In re 3DFX Interactive, Inc., Bankruptcy No. 02-55795-RLE.

Citation389 B.R. 842
Decision Date30 April 2008
Docket NumberBankruptcy No. 02-55795-RLE.,Adversary No. 03-5079.
CourtUnited States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Northern District of California
PartiesIn re 3DFX INTERACTIVE, INC., Debtor. William A. Brandt, Jr., Trustee, Plaintiff, v. nVidia Corporation, a Delaware Corporation; et al., Defendants.

Aron M. Oliner, Law Offices of Duane Morris, Craig C. Chiang, Robert E. Izmirian, Buchalter, Nemer, Fields and Younger, Kim Arnone, Law Offices of Buchalter Nemer, San Francisco, CA, for Plaintiff.

Frederick D. Holden, Leah Nutting, Robert P. Varian, Ruth Kwon, Orrick, Herrington and Sutcliffe, San Francisco, CA, for Defendants.

MEMORANDUM DECISION AFTER TRIAL

ROGER L. EFREMSKY, Bankruptcy Judge.

Before the Court is the First Amended Complaint (the "Complaint") filed by William A. Brandt, Jr., the Trustee of the above-captioned chapter 11 estate of 3dfx Interactive, Inc. (the "Trustee" and "3dfx"), against nVidia Corporation and nVidia U.S. Investment Company (collectively, "nVidia") for avoidance of a fraudulent conveyance. This phase of the case has been tried and submitted for decision.

The Trustee is represented by Peter G. Bertrand, Richard C. Darwin and Kim Y. Arnone of Buchalter Nemer. nVidia is represented by Robert P. Varian, Karen Johnson-McKewan and James N. Kramer of Orrick, Herrington & Sutcliffe LLP.

This Memorandum Decision constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

I. FACTS
A. Procedural Background
1. The Adversary Proceeding

3dfx filed this chapter 11 case on October 15, 2002, and the Trustee was appointed January 24, 2003. On February 24, 2003, the Trustee commenced this adversary proceeding.

The Complaint states four claims for relief based on California Civil Code §§ 3439.04(a) and (b) and § 3439.05 (California's Uniform Fraudulent Transfer Act (the "UFTA")), applicable here through Bankruptcy Code § 544(b)(1). The Trustee alleges that in the transaction between nVidia and 3dfx (the "Transaction") documented in the Asset Purchase Agreement dated December 15, 2000 (the "APA"), nVidia paid less than reasonably equivalent value for what it received. nVidia responded to the Complaint and the parties have engaged in extensive discovery.

In August 2005, the Trustee filed a motion for summary judgment which nVidia opposed. On December 22, 2005, the Court issued an order granting in part and denying in part the Trustee's motion (the "Summary Judgment Order"). Docket no. 172. The Summary Judgment Order provides that judicial estoppel precludes nVidia from asserting in this action that the "transaction value" is anything other than $108 million. The Court denied summary judgment regarding what specific assets were transferred in the Transaction and the value, if any, to be ascribed to them.

2. The Questions to be Tried

On January 26, 2007, the parties filed a Joint Statement of Legal and Factual Questions for Trial (the "Joint Statement"). Docket no. 237. On January 31, 2007, the Court issued a Pre-Trial Order establishing a schedule for trial and the manner in which this valuation phase of the trial would be handled. Docket no. 253. A timed trial took place between March 21, 2007 and April 5, 2007. Posttrial briefing is complete and the matter is ready for decision.

Pursuant to the Joint Statement and Pre-Trial Order, the issues, to be determined at this phase of the case are:

In the Transaction:

1. What was transferred and/or surrendered by 3dfx to nVidia?

2. With respect to what was transferred and/or surrendered, what is subject to avoidance under applicable state and federal fraudulent transfer statutes?

3. With respect to what is identified in the answer to the second question, what was the fair market value as of the date it was transferred and/or surrendered?
4. Was the $70 million paid by nVidia reasonably equivalent to the fair market value identified in the answer to the third question?

3. The Witnesses

nVidia offered direct testimony by declarations from the following witnesses which were admitted into evidence:

1. Jen-Hsun Huang, president and chief executive officer of nVidia.

2. Christine Hoberg, former chief financial officer of nVidia.

3. Alex Leupp, former president and chief executive officer of 3dfx.

4. Phil Carmack, senior vice president of the handheld GPU business unit of nVidia, former vice president of hardware engineering at 3dfx and former executive vice president of research and development at 3dfx.

