ argument that the 4 year limitations period began to run from the internal reorganization in 2002, reasoning:

1. Separation was not complete until 2005

2. Tronox suffered no injury in 2002

3. The 2002 transfers were part of a “single integrated scheme”

4. As a matter of policy

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SEGMENT 1:


Tronox – Actual Fraud

Held: The transfers of property that culminated in the spinoff were made with actual intent to hinder or delay creditors

• The “obvious consequence” of the transfers was that the legacy creditors would not be able to claim against substantially all of the Kerr-McGee assets

• Certain badges of fraud were also present

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SEGMENT 1:


Tronox – Badges of Fraud

• Transfer was to an insider• Debtor retained possession or control of property transferred• Transfer was not disclosed or was concealed• Before transfer was made, debtor had been sued or threatened with suit• Transfer was for less than reasonably equivalent value• Debtor was or became insolvent as a consequence of transfer

“Any one of these . . . badges of fraud may stamp the transaction as fraudulent.”

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SEGMENT 1:


Tronox – Burden of Proof

Defendants failed to rebut the clear and convincing evidence that supported the Court’s finding of intent to hinder and delay the legacy creditors

Defendants had not established: • A good faith belief that Tronox would be able to support the legacy liabilities• A “legitimate supervening purpose” for the transfer; although Defendants identified a legitimate

business reason for separating the businesses, it had not identified a legitimate business reason for imposing all of the legacy liabilities on Tronox

• That its conduct should be viewed as lawful management of the legacy liabilities

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SEGMENT 1:


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Introduction

Joe Gardemal is a Managing Director with Alvarez & Marsal Global Forensic and Dispute Services in Washington, D.C. He is a Certified Public Accountant/Accredited in Business Valuation, a Certified Valuation Analyst, and is Certified in Distressed Business Valuation by the Association of Insolvency and Restructuring Advisors. Mr. Gardemal has over 25 years of experience in forensic accounting, auditing, investigations, and valuation and damages estimation in commercial litigation and bankruptcy matters. He has worked with clients in a wide variety of industries, including insurance and investments; auto manufacturing, distribution and retailing; defense and aerospace; satellite and cable television; financial institutions; education; and pharmaceuticals. He has provided expert testimony in these areas in U.S. State and Federal Courts and in international matters, and has worked on a large number of prominent bankruptcy-related matters, including Lehman Brothers.

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SEGMENT 2:


CONTENTS

I. Tronox Case Overview

II. Forensic Accounting – Constructive Fraud

III. Solvency Analysis – Balance Sheet Test

IV. Valuation Of Assets Transferred

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SEGMENT 2:


Tronox Case Overview

Kerr-McGee operated two core businesses: oil and gas exploration and production; and chemical production.

History– Founded in 1929, Kerr-McGee operated various businesses, including wood-treating, uranium mining and

processing, thorium processing, and ammonium perchlorate manufacturing. – By the early 2000s, Kerr-McGee had discontinued most of its historic business operations but remained

responsible for massive legacy environmental and tort liabilities related to those businesses. – At that time, Kerr-McGee operated two core businesses: oil and gas exploration and production; and

chemical production.

Between 2002 and 2005, Kerr-McGee transferred the oil and gas assets to a “new” Kerr-McGee.

Spun off the remaining assets (a small, cyclical chemical business with 85-odd years of legacy liabilities, which was re-named Tronox) in 2006.

A few months later, Anadarko acquired Kerr-McGee (and the oil and gas business) for $18 billion.

Meanwhile, as a result of the transactions, Tronox was rendered insolvent and unable to pay for its legacy liabilities, and ultimately filed for bankruptcy in 2009.

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SEGMENT 2:

Cited from http://www2.epa.gov/enforcement/case-summary-settlement-agreement-anadarko-fraud-case-results-billions-environmental#fraud


Tronox Case Overview

Tronox Inc., et al., v. Kerr-McGee Corp., et al., (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. 2013).

The Bankruptcy Court held that:

– Spinoff transaction that defendants orchestrated to free substantially all of their assets from 85 years of environmental and tort liabilities, while assigning such liabilities to undercapitalized debtors, was effected with actual intent to hinder or delay creditors;

– Court did not have to conduct its ‘‘reasonably equivalent value’’ and ‘‘insolvency’’ analyses, for purposes of adjudicating constructive fraudulent transfer claims, on strict debtor-by-debtor basis;

– Debtors’ ability to survive for several years following challenged transaction, and to complete initial public offering (IPO) and to issue $350 million in unsecured bond debt, was insufficient to establish their solvency at time of transaction.

