In Re PWS Holding Corp.

Opinions of the United
2000 Decisions States Court of Appeals
for the Third Circuit
9-18-2000
In Re: PWS Holding
Precedential or Non-Precedential:
Docket 00-5042
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Recommended Citation
"In Re: PWS Holding" (2000). 2000 Decisions. Paper 199.
http://digitalcommons.law.villanova.edu/thirdcircuit_2000/199
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Filed September 18, 2000
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 00-5042 and 00-5074
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
W.R. Huff Asset Management Co., L.L.C.,
Appellant in 00-5042
HSBC BANK USA, as Indenture Trustee for
the 10.5% Senior Subordinated Notes,
Appellant in 00-5074
On Appeal From the United States District Court
for the District of Delaware
(D.C. Civ. No. 98-cv-00212)
District Judge: Honorable Sue L. Robinson
Argued: March 10, 2000
Before: BECKER, Chief Judge, SCIRICA and
NYGAARD Circuit Judges.
(Filed: September 18, 2000)
EDWARD S. WEISFELNER,
ESQUIRE (ARGUED)
ANDREW DASH, ESQUIRE
JOHN P. BIEDERMANN, ESQUIRE
Berlack, Israels & Liberman
120 West 45th Street
New York, NY 10036
STEVEN K. KORTANEK, ESQUIRE
JOANNE B. WILLS, ESQUIRE
Klehr, Harrison, Harvey, Branzburg
& Ellers, LLP
919 Market Street, Suite 1000
Wilmington, DE 19801
Counsel for Appellant
W.R. Huff Asset Management Co.
PETER D. WOLFSON, ESQUIRE
(ARGUED)
CAROL NEVILLE, ESQUIRE
Pryor, Cashman, Sherman & Flynn,
LLP
410 Park Avenue
New York, NY 10022-4441
JEFFREY C. WISLER, ESQUIRE
Connolly, Bove, Lodge & Hutz
1220 Market Building
P.O. Box 2207
Wilmington, DE 19899
Counsel for Appellant
HSBC Bank USA, Indenture Trustee
HARVEY R. MILLER, ESQUIRE
(ARGUED)
LORI R. FIFE, ESQUIRE
MARC D. PUNTUS, ESQUIRE
Weil, Gotshal & Manges, LLP
767 Fifth Avenue
New York, NY 10153
2
THOMAS L. AMBRO, ESQUIRE
DANIEL J. DeFRANCESCHI,
ESQUIRE
One Rodney Square
P.O. Box 551
Wilmington, DE 19899
Counsel for Appellees PWS Holding
Corp.; Bruno's, Inc.; Food Max of MI,
Inc.; AF Stores, Inc.; BR Air, Inc.;
Food Max of GA, Inc.; Food Max of
TN, Inc.; Foodmax Inc.; Lakeshore
Foods, Inc.; Brunos Food Stores;
Georgia Sales Co.; SSS Entr, Inc.
HAROLD S. NOVIKOFF, ESQUIRE
(ARGUED)
AMY R. WOLF, ESQUIRE
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
EDWARD G. BIESTER, III, ESQUIRE
Duane, Morris & Heckscher
4200 One Liberty Place
Philadelphia, PA 19103-7396
TERESA K.D. CURRIER, ESQUIRE
Duane, Morris & Heckscher
1201 Market Street, Suite 1500
P.O. Box 195
Wilmington, DE 19899
Counsel for Appellee
Chase Manhattan Bank
DENNIS S. KAYES, ESQUIRE
(ARGUED)
STUART E. HERTZBERG, ESQUIRE
I. WILLIAM COHEN, ESQUIRE
Pepper, Hamilton, LLP
100 Renaissance Center, 36th Floor
Detroit, MI 48243
3
DAVID M. FOURNIER, ESQUIRE
MONICA LEIGH LOFTIN, ESQUIRE
Pepper, Hamilton, LLP
1201 Market Street, Suite 1600
Wilmington, DE 19801
Counsel for Appellee Official
Committee of Unsecured Creditors
OPINION OF THE COURT
BECKER, Chief Judge.
W.R. Huff Asset Management Co., L.L.C. ("Huff "), and
HSBC Bank USA ("HSBC") appeal from the order of the
District Court confirming a reorganization plan for Bruno's,
Inc., (Bruno's), and several affiliates.1 Bruno's is based in
Alabama and operates a chain of supermarkets in the
southeastern United States. Huff was the holder of $290
million in Bruno's subordinated notes; HSBC was the
indenture trustee for the subordinated notes (we refer to
them together as Huff). They argue that the District Court
should not have confirmed the plan for a host of reasons,
most notably because it contains releases that violate the
absolute priority rule of 11 U.S.C. S 1129(b)(2)(B)(ii) and are
thus impermissible under the Bankruptcy Code.
Three separate interests have appeared to defend the
plan: the debtors and debtors-in-possession (referred to
throughout as the Debtors); the Chase Manhattan Bank,
representing the group of banks (the Banks) that were the
senior lenders to Bruno's before the reorganization; and the
Official Unsecured Creditors' Committee. Together they
contend that the plan does not violate the absolute priority
rule because the releases were not granted "on account of "
the interests of the released parties, but rather the claims
released had little or no value.
_________________________________________________________________
1. The affiliates are PWS Holding Corp., 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
Foodstores, Inc., Georgia Sales Co., and SSS Enterprises, Inc.
4
The absolute priority rule, found in 11 U.S.C.
S 1129(b)(2)(B)(ii), provides that "the holder of any claim or
interest that is junior to the claims of [a class of unsecured
claims] will not receive or retain under the plan on account
of such junior claim or interest any property." In Bank of
America National Trust and Savings Association v. 203
North LaSalle Street Partnership, 526 U.S. 434 (1999), the
Supreme Court interpreted the "on account of " language in
S (b)(2)(ii). The Court rejected arguments that "on account
of " means "in satisfaction of " the interest or "in exchange
for" the interest and concluded that it means"because of "
the interest. Id. at 450-51. Accordingly, a causal connection
between holding the prior claim or interest, and receiving or
retaining property, will trigger the absolute priority rule.
Huff submits that this plan, by releasing claims held by the
bankrupt entity that arose out of the leveraged
recapitalization, essentially transferred property to holders
of junior equity in violation of the absolute priority rule.
Huff argues that the release was a transfer to junior equity
because the potential claims included claims against junior
equity--affiliates of Kohlberg, Kravis, Roberts & Co., L.L.C.
(KKR), and other participants in the recapitalization. Huff
contends that the transfer violated the absolute priority
rule because senior creditors (including Huff) had not been
paid in full.
We conclude that the District Court did not err in the
challenged respects.2 The Examiner appointed by the
District Court under 11 U.S.C. SS 1104(c) and 105(a) at the
behest of Huff found in a comprehensive report that the
claims released had little potential merit. We find no error
in the District Court's decision to accept the Examiner's
findings and legal conclusions regarding the viability of the
claims, and we reject Huff 's contention that the releases
were granted "on account of " old equity's interest. We also
reject the Debtors' contention that the challenge to
confirmation is equitably moot under In re Continental
Airlines, 91 F.3d 553, 559 (3d Cir. 1996) (en banc).
_________________________________________________________________
2. Because the order of reference to the Bankruptcy Court was
withdrawn in the District of Delaware, this case was heard initially in
the
District Court.
