In Re: PWS Holding Corp , 303 F.3d 308 ( 2002 )

Opinions of the United
2002 Decisions States Court of Appeals
for the Third Circuit
9-12-2002
In Re: PWS Holding Corp
Precedential or Non-Precedential: Precedential
Docket No. 01-1462
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"In Re: PWS Holding Corp " (2002). 2002 Decisions. Paper 563.
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PRECEDENTIAL
Filed September 12, 2002
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-1462
IN RE: PWS HOLDING CORPORATION;
BRUNO’S, INC.;
FOOD MAX OF MISSISSIPPI, INC.;
A.F. STORES, INC.;
BR AIR, INC.;
FOOD MAX OF GEORGIA, INC.;
FOOD MAX OF TENNESSEE, INC.;
FOODMAX, INC.;
LAKESHORE FOODS, INC.;
BRUNO’S FOOD STORES, INC.;
GEORGIA SALES COMPANY;
SSS ENTERPRISE, INC.,
Debtors,
Wyatt R. Haskell, individually and on behalf
of others similarly situated,
Appellant
On Appeal from the United States District Court
for the District of Delaware Exercising Original
Jurisdiction in a Bankruptcy Case
District Court Judge: The Honorable Sue L. Robinson
(D.C. No: 98-00212 through 98-00223)
Argued on April 1, 2002
Before: SLOVITER, FUENTES, and MICHEL,*
Circuit Judges.
_________________________________________________________________
* Hon. Paul R. Michel, United States Court of Appeals for the Federal
Circuit, sitting by designation.
(Opinion Filed: September 12, 2002)
J. VERNON PATRICK (Argued)
JEFFREY V. HAVERCROFT
Haskell Slaughter Young &
Rediker, L.L.C.
1200 AmSouth/Harbert Plaza
1901 Sixth Avenue North
Birmingham, AL 35203
Counsel for Appellant Haskell
HARVEY R. MILLER (Argued)
LORI R. FIFE
Weil, Gotshal & Manges LLP
767 Fifth Avenue
27th Floor
New York, NY 10153
DANIEL J. DeFRANCESCHI
Richards, Layton & Finger, P.A.
One Rodney Square
P.O. Box 551
Wilmington, DE 19899
Counsel for Appellees
PWS Holding Corp., Bruno’s, Inc.,
et al.
AMY R. WOLF (Argued)
HAROLD S. NOVIKOFF
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
EDWARD G. BIESTER, III
Duane, Morris & Heckscher, LLP
One Liberty Place
Philadelphia, PA 19103-7396
Counsel for Appellee
Chase Manhattan Bank
2
OPINION OF THE COURT
FUENTES, Circuit Judge:
Wyatt R. Haskell appeals from the order of the District
Court enforcing its previous confirmation order
("Confirmation Order") of a bankruptcy reorganization plan
("Reorganization Plan") for Bruno’s, Inc., an Alabama-based
company that operates a chain of supermarkets in the
southeastern United States. The order specifically enjoins
the prosecution of certain fraudulent transfer claims
asserted by Haskell in Alabama state court. The District
Court further ordered that, as a result of Haskell’s violation
of the Confirmation Order, he is to pay the costs associated
with obtaining the enforcement order. As a holder of $2.45
million in Bruno’s subordinated notes, Haskell argues that
the Reorganization Plan and the Confirmation Order do not
bar him from pursuing direct fraudulent transfer claims
under the Alabama Uniform Fraudulent Transfer Act
("AUFTA"), Ala. Code, S 8-9A-1, et. seq.
Because the fraudulent transfer claims asserted by
Haskell in Alabama state court were extinguished by the
Reorganization Plan and Confirmation Order, and because
Haskell continued to prosecute the Alabama action in
violation of the Confirmation Order, we will affirm the
District Court’s enforcement order in all respects.
I.
Bruno’s operates a chain of about 200 supermarkets in
the southeastern United States. In 1995, affiliates of
Kohlberg, Kravis, Roberts & Co., LP ("KKR") acquired an
83.33% interest in Bruno’s in a leveraged recapitalization,
which was financed by an equity contribution of $250
million by KKR, a revolving credit and term loan facility
provided by a group of banks (the "Banks"), and the
issuance by Bruno’s of $400 million in notes due in 2005
pursuant to an indenture. The indenture provides that the
noteholders’ claims are fully subordinated to the payment
in full of the claims of the senior lenders. The total
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financing of the leveraged recapitalization was
approximately $1.25 billion.
