Critical Texas Two-Step Valuation Question in DBMP Fraudulent Transfer Suit Under Advisement; Raises Novel ‘Unperformed Promise to Support’ Argument in Two-Step Context

Legal Analysis: Josh Neifeld

Relevant Documents:
Asbestos Claimants’ Motion for Summary Judgment
Defendants’ Opposition
Asbestos Claimants’ Reply
Agenda

The more than six-yearlong DBMP “Texas two-step” chapter 11 case is at a crossroads, as parties await a key summary judgment decision from North Carolina Bankruptcy Judge Ashley A. Edwards. At a hearing last week, the official asbestos claimants committee and future claims representative, or FCR, urged Judge Edwards to find that debtor DBMP received no value as a matter of law when it entered into a funding agreement as part of the 2019 corporate restructuring, which served as the first step in CertainTeed’s Texas two-step restructuring strategy.

A ruling in favor of the asbestos claimants and FCR would be a major victory in the claimants’ fraudulent transfer suit, which seeks to void the 2019 corporate restructuring as a fraudulent transfer. Nondebtor defendants CertainTeed and Saint-Gobain opposed summary judgment.

Following the now-familiar Texas two-step playbook, the 2019 restructuring involved a divisional merger that essentially divided “old” CertainTeed into two entities: the debtor DBMP, stuck with asbestos liabilities, and “new” CertainTeed, the company newly divested of talc liabilities and with meaningful operating assets. After the 2019 divisional merger, debtor DBMP filed its chapter 11 bankruptcy case to resolve talc liabilities.

Funding for the debtor’s case has been, and continues to be, provided by CertainTeed under the funding agreement put in place during the 2019 restructuring. Under the funding agreement, new CertainTeed agrees to fund the administrative costs of the debtor’s chapter 11 case and, if necessary, fund the debtor’s chapter 11 plan distributions.

No court has evaluated the particular question at issue in the parties’ current dispute: whether the debtor entity received any “value” for purposes of fraudulent conveyance law when it entered into the funding agreement.

The asbestos claimants and FCR argue that the funding agreement is no more than an “IOU,” specifically an “unperformed promise to furnish support to the debtor.” That characterization is meaningful because under relevant state and federal fraudulent transfer law, such obligations are expressly carved out from the definition of “value.”

Under section 548 of the Bankruptcy Code, value is a critical element for a constructive fraudulent transfer analysis because a constructive fraudulent transfer is one where the debtor “received less than a reasonably equivalent value in exchange for such transfer or obligation” (emphasis added).

“DBMP received less than reasonably equivalent value in the corporate restructuring,” Kevin Maclay of Caplin & Drysdell, counsel to the claimants’ committee, argued at the Aug. 6 hearing.

“The court just needs to follow the two-step inquiry,” Maclay continued. “The first step … is whether the funding agreement is excluded from the definition of value.” If it is, Maclay said, “the pittance – as low as nothing – that the debtor received in the corporate restructuring is not and cannot be reasonably equivalent to the considerable value of its predecessor, old CertainTeed.”

Howard Steel of Goodwin Procter made arguments for the nondebtor affiliate defendants. “Let’s talk about what the funding agreement actually is,” Steel began, it is “a valuable, enforceable, contract.”

Steel argued that the agreement is “property” of “uncapped value available to the debtor’s estate and creditors.”

According to Steel, “every court that has addressed the issue” has found that funding obligations constitute value, “provided they are enforceable” and that there is an “economic benefit to the debtor and creditors.”

“Everyone in this courtroom knows that the funding agreement has significant value as a practical matter,” Steel said, adding that the argument that the agreement has no value “belies practical reality.” Plaintiffs are asking for an “absurd outcome,” he contended.

Steel argued that the plaintiffs’ position “is belied by a lot of jurisprudence.” He cited Judge Laura T. Beyer’s opinion in the Bestwall Texas two-step case, where the judge found a similar funding agreement enforceable, and the Fourth Circuit’s recent stay relief opinion, where the court found that the DBMP funding agreement “is a valuable agreement.”

However, no court has determined the specific question at issue now: whether the “unperformed promise to support” exception applies.

Jeffrey Liesemer of Caplin Drysdale, counsel to the committee, noted this and stressed that in “none” of the cases cited by the defendants “was this particular definition of value at issue,” adding that “at no part was a fraudulent transfer proceeding before those jurists.”

Felton Parrish of Young Conaway, representing the FCR, rhetorically asked, “If the funding agreement is not a promise to furnish support, what is it?”

They say, “‘It’s a contract. It’s a property right,’” Parrish said. “Well yeah, a contract to do what?” Parrish submitted that the funding agreement is “a promise to provide support, so it does not constitute value under the plain language of the [fraudulent transfer] statute.”

But Michael Goldstein of Goodwin Procter, counsel to the nondebtor defendants, argued that the plaintiffs were taking a novel and expansive interpretation of the “promise of support” exception to the Bankruptcy Code’s definition of fraudulent transfer value.

“Support is not defined,” Goldstein said. If you “go back into history,” Goldstein submitted, “every financial conveyance case … that deals with support” is with respect to “promises of personal care.”

Pointing to commentary in the uniform model law for state fraudulent transfer, Goldstein argued that “a mere promise to take care of my grandmother when she is ill” is the type of “unperformed promise to furnish support” that fraudulent transfer law is concerned with – not funding agreements.

“We don’t have an expressed case that says what we are saying,” Goldstein said, but he submitted that the jurisprudence is clear that “when you talk about ‘support,’ [you] are really talking about family support.” Otherwise, Goldstein argued, almost every commercial agreement for some type of funding could constitute “support” and be vulnerable to fraudulent transfer.

Judge Edwards thanked the parties for their arguments and said that they had given her “a lot to think about.”