How to preserve optimization of a business in bankruptcy

When a company or family of companies faces the potential for substantial future claims stemming from a harmful or defective product, to the company will ideally try to protect the “good” portion of the business by separating it from the “bad” part of the business through internal restructurings or asset transfers. Critically, both the transferor and the transferee must be solvent before and after the transfers take place to minimize the risk that successful fraudulent transfer or veil piercing claims will be brought against any of the resulting companies in a future bankruptcy filing.   

This can be accomplished through a true “Structural Optimization” (again, see prior articles on this topic here, here and here), where the liabilities and an amount of an off-setting combination of cash, insurance, or securities are left in a “badco” vehicle. This can be done in a straightforward manner by a transfer of assets away from badco or through a divisive merger statute under Texas or Delaware law, if the entity is (or can become) an entity organized under either of those state laws. Another way of accomplishing this separation is the “old-fashioned” way of splitting out operating units from each other, where the liability remains with the operating assets that produced the liability, while other operating assets are separated out into new “sister” companies. If done correctly, and on a fully solvent basis, it’s as if there were two or more companies all along.  

Vanderbilt minerals case 

That’s exactly the path chosen by the board of directors of R.T. Vanderbilt Company Inc. (“RTV”) – an industrial chemical and mineral company – in 2012-13, when it effectively split into four businesses: a “holding” company of the same name, two operating subsidiaries – (i) Vanderbilt Minerals LLC (“Minerals” and (ii) Vanderbilt Chemicals, LLC (“Chemicals”) – and one common shared services company, Vanderbilt Global Services LLC (“Services”). The goal of these entities, in addition to prospering, was to (a) survive at least as long as the statute of limitations on fraudulent transfers (which typically maxes out at four to six years)^[1], and (b) not co-mingle assets or operations or other indicia of lack of separateness that could lead to successful veil piercing claims. 

Unfortunately, due to liquidity issues of certain entities, including Chemicals, Minerals advanced significant sums of money to other group entities to help fund the group’s operations over time. As a result, RTV violated one of the core tenets of veil piercing defense strategy by allowing for meaningful loans among the family of companies and tying their futures together. 

Fast forward a few years, and it became clear that the trouble really sat with Minerals – the cash producing company – as it now faced snowballing asbestos claims that potentially exceeded the entity’s value. Over time, judgements and payouts drained Minerals’ available cash, until it reached the breaking point and was forced to file for bankruptcy on February 16, 2026 in the United States Bankruptcy Court for the Northern District of New York. At the time of filing, the other RTV group entities owed Minerals a substantial amount of money and Minerals had potential “general” alter ego claims / veil piercing that it could pursue against its parent RTV and its other affiliates.  

But, RTV did the “right thing” prior to filing, and rather than try to decide internally how to value these debt and litigation claims, it took several important steps by (i) appointing a sole and truly independent director responsible for investigating these claims, and (ii) providing an allotted budget to the director and time for him and a law firm of his choosing to thoughtfully conduct an investigation into the matter and form their own conclusions. That independent director ultimately entered into a settlement which provided for non-debtor assets (since cash was in short supply) to be made available for sale by the debtor Minerals as a part of its bankruptcy process (and, in the process, take advantage of the protections of “free and clear” sales under Bankruptcy Code section 363). The settlement, as described by the independent director, apparently allocated no value for any veil piercing/alter ego type claims (due in part to the passage of time and the specific circumstances), and instead focused on the intercompany debt and receivables, including factoring in the cost of collection on those claims.     

Importantly, that settlement narrowly applied only to the claims between the debtor and its affiliates, but did not attempt to curtail any direct claims that asbestos plaintiffs might have against the non-debtor entities or the officers or directors of debtor Minerals or its non-debtor affiliates.  Nevertheless, the asbestos plaintiffs objected in bankruptcy on a variety of grounds, including that they had massive claims and this small settlement was insufficient, and, further, that the process run by the independent director was a “sham”.

The Bankruptcy Court was faced with a difficult choice – permit a settlement that all but guaranteed a low level of recovery for the claimants in the bankruptcy case, or reject it, notwithstanding the difficult financial circumstances facing the debtor and the independent process run to investigate and resolve the variety of intercompany claims. Ultimately the Bankruptcy Court decided—followingan application of the Iridium factors (named after a binding 2007 Second Circuit Court of Appeals opinion that sets out seven factors that bankruptcy courts in the Second Circuit must evaluate when considering bankruptcy settlements)—that approving the settlement was on balance appropriate.  

The Iridium factors that the Bankruptcy Court evaluated included the following: (1) whether the settlement made sense given the likelihood of litigation success (it did); (2) the impact of litigation and related costs (would be lengthy and costly); (3) the interests of creditors (they are getting the benefit of the deal); (4) support for the settlement (court found it favored trade, lenders and others, even if the asbestos plaintiffs were against); (5) competency of counsel (and by extension, the true independence of the independent director); (6) the scope of the releases (as narrow as possible, but still a concern, troubling the court the most); and (7) the extent of arm’s length bargaining (again, the independent director was the deciding element here). 

As a result, after the Bankruptcy Court approved the settlement on April 27, 2026, and with essentially no value allocated to claw-back or veil piercing claims, RTV accomplished its goal from 2012/13 of separating out the Minerals business and its asbestos exposure from the remainder of the businesses, without having to pay additional amounts later to preserve the separateness. The only “mistake”, and perhaps it was a calculated one, was to allow for significant intercompany borrowings and receivables to accumulate, risking an alter ego attack, but that was effectively resolved through the appointment of the independent director and allowing for a full examination of all the facts and circumstances. 

There are four key lessons to take away from all of this: 

Authored by Christopher R. Donoho III and Edward McNeilly.