# ASARCO LLC v. Americas Mining Corp.

> District Court, S.D. Texas · August 30, 2008 · 396 B.R. 278

URL: https://www.frixlaw.com/law-library/cases/1966718

## Case

- **Full name:** ASARCO LLC, Southern Peru Holdings, LLC, Plaintiffs, v. AMERICAS MINING CORPORATION, Defendant
- **Court:** District Court, S.D. Texas
- **Decided:** August 30, 2008
- **Citations:** 396 B.R. 278; 2008 U.S. Dist. LEXIS 71269; 2008 WL 4009927
- **Precedential status:** Published
- **Opinion:** Opinion by Hanen
- **Judges:** Andrew S. Hanen
- **Cited by:** 84 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/1966718

## How later opinions describe it (automated extraction)

- recognizing that Delaware law on alter ego “requires that the corporate structure cause fraud or some similar injustice,” and explaining that “although fraud is not required, an inherent trait of Delaware’s alter ego theory is injustice or unfairness.”
- holding that a transfer was made with an actual intent to hinder, defraud, and delay creditors despite conveying reasonably equivalent value
- holding that the defendant transferee may be sued for breach of fiduciary duty when it accepted a fraudulent stock transfer, knowing that the transfer would breach title fiduciary duty the transferor owed its creditors
- finding that even though debtor survived for more than two years after the challenged transfer, it had “unreasonably small assets and was unable to generate sufficient cash flow to sustain operations . . . .”

## Opinion text

MEMORANDUM OPINION & ORDER
ANDREW S. HANEN, District Judge.
The plaintiffs, ASARCO LLC and Southern Peru Holdings LLC (both of which are currently in bankruptcy), filed this action in their capacities as debtors in possession and on behalf of ASARCO’s creditors to recover from Defendant Americas Mining Corporation (“AMC”) the stock representing 54.18% of the outstanding shares of Southern Peru Copper Company (“SPCC”) and damages resulting from having been wrongfully deprived of
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this stock ownership.
1
Alternatively, they request damages due to the actions of the defendant. They also seek punitive damages. Plaintiffs assert five causes of action: (1) actual fraudulent transfer; (2) constructive fraudulent transfer; (3) breach of fiduciary duty; (4) aiding and abetting a breach of fiduciary duty; and (5) conspiracy.
The defendant has denied these allegations and has pursued a counterclaim for recoupment against ASARCO based on: (1) breach of representation; (2) breach of good faith and fair dealing; and (3) breach of warranty. The Court and the parties have agreed that the Court has jurisdiction over all claims and counterclaims under 28 U.S.C. § 1334 and that venue is proper in this Division and District.
The Court held a four-week bench trial and hereby issues this opinion to partially resolve this matter. The Court prefers to address these issues in a narrative form. Nevertheless, the factual statements made hereinafter (except where the Court specifically notes a factual dispute) should be considered as findings of fact regardless of any heading or lack thereof. Moreover, for virtually every finding, the record is replete with testimony and exhibits that support the finding. Similarly, the legal conclusions, except where the Court discusses the various competing legal theories and positions, should be taken as conclusions of law regardless of any label or lack thereof.
Pending before the Court as the trial began were: (1) Americas Mining Corporation’s Motion for Summary Judgment on Plaintiffs’ Claims (Doc. No. 251); (2) Americas Mining Corporation’s Motion for Summary Judgment on Plaintiffs’ Standing to Bring Counts I and II (Doc. No. 253); and (3) Plaintiffs’ Motion for Public Trial. (Doc. No. 301). Also pending were various
Daubert
motions filed by both sides. (Doc. Nos. 302, 304, 305, 306, and 307). Prior to beginning the presentation of the evidence, the Court granted the Motion for Public Trial. It deferred ruling on either of the motions for summary judgment. Since the trial was to the bench, and no harm could result, the Court also deferred ruling on the
Daubert
motions as they were very fact intensive, and the Court preferred to resolve the objections in the context of the evidence as it was being presented and to allow both the direct-examination and cross-examination to fully develop each matter. The rulings expressed herein resolve the
Daubert
motions and also resolve the issues raised by the motions for summary judgment.
During the trial, the parties presented various motions. The defendant made a motion for judgment or directed verdict which the Court, in effect, overruled from the bench preferring to rule on all of the issues raised with a full record. (Doc. No. 392). Also, Plaintiffs filed a motion to enforce trial subpoenas for Daniel Telle-chea, German Larrea, and Genaro Larrea. All three witnesses had previously testified in the trial by video deposition. During the arguments on this motion, counsel for Plaintiffs conceded that, despite the fact that hours of these videos had been played, the witness Plaintiffs really needed to testify live was German Larrea. After hearing arguments from both sides, the Court decided it needed to hear from Mr. Larrea for a number of reasons and ordered his appearance. Further, in entering its order on this motion, the Court took into consid
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eration the many representations made by defense counsel that Mr. Larrea would appear live.
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Counsel for Plaintiffs relied upon these representations. The Court found that it would result in “unfair gamesmanship” to allow the defendant to shield its CEO, German Larrea, from testifying after having represented to counsel that he would appear live. The Court hereby notes that it found his testimony to be quite valuable, particularly on the history of the relationship between Grupo and ASARCO and on the copper mining industry. He provided information not offered by any other witness for either side and not contained in his previously played video deposition. In formulating this Memorandum Opinion and Order, this Court has not utilized his live testimony, with one exception, as support for any ruling on any contested issues.
3
While the Court did not, in fact, grant the plaintiffs’ motion, the practical consequence of the Court’s ruling was the granting of Plaintiffs’ motion with regard to German Larrea. Plaintiffs’ counsel’s statement with regard to the necessity, or lack thereof, to hear from Genaro Larrea and Daniel Tellechea live had the practical effect of withdrawing the remaining portion of their motion. (Doc. No. 384). The Court’s ruling also had the effect of overruling Defendant’s Motion for Reconsideration. (Doc. No. 395).
1. BACKGROUND OF THE DISPUTE
A. The Players
As of 2003, ASARCO Incorporated (hereinafter “ASARCO”) had been involved in the mining industry, both domestically and internationally, for over a century. During the pertinent time-period involved in this dispute, ASARCO was incorporated in New Jersey and headquartered in Phoenix, Arizona. In February of 2005, ASARCO Incorporated was merged into ASARCO LLC, a Delaware limited liability company.
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One of the primary products from its mining operations was, and is, copper. In 1999, when this saga began, ASARCO also owned two non-mining subsidiaries, Enthone-OMI, Inc., a specialty chemicals maker, and American Limestone Company, which produces construction aggregates, ready-mixed concrete, and limestone.
Grupo Mexico, S.A.B. de C.V. (hereinafter “Grupo”) is a Mexican corporation that has been involved in the mining industry since the 1960’s. Grupo is essentially a holding company involved primarily in two different industries: mining and railroads. Its railroad operations are concentrated in a subsidiary called Infraestructura y Transportes Mexico, S.A. de C.V. (hereinafter “ITM”), while its mining interests are vested in another subsidiary called Grupo Minera Mexico (hereinafter “Min-era Mexico”). Grupo’s Chairman of the Board and Chief Executive Officer is German Larrea. He has worked for Grupo for decades. He succeeded his father, who had founded Grupo and headed it for a number of years. The Larrea family and their company, Empresarios Industriales de Mexico, S.A. de C.V. (of which German Larrea is also the Chairman of the Board and Chief Executive Officer), own the con
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trolling interest in Grupo. The record establishes without a doubt that German Larrea rules Grupo and all of its affiliates and no major decision is made without his approval.
For many years prior to 1999, Grupo and ASARCO had various business relationships. In Grupo’s early ventures in the mining arena, it actually partnered with ASARCO. In fact, at one point in time, ASARCO had an ownership position in Grupo and had a representative on Gru-po’s Board of Directors. ASARCO even had a subsidiary named ASARCO Mexica-na, which over time became a Grupo entity. As Grupo’s mining operations grew, it became a more integrated operation, one that took the ore from the ground all the way through the smelting or refining process. Its mining operations, in addition to copper, include mining for silver, zinc, and gold. As time progressed, ASARCO abandoned its position in Grupo, and the two companies eventually seemed to have switched roles. Grupo liked ASARCO’s assets and numbers and began to acquire its shares. ASARCO had large copper ore reserves in the United States, in addition to its ongoing copper production and international assets. By 1999, Grupo had accumulated 10 percent of the stock of ASAR-CO.
One of the international assets that AS-ARCO owned was the controlling interest (54.18%) in Southern Peru Copper Company (hereinafter “SPCC”) — a publicly traded Peruvian copper company. ASARCO’s ownership equated to approximately 43,-348,949 shares of the Class A Common Stock of SPCC. These shares, as will be discussed in detail below, were “Founder’s Shares” with enhanced voting rights. Phelps Dodge and Cerro Trading Co., Inc., both copper mining competitors of ASAR-CO (and with Grupo for that matter), owned the other Founder’s Shares. The remaining shares of common stock were “thinly traded.” In an average month, less than one percent (1%) of the shares of SPCC were actively traded on the open market. These publicly traded shares did not possess equal voting rights with the Founder’s Shares.
In the late 1990’s, Grupo began to look for opportunities to expand its mining investments. While Grupo was not necessarily looking for product diversification, it was seeking geographic diversity. Grupo wanted to globalize and take advantage of NAFTA. It also wanted access to the financing available on the New York Stock Exchange. Two companies attracted its interest: ASARCO and Cypress Minerals. Grupo hired Lehman Brothers to study an acquisition of Cypress and Chase to study a possible acquisition of ASARCO. While Grupo was seriously looking at these merger possibilities, it had not begun to actively pursue either target. Consequently, it was somewhat surprised and spurred to action by the fact that one of its competitors, Phelps Dodge, in the latter half of 1999, made a tender offer for ASARCO. In reaction, Grupo accelerated its analysis and decided to enter the bidding war for ASARCO instead of pursuing Cypress. Grupo preferred ASARCO’s reserves and production numbers. According to Grupo’s thinking, ASARCO had better properties in the United States than Cypress and also had reserves in Chile and Peru. Phelps Dodge’s offer was approximately of $26.75 per share, which was more than the stock market price of the stock. A bidding war ensued and ultimately Phelps Dodge’s bid was topped by Grupo’s bid of $29.75 a share for the remaining 90% of the shares of ASARCO that Grupo did not already own. Due to the fact that the acquisition was the result of a contested bidding war, Grupo was unable to do complete due diligence into ASARCO’s condition before acquiring AS-
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ARCO. At the time of the acquisition, Grupo did not feel that either the potential environmental or asbestos liabilities of AS-ARCO were a major concern.
Grupo’s total purchase price exceeded $2 billion, which included $1.16 billion in cash and the assumption of ASARCO’s outstanding debts. A formal agreement between ASARCO and Grupo was entered into in late October of 1999, which was accepted by the stockholders of ASARCO the next month. To finance the acquisition, Grupo negotiated an $817 million loan from Chase Manhattan Bank and Chase Securities Inc. (hereinafter referred to jointly as “Chase”) to a subsidiary that Grupo had formed specifically to acquire ASARCO. Its name was ASMEX. This loan was guaranteed by Grupo. The remainder of the cash portion, approximately $430 million, came from equity capital contributed by Grupo or one of its affiliates. After the acquisition was completed, AS-MEX was merged into ASARCO, and AS-ARCO became a wholly owned subsidiary of Grupo. ASARCO’s new board of directors consisted of German Larrea, Genaro Larrea, Hector Calva, Daniel Tellechea, Oscar Gonzalez Rocha, Xavier Garcia de Quevedo, Alfredo Casar, Daniel Chavez, Manuel Calderon, Alberto de la Parra, Francis McAllister, and Kevin Morana. All of the individuals, with the exception of Francis McAllister and Morana, were affiliated with Grupo.
Consistent with the practice in many leveraged buyout situations, the debt created by the acquisition was transferred to the acquired company. This greatly increased ASARCO’s debt load. The $817 million debt from the Tender Offer Facility was added to its pre-existing debt of approximately $950 million — thus, saddling ASARCO with a total long-term debt of $1.767 billion. ASARCO also had an additional $450 million debt added to its ledger as part of a Revolving Credit Agreement that was financed by a consortium of 19 banks, again headed by Chase. This replaced a pre-acquisition debt facility. This new Revolving Credit Agreement (referred to many times in the record as the “Chase Revolver” or “Revolver”) had a maturity date of November 15, 2002. It was to be secured by many of ASARCO’s assets including inventory, accounts receivable, and the stock ASARCO held in SPCC. It was also guaranteed by Grupo.
It was this anticipated pledge of SPCC stock that is one of the building blocks of the current controversy. Plaintiffs claim that the following described transaction was motivated by an intent to defraud the creditors of ASARCO. Grupo and Americas Mining Corporation (hereinafter “AMC”), of course, deny this claim. The merits of and defenses to these allegations will be discussed in more detail below. Suffice it to say, Chase sought security for this new Revolver and Grupo, attempting to satisfy this need, sought to offer the SPCC shares as collateral. The ability to “pledge” these shares was arguably limited by the controlling SPCC corporate documents. These documents include the SPCC Shareholders Agreement and the Restated Certificate of Incorporation. ASARCO’s stock ownership (being Founder’s Shares) was such that it was allowed to nominate a majority of the SPCC directors and it, along with the other Founding Stockholders, had the right to elect 13 of the 15 members of the Board, as well as the SPCC President. SPCC was, and is, a successful mining operation in Peru. Thus, regardless of whose point of view one adopts, this stock was a very valuable asset.