5. Paul D. Carmichael, former in-house counsel for nVidia.

6. Mark Maxson, a principal in the valuation practice at Deloitte & Touche.

7. Mark Waissar, former vice president at Morgan Stanley.

nVidia offered direct testimony by declarations and reports from the following expert witnesses which were admitted into evidence:

1. Roger J. Grabowski, regarding valuation issues.

2. Roman Weil, regarding accounting issues.

3. Jon G. Peddie, regarding graphics industry issues.

4. Charles D. Murphy, III, regarding investment banking issues.

5. Matthew R. Lynde, regarding patent damages issues.

The Trustee offered direct testimony by declarations and reports from the following expert witnesses which were admitted into evidence:

1. Richard Ferraro, regarding industry issues.

2. Michael J. Wagner, regarding valuation issues.

The Trustee also offered testimony by designated deposition excerpts for Paul Carmichael, Richard Heddelson, Steve Pettigrew as part of his case-in-chief.

The Court heard testimony from nVidia's experts Messrs Weil, Peddie, and Murphy and from the Trustee's experts Messrs Ferraro and Wagner.

The Court also heard testimony from Jen-Hsun Huang, Christine Hoberg, Alex Leupp, Mark Maxson, and Richard Cording (the former controller of nVidia).

Designated deposition excerpts were also admitted into evidence. Before trial, both parties filed evidentiary objections to certain parts of the declarations and experts' reports. The Court ruled on these objections, in part, before trial began.1 To the extent the Court relies upon any evidence for which there may have been a pending objection, any such objection is overruled.

B. Background Regarding the Parties
1. The Brief Life of 3dfx

3dfx was a publicly traded semiconductor company incorporated in California in 1994. Its initial public offering took place in April 1997. 3dfx described itself as part of the world of "interactive, electronic entertainment" that had started with coin-operated arcade games, then moved into home entertainment through the advent of inexpensive, dedicated home game consoles that attached to televisions and then progressed to games playable on personal computers. Ex. 5011, pp. 4-5.2 3dfx claimed that its products were used in more than 700 titles for personal computer games and more than 20 titles for arcade games. Game titles included Everquest, Alien vs. Predator, Hydro Thunder, and Savage Quest. Ex. 5011, p. 10.3

3dfx first shipped its graphics products (known as the Voodoo Graphics chipset) in September 1996 and introduced subsequent versions in 1997, 1998 and 1999 (with variations on the Voodoo name, such as the Voodoo 2, 3, 4, and 5, Voodoo Rush and Voodoo Banshee). 3dfx's target market had historically been the retail market for add-in graphics cards and 3dfx had devoted significant energy to establishing 3dfx and Voodoo as brand names in the retail market. Ex. 5011, pp. 6-8. At the time of the Transaction, Voodoo Rampage was in development but had not been completed. Voodoo Rampage had been "taped out" in early December 2000 but it could have been as much as another year before it would have been ready for commercial exploitation. RT 1503-1505 and 1319-1321.

2. 3dfx Merger with STB Systems, Inc.

Before May 1999, 3dfx was what is known as a "merchant chip" business—it designed and sold graphics chips to a variety of companies who then used the chips in their own products. In May 1999, 3dfx completed its acquisition of STB Systems, Inc. ("STB"), a Texas based graphics board company with a manufacturing facility in Mexico. Ex. 5011, pp. 3, 14. The purpose of the 3dfx/STB merger was to allow 3dfx an avenue to deliver the 3dfx graphics chip directly to the retail/distributor market on a graphics board designed and built by 3dfx rather than on graphics cards designed by various third party companies. Ex. 5011, p. 3. The acquisition of STB fundamentally changed 3dfx's business strategy. Alex Leupp, former chief executive officer of 3dfx, characterized the STB acquisition as a "mistake." Ex. BV, ¶ 6.

Jon Peddie,4 nVidia's industry expert, also described the STB merger as an ill-advised strategic decision:

This change in 3dfx's business and product offerings brought it into direct competition with companies that had previously been major customers. Although this decision was intended to simplify the design process and shorten product cycles by putting its chips in a single board design ... 3dfx's transition from a merchant chip company to an add-in board company undermined 3dfx's customer relationships and reduced its sales.

Ex. BZ, ¶ 15.

Following the merger, certain operating functions of each company were combined in an attempt to achieve operating efficiency. Various engineering functions were merged to coordinate the graphics chip design process and graphics board design process. The sales and marketing operations were unified to address customer needs, particularly in the retail/distribution channel. Ex. 5011, p. 3. However, as a result of the merger, 3dfx lost two customers who had accounted for 58% of its total revenues for fiscal year 1998. 3dfx was unable to replace the lost revenues attributable to these two significant customers. STB revenues also declined after the merger because STB was unable to sell boards incorporating graphics...

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