Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_02-cv-03838/USCOURTS-cand-3_02-cv-03838-31/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:1331 Fed. Question

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re:

CROWN VANTAGE, INC.,

Debtor

 

CROWN PAPER COMPANY, et al.,

Plaintiffs

v.

FORT JAMES CORPORATION, f/k/a

JAMES RIVER CORPORATION OF

VIRGINIA, et al.,

Defendants /

No. C-02-3838 MMC

ORDER GRANTING DEFENDANTS’

MOTION FOR SUMMARY JUDGMENT

ON COUNT TWO

Before the Court is the motion, filed November 9, 2006 by defendants Fort James

Corporation, Fort James Operating Company, Fort James Fiber Company, and Fort James

International Holdings, Ltd. (collectively, “Fort James”), for summary judgment as to Count

Two of the Second Amended Complaint (“SAC”). Plaintiffs Jeffrey H. Beck, Liquidating

Trustee, and Crown Paper Liquidating Trust (collectively, “Liquidating Trustee”) have filed

opposition, to which Fort James has replied.

Case 3:02-cv-03838-MMC Document 249 Filed 01/12/07 Page 1 of 6
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The matter came on regularly for hearing on December 15, 2006. Leo R. Beus and

Albert J. Morrison of Beus Gilbert PLLC, and Allan Steyer of Steyer Lowenthal Boodrookas

Alvarez & Smith LLP, appeared on behalf of the Liquidating Trustee. Joseph F. Coyne, Jr.,

and Kenneth A. O’Brien, Jr., of Sheppard, Mullin, Richter & Hampton LLP appeared on

behalf of Fort James. Having considered the papers filed in support of and in opposition to

the motion, and the arguments of counsel, the Court rules as follows.

BACKGROUND

On or about August 25, 1995, pursuant to a “spin-off,” Fort James transferred to

Crown Paper Company/Crown Vantage, Inc. (collectively, “Crown”) certain portions of Fort

James’s paper businesses, and Crown provided certain consideration to Fort James,

including cash, the assumption of certain liabilities, and $100,000,000 “pay-in-kind” notes

(“PIK notes”). (See SAC ¶¶ 252, 254, 256, 262(c).) By agreement dated March 18, 1998,

Fort James and Crown entered into an “Option and Settlement Agreement” (“OSA”), in

which Crown, inter alia, released any claims it might have had against Fort James and

certain other parties, (see Morrison Decl. App. IV Ex. 217 ¶ 2.3), and Fort James, inter alia,

reduced by $33,000,000 the principal Crown owed to Fort James on the PIK notes and

forgave $188,910 in accrued interest, (see id. ¶¶ 2.2).

DISCUSSION

In Count Two, the Liquidating Trustee alleges that when Crown entered into the

OSA and released potential claims, Crown engaged in a fraudulent transfer of assets to

Fort James.

A bankruptcy trustee, on behalf of the debtor’s creditors, may avoid a transfer

“voidable under applicable law,” see 11 U.S.C. § 544(b)(1), which includes state law, see

Wyle v. C.H. Rider & Family (In re United Energy Corp.), 944 F. 2d 589, 593 (9th Cir. 1991). 

By order filed July 12, 2004, the Court held Virginia law governed Count Two. (See Order,

filed July 12, 2004, at 14:11.) Under Virginia law, a transfer “given with intent to delay,

hinder or defraud creditors, purchasers or other persons of or from what they are or may be

lawfully entitled to shall, as to such creditors, purchasers or other persons, their

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By those orders, the Court also dismissed with prejudice, on grounds other than the

releases, all claims brought by the Liquidating Trustee on behalf of Crown in a related

action against a number of other parties, including Fort James’s former President and CEO. 

See Crown Paper Liquidating Trust v. PricewaterhouseCoopers, C 02-3836 MMC. The

parties disagree as to whether certain defendants in the related action are covered by the

releases in the OSA. Any such disagreement is not material to the instant motion, and no

party appears to argue otherwise.

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Indeed, in the parties’ recently-filed Joint Pre-Trial Statement, the parties jointly

represent that “[n]o money damages are claimed in connection with [Count Two].” (See

Joint Pre-Trial Statement, filed January 8, 2007, at 3:13.)

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representatives or assigns, be void.” See Va. Code Ann. § 55-80. Additionally, under

Virginia Law, a transfer “which is not upon consideration deemed valuable in law . . . by a

transferor who is thereby rendered insolvent, shall be void as to creditors whose debts shall

have been contracted at the time it was made.” See Va. Code Ann. § 55-81.

Fort James argues that the Liquidating Trustee cannot establish a claim under either

Virginia statute. The Court agrees.

At the outset, the Court notes that the relief sought by the Liquidating Trustee in

Count Two is the following: “an order avoiding and rescinding the releases granted in the

[OSA] and/or an award of damages against Fort James for the value of the claims released

in the [OSA] in an amount to be determined at trial.” (See SAC ¶ 770.) By orders filed

September 25, 2003 and July 12, 2004, the Court dismissed with prejudice, on grounds

other than the releases in the OSA, all claims the Liquidating Trustee brought herein on

behalf of Crown against Fort James.1 Consequently, the value of the claims Crown

released is, as a matter of law, zero, and the Liquidating Trustee cannot establish its

entitlement to monetary damages.2 The other remedy sought, specifically, rescission of the

releases, would have the effect of allowing the Liquidating Trustee to file said claims on

behalf of Crown in spite of the releases. “Awarding” such relief, however, gives the

creditors no remedy, because the Liquidating Trustee already has filed such claims, which,

as noted, were dismissed with prejudice on grounds independent of the releases. In short,

the Liquidating Trustee has failed to identify a meaningful remedy that could be awarded

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When the Liquidating Trustee filed the SAC on August 6, 2004, the Liquidating

Trustee appeared to recognize as much: “[T]he Trustee contends that Count 2 of this

Second Amended Complaint need not be litigated at this time. The Trustee contends that

Count 2 of this Second Amended Complaint will become relevant if and when the Trustee

prevails on appeal as to any dismissed claims.” (See SAC ¶ 1.)