Under the terms of section 4.9 of the Restated Certificate of Incorporation (and under the terms of the SPCC Stockholders Agreement), any Founding Stockholder
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who transferred its Founder’s Shares to a party that was not an affiliate would cause those shares to lose their super-voting rights. Those remaining Founder’s Shares would retain their super-voting features as long as the three Founding Stockholders continued to hold at least an aggregate of 35% of the outstanding SPCC stock. If the percentage of Founder’s Shares owned by the three founding entities dipped below 35%, all of the shares would convert to regular common stock.
Grupo was worried about triggering the provision whereby ASARCO’s SPCC shares would lose their superior voting rights when it pledged them as the collateral for the Revolver provided by the Chase Bank consortium. It consulted with its legal and financial advisors to devise a strategy to avoid this occurrence. To avoid this possibility, on November 8,1999, Grupo created Southern Peru Holding Company (hereinafter “SPHC”) as a totally owned subsidiary of ASARCO. Its Board of Directors consisted of German Larrea, Genaro Larrea, and Agustín San-tamaría, all individuals who owed their loyalty to Grupo. Grupo then had ASARCO transfer ownership of the stock to SPHC. Since SPHC was wholly owned by ASAR-CO, it was, therefore, an affiliate of a Founding Stockholder and the transfer did not trigger the loss of Founder’s Share status. Then ASARCO pledged the SPHC stock, not the SPCC stock, to Chase, thus avoiding a claim that it might have triggered a conversion of its Founder’s Shares to common stock by transferring (“pledging”) the SPCC shares directly. SPHC’s sole function was to hold and own the SPCC stock. During the time of the events in question, SPHC had no employees, no business to perform, and no debt.
5
Grupo had a long-range goal of establishing an entity that would encompass producing interests in different geographic areas and ultimately taking that company public. In furtherance of this goal, Grupo next formed Americas Mining Corporation as a wholly owned subsidiary in October of 2000. At all of the pertinent times involved in this matter, AMC had no full-time employees and it did no business other than hold ASARCO’s stock. AMC is a Delaware company headquartered in Phoenix, Arizona. Like SPHC, its Board consisted only of Grupo employees or retainers. Grupo then transferred its AS-ARCO stock to AMC. The stated purpose for this maneuver was the eventual goal of having AMC own all of Grupo’s mining interests (in the United States, Mexico, Peru, and anywhere else that they may be acquired) and having this American company have access to domestic capital markets. By the end of this restructuring, for all purposes relevant to this case, a four-tier corporate family was established. Grupo wholly owned AMC, which wholly owned ASARCO, which wholly owned SPHC, which owned the majority of stock in SPCC.
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Grupo’s practice of stocking the boards of its subsidiaries with Grupo employees or loyal retainers was described as a “uniform practice” and was one that continued up through the transaction in question, contrary to the advice of its eor-
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porate counsel at Sidley Austin Brown & Wood, LLP (hereinafter “Sidley Austin”).
B. The Market
While somewhat in dispute in this case, all of the evidence from individuals who have been intimately involved in the mining industry portrays the copper market as a cyclical market — one in which prices go through periods of high prices and then fall into periods of low prices. Those in the business essentially described the prediction of copper prices to be an exercise in futility. One veteran of 30-plus years in the mining industry, Bernard Guarnera, basically denied being an “expert” in the area of price predicting because “no one is ever right.” This will be discussed in more detail below, but suffice it to say that the five-year period between 1999 and 2004 was one of low prices. In 1999, at the time Grupo acquired ASARCO, average copper prices were approximately 70-80 cents a pound. Subsequently, they were 70-80 cents (in 2000) and 60-70 cents (in 2001 and 2002). In 2003, the average prices inched back above the 80 cents per pound figure and then in 2004 jumped to an average price well above $1.00. These lower prices put a great deal of financial stress on the copper industry as a whole and on ASARCO, specifically — especially given its newly acquired debt. Prices in 2008 now exceed $3.50 per pound based primarily on increased demand. This is compared to a 1990’s pre-transaction high of 95 cents per pound of copper in 1995.
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Copper companies, despite their size, have little direct effect on prices. The market sets the price, and most companies sell at this price. Even the long-term contracts were and are primarily based upon the current price. It is not customary for prices to be set for a number of years. This is true for Grupo, its subsidiaries, and its competitors. The recent rise in prices has been primarily fueled by demand from China and India. Prior to this new trend, the United States was the world’s largest consumer, but now China has replaced it. Predictions are that India’s consumption will also continue to rise.
C. ASARCO’s Post-Acquisition Financial Position And The Transfer Of The SPCC Stock
The transaction at the heart of this conflict is the 2003 transfer of SPCC stock from SPHC to AMC. AMC claims that this transfer was the most viable option, at the time, to save ASARCO from its financial problems. ASARCO alleges that the transfer was based upon Grupo’s assessment that ASARCO’s viability was questionable and that the SPCC stock was its most prized asset. Plaintiffs contend that the sale, therefore, was not made to improve ASARCO’s financial position, but was solely a means for AMC/Grupo to “cherry-pick” ASARCO’s most prized asset before it was lost to creditors or by bankruptcy. There is a general agreement between the parties that whatever the prevailing intent, the actions were taken because of low copper prices, the increased debt load at ASARCO, and the mounting level of contingent environmental and asbestos claims.
1. The Department Of Justice (Hereinafter “DOJ”) Lawsuit
While there is a dispute over the motivation and intent for the transfer of the SPCC stock, there is no dispute over the fact that ASARCO’s environmental problems (in addition to its exposure to asbestos claims) were an overriding and complicating factor that plagued ASARCO and consequently AMC/Grupo. At the time of
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its acquisition by Grupo, ASARCO had numerous environmental problems. The extent of these problems was not known by Grupo because of its inability to conduct meaningful due diligence prior to its tender offer. In 2001, after Grupo had time to evaluate its new acquisition, one Grupo official described ASARCO as a company with very high operating costs, high real liabilities, and very high contingent liabilities. These problems continued to multiply in the post-acquisition years. The environmental problems were complicated by numerous asbestos-related claims.
8
As ASARCO’s financial problems began to mount, the number of times it failed to comply with various environmental obligations also increased.
As ASARCO’s troubles increased, it became apparent to those concerned that someone, and in all likelihood AMC/Grupo, would try to acquire the SPCC stock, since that stock was ASARCO’s “crown jewel.” As early as December of 2001, AMC/Gru-po/ASARCO discussed selling the SPCC stock as a means to solve ASARCO’s outstanding liabilities. These discussions with lenders and others continued throughout 2002 and as will be seen below, culminated with the sale in March of 2003. These discussions become so widely known that on October 4, 2002, Grupo issued a press release to calm the growing speculation that the SPCC stock would be sold on the open market. The release announced instead that the stock would be transferred in such a fashion that there would be no change in beneficial ownership or control.
The clearer it became that the SPCC stock would be transferred to someone, the more uneasy some of ASARCO’s creditors became. One of the largest creditors was the United States. Ultimately, the Department of Justice became so concerned about ASARCO’s ability to satisfy its environmental responsibilities if the stock was sold that in August of 2002, it filed a lawsuit in federal court to enjoin the sale of the stock. The DOJ was successful in obtaining a temporary injunction. As the plans (detailed below) for the sale of the SPCC and AMC/Grupo began to take shape and gain traction inside the Grupo corporate family, the attempts to resolve the injunction situation with the DOJ intensified. AMC/Grupo’s goal in these negotiations was to satisfy the DOJ that the sale of the stock would not jeopardize AS-ARCO’s ability to fulfill its environmental obligations and to otherwise sufficiently satisfy the DOJ such that it would be willing to agree to a dissolution of the injunction. The ASARCO directors at this point were all directors officers or employees of Grupo and/or AMC with the exception of Alberto de la Parra, who was Gru-po’s outside counsel and is currently its General Counsel.
In late 2001, the DOJ commissioned a study from Behre Dolbear and Company (hereinafter “Behre Dolbear”) to estimate the fair value of the SPCC stock
9
. Their report, issued in April of 2002, indicated the value ASARCO’s interest in SPCC was $817.2 million. AMC/Grupo was, and is to this day, critical of that evaluation. Grupo, after the acquisition, hired Pricewaterhou-seCoopers (hereinafter “PWC”) to help it assign a value to the recently acquired assets. It assigned a business enterprise value of $893 million, which when adjusted
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to a value of the SPCC stock, results in a $672 million valuation. In the spring of 2001, AMC/Grupo/ASARCO retained Houlihan Lokey Howard & Zukin (hereinafter “Houlihan”) to provide opinions on the fairness of the transaction and ASAR-CO’s solvency post-transaction. Later, in light of the government’s report from Behre Dolbear, ASARCO asked Houlihan to update valuation reports it had previously made, which had put the value of the stock at $720 million. Houlihan eventually concluded in a July 2002 report that the stock was worth $662 million. The pertinent Houlihan employees met with the DOJ and pointed out that if one corrected for the flaws it perceived in the Behre Dolbear report, the “accurate” valuation would be $634.8 million, a figure less than the Houlihan evaluation.
The negotiations between AMC/Gru-po/ASARCO and the DOJ continued well into the fall of 2002.
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Ultimately, the Grupo entities agreed to temporarily resolve their differences with the DOJ by agreeing to fund a $100 million trust in return for a three-year moratorium on any attempt by the federal government to seek judicial enforcement of environmental liabilities. The trust was to be funded by a note that was part of the sale proceeds, and it was to be guaranteed by Grupo. In exchange, the DOJ conceded that ASAR-CO could proceed with the proposed sale. The settlement agreement was reduced to an agreed judgment (“Consent Decree”) which was signed by a federal judge in Arizona on February 3, 2003. The Consent Decree took into consideration the possibility that a lawsuit, like the instant one, might be brought by other interested parties and that the transaction might ultimately be set aside. If the sale were set aside, the agreed judgment would become null and void. An additional term required ASARCO to remain in business (i.e., not seek bankruptcy) for at least one year. The United States remains one of the largest creditors of ASARCO and is pursuing a large claim in the ASARCO bankruptcy.
2. Postr-Acquisition ASARCO And The Transfer Of The SPCC Stock
To reduce the debt from the 1999 acquisition, ASARCO almost immediately had to begin selling its “non-core” assets. The two most important sales were those of Ethone-OMI, which was sold for $503 million in December of 1999, and American Limestone in May of 2000 for $232 million. ASARCO used these funds to pay off the Tender Offer Facility in 2000.
This left ASARCO with approximately $300 million at its disposal to use as working capital according to Daniel Tellechea, Grupo’s Chief Financial Officer. Nevertheless, as the new century began, financial pressures began to mount. In addition to the fact that it was having problems meeting its day-to-day financial obligations, ASARCO was beset with legal liabilities from environmental and asbestos claims. Adverse judgments and settlements resulted in additional financial drain, and at times ASARCO was even having great difficulties paying its defense counsel and experts.
By the fall of 2001, ASARCO’s financial difficulties had reached a point where they could no longer be ignored. In September 2001, ASARCO technically defaulted on
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the $450 million Revolver. In October, it engaged the law firm of Sidley Austin to provide bankruptcy and restructuring advice. Also, in October, ASARCO’s debt far exceeded the sales volume and profit it was generating. ASARCO was falling behind on payments to many of its critical vendors. Some even refused to supply the parts or fuel for the vehicles necessary for ASARCO’s mining operations. Instead of rebounding, copper prices fell to the vicinity of 60 cents per pound by November 2001. ASARCO did not have the $50 million it needed to pay a bond debt that came due in December. In late 2001, the Larrea family (through AMC) loaned $41.75 million to ASARCO to keep it afloat.
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In 2002, ASARCO’s auditors, reviewing 2001 numbers, indicated that there was “substantial doubt about ASARCO’s ability to continue as a going concern.” Arthur Anderson reported a loss for AS-ARCO of $392 million in 2001 and predicted that ASARCO would need an additional $200 million cash infusion in 2003. Late in 2001, AMC/Grupo/ASARCO and their ad-visors began to seriously discuss plans for some kind of major restructuring, including discussions of filing bankruptcy. By December, they were also in negotiations with their lenders about the best course of action.
The financial problems continued to mount in 2002. In January, ASARCO stopped paying various creditors and contractors. It owed over $80 million in past-due debt by February 2002. Throughout 2002, ASARCO could not even make the payments on the principal or interest it owed to the Larrea family, thus incurring interest charges, which were not paid until October of 2003. ASARCO was not even able to pay the very experts it had retained to help with the cash crisis. Midway through 2002, Sidley Austin noted that Houlihan could not render a solvency opinion for ASARCO and if one was needed, AMC/Grupo would have to hire another firm. Houlihan had valued the shares at $641 million but stated that the purchase price would need to include a premium of $193 million for Houlihan to be comfortable rendering a fairness or solvency opinion. Daniel Tellechea testified that in 2002 ASARCO had a negative stockholder’s equity. The record is replete with examples of a variety of debts that ASAR-CO could not pay.
