In a decision likely to have a knock-on effect for future fraudulent transfer defense and valuation litigation, the Delaware bankruptcy court recently ruled that the price agreed in the sale of an oil and gas company closed by market participants represents the reasonably equivalent value for the assets being sold and is more reliable evidence of value than expert testimony prepared for the purposes of litigation. The court held that in order to challenge the value of a sold asset, a plaintiff would have to demonstrate that the marketing and sale process was “irretrievably tainted or deeply flawed.”
In 2011, Samson Resources Company, an oil and gas exploration and production company, was sold to a consortium of private equity investors for $7.2 billion. Four years later, Samson Resources filed for bankruptcy. In Kravitz v. Samson Energy Co. LLC, et al.,* the settlement trustee appointed in the bankruptcy brought claims against Samson Energy Co. and its owners (the sellers of the business) asserting that the 2011 sale, and a related corporate spinoff to address the assets the consortium did not purchase, were fraudulent transfers.
The trustee alleged that the retained assets were worth considerably more than the consideration given for them, that the rest of the company that was sold was worth significantly less than the $7.2 billion that was paid, and that the approximately $3 billion in debt placed on the company by the transaction left it inadequately capitalized and unable to cope with future commodity price swings. The claims sought to avoid the sale and to recover damages up to the $7.2 billion purchase price.
The claims against Samson Energy Co. and its owners were defeated after a three-week trial before Judge Brendan Linehan Shannon in the Delaware bankruptcy court.
The trustee’s case relied on expert opinions, created for purposes of the litigation, that claimed that the methods used to arrive at the purchase price were inconsistent with the standards used in the oil and gas industry for the classification and valuation of petroleum reserves and resources, particularly unproven, undeveloped acreage.
The trustee put forth expert testimony that calculated the value of Samson Resources, using information available as of the date of the transaction, at billions of dollars less than the sale price. Using those same methodologies, the trustee’s experts also opined that Samson Resources was inadequately capitalized, based on their projection of cash flows and assumptions as to commodity hedging.
THE JUDGE’S OPINION
As Judge Shannon noted in his opinion, the defense did not offer “a traditional expert valuation case to counter that presented by the Trustee.” Rather, the defendants mined the evidence (all of it beyond the trial-subpoena power of the court) of the robust marketing, diligence, and bargaining that led to the sale.
The defendants rested their case on the proposition that the purchase price resulting from this process was, by definition, fair market value—and therefore could not be overcome by post-hoc litigation opinions.
Judge Shannon agreed with the defendants:
It is black letter law in this Circuit that the gold standard for determining the value of an asset is to sell it in an open and fair market. A thing is worth what a willing buyer will pay to a willing seller following a proper marketing process. This standard places primacy on the reliability of a transaction where parties have evaluated risk and reward and placed their own money on the line. Buyers and sellers may be right or wrong about what the future may hold, but the value is fixed and conclusively established by the price paid at closing. Under this approach, the opinion of a valuation expert, invariably influenced by hindsight, is by definition less reliable than a closed sale by market participants. As a practical matter, it is incumbent on a party challenging the value of a sold asset to demonstrate that the marketing and sale process was irretrievably tainted or deeply flawed.
THE ALLONHILL DECISION
The ruling cites to another decision from 2019 that also dealt with an attempt to unwind an arm’s-length transaction that was the product of a marketing process as a fraudulent transfer. In that case, Allonhill LLC v. Stewart Lender Services Inc.,* also tried in the Delaware bankruptcy court, Judge Kevin Gross rejected the debtor’s claim, which rested on the premise that a prepetition buyer of assets paid less for the assets than they were worth.
Judge Gross wrote that “a market test—reflecting the actual price a willing buyer agrees to pay—is the best determination of fair market value” and rejected after-the-fact valuation testimony that second-guessed that price: “The market has spoken.”
Building on the Allonhill decision, the Samson decision will make it harder to challenge arm’s-length transactions as fraudulent transfers, even those involving companies in distress, unless the plaintiff can prove that the process to market the assets was “irretrievably tainted or deeply flawed.”
It also has implications for valuation litigation generally, further establishing the primacy of market evidence over expert opinions invariably infected by hindsight:
[T]he parties to this dispute have taken differing approaches to this element of the case. Plaintiff has offered an expert opinion fixing the valuation of SIC at approximately $2.7 billion. The Defendants, by contrast, contend that the sale process and the price set thereby provide overwhelming and dispositive evidence of the value of Samson in 2011. Importantly, the Defendants assert that if the Court concludes that the sale process was properly conducted, there is no reason even to reach the Plaintiff’s valuation case.
The opinion establishes that a plaintiff wishing to challenge a market transaction as a fraudulent transfer must first show that the sale process was flawed before an after-the-fact valuation opinion can be considered to contradict the sale price. This could lead to a shift in focus in these cases—away from a battle of valuation experts to issues regarding the sale process, which often requires evidence from third parties, including advisors and other transaction participants, who may be reluctant witnesses outside the subpoena power of the trial court, making third-party discovery critical.
*Morgan Lewis represented the defendants, Samson Energy Co. and Stewart Lender Services, respectively, in these matters.