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SEGMENT 2:

Cited from Tronox Inc., et al., v. Kerr-McGee Corp., et al., (In re Tronox Inc.), 503 B.R. 239 (Bankr. S.D.N.Y. 2013).


Forensic AccountingConstructive Fraud

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SEGMENT 2:


Forensic Accounting – Badges of Fraud

Badges of Fraud: Circumstances so commonly associated with fraudulent transfers that their presence gives rise to an inference of intent.

Badges of fraud are not conclusive, but they “help to ‘focus the inquiry on the circumstances that suggest a conveyance was made with fraudulent intent..”

The following factors supported the conclusion that the Defendants acted with actual intent to hinder or delay creditors:

– Factor 1: The transfer or obligation was to an insider.

– Factor 2: The debtor retained possession or control of the property transferred after the transfer.

– Factor 3: The transfer or obligation was disclosed or concealed.

– Factor 4: Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.

– Factor 5: The transfer was of substantially all of the debtor’s assets.

– Factors 8 & 9: Whether the consideration received by the debtor was reasonably equivalent to the value of the property conveyed and whether the debtor was or became insolvent as a consequence of the transfer.

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SEGMENT 2:



Forensic Accounting – Constructive Fraud

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SEGMENT 2:



To prevail on constructive fraud, the plaintiff must prove:

– a conveyance of an interest in property;

– for less than reasonably equivalent value;

– that rendered the transferor insolvent, inadequately capitalized, or unable to pay its debts as they became due

These requirements mirror Factors 8 and 9 in the Oklahoma UFTA’s badges of fraud.

Solvency AnalysisBalance Sheet Test

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SEGMENT 2:


Solvency Analysis – Balance Sheet Test

Insolvency defined in Oklahoma UFTA and Bankruptcy Code

The Oklahoma UFTA defines insolvency as follows for a non-partnership debtor:

– A debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.

– A debtor who is generally not paying his debts as they become due is presumed to be insolvent…– Assets pursuant to the provisions of this section do not include property that has been transferred,

concealed, or removed with intent to hinder, delay or defraud creditors or that has been transferred in a manner making the transfer voidable pursuant to the provisions of the Uniform Fraudulent Transfer Act.

The Bankruptcy Code at § 101(32) defines insolvent, in relevant part, as follows:

– With reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation.

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SEGMENT 2:




The relevant analysis of solvency for fraudulent conveyance purposes in Tronox was a “balance sheet test,” examining whether debts in aggregate are greater than assets in the aggregate.

The Public Market

– Defendants’ reliance on the ‘‘market’’ and the fact that lenders loaned $450 million in senior secured debt and that Tronox was also able to sell into the market $350 million in bonds and $224.7 million in stock is unavailing…

» The debt that Tronox issued was secured by all of the assets of all of the Tronox companies, and …would come first in any bankruptcy or liquidation of the enterprise.

» The projections on which the IPO was based were inflated, sell-side projections…key numbers were imposed at the direction of Kerr–McGee’s chief financial officer.

» Financial statement reserves for environmental liabilities are of no probative value in a solvency analysis.

» The way the market might look at [these] legacy liabilities, certainly the way GAAP looks at them is different than the determination of a claim under… the Oklahoma UFTA.

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SEGMENT 2:





Defendants’ Market Defense

– Defendants assert, ‘‘In this trial, the enormous body of contemporaneous market evidence of solvency was far stronger than in VFB, Iridium and CarCo - all of which found for defendants on solvency.’’

– Defendants assert the evidence at trial established two critical bookends to the public market.

» On the one hand is Apollo’s signed, fully-financed offer to purchase the Chemical Business, based on six months and millions of dollars in diligence.

» On the other hand are the compelling, contemporaneous statements and actions of Tronox’s own officers and managers, including statements subject to the securities laws— all of which are consistent with the public market evidence of solvency.

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SEGMENT 2:





The Allegedly Sophisticated Market Players

– Defendants rely on Apollo…[and] on the participants in the market who performed independent due diligence that extended well beyond public information.

» However, these ‘‘market participants’’ had interests which were unique and caused them to be hardly representative of ‘‘the market.’’

» The Secured Lenders could be confident that they would be paid before any legacy liability claims—as was indeed the case in Tronox’s bankruptcy.