5
Huff 's other challenges to confirmation include that the
plan should not have been confirmed because the District
Court erred in determining that it was proposed in good
faith as required by 11 U.S.C. S1129(a)(3). Huff has not
offered anything but innuendo to support its contention
that the Debtors violated this portion of the Code, and we
find no error in the District Court's conclusion that the
plan was proposed in good faith.
Additionally, Huff contends that the plan should not have
been confirmed because it violates the following sections of
the Bankruptcy Code: 11 U.S.C. S 510(a), which provides
that a "subordination agreement is enforceable in a case
under this title to the same extent that such agreement is
enforceable under applicable nonbankruptcy law;" 11
U.S.C. S 524(e), which provides that "[e]xcept as provided in
subsection (a)(3) of this section, discharge of a debt of the
debtor does not affect the liability of any other entity on, or
the property of any other entity for, such debt;" 11 U.S.C.
S 363, which governs the sale of assets outside of the
reorganization plan; 11 U.S.C. S 1129(a)(2), which provides
that a court shall confirm a plan only if "[t]he proponent of
the plan complies with the applicable provisions of this
Title;" and 11 U.S.C. S 1129(a)(7), which provides that a
court shall confirm a plan only if the debtor demonstrated
at the Confirmation Hearing that creditors rejecting the
plan would not receive a greater recovery in a Chapter 7
liquidation.
We reject Huff 's argument under S 510(a) because the
subordinated noteholders' rights under the agreement do
not arise until the senior indebtedness is paid in full, which
has not happened under the plan. We reject the S 524(e)
argument because we conclude that the limited release in
Paragraph 58 of the plan does not come within the meaning
of S 524(e) and is consistent with the standard of liability
under the Code. We reject Huff 's S 363 argument because
we do not agree with the contention that the Plan triggered
a duty to fully market the company. We conclude that Huff
does not have standing to raise the challenge under
S 1129(a)(2) because third-party standing is limited on
appeal in bankruptcy cases and Huff cannot show that it
was personally aggrieved by any alleged failure of
6
disclosure. Finally, because we are satisfied that the
Debtors met the S 1129(a)(7) burden of demonstrating that
the creditors would not receive a greater recovery under
Chapter 7, we reject the challenge under this section as
well. We will therefore affirm the order of the District Court
confirming the plan.
I. Factual & Procedural Background
As of the commencement date of the Chapter 11 cases,
Bruno's was a chain of about 200 supermarkets operating
in the southeastern United States (principally in Alabama).
In 1995, affiliates of KKR acquired an 83.33% interest in
Bruno's in a leveraged recapitalization. As part of this
transaction, then existing shareholders of Bruno's were
bought out for approximately $880 million. The leveraged
recapitalization was financed by a revolving credit and term
loan facility provided by the Banks, an equity contribution
of $250 million by KKR through Crimson Associates LLP,
and the issuance by Bruno's of $400 million in notes due
in 2005 pursuant to an indenture. Section 9 of the
indenture contains a subordination clause that provides
that the noteholders' claims are fully subordinated to the
payment in full (including interest) of the claims of the
senior lenders (the Banks).
For at least two years following the leveraged
recapitalization, Bruno's paid all of its debts as they
matured (including $97.5 million in interest payments on
the subordinated notes). In the summer of 1997, the
Debtors were able to refinance the Bank debt relating to the
recapitalization at a lower interest rate and on terms more
favorable than the original terms. But by the second half of
1997, as a result of either mismanagement by the directors
selected by KKR and a controversial change in pricing
policy (according to Huff), or as a result of a greatly
increased level of competition in the market (according to
the Debtors), Bruno's began to falter. Bruno's had difficulty
in meeting payment obligations from the recapitalization
and in paying its suppliers and other creditors. On
February 2, 1998, it filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code. Since thefiling
date, the Debtors have remained in possession.
7
As of the filing date, Bruno's owed approximately $462
million to the Banks, $135 million to trade vendors,
suppliers, and other unsecured creditors, and $421 million
on the subordinated notes. In the 90 days prior tofiling for
relief, it made payments to a variety of creditors and
suppliers amounting to more than $600 million, including
to firms that provided professional services to the Debtors.3
However, the only preference action the Debtors pursued
was an action against the Banks seeking to avoid liens
granted to the prepetition lenders in December 1997.
In February 1998, the Bankruptcy Trustee appointed a
nine member "Official Unsecured Creditor's Committee" (the
Committee). Huff, holder of $290 million in subordinated
notes, was the largest creditor of the estate and was elected
co-chair of the Committee. The other members of the
Committee included four representatives of the Banks,
three representatives from the trade, and one representative
of the other subordinated noteholders. A representative
from the United Food and Commercial Workers Union,
which represented supermarket employees of Bruno's, was
appointed to serve on the Committee from March 1998 to
April 1999.
In October 1998, the Debtors presented a business plan
to the Committee. The Committee rejected this plan and
then appointed a subcommittee, the "Strategic Alternatives
Committee," to work with the Debtors to develop a new
plan. This Subcommittee conducted a test marketing of the
enterprise and sent out a summary information package to
two different sets of potential buyers (neither of which
included financial buyers). The Subcommittee did not
believe that there would be interest in purchasing the
enterprise, and indeed none of the companies contacted
expressed an interest. By January 1999, the Debtors
concluded that no potential buyers had an interest in the
acquisition.
_________________________________________________________________
3. For example, payments to suppliers included approximately $19
million to Kraft Foods, $4.1 million to Frito-Lay, and $750,000 to
Pillsbury. Payments to providers of professional services included
$225,551.69 to Cravath, Swaine & Moore, $1.2 million to KKR, and
$232,838.71 to Wasserstein Perella & Co.
8
Throughout the spring of 1999, the Committee and
subgroups of the Committee convened several times to
develop a reorganization plan. Huff asserts that it was
excluded from these meetings and that many of the
conferees pursued some interest other than maximizing the
size of the bankruptcy estate. In March 1999, the Debtors'
law firm determined that legal claims arising out of the
leveraged recapitalization (primarily fraudulent transfer
claims) were not worth pursuing because they believed that
the claims were unlikely to succeed and that litigation
would be expensive, time consuming, complicated,
protracted and vigorously defended, and likely would delay
the confirmation of the reorganization plan. In April 1999,
the Committee voted to deny funds to pursue the claims,
while preserving the claims for further consideration. In
response, Huff successfully moved for the appointment of
an independent examiner to evaluate the claims. The
Debtors presented the first version of the new plan in May
1999. It was revised several times between May and
December 1999.
As a part of the negotiations regarding reorganization,
three independent entities (Wasserstein Perella & Co. (for
the Debtors), PricewaterhouseCoopers (for the Committee),
and Chilimark Partners (for the Banks)) conducted
assessments of the Debtors and reported current value
estimations ranging between $260 and $315 million. Huff 's
expert argued for a valuation at $580 million, but this
valuation was rejected by the District Court, and Huff
appears to have abandoned any argument for it on appeal.
HSBC still appears to contend that the reorganized
enterprise was "significantly undervalued by the Debtors
and the Bank Group." HSBC does not, however, argue that
the District Court committed clear error in determining that
the reorganization value of the Debtors was "substantially
below the amount necessary to allow for the satisfaction in
full of the Bank claims" and thus that Huff and the other
holders of subordinated notes were substantially out of the
money (by about $300 million). The interests of the holders
of the subordinated notes, including Huff and HSBC, were
thus wiped out and, by operation of the Code, 11 U.S.C.
