KIRSCHNER v. J.P. Morgan Chase Bank, N.A.

UNITED STATES BANKRUPTCY COURT

DISTRICT OF DELAWARE

Tn re:

Chapter 11

MILLENNIUM LAB HOLDINGS II, LLC, et al.,

Case No. 15-12284 (LSS)

Debtors.

MARC 5S. KIRSCHNER solely in his capacity as

TRUSTEE OF THE MILLENNIUM CORPORATE

CLAIM TRUST,

Plaintiff,

Adv, No, 17-51840 (LSS)

v.

Re; Adv. Pro, Docket Nos. 248 & 250

J.P. MORGAN CHASE BANK, N.A., CITIBANK

N.A., BMO HARRIS BANK, N.A., and

SUNTRUST BANK,

Defendants.

OPINION

Defendants’ Motion for Summary Judgment [Docket No. 250]

Defendants’ Motion to Strike Certain Portions of the

Rule 26(a)(2) Report of Yvette R. Austin Smith [ Docket No. 248]

Plaintiff initiated this adversary proceeding seeking to recover the $35.3 million

arrangement fee paid to Defendants as part of Millennium’s 2014 Dividend Recapitalization

Transaction as an actual (Count 1D or constructive (Count ID) fraudulent conveyance.

Through that transaction, Millennium borrowed $1.775 billion from a consortium of sixty-

one investors. As detaiied herein, Millennium used the proceeds of the loan to payotf

Defendants’ 2012 loan, make distributions/dividends to shareholders of $1.415 million,

make certain payments to employees and pay Defendants the $35.3 million arrangement

fee. The day prior to the Dividend Recapitalization Transaction, Millennium had $303

million in funded debt; the day after it had $1.775 billion. Millennium’s assets were the

same.

Defendants’ motion to dismiss was previously denied’ and Defendants return on a

motion for summary judgment. Defendants contend there is no evidence of intent to

defraud creditors as all parties believed that Millennium could sustain the new debt on the

company, so summary judgment must be granted in its favor on Count I, Defendants also

contend that they provided reasonably equivalent value for the arrangement fee as they

arranged and syndicated the loan, which was funded. Further, Defendants contend that

Millennium was not insolvent nor rendered insolvent on account of the Dividend

Recapitalization Transaction because Plaintiff's expert’s opinion is unreliable. For these

reasons, Defendants assert that summary judgment must be granted in its favor on Count IL.

Having reviewed the record submitted, | conclude that there are genuine disputes of

material fact on both Counts. There were no disinterested parties in the Dividend

Recapitalization Transaction and the transaction was designed such that Millennium would

end up with no funds at the end of the day. Further, Plaintiffs expert testimony on

solvency is not unreliable. As reasonable minds can differ as to the import of the evidence,

summary judgment is denied.

1 Kirschner v, J.P, Morgan Chase Bank, N.A., Case No. 15-12284, Adv. Pro. No. 17-51840, 2019 WL

1005657 (Bankr. D. Del, Feb, 28, 2019), ECF No. 52. Citations to the docket refer to the adversary

proceeding docket.

Background

Millennium Laboratories IT, LLC (“Millennium” or “Debtor”*) was founded by

James Slattery in 2007. In 2010, private equity firm TA Associates acquired a 49% stake in

Millennium.’ Millennium provides laboratory services to the medical community, focusing

on urine drug testing which physicians use to monitor their patients’ use of prescription

medications and to identify drug abuse. In addition to private third-party payors such as

insurance companies, Millennium bills Medicare and Medicaid for its services.

Participating in Medicare and Medicaid subjected Millennium to oversight by

federal, state and local authorities.t Certain of Millennium’s business practices attracted the

attention of competitors and eventually the Department of Justice. These practices included

Millennium’s point of care (“POC”) test cup program, Millennium’s use of custom profiles

and Millennium’s “troubled practices” review.

Through its POC test cup program, Millennium entered into agreements with

physicians to provide them with POC test cups free of charge provided the cups were used.

for collecting and transporting specimens to Millennium for testing.” The POC test cups

contained a testing strip providing the physician with immediate, preliminary results.

2 For purposes of this opinion Millennium’s change in corporate form is itrelevant, so I will simply

use Millennium.

+ Def. Ex. 3 (Warm Deal Memorandum) at 2. Citations in the form “Def. Ex.__” refer to

Defendants’ exhibits attached to the Declaration of Mark A. Popovsky in Support of Defendants’

Motion for Summary Judgment and Motion to Strike Certain Portions of the Rule 26(a)(2) Report

of Yvette R. Austin Smith, ECF No. 252. Citations in the form “Pl. Ex. __” refer to Plaintiff's

exhibits attached. to Declaration of Grant L. Johnson in Opposition to Defendants’ Motion for

Summary Judgment, ECF No. 281.

4 Def. Ex. 2 (Excerpt of Decl. of William Brock Hardaway in Supp. of the Debtors’ Chapter 11 Pets.

and First Day Pleadings (“First Day Deci.”) at 4 15.

> Def. Ex. 26 (Voluntary SelfReferral Disclosure) at 4; Pi. Ex. 5 (Specimen Collection Cup Letter).

Millennium billed for and conducted “confirmatory testing” to verify the preliminary results

and to accurately analyze the specimen.® Millennium billed for any cups that were not used.

for this purpose.’

As part of its business operations, Millennium also supplied its customers with order

forms that permitted a physician to select from numerous individual diagnostic tests or to

choose a “custom profile.”® A custom profile was created by each doctor practice and was

often a battery of 12-18 separate tests. While easier, the use of custom profiles rather than

individual, targeted testing, created the risk of performing medically unnecessary tests.

As another part of its business practice, Millennium compiled a list (the “Troubled

Practices” list) of those doctor practices which were not sufficiently profitable, the defining

metric being the average revenue per specimen tested.’ Millennium severed (or threatened.

to sever) its relationship with customers on the Troubled Practices list if their accounts did

not become profitable within given timeframes.’

Over the years, Millennium sought and/or received advice on the legality of its

business practices. As early as 2009, Millennium sought legal advice from Jane Wood of

McDonald Hopkins with respect to these practices.'' In 2010, Millennium received

unsolicited advice from its auditor, CodeMap, LLC, which encouraged Millennium to

Def. Ex. 26 (Voluntary Self-Referral Disclosure) at 4; Def. Ex, 35 (6-Panel POC Test Requisition).

? Pl. Ex. 5 (Specimen Collection Cup Letter),

® Def. Ex. 35 (6-Panel POC Test Requisition).

Pl. Ex. 2] (Troubled Practices Presentation to DOJ) at ML_DE_00670150.

10 Pl. Ex. 21 (Troubled Practices Presentation to DOJ) at ML_DE_00670166.

Def, Ex. 28 (Wood Decl.) 6.

Af

reconsider its practice of providing free collection cups.” In 2010, Millennium also sought

and received advice from Ronald Wisor and Helen Trilling of Hogan Lovells US LLP

regarding whether Millennium’s programs violated the Stark Law, 42 U.S.C. § 1395nn(a}

and/or the federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b).* In 2011 and 2012,

Millennium continued to receive advice from Wood and Wisor as well as from Martin

Price, first as a partner at Hogan Lovells and then as in-house counsel."