As more debts became past due, there seemed to be very few options that could resolve ASARCO’s financial position. Those included cutting costs and reducing production, high-grading mines, borrowing money, selling assets, or hoping for a quick and/or drastic move upward in copper prices.
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ASARCO had already begun to high grade and to cut production and costs, but these measures were not enough. Since copper prices seemed mired in the range of 70-80 cents, no help was forthcoming in that area. The only options left available to attempt to right the ship were borrowing more money or selling more assets. With its income already not covering the debts it was incur
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ring, as well as the past-due liabilities, the chances of obtaining successful financing seemed remote. Due in part to the unpaid bills, default on loan covenants, cross-default positions, and looming bond obligations, Chase began to apply increasing pressure on ASARCO for payment in full on the Revolver. Chase threatened to foreclose on its security interests (including the SPHC stock) if the debt was not paid. Most AMC/Grupo/ASARCO insiders and consultants felt that there were only plausible two courses of action: bankruptcy or the sale of assets. At least one bankruptcy expert testified at trial that either course of action would have been reasonable. ASARCO’s best and most valuable asset was ASARCO’s stock in SPCC. Beginning as early as 2001, AMC/Grupo concluded that the most viable option was to sell the SPCC shares. However, AMC/Grupo did not want to relinquish control of this valuable asset. Even in the midst of this prolonged copper price downturn, the SPCC operations remained profitable — this being another indication of the quality of the Peruvian operation.
To stay afloat, ASARCO monetized insurance policies, sold equipment, high graded certain mines, and failed to make payments and cash calls on certain legal obligations, investment properties, and/or mining prospects.
13
Between 1999 and 2002, apart from its ownership in SPCC, ASARCO had net losses in excess of $680 million. This was true despite the fact that it monetized insurance policies in an amount exceeding $170 million.
Various legal and financial experts were hired to help effectuate a restructuring and, if possible, an intra-company sale of the SPCC stock. Houlihan had already been hired to provide opinions regarding the fairness of any proposed consideration and the post-transaction solvency of AS-ARCO, and Sidley Austin had also been hired by AMC/Grupo/ASARCO. AMC/Grupo/ASARCO hired the law firm of Squire Sanders & Dempsey (hereinafter “Squire Sanders”) in early July of 2002 to help formulate and analyze possible options. In August of 2002, they also hired Ernst and Young Corporate Finance (hereinafter “EYCF”) to advise them with regard to possible restructuring. Later, ASARCO expanded the duties of EYCF to evaluate the SPCC stock.
As noted, a year earlier, Houlihan estimated that a $720 million sales price for the SPCC stock would be fair from a financial standpoint and also opined that this sale would leave ASARCO solvent. By May of 2002, however, Houlihan reported that ASARCO would need to realize $834 million for the price to be fair from a financial standpoint and for ASARCO to continue operating properly. It also suggested, for the first time, that ASARCO might be better off financially if it kept the shares of SPCC.
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In July of 2002, Houli-han concluded, somewhat in response to the Behre Dolbear figure of $817.2 million, that the fair market value of the shares was $662 million.
With looming financial deadlines and no expectation for a surge in copper prices, EYCF and Squire Sanders along with company executives began to seriously consider refinancing and restructuring alternatives, including the possibility of filing bankruptcy. From its first meeting with
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Squire Sanders in Mexico City in July of 2002, AMC/Grupo stressed their desire to transfer the SPCC stock to AMC and do it in such a manner as to avoid a fraudulent conveyance action. The record clearly reflects the continual desire of Grupo to keep control of the SPCC stock. While it saw the need to sell the stock to generate funds for ASARCO, neither AMC/Gru-po/ASARCO nor any third party marketed the SPCC stock in any kind of public fashion. While German Larrea testified that he told Chase that he would review any third-party offers, AMC/Grupo/ASAR-CO did nothing to solicit or seek out such offers. For example, they never hired an investment bank, mining consultant, or financial institution to help place the stock on the market. Numerous witnesses testified and multiple exhibits support the conclusion that it was AMC/Grupo’s constant desire to retain the SPCC stock.
15
Additionally, the notes from that same meeting indicate a secondary goal of AMC/Grupo was to find a means of putting cash into ASARCO in a manner whereby the “value of new cash investment does not automatically flow to creditors but is retained by [AMC/Grupo].” Shortly thereafter, Squire Sanders recommended that ASARCO add independent directors to ASARCO’s Board to help serve on a Restructuring Committee. That Committee was formed in October of 2002 and consisted of the two new independent directors, Al Frei and Jock Patton, plus Genaro Larrea, ASARCO’s President (and brother of German Larrea, who was Chairman and CEO of Grupo and AMC). This Committee met five times over the subsequent four months.
By late 2002, Squires Sanders reported that ASARCO was in danger of running out of cash. Tellechea was predicting in October of 2002 that there would be a cash shortfall of $11-31 million by the year’s end. AMC/Grupo also entered negotiations with the Chase Bank group for an extension of the Revolver, which otherwise would come due in November of 2002. As part of those negotiations, AMC took a $50 million participation interest in the $450 million obligation. This resulted in a two-month extension of the due date to January 31, 2003. This extension agreement was reached in tandem with the near-completion of the ASARCO/DOJ negotiations to dissolve the injunction. The decision was ultimately reached by Grupo to have ASARCO sell the SPCC shares to AMC.
16
It was recognized by all involved, including the boards of Grupo, AMC, and ASARCO as well as their legal and financial advis-ors, that such a transaction would be viewed by everyone as an intra-company transaction. That being the case, and in order to get the benefit of the business judgment rule, it was decided that the transaction must not only be for reasonably equivalent value, but that it must also be blessed by the outside directors.
Of additional concern was the upcoming deadline to redeem the so-called “Yankee Bonds.” At issue were $100 million worth of outstanding bonds coming due on February 3, 2003. The bonds were unsecured. The bonds were drawing periodic interest, which ASARCO was not paying. These bonds and the Chase Revolver were the
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only upcoming fixed debt obligations. The next long-term financing obligations were bonds coming due in 2013. As will be seen below, there was significant internal debate over the need to and/or wisdom of paying the Yankee Bonds at par. The individuals at AMC/Grupo wanted ASAR-CO to pay the bonds at par plus interest, which is what eventually happened. Various individuals at ASARCO and its advis-ors suggested at least two separate avenues: (1) buying the bonds at discount (they were trading on the open market at 50-60 cents on the dollar at various times during 2002); or (2) not paying them at all and treating the bond holders as any other unsecured creditor. AMC/Grupo officials testified at trial that the “banks” were forcing it to pay these bonds as a condition of refinancing. There were exhibits introduced at trial to support this assertion, especially with respect to AMC/Grupo’s ongoing negotiations with one bank in particular, Barclays. Similarly, there was testimony, verified by at least three witnesses and multiple exhibits, that Genaro Larrea told individuals involved in the restructuring that the bonds had to be paid because Inbursa, a Mexican bank that owned, or whose principals owned, a large number of the bonds, was demanding payment as a condition of its financing the Grupo purchase of the SPCC stock. These statements were later retracted by Genaro Lar-rea. There was also evidence that several banks expressed the contrary opinion, i.e. that the bonds should not be paid. Suffice it to say, as the proposed sale began to take shape, a second critical debt deadline loomed, and a strategy had to be devised to deal with it.
As stated above, Squire Sanders and EYCF recommended two local businessmen to serve as independent directors. Both were local Phoenix businessmen who had worked with Squire Sanders before, and both had experience in companies that were in or on the verge of bankruptcy. When it became clear that Chase would grant an extension beyond the November 2002 deadline, it became less certain that bankruptcy was the only way to protect the SPCC stock from foreclosure. Given that a sale was possible, the role of the two independent directors was changed to include the duties of being the independent eyes and ears on this intra-company transaction.
In the meantime, EYCF (based in part upon the work of its affiliate Ernst and Young LLP) found that the fair market value of the shares in December of 2002 was $640 million and in January of 2003 opined that the $765 million being paid in consideration was greater than the value of the stock at year-end 2002. On January 27, 2003, the Restructuring Committee met to consider the proposed transaction along with other pressing problems. Doug McAllister, General Counsel of ASARCO, presented the latest draft of the Consent Decree, which in substance allowed the stock sale to proceed. On behalf of EYCF, Grant Lyon presented Ernst & Young’s analysis of its valuation method and its final analysis concerning the value of the SPCC stock.
17
The Directors questioned this $640 million figure as being too low since the stock market price of the SPCC shares was $670 million at the time in question, but were apparently satisfied by Lyon’s explanation. Lyon discussed his reasoning as to why the DOJ/Behre Dol-bear figure of $817 million was not accurate. He also discussed the tax consequences of the sale and the various values
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that could be ascribed to the non-cash portion of the proposed consideration. Ultimately, the Committee’s conclusion was that, regardless of which of the various values was used, the total package exceeded the $640 million figure. Based upon the advice and the numbers presented to it, the Committee conditionally voted to recommend approval of the sale to AMC.
Nevertheless, the Committee refused to approve the payment of the Yankee Bonds, which were due on February 3, 2003, despite the representation by Genaro Larrea that such payment was a condition of the Banco Inbursa financing. Lyon explained that in 2003 significant cash flow and capital deficits were expected and that the proposed payment of the Yankee Bonds would leave ASARCO with no apparent means of meeting these needs. The Restructuring Committee agreed to defer the consideration of this issue pending updated cash flow projections. The Committee expressed its willingness to approve the payment of the bonds if ASARCO could still maintain operations and meet its obligations to other creditors.
At this point in time, the cohesiveness of the Restructuring Committee seemed to evaporate. The outsider members of the Committee along with some of its advisors sought to confer with senior management on these cash flow and creditor issues. (It was expected that the management team would present figures indicating a $60 million deficit or “hole.”) Genaro Larrea, the Committee’s third member, allegedly thwarted these efforts by sending the management team to Tucson, Arizona. On January 29, 2003, the Committee reconvened. The AMC/Grupo financing for the transaction was discussed. At that meeting, Genaro Larrea presented “new cash projections,” but no one could verify their accuracy. Patton insisted that management be made available to EYCF and the Committee members to verify these projections. The legal advisors present acknowledged that the Committee was undertaking proper procedures.
Then the discussion again turned to the payment of the Yankee Bonds. Larrea told the assembled group that contrary to what he had told them earlier, the payment of the Yankee Bonds was not a prerequisite of the financing that Grupo was seeking from Inbursa. The attorneys from Squire Sanders reiterated to the Committee that, in light of ASARCO’s financial position, ASARCO’s directors had a fiduciary duty to all of ASARCO’s creditors. “This duty requires that the Corporation preserve the value of its assets for the benefit of its creditors and attempt to treat, as much as possible, similarly situated creditors fairly and equitably.” They also instructed the Committee “if the payment of the Yankee Bonds did jeopardize the Corporation’s ability to continue its operations or meet its other scheduled obligation ... and essentially preferred one group of creditors over other similarly situated creditors, the directors would likely be considered to have breached their fiduciary obligations to creditors.” After this caution, the Committee agreed that no payment of the Yankee Bonds would be made until and unless EYCF verified that ASARCO would have the ability to continue after the bonds were paid. The meeting concluded, much like the one two days earlier, with the Committee deciding to wait for further information on the company’s cash position.
No sooner had they adjourned when Grupo issued a press release under ASAR-CO’s name. In that release were several statements that were not true or at the very least were misleading, including the statement that “... ASARCO will receive the funds necessary to pay $550 million in debt due next week.” This statement is
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somewhat misleading in that the plan was for ASARCO to receive only $500 million in cash. Further, the statement, in effect, announced that the Yankee Bonds would be paid — an act that had specifically been tabled by the Restructuring Committee. ($450 million of the cash would go toward paying the Revolver, and the remaining $50 million would go towards paying the Yankee Bonds. The additional $50 million owing on the Yankee Bonds would come from ASARCO.)
The press release also stated: “... [T]his agreement provides a structure under which ASARCO can meet near-term obligations ...” and “[T]he value of the transaction and the terms under which it will occur were validated in an independent analysis conducted by the international accounting firm of Ernst
&
Young.” Neither of these statements were completely true, as EYCF had not approved the “terms under which it would occur.”
Initially, ASARCO could not, at the time, meet its short-term obligations, and the agreement did not enable ASARCO to meet any of its other obligations (with the exception of the Chase Revolver, the Yankee Bonds, and the Larrea debt).
18
Further, EYCF later told the Board that it did not believe the payment of the Yankee Bonds would bring ASARCO to a position of financial stability. To the contrary, EYCF emphasized that the payment of the Yankee Bonds would cause ASARCO to face severe liquidity deficits. While upset at the press release for the reasons expressed above and because it violated their engagement agreement and was not cleared with the individuals working on the transaction, EYCF continued to take its directions from the Restructuring Committee. It reviewed the new financial projections and reported back on February 3, 2003. Even using the “new” figures, EYCF predicted negative cash balances of over $50 million during 2003. Further, they noted at least $75 million of unpaid debts to entities such as Glencore ($30 million), Dresder ($11 million), Mitsui ($13 million), the states of New York and Connecticut ($12 million), and $9 million in miscellaneous obligations.
19
Even using the Revised Projections, EYCF stated:
... we do not believe that ASARCO can continue its obligations without significant cash infusions. Such cash infusions could come from both the residual cash of $50 million from the sale of the SPCC stock (after the Chase $450 million facility is satisfied) ... or the monetization of certain insurance policies in the approximate amount of $49 million ... However, if the Residual Cash and the Insurance Proceeds are used to pay the $100 million Yankee Bonds ..., we believe that ASARCO will face the possible inability to continue to fund its operations.