S 1126(g), the holders are deemed to have rejected the plan.
9
Huff and HSBC challenge three separate releases of legal
claims included in the plan. We describe the different
releases in the three following subsections, sections I.A-C.
A.
The first releases pertain to the estate's claims arising
out of the leveraged recapitalization. These releases include
"avoidance claims" that, if successful, could have allowed
the Debtors to avoid certain aspects of the 1995 leveraged
recapitalization. In late 1998, the Debtors, with the consent
of the Committee, undertook a review of the leveraged
recapitalization to determine if any viable fraudulent
transfer claims existed and should be pursued. In March
1999, the Debtors' counsel Weil, Gotshal & Manges
completed a 100 page report analyzing the claims,
concluding that the transaction was not a fraudulent
transfer and that there were no viable claims against any of
its participants. In April 1999, the Committee nevertheless
voted to preserve these causes of action in the plan. One
month later, however, the Committee reversed its position
and, with the support of the trade representatives and the
Banks, voted to support the plan releasing the claims.
Huff and HSBC objected to these releases and, as noted,
successfully moved the District Court for the appointment
of an Examiner to evaluate the claims. The District Court
appointed Harrison J. Goldin as Examiner. The Examiner's
Final Report, prepared with the aid of eminent counsel,
made extensive findings of fact regarding the leveraged
recapitalization.4 The Examiner adopted a model for
assessing the viability of the claims that broke the
probability of success into five categories. Under the model,
the Examiner concluded that a claim was "highly likely" to
succeed if he believed that it had an 80% or greater chance
of success; "likely" if the Examiner believed that it had a
60% to 80% chance of success; "reasonable" if the
Examiner believed that the likelihood of success was
between 40% and 60%; "unlikely" if the Examiner believed
its chance of success was only between 20% and 40%; and
_________________________________________________________________
4. The Examiner interviewed 19 people and reviewed approximately
75,000 pages of documents relating to the transaction.
10
"remote" if the Examiner concluded that there was less
than a 20% chance of success.
As the report details, in August 1995, certain affiliates of
KKR, including an Alabama corporation formed for the
transaction, Crimson Associates LLP (of which KKR is the
general partner), acquired 83.33% of the stock of Bruno's.
To pay for this transaction, Bruno's and its affiliated
Debtors obtained cash and credit through the issuance of
$400 million in notes, a $475 million term loan facility from
Chemical Bank, and a $125 million revolving credit facility
from Chemical Bank (from which approximately $10 million
was drawn to fund the 1995 transaction). KKR and its
affiliates contributed $250 million, and Bruno's applied $20
million of its existing cash to the transaction.
The net cash proceeds were allocated to the following
principal uses: (1) payment of $880.1 million of cash
merger consideration to the pre-closing shareholders (the
purchase of Bruno's pre-transaction outstanding common
stock at $12.00 per share); (2) repayment of $200 million
plus accrued interest in pre-transaction indebtedness; and
(3) payment of approximately $40 million in fees and
expenses related to the merger.5 The Examiner hired Goldin
Associates, L.L.C., to perform a detailed financial analysis
of the recapitalization. The analysis covered two principal
issues regarding Bruno's at the time of the recapitalization:
the solvency of Bruno's, and the adequacy of Bruno's'
capital resources to meet its future needs, including its
ability to pay its debts and satisfy its liabilities as due.
These issues are important to analyzing the claims arising
out of the recapitalization because the viability of the
claims depends on whether the recapitalization left Bruno's
insolvent or with an unreasonably small amount of assets
in relation to the business or the transaction. If the value
of the assets acquired in the recapitalization does not
exceed the debt incurred, or if the business was left with
unreasonably small capital, the transaction may be a
_________________________________________________________________
5. These fees and expenses included $15 million in fees to KKR, more
than $14 million to Chase, and more than $10 million to BT Securities
for underwriting fees and intrabank funding costs.
11
"fraudulent transfer." Transactions in violation of the
prohibition on fraudulent transfers can be avoided. 6
The test of solvency is whether, at the time of the
recapitalization, the company's assets exceeded its
liabilities. There are two basic approaches to this
evaluation: asset by asset evaluation, which ascribes value
to each asset and determines solvency by comparing the
sum of those assets to total liabilities, and enterprise
valuation, which values the business as a going concern
and includes intangibles such as relationships with
customers and suppliers, and the name, profile, and
reputation of the business.7 The Examiner concluded that
it was likely (i.e., that there was a 60-80% chance) that a
court would apply the business enterprise analysis. The
Examiner believed that the business enterprise evaluation
was the appropriate measure of solvency because KKR
acquired Bruno's as a going concern.
Under the business enterprise evaluation, the Examiner
performed three separate analyses: a comparable public
company analysis, a comparable acquisitions analysis, and
a discounted cash flow analysis. The Examiner found that
in all but one of the relevant formulations, Bruno's was
solvent at the time of the recapitalization. The approach
favored by the Examiner, comparing enterprise value
derived from a discounted cash flow analysis to long-term
debt, reflected that the enterprise value of Bruno's exceeded
its long-term debt by approximately $270 million to $690
million. The valuation is a range because the Examiner
used three earnings amounts: sales, EBITDA (earnings
_________________________________________________________________
6. Fraudulent transfer actions may be brought by a debtor-in-possession
under S 548 of the Code, see 11 U.S.C.S 548, and, pursuant to S 544(b)
of the Code, under applicable state fraudulent transfer statutes, see 11
U.S.C. S 544(b). Because the recapitalization occurred approximately two
and one-half years before the commencement of the Chapter 11 cases,
S 548 is inapplicable, and hence any fraudulent transfer claims would
have to be brought under state law through S 544(b) of the Code.
7. In assessing liabilities, the Examiner considered the bank loans,
subordinated notes, capital lease obligations, deferred tax liability, and
contingent and other off-balance sheet liabilities. The Examiner
concluded that no material adjustments to the balance sheet liabilities
were required for purposes of the solvency analysis.
12
before interest, taxes, depreciation, and amortization), and
EBIT (earnings before interest and taxes). The trading
market enterprise value is divided by these earning
amounts to derive multiples, which are applied to Bruno's'
earnings totals to derive valuation.
The other methods of analyzing solvency also resulted in
a range because the Examiner considered multiple earnings
amounts. The "assets to liabilities" construct, comparing
total adjusted enterprise value derived from a discounted
cash flow analysis to total liabilities, showed that Bruno's
was solvent by approximately $215 to $635 million. The
acquisition multiples test, which gives greater weight to an
acquisition premium, also indicated that Bruno's was
solvent, with assets of approximately $188 million to $250
million, using multiples of EBITDA and EBIT, respectively
(and higher if the multiple of sales is applied). 8 The market
multiples solvency test, which does not include a control
premium, produced lower margins of solvency ranging from
approximately $27 to $104 million. The only test which
indicated insolvency applied a southeast sales multiple.
Under this test, the Examiner considered the sales earnings
amount for comparable enterprises operating in the
southeastern United States only.
The Examiner concluded that the southeast sales test
was an inappropriate means of measuring the solvency of
Bruno's and, in any event, should be given less weight than
the other valuations standards. The Examiner also noted
that the purchase price itself was probative of Bruno's'
value (and thus solvency). The purchase price indicated an
enterprise value of $1.2 billion, which exceeded long-term
debt by approximately $245 million. Adding current
liabilities of $156.4 million, the sum exceeded total
liabilities by about $90 million.9 Although he deemed it
unlikely that a court would apply the asset-by-asset test,
_________________________________________________________________
8. The Examiner considered the sales multiple to be a less appropriate
measure of solvency than EBITDA and EBIT.