In 2011, Ameritox, Ltd., one of Millennium’s competitors, sued Millennium for

unfair competition, alleging the free POC test cup program violated the Stark Law and the

federal Anti-Kickback statute.’ And in March 2012, the DOJ sent Millennium a subpoena

requesting, inter alia, all documents “relating to the Company’s policies or procedures

concerning: (a) the sales, marketing, or promotion of urine drug testing/screening (including

the confirmation testing of negative results or custom profiles); and (b) the reimbursement

process for urine drug testing . . . (including reimbursement for confirmation testing of

negative results or . . . from custom profiles).”"°

By early 2014, Millennium was aware of at least two draft local coverage

determinations by Medicare administrators (Palmetto and Noridian) indicating that testing

to confirm negative results and specimen validity testing were excluded from Medicare

PI, Ex. 9 (Draft Annual Compliance Audit Report) at ML_DE_00499785-00499787. Millennium

chose not to have CodeMap provide a final audit report. Pi. Ex. 10 (1/19/11 email from Hefty to

Price and Trilling; 1/20/11 email from Appel to Hefty).

3 See e.g, Def. Ex. 31 (10/6/10 Letter to Appel from Wisor).

4 See e.g. Pl. Ex. 6 (2/15/11 email from Price to Appel and Wisor}; Pl. Ex. 8 (Millennium

Laboratories, Inc. Chronology -- Legal Advice, Revision 2/13/13),

Ameritox, Ltd. v. Millennium Labs, Inc., 803 F.3d 518, 521-22 (11th Cir. 2015).

16 Def. Ex. 40 (DOJ Subpoena) at Attachment to Subpoena Duces Tecum 4 5.

coverage.’ And, as of February 28, 2014, Millennium’s internal five-year forecasting

assumed a 30% reduction in Medicare reimbursement effective June 1, 2014."

The Dividend Recapitalization Transaction

In March 2012, Millennium entered into a Credit Agreement with JPMorgan Chase

Bank, N.A., as prior administrative agent (and the other Defendants, as lenders) for a $310

million term loan facility (as subsequently amended and restated, “Term Loan A”) and a

$20 million revolving credit facility.”

Consideration of another financing began in the middle of 2013.” J.P. Morgan

Securities LLC (“JPM Securities”) reached out to TA Associates to suggest that Millennium

could “do a dividend.””! To further discussions, a Managing Director, Leveraged Finance

at JPM Securities prepared discussion materials providing thoughts on a dividend

recapitalization.” JPM Securities presented three options: 1) use of cash on hand to make a

dividend, with JPM assisting in obtaining an amendment to current debt documents to

permit it, 2) upsizing the current Term Loan A, with JPM Securities assisting, and use of

cash on hand to fund a distribution or 3) syndication of a new Term Loan A and Term

Loan B in the institutional loan market and use of cash on hand to fund a distribution to

Pl, Exs. 16 (Noridian Draft LCD) at 14-15, 37 (1/20/14 Email from Simmons to Hardaway).

'8 Pl. Ex. 39 (2/28/14 Email attachment from Kennedy to Pencak) at 1.

Def, Ex. 2 (First Day Decl.) 12.

* Def. Ex. 6 (Griswold Dep.) 51:23-53:5.

20 Id, at 52:11-53:12.

Td. at 52:17-20.

Pi, Ex. 51 (5/31/13 Discussion Materials).

shareholders.” The three options ranged from a dividend of $120 million (Option 1) to

$1,074.3 million (Option 3).*

JPM Securities updated its discussion materials in January 2014, providing three

new options.” The “Max pro rata” option embodied an upsized Term Loan A option,

which provided for a dividend of $509 million. ‘The “Max 1* lien term loan” option

embodied a new $1,455 million Term Loan B to provide distributions/dividends to

shareholders of $1,415.7 million. The “Max dividend” option embodied a new $1,455

million Term Loan B and the paydown of Term Loan A to provide for a $1,539.7 million

dividend to shareholders. On February 13, 2014, Millennium decided to go with the Max

dividend option.”

On April 14, 2014, Millennium closed on a $1.775 billion term loan facility (“Term

Loan B”) effectuating the Dividend Recapitalization Transaction. JPM Securities and

Citibank Global Markets Inc. (“Citi”) acted as Joint Lead Arrangers and Jomt Bookmakers.

JPMorgan Chase Bank acted as Administrative Agent and Citi also acted as Syndication

Agent. BMO Capital Markets Corp. (“BMOC”) and SunTrust Bank acted as Co-Managers

and Co-Documentation Agents.”” The proceeds of the Loan were used primarily to

refinance Term Loan A, pay fees to the banks including arrangement fees of $35.3 million

3 Td at 5.

74 Td.

Pl. Ex. 52 (1/21/14 Discussion Materials) at 4.

PL. Ex. 52 (2/13/14 email from Karanikolaidis to LeeLum).

27 Def. Ex. 16 (Excerpt of Credit Agreement dated 4/16/14).

(“Arrangement Fee”), make a distribution to Millennium’s shareholders and pay bonuses to

certain Millennium executives as follows:

Term Loan A payoff $ 303,827,648.00

Arrangement Fee:

JPM $ 19,415,000.00

Citi $ 12,355,000.00

BMOC $ 1,765,000.00

SunTrust $ 1,765,000.00

Distribution to shareholders $ 1,415,632,175.76 *

As reflected in the March 16, 2014 Commitment Letter, Defendants each committed

to underwrite a certain portion of Term Loan B.” Consistent with their intent to syndicate

the loan, however, in the month prior to its issuance, JPM Securities and Citi marketed the

opportunity to certain sophisticated investors.*” Ultimately, Term Loan B was syndicated to

a group of sixty-one investors.*' Of Defendants, only SunTrust Bank appears to be a lender

under the new facility.

The Settlement with DOJ

DOJ took a series of action against Millennium in 2014 and 2015. In December

2014, DOJ informed Millennium that it would be pursuing civil claims and in March 2015,

it filed a civil complaint seeking to intervene in pending qui tam actions. In February 2015,

28 Expenses were also deducted from the Term Loan B proceeds as well as certain other fees, none

of which are relevant to this opinion. The transaction also included a $50 million revolving credit

facility, but that is not the subject of this lawsuit.

2 Def. Ex. 13 (Excerpts of Commitment Letter) (TPM (55%), Citi (35%), BMOC (5%) and

SunTrust (5%)).

3° Pl, Ex. 2 (Confidential Information Memo).

31 Def. Ex. 17 (Lender Allocation).

Nordian Healthcare Solutions, LLC, Millennium’s Medicare Administrative Contractor

with the Centers for Medicare and Medicaid Services, informed Millennium that its

Medicare billing privileges would be revoked for billing abuses. Settlement discussions

ensued with the DOJ as well as certain states. In May 2015, Millennium entered into a

Term Sheet with the United States and the certain states, which provided for Miliennium’s

payment of $256 million to resolve their allegations. Millennium also entered into a

Corporate Integrity Agreement.”