EYCF made it clear that paying the Yankee Bonds would compromise ASARCO’s viability and that it expected ASARCO to immediately clarify the press release.
Having received EYCF’s analysis, the legal team at Squire Sanders immediately sent the Restructuring Committee a memo that detailed the Committee’s duties and obligations. The firm concluded that AS-ARCO was in the “zone of insolvency,” if
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not actually insolvent and that the Board owed a fiduciary duty to ASARCO’s creditors. They concluded that “[biased upon the currently available information regarding ASARCO’s financial condition, we believe that it is extremely difficult for AS-ARCO to articulate a supportable business justification consistent with its fiduciary duty to all creditors for paying the Yankee Bonds.... Rather, the motivation for payment ... seems primarily related to AMC’s interest in securing financing....”
Genaro Larrea asked Squire Sanders to expand its memo, which it did on February 5, 2003. In addition to the advice it offered, it warned the Board that:
... it is well settled that the fact that ASARCO may be receiving reasonably equivalent value in exchange for the sales of the SPCC shares is immaterial to the question of intent and voidability in a fraudulent transfer lawsuit alleging actual intent to hinder, delay or defraud ASARCO’s creditors. The projected cash flow deficits of ASARCO materially jeopardize its ability to continue to operate outside of a bankruptcy proceeding.
When coupled, with the $75 million dollars in Other Obligations that ASARCO has no present ability to satisfy, the payment of the $100 million to the holders of Yankee Bonds not only jeopardizes ASARCO’s ability to continue to operate but also prefers, in a distressed company scenario, one group of creditors
(i.e., the Yankee Bonds) over all other similarly situated creditors (i.e., environmental and asbestos claimants holding unsecured claims, trade creditors, the more than $300 million dollars of unsecured notes outstanding and the $75 million dollars of Other Obligations), [emphasis added]
The opinion concluded that the payment of the Yankee Bonds “... will give creditors a credible basis to challenge the SPCC sales as a fraudulent conveyance under the actual intent to hinder, delay, and defraud creditors standard, not withstanding the Ernst & Young ‘reasonable equivalent value’ opinion.” The firm then predicted this very lawsuit if the Yankee Bonds were paid.
Over the next few days, Squire Sanders, Genaro Larrea, and Daniel Tellechea continued to play out various scenarios, including: (1) paying the Yankee Bonds without filling the deficit/hole; (2) paying the Yankee Bonds and filling the deficit/hole; and (3) not paying the Yankee Bonds. The firm opined that the first scenario involved a significant risk of a successful challenge to the SPCC sale. Despite being warned by its financial and legal advisors, AMC/Grupo insisted on the payment of the Yankee Bonds without filling the hole.
The fallout between ASARCO and its independent directors and EYCF escalated when Grupo had ASARCO announce on February 20, 2003 that ASARCO would use proceeds from the stock transfer to pay the Yankee Bonds at par plus all accrued interest. All the while, ASAR-CO’s financial condition continued to deteriorate. Societe Generale, which had a judgment against ASARCO, sought to execute its judgment on whatever assets it could reach, including the SPCC stock. Millions of dollars were owed to outside creditors. It was noted on February 27, 2003, that even the independent members of the Restructuring Committee had not been paid in months. As of March 3, 2003, the Pozia law firm, ASARCO’s national asbestos counsel, was owed over $3.5 million. There also was over $30 million in “held checks.” Genaro Larrea wrote German in February telling him that ASAR-CO had no operating funds. Genaro Lar-rea believed ASARCO had only three real options: (1) not pay the Yankee Bonds; (2)
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secure a keep-well agreement from AMC/Grupo; or (3) put ASARCO into Chapter 11. On behalf of AMC/Grupo, German Larrea considered these suggestions, but rejected all of these options.
Since ASARCO made the Yankee Bonds announcement without the approval of the Restructuring Committee and despite the warnings from its professional advisors, Jock Patton emailed Genaro Larrea after the February 20th announcement with multiple objections and questions. He questioned the fact that no final cash projections were provided as promised. He further complained that the payment of the Yankee Bonds as announced was contrary to the decision in their last meeting. Finally, he reiterated the amount of the debt that still surrounded ASARCO, including a partial list of over $75 million of outstanding debts. He refused to sign any documents related to the matter. In late March of 2003, Squire Sanders informed Patton that he should resign unless the decision to pay the Yankee Bonds was reversed.
Ultimately, on March 26, 2003, Patton and Frei did resign from the Board and withdrew their consent from the entire transaction — not just the payment of the Yankee Bonds.
20
The next day, EYCF resigned over the intended payment of the Yankee Bonds. It also refused to issue the bring-down opinion that had been contemplated and that Sidley Austin had advised AMC/Grupo to get. EYCF considered withdrawing the reasonably equivalent value opinion, but ultimately left it in place after AMC/Grupo threatened it with litigation if it withdrew the opinion.
On March 31, 2003, AMC/Grupo closed the transaction. At this point, ASARCO had numerous creditors, including contingent and liquidated creditors that were unsecured. The transaction was approved by the remaining board members of AS-ARCO without dissent, primarily because the dissenting board members had resigned and the remaining board members were all affiliated with AMC/Grupo. The funds were dispersed according to a Funds Flow Memorandum. The funds, transferred on this date, which totaled $672,653,400, came from the following sources:
(A) $ 200,000,000 from Servicios Agent Acct;
(B) $ 310,000,000 from AMC’s Agent Acct;
(C) $ 102,353,400 from Servicios;
(D) $ 10,300,000 from Grupo; and
(E) $ 50,000,000 from ASARCO
The ultimate recipients of the consideration at the end of the day were:
(A) Chase Bank Group (including AMC) — $450 million principal plus interest on the Revolver (cash payment) (AMC received $50 million plus interest back because of its participation in the Revolver).
(B) SPHC — $123.25 million note from AMC (to be paid in 7 equal annual installments with 7% interest)
(C) The United States — $100 million Trust Note (to be paid in 8 equal annual installments with 7% interest and a AMC/Grupo guarantee)
(D) ASARCO/SPHC' — forgiveness of the AMC/Larrea $41.75 million note (the “advance” payment)
(E) Yankee Bond Holders — $100 million plus interest (cash payment)
Before closing, Daniel Tellechea, Armando Ortega, and Douglas McAllister conferred with Michael Fitzgerald of Sid-
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ley Austin, their long-standing corporate counsel, about the propriety of going forward with the transaction, given the resignations of Frei, Patton, and EYCF. At the time, Sidley Austin represented Grupo, AMC, and ASARCO. He did not opine on the future legal consequences, but did tell Grupo that there was no legal prohibition against proceeding ahead with the transaction.
The transaction was completed and the funds were distributed. While ASARCO was relieved of its overdue obligations on the Revolver and Yankee Bonds, it continued to have financial problems. Less than two weeks later, there was at least $23 million in “held checks” — some that had been held for over a year. In June of 2003, Fitzgerald noted in a memo to Grupo that “ASARCO’s current operations are under severe financial pressure. It has limited cash flow and numerous creditors are demanding payment.” The memo went on to discuss the fact that several individuals from AMC/Grupo still served on the Board of ASARCO and that they would have fiduciary duties to creditors of ASARCO. Fitzgerald emphasized that “[t]hroughout the consideration of this sale, one of the issues has been a potential attack on the sale as being a fraudulent conveyance .... ” Fitzgerald advised AMC to immediately prepare to defend such an attack either outside of, or as a part of, an ASARCO bankruptcy proceeding. He also advised that the AMC/Grupo representatives on the ASARCO Board of Directors resign if a bankruptcy occurred. Fitzgerald testified that he had consistently advised Grupo’s representatives not to sit on the boards of the company’s subsidiaries. He repeated this advice in a memorandum on June 27, 2003. He explained that the overlapping directorships might enable creditors (and particularly asbestos and environmental claimants) to pierce the corporate veil, and he warned that a judge might allow ASARCO’s creditors to make claims against AMC or Grupo. Three weeks later (on July 18, 2003), all nine representatives of Grupo resigned from ASARCO’s board, and Grupo’s representatives resigned from SPHC’s board.
Before resigning, these executives decided to postpone paying $2 million worth of ASARCO bond interest, so that the money could be directed to pay freight and power charges. At the time of the resignations, cash flow was short even for making payroll (as it had been all year). At that point, however, the accounting department described the situation as a “crisis.” This confirmed earlier predictions by EYCF that ASARCO would suffer a cash deficit of $61.1 million in 2003, with a cash balance of a negative $46 million. Arthur Anderson had also previously (in 2002) estimated that ASARCO would need $200 million of additional funds in 2003.
Throughout the years prior to its bankruptcy filing (2003-2005), ASARCO continued to survive from hand to mouth. It cannibalized assets, sold or abandoned other assets, fired employees, high-graded mines, monetized badly needed insurance policies, and cut costs. It also maintained a pattern of delaying or refusing to pay creditors. In layman’s terms, it was constantly “robbing Peter to pay Paul.” Operational personnel also complained that the lack of cash was hurting ASARCO’s ability to maintain operations. Years of underfunding had caused a deep drop in performance. They complained that the lost revenues due to lack of funding were nearly $100 million and that the company was losing valuable workers. Two months pri- or to the March 2003 closing, George Burns had presented in great detail the production problems that 2002 had presented and why he thought ASARCO would suffer the same problems throughout 2003. He complained that he could not
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meet the 2003 forecast due to lack of cash. According to Burns, the cash shortage prevented ASARCO’s operational divisions from: (1) stripping (resulting in large shortfalls); (2) maintaining pumping operations; (3) making prompt payments, and in many instances any payments, to suppliers (causing curtailment of operations in the Ray, Hayden, Mission Underground, and Mission Pit mines).
These problems continued in the post-closing years. As the cash flow problems continued to mount, ASARCO’s legal problems also continued to skyrocket. In November of 2004, Mesirow Financial Consulting assumed that ASARCO’s asbestos-related liabilities would climb from $86 million to $550 million and that its environmental liabilities would climb to $900 million, assuming a 2005 bankruptcy. By July 12, 2005 — two to three months after five of ASARCO’s non-operating subsidiaries filed bankruptcy — Standard & Poor’s Rating Service had lowered its credit rating on ASARCO from BB — to CCC. Its outlook was downgraded from “Positive” to “Negative.” S & P noted only two positives: rising copper prices and minimal long-term debt maturities in the next seven years. The negatives it noted were: minimum support from AMC and Grupo, high exposure to environmental and asbestos claims, poor operating performance, high production costs, and a recent strike. It especially noted corporate restructuring design “with the intention of isolating the company [AMC] from ASARCO.” It questioned the fact that ASARCO was relying on the AMC note payments to “meet its short-term obligations” and pointed out that it did “not have access to bank lines.” Other financial rating organizations had also downgraded ASARCO. According to the Fitch credit rating on August 10, 2005, ASARCO was in the category of imminent default.
By the time ASARCO was looking seriously at bankruptcy in 2005, there were thousands of asbestos claims involving AS-ARCO or its subsidiaries and they were increasing on a daily basis. ASARCO had also been hit with a labor strike. ASAR-CO put its subsidiaries, Capeo and LAQ, into a prepackaged 524(g) bankruptcy on April 11, 2005. Ultimately (and reluctantly), on advice of counsel, ASARCO followed these subsidiaries into Chapter 11 on August 9, 2005. SPHC filed a voluntary petition for Chapter 11 protection the next year. Plaintiffs now bring these claims in their capacities of debtors in possession and on behalf of ASARCO’s unpaid creditors.
II. FRAUDULENT TRANSFER
Plaintiffs bring fraudulent transfer claims pursuant to §§ 544 and 550 of the Federal Bankruptcy Code. (Plaintiffs’ Second Amended Complaint (hereinafter “Complaint” or “Compl.”) ¶ 3.) According to § 544(b), a “trustee may avoid any transfer of an interest of the debtor in property ... that is voidable under applicable [state] law by a creditor” holding an allowable unsecured claim.
21
11 U.S.C. § 544 (b)(1). Trustees and debtors in possession use § 544(b) as a conduit to assert state-law-based fraudulent transfer claims in bankruptcy.
22
In bringing the fraudulent transfer claims, the trustee or debtor
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in possession is given the same avoiding powers that an unsecured creditor with an allowable claim might have under applicable law. In its Order on Defendant’s Motion to Dismiss, the Court determined that the applicable law for Plaintiffs’ fraudulent transfer claims is Delaware’s version of the Uniform Fraudulent Transfer Act (hereinafter “UFTA”).
ASARCO LLC v. Americas Mining Corp.,
382 B.R. 49, 64 (S.D.Tex.2007). Plaintiffs assert claims under Delaware’s constructive fraudulent transfer and actual intent fraudulent transfer provisions.
A. Standing
In order for Plaintiffs to prevail on the fraudulent transfer claims under Delaware law, Plaintiffs must prove the threshold requirements stated in Bankruptcy Code § 544: (1) there are actual, unsecured creditors that would have standing to avoid the challenged transfer; and (2) the challenged transfer involved an interest of the debtor in property, i.e. the debt- or transferred property in which it had an interest.
