On August 30, 2008, the United States District Court for the District of Northern Texas issued its ruling on whether Americas Mining Corporation (“AMC”) (and its parent Grupo Mexico) had caused ASARCO LLC (“ASARCO”), a wholly owned subsidiary of Grupo Mexico, to fraudulently transfer stock of Southern Peru Copper Company (“SPCC”) from ASARCO to AMC. The Court determined that AMC was liable for (1) intentional fraudulent transfer, (2) aiding and abetting breach of fiduciary duty under New Jersey law; and (3) civil conspiracy under Arizona law. See ASARCO LLC v. Americas Mining Corp., 396 B.R. 278 (S.D. Tex. 2008).
The Court allowed the parties additional time to brief the issue of what the appropriate damages would be, with the two main issues being (1) whether ASARCO was entitled to the return of the fraudulently transferred property itself or a cash award and (2) whether the damages should be decided in the context of the bankruptcy case and thus limited by the amounts necessary to make creditors whole. The parties briefed these issues, and on April 14, 2009, the District Court issued its Amended Memorandum Opinion and Order awarding ASARCO’s bankruptcy estate damages on its claims against Americas Mining Corporation (“AMC”) (and by extension Grupo Mexico). See ASARCO LLC v. Americas Mining Corporation, Case No. 07-00018 (ASH), Amended Memorandum Opinion and Order, April 14, 2009 (the “Damages Opinion”). The Court granted nearly all of ASARCO’s requested damages, including: (1) ordering the stock of SPCC to be returned; (2) ordering the payment of lost dividends; and (3) ordering the payment of prejudgment interest. Subsequent press reports have valued the damages award at over $6 billion.
In 1999, Grupo Mexico acquired ASARCO LLC, which held as one of its key assets, the controlling interest (54.18%) in SPCC, a publicly traded Peruvian copper company. The purchase, among other things, resulted in ASARCO being burdened by a significant debt load. This debt included a $450 million Revolving Credit Agreement financed by a number of banks and secured by, among other things, the stock of SPCC held by ASARCO. Following the acquisition, through the creation of Southern Peru Holding Company (“SPHC”) and AMC the corporate structure of Grupo’s ownership of ASARCO was as follows: Grupo wholly owned AMC, AMC wholly owned ASARCO, ASARCO wholly owned SPHC, and SPHC held the shares of SPCC stock.
ASARCO, to relieve its debt burden, sold its SPCC shares to AMC in March of 2003. The transaction did not solve all of ASARCO’s financial troubles and given its liquidity problems as well as its asbestos-related and environmental liabilities, ASARCO sought chapter 11 relief on August 9, 2005. On February 2, 2007, ASARCO brought claims in the District Court against AMC seeking to, among other things, avoid the transfer of the stock of SPCC as a fraudulent conveyance.
The District Court’s Decision
In ruling on the issue of damages, the District Court separated its decision from the consequences thereof on the chapter 11 case. AMC’s central argument on damages was that the District Court should not award any damages to ASARCO because the award would not benefit the estate since all creditors were to be paid in full as part of a plan proposed by Grupo. In rejecting this argument, the Court stated that it was making its decision on damages based “solely upon the evidence presented at trial and the applicable law in this case.” Damages Opinion at 11. In other words, the Court decided the litigation issues in a vacuum and will allow the bankruptcy court to deal with the consequences of its decision. Id. at 31 (“As it stands now, this Court will decide this fraudulent-transfer action and leave the arguments over the judgment’s effects on the bankruptcy action to the Bankruptcy Court and those parties involved in that action.”).
While the Court recognized that creditors cannot receive more than what they are owed, the Court remarked (1) that it was skeptical that Grupo was proposing a true full payment plan and (2) that there was no evidence as to the status of the bankruptcy case or the amounts due on creditors’ claims, including asbestos and environmental claims. Id. at 12, 30. The Court did recognize that the extent of the contingent liabilities would eventually need to be ascertained and that AMC as the sole ASARCO equity owner “may ultimately be able to recover some portions of the judgment in this case.” Id. The Court concluded, however, that its decision was not the appropriate vehicle for such a determination.
Beyond the initial issue of the full payment plan, the Court’s analysis with respect to damages was fairly straightforward. The Court held that under section 550 of the Bankruptcy Code the usual practice is to return the fraudulently transferred property and that there was no reason to depart from that practice in this case. Importantly, one of the main focuses for the court in returning the stock was the difficulty in valuing it at the time of the judgment. Id. at 13 fn. 8. The Court also awarded to ASARCO, lost dividends measured from the time of the transfer, as well as prejudgment interest from the date liability accrued. These damages were $1,967,548,106.58 and $326,465,851.95 respectively. Id. at 14.
The Court awarded the same remedies for ASARCO’s aiding and abetting a breach of fiduciary duty and civil conspiracy claims as were awarded for the fraudulent conveyance claim, though the Court applied the highest overall applicable rate to the prejudgment interest (the 10% rate under Arizona law for the civil conspiracy claim).
Finally, ASARCO had also claimed damages for loss of control (i.e. control premium) because the percentage ownership after the return of the stock would be less than 50%, while the percentage ownership prior to the challenged transfer was greater than 50%. The court rejected this claim, stating that ASARCO would have lost control of the SPCC stock whether the fraudulent transfer had occurred or not. Id. at 27 (“The evidence in this case establishes that ASARCO would not have kept control of SPCC because it was going to have to part with the stock.”).
Because fraudulent transfer remedies seek to restore the parties to the positions they would have been in had the transfer not occurred, the Court held that AMC was entitled to offset the amount it owed to ASARCO by the amount of the consideration that it gave in the initial transaction. Id. at 31. While the parties disputed the value of the consideration given, the Court determined that the gross value amount of approximately $765 million put forth by AMC was the proper starting point and then subtracted the amount of the last payment set to be made in 2010 (approximately $17.6 million). Id. at 32. The Court determined that the payment need not be made, but should be subtracted from the offset amount. Id. Thus, the Court held that AMC was entitled to an offset in the amount of $747,392,857 plus $164,313,884.78 of prejudgment interest on the amount of the offset accruing from February 2, 2007 to April 15, 2009.
While the damages award was nearly everything that ASARCO had sought (other than the loss of control damages), AMC (and thus Grupo) is still the equity owner of ASARCO and to the extent a deal is worked out in the chapter 11 case to determine and satisfy the amount of contingent liabilities and claims of other creditors, the economic effect of this decision is still very much unknown. In fact, on April 22, 2009, the Bankruptcy Court approved a settlement, release and revised bid protections as part of an Asset Purchase Agreement between Sterlite (USA), Inc. and ASARCO and certain of its subsidiaries.1 Sterlite’s current buyout bid for ASARCO is $1.1 billion plus a note of $600 million. Meanwhile, on May 15, Grupo Mexico filed its own reorganization plan for ASARCO, offering $1.3 billion in cash and a $250 million note for the company, thus setting the stage for an unpredictable bidding war that may have a substantial effect on the consequences of the District Court’s damages decision. For example, if Grupo can win the bidding war to retain its ownership of ASARCO and also resolve the contingent liabilities, it may lessen the negative economic consequences of the decision.