Procedural Posture

Millennium and affiliated entities filed voluntary bankruptcy petitions on November

10, 2015. Debtor’s plan of reorganization was confirmed on December 14, 2015. Plaintiff,

in his capacity as the Trustee of the Millennium Corporate Claim Trust created by Debtor's

pian, sues Defendants under § 548 of the Bankruptcy Code to recover the Arrangement Fee

under theories of both actual and constructive fraudulent conveyance.* Defendants and

Plaintiff filed cross motions for summary judgment. Defendants and Plaintiff also filed

motions in imine seeking to exclude all or a portion of the other’s expert’s testimony. This

opinion will address only Defendants’ motions.**

32 See generally Def. Ex. 2 (First Day Declaration) {ff 26-27.

33 The shareholders were released in the bankruptcy case as part of a settlement in which they paid

$325 million to the estate.

34 Plaintiff's pre-trial motions will be addressed in a subsequent opinion.

Oo

Jurisdiction

The court has jurisdiction pursuant to 28 U.S.C. § 1334 and the authority to enter

final orders as this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H).*

Legal Standard

To succeed on a motion for summary judgment a movant must demonstrate “that

there is no genuine dispute as to any material fact and the movant is entitled to judgment as

a matter of law.’”** The movant may support its motion by citing to evidence in the record

or by “showing that the materials cited do not establish the absence or presence of a genuine

dispute, or that an adverse party cannot produce admissible evidence to support the fact.”*”

Where the moving party establishes the absence of a genuine dispute the burden shifts to the

non-moving party who “must set forth specific facts showing that there is a genuine issue for

trial.”*

To resolve a motion for summary judgment the court does not “weigh the evidence

and determine the truth of the matter[,|” but instead “determine[s] whether there is a

genuine issue for trial.” “Facts that could alter the outcome are ‘material,’”” And

35 SunTrust is the only party that specifically consented to the entry of final orders by the court. The

other parties made no statement regarding this authority and so have consented. Del. Bankr. L.R.

7012-1.

36 Fed. R. Civ. P. 56(a) (applicable to adversary proceedings by Fed. R. Bankr. P. 7056).

7 Fed. R. Cty. P. 56(c)(1).

38 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986).

® Anderson, 477 U.S, at 249.

40 Horowitz v. Fed. Kemper Life Assurance Co., 57 F.3d 300, 302 n.1 (3d Cir. 1995) (citing Anderson, 477

US. at 248).

: in

disputes are “genuine” if “reasonable minds could differ as to the import of the evidence.”™

“The inquiry performed is the threshold inquiry of determining whether there is the need for

a trial—whether, in other words, there are any genuine factual issues that properly can be

resolved only by a finder of fact because they may reasonably be resolved in favor of either

party.” The court conducts this inquiry viewing the “underlying facts and all reasonable

inferences therefrom in the light most favorable to the party opposing the motion.”” In its

review, the court may consider all record evidence.”

Discussion

L Actual Fraudulent Conveyance

Defendants seek summary judgment on Count I of the Complaint, by which the

Trustee seeks to recover the Arrangement Fee as an actual fraudulent conveyance. To avoid

transfers pursuant to § 548(a)(1)(A), Trustee must show that the transfers were made within

the two years prior to the bankruptcy filing and. with the actual intent to hinder, delay or

defraud creditors.* It is the intent of the transferor, not the transferee, that must be

established.*

4 Anderson, 477 U.S. at 250.

Td,

43° Bhant v. Lower Merion School Dist,, 767 F.3d 247, 265 (3d Cir. 2014) (quoting Pa. Coal Ass’n v.

Babbitt, 63 F.3d 231, 236 (3d Cir. 1995)).

Fed. R. Civ. P. 56(c)(3).

4 Kirschner, 2019 WL 1005657, at *2 (citing 11 U.S.C. § 548(a)(1)(A); Liquidation Tr. of Hechinger

Inv. Co. v, Fleet Retail Fin. Grp. (In re Hechinger Inv. Co, of Del.), 327 B.R. 537, 550 (D. Del. 2005); SB

Liquidation Tr. v. Preferred Bank (In re Syntax-Brillian Corp.), Case No. 08-11407, Adv. Pro. No. 10-

51389, 2016 WL 1165634, at *4 (Bankr. D. Del. Feb. 8, 2016)).

4% Id. (citing Dobin v. Hill, 342 B.R. 183, 198 (Bankr. D.N.J, 2006)).

44

Defendants argue that notwithstanding significant document production and

depositions of all the principals, Plaintiff has failed to marshal any evidence of an actual

intent to hinder, delay or defraud creditors. Defendants point to the depositions of

Miflennium’s Chief Financial Officer, VP of Financial Planning and Analysis and former

Chief Executive Officer, among others, to show that each witness denies intending to

defraud creditors, and believed at the time, based on advice of counsel, that Millennium

would weather the storm of the DOJ investigation and/or would be able to pay debts as

they became due. Defendants also argue that any notion of a fraudulent conveyance is

belied by the very fact that dozens of sophisticated lenders, with access to full information,

agreed to fund Term Loan B. Defendants contend that Trustee conflates poor business

judgment with fraudulent intent.

Trustee contends that I should ignore any and all testimony of Millennium’s

principals as self-serving because they (and Defendants) were focused on their own personal

enrichment with no concern about Miilennium’s ability to satisfy its obligations. Trustee

points out that none of the $1.75 billion borrowed remained with Millennium.” He also

asserts Millennium’s intent is evinced by its knowledge of the possibility of adverse

outcomes from the DOJ investigation, its choice to listen to only the most favorable advice

and its decision to hide details of the ongoing investigation from lenders during the

syndication process.

Having reviewed all the evidence, I am unconvinced that summary judgment is

appropriate. Trustee identified sufficient evidence from which a trier of fact could infer

* See Pl, Ex. 58 (“[With our credit rating, surprised [the interest rate] was this high. Probably due

to large amount and the fact it’s being used for 100% distribution rather than growth in the

business.”).

19

fraudulent intent. First, none of Millennium’s decision makers were disinterested. James

Slattery (Founder and Chairman of the Board of Managers) as well as Howard Appel

(President) each received distributions from the proceeds of Term Loan B as equity

holders.* Slattery knew in advance what he and his children could expect to receive from

the Dividend Recapitalization Transaction.® In discussions with BMO, Slattery and Appel

stated they would “sell today . . . to achieve a simple, clean exit.” Afterwards, Appel

thanked JPM Securities for facilitating the dividend recapitalization stating “[i]t’s more than

getting the deal done; you’ve changed our personal lives for generations to come.”*! Price

(General Counsel} received $12.9 million on his vested and unvested stock options and

contemporancously executed a bonus agreement.”

Second, Millennium was not entirely forthcoming with the information it provided

to potential investors about the risks inherent in its business model. At the same time Term

Loan B was being marketed, Millennium was planning meetings with DOJ on its Troubled

Practices list and custom profiles among other things. Millennium’s lawyers hoped to “get

#8 | could not find a definitive list of the members of the Board of Managers, but Defendants do not

argue that Millennium’s decision makers were not interested. To the extent TA had members on the

Board of Managers, it received a distribution from the Dividend Recapitalization in the amount of

$624,620,000. Pi. Ex. 76 (Sources and Uses).