From November 1997 through March 1999, Haskell
purchased $2.45 million in principal amount of
subordinated notes, at an average cost of 20 to 22 cents on
the dollar, or $490,000 to $539,000 in the aggregate.
On February 2, 1997, facing difficulty meeting payment
obligations from the recapitalization and in paying its
suppliers and other creditors, Bruno’s and its affiliates1
(collectively "Debtors") filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code. As of that filing
date, Bruno’s owed approximately $462 million to the
Banks, $135 million to trade vendors, suppliers, and other
secured creditors, and $421 million on the subordinated
notes. In February 1998, the Bankruptcy Trustee appointed
a nine-member "Official Unsecured Creditor’s Committee"
(the "Committee"), which comprised four representatives of
the Banks, three representatives of the trade vendors, and
two representatives of the subordinated noteholders.
During the spring of 1999, the Committee and subgroups
of the Committee convened several times to develop the
Reorganization Plan for the Debtors.
In March 1999, the Debtors’ attorneys determined that
legal claims arising from the leveraged recapitalization,
primarily fraudulent transfer claims, were not viable
against any of its participants. Although the Committee
initially voted to preserve these causes of action in the plan,
it reversed its position in May 1999 and, with the support
of the trade vendor representatives and the Banks, voted to
support the plan releasing the claims. Haskell, W.R. Huff
Asset Management Co., L.L.C. ("Huff "), a holder of $290
million in Bruno’s subordinated notes, and HSBC Bank
USA ("HSBC"), the indenture trustee for the subordinated
notes, objected to these releases and successfully moved for
the appointment of an independent examiner to evaluate
the claims. The examiner found, however, that the claims
_________________________________________________________________
1. The affiliates are PWS Holding Corp., Food Max of Mississippi, Inc.,
A.F. Food Stores, Inc., BR Air, Inc., Food Max of Georgia, Inc., Food Max
of Tennessee, Inc., FoodMax, Inc., Lakeshore Foods, Inc., Bruno’s Food
Stores, Inc., Georgia Sales Co., and SSS Enterprise, Inc.
4
were "not promising," were "limited and speculative," and
that "significant defenses" were available to each of the
principal participants, the former shareholders, the Banks,
the subordinated noteholders, and KKR in the
recapitalization. The examiner thus concluded that the
fraudulent transfer claims were "extremely difficult to
justify" in the face of "the multiple legal and factual
obstacles to any substantial fraudulent transfer or illegal
distribution recovery by the Debtors." Accordingly, under
the Reorganization Plan, these legal claims were
extinguished and the potential targets of any prosecution of
these claims were, in effect, released.
On August 5, 1999, Haskell commenced an action in
Alabama state court ("Haskell Alabama Action") on behalf of
himself and similarly situated noteholders, asserting claims
under the AUFTA, alter-ego claims, conspiracy claims, and
breach of fiduciary duty claims. The defendants in the
Haskell Alabama Action consist primarily of participants in
the leveraged recapitalization, including co-appellee The
Chase Manhattan Bank ("Chase"), which served as
administrative agent for the senior lenders to Bruno’s in the
leveraged recapitalization. In response, Bruno’s invoked the
automatic stay under 11 U.S.C. S 362 of the Bankruptcy
Code, and the prosecution of the Haskell Alabama Action
was suspended.
The final Reorganization Plan explicitly makes reference
to the Haskell Alabama Action, providing:
9.3 Claims Extinguished.
(a) As of the Effective Date, any and all avoidance
claims accruing to the Debtors and Debtors in
Possession under sections 502(d), 544, 545, 547, 548,
549, 550, and 551 of the Bankruptcy Code, including,
without limitation, all of the claims that are asserted in
the Haskell Alabama Action and the Huff Alabama
Action, shall be extinguished whether or not then
pending.