See
11 U.S.C. § 544 .
1. ACTUAL, UNSECURED CREDITORS
Plaintiffs must first establish the existence of an actual creditor with a viable cause of action against the debtor that is not time barred or otherwise invalid. CollieR on BANKRUPTCY ¶ 544.09 (15th ed. rev.). In other words, each Plaintiff must prove: (1) at the time of the challenged transfer, there was in existence one or more creditors holding unsecured claims against the debtor; (2) the transfer could have been set aside by such creditor under Delaware law; and (3) at least one of the unsecured creditors with the right to challenge the transaction, or its successor in interest, continued to have a claim against the plaintiff until the commencement of the case and is entitled to an allowed claim against the estate. Commercial Bankruptcy Litigation § 10:4; Collier on Bankruptcy ¶ 544.09 (15th ed. rev.).
There is no evidence that SPHC had any debts or obligations at the time of the challenged transfer, much less any evidence of a creditor with an unsecured claim against SPHC. For this reason, SPHC, as debtor in possession, lacks standing to pursue any fraudulent transfer claims via § 544.
ASARCO presented evidence at trial and the Court so finds that it had a number of unsecured creditors at the time of the challenged transfer.
{See, e.g.,
PX 0212). The Court finds that, all other elements being satisfied, these creditors could have set the transfer of the SPCC stock aside pursuant to Delaware law. At least one of the unsecured creditors who could have challenged the transfer existed at the commencement of this case and is entitled to an allowable claim against the estate.
{See, e.g.,
PX 1374, PX 1397, PX 1377, PX 1378, PX 1375, PX 1386, PX 1388, PX 1392, PX 1372, PX 1389). AS-ARCO, therefore, has satisfied the first requirement to bring a claim under § 544.
2. INTEREST OF THE DEBTOR IN PROPERTY (ALTER EGO)
In order to have standing to pursue its fraudulent transfer claims, ASAR-CO must also prove it had an interest in the stock that was transferred.
23
If AS-ARCO cannot prove that it had an interest in the transferred property pursuant to
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Delaware state law, it does not have standing to bring either fraudulent transfer claim. To meet this requirement, ASAR-CO asserts a reverse-veil-piercing argument, urging this Court to disregard the separateness of ASARCO and SPHC so as to expand ASARCO’s estate to include the asset (stock) that formerly belonged to SPHC. In other words, ASARCO asks the Court to find that SPHC was its alter ego so that it can claim an interest in the SPCC stock that was transferred from SPHC to AMC.
a. Elements Of Alter Ego
Although Delaware courts have not yet recognized the availability of reverse-veil piercing, this Court, in a previous Order (Doc. No. 156), predicted that Delaware would adopt this doctrine if presented with a similar factual scenario. The Court also predicted that in determining whether to reverse pierce a corporate veil, Delaware would use similar equitable considerations as it would under a traditional veil-piercing claim.
24
Under Delaware law, in order to pierce the corporate veil on an alter-ego theory, traditionally a plaintiff must prove: (1) the parent and subsidiary operated as a single economic entity; and (2) an overall element of injustice or unfairness is present.
In re Foxmeyer Corp.,
290 B.R. 229, 235 (Bankr.D.Del.2003). In short, the question is whether the two corporations operated as a single economic entity such that it would be inequitable to uphold the legal distinction.
Harper v. Delaware Valley Broadcasters, Inc.,
743 F.Supp. 1076, 1085 (D.Del.1990) (applying Delaware law).
b. Burden Of Proof
Before discussing whether reverse-veil piercing is warranted in this case, the Court must determine what burden of proof Delaware would apply to an alter-ego claim. Delaware courts have not directly addressed the burden of proof required to prevail on a veil-piercing claim. There is a presumption in Delaware, however, that the burden of proof in civil cases is a preponderance of the evidence.
Warwick v. Addicks,
157 A. 205, 206-07 (Del.Super.Ct.1931). Courts applying Delaware law often discuss alter ego and veil piercing without mentioning any heightened evidentiary standard.
See, e.g., Harper,
743 F.Supp. at 1085-86 (applying Delaware law). This seems to indicate that the traditional burden, preponderance of the evidence, applies to alter-ego claims under Delaware law.
Nevertheless, numerous Delaware courts have noted that convincing a Delaware court to pierce the corporate veil is a difficult task.
See Wallace ex. rel. Cencom Cable Income Partners II, Inc. v. Wood,
752 A.2d 1175, 1183 (Del.Ch.1999);
Harco Nat’l Ins. Co. v. Green Farms, Inc.,
Civ. A. No. 1131, 1989 WL 110537 , at *4 (Del.Ch. Sept. 19, 1989). At least one Delaware court noted that it would not disregard the corporate form absent “compelling cause.”
Midland Interiors, Inc. v. Burleigh,
No. Civ.A. 18544, 2006 WL 3783476 , at *3 (Del.Ch. Dec. 19, 2006). Federal courts applying Delaware law have noted that Delaware requires a strong case to pierce the corporate veil and that there is a high burden on a party seeking to disregard the corporate form.
Alberto v. Diversified Group, Inc.,
55 F.3d 201, 205-07 (5th Cir.
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1995);
TransUnion LLC v. Credit Research, Inc.,
No. 00 C 3885, 2001 WL
648953,
at
*8
(N.D.Ill. June 4, 2001).
However, only one case applying Delaware law has actually held that the burden might be higher than a preponderance of the evidence.
See In re Foxmeyer Corp.,
290 B.R. 229, 237 (Bankr.D.Del.2003). In that case, the bankruptcy court found it nonsensical that the preponderance of the evidence standard could apply where numerous Delaware courts had noted that the party seeking to pierce the veil had a heavy burden and that persuading a Delaware court to disregard the corporate form was a difficult task.
Id.
at 237 . Based on this reasoning,
Foxmeyer
held “the appropriate standard of proof by which one must prove a case for a piercing of the corporate veil under Delaware law is, if not a clear and convincing evidence standard, at least somewhat greater than merely a preponderance of the evidence standard.”
Id.
Notably, however, even this court did not find that the standard was clear and convincing evidence, and it failed to elaborate on what this potential intermediate standard would be because it found that the bankruptcy trustee did not even satisfy the minimal preponderance of the evidence standard.
Id.
Despite the suggestion in
Foxmeyer,
this Court finds that Delaware would apply the preponderance of the evidence standard to Plaintiffs’ reverse-veil-piercing claim. There is no authority stating that the standard under Delaware law is clear and convincing evidence, and there is little indication from the Delaware courts that preponderance of the evidence is not the appropriate standard. Moreover, the majority of jurisdictions apply a preponderance of the evidence standard to veil-piercing actions.
25
Furthermore, the prevailing default standard in Delaware civil cases dictates the use of the preponderance of the evidence. This Court acknowledges that it is not easy for a party to prevail on a veil-piercing claim, but this is due to the difficulty in demonstrating that the corporate form was used for a fraud or an injustice, not because there is a heightened burden of proof. Therefore, the Court will analyze the alter-ego claim under the preponderance of the evidence standard.
c.
Single Economic Unit
The first element of an alter-ego claim is that the two corporations operated as a single economic unit. To determine whether a plaintiff meets this first requirement, courts look to a number of factors “which reveal how the corporation operates and the particular [party’s] relationship to that operation.”
Harper v. Delaware Valley Broadcasters, Inc.,
743 F.Supp. 1076, 1085 (D.Del.1990) (applying Delaware law). These factors include: (1)
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whether the corporation was adequately capitalized for the corporate undertaking; (2) whether the corporation was solvent; (3) whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; (4) whether the dominant shareholder siphoned corporate funds; and (5) whether, in general, the corporation simply functioned as a facade for the dominant shareholder.
Id.
No single factor can justify a decision to disregard the separateness of corporate entities.
Alberto v. Diversified Group, Inc.,
55 F.3d 201, 205 (5th Cir.1995) (applying Delaware law).
It is clear from the evidence that SPHC functioned as a single economic unit with ASARCO. SPHC was a shell corporation whose sole purpose was to hold the SPCC stock.
26
SPHC had no other assets besides the 54.18% ownership of SPCC, nor did SPHC have any debts. (Tellechea Depo (2008) 469:23-25; Williams Depo. 40:10-13). SPHC did not engage in any business or activity other than the ownership of SPCC stock. (PX 0411; Tellechea Depo. (2008) 683:23-684:2). SPHC had no independent officers or directors. (Jt. Pretrial Order Admission No. 14; McAllis-ter Depo. 262:318, 265:18-266:3; Tellechea Depo. (2008) 470:l-6).
27
It had no separate office space and no employees. (Kee-gan Depo. 42:4-8; Tellechea Depo. (2008) 683:11-13). Additionally, the record indicates that SPHC did not recognize corporate formalities. For example, SPHC’s Vice President, Genaro Larrea, could not recall conducting any activity as an officer or director of this company, and Mr. McAl-lister, General Counsel for ASARCO, also indicated that corporate formalities were not kept. (Genaro Larrea Depo. 71:19— 72:1, 76:7-9; McAllister Depo. at 262:3-1, 265:18-266:3). Further, the Grupo conglomerate treated ASARCO as the owner of the SPCC stock before, during, and after the transaction in question. For example, the SPCC dividends were paid directly to ASARCO prior to the transfer. (PX 0853; PX 0164; PX 0861; PX 0171, PX 0501; PX 0549; PX 0861; Tucker 10-23-11:2). Also, the $41.75 million loan was made to ASARCO as an advance on AMC’s purchase of the SPCC shares (which were technically held by SPHC). (PX0042). Similarly, after the transfer, payments on the $123 million note, which were part of the consideration for the SPCC stock, were paid by AMC directly to ASARCO, not to SPHC. (PX 0307; PX 0324; PX 0316). The testimony indicated that for most of SPHC’s existence prior to the transfer, it did not even have a bank account. (PX 0164). Also, although not binding upon this court, the Consent Decree, signed by all parties involved, stated that “ASARCO and SPHC intended to sell
their
stock holdings and majority ownership interest” in SPCC to AMC, indicating that both entities had an interest in the stock. (PX 0214 (emphasis added)). This same document referred to the stock interest as belonging to “ASARCO/SPHC.” (PX 0214).
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Although it is arguable that not all of the factors are met in this case, the overwhelming weight of the evidence indicates, and the Court finds, that SPHC and ASARCO operated as a single economic unit. Corporate formalities were not observed, and all of SPHC’s officers and directors were also officers or directors of ASARCO, AMC, or Grupo. The dividends from SPHC’s only asset went directly to ASARCO, its dominant shareholder, which had total control of the funds. In general, SPHC functioned as a facade for ASAR-CO. For these reasons, the Court finds that ASARCO has proven the first prong of its alter-ego claim, that ASARCO and SPHC were a single economic unit.
28
d. Fraud, Unfairness, Or Injustice
The second prong recognizes that, under Delaware law, the alter-ego theory requires that the corporate structure cause fraud or some similar injustice.
Outokumpu Eng’g Enters., Inc. v. Kvaerner,
685 A.2d 724, 729 (Del.Super.1996). Fraud is frequently cited as a basis for piercing a corporate veil, but it is not the only justification.
PSG Poker, LLC v. De-Rosa-Grund,
No. 06 Civ. 1104(DLC), 2008 WL 190055 , at *10 (S.D.N.Y. Jan. 22, 2008). Delaware courts recognize that veil piercing is permitted “in the interest of justice, when such matters as fraud, contravention of law or contract, public wrong, or where equitable consideration among members of the corporation require it, are involved.”
Pauley Petroleum Inc. v. Cont’l Oil Co.,
239 A.2d 629, 633 (Del.1968);
see PSG Poker, LLC,
2008 WL 190055 , at *10;. In short, although fraud is not required, an inherent trait of Delaware’s alter-ego theory is injustice or unfairness. This is because veil piercing is an equitable concept, and the Court must determine whether it would be inequitable to uphold a legal distinction between SPHC and ASARCO.
AMC argues that the fraud, injustice, or unfairness supporting the alter-ego claim “must be distinct from the allegations of the underlying cause of action.”
Id.
AMC contends that this means ASARCO cannot rely on “any alleged wrongdoing involved in the underlying fraudulent transfer cause of action.”
29
Under Delaware law, a plaintiff must show fraud or inequity in the use of the corporate form, i.e., the corporate structure itself must be used to effect the fraud or injustice.
Outokumpu Eng’g Enters.,
685 A.2d at 729 . Most of the cases in which a court states that the requisite unfairness or injustice cannot be the underlying cause of action are cases in which the underlying claim is for breach of contract or some other allegation that is wholly unrelated to the manipulation of the corporate form.
See id.
at 729 . In
Outokumpu,
the plaintiff failed to show that affiliated corporations were “involved in an
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elaborate shell game or [were] otherwise abusing the corporate form to effect a fraud.”
Id.
Presumably, had this been shown, the court might have pierced the corporate veil. Similarly, in
Mobil Oil Corp. v. Linear Films, Inc.,
the court noted that every breach of contract or tort is in some way an injustice. 718 F.Supp. 260, 268 (D.Del.1989). The court went on to state that for this reason, the underlying cause of action does not supply the necessary fraud or injustice, and to hold otherwise would sanction bootstrapping.
Id.
It concluded that the fraud, injustice, or unfairness must be in the
use of the corporate form. Id.
at 269. The
Mobil Oil
court did not find the requisite injustice to justify piercing the corporate veil.