Pl. Ex. 87 (Slattery Dep.) 119:25-120:18.

0 Pl. Ex. 44 (Call Report) at 1 of 4. On the BMO call, the parties also discussed Slattery, Appel and

David Cohen (COO) estate planning. Jd.

| Pl. Ex, 68 (4/17/14 email Appel to Hardaway with cc to entire JPM Securities Team). Appel

also contemporaneously sought a Palladium Card from JPM. Pl. Ex. 56.

Def, Ex. 27 (Price Dep.) 173:10-174:2; Pl. Exs. 53 (Option Cancellation Agreement), 54 (Closing

Compensation and Bonus Agreement).

12

the government to a favorable decision soon,” but were wary of an unfavorable one.

Millennium was also aware that the DOJ was “actively investigating” the issue of “medical

necessity” by issuing subpoenas to Millennium’s customers.” On the reimbursement front,

Millennium was receiving reports regarding the American Medical Association’s review of

certain drug testing and the negative effect that could have on Millennium’s revenue.»

Millennium also knew about the ongoing Ameritox litigation. Nonetheless, Hardaway

(Millennium’s CEQ) does not remember any specific discussion about a “do nothing

strategy” (i.e. wait to see the outcome of the litigation and government investigation before

doing the Dividend Recapitalization Transaction). Millennium knew that the litigation

and government investigation risks did not appear in the Confidential Information

Memorandum prepared by JPM Securities. In fact, Millennium’s in-house counsel even

asked its outside attorneys whether syndicate investors could have a claim against

Millennium for this lack of information.”

Finally, Hardaway set the tone for meetings with investors when he declared the

“messaging” should be: “we need to refer to this consistently as a Bank Refinancing. We

are growing company that needs a capital structure to allow for our future needs. That is all

this is.”** This messaging was not true. The Dividend Recapitalization Transaction was—

3 Pi. Ex, 48 (3/11/14 email from Loucks to Price).

4

Pj, Ex, 35 (Coding and Reimbursement Assessment for Drugs of Abuse Testing).

Def. Ex. 38 (Hardaway Dep.) 139:24-142:9.

Pi. Ex. 66 (3/27/14 email Price to Silver).

38 Pl. Ex, 57 (3/21/14 email Hardaway to Appel, Kennedy, Pencak, Smith, Price).

1A

and always was designed to be—a way for Millennium to provide a return to its

stockholders.

Only two months after the Dividend Recapitalization Transaction closed, Ameritox

received a jury verdict in its favor on claims that Millennium’s POC practices violated the

Stark Act. Within four months of the closing, Millennium self-reported its practice of

providing point-of-care cups to physicians at no charge to “resolve a potential violation of

the ‘Stark’ physician self-referral law.”

Defendants have tendered evidence—primarily through deposition testimony—that

neither Millennium nor Defendants® believed Millennium would become insolvent by

virtue of the Dividend Recapitalization Transaction, that the entire transaction, including

the dividend to shareholders was disclosed and the litigation was public knowledge. While

this creates a material issue of fact, it does not negate the other evidence and inferences that

can be drawn therefrom.

For these reasons, Defendants’ motion for summary judgment is denied as to

Count I.

Constructive Fraudulent Conveyance

Defendants seek summary judgment on Count II of the Complaint, by which the

Trustee seeks to recover the Arrangement Fee as a constructive fraudulent conveyance. To

Def. Ex. 26 (Voluntary Self-Referral Disclosure) at 1.

6° While the intent of transferees is not determinative in an actual fraudulent conveyance analysis, at

best, only Citi was disinterested. JPM, SunTrust and BOMC were each lenders under the 2012

Term A Loan which was repaid from proceeds of Term Loan B. Defendants, and in particular,

JPM and Citi, were aware of the government investigations and the civil litigation.

Notwithstanding, neither the Rating Agency Presentation nor the Confidential Information

Memorandum discuss Millennium’s litigation, the DOJ investigation or changes in reimbursements.

yc

avoid transfers pursuant to § 548(a)(1}(B), Trustee must show that (1) a transfer of an

interest of the debtor’s property occurred within two years of the filing of the bankruptcy

petition, (2) the debtor “received less than reasonably equivalent value in exchange for such

transfer” and (3) the debtor was cither () “insolvent on the date of such transfer or was

made” or rendered insolvent as a result; (11) “engaged in business or a transaction . . . for

which any property remaining with the debtor was an unreasonably small capital;” or (III)

intended to incur debts beyond the debtor’s ability to repay.*!

Defendants contend they are entitled to summary judgment on either of two theories.

First, Defendants argue that they provided reasonably equivalent value for the Arrangement

Fee because the fee was market (or below) and Defendants’ collective services resulted in a

successful financing. Term Loan B was fully funded by a sixty-one-investor syndicate, and

in any event, Defendants underwrote the financing. Second, Defendants argue that the

closing of Term Loan B provided Millennium access to broader capital markets in the

future.

Trustee does not argue that the Arrangement Fee was above market or that

Defendants did not perform services relative to Term Loan B. Rather, Trustee counters that

the contracted for services provided no benefit to Millennium because the proceeds from the

financing were used to pay off Term Loan A, pay dividends and bonuses to insiders and

Defendants’ fees. The result of the financing, therefore, was to place an additional

$1.4 billion of debt on Millennium without a penny for working capital needs or to promote

growth, .

6 11 U.S.C. § 548(a)(1)(B) (omitting inapplicable subsection).

tc

A. Reasonably equivalent value

The Third Circuit employs a two-part test to assess whether a debtor received

reasonably equivalent value. First, the court determines whether the transfer conferred any

value on the debtor.” To do this “a court must consider whether, ‘based on the

circumstances that existed at the time’ of the transfer, it was ‘legitimate and reasonable’ to

expect some value accruing to the debtor.”” The Third Circuit has interpreted “value” to

include any direct or indirect benefit,“ even “the mere ‘opportunity’ to receive an economic

benefit in the future.”©

Second, if the debtor received value, then the court evaluates whether the value

conferred was reasonably equivalent to the value transferred.® This second step is a factual

analysis that requires the court to “look to the ‘totality of the circumstances,’ including (1)

the ‘fair market value’ of the benefit received as a result of the transfer, (2) ‘the existence of

an arm’s length relationship between the debtor and the transferee,’ and (3) the transferee’s

good faith.”*’ Because the purpose of fraudulent conveyance laws is estate preservation, the

6 Mellon Bank, v. Official Comm. of Unsecured Creditors (In re R.M.L. Inc), 92 F.3d 139, 152 3d

Cir, 1996).

8 Pension Transfer Corp. v. Beneficiaries Under the Third Amend. to Fruehauf Trailer Corp. Retirement Plan

No. 003 (fn re Fruchauf Trailer Corp.), 444 F.3d 203, 212 Gd Cir. 2006) (citing RALL., 92 F.3d at 152).

64 Liguidation Tr. of Hechinger Inv. Co of Del. v. Fleet Retail Fin. Grp. (In re Hechinger Inv, Co. of Del.), 327

B.R. 537, 552 (D. Del, 2005) (expected cost saving and. market synergies from acquisition/merger

constituted value).