(b) As of the Effective Date, any and all alter-ego or
derivative claims accruing to the Debtors and Debtors
in Possession, including, without limitation, all of the
claims that are asserted or could be asserted in the
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Haskell Alabama Action and the Huff Alabama Action,
shall be extinguished whether or not then pending.
App. IV, at 773 (emphasis added). Haskell, together with
Huff and HSBC, objected to the confirmation of the plan,
specifically opposing the plan’s release and extinguishment
provisions. However, after a three-day hearing, the District
Court approved the Debtors’ Reorganization Plan and
issued the Confirmation Order on December 30, 1999.
Making specific reference to the Haskell Alabama Action
and creditors’ claims against nondebtor third parties,
Paragraphs 50, 51, and 52 of the District Court’s
Confirmation Order provide:
50. As of the Effective Date, any and all avoidance
claims owned by or vested in the Debtors and Debtors
in Possession under sections 502(d), 544, 545, 547,
548, 549, 550 and 551 of the Bankruptcy Code,
including, without limitation, all of the avoidance
claims that are owned by or vested in the Debtors and
Debtors in Possession pursuant to the Bankruptcy
Code and applicable provisions of law and that are
asserted or could be asserted in the Haskell Alabama
Action and the Huff Alabama Action, shall be
extinguished whether or not then pending.
51. As of the Effective Date, any and all alter-ego or
derivative claims owned by or vested in the Debtors
and Debtors in Possession, including, without
limitation, all of the alter-ego or derivative claims that
are owned or vested in the Debtors and Debtors in
Possession pursuant to the Bankruptcy Code and
applicable provisions of law and that are asserted or
could be asserted in the Haskell Alabama Action and
the Huff Alabama Action, shall be extinguished whether
or not then pending.
52. Nothing contained in paragraphs 50 or 51 of this
Confirmation Order or in Sections 9.3(a) and 9.3(b) of
the Plan shall be construed to extinguish, limit or bar
any direct, personal and non-derivative claim which
may be asserted against nondebtor third parties by
creditors in their individual capacity or for the benefit
of other similarly situated creditors; provided , however,
6
that, notwithstanding the foregoing, creditors may not
assert against nondebtor third parties any claims that
are owned by or vested in the Debtors and Debtors in
Possession and extinguished pursuant to Sections 9.3(a)
and 9.3(b) of the Plan (as such Section is incorporated
in paragraphs 50 and 51 of this Confirmation Order).
App. VIII, at 2027-28 (emphasis added). The clear language
of the Confirmation Order specifically provides that the
fraudulent transfer claims asserted in the Haskell Alabama
Action are extinguished pursuant to Section 9.3 of the
Reorganization Plan and cannot be asserted by creditors
against third parties. Further, Paragraph 54 of the
Confirmation Order permanently enjoins:
all entities who have held, hold or may hold Claims
against or Equity Interests in any or all of the Debtors
from . . . commencing or continuing in any manner any
action or other proceeding of any kind with respect to
any claims and Causes of Action that are extinguished
or released pursuant to the Plan or this Confirmation
Order, including, without limitation, the claims
extinguished pursuant to Section 9.3 of the Plan . .. .
App. VIII, at 2029.
Huff and HSBC appealed from the District Court’s order
confirming the Reorganization Plan, challenging three
separate releases of legal claims included in the plan.
Haskell did not join in that appeal. On September 18, 2000,
we affirmed the District Court’s Confirmation Order in In re
PWS Holding Corp., 228 F.3d 224 (3d Cir. 2000). 2
_________________________________________________________________
2. In PWS Holding Corp., we observed that the District Court concluded
that the claims were extinguished for the following three reasons:
First, [the District Court] was persuaded by the Examiner’s
conclusion that there was a low likelihood of recovery on the claims.
. . . Second, the Court concluded that the potential cost to the
estate of prosecuting the action and defending and paying
indemnification claims, cross claims, and counterclaims arising out
of the prosecution was high. Third, the Court believed that there
was some likelihood that the Banks and the subordinate
noteholders, as participants in the leveraged recapitalization, would
be estopped from recovering on the claims.