9. The Examiner's Report appears to contain an arithmetical or
typographical error in that it concludes from the above numbers that the
sum exceeded total liabilities by over $190 million, rather than $90
million. Nothing in this case turns on this point, however.
13
the Examiner also conducted an analysis under the asset-
by-asset methodology. The sum of Bruno's assets, valued
piecemeal, was $1,024.8 million. The assets did not exceed
the total of liabilities, which were $1,114.1 million.
Additionally, the Examiner analyzed whether the
recapitalization left Bruno's with unreasonably small
capital. The critical question is whether the parties'
projections were reasonable at the time of the transaction.
The analysis looked at historical data, such as cashflow,
net sales, gross profit margins, and net profits and losses,
and whether the parties considered difficulties that might
arise, such as interest rates fluctuations and market
downturns, to gauge the reasonableness of the projections
in light of working capital needs in the industry and actual
cash available to service needs. Actual performance of the
debtor following the transaction is evidence of whether the
parties' projections were reasonable.
The Examiner opined that Bruno's was not
undercapitalized. He concluded that at the time of the
recapitalization Bruno's was a viable enterprise capable of
substantial improvement, and that the parties' projections,
although aggressive in some areas, were conservative in
others. The enterprise failed, in his opinion, not because of
inadequate capital, but because a series of unfortunate
decisions, including a change in pricing strategy and a
decision to close one distribution center, caused substantial
erosion in the company's customer base. Declining demand
for Bruno's' services resulted in declining revenue, which
led to the bankruptcy.
In part because of these conclusions, the Examiner
opined that any claims arising out of the recapitalization
were unlikely to succeed (i.e., that they had only a 20-40%
chance of success). He reasoned that "the Recapitalization
differed fundamentally from prior-leveraged transactions
that have been found to be unlawful; among other things,
the risks of the transaction were borne by the acquirer
(KKR) and the lenders (who were unsecured), rather than
shifted onto pre-transaction creditors." The Examiner also
concluded that the claims were "not promising," were
"limited and speculative," that "significant defenses" were
available to each of the principal participants, the former
14
shareholders, the Banks, the subordinated noteholders,
and KKR in the recapitalization, and that
[i]n light of the multiple legal and factual obstacles to
any substantial fraudulent transfer or illegal
distribution recovery by the Debtors [relating to the
recapitalization], the examiner believes that the
prosecution of such claims is extremely difficult to
justify . . . . As a legal matter, the laws of the governing
jurisdiction (Alabama, and, if suit is filed in Delaware,
the Third Circuit) present formidable obstacles to
recovery from the principal defendants.
The releases of these claims do not cover any direct,
personal, non-derivative claims held by creditors against
non-debtor third parties. The releases do extinguish many
if not all of the claims arising out of the recapitalization
that could have been pursued by the Debtors or on their
behalf. The parties do not dispute the findings of fact
included in the Examiner's Final Report. Huff and HSBC
argue, however, that the Examiner's (and the District
Court's) conclusion that there was little value to be had
from the claims was flawed because it depended on the
Examiner's conclusion that Bruno's was left solvent after
the recapitalization. Huff argues that the Examiner erred in
adopting the enterprise valuation approach.
B.
The second issue regarding the releases has to do with
Paragraph 58 of the Confirmation order, which releases
Committee members and professionals who provided
services after the petition date from certain liability for their
work in the reorganization. The release in Paragraph 58 is
limited to claims brought in connection with work on the
bankruptcy reorganization plan, and it does not eliminate
liability but rather limits it to willful misconduct or gross
negligence. Huff and HSBC nevertheless argue that this
release violates S 524(e) of the Bankruptcy Code because it
affects the liability of another entity for the debt of the
Debtors. The Debtors respond that the releases do not
come within the meaning of S 524(e) and were consistent
with the standard of liability under the Code.
15
C.
The third set of claims concern the waiver of preferences,
i.e., preference claims to recover from trade creditors and
suppliers for payments made in the 90 days prior tofiling
for bankruptcy. As noted above, the Debtors paid out
substantial sums of money during this period. Under
bankruptcy law, such payments can be recovered by the
estate; S 547 of the Bankruptcy Code vests exclusive
discretion to prosecute or not prosecute preference claims
with the trustee or debtor-in-possession. Afterfiling, the
Debtors pursued a preference action against the Banks,
seeking to avoid certain liens granted to the Banks within
90 days of the filing. The action settled; the Banks agreed
to release the liens granted just prior to the bankruptcy
filing against property and assets of the Debtors and, in
exchange, the Debtors agreed to pay the fees and expenses
of the Banks' attorneys throughout the Chapter 11 case.
The Debtors waived many other preference actions. The
Debtors represent that they decided to waive these claims
as a part of the reorganization plan in order to facilitate
and rehabilitate post-reorganization relationships with key
suppliers.
D.
The District Court confirmed the Debtors' reorganization
plan after a three day hearing. The confirmation order was
issued by the District Court pursuant to 28 U.S.C.S 1334,
which grants jurisdiction to the district courts over
bankruptcy matters. Because this is an appeal from a
district court exercising original jurisdiction in bankruptcy,
our jurisdiction stems from 28 U.S.C. S 1291 rather than
28 U.S.C. S 158(d). See In re Marvel Entertainment Group,
Inc., 140 F.3d 463, 470 (3d Cir. 1998). The confirmation
order was a final appealable order. See id. at 469. We
review the District Court's legal determinations de novo, its
factual findings for clear error, and its exercise of discretion
for abuse thereof. See In re Environmental Energy, Inc., 188
F.3d 116, 122 (3d Cir. 1999).
II. Equitable Mootness
Under the doctrine of equitable mootness, an appeal
should be dismissed, even if the court has jurisdiction and
16
could fashion relief, if the implementation of that relief
would be inequitable. See In re Continental Airlines, 91 F.3d
553, 559 (3d Cir. 1996) (Continental I). As we noted in
Continental I, "[t]he use of the word`mootness' as a
shortcut for a court's decision that the fait accompli of a
plan confirmation should preclude further judicial
proceedings has led to unfortunate confusion" between
equitable mootness and constitutional mootness. Id.
Constitutional mootness implicates the Article III case or
controversy requirement; an appeal is moot in the
constitutional sense only if events have taken place that
make it "impossible for the court to grant `any effectual
relief whatever.' " Church of Scientology of Calif. v. United
States, 506 U.S. 9, 12 (1992) (citation omitted). Equitable
mootness is a broader concept that has developed in
bankruptcy law. It provides that that "[a]n appeal should
. . . be dismissed as moot when, even though effective relief
could conceivably be fashioned, implementation of that
relief would be inequitable." Continental I , 91 F.3d at 558
(citing In re Chateaugay Corp., 988 F.2d 322, 325 (2d Cir.
1993)).