Id.
at 270 . That court noted that the defendant did not use the corporate form to perpetrate a fraud or work an injustice on the plaintiff, nor did it use the corporate form to operate a sophisticated shell game, shuttling assets between entities.
Id.
In these cases, if the plaintiffs had proven that the corporate form was somehow used to perpetrate a fraud, work an injustice, or operated as part of a sophisticated shell game, the result might have been different. The plaintiffs in these cases, however, simply attempted to use the underlying allegation to justify piercing the veil, rather than to demonstrate how the corporate form was misused or manipulated to accomplish the alleged wrongful conduct.
The Court agrees with AMC’s assertion that ASARCO must prove more than simply that a fraudulent transfer occurred in order to prevail on its alter-ego claim. ASARCO must show that SPHC’s corporate form was somehow used to perpetrate a fraud, work an injustice, or as part of a sophisticated shell game, culminating in a fraudulent transfer. If ASARCO shows that the corporate form was somehow used to accomplish the allegedly fraudulent transfer, then there is no legitimate reason to conclude that ASARCO cannot rely on the wrongdoing surrounding the challenged transaction to justify piercing the corporate veil. In short, a fraudulent transfer, standing alone, cannot be the fraud or injustice that justifies veil piercing; however, if ASARCO proves that the corporate form was manipulated or misused so as to accomplish a fraudulent transfer, it may be equitable to pierce the veil. To hold otherwise would be stating that a party seeking to recover for the fraud or injustice that resulted from a sophisticated shell game is unable to pierce the corporate veil. In effect, a contrary conclusion would essentially recognize that a conglomerate can utilize each subsidiary to work one instance of fraud or injustice with impunity. This has never been the law in Delaware.
i. SPHC Was Not Created
As A
Sham To Perpetrate A Fraud
ASARCO alleges that SPHC was formed as a sham to perpetrate a fraud. (ComplJ 4.) That allegation, if true, would certainly be grounds for piercing the corporate veil. This Court, however, finds that SPHC was created in 1999 for a valid business purpose. As part of the acquisition of ASARCO in 1999, Chase Bank Group sought to perfect a security interest against ASARCO’s interest in SPCC. (Tel-lechea Depo. 571:7-22.) There were concerns, however, that under the SPCC Shareholder’s Agreement and Restated Certificate of Incorporation, a direct pledge of the SPCC stock would trigger a conversion of the SPCC shares from “super-voting” stock to ordinary common stock, which would reduce the value of those shares. (Williams Depo. 163:3-15; Tellechea Depo. 471:3-25; 571:7-572:23; Fitzgerald, June 3, 2008, 40:1-24). For this reason, Grupo and ASARCO created
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SPHC, transferred the SPCC stock to SPHC, and pledged the SPHC shares to Chase as a security for the Revolver, instead of pledging the SPCC shares directly. (Williams Depo. 163:3-15; Tellechea Depo. (2008) 571:7-572:23). This was an effective means by which Chase could have the benefit of a security interest in the SPCC shares without any risk of converting those shares into less valuable stock. (Williams Depo. 163:3-15; Fitzgerald, June 3, 2008, 40:1-24). Thus, the Court finds that SPHC was created for a legitimate reason and not to effect a fraud, injustice, or unfairness.
ii. SPHC’s Corporate Form Was Used To Effect Fraud, Injustice Or Inequity
The fact that SPHC was created for a legitimate purpose, however, does not necessarily negate ASARCO’s argument that the corporate form was later misused or manipulated to accomplish the alleged fraudulent transfer.
30
For the purpose of the analysis in this section, the Court assumes, without deciding, that the challenged transfer was in fact fraudulent. This fact, standing alone, however, would be insufficient to justify piercing the corporate veil. ASARCO must also show that the corporate form was used to commit this fraud or injustice or that recognizing the separateness of the two entities would perpetrate a fraud or an injustice such that equity would require the Court to disregard the corporate veil.
Again assuming arguendo that the transfer was indeed fraudulent, the only reason that AMC would escape liability for this wrong would be because SPHC, the legal owner of the stock at the time of the transaction, did not have any creditors with standing to avoid the transfer. Yet, ASARCO’s creditors would be deprived of ASARCO’s most valuable asset and its best means of paying its outstanding debts. If the transfer was fraudulent, AMC unjustly enriched itself at the expense of ASARCO and its creditors. It would be inequitable to allow Grupo to saddle ASARCO with the LBO debt and orchestrate the creation of SPHC and the transfer of SPCC stock first to SPHC (and then AMC/Grupo to wrongly dictate the subsequent stock transfer to AMC), and then also allow AMC to hide behind the fact that SPHC had no unsecured creditors in order to dodge liability for the transfer. If ASARCO had held the stock at the time of the transfer, then there would be no question that ASARCO, as debtor in possession, would have standing to challenge the transfer. Also, if SPHC had any unsecured creditors, then SPHC as debtor in possession could seek to set aside this transfer. Since SPHC was created solely as a holding company for the SPCC stock, neither SPHC nor ASARCO has standing to challenge the transaction. AMC would be shielded from liability for the fraudulent transfer, unless ASARCO can prevail on its veil-piercing claim.
The Court finds that equity does not permit AMC to now claim that ASARCO and SPHC are separate entities solely for the purposes of allowing AMC to take advantage of the corporate form to escape
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potential liability. Since the creation of SPHC and the transfer of the SPCC stock thereto, AMC/Grupo have treated ASAR-CO as the owner of the SPCC stock. For example, in November 2001, AMC loaned ASARCO (not SPHC) $41.75 million as an advance payment on the SPCC stock. (PX 0042). This document contemplated entering into an agreement where “ASARCO, directly or indirectly, would sell to AMC and AMC would purchase from ASARCO, directly or indirectly, the total aggregate amount of its direct and/or indirect equity participation in Southern Peru Copper Corporation .... ” (PX 0042). In 2002, Grupo issued a press releases regarding the contemplated transfer of the SPCC shares. It represented that Grupo was considering transferring the stock from one subsidiary “ASARCO Inc., to another, the Americas Mining Corp. holding company.” (PX 0133). The press release also quoted Grupo as stating that its plans “do not contemplate any change of control in SPCC nor any modification in its ultimate beneficial ownership of SPCC.” (PX 0133). Similarly, in the press release issued January 30, 2003, AMC/Grupo represented to the public that ASARCO held the SPCC shares. (PX 0200). In fact, the press release did not even mention SPHC, but rather discussed the benefits to ASARCO that would result from the transfer of “AS-ARCO’s 54.2% interest in SPCC.” (PX 0200). At all relevant times, AMC/Grupo not only treated ASARCO and SPHC as a single economic unit but expressly acknowledged ASARCO’s interest in SPCC, going so far as to represent to the public that ASARCO owned the SPCC shares. The record is full of references, both within the Grupo corporate family, as well as in representations made to creditors and the public, that the stock in question was AS-ARCO’s stock. To allow AMC/Grupo to ignore four years (1999-2003) of conduct and now claim the corporate forms protects it from attack would be a great inequity that Delaware courts, sitting in equity, would not allow.
It was not until the instigation of this litigation that AMC/Grupo treated ASAR-CO and SPHC as separate corporations, and AMC does so now solely as a tactic to shield itself from liability for the alleged fraudulent transfer. After AMC disregarded the corporate separateness of these two entities and treated ASARCO as the owner of the SPCC shares for years, it would be inequitable and unjust to now permit AMC to hide behind the corporate form that it ignored at the time of the challenged transaction.
Although SPHC was not created to perpetrate a fraud, AMC subsequently used its corporate form as a tool to perpetrate an unjust and inequitable transfer and now asks the Court to recognize SPHC’s corporate separateness (even though AMC never did so before this litigation) so that it may be shielded from potential liability. In such a situation, equity demands that the Court disregard the corporate separateness of ASARCO and SPHC.
31
iii. ASARCO Is Not Barred From Claiming Alter Ego Because ASAR-CO “Created” SPHC
AMC argues that ASARCO should be precluded from asking this Court to disregard the corporate separateness of ASARCO and SPHC, since ASAR-
*324
CO created SPHC. Various jurisdictions have noted that a request to pierce the corporate veil made by the one who voluntarily created the corporate structure should be viewed with greater skepticism, especially if a third party will be disadvantaged thereby.
Schreiber Foods Inc. v. Beatrice Cheese, Inc.,
305 F.Supp.2d 939, 953 (E.D.Wis.2004);
Sharkey v. Ultramar Energy Ltd.,
867 F.Supp. 258, 259 (S.D.N.Y.1994)
rev’d on other grounds,
70 F.3d 226 (2d Cir.1995); 1 Fletcher Cyclopedia § 41.70. Part of the rationale behind this principle is that the alter-ego doctrine is an equitable concept that should be used as a sword, not a shield.
See United States v. Aiello,
D.C. No. CR-94-00142-1-DFL, 1999 WL 891333 , at *2 (9th Cir. Oct. 15, 1999);
Lumpkin v. Envirodyne Indus., Inc.,
933 F.2d 449, 460 (7th Cir.1991).
The present situation, however, is distinguishable from the authorities AMC cited. ASARCO pled, and the Court finds, that the creation of SPHC was not a wholly voluntary act of ASARCO, but rather Gru-po dictated the creation of SPHC. But for Grupo’s desire to pledge the SPCC shares to Chase in order to help finance the LBO of ASARCO, SPHC would never have existed, and ASARCO’s creditors would unquestionably have the ability to challenge the transfer to AMC. This is not a situation in which the parent corporation seeks to prevail on the alter-ego claim in order to avoid liability.
Also, AMC did not allege, and the Court could not identify, any third party who would be harmed if the Court disregards the corporate separateness of ASARCO and SPHC. Piercing the corporate veil in this case will not result in harm to any innocent shareholders or corporate creditors. ASARCO was the sole shareholder of SPHC, and Grupo, who dictated the creation of SPHC and who received the benefit of the challenged transfer, was, at the time, ASARCO’s sole shareholder. The only entities “harmed” by disregarding the corporate form would be the company that created it, Grupo, and Grupo’s wholly owned subsidiary, Defendant AMC, which received the stock in question. No corporate creditors will be harmed by disregarding the corporate separateness. In fact, ASARCO’s creditors might benefit from such a finding. SPHC had no creditors that could be injured.
Unlike the cases cited by AMC, in the case at hand, the parent, as debtor in possession, is using the doctrine as a sword, requesting the Court to pierce the corporate veil to allow it to pursue a claim for fraudulent transfer on behalf of its creditors against a defendant that is the wholly owned subsidiary of the entity who controlled the shell subsidiary. The Court finds it would be inequitable to recognize the corporate separateness of ASARCO and SPHC. It further finds inapplicable the concept behind the argument that AS-ARCO, as SPHC’s creator, should be barred from making such assertion. For the above reasons, the Court finds that ASARCO proved its alter-ego claim by a preponderance of the evidence, and equity dictates reverse-veil piercing in this case.
e. Defenses
To The Alter-Ego Claim
Before the Court can discuss the substance of the various defenses that Defendant claims bar Plaintiffs alter-ego claim, the Court must first determine whether the alter-ego claim is subject to the same defenses that the debtor would be subject to if this claim were brought outside of bankruptcy or, alternatively, whether ASARCO stands in the shoes of its unsecured creditors for purposes of the alter-ego claim such that it is only subject to defenses that would be good against the unsecured creditors in whose shoes it stands.
*325
In order to fully answer this question, the Court finds it helpful to understand certain provisions from the Bankruptcy Code regarding the capacity of trustees and debtors in possession to sue and be sued. Section 323(b) of the Bankruptcy Code gives trustees the right to prosecute any action belonging to the bankruptcy estate.
32
Actions commenced on behalf of the estate by a trustee or debtor in possession “fall into two broad categories: (1) actions brought by the trustee as successor to the debtor’s interests included as property of the estate under 11 U.S.C. § 541 , and (2) actions brought under one of the trustee’s avoidance powers.”
Sender v. Simon,
84 F.3d 1299, 1304 (10th Cir.1996) (citing 2 Collier on BANKRUPTCY 323.02[4]) (now Collier ON Bankruptcy ¶ 323.03 (15th ed. rev.)).
The filing of a petition in bankruptcy creates the bankruptcy estate pursuant to 11 U.S.C. § 541 (a). The estate consists of all legal and equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541 (a)(1). Causes of action that, according to applicable state law, were available to the debtor at the time that the bankruptcy case commenced become property of the estate pursuant to § 541.
Louisiana World Exposition v. Federal Ins. Co.,
858 F.2d 233, 245 (5th Cir.1988).
33
These actions fall within the first category of cases a trustee may bring on behalf of the estate. The trustee steps into the shoes of the debtor at the commencement of the case and may assert those claims that are part of the debtor’s estate. For suits brought in this capacity, the trustee is subject to all of the same defenses that would have been available against the debtor. Collier, ¶ 323.03.
Under certain circumstances, trustees have power to bring actions pursuant to their avoiding power.
34
These are the second category of cases. When the trustee exercises its avoiding powers, i.e., sues as an assignee of the creditors, it accedes to a superior status and possesses extraordinary rights.