7
On January 10, 2000, Haskell moved for an order to alter
or amend the Confirmation Order so as to require deletion
of the extinguishment and injunctive provisions pertaining
to the claims asserted in the Haskell Alabama Action. At a
hearing on January 20, 2000, the District Court denied
Haskell’s motion to alter or amend. Because Haskell then
resumed the prosecution of the Haskell Alabama Action,
the Debtors filed a motion on April 3, 2000 to enforce the
Confirmation Order and specifically to enjoin Haskell’s
prosecution of extinguished claims. On April 26, 2000,
Haskell filed an amended and restated complaint in the
Haskell Alabama Action. The restated complaint alleges
seven counts, including four premised upon the argument
that the leveraged recapitalization was a fraudulent transfer
under Alabama state law.3
On December 7, 2000, the District Court granted the
Debtors’ motion to enforce the Confirmation Order of
December 30, 1999 and to enjoin the prosecution in the
Haskell Alabama Action of the four counts premised upon
Haskell’s fraudulent transfer claims. The District Court
further ordered that Haskell pay the costs, including
reasonable attorneys’ fees, associated with that proceeding.
Haskell timely appeals from the December 7, 2000 order
of the District Court.
II.
The District Court had jurisdiction to hear and determine
_________________________________________________________________
228 F.3d at 239. We ultimately found that "[t]he Examiner’s and the
District Court’s conclusions that the claims were unlikely to succeed and
were potentially costly to pursue are legally and factually supported." Id.
at 242.
3. Count I of the restated complaint alleges fraudulent transfer claims
under the AUFTA. Count IV claims that the defendants breached their
fiduciary duties to the subordinated noteholders by approving the
leveraged recapitalization. Count V alleges that the defendants conspired
to cause Bruno’s to make fraudulent transfers. Finally, Count VI asserts
that the defendants joined and rendered substantial assistance in
causing Bruno’s to violate the AUFTA by making fraudulent transfers.
8
the Debtors’ motion to enforce the Confirmation Order
pursuant to 28 U.S.C. S 1334. We exercise jurisdiction
under 28 U.S.C. S 1291. Although we review a district
court’s factual findings only for clear error, we exercise
plenary review over any legal determinations. Official Comm.
of Unsecured Creditors v. R.F. Lafferty & Co., Inc. , 267 F.3d
340, 346 (3d Cir. 2001); In re O’Dowd, 233 F.3d 197, 201-
02 (3d Cir. 2000).
III.
Fraudulent conveyance law aims "to make available to
creditors those assets of the debtor that are rightfully a part
of the bankruptcy estate, even if they have been transferred
away." Buncher Co. v. Official Comm. of Unsecured Creditors
of GenFarm Ltd. P’ship IV, 229 F.3d 245, 250 (3d Cir. 2000)
(citing In re Cybergenics Corp., 226 F.3d 237, 241-42 (3d
Cir. 2000)). The Uniform Fraudulent Transfer Act, as
adopted in Alabama, provides that the transfer of an asset
or an interest in an asset is fraudulent as to a creditor if (1)
"the debtor made the transfer without receiving a
reasonably equivalent value in exchange for the transfer"
and (2) the debtor "[w]as engaged or was about to engage in
a business or a transaction for which the remaining assets
of the debtor were unreasonably small in relation to the
business or transaction" or "[i]ntended to incur, or believed
or reasonably should have believed that he or she would
incur, debts beyond his or her ability to pay as they became
due." Ala. Code 1975, S 8-9A-4. Among the remedies that
the AUFTA affords creditors is the "[a]voidance of the
transfer to the extent necessary to satisfy the creditor’s
claim." Ala. Code 1975, S 8-9A-7.
Both the Reorganization Plan and the Confirmation Order
specifically identify "all avoidance claims" asserted in the
"Haskell Alabama Action," such as those available under
the AUFTA, as "extinguished." Haskell points out, however,
that the AUFTA provides a direct right of action to creditors,
and not to the grantors of a fraudulent conveyance. 4
_________________________________________________________________
4. The following are the relevant provisions of the AUFTA that describe a
creditor’s remedies:
9
Because the AUFTA claims do not belong to Bruno’s
bankruptcy estate, Haskell argues that the extinguishment
provisions in the Reorganization Plan and Confirmation
Order do not bar him from prosecuting fraudulent transfer
claims in the Haskell Alabama Action. The fatal flaw in
Haskell’s argument, however, is that it fails to consider
properly the interplay between claims under the AUFTA and
the Bankruptcy Code.