In Continental I, we dismissed the appeal after finding it
equitably moot because the appeal had an "integral nexus"
with the feasibility of the Continental Debtors' plan of
reorganization. Id. at 564. The Court identified prudential
factors with which to evaluate equitable mootness,
including whether the plan has been substantially
consummated or stayed, whether the requested relief would
affect the rights of other parties, whether the requested
relief would affect the success of the plan, and whether it
would further the public policy of affording finality to
bankruptcy judgments. See id. at 560. These factors are
given varying weight, depending on the particular
circumstances, but the foremost consideration is whether
the reorganization plan has been substantially
consummated. See id. "This is especially so where the
reorganization involves intricate transactions . . . or where
outside investors have relied on the confirmation of the
plan." Id. at 560-61 (citations omitted). We have also noted,
however, that the doctrine is "limited in scope and [should
be] cautiously applied," id. at 559, and that it involves "a
17
discretionary balancing of equitable and prudential factors,"
id. at 560.
The Debtors here argue that, since the stay was denied
and the reorganization has gone forward, this appeal is
equitably moot. They argue that the appeal, if successful,
would necessitate the reversal or unraveling of the entire
plan of reorganization. We disagree. There are intermediate
options. The releases (or some of the releases) could be
stricken from the plan without undoing other portions of it.
We draw instruction in this regard from In re Chateaugay
Corp., 167 B.R. 776, 780 (S.D.N.Y. 1994), in which the
court stated that
[i]t is difficult to conceive how a potential liability of, at
most, several million dollars could unravel the Debtors'
reorganization, which involved the transfer of billions of
dollars, and which has resulted in the revival of
Debtors into a multibillion dollar operation with $200
million in working capital . . . appellees have made no
showing that it would "knock the props out from under
the authorization for every transaction that has taken
place and create an unmanageable, uncontrollable
situation for the Bankruptcy Court."
(quoting In re Chateaugay Corp., 10 F.3d 944, 952 (2d Cir.
1993)).
In balancing the policy favoring finality of bankruptcy
court judgments--particularly reorganization plans--
against other considerations, we conclude that the equities
here do not require dismissal. Huff has clearly been an
active participant in the reorganization and was heard at
length in the confirmation hearing, and in that sense has
had its day in court. It seeks to invalidate releases that
affect the rights and liabilities of third parties. The plan has
been substantially consummated, but, as noted above, the
plan could go forward even if the releases were struck, and
Huff 's reply brief suggests that it now seeks only
alterations to the plan rather than an unraveling of the
reorganization. Cf. In re Continental Airlines , 203 F.3d 203,
210 (3d Cir. 2000) (Continental II) (rejecting equitable
mootness argument as inadequately pled, but noting also
that the argument was unlikely to succeed because"[n]o
18
evidence or arguments have been presented that Plaintiffs'
appeal, if successful, would necessitate the reversal or
unraveling of the entire plan of reorganization"). We
therefore hold that this appeal should not be dismissed for
equitable mootness.
III. The Absolute Priority Rule
Section 1129(b)(2) of the Bankruptcy Code requires that
creditors be paid in full before holders of equity receive any
distribution. It reads in pertinent part:
(2) For the purpose of this subsection, the condition
that a plan be fair and equitable with respect to a class
includes the following requirements:
. . .
(b) With respect to a class of unsecured claims--
. . .
(ii) the holder of any claim or interest that is junior to
the claims of such class will not receive or retain under
the plan on account of such junior claim or interest
any property.
11 U.S.C. S 1129(b)(2). This provision is the"absolute
priority rule." Huff contends that the District Court erred in
confirming the plan because, by releasing the claims arising
out of the recapitalization, the plan awarded an interest to
old equity (KKR and the other participants in the
reorganization) "on account of " their interest in the estate
in violation of the absolute priority rule. Huff 's theory has
several components. First, it makes the legal argument that
under Bank of America National Trust and Savings
Association v. 203 North LaSalle Street Partnership , 526
U.S. 434 (1999), the Supreme Court's most recent case
construing S 1129(b)(2), no junior class of creditors or
interest holders may receive or retain any property under a
plan in which a rejecting class of creditors is not being paid
in full. Second, Huff submits that the District Court erred
in concluding that the claims were eliminated because they
were unlikely to succeed and potentially costly to the
debtors to pursue. The success of this contention depends
19
on Huff 's ability to establish that the Examiner and the
District Court erred in concluding that the claims were
unlikely to succeed. We begin by discussing 203 North
LaSalle.
A.
In 203 North LaSalle, 526 U.S. 434 (1999), the Supreme
Court held that, even if it is assumed that there is a new
value corollary to the absolute priority rule (which would
allow old equity to contribute new value and receive interest
in the reorganized entity in exchange), allowing junior
interest holders to have an exclusive opportunity to obtain
an interest in a reorganized entity by providing new value,
free from competition and without market valuation,
violates S 1129(b)(2)(B)(ii). See id. at 458.10 This is because
the exclusive opportunity to invest in the reorganized entity
(and receive equity in it thereby) must be considered
property received "on account of " the junior claim (the
equity interest). Id. Huff argues that the plan, by releasing
the claims arising out of the leveraged recapitalization held
by the bankrupt entity against holders of junior equity
(such as KKR) even though senior creditors were not paid
in full, essentially transferred property to those holders of
junior equity in violation of the absolute priority rule.
There can be little doubt that a legal claim is property
within the meaning of the Bankruptcy Code. See Northview
Motors, Inc. v. Chrysler Motors Corp., 186 F.3d 346, 350 (3d
Cir. 1999) (treating estate's legal claims as estate property
within the meaning of the Code). Similarly, a release of
liability has value cognizable under the Code. Accordingly,
when the Debtors extinguished the claims arising out of the
_________________________________________________________________
10. For some time, there has been a split of authority regarding whether
there is a "new value" exception or corollary to the absolute priority
rule.
Such a corollary would mean that, when old equity provides new value
under the reorganization plan, any property it receives under the plan
would not be considered to be received "on account of " the old equity
interest and therefore would not violate the absolute priority rule. The
Supreme Court declined to decide whether there is a new value corollary
in 203 North LaSalle, 526 U.S. at 454 (1999), and that issue is not
presented in this case.
20
recapitalization, KKR received something of value even
though some creditors senior to the equity holder had not
been paid in full. KKR is a key potential object of the
avoidance claims because it was a moving force in the
reorganization, and a holder of equity in the Debtors. Thus,
if KKR benefitted from the releases "on account of " its
interest in the Debtors, then the plan violated the absolute
priority rule.
In 203 North LaSalle, the Supreme Court interpreted the
"on account of " language in S 1129(B)(2)(b)(ii). The Court
rejected arguments that "on account of " means "in
satisfaction of " the interest or "in exchange for" the interest
and concluded that it means "because of " the interest. 526
U.S. at 450-51. Accordingly, a causal connection between
holding the prior claim or interest, and receiving or
retaining property, will trigger the absolute priority rule.
The degree of causation required is not defined specifically
in 203 North LaSalle, because the Court concluded that on
either of several views the creditor's objection in that case
would require rejection of the plan at issue. See id. at 454.
Nevertheless, the Court provided a few points of reference
for defining prohibited "on account of " transactions.
First, the Court rejected the amicus curiae position of the
United States, which had contended that, under a
reorganization plan, old equity should not be allowed to
take any property of the debtor if creditors are not paid in
full. See id. at 451. The Court said that this "starchy"
position could not be correct because, under this view of
the absolute priority rule, Congress would have omitted
entirely the phrase "on account of." Id. at 451-52. This
confirms that there are some cases in which property can
transfer to junior interests not "on account of " those
interests but for other reasons.