» Apollo did not make a ‘‘final and binding’’ offer for Tronox of $1.3 billion.

Statements and Actions of Tronox Management

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SEGMENT 2:





Debts at the Date of the IPO “at a Fair Valuation”

– Under the UFTA, there is no substitute for performing an analysis of Tronox’s assets as at the date of the IPO and measuring them against its liabilities, both at a fair value…this case is about environmental liabilities.

– Plaintiffs’ Environmental Expert’s analysis is the only comprehensive valuation in the vast record of this case of Tronox’s environmental liabilities.

– Defendants’ failure, at any time, either before or after this case was filed, to come forward with a comprehensive analysis of the environmental liabilities that Kerr–McGee had imposed on Tronox, is a major failure of proof.

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SEGMENT 2:



Solvency Analysis – Unreasonably Small Capital/Inability to Pay Debts

Unreasonably Small Capital Test

– The Court accepted the testimony of Plaintiffs’ expert that Tronox’s projections were unreasonable and that its capital was inadequate, “burdened as it was by the legacy liabilities.”

Inability to Pay Debts as They Come Due

– The Court found that Plaintiffs had met their burden of proof, in part because “Defendants never even performed an analysis of Tronox’s ability to satisfy the legacy liabilities.”

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SEGMENT 2:



Valuation Analysis

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SEGMENT 2:


Valuation Analysis

Income Approaches include Discounted Cash Flow and Capitalization of Earnings; Market Approaches include Comparable Company Analysis and Comparable Transaction Analysis.

In this case, standard approaches in determining business enterprise value (BEV) of assets transferred include:

– A discounted cash flow analysis: Under a DCF, the company's debt-free cash flow is projected over a period of time until such time that the company reaches a stabilized level of growth.

– A comparable company analysis: Publicly-traded companies with similar operating characteristics that are in the same or similar industry as the target company to be valued are identified. Based on the identified companies, various value multiples are derived and applied to the target company.

– A comparable transaction analysis: Similar to the comparable company analysis, value indicators are used to estimate the values of the target company.

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SEGMENT 2:


Valuation Analysis – Key Issues

Projected pricing of titanium dioxide

Valuation of legacy environmental liabilities

– Expert testimony

– Third-party due diligence

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SEGMENT 2:


Valuation Analysis

DCF determines BEV by examining the earning capacity of the enterprise over a reasonable period of time, adds a residual or terminal value to extend the analysis beyond the chosen period, and then discounts the result to present value.

Discounted Cash Flow Analysis:

– Defendant expert’s calculation of $1.7 billion was not persuasive.

– Plaintiff’s expert did not start his discounted cash flow analysis with the company’s internal projections. He adjusted them downwards for several reasons including:

» The financial projections in Tronox’s S–1 were inflated ‘‘sell-side’’ projections based on overly optimistic assumptions.

» The IPO projections were unrealistic when compared with Tronox’s historical performance.

» Tronox TiO2 business peaked early in 2005 and was on the downturn by the time of the IPO in November.

– Defendant’s expert simply used the management projections…without subjecting them to any analysis or considering the chemical business’ historical performance.

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SEGMENT 2:



Valuation Analysis

The comparable company analysis attempts to determine value by reference to the value of companies in the same line of business.

Comparable Company Analysis:

– Defendant expert’s conclusion that Tronox’s BEV based on the comparable company analysis was of $1.48 to $1.6 billion was not persuasive.

– Defendants’ expert was flawed by his choice of companies for comparative purposes…His list of comparable companies included:

» DuPont, vastly larger and more diversified than Tronox;

» Diversified companies such as Cabot Corp. and Eastman Chemical; and

» Specialty chemical companies (such as Hercules) which typically trade at a higher multiple than commodity chemical companies like Tronox.

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SEGMENT 2:



Valuation Analysis

The comparable transaction analysis attempts to determine value by reference to the merger and acquisition activity of companies in the same line of business.

Comparable Transaction Analysis:

– Defendants’ expert analysis…resulted in a BEV of $1.5 billion, but this analysis was flawed by weaknesses in the third parties’ projections.

– Defendants’ expert included transactions involving:

» An Indian fertilizer company

» A Swiss company making waterproofing materials and parts for car manufacturers, and

» A company making foam-related products for diapers and adult incontinence products.

– Defendants’ expert purported to confirm his results by using what he calculated as ‘‘third-party projections’’ of Tronox’s future income instead of Tronox’s internal projections.