6 Fruehauf Trailer Corp, 444 F.3d at 214 (quoting R.M.L., 92 F.3d at 148). There is, however, no

“ver se rule requiring a precise calculation of the cash value of intangible costs and benefits in every

case.” Id.

6 RM.L., 92 F.3d at 152.

6? Fruchauf Trailer Corp., 444 F.3d at 213 (quoting R.ACL., 92 F.3d at 148-49, 153).

174

question of reasonably equivalent value is viewed from the standpoint of creditors based on

the circumstances existing when the transfer took place.

Defendants contend that, without doubt, Debtor received value because Defendants

arranged the loan, Term Loan B closed (i.c., the loan was funded) and Defendants

committed to fund the entire $1.775 billion. Further, Defendants state that Debtor received

indirect benefits in that “the ability to borrow money” has value as does positioning Debtor

to have broader access to the capital markets.

Plaintiff contends that no value was provided because the Arrangement Fee was part

of a transaction that left nothing for Debtor at the end of the day. Plaintiff also argues that

the asserted indirect benefits are not supported as there is no evidence of any actual

additional ability to borrow money or broader access to capital markets.

There are genuine disputes of material fact as to whether Debtor received any value

from the Dividend Recapitalization Transaction. Initially, because the collapsing doctrine

has been raised, I conclude that the Dividend Recapitalization Transaction is a single

transaction, not a series of transactions which need to be collapsed. Millennium closed on

Term Loan B in order to effectuate the Dividend Recapitalization Transaction and to satisfy

other obligations as expressly contemplated when Defendants committed to and syndicated

the loan. The proceeds of Term Loan B were both received and paid out at closing: to

shareholders and employees, to pay off Term Loan A and to pay the Arrangement Fee. It

was, quite simply, one transaction. In evaluating the Arrangement Fee, therefore, I can

consider the entire transaction.

8 re R.M.L,, Inc, 92 F.3d 139, 150 Gd Cir. 1996) (quoting Melion Bank N_A. v. Metro Comme’ns.,

Inc., 945 F.2d 635, 646 (3d Cir. 1991); see also Kartzman v. Latoc, Inc. (in re Mall at the Galaxy, Inc.),

No. 23-1906, 2024 WL 3688721 at * 3 (3d Cir. Aug. 7, 2024) (non-precedential).

19

To the extent, however, one looks at the factors considered in collapsing multiple

transactions, these are satisfied as well.” Millennium, Defendants and the shareholders all

knew of ail parts (or “steps”) of the Dividend Recapitalization Transaction, and no one

“step” of the transaction (Le. raising funds, borrowing funds, loaning funds, payment of the

dividend, payment of the Arrangement Fee) would have occurred on its own. Certainly,

there would be no Arrangement Fee without the Dividend Recapitalization Transaction.”

© Hechinger, 327 B.R. at 546-47 (when considering whether to collapse multiple transactions, the

focus is “not on the structure of the transaction but the knowledge and intent of the parties involved

in the transaction”) (internal citations and quotation marks omitted); Mervyn's Holdings LLC v, Lubert-

Adler Grp. IV, LLC (in ve Mervyn's Holdings, LLC), 426 B.R. 488, 497 (Bankr. D, Del. 2010) (ooking at

whether the parties had knowledge of the transaction and whether each transaction would have

occurred on its own or was otherwise dependent or conditioned on the other transactions).

” Compare Tabor Court Realty Group Corp. where the Third Circuit concluded that finds lent to one

company, immediately re-lent to a second and ultimately paid out to shareholders was one

integrated transaction. United States v. Tabor Court Realty Group Corp., 803 F.2d 1288, 1302 (3d Cir.

1986) (“The two exchanges were part of one mtegrated transaction. As the [lower] court concluded:

$4,085 ,000 in ITT loan proceeds which were lent immediately by the borrowing companies to

Great American were merely passed through the borrowers to Great American and ultimately to the

selling stockholders and cannot be deemed consideration received by the borrowing companies.”).

Here, of course, there was no intermediate company—the proceeds of Term Loan B went from

Defendants to Millennium to the shareholders, Citibank (on Term Loan A}, employees and

Defendants (as the Arrangement Fee). See also Off Comm. Of Unsecured Creditors of Nat'l Forge Co. v.

Clark (In re National Forge Co.), 344 B.R. 340, 350 (W.D. Pa. 2006) (footnotes omitted) (applying

collapsing doctrine to stock redemption):

Moreover, the Committee acknowledges that NFC, Holdings and the Lenders were

all jointly involved in arranging the financing that would fund the stock redemption.

It is undisputed on this record that, on or about March 29, 1999, NFC, Holdings,

National Forge Europe Limited, and the Lenders entered into an agreement which

permitted NFC and/or Holdings to borrow up to $4 million (secured by liens on NEC's

assets) under an existing credit agreement in order to effectuate the stock redemption.

(See Def.'s Append. in Supp. of Mot. for Summ. Judg. [Doc. # 45] at Ex. A-2.) Those

who received distributions under the stock redemption included individuals who were

directors, officers or management-level employees of NFC and Hoidings, and the

mechanics of the stock redemption were spelled out in Holdings’ corporate minutes.

Given these uncontroverted facts, we conclude that alt of the relevant parties to the

disputed transfer had knowledge of the stock redemption plan. While the Committee

insists that the Defendants' allegations regarding the knowledge and intent of the

parties are “replete” with material issues of fact, it provides nothing further by way of

explanation or example to buttress its claim.

10

Looking at the Dividend Recapitalization Transaction as a whole, there are, at least,

material facts in dispute as to whether Millennium received reasonably equivalent value in

exchange for the Arrangement Fee. As stated before, the transaction left nothing for

Millennium. And, viewing this from the creditors’ standpoint, a question exists as to the

alleged indirect benefits.

The cases cited by Defendants do not compel a different result at this stage. In

Hechinger, a liquidating trustee brought breach of fiduciary duty and fraudulent conveyance

claims against multiple defendants arising out of Hechinger’s acquisition and merger with

Builders’ Square. The court granted summary judgment in favor of all defendants on the

fraudulent conveyance claim concluding that the plaintiff failed to show any fact to refute

that Hechinger received (indirect) value through the challenged acquisition/merger

transaction. In the course of that discussion, the court specifically commented that plaintiff

failed to show that the management fee paid by Hechinger was not industry standard,

further supporting summary judgment for the recipient of the management fee. In doing so,

however, the Hechinger cout distinguished the bank fee paid to Chase (which fronted a

group of 22 lenders providing a $600 million facility for the combined entity). The court

granted summary judgment in Chase’s favor stating, “[bjecause the court finds that the

Tn addition, it appears undisputed that each critical step of the stock redemption plan

would not have occurred on its own, but instead depended upon the occurrence of the

others. For example, NFC would not have sought to borrow the additional $4 million

from the Lenders (and the Lenders would not have lent those monies) if not for the

purpose of financing the stock redemption. Similarly, NFC would not have

undertaken the disputed transfer of $5.7 million to Holdings absent Holdings' intent to

use the funds to accomplish the stock redemption. Again, it appears uncontroverted

that all parties were aware of the ultimate purpose of loans to NFC, the transfer of loan

proceeds from NFC to Holdings, and the distribution of those monies to Holdings'

Class B shareholders—namely, the redemption of Holdings' Class B shares,

an

Transaction was not avoidable, the fees paid to Chase are also not avoidable.”" The court

provides no guidance as to what it would have done in circumstances, such as those before

me, where there is no conclusion that the entire transaction cannot be avoided.