Second, in considering the necessary level of causation,
the Court looked to the two basic goals of Chapter 11:
those of "preserving going concerns and maximizing
property available to satisfy creditors." Id. at 453. While
emphasizing that it was not providing "an exhaustive list of
the requirements," id., the Court explained:
Causation between the old equity's holdings and
subsequent property substantial enough to disqualify a
21
plan would presumably occur on this view of things
whenever old equity's later property would come at a
price that failed to provide the greatest possible
addition to the bankruptcy estate, and it would always
come at a price too low when the equity holders
obtained or preserved an ownership interest for less
than someone else would have paid.
Id. at 453 (citations omitted).
B.
We do not believe that these releases were made"on
account of " KKR's junior interest as that phrase is
construed in 203 North LaSalle. What doomed the plan in
203 North LaSalle was not that old equity received property
under the plan, but the "exclusivity" that old equity
enjoyed, which suggested that old equity might have
obtained the interest for less than someone else might have
paid.11 Under the 203 North LaSalle plan, old equity set the
price for the interest it obtained under the plan, and the
right to set this price amounted to a property right in itself:
Hence it is that the exclusiveness of the opportunity
with its protection against the market's scrutiny of the
purchase price by means of competing bids or even
competing plan proposals, renders the partners' right a
property interest extended "on account of " the old
equity position and therefore subject to an unpaid
senior creditor class's objection.
Id. at 456.
In this case, to the extent that KKR and the other entities
that benefitted from the releases had an exclusive
_________________________________________________________________
11. Huff argues that 203 North LaSalle's prohibition on exclusive
opportunities was violated here because the Debtors had the exclusive
opportunity to dispose of the Debtors' property. However, to read 203
North LaSalle so broadly would be to undermine the express statutory
provision for exclusivity in S 1121(b), which provides "[e]xcept as
otherwise provided in this section, only the debtor may file a plan until
after 120 days after the date of the order for relief under this chapter."
See In re Zenith Electronics, 241 B.R. 92, 106 (Bankr. D. Del. 1999)
(making this point). This we decline to do.
22
opportunity to gain the release in the reorganization, it was
only because they were on the radar screen as potentially
liable parties. Huff has adduced no evidence that they
sought out the releases or set a price for them; indeed, Huff
itself made several offers for the claims, which were
considered and rejected, demonstrating that KKR enjoyed
no exclusivity of opportunity.12
The District Court held that the decision to extinguish
the claims arising out of the recapitalization was made
because the claims were adjudged to have a negative value
to the estate and not because the junior creditors
persuaded the Debtors to release them "on account of "
their interest in the Debtors and in violation of the absolute
priority rule. It concluded that the claims were extinguished
for three reasons. First, it was persuaded by the Examiner's
conclusion that there was a low likelihood of recovery on
the claims. At the stay hearing, the Court noted that
I have to say I was sitting at the end of the
confirmation hearing, still waiting to hear the facts that
would convince me that there . . . was value to be had
. . . and I never heard that. And I remain convinced
that there was every opportunity to make that record,
and that record was not made.
The Examiner concluded that the prospects for successfully
prosecuting the claims were "not promising." He noted that,
as a factual matter, the recapitalization transaction differed
markedly from prior highly leveraged transactions that had
been found to be unlawful insofar as the risks of the
transaction were born by the acquirer (KKR) and other
unsecured creditors and not by pre-transaction creditors.
Second, the Court concluded that the potential cost to the
_________________________________________________________________
12. Huff has argued that its own willingness to buy the claims from the
bankruptcy estate shows that the claims did have value (and thus, by
implication, that they were extinguished not because they lacked value
but because they had value that the junior creditors saw and managed
to capture in violation of the absolute priority rule). But Huff offered
only
$100,000 plus some portion of any future recovery. We do not think that
relatively meager and arguably strategic offer demonstrates that the
claims would have had more value to the estate if they had been
preserved or sold to Huff than they did under the reorganization plan.
23
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 subordinated noteholders, as participants in the
leveraged recapitalization, would be estopped from
recovering on the claims.
Huff and HSBC do not challenge the Examiner's (and the
District Court's) factual findings, which, at all events, are
well supported, but contend that the Examiner's analysis of
the value of the claims was flawed because he made a legal
error in determining that a court would evaluate the claims
on an enterprise evaluation basis, and thus he incorrectly
concluded that the claims were unlikely to succeed. It is on
this basis that they challenge the finding made by the
Examiner and accepted by the District Court that the
claims were of little value to the estate. Their theory is that
the claims did have substantial value and thus that the
District Court erred in concluding that the claims were
released because they were adjudged to be unlikely to
succeed.
C.
The Examiner analyzed the viability of any claims arising
out of the recapitalization primarily under Alabama law.13
Two types of fraudulent transfers, actual and constructive,
are within the scope of the Alabama Fraudulent Transfer
Act, ALA. CODE 1975, S 8-9A-1 et seq. See McPherson Oil Co.,
Inc. v. Massey, 643 So. 2d 595, 596 (Ala. 1994). An actual
fraudulent transfer is one made by a debtor who transfers
assets "with actual intent to hinder, delay, or defraud any
creditor of the debtor." ALA. CODE 1975, S 8-9A-4(a). The
trial court considers several factors in determining whether
the debtor possessed the requisite intent, including to
_________________________________________________________________
13. Huff does not challenge the decision to analyze claims arising out of
the recapitalization under Alabama law. The Examiner canvassed choice
of law rules and determined that Alabama law would apply to the claims
whether suit was filed within the Third Circuit or in Alabama because
Alabama's contacts with Bruno's generally, and with the recapitalization
specifically, exceeded all others in quantity, substance, and
significance.
24
whom the transfer was made, the amount of assets
transferred, and the financial condition of the debtor before
and after the transfer. See id., S8-9A-4(b); McPherson Oil,
643 So. 2d at 596. A constructive fraudulent transfer occurs
when a debtor transfers assets to another without
consideration, and the debtor was, or became, insolvent at
the time of the transfer. See ALA. CODE 1975, S 8-9A-5(a);
McPherson Oil, 643 So. 2d at 596; Champion v. Locklear,
523 So. 2d 336, 338 (Ala. 1988).
The parties have focused on potential constructive
fraudulent transfer claims.14 To succeed on a claim of
constructive fraudulent transfer arising out of the
recapitalization, a claimant would have to show that
Bruno's was insolvent or left with unreasonably small
capital at the time of the recapitalization.15 Based on the
conclusion that the leveraged recapitalization did not
render Bruno's insolvent or leave it with unreasonably
small capital, the Examiner concluded that the claims had
little value.16 He noted as well that, because KKR bore most
of the risk of the transaction, the chance that KKR would
be held liable for constructive fraudulent transfer was
remote.
Huff would have us reject the Examiner's conclusions
that Bruno's was solvent after the recapitalization on the
basis that the Examiner used an incorrect method to
evaluate solvency. Huff argues that the Examiner erred by
evaluating solvency on a "business enterprise" method
rather than a "piecemeal or asset-by-asset" valuation
method (which does not take goodwill into account except
_________________________________________________________________
14. The Examiner concluded that the chances that a claim for actual
fraudulent transfer would succeed were remote.
15. The Examiner concluded that the fraudulent transfer claims would
not be barred under the applicable statutes of limitations, and no one
has challenged that conclusion.
16. The Examiner also concluded that there was a reasonable possibility
that the subordinated noteholders and the Banks would be estopped
from sharing in any fraudulent transfer recoveries. In this regard, it is
significant that 87% of the debtors' creditors (i.e. the senior lenders
and
the subordinated noteholders) participated in the recapitalization.