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SEGMENT 2:



Valuation Analysis (in Billions)

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SEGMENT 2:



Approach Plaintiff Defendant Court

Assets

Discounted Cash Flow $1.01 $1.70

Comparable Company $1.00 $1.54

Comparable Transaction $1.10 $1.70

Average/Conclusion $1.03 $1.70 $1.03

Non-Operating Assets $0.19 $0.11 $0.19

Total Assets $1.22 $1.81 $1.22

Liabilities $2.17 $1.02 $2.07

Net Assets -$0.95 $0.79 -$0.85

Introduction

William R. Wagner is a partner in the Financial Services Practice Group of Pepper Hamilton LLP, resident in the New York

office.

Mr. Wagner focuses his practice on complex international and domestic loan workouts, financial restructurings and

distressed investments. He has extensive secured and unsecured bank financing experience, including real estate, aircraft,

sports lending, acquisition finance, leasing, securitization, structured finance, swaps and derivatives.

Mr. Wagner also represents investment and commercial banks, asset managers, funds and other strategic investors in

trades of distressed and par-value loan obligations. He has extensive experience in both foreign and domestic trading

markets ranging from individual loan trades to complex portfolio acquisitions and sales.

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SEGMENT 3:


Section 548 - Federal Cause of Action for Avoidance of Fraudulent Transfers

• 548(a)(1)(A) – Intentional Fraud

− Permits the trustee to avoid any transfers made or obligations incurred by the debtor within two years of the petition date where there was “actual intent to hinder, delay or defraud” any entity to which the debtor was or became indebted at the time of or after the transfer or obligation.

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SEGMENT 3:


Section 548 - Federal Cause of Action for Avoidance of Fraudulent Transfer

• 548(a)(1)(B) – Constructive Fraud

− Permits the trustee to avoid transfers or obligations where the debtor received “less than reasonably equivalent value in exchange” and either:

• was insolvent or became insolvent;

• was left with unreasonably small capital;

• intended to incur or believed it would incur debts beyond its ability to pay; or

• made the transfer or incurred the obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

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SEGMENT 3:


Section 544(b) Avoidance Powers

• Provides that the trustee “may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law” by a creditor with an allowable unsecured claim

• Empowers the trustee to utilize any legal theory of recovery that a creditor could assert under state law, such as a state’s version of the Uniform Fraudulent Transfer Act or the Uniform Fraudulent Conveyance Act or other applicable law

− Creditors of the debtor may also have a cause of action under state fraudulent transfer law

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SEGMENT 3:


Section 546 – Safe Harbor Provisions

• Notwithstanding the trustee’s avoidance powers, including under sections 544 and 548, the trustee cannot avoid certain types of transactions in the financial markets made by or to various enumerated participants, unless the transaction is the product of actual fraud under section 548(a)(1)(A):

− Section 546(e) – protects margin payments and settlement payments

− Section 546(f) – protects repurchase agreements

− Section 546(g) – protects swap agreements

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SEGMENT 3:


Recent S.D.N.Y. Jurisprudence

ISSUE

• Do section 546’s safe harbor provisions bar fraudulent transfer claims under state law related to the financial transactions otherwise protected from avoidance under the Bankruptcy Code’s safe harbor provisions?

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SEGMENT 3:


Recent S.D.N.Y. Jurisprudence

ANSWER

• Three recent cases have created a split of authority in the Southern District of New York:

− Whyte v. Barclays Bank PLC, 494 B.R. 196 (S.D.N.Y. 2013)

− In re Tribune Fraudulent Conveyance Litig., 499 B.R. 310 (S.D.N.Y. 2013)

− Weisfelner v. Fund 1 (In re Lyondell Chemical Co.), 503 B.R. 348 (Bankr. S.D.N.Y. 2014)

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SEGMENT 3:


Barclays Bank (Judge Rakoff)

• Background

− a post-confirmation litigation trust was assigned “any and all” of certain debtors’ and creditors’ claims

− the litigation trustee sought to avoid a pre-petition swap transaction under state fraudulent transfer law

− the trustee tried to get around the safe harbor for swap transactions under section 546(g) by arguing that she was not pursuing it under section 544, but rather as assignee of the creditor claims assigned to the trust since section 546(g) only applies to estate representatives exercising federal avoidance powers, it should not apply to claims asserted by creditors

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SEGMENT 3:


Barclays Bank (Judge Rakoff)

• Holding

− section 546(g) implicitly preempts state law fraudulent conveyance actions seeking to avoid swap transactions

− permitting a trustee to avoid a swap transaction by a state fraudulent conveyance action would stand as a major obstacle to the purposes and objectives of Congress in passing section 546(g)

− the safe harbors were intended to stabilize the financial markets in the event of a major bankruptcy in the industry, and the “facial breadth of these provisions, and the corresponding legislative history, make plain that Congress intended to place swap transactions totally beyond the inherently destabilizing effects of a bankruptcy and its attendant litigation.”

