On January 20, 2012, the US Bankruptcy Court for the Southern District of New York issued an opinion in an adversary proceeding filed by Tronox Incorporated (Tronox) against Anadarko Petroleum Corporation (Anadarko) and Kerr-McGee Corporation (Kerr-McGee) arising out of a spin-off that allegedly led to Tronox's Chapter 11 bankruptcy case.

The court considered competing motions for partial summary judgment regarding an alleged cap on the damages that Tronox could recover if it establishes that the transfer of assets in the spin-off was an intentional or constructive fraudulent conveyance under the Bankruptcy Code.

Anadarko and Kerr-McGee argued that section 550 of the Bankruptcy Code caps Tronox's recovery on its fraudulent transfer claims at the amount of "unpaid creditor claims" in the case. The court ruled in favor of Tronox, holding that section 550(a) of the Bankruptcy Code does not impose a cap and that the appropriate amount of damages can only be determined after trial.

In 2005, Kerr-McGee separated from Tronox in a spinoff and, within three months of completion of the spinoff, Anadarko made a buyout offer which resulted in the sale of Kerr-McGee to Anadarko for $18 billion. Tronox, a maker of specialty chemicals, alleges that the spinoff resulted in Tronox's predecessor segregating valuable oil and gas exploration and production assets from billions of dollars of environmental, tort and other liabilities. Tronox filed for Chapter 11 relief on January 12, 2009 and began an adversary proceeding against Anadarko and Kerr-McGee, alleging that the sale to Anadarko of the "cleansed" oil and gas assets was an intentional or constructive fraudulent conveyance which left Tronox insolvent and undercapitalized.

In Tronox's Chapter 11 proceedings, environmental and tort creditors filed proofs of claim for unliquidated amounts that, where quantified, totaled more than $6.9 billion. Tronox reached a settlement with its environmental and tort creditors, who agreed to satisfy their claims against Tronox in return for all proceeds from the adversary proceeding against Anadarko and Kerr-McGee, as well as certain cash consideration. The court approved the settlement and confirmed Tronox's plan on November 30, 2010.

Tronox pursued most of its claims in this proceeding under section 544(b) of the Bankruptcy Code (accessing the law of Oklahoma), which is substantially the same as section 548 of the Bankruptcy Code. However, the court held that the limitation on liability imposed under Oklahoma law did not apply in bankruptcy. Instead, the court explained that recovery under section 544(b) is governed by section 550(a) of the Bankruptcy Code.

Section 550(a) of the Bankruptcy Code provides that a trustee "may recover for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property." In the adversary proceeding, Anadarko and Kerr-McGee moved for partial summary judgment regarding damages that Tronox may recover at trial (scheduled for May 2012), asserting that the clause "for the benefit of the estate" caps Tronox's potential recovery at the amount of unpaid creditor claims and requires an accounting at trial of the amounts that the tort and environmental creditors are owed, or were owed on the petition date.

The court rejected this argument, holding that the "for the benefit of the estate" clause in section 550(a) does not limit Tronox's recovery on its fraudulent transfer claims at trial. The court explained that, once an avoidance action creates some benefit for creditors, section 550(a) is satisfied and any limits to recovery must be found elsewhere in the law. Section 550(a) sets a minimum floor for recovery in an avoidance action but does not impose any ceiling on the maximum benefits that can be obtained once the floor has been met. The willingness of the environmental and tort claimants to take a small amount of cash and uncertain litigation claims benefited the Tronox estate by providing the general unsecured creditors with a stock interest in the company freed of legacy liabilities and, therefore, satisfied section 550's "for the benefit of the estate" requirement. The concept of an estate, the court noted, is not limited to the interest of creditors or a subclass of creditors.

In looking at the plain language of the statute, the court noted that Congress could have drafted the clause to read "to the extent of benefit to the estate." Because Congress used this phrase in an earlier clause of section 550(a), the court found it is reasonable to infer that Congress would have explicitly provided so if it had intended to limit recovery to the extent of benefit to the estate.

The court further found that to require for recovery in an avoidance action a prior calculation of each creditor's claim in the case and a limitation of avoidance liability to the deficiency in payment would impede settlements like the one in Tronox's plan by refusing to afford a creditor who has taken a litigation risk a prospect of a possible recovery beyond that creditor's individual damages. It would encourage valuation litigation and effectively impose a requirement that a judgment in an avoidance action must precede plan confirmation.

The court did deny Tronox's motion to the extent it sought a holding that there is no limitation on damages other than the value of the fraudulently conveyed property. The court said that in this case, the appropriate measure of damages, if any, can only be determined after trial of all relevant issues.

To learn more about fraudulent conveyances, see Practice Notes, Fraudulent Conveyances in Bankruptcy: Overview and Fraudulent Conveyances: Issues and Strategies for Lenders and Private Equity Sponsors.

For more information on spin-offs, see Practice Note, Spin-offs: Overview.