New York Court Follows Third Circuit On Valuation

A federal bankruptcy court in New York has concluded that the market price of a company's stock is the most reliable valuation to determine whether disputed transfers were avoidable. In re Iridium Operating LLC (Statutory Committee of Unsecured Creditors of Iridium v. Motorola, Inc.), 373 B.R. 283 (Bankr. S.D.N.Y., Aug. 31, 2007).

In so holding, the Bankruptcy Court for the Southern District of New York noted that the U.S. Court of Appeals for the Third Circuit recently reached the same conclusion in VFB LLC v. Campbell Soup Co., 482 F.3d 624 (3d Cir. 2007). In Campbell, the Third Circuit concluded that the market price of a company's stock following a leveraged spin-off was the most reliable valuation to determine whether the transaction was fraudulent and should be set aside. See Commercial Restructuring & Bankruptcy Alert, June 2007, p. 1, "Market Price Used To Reject Fraudulent Conveyance Challenge To Leveraged Spin."

Iridium was poised to operate global telecommunications from low-earth orbit satellites. Motorola was Iridium's financial backer for the development and deployment of the satellites. In 1998, Iridium activated the service and nine months later it was in bankruptcy. Its stock was trading $48/share six months before the filing and about $3/share at the time of the bankruptcy filing.

Iridium's Creditors' Committee sued Motorola seeking to recover $3.7 billion in alleged avoidable transfers from Iridium that were made as milestone payments to Motorola under a contract.

The issue before the court was whether the transfers to Motorola were avoidable because Iridium was insolvent, or had unreasonably small capital during the four-year period prior to the petition date. The court concluded that the committee had not carried its burden.

To address the questions of solvency and capital adequacy, the court reviewed the engineering and commercial origins of Iridium, including: the company's market research, forward-looking subscriber's estimates and revenue projections, the reasonableness of Iridium's business plan, and valuation questions of capital markets at the relevant time (all of which are discussed at length in the opinion).

Not surprisingly, there was conflicting expert opinion testimony regarding Iridium's solvency and the adequacy of its capital, in light of its capital structure and business prospects. The contest was between two fundamentally different valuation theories and methodologies.

Motorola relied on Iridium's...