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the creditors.3 For this reason alone, summary judgment on Count Two is appropriate.

Alternatively, the Court finds the Liquidating Trustee has failed to establish the

existence of a triable issue of fact as to liability, either under Virginia’s constructive or

intentional fraudulent transfer statutes.

The Liquidating Trustee cannot prevail under § 55-81, Virginia’s constructive

fraudulent transfer statute, if Crown received from Fort James “any valuable consideration.” 

See Shaia v. Meyer (In re Meyer), 244 F. 3d 352, 355 (4th Cir. 2001) (emphasis added). 

As noted, in return for the releases, Fort James, inter alia, reduced by $33,000,000 the

principal Crown owed to Fort James on the PIK notes and forgave $188,910 in accrued

interest. (See Morrison Decl. Tab IV Ex. 217 ¶ 2.2.) The Liquidating Trustee does not

deny that forgiveness of a debt normally constitutes valuable consideration; rather, the

Liquidating Trustee argues the debts forgiven by Fort James were never enforceable. In

support of this argument, the Liquidating Trustee first argues that Crown never had an

obligation to repay the PIK notes because Crown issued the PIK notes as part of the

August 1995 spin-off, in which, the Liquidating Trustee asserts, Crown received nothing of

value. This argument is foreclosed by the Court’s prior finding that Crown did receive

consideration in the spin-off. (See Order Granting in Part and Denying in Part Defs.’ Mot.

for Summ. J., filed August 11, 2006, at 7-8.) The Liquidating Trustee next argues that, in

any event, Crown would not have been able to repay the PIK notes when the principal

became due in later years. This argument likewise fails. Even if Fort James’s ability to

recover payment on the PIK notes could be characterized as “doubtful” in light of Crown’s

then-existing financial condition, Fort James’s forgiveness of those debts nevertheless

constitutes valid consideration as a matter of law. See Pierce v. Plogger, 223 Va. 116, 121

(1982) (holding that even where claim released is of “doubtful” validity, release constitutes

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Another commonly considered “badge” is the “retention of possession of the

property by the grantor,” see id., which is not applicable herein.

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Fort James ceased being Crown’s sole shareholder in late August 1995. (See

Order, filed July 12, 2004, at 6:24-28.) With respect to dealings between Fort James and

Crown at the time of the OSA, Fort James offers evidence, undisputed by the Liquidating

Trustee, that each side was represented by outside counsel and that the parties, through

such counsel, engaged in lengthy negotiations that culminated in the OSA. (See Cutchins

Decl. ¶ 9.)

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The Liquidating Trustee has offered no evidence as to the value of the released

claims in March 1998, thereby precluding a comparison between an asserted value of

those claims and the value of the consideration paid in exchange therefor. Rather, with

respect to the “badge” of inadequate consideration, the Liquidating Trustee argues only that

Crown received nothing of value from Fort James, which assertion, as discussed above,

the Liquidating Trustee cannot establish.

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valid consideration “as a matter of law”).

As to § 55-80, Virginia’s intentional fraudulent transfer statute, because the

Liquidating Trustee offers no direct evidence of Crown’s fraudulent intent, the Liquidating

Trustee can establish its claim only by offering sufficient circumstantial evidence, known as

“badges of fraud,” from which Crown’s fraudulent intent reasonably can be inferred. See

Temple v. Jones, Son & Co., 179 Va. 286, 298 (1942) (holding plaintiff can establish prima

facie case of fraudulent transfer by “proving what [are] commonly known as indicia or

badges of fraud”). Among those “badges of fraud,” courts applying Virginia law have

considered a “close relationship of the parties,” the “pursuit of the grantor by creditors at

the time of the transfer,” the presence of “inadequate consideration,” and the “grantor’s

insolvency.” See In re AMA Corp., 175 B.R. 894, 898 (Bankr. W.D. Va. 1984) (citing

cases).4

 Here, the Liquidating Trustee has failed to offer any evidence that, in March 1998,

a close relationship existed between Crown and Fort James,5 or that Crown was being

pursued by creditors, at least no creditor other than Fort James, to whom the challenged

transfer was made. Moreover, the Liquidating Trustee has failed to offer evidence from

which a trier of fact reasonably could conclude the consideration received by Crown, which,

as noted, included forgiveness of a $33,000,000 debt, constituted inadequate consideration

for the releases.6 Finally, although the Liquidating Trustee argues Crown was insolvent at

the time Crown released the subject claims, and even if sufficient evidence exists to

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establish insolvency, such evidence, standing alone, is insufficient to create a triable issue

of fact as to Crown’s intent. See Fowlkes v. Tucker, 164 Va. 507, 514 (1935) (holding

existence of close relationship between parties and insolvency of transferor “do not of

themselves constitute badges of fraud” sufficient to establish a fraudulent transfer claim);

see, e.g., McClintock v. Royall, 173 Va. 408, 415 (1939) (holding, although “record [was]

replete with facts showing the insolvency of [the transferor],” plaintiff failed to establish

claim for fraudulent conveyance because plaintiff failed to establish any other fact from

which fraudulent intent could be inferred).

Accordingly, Fort James is entitled to summary judgment on Count Two.

CONCLUSION

For the reasons stated, Fort James’s motion for summary judgment on Count Two is

hereby GRANTED.

IT IS SO ORDERED.

Dated: January 12, 2007 

MAXINE M. CHESNEY

United States District Judge

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