Similarly, Plassein” provides no guidance. There, after trial, the court found that

plaintiff had not proven lack of reasonably equivalent value. While the Plassein court based

its decision on expert testimony regarding the reasonable value of the services rendered to

earn the challenged fees (acquisition fee, management fee, financial advisory fees), it does

not appear that plaintiff asked the court to consider the underlying transactions in its

analysis as the court does not comment on them.

Conversely, the Third Circuit has concluded that a market-based bank commitment

fee may be avoided in appropriate circumstances.” In R.M.L., Mellon Bank issued a

commitment letter to provide a $53 million revolving loan to Intershoe. The commitment

letter had multiple contingencies, including an equity infusion. When the equity infusion

did not occur, the deal collapsed and Mellon Bank did not fund the loan. After Intershoe

filed a voluntary bankruptcy case, its creditors’ committee sued to recover $515,000 paid to

Mellon Bank in connection with the financing commitment. Mellon Bank argued that the

commitment fees were market rate. Finding that the conditions to Mellon Bank’s

commitment to fund were so conditional when issued that the funding was unlikely to

ve Hechinger, 327 at 553 n.24.

Brandt v. Trivest If, Inc. Gn re Plassein Int'l Corp.), 405 B.R. 402 (Bankr. D. Del. 2009) aff'd 428 B.R.

64 (D, Del. 2010).

3 See generally R.M.L., 92 F.3d 139.

94

occur, the bankruptcy court concluded that Intershoe did not receive reasonably equivalent

value for the commitment fees paid.” The Third Circuit affirmed.

While R.A. is factually distinguishable as Term Loan B was funded, the lesson

from R.AZL. is that market-based fees are not per se reasonably equivalent value. The record

before me does not establish, as a matter of law, that the value conferred was reasonably

equivalent to the value transferred. Trustee points to emails and other evidence that

suggest, when viewed in the light most favorable to Trustee, Defendants and Millennium’s

insiders pushed the Dividend Recapitalization Transaction through for their own personal

benefit. Trustee also asserts that Millennium did not receive reasonably equivalent value

because the loan proceeds did not remain with Millennium and that any alleged indirect

benefits were illusory. Considering the totality of the circumstances, including that

Defendants were instrumental in structuring the transaction, genuine disputes of material

fact exist as to whether the transfer was the result of an arm’s length negotiation or received

in good faith. Ultimately, it will be Trustee’s burden to establish, by a preponderance of the

evidence, that reasonably equivalent value was not received on account of the transfer, but

that is an issue for trial.

4 The bankruptcy court did not avoid $127,538.04 in out-of-pocket expenses incurred by Meilon

Bank. These expenses were not part of the appeal.

a9

B. Insolvency and Defendants’ Motion to Strike the Testimony of Plaintiff's Expert Yvette R.

Austin Simith®

Defendants next contest Trustee’s ability to establish Millennium’s insolvency at the

time of, or resulting from, the Dividend Recapitalization Transaction. ‘To support his

allegations of insolvency, Trustee relies on his proffered expert, Yvette R. Austin Smith, to

establish the necessary facts. Austin Smith is a principal and chairman of The Brattle

Group, co-leads the firm’s Mergers & Acquisitions practice and previously led the firm’s

Bankruptcy Restructuring practice, Her credentials are not challenged.” In her expert

report, Austin Smith opines, among other things, 1) “that Millennium was rendered balance

sheet insolvent as a result of the [Dividend Recapitalization] Transaction,” 2) “it was

reasonably foreseeable that the [Dividend Recapitalization] Transaction would leave

Millennium with unreasonably small capital” and 3) “the [Dividend Recapitalization]

® Defendants first argue that Trustee’s solvency argument cannot succeed because it hinges on the

collapsing doctrine. As I have concluded there is only one transaction, this argument fails.

Defendants also argue that “as explained above, [ | the judge-made exception of the collapsing

doctrine was not derived to protect secured lenders who knowingly and willingly participate in a

transaction and are compensated for doing so, and it is inappropriate here.” Mem. of Law in Supp.

of Defs.’ Mot. for Summ. J. 29, ECF No, 251, This argument was raised at oral argument on the

previous motion to dismiss. In denying the motion to dismiss, I invited briefing on that issue.

Kirschner, 2019 WL 1005657, at *7. While raised in the motion for summary judgment, Defendants

still fail to provide an analysis. Accordingly, I do not consider the argument.

7 Austin Smith has a master’s degree in business administration from Columbia University’s

Graduate School of Business and has completed additional graduate coursework in financial

mathematics at the Courant Institute of Mathematical Sciences at New York University. She was

an instructor teaching a graduate finance course, Business Analysis and Valuation, at Harvard

University Extension School. She has published and presented on valuation and credit analysis for

organizations including the American Bar Association, the American Bankruptcy Institute, the

National Conference of Bankruptcy Judges, Thomson Reuters, and Bloomberg Law. Expert Report

of Yvette R. Austin Smith ff 2-3, Ex. 1 to Decl. of Grant L. Johnson in Opp’n to Defs.’ Daubert

Mot. to Exclude the Test of P1.’s Proposed Expert Yvette R. Austin Smith, ECF No. 285-1 (“Austin

Smith Report”).

92

Transaction encumbered Millennium with debt beyond the company’s ability to pay as that

debt matured.””’

Defendants’ argument that there is no triable issue of fact on Millennium’s solvency

in 2014 relies upon their motion to strike certain portions of Austin Smith’s report as

unreliable. Defendants put forth three reasons why Austin Smith’s conclusions should be

excluded: 1) Austin Smith incorporated the weighted average cost of capital ((WACC”)

calculated by Millennium’s solvency advisor (Vantage Point) for the Dividend

Recapitalization Transaction without explanation or support, 2) the WACC itself is

unreliable because it was “derived from an unsound methodology” and 3) Austin Smith’s

capital adequacy test and ability to pay debts test fail to analyze Millenntum’s ability to raise

capital. Trustee responds that Austin Smith’s calculations are reliable, consistent with

sound valuation practice, and she considered whether Millennium would be to able

refinance the loan,

I. Austin Smith’s use of Vantage Point’s WACC

In her discounted cash flow analysis, Austin Smith uses a weighted average cost of

capital of 14.8%. Defendants contend that Austin Smith stmply adopted. Vantage Point’s

WACC without any of her own analysis or an understanding of how Vantage Point arrived

at that figure. Because of that, Defendants ciaim that they are unable to effectively cross-

examine Austin Smith about the bases for the WACC, why she used it and her

methodological choices. Defendants further contend that they are left guessing about how

Austin Smith reached her decisions such that Defendants’ rebuttal expert, Amy Hutton,

could not effectively evaluate and address Austin Smith’s opinion.

Austin Smith Report 4 7.