25
insofar as the entity includes separately saleable
intangibles).17
The Examiner used the business enterprise method, as
opposed to the asset-by-asset method, after extensive
analysis of the case law. He concluded that it was unlikely
that a court would analyze fraudulent conveyance claims
under the asset-by-asset test and that the business
enterprise method was consistent with generally accepted
accounting principles (GAAP) and appropriate under the
circumstances. We conclude that the District Court's
decision to credit the Examiner's Report, which concluded
that the business enterprise approach was the appropriate
measure of solvency, was not error. The Alabama
Fraudulent Transfer Act does not appear to require an
asset-by-asset approach.18 The statute limits the definition
of assets without excluding assets, such as goodwill, that
are typically included in the business enterprise analysis
_________________________________________________________________
17. The Examiner actually used an "adjusted business enterprise"
method, in which he considered short-term liabilities, which are often
left out of a business enterprise analysis. He did so because he
concluded that a court analyzing fraudulent transfer would include short
term liabilities in an assessment of liabilities. The Examiner also
considered contingent and off-balance sheet liabilities for the same
reason.
18. The statute provides that
(a) A debtor is insolvent if the sum of the debtor's debts is
greater
than all of the debtor's assets at a fair valuation.
(b) A debtor who is generally not paying his debts as they become
due is presumed to be insolvent.
***
(d) Assets under this section do not include property that has been
transferred, concealed, or removed with intent to hinder, delay, or
defraud creditors or that has been transferred in a manner making
the transfer voidable under this chapter.
(e) Debts under this section do not include an obligation to the
extent it is secured by a valid lien on property of the debtor not
included as an asset.
ALA. CODE 1975 S 8-9A-2. No evaluation method is specified by the
statute, which does not define "fair valuation."
26
but not in an asset-by-asset evaluation. See ALA. CODE 1975
S 8-9A-2.
Moreover, however value is analyzed, it is clear that
Bruno's functioned soundly for several years after the
recapitalization, paying its debts (including all interest
payments) and successfully renegotiating the interest rates
on some of its loans. Huff has given us no reason to
conclude that the Examiner incorrectly determined that
Bruno's was solvent at the time of the recapitalization. Huff
itself initially invested in Bruno's in December 1995 (four
months after the recapitalization). It made additional
investments in 1996 and early 1997, and in October 1997
Huff 's analysts were still recommending Bruno's as a
"buy." Importantly, and as the District Court noted, at the
time of the recapitalization Huff 's own experts agreed that
Bruno's was solvent:
The credit analysis prepared by Huff 's financial
analyst, Allen Gurevich, in August 1995 (Debtor's
Exhibit 18) and the testimony of Huff 's portfolio
manager (tr. pp 122-123) and Huff 's inside attorney
Bryan Bloom (tr. 166-0167) that the fair market value
of Bruno's at the time of the Leveraged Recapitalization
in August 1995 approximated 1.1 billion.
And as the Examiner noted, "in connection with the
transaction, other sophisticated financial inst[itutions]
relied on KKR's projections. From interviews with
representatives of all of these institutions and a review of
thousands of documents, the Examiner is aware of no
instance in which these institutions contemporaneously
challenged the reasonableness of KKR's projections for
Bruno's." Huff 's challenge to the Examiner's and the
District Court's finding that the leveraged recapitalization
did not render Bruno's insolvent is unavailing.
As noted above, Huff does not challenge the Examiner's
factual findings, and we find no error in District Court's
decision to accept the Examiner's decision to evaluate the
claims using the business enterprise method. Huff 's
remaining argument that the release of the claims was on
account of the interest amounts to an argument from res
ipsa loquitur: KKR had an equity interest in the corporation,
27
and therefore the Debtors must have made the releases for
that reason. If we were to accept this position, without
some evidence of a causal relationship, any time that old
equity received anything of value under a reorganization
plan we would have to conclude that it was received"on
account of " the interest--the position rejected by the
Supreme Court in 203 North LaSalle. See 526 U.S. at 451-
52. In this regard, it is significant that claims against all
participants in the recapitalization, and not just KKR, were
extinguished, including all claims against the noteholders
(including Huff) and all claims against the shareholders
who were bought out in the recapitalization (who were the
managers of the company when it made the deal for the
reorganization).
The evidence compels the conclusion that the claims
were extinguished because, in the judgment of the plan
proponents, extinguishment was the approach most likely
to provide the greatest possible addition to the bankruptcy
estate. To be sure, the releases were not subjected to a
formal "market test," as 203 North LaSalle suggests may be
required. However, in these circumstances, the Examiner's
finding that the claims had little to no value, which was
accepted by the District Court, was an appropriate
surrogate for a market test and an acceptable safeguard.
We thus conclude that the District Court did not err in
concluding that the potential cost of defending and paying
indemnification claims, cross claims, and counterclaims
arising out of the prosecution of the claims was high, and
that the claims were extinguished not on account of KKR's
interest in the Debtors, but because the Debtors
determined that they were unlikely to have any value. The
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. Huff has
failed to demonstrate the requisite causal relationship
between the transfer of value and KKR's interest in the
Debtors. Therefore, we conclude that the plan did not
violate the absolute priority rule.
This is not to say that a reorganization plan can transfer
assets whenever the Trustee or the Debtor-in-Possession
judges that to do so would be in the best interest of the
28
reorganized entity. Rather, we announce a narrow rule that,
without direct evidence of causation, releasing potential
claims against junior equity does not violate the absolute
priority rule in the particular circumstance in which the
estate's claims are of only marginal viability and could be
costly for the reorganized entity to pursue.
IV. Good Faith
Huff contends that the plan should not have been
confirmed because the District Court erred in determining
that it was proposed in good faith. Section 1129(a)(3)
provides that the court shall confirm a plan only if "[t]he
plan has been proposed in good faith and not by any means
forbidden by law." 11 U.S.C. S 1129(a)(3)."[F]or purposes of
determining good faith under section 1129(a)(3) . . . the
important point of inquiry is the plan itself and whether
such a plan will fairly achieve a result consistent with the
objectives and purposes of the Bankruptcy Code." In re
Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 150 n.5
(3d Cir. 1986) (quoting In re Madison Hotel Assocs., 749
F.2d 410, 425 (7th Cir. 1984)) (alteration in original). The
District Court's determinations of fact pertaining to good
faith are reviewed for clear error. Cf. Abbotts Dairies, 788
F.2d at 147 (holding that the standard of review for good
faith under S 363(m) of the Code is mixed:"we exercise
plenary review of the legal standard applied by the district
and bankruptcy courts, but review the latter court's
findings of fact on a clearly erroneous standard") (citations
omitted).
Huff contends that the plan was not proposed in good
faith because the releases from any claims arising out of
the recapitalization were made in a collusive quid pro quo
for the waiver of preferences. Huff 's theory of bad faith is
that KKR orchestrated the reorganization and controlled the
Debtors throughout the reorganization in order to avoid
potential liability arising out of the leveraged
recapitalization, and that it persuaded the other creditors to
agree to the reorganization plan by including the waiver of
preferences.
As the District Court found, however, the timing of the
releases belies this argument; there is scant evidence tying
29
the release of the claims arising out of the recapitalization
to the waiver of preferences. The Debtors decided not to
pursue the preferences on March 17, 1999. One month
later, the Committee passed a resolution preserving the
claims arising out of the recapitalization until further
information could be gathered about them. This shows that
a month after the Debtors decided not to pursue the
preferences, the Committee had not decided whether to
release the claims arising out of the recapitalization plans.