The relevant provision of the Bankruptcy Code in this
case is 11 U.S.C. S 544(b). Section 544(b) provides that,
upon commencement of a case under the Bankruptcy Code,
a trustee or debtor in possession "may avoid any transfer of
an interest of the debtor in property or any obligation
incurred by the debtor that is voidable under applicable law
by a creditor holding an unsecured claim that is allowable"
under the Bankruptcy Code.5 11 U.S.C. S 544(b). In other
_________________________________________________________________
S 8-9A-7. Remedies of creditors.
(a) In an action for relief against a transfer under this chapter, the
remedies available to creditors, subject to the limitations in Section
8-9A-8, include:
(1) Avoidance of the transfer to the extent necessary to satisfy the
creditor’s claim . . . .
S 8-9A-8 Defenses, liability, and protection of transferee.
. . .
(b) Except as otherwise provided in this section, to the extent a
transfer is voidable in an action by a creditor under Section 8-9A-
7(a)(1), the creditor may recover judgment for the value of the asset
transferred, as adjusted under subsection (c), or the amount
necessary to satisfy the creditor’s claim, whichever is less, or
judgment for conveyance of the asset transferred. The judgment may
be entered against:
(1) The first transferee of the asset or the person for whose benefit
the transfer was made . . . .
Ala. Code 1975, SS 8-9A-7 and 8-9A-8.
5. Although S 544(b) does not make reference to the "debtor in
possession," the Bankruptcy Code generally gives the "debtor in
possession" the powers and duties of a trustee. 11 U.S.C. S 1107(a).
Thus, the two terms are "essentially interchangeable." In re Cybergenics
Corporation, 226 F.3d 237, 243 (3d Cir. 2000).
10
words, S 544(b) places the debtor in possession in the shoes
of its creditors, giving it the right to prosecute individual
creditors’ fraudulent transfer claims for the benefit of the
bankruptcy estate. This provision of the Bankruptcy Code
is consistent with its objective of equitable distribution. See
N.L.R.B. v. Martin Arsham Sewing Co., 873 F.2d 884, 888
(6th Cir. 1989) (noting that "[t]o allow a creditor of the
bankrupt to pursue his remedy against third parties on a
fraudulent transfer theory would undermine the
Bankruptcy Code policy of equitable distribution by
allowing the creditor ‘to push its way to the front of the line
of creditors’ " (quoting In re Cent. Heating & Air
Conditioning, Inc., 64 B.R. 733, 737 (N.D. Ohio 1986)); see
also Moore v. Bay, 284 U.S. 4, 5 (1931) (observing that
what is recovered for benefit of bankrupt’s estate is to be
distributed in equal parts among allowed unsecured claims
that lack priority).
Haskell contends that he has the right to assert his
fraudulent transfer claims despite the language inS 544(b).
He frames the issue in terms of ownership, focusing upon
whether the fraudulent transfer claims belong to the
Debtors. He makes reference to our previous decision in In
re Cybergenics Corp., 226 F.3d 237 (3d Cir. 2000), in which
we stated, "The fact that section 544(b) authorizes a debtor
in possession . . . to avoid a transfer using a creditor’s
fraudulent transfer action does not mean that the
fraudulent transfer action is actually an asset of the debtor
in possession . . . ." Id. at 243. Since creditors’ actions
under the AUFTA are not assets belonging to the Debtors,
as Cybergenics makes clear, Haskell reasons that they are
direct, non-derivative claims and, thus, unaffected by the
extinguishment provisions in the Reorganization Plan and
Confirmation Order. A closer analysis of our decision in
Cybergenics demonstrates the flaws in Haskell’s argument.