IA

Defendants rely on ZF Meritor” and similar cases which exclude expert testimony

when the expert adopts another’s data without knowing or understanding the circumstances

under which the data was created or the assumptions it was based on.” Since ZF Meritor,

the Third Circuit and lower courts within the circuit have explained and apphed ZF Meritor

as well as the later Third Circuit decision, In re SemCrude.® For example, in Allscripts, the

court found reliable (for purposes of Rule 702) an expert’s opinion relying on the company’s

internal projections reflected in a report used by a third company (Valuation Research

Corporation) that provided a valuation contemporaneous with the challenged transaction.

The Allscripts court concluded that the expert adequately explained at his deposition why he

found the projections to be valid: the projections were GAAP compliant, the Valuation

Research report verified the projections using industry standards with which the expert was

familiar and the projections were used in connection with the underlying merger at issue.

As the court concluded:

Mr. Ratner's lost profits analysis resembles the analysis admitted in SemCrude.

The three bases upon which our Court of Appeals distinguished SemCrude from

ZF Meritor exist in some form here. First, Mr. Ratner did not “simply ‘rel[y] on

a one-page set of profit and volume projections’ to calculate damages.” He,

like the expert in SemCrude, relied on Valuation Research's adoption of those

projections “contemporaneously prepared” around Health Grid's merger with

8 ZF Meritor, LLC vy. Eaton Corp., 696 F.3d 254, 292 (3d Cir. 2012) (affirming district court’s

exclusion of expert testimony where the expert relied on “a one-page set of profit and volume

projections without knowing the circumstances under which such projections were created or the

assumptions on which they were based.”).

® See Allscripts Healthcare, LLC v. Andor Health, LLC, Civ. Act. No, 21-704-MAK, 2022 WI 3021560,

at * 17.112 (D. Del. July 29, 2022) (collecting cases).

8 In re SemCrude L.P., 648 FE App’x. 205, 214 (3d Cir. 2016) (holding the bankruptcy court did not

abuse its discretion in admitting the expert testimony where “the Goldman Sachs Report was a

contemporaneous report capturing the marketplace value; [the expert] explained the reasons for his

teliance on the Goldman Sach’s analysis; and [the expert] then adjusted the Goldman Sachs

valuation based on his own analysis and judgment while giving cogent reasons to support his

conclusions”).

a5

Allscripts not “in anticipation of litigation.” Mr. Ratner, like the SemCrude

expert, relied on Valuation Research's use of the Merger Projections because

Valuation Research undertook “significant due diligence” to publish a GAAP-

compliant vaiuation of a publicly traded company's merger. Valuation

Research's stamp of approval distinguishes this case from the one-page set of

unverified projections upon which the expert relied in ZF Meritor. Second, Mr.

Ratner possesses experience comparable to the experience of the valuators who

prepared the Valuation Research report. While Mr. Ratner never worked at

Valuation Research like the SemCrude expert worked at Goldman Sachs, Mr.

Ratner still possesses enough experience in the field to know the methods

undergirding Valuation Research's due diligence. Third, Mr. Ratner “did not

simply adopt the [Valuation Research report] as his own.” Mr. Ratner swore

as to his reasons for finding the data in the Valuation Research report reliable.

He applied his judgment and experience in the field to determine Valuation

Research's adoption of the Merger Projections made the Merger Projections

reliable. This satisfies us Mr. Ratner’s methods are reliable enough to be

admitted.*!

Austin Smith’s determination to use a 14.8% WACC bears striking resemblance to

the situation in Allscripts. She states in her report that the WACC is the discount rate

calculated by Vantage Point for the solvency analysis it presented to Millennium in

connection with the Dividend Recapitalization Transaction.” At her deposition, Austin

Smith explains her review of the Vantage Point report, including that she and her team

reviewed a report that described Vantage Point’s choice of various premiums. She explains

the Capital Asset Pricing Model employed by Vantage Point. She also discusses the

comparable companies analysis performed by Vantage Point and explains the sources from

3! Allscripts, at *17 (footnotes omitted).

8 Austin Smith Report { 143. The Vantage Point report was prepared contemporancously with the

dividend recapitalization and was not in anticipation of litigation. Compare SemCrude, 648 Fed.

App’x at 213-14 (Goldman Sachs valuation was contemporaneously prepared and not in

anticipation of litigation).

which Vantage Point identified the risk premiums it chose.” Finally, Austin Smith testifies

that the Capital Asset Pricing Model is a model she regularly uses and is reliable.**

Austin Smith further explained why she determined to use the Vantage Point 14.8%

WACC., She testified about her own comparable companies analysis and that she did not

identify or derive a more accurate estimate of the WACC.® She also testified that

Millennium relied on the 14.8% WACC and that FTT’s WACC of 14.0% at the time

(“additional market evidence”), supported her conclusion that 14.8% was a reasonable

estimate for the WACC.*°

8 eg, Yvette R. Austin Smith Dep. Tr. 135:9-138:20, Ex. 2 to Decl. of Grant L. Johnson in

Opp’n to Defs,? Daubert Mot. to Exclude the Test. of Pl.’s Proposed Expert Yvette R, Austin Smith,

ECF No. 285-1.

4 Yd. at 125:7-14,

85 Td, at 117:4-119:20; 295:22-298:11.

86 at 118:16-119:4. Austin Smith summed it up as follows:

Q. Okay. So just to make sure I understand, you didn’t attempt to put your five

companies into their analysis and understand what the result would be?

A. No, because I was — I was looking to incorporate market information that I did

not develop, I was looking for a market information to confirm, be a confirmatory

piece of input to the market — to the analysis that | conducted. So to mix the two

together would actualiy work against that purpose.

Q. How is that?

A. Because I independently identified a set of five companies, I derived what was

the observed WACC implied by those five companies, and I came to the conclusion

that that observed WACC did not sufficiently compensate investors for the risk of

Millennium cash flows.

i then sought to understand whether there was market data that was

confirmatory of my conclusions. And in fact, when I iocked at the FTI analysis, the

Vantage Point analysis and the TA Associates analysis, ali of those analyses are

confirmatory of my conclusion and actually one of the aspects that I think reinforces

the robustness of the analysis is that even using slightly different companies and

77

Austin Smith’s use of the Vantage Point WACC is based on good grounds. Further,

it is apparent from a read of her deposition testimony that Defendants were able to—and

did—cross examine Austin Smith on the bases of her opinions. Finally, Defendants’ expert,

Amy Hutton, was also able to respond to Austin Smith’s report,*’

Whether Austin Smith’s solvency opinion is credible such that it supports a factual

finding that Debtors were rendered insolvent as a result of the Dividend Recapitalization

Transaction is not an issue to be resolved at this time. Austin Smith sufficiently explained

why she adopted Vantage Point’s WACC, the reasons she adopted it and the underlying

methodology Vantage Point employed.” Accordingly, I decline to exclude her testimony as

unreliable on these grounds.”

2. Reliability of the WACC calculated by Vantage Point

Defendants next seek to exclude portions of Austin Smith’s expert report as

unreliable because the 14.8% WACC includes a company specific risk premium of 5%, At

bottom, Defendants argue that a company specific risk premium is never appropriate as an

slightly different either methodologies or inputs, depending how you want to describe

it, all arrived at the same conciusion.