At the confirmation hearing, Ms. Schirmang, co-chair of
the Committee, testified that the Debtors did not release
the claims arising out of the leveraged recapitalization in a
quid pro quo deal for the preference claims. She testified
that, when the Committee decided to release the claims in
May 1999, it did so "in the interest of getting the plan into
the hands of creditors and hopefully getting a distribution
as soon as possible and getting the Debtor out of
bankruptcy." Ms. Schirmang also testified that the
preference waivers were intended to maintain and
rehabilitate post-petition relationships within the trade, and
that there was nothing unusual about the waiver of
preferences: "to be honest with you, I have never seen a
reorganized debtor pursuing preference actions." The trade
creditors who benefitted from the waivers included key
suppliers to the business. See note 3, supra. Huff has not
presented anything but innuendo in support of its
argument that the Debtors failed to act in good faith. Given
the record evidence, we conclude that the District Court's
finding that the plan was proposed in good faith was not in
error.
V. Conformity to Applicable Provision of
Title II of the Code
Section 1129(a)(1) provides that the court shall confirm a
plan if it "complies with the applicable provisions of this
title." 11 U.S.C. S 1129(a)(1). This requires that the plan
conform to the applicable provisions of Title II. See
Lawrence P. King, Collier on BankruptcyP 1129.03[1], 1129-
25 (15th ed. rev. 1996). Huff argues that the plan should
not have been confirmed because it violates several
provisions of Title II.
30
A. Section 510(a)
Section 510(a) provides that a "subordination agreement
is enforceable in a case under this title to the same extent
that such agreement is enforceable under applicable
nonbankruptcy law." Huff argues that it had subrogation
rights under the indenture which are violated by the terms
of the plan. The relevant provision of the indenture provides
that
[a]fter all senior indebtedness has been paid in full
. . . . Holders shall be subrogated . . . to the rights of
holder of Senior Indebtedness to receive distributions
[from the debtors] applicable to Senior Indebtedness to
the extent that distributions otherwise payable to the
Holders have been applied to the payment of Senior
Indebtedness. No payments or distributions to the
holders of Senior Indebtedness to which the Holders of
the Securities or the Trustee would be entitled except
for the provisions of this Article . . . shall, as between
the Company, its creditors other than holders of the
Senior Indebtedness and the Holders of the Securities,
be deemed to be a payment by the Company to or on
account of Senior Indebtedness.
The subordination agreement is an intercreditor
arrangement between the Banks (the senior indebtedness)
and the subordinated noteholders. It does not relieve the
Debtors of their payment obligations on the subordinated
notes. But the subordinated noteholders' subrogation rights
under the indenture described in these provisions never
arose because the Banks' claims were not paid in full under
the plan. There is no question that the Banks were not paid
in full under the reorganization plan, because the
reorganized entity was worth at most $340 million, whereas
the Banks had claims of $421 million.
Huff argues that the subordinated noteholders had a
right under this provision to subrogation. More specifically,
Huff argues that it should be awarded warrants to
purchase common stock if and when the reorganized
company reaches a value of $421 million. But the
bankruptcy estate is evaluated and distributions made at
the time of the effective date of the reorganization plan. See
31
11 U.S.C. S 1129(b)(2)(B)(i) (referring to"value, as of the
effective date of the plan"). After that date, there are no
remaining claims under which Huff could assert
subrogation rights. This contention therefore fails.
Huff also argues that under an additional clause, the so-
called X clause, the subordinated noteholders should get
securities in the new entity subordinated to the Banks'
interests to the same extent that they had an interest in the
old entity.19 The clause states that
[u]ntil all Obligations with respect to Senior
Indebtedness (as provided in Subsection above) are
paid in full in cash or cash equivalent, any distribution
to which holders would be entitled but for this article
shall be made to holders of Senior Indebtedness (except
that Holder may receive (i) securities that are
subordinated to at least the same extent as the
Securities to (a) Senior Indebtedness and (b) any
securities issue in exchange for Senior Indebtedness),
as their interests may appear.
This clause does not apply to the current situation. The
clause requires that, if the Debtors distribute securities to
the subordinated noteholders, the general obligation to turn
over distributions to Senior Indebtedness is waived so long
as the new securities are subordinated "to the same extent
as" the existing subordinated debt.
As the Seventh Circuit has explained, these clauses are
quite common, and are intended to avoid a procedure of
requiring junior creditors to turn over securities and then
receive them back once senior creditors are paid in full:
[s]uch clauses are common in bond debentures,
although there is no standard wording. Without the
clause, the subordination agreement that it qualifies
would require the junior creditors to turn over to the
senior creditors any securities that they had received
as a distribution in the reorganization, unless the
senior creditors had been paid in full. Then,
_________________________________________________________________
19. The Debtors argue that this issue was not raised in the District
Court, but we are satisfied that it was raised in HSBC's objections to the
plan, and in Huff 's argument to the District Court.
32
presumably, if the senior creditors obtained full
payment by liquidating some of the securities that had
been turned over, the remaining securities would be
turned back over to the junior creditors. The X Clause
shortcuts this cumbersome procedure and enhances
the marketability of the securities received by the
junior creditors, since their right to possess (as distinct
from pocket the proceeds of) the securities is
uninterrupted.
In the Matter of Envirodyne Indus., Inc., 29 F.3d 301, 306
(7th Cir. 1994). We agree. The clause is not a requirement
that the Debtors distribute to the subordinated noteholders
subordinated securities, or warrants to purchase securities,
if the reorganized entity does well in the future so that the
Banks (the Senior Indebtedness) make back their losses, in
proportion to any securities distributed to Senior
Indebtedness.
Huff makes one final argument under this section--that
the provision of the indenture that states that"nothing in
the indenture shall impair, as between the Company and
the holders, the obligation of the Company, which is
absolute and unconditional, to pay principal of and interest
on the Securities in accordance with their terms," requires
the Debtors to preserve a recovery for the noteholders with
the issuance of securities junior to the common stock. This
is a misreading of the provision, which simply provides that
the subordination agreement is an intercreditor
arrangement, i.e., an arrangement between the Banks (the
senior indebtedness) and the subordinated noteholders,
and does not relieve the Debtors of their payment
obligations on the subordinated notes.
B. Section 524(e)
Section 524(e) provides that "[e]xcept as provided in
subsection (a)(3) of this section,[20 ] discharge of a debt of
_________________________________________________________________
20. Subsection (a)(3) provides that a discharge of a case under Title II
operates as an injunction against the commencement or
continuation of an action, the employment of process, or an act, to
33
the debtor does not affect the liability of any other entity
on, or the property of any other entity for, such debt." 11
U.S.C. S 524(e). Huff argues that the release in Paragraph
58 of the confirmation order violates S 524(e), because it
affects the liability of the members of the Committee and
professionals who provided services to the Debtors to third
parties. However, we believe that Paragraph 58, which is
apparently a commonplace provision in Chapter 11 plans,
does not affect the liability of these parties, but rather
states the standard of liability under the Code, and thus
does not come within the meaning of 524(e).21
Section 524(e) "makes clear that the bankruptcy
discharge of the debtor, by itself, does not operate to relieve
non-debtors of their liabilities." In re Continental Airlines,
203 F.