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SEGMENT 3:


Tribune (Judge Sullivan)

• Background

− the Creditors’ Committee (succeeded post-confirmation by a litigation trust) and individual creditors of the debtor sought, by separate actions in more than twenty state and federal courts, to avoid as fraudulent transfers funds distributed to individuals and entities bought out in the course of a pre-petition leveraged buyout of the debtor

− the Committee sought to avoid the distributions as intentionally fraudulent transfers under section 548(a)(1)(A), while the individual creditor actions sought avoidance under state law

− the defendants argued that the individual creditors’ claims under state law were prohibited under section 546(e)’s safe harbor for settlement payments, and cited Barclays Bank to argue that Congress impliedly preempted such claims by enacting section 546(e) because the claims would frustrate the purpose of the safe harbor to provide certainty and stability to securities transactions

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SEGMENT 3:


Tribune (Judge Sullivan)

• Holding

− section 546(e) addresses its prohibition only to the bankruptcy trustee, and Congress did not impliedly preempt creditors’ state law constructive fraud claims

− Congress did not enact section 546(e) to protect market stability to the exclusion of all other policies, and other sections of the Code show it knew how to expressly preempt creditor actions where desired

− Barclays Bank was distinguishable because unlike the individual creditors in Tribune, there the litigation trust served in the capacity of both the bankruptcy trustee and the representative of outside creditors, and therefore could not pursue as the creditors’ representative an avoidance claim it was barred from pursuing as the trustee

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SEGMENT 3:


Lyondell (Judge Gerber)

• Background

− a Creditors’ Trust was assignee under the debtor’s reorganization plan of claims by certain classes of creditors, and sought to avoid distributions received by the debtor’s former shareholders in a prepetition leveraged buyout the claims were asserted solely under state law

− the defendants argued that (i) section 546(e)’s safe harbor for settlement payments provided a substantive defense to the state law claims just as if they had been brought under the Code, and (ii) the failure of states to provide a similar safe harbor in their constructive fraudulent transfer avoidance statutes rendered the statutes preempted by section 546(e)

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SEGMENT 3:


Lyondell (Judge Gerber)

• Holding

− followed Tribune in holding that the plain language of section 546(e) renders it inapplicable to state law claims brought on behalf of individual creditors

− also followed Tribune in finding that Congress did not impliedly preempt state fraudulent transfer law through section 546(e) because the Bankruptcy Code entails an array of policy decisions in addition to protecting markets from systemic risk, including the avoidance of insolvent entities’ transfers where they are at the expense of the creditor community and the absolute priority rule

− Court drew a distinction between protecting financial markets and protecting investors in public markets (“Nothing in the legislative history of the existing law evidences a desire to protect individual investors who are beneficial recipients of insolvents’ assets.”).

− Court found Barclays Bank both distinguishable and its analysis “to be less thorough than that of Tribune, and … flawed.”

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SEGMENT 3:


Outlook for Safe Harbor Defenses in S.D.N.Y.

• Barclays Bank remains good law and offers some support for the argument that state law constructive fraud claims are preempted by section 546’s safe harbor provisions where one of the enumerated transactions is implicated

• HOWEVER, the tide seems to be turning in light of Tribune and Lyondell, which are both more recent than Barclays Bank and either distinguish or criticize its reasoning

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SEGMENT 3:


Outlook for Safe Harbor Defenses in S.D.N.Y.

• the current state of play may be that while there is a split of authority in the district, future courts are more likely to follow Judge Sullivan and Judge Gerber in finding that section 546 does not apply to state law fraudulent transfer claims and does not preempt them

• Note that both Barclays Bank and Tribune have been appealed to the Second Circuit and will be heard in tandem, so stay tuned for a resolution

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SEGMENT 3:


► You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type your

question in the box that appears and click send.

► Questions will be answered in the order they are received.

Q&A:

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SEGMENT 1:


SEGMENT 2:


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