NVIDIA 2010 Annual Report Download - page 42

Trustee Lawsuit.
In March 2003, the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate served his complaint on
NVIDIA. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer and seeks
additional payments from us. The Trustee’s fraudulent transfer theory alleged that NVIDIA had failed to pay reasonably equivalent
value for 3dfx’s assets, and sought recovery of the difference between the $70 million paid and the alleged fair value, which the
Trustee estimated to exceed $50 million. The Trustee’s successor liability theory alleged NVIDIA was effectively 3dfx’s legal
successor and was therefore responsible for all of 3dfx’s unpaid liabilities. This action was consolidated for pretrial purposes with the
landlord cases, as noted above.
On October 13, 2005, the Bankruptcy Court heard the Trustee’s motion for summary adjudication, and on December 23, 2005,
denied that motion in all material respects and held that NVIDIA may not dispute that the value of the 3dfx transaction was less than
$108 million. The Bankruptcy Court denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA was at
least $108 million.
In early November 2005, after several months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the
Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against
us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the
Bankruptcy Court. The conditional settlement called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate.
Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the
satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended
October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for
3dfx. The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially
through the confirmation process.
On December 21, 2006, the Bankruptcy Court scheduled a trial for one portion of the Trustee’s case against NVIDIA. On January
2, 2007, NVIDIA terminated the settlement agreement on grounds that the Bankruptcy Court had failed to proceed toward
confirmation of the Creditors’ Committee’s plan. A non-jury trial began on March 21, 2007 on valuation issues in the Trustee’s
constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx
transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as “property” subject to the Bankruptcy Court’s
avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the fair market
value of the “property” identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid “reasonably equivalent” to
the fair market value of that property? The parties completed post-trial briefing on May 25, 2007.
On April 30, 2008, the Bankruptcy Court issued its Memorandum Decision After Trial, in which it provided a detailed summary
of the trial proceedings and the parties’ contentions and evidence and concluded that “the creditors of 3dfx were not injured by the
Transaction.” This decision did not entirely dispose of the Trustee’s action, however, as the Trustee’s claims for successor liability
and intentional fraudulent conveyance were still pending. On June 19, 2008, NVIDIA filed a motion for summary judgment to
convert the Memorandum Decision After Trial to a final judgment. That motion was granted in its entirety and judgment was entered
in NVIDIA’s favor on September 11, 2008. The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on
September 25, 2008, NVIDIA exercised its election to have the appeal heard by the United States District Court, where the appeal is
pending. The District Court’s hearing on the Trustee’s appeal was held on June 10, 2009 and the appeal remains under submission.
While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee’s
case still remains pending on appeal. Accordingly, we have not reversed the accrual of $30.6 million – $5.6 million as a charge to
settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30,
2005, pending resolution of the appeal of the Trustee’s case.
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Source: NVIDIA CORP, 10-K, March 18, 2010 Powered by Morningstar® Document Research℠