MR. POPOVSEY: Thank you. don’t have any further questions at this time,

Id. at 306:1-307:16.

87 See generally Def. Ex. 65 (Expert Report of Amy Hutton).

88 “The focus ... must be solely on principles and methodology, not on the conclusions that they

generate.” Daubert v. Merrell Dow Pharm., 509 US. 579, 595 (1993).

8 See ZF Meritor, 696 F.3d at 292.

Bg, SemCrude, 648 F. App’x. at 214.

79

adjustment to the WACC.” Rather, they argue, any company specific risk must be

accounted for by an adjustment to expected cash flows. To support their position,

Defendants rely on the opinion of their hired expert, Amy Hutton, and certain Delaware

Chancery Court opinions. Trustee distinguishes the cases cited by Defendants and argues

that Hutton’s opinion should be disregarded as inconsistent with precedent, accepted

methods of practitioners, and her own prior opinion in another case.”

I decline to establish a per se rule that company specific risk may never be accounted

for though an adjustment to the WACC and I do not read the cited cases as establishing

such arule. Jn re Orchard Enterprises 1s a post-trial decision in which the Chancery Court

concluded that it did not believe a company-specific risk premium should be used in a

CAPM calculation “especially in a case like this.”” The circumstances of that case

included: (@ the valuation of a public company in a take-private transaction, (41) the

company’s expert sought to use a company-specific risk premium, (iii) that expert “gave

overwhelming weight” to management’s projections and (iv) that expert was the company’s

financial advisor in the challenged transaction and had “his hands deep in the dough of the

projections used in the fairness opinion and then in his valuation report.” For those, and

other reasons, then-Chancellor Strine concluded that “Orchard has failed to convince me of

1 Des.’ Mem, of Law in Supp. of Their Mot. to Strike Certain Portions of the Rule 26(a)(2) Report

of Yvette Austin Smith at 16, ECF No. 249 (“The inclusion in the WACC of a company-specific risk

premium finds no support in the case law and has no basis in the financial theory and the academic

literature.”) (internal citation and quotation omitted).

Pl.’s Mem. of Law in Opp’n to Defs.’ Mot. to Strike Certain Portions of the Rule 26(a)(2) Report

of Yvette R. Austin Smith at 26-27, ECF No. 284.

°3 In ve Orchard Enters., Inc., C.A, No. 5713-CS, 2012 WL 2923305, at *19 (Del. Ch. July 18, 2012),

Hd. at *20.

40

the appropriateness of the company-specific risk premium used by [the company’s expert] in

his valuation of the company.”” Further, while recognizing that academics and finance

scholars disapprove including company specific risk premiums in the Capital Asset Pricing

Model, then-Chancellor Strine recognizes that practitioners use company specific risk to

capture risks not reflected in the WACC.” Finally, the court acknowledged that adjusting

available projections “would involve as much subjectivity as heaping on to the discount

rate” even though it would “force more rigor and clarity about the expert’s concern.”??”

Fd, at *21,

Id. at *19,

Td, at *20.

*% Defendants’ other cases are also distinguishable and do not support the exclusion of Austin

Smith’s expert report on these grounds. Union iff, 1995 Inv, Ltd. P’ship v. Union Fin. Grp., Lid. is an

earlier then- Vice Chancellor Strine decision in which he chose not to enter the debate about whether

company-specific risk premiums can be added to come up with an accurate cost of capital for use in

a DCF analysis noting, as he later does in Orchard Futers, the dichotomy between an academic

approach and a practitioner approach to valuation. 847 A.2d 340, 354 n.28 (Del. Ch. 2004),

Interestingly, after making this observation, then-Vice Chancellor Strine constructed his own DCF

analysis and chose to use the three-factor Fama and French CAPM cost of capital rather than the

original CAPM. Jd. at 362. In doing so, however, he acknowledged that the Fama-French three-

factor model is “not wholly accepted, neither is the original CAPM itself.” id. at 363.

Solar Cells, Inc. v. True N. Partners, LLC was decided in the context of a motion for a preliminary

injunction. No. Civ. A. 19477, 2002 WL 749163 (Del. Ch. Apr. 25, 2002). The court decided for

noultiple reasons that there was a reasonable probability that it would not find entirely fair an

investment banker’s valuation of a company (prepared for a merger transaction) that differed

materially from the investment banker’s valuations made two and six months earlier. In a footnote,

the court noted that even the purchaser’s litigation expert valued the company higher and only

reduced his valuation by applying a 40% “marketability” discount and that this litigation expert had

no expertise in the company’s industry. In that context, the court made the general observation that

the Court of Chancery is “suspicious of expert valuations offered at trial that incorporate subjective

measures of company specific risk premia, as subjective measures may easily be employed as a

means to smuggle improper risk assurnptions into the discount rate so as to affect dramatically the

expert’s ultimate opinion on value.” Jd. at *6 n.11 (citations omitted), Even with this caution, the

court did not rule, as a matter of law, that company specific risk premia are never appropriate in

yaluing a company. In the matter before me, the 5% company specific risk premium complained

about was used by Vantage Point in valuing Millennium at the time of the transaction; it is not first

being “smuggle[d]” into risk assumptions by an expert hired for litigation.

an

Here, on a pretrial motion to strike, I will not exclude this testimony. The valuation

before me is of a private company, the expert who is seeking to employ a company specific

tisk premium was retained by the liquidating trustee (not Millennium) and was not involved

in creating management’s projections. To the extent that Defendants believe Austin Smith’s

use of a company specific risk premium is inappropriate on the facts of this case or

duplicative of adjustments made to projections, this is an area ripe for cross-examination

and/or a counter expert opinion. Accordingly, I decline to exclude her testimony as

unreliable on these grounds.”

3. The ability to pay debts and the capital adequacy tests

In their final argument to exclude the expert report of Austin Smith, Defendants

argue that she failed to consider Millennium’s ability to refinance the term loan or raise

additional capital and therefore her opinions based on the ability to pay debts and capital

adequacy tests must be excluded. This argument, however, is belied by Austin Smith’s

report. Page 91 of her report states, “I further considered Millennium’s prospects for

refinancing the Term Loan” and concluded that Millennium’s leverage ratios placed

“Millennium above the levels typically associated with Caa-C credits[, meaning t]here was

no reasonable prospect that Millennium would repay the Term Loan at maturity in April

2021.” Again, her conclusions are properly the subject of cross-examination.

Accordingly, I decline to exclude her testimony on this ground.

Trustee provided facts from which I can infer, when viewed in the light most

favorable to Trustee, Millennium did not receive reasonably equivalent value in exchange

SemCrude, 648 EF. App’x. at 214.

100 Austin Smith Report at { 169.

a1

for the fee paid to Defendants and Millennium was insolvent at the time of the Dividend

Recapitalization Transaction or became insolvent as a result. Summary judgment on

Trustee’s claim for constructive fraudulent transfer will not be granted.

Conclusion

For the reasons set forth above, Defendants’ motions are DENIED.

ot ee 2 é eA “ .

Dated: March 12, 2025 0 TOME ff bottle et bef Huet,

“Laurie Selber Silverstein

United States Bankruptcy Judge

25