In re Ostrom-Martin, Inc.,
188 B.R. 245, 251 (Bankr.C.D.Ill.1995). The trustee stands in the shoes of the creditor and is subject only to the defenses that would be available against the creditor, not the debtor. Collier, ¶ 323.03. For example, the doctrine of
in pari delic-to,
which applies to actions brought under the first category (where the trustee stands in the debtor’s shoes), does not apply in this situation.
Id.
Section 544 of the Bankruptcy Code is an example of one of the trustee’s avoiding powers.
Sender v. Simon,
84 F.3d 1299, 1304 (10th Cir.1996) (“Because § 544 gives a trustee certain avoidance powers, actions brought under the section fall within the second category of types of trustee actions.”);
see also In re Porter McLeod, Inc.,
231 B.R. 786, 792 (D.Colo.1999).
35
According to § 544(b), the section
*326
under which ASARCO brings its fraudulent transfer claims in this case, a trustee or debtor in possession “may avoid any transfer of interest of the debtor in property ... that is voidable under applicable law by a creditor holding an unsecured claim....” 11 U.S.C. § 544 (b)(1). This gives trustees and debtors in possession the ability to avoid pre-petition transfers that are avoidable by an actual, existing unsecured creditor under non-bankruptcy law. CollieR, ¶ 544.02. Section 544(b) does not indicate the requirements of avoiding a transfer; rather the trustee’s powers are predicated on the non-bankruptcy law that is applicable to the action (in this case Delaware’s enactment of the UFTA).
Sender,
84 F.3d at 1304 . The trustee’s rights are derivative of an actual unsecured creditor’s rights, meaning that the trustee steps into the shoes of the creditor. The trustee is subject to the same defenses as the creditor would be (but not those defenses available only against the debtor).
Smith v. American Founders Fin., Corp.,
365 B.R. 647, 659 (S.D.Tex.2007) (J. Rosenthal). Thus, if the creditor is estopped or barred from recovery, so is the trustee.
Id.
As noted above, Plaintiff seeks to avoid the stock transfer based on its state-law fraudulent transfer claims, pursuant to § 544(b). (Compl. at ¶ 82, 94). Therefore, with regard to the fraudulent transfer claims, the Plaintiff, as debtor in possession, stands in the shoes of its unsecured creditors, and its claims are subject to defenses that would be available against the creditors, but not those that would prevail against the debtor. This is undisputed. The issue this Court must answer, however, is whether the alter-ego claim, under which ASARCO must prevail to pursue its fraudulent transfer claims, is brought pursuant to the debtor in possession’s avoidance powers under § 544(b) or, alternatively, is a claim brought on behalf of the debtor.
Defendant asserts that the alter-ego claim falls into the category of actions “brought by the trustee as successor to the debtor’s interests included as property under § 541,” and thus, for purposes of this claim, the debtor in possession stands in the shoes of the
debtor
not the
creditor.
If this is true, Plaintiffs alter-ego claim would then be subject to any defenses that would have been available against the pre-petition debtor. In other words, Defendant essentially contends that even though the fraudulent-transfer claim itself is only subject to defenses that would be available against the unsecured creditors, the alter-ego claim, which ASARCO must prove to succeed on its fraudulent-transfer claim, is not an avoidance action, and, therefore, is subject to defenses that would be available against the debtor.
36
In support of this argument, AMC cites a district court case applying Delaware law, holding that the alter-ego claim is an asset of the estate under § 541, meaning it is an action the debtor in possession can pursue in the shoes of the debtor. AMC’s Proposed Findings of Facts and Conclusions of Law at ¶ 29 (citing
MC Asset Recovery, LLC v. Southern Co.,
Civil Action No. 1:06-cv-0417-BBM, 2006 WL 5112612 , at *9 (N.D.Ga. Dec. 11, 2006)). However, the fact that the alter-ego claim qualifies as property of the estate under § 541, standing alone, does not mandate
*327
that it falls solely within the first category.
37
Often times an action can fall into both categories, and a trustee may choose under which provision to proceed. Also, the alter-ego claim in that case was not pursued as a threshold matter for a fraudulent-transfer claim.
Another argument in support of AMC’s position is that the first category (claims brought as successor to the debtor’s interests) seems to be a default rule. Out of all the claims that belong to the estate pursuant to § 541, some of these claims may also qualify as “avoidance actions.” For those special claims that qualify, the trustee may choose to bring them under its avoidance powers so that the trustee can stand in the creditors’ shoes, rather than the debtor’s, for purposes of that claim. As noted above, § 544, the applicable avoidance-power provision in this case, requires, as a threshold matter, that the debtor have an interest in property.
See
11 U.S.C. § 544 . Without this threshold showing, § 544 does not apply, and so the claim never qualifies as one that can be brought pursuant to the debtor in possession’s avoidance powers. ASARCO must prevail on its reverse-veil piercing alter-ego claim in order to establish this threshold issue — that ASARCO, as the debtor, had an interest in the property that is the subject of the allegedly fraudulent transfer it seeks to avoid.
On the other hand, one can view the alter-ego claim as being so intertwined with the fraudulent-transfer claim that it is a claim brought pursuant to its avoidance powers. If ASARCO’s unsecured creditors brought the fraudulent-transfer claims outside of bankruptcy they would have to prevail on the alter-ego claim in order to have standing to challenge the transfer from SPHC to AMC. Without piercing the corporate veil, neither ASARCO nor its creditors could show the interest in property needed to challenge the transfer. Similarly, if Plaintiff had not pursued the fraudulent-transfer claims, there would be no need to assert the alter-ego claim. Under this reasoning, the alter-ego claim could be viewed merely as a sub-issue to the greater fraudulent transfer claim brought pursuant to § 544(b), making the alter-ego claim part of the claim brought pursuant to the debtor in possession’s avoiding powers.
The Court finds that the better-reasoned argument is that the alter-ego claim is interrelated with the fraudulent-transfer claims to the point that the alter-ego claim should be viewed as brought under the debtor in possession’s avoiding powers. This is not an independent action that the debtor would otherwise bring; rather, the debtor in possession seeks to pierce the corporate veil only so that it may pursue fraudulent-conveyance actions for which it clearly stands in the unsecured creditors’ shoes. If ASARCO’s creditors were to challenge the stock transfer from SPHC to AMC outside of bankruptcy, they would have to prevail on this alter-ego claim to do so. Therefore, the Court finds ASAR-CO’s rights regarding the alter-ego claim are derivative of the rights of Plaintiffs actual unsecured creditors. Thus, ASAR-CO, as debtor in possession, is subject only to defenses that would be available against the unsecured creditors if the claim were brought outside of this bankruptcy action.
AMC argues, however, that the alter-ego claim is barred even if ASARCO stands in the creditors’ shoes because AS-
*328
ARCO’s creditors failed to pursue an available legal remedy. Specifically, Defendant states that the alleged harm to the creditors occurred in 1999 when the SPCC shares were transferred from ASARCO to SPHC, and ASARCO’s creditors could have brought a fraudulent-transfer claim at that time.
Although it is well settled that for a court to award equitable relief, there must be no adequate legal remedy available, Defendant’s argument would not necessarily operate as a complete bar to the equitable remedy of veil piercing. If the creditors had asserted a fraudulent-transfer claim based on the 1999 transfer within the statute of limitations period, the creditors would not have been required to prove up this alter-ego claim to do so. This is because the transfer at issue would have been between ASARCO, the debtor, and SPHC. The Court also noted that the transfer of the SPCC stock from ASARCO to SPHC was a separate transaction than the one challenged in this lawsuit. The unsecured creditors, in whose shoes Plaintiff stands, may not have existed at the time of that transfer.
38
Assuming arguendo that the running of the statute of limitations on the fraudulent-transfer claim for the 1999 transfer does not mean that an adequate legal remedy was unavailable, AMC’s argument may not be a complete bar to the equitable remedy of veil piercing. This “adequate remedy at law” defense only bars the alter-ego claim to the extent that ASARCO’s veil-piercing argument relies on the creation of SPHC and the initial transfer of the SPCC stock to prove the requisite fraud, injustice, or unfairness. As noted above, however, the Court does not find the requisite fraud, injustice, or unfairness in the
creation
of SPHC or the transfer of the SPCC stock thereto, but rather in the subsequent use of SPHC as a shield to effect the transfer of the SPCC stock. Therefore, AMC’s “adequate remedy at law” argument does not bar Plaintiffs’ veil-piercing claim based on the subsequent use of SPHC to effect a fraud, injustice or unfairness.
AMC’s remaining defenses would not be available against the unsecured creditors. AMC, therefore, cannot prevail on these defenses because Plaintiff brings the alter-ego claim pursuant to its avoiding power and stands in its unsecured creditors’ shoes. Even though the Court finds that the alter-ego claim is part of the fraudulent-transfer claims so as to fall under the debtor in possession’s avoiding power, the Court acknowledges the strong argument to the contrary and will, therefore, briefly discuss AMC’s alleged defenses that could be brought against the Plaintiff if it stands only in the debtor’s shoes for purposes of the alter-ego claim. The potential defenses raised by AMC are: (1) judicial estop-pel; (2) acquiescence; (3) unclean hands; and (4)
in pari delicto.
i. Judicial Estoppel
Before discussing the judicial es-toppel argument, the Court must first determine whether state or federal law should apply to this defense. The Fifth Circuit has recently noted that many courts faced with judicial estoppel questions conclude that “federal law should apply because a federal court should have the ability ‘to protect itself from manipulation’
*329
and this ability should not vary in a diversity action because it is a matter of federal procedure and not a substantive concern.”
Hall v. GE Plastic Pacific PTE Ltd.,
327 F.3d 391, 395 (5th Cir.2003) (internal citations omitted). The Fifth Circuit has generally considered judicial estoppel a matter of federal procedure and has applied federal law.
Id.
(citing
Ergo Science, Inc. v. Martin,
73 F.3d 595, 600 (5th Cir.1996)). In the present case, both the prior proceeding and the current litigation were and are in federal courts; thus,“it is the federal court that is subject to manipulation and in need of protection,” further justifying application of federal law to the judicial estoppel issue.
See id.
at 395-96. For these reasons, the Court concludes that federal law applies to the judicial estoppel defense.
The policies underlying the doctrine of judicial estoppel include “preventing internal inconsistency, precluding litigants from ‘playing fast and loose’ with the courts, and prohibiting parties from deliberately changing positions according to the exigencies of the moment.”
United States v. McCaskey,
9 F.3d 368, 378 (5th Cir.1993). The purpose of the doctrine is to protect the integrity of the courts; it is not designed to protect litigants.
New Hampshire v. Maine,
532 U.S. 742, 749-50 , 121 S.Ct. 1808 , 149 L.Ed.2d 968 (2001);
In re Food Fast Holdings, Ltd.,
Civil Action No. 6:04cv562, 2006 WL 2259842 , at *4, 2006 U.S. Dist. LEXIS 54761 , at *10 (E.D.Tex., Aug. 7, 2006). It is not intended to eliminate all inconsistencies.
Ryan Operations G.P. v. Santiam-Midwest Lumber Co.,
81 F.3d 355, 358 (3d Cir.1996). Judicial estoppel is an extraordinary remedy that should only be used when a party’s inconsistent behavior will result in a miscarriage of justice.
Id.
at 365 .
The Supreme Court has noted that the circumstances under which judicial estoppel may be invoked are not reducible to any general formulation of principle.
New Hampshire,
532 U.S. at 750 , 121 S.Ct. 1808 . Nevertheless, the high court has discussed several non-exclusive factors that can help guide a court in determining whether the doctrine applies.
Id.
Factors a court may consider include whether: (1) the position of the party against which estoppel is sought is “clearly inconsistent” with its prior legal position; (2) the party against which estoppel is sought succeeded in persuading a court to accept its prior position; and (3) “the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.”
Id.
at 750-51 , 121 S.Ct. 1808 . The Supreme Court also noted that it may be appropriate to resist the application of judicial estoppel when the prior statement is the result of inadvertence or mistake.
Id.
at 753 , 121 S.Ct. 1808 . The Supreme Court emphasized that judicial estoppel is an equitable concept, and additional considerations may aid a court’s decision in different factual contexts.
Id.
at 751 , 121 S.Ct. 1808 .
AMC argues that ASARCO is es-topped from bringing the alter-ego claim because of Plaintiffs pre-petition position before the Arizona District Court. The Government’s Complaint in that case alleged, inter alia, that: “ASARCO dominates and controls SPHC through its ownership of all of SPHC’s stock and the identity or overlap of ASARCO’s and SPHC’s officers and directors;” “Í3PHC conducts no other business than that of owning the Stock, has no employees, has no creditors” and “has no assets other than the Stock;” “as a result of the Banks’ secured lien encumbering the Stock, SPHC is grossly undercapitalized;”
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“SPHC has failed to respect corporate formalities;” and “SPHC is a mere instrumentality and alter ego of ASARCO and its corporate identity must be disregarded to prevent fraud or injustice to the United States and the other creditors of ASAR-CO.” (PX 0106). In their answer to this complaint, ASARCO and SPHC responded to each of these allegations by stating, “[t]hey deny the averments of [each paragraph].” (DX 0289). This document was signed by an attorney from Sidley Austin, the firm that represented both ASARCO and AMC in connection with the Consent Decree and the SPCC stock transfer. (Lazalde Depo., 414:11-415:20). Based on ASARCO’s and SPHC’s denial of alter ego in these documents, AMC contends that ASARCO is judicially estopped from claiming alter ego in the present litigation.