In Cybergenics, the debtor in possession, Cybergenics
Corp., had sold all of its assets to a third party after filing
for bankruptcy. Id. at 239. Subsequent to that, a group of
Cybergenics’ unsecured creditors sought leave from the
Bankruptcy Court to bring a fraudulent transfer action on
behalf of the bankruptcy estate.6Id. at 240. Those named
_________________________________________________________________
6. We note that the creditors in Cybergenics sought to bring a fraudulent
transfer action under S 544(b) on behalf of the bankruptcy estate,
11
as defendants in the creditors’ suit argued that the
creditors could not bring the action because any fraudulent
transfer claims had been transferred in Cybergenics’ asset
sale. Id. Agreeing that such claims had been sold in the
asset sale, the District Court dismissed the creditors’
complaint for lack of subject matter jurisdiction under
Federal Rule of Civil Procedure 12(b)(1). Id. at 240-41. We
reversed the dismissal, holding that the fraudulent transfer
claim was never an asset of Cybergenics, the debtor in
possession. Id. at 245. Expounding on the debtor’s power to
avoid fraudulent transfers, we explained:
The power to avoid the debtor’s prepetition transfers
and obligations to maximize the bankruptcy estate for
the benefit of creditors has been called a "legal fiction"
by one court. It puts the debtor in possession "in the
overshoes" of a creditor. This attribute is no more an
asset of Cybergenics as debtor in possession than it
would be a personal asset of a trustee, had one been
appointed in this case. Much like a public official has
certain powers upon taking office as a means to carry
out the functions bestowed by virtue of the office or
public trust, the debtor in possession is similarly
endowed to bring certain claims on behalf of, and for
the benefit of, all creditors.
Cybergenics, 226 F.3d at 243-44 (internal citations
omitted).
In arguing that his claims as a noteholder were not
extinguished under the Reorganization Plan and
Confirmation Order, Haskell fixates upon our conclusion in
Cybergenics that fraudulent transfer claims do not
_________________________________________________________________
whereas, in this case, Haskell seeks to bring his claims directly under
the AUFTA, not derivatively through the debtor’s power to assert
fraudulent transfer claims under S 544(b). After the Supreme Court’s
holding that only a trustee or debtor-in-possession is empowered to
invoke S 506(c) of the Bankruptcy Code in Hartford Underwriters Ins. Co.
v. Union Planters Bank, N.A., 530 U.S. 1, 9 (2000), there is some doubt
as to whether a creditor can act derivatively in the debtor’s stead to
invoke S 544(b). However, because Haskell does not seek to invoke
S 544(b), we are not confronted by that issue in this case.
12
constitute assets of the debtor in possession. In doing so,
however, he neglects to consider the well-established rule
under S 544(b) that we reaffirmed in Cybergenics, namely,
that "a debtor in possession is empowered to pursue . . .
fraudulent transfer claims for the benefit of all creditors."
Id. at 245. Unlike in Cybergenics, the debtor in possession
in this case, after thoroughly investigating and evaluating
the potential fraudulent transfer claims, explicitly
extinguished all such claims in its Reorganization Plan. The
District confirmed the Reorganization Plan in its December
7, 1999 order, which we then affirmed in PWS Holding
Corp., 228 F.3d at 250. Much as a party might decide to
resolve a claim by reaching an out-of-court settlement,
Bruno’s resolved the fraudulent transfer claims here by
extinguishing them. In contrast, the debtor in Cybergenics
merely completed a sale of its assets. It did not exercise its
power under S 544(b) to resolve potential fraudulent
transfer claims, as did the debtor in this case.
Haskell had the opportunity to contest the
extinguishment of the fraudulent transfer claims, but his
objections were overruled by the District Court through its
Confirmation Order, from which he did not file an appeal.
Because Bruno’s validly and effectively extinguished all
potential fraudulent transfer claims arising from the
leveraged recapitalization, Haskell is precluded from now
prosecuting those claims in Alabama state court. They have
been resolved.
Accordingly, we will affirm the District Court’s order
enforcing its previous Confirmation Order and enjoining
Haskell from continuing to prosecute the AUFTA-related
claims asserted in the Haskell Alabama Action. Because we
agree with the District Court that Haskell violated the
Confirmation Order, we will also affirm the District Court’s
order that he pay the costs associated with obtaining the
enforcement order.
IV.
For the foregoing reasons, we will affirm the order of the
District Court in all respects.
13
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
14