Vfb LLC v. Campbell Soup Co.

• Citation: 482 F.3d 624
• Decision Date: 30 March 2007
• Docket Number: No. 05-4879.,05-4879.
• Parties: 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.
• Court: U.S. Court of Appeals — Third Circuit

482 F.3d 624

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.

No. 05-4879.

United States Court of Appeals, Third Circuit.

Argued January 18, 2007.

Filed March 30, 2007.

John A. Lee, Esquire, Robin Russel, Esquire, Andrews & Kurth LLP, Houston, TX, Barbara W. Mather, [Argued], Robert L. Hickok, Benjamin P. Cooper, Pepper Hamilton LLP, Philadelphia, PA, for Appellant.

Richard P. McElroy, Mary Ann Mullaney, Blank Rome LLP, Philadelphia, PA, Michael W. Schwartz, [Argued], Harold S. Novikoff, David C. Bryan, Wachtell, Lipton, Rosen & Katz, New York, NY, for Appellees.

Before SLOVITER, RENDELL, and CUDAHY,^* Circuit Judges.

OPINION OF THE COURT

CUDAHY, Circuit Judge.

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, 2005 WL 2234606, 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 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 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 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 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...