The first factor the Court should consider is whether the position of the party against which estoppel is sought is clearly inconsistent with its prior legal position.
New Hampshire,
532 U.S. at 750 , 121 S.Ct. 1808 . ASARCO’s and SPHC’s denial that SPHC was ASARCO’s alter ego is a clearly inconsistent position from the opposite position ASARCO currently holds. This factor weighs against ASARCO.
The next factor is whether the party against whom estoppel is sought succeeded in persuading a court to accept its prior position.
New Hampshire,
532 U.S. at 750 , 121 S.Ct. 1808 . AMC argues that this factor is met because, by disputing the alter-ego claim, ASARCO convinced the Arizona Court that the underlying litigation would be prolonged and complicated, thus persuading the court to enter the Consent Decree to avoid prolonged litigation and to implement a fair and reasonable settlement. Although AMC’s argument is not baseless, an equal inference could be drawn that the Arizona Court believed the two were alter egos, and, thus, was not persuaded by ASARCO and SPHC’s denial of such status. In fact, the Consent Decree repeatedly refers to
their
stock holdings and majority ownership interest in SPCC, meaning both ASARCO’s and SPHC’s interest, and the decree often referred to “ASARCO/SPHC’s ownership in SPCC.” (PX 0004). Additionally, the Consent Decree sets forth the terms and conditions to be included in the Agreement of Sale, which specifies payment by AMC to “ASARCO/SPHC” and that “ASAR-CO/SPHC” pay indebtedness under the Revolver. (PX 0004). The Consent Decree also provides that any dividends paid by SPCC for the fourth quarter of 2002 be paid to ASARCO, regardless of which party is the shareholder of record the date the right to the dividend vests. (PX 0004). These statements in the Consent Decree indicate that the District Court did not accept ASARCO and SPHC’s denial that SPHC was ASARCO’s alter ego. Based on the record before this Court, the Court finds that in entering the Consent Decree, the Arizona Court did not make any decision as to whether the two entities were alter egos; therefore, ASARCO did not “succeed in persuading a court to accept its prior position.”. This factor weighs in ASARCO’s favor.
The third factor considers “whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.”
New Hampshire,
532 U.S. at 751 , 121 S.Ct. 1808 . This factor also weighs in favor of ASAR-CO. Although the statements made in ASARCO and SPHC’s answer in the DOJ case are inconsistent with ASARCO’s alter-ego claim, this is not a case in which a plaintiff is changing its position so as to derive an unfair advantage or impose an unfair detriment on the defendant. AS-ARCO will not derive an unfair advantage by “changing its position” because its prior
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position was dictated, at least in part, by the defendant in this case. For the same reason, it would not impose an unfair detriment on AMC for ASARCO to assert a position inconsistent with its prior statements that were made pursuant to AMC/Grupo’s direction.
Throughout the course of this trial, AS-ARCO has consistently alleged that it was under the control of AMC and Grupo with respect to the pertinent events of this case. There has been a plethora of testimony in support of these contentions. For example, Mr. McAllister, ASARCO’s in-house counsel, testified that ASARCO could not do anything without Grupo’s, i.e. German Larrea’s, approval. (McAllister Depo. 168:9-168:25). Also, Genaro Larrea, AS-ARCO’s CEO at the time, indicated that Grupo controlled ASARCO’s board. (Genaro Larrea Depo. 164:3-165:11). There is also evidence of Grupo’s and AMC’s control over ASARCO and SPHC’s answer in the DOJ case. This answer was signed by a lawyer from Sidley Austin. There was conflicting testimony throughout the course of the trial regarding which entities Sidley Austin represented.
39
Even ASAR-CO’s in-house counsel believed Sidley Austin’s loyalty was to Grupo and AMC, not ASARCO and SPHC. (McAllister Depo. 401:13-403:3). Because AMC/Grupo controlled ASARCO and SPHC with regard to the Arizona case, and the SPCC transfer as a whole, defendant AMC cannot now claim that Plaintiff would derive an unfair advantage or impose an unfair burden on AMC by now asserting a position different than the one AMC forced ASARCO to take in the DOJ case.
Another factor courts often consider is whether the prior statement is the result of inadvertence or mistake. This consideration is not directly applicable here. ASARCO does not contend that its prior denial of alter ego was a result of inadvertence or mistake but instead was the result of being controlled by its parent, the defendant in this case.
40
Judicial estoppel is an equitable remedy that courts should only use when a party’s inconsistent behavior will result in a miscarriage of justice. Considering the facts of this case, the Court does not find that justice would be served by declaring that ASARCO cannot pursue its case against AMC because of an inconsistent statement made in a prior proceeding that ASARCO was forced to make, in part, by its parent AMC. The Court finds that ASARCO’s alter-ego claim would not be barred by judicial estoppel even if the claim were not brought under Plaintiffs avoiding powers.
ii. Acquiescence
AMC next argues that ASARCO’s alter-ego claim is barred by the doctrine of acquiescence. Specifically, AMC alleges that ASARCO’s request to reverse pierce
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SPHC’s corporate veil is an attempt to undo the corporate form that ASARCO created. AMC contends that Delaware law prohibits a shareholder from seeking to unwind his own acts and, for this reason, ASARCO is precluded from bringing its alter-ego claim.
According to the Supreme Court of Delaware, “[acquiescence is an equitable defense which is assertable against a party who remains inactive for a considerable period of time, or who recognizes the validity of the complained of act or who acts in a manner inconsistent with the subsequent repudiation and thus leads the other party to believe the act has been approved.”
Julin v. Julin,
787 A.2d 82, 84 (Del.2001). A determination of whether this defense applies is fact intensive, often requiring an evaluation of the knowledge, intention, and motivation of the allegedly acquiescing party.
41
Id.
The doctrine has traditionally included a showing that the plaintiff, by words or deed, has acknowledged the legitimacy of the conduct it now wishes to challenge.
Clements v. Rogers,
790 A.2d 1222 , 1238 n. 46 (Del.Ch.2001);
In re PNB Holding Co. Shareholders Lit.,
No. Civ. A. 28-N, 2006 WL 2403999 , at *21 (Del.Ch. Aug. 18, 2006). A Delaware chancery court has found that this test was met when “an uncoerced stockholder, acting on an informed basis, casts an affirmative vote in favor of a transaction.”
In re PNB,
2006 WL 2403999 , at *21. In other words, the stockholder cannot cast an affirmative vote at the election and then try to go back on that vote in court, if the vote was informed and uncoerced.
Id.
Some Delaware courts, in cases outside of the merger context, have included, as an element of an acquiescence defense, a showing that the party to be estopped benefitted from the transaction. A Delaware chancery court stated that “one who has full knowledge of and accepts the benefits of a transaction may be denied equitable relief if he or she thereafter attacks the same transaction.”
Con’t Ins. Co. v. Rutledge & Co., Inc.,
750 A.2d 1219, 1240 (Del.Ch.2000). In
Continental Ins.,
a limited partner sued the general partner and its sole shareholder.
Id.
at 1223 . One of the general partner’s defenses was that it could not be liable for self-dealing because the limited partner (the plaintiff) acquiesced.
Id.
at 1240-41 . The court found the defense inapplicable because the plaintiff “had not at that time accepted any benefit from any self-dealing transactions.”
Id.
at 1241 .
AMC contends that ASARCO’s alter-ego claim is barred by acquiescence because ASARCO approved the creation of SPHC and the transfer of the SPCC stock to SPHC. The Court has already determined, however, that the creation of SPHC and the transfer of the SPCC stock to SPHC was done for a legitimate business purpose and did not effect a fraud, injustice, or unfairness. ASARCO’s alter-ego claim does not rest only on the purpose of SPHC’s creation, but also, on how the corporate form was subsequently used to transfer the SPCC stock from SPHC to AMC and the injustice that would result if AMC were now allowed to use the corporate form as a shield. Assuming arguendo that ASARCO did acquiesce to the cre
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ation of SPHC and the transfer of the SPCC shares thereto, this would not prevent ASARCO from prevailing on its alter-ego claim, which is based on the use of SPHC subsequent to its creation.
iii. Unclean Hands
AMC next contends that ASAR-CO is barred from bringing its veil-piercing claim because of the doctrine of unclean hands. AMC contends that to prove its reverse-veil-piercing claim, ASARCO must demonstrate its own inequitable conduct in the creation or use of the corporate form of SPHC.
It is a well-known maxim that one who comes into equity must do so with clean hands.
Nakahara v. NS 1991 Am. Trust,
739 A.2d 770, 791 (Del.Ch.1998). The doctrine of unclean hands provides that “a litigant who engages in reprehensible conduct in relation to the matter in controversy ... forfeits his right to have the court hear his claim, regardless of merit.”
Portnoy v. Cryo-Cell Int'l, Inc.,
940 A.2d 43, 80-81 (Del.Ch.2008) (quoting
Nakahara,
739 A.2d at 791-92 ). This equitable doctrine “is not strictly a defense to which a litigant is legally entitled. Rather, it is a rule of public policy to protect the public and the court against misuse by persons who, because of their conduct, have forfeited the right to have their claims considered.”
Gallagher v. Holcomb & Salter,
Civ. A. No. 9337, 1991 WL 158969 , at *4 (Del.Ch.1991). In order for the plaintiffs claim to be barred, its inequitable conduct must relate directly to the matter in controversy.
Nakahara,
739 A.2d at 792 . The question is whether the plaintiffs conduct is so offensive to the integrity of the court that its claim should be denied.
Portnoy,
940 A.2d at 82 (citing
Gallagher,
1991 WL 158969 , at *4). Delaware courts have noted that this doctrine does not apply if its application would work an inequitable result.
Id.
There is no dispute that veil-piercing and alter-ego claims in Delaware are only available in courts of chancery, i.e., they are only available in equity.
MediTec of Egypt Corp. v. Bausch & Lomb Surgical, France,
Consolidated C.A. No. 19760-NC, 2004 Del. Ch. LEXIS 21, at *8 (Del.Ch.2004). Thus, ASARCO must pursue this equitable relief with clean hands. The Court disagrees with AMC’s argument that ASARCO must prove its own inequitable conduct in order to prevail on its alter-ego claim. ASARCO has successfully proven that its conduct related to the SPCC transfer was dominated and controlled by AMC and Grupo, and that AS-ARCO’s parents, not an independent AS-ARCO, dictated the creation of SPHC, the transfer of the SPCC stock to it, and the subsequent transfer of the stock to AMC. ASARCO had no choice in those transactions. Its actions were compelled by AMC/Grupo, and, therefore, AMC/Grupo cannot now argue that equity precludes ASARCO from challenging those actions. It would be inequitable to allow AMC to blame ASARCO for the conduct in which it was forced to participate.
42
f. Proof of Claim
AMC next contends that ASAR-CO’s alter-ego claim is barred because AS-ARCO did not file a proof of claim against
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SPHC. ASARCO responds that it was not required to file a proof of claim and, alternatively, that its complaint, constitutes an informal proof of claim.
A creditor is required to timely file a proof of claim or interest if the claim is disputed, contingent, or unliquidated. 11 U.S.C. § 502 . The bankruptcy court sets the deadline, or bar date, for creditors to file their proof of claims. Fed. R. BaNKR. P. 3003(c)(3). Failure to file such a claim means that the claim may be disallowed and that the creditor may not be treated as such with respect to such claim for the purpose of voting and redistribution.
Id., see
11 U.S.C. § 502 ; Fed. R. BaNkr. P. 3003(c)(3).
The Bankruptcy Code defines “creditor” as an:
(A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor; (B) entity that has a claim against the estate of a kind specified in section 348(d), 502(f), 502(g), 502(h) or 502(i) of this title; or (C) entity that has a community claim. 11 U.S.C. § 101 (10).
A “claim” is defined as:
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. 11 U.S.C. § 101 (5).
The Court finds that ASARCO is not a “creditor” as the term is defined in the Bankruptcy Code, because it does not have a “claim” against SPHC; therefore, it was not required to file a proof of claim against SPHC. ASARCO is not asserting any right to payment by SPHC, nor is it seeking an equitable remedy for breach of a performance. Rather, the alter-ego claim is a threshold issue in ASARCO’s efforts to hold AMC, who is not a debtor in bankruptcy, liable for an alleged fraudulent transfer. Since ASARCO is not a creditor with a claim against SPHC’s estate, it was not required to file a proof of claim.
Even if a proof of claim were required, ASARCO contends that it met the requirement because the complaints filed in this case and in the bankruptcy court constitute an informal proof of claim. In
In re Nikoloutsos,
the Fifth Circuit stated that the following elements must be met in order for a document to qualify as an informal proof a claim: (1) the claim must be in writing; (2) the writing must contain a demand by the creditor on the debtor’s estate; (3) the writing must evidence an intent to hold the debtor liable for such debt; (4) the writing must be filed with the bankruptcy court; and (5) based upon the facts of the case, allowance of the claim must be equitable under the circumstances. 199 F.3d 233, 236 (5th Cir.2000).
To qualify, the informal proof of claim must be filed by the bar date. The bar date in this ease was May 21, 2007.
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The Original Complaint in this case was filed on February 2, 2007. In that Complaint, ASARCO alleged that SPHC had no business other than owning the SPCC shares, was a mere instrumentality and alter ego of ASARCO, and was formed as
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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1966718. Public record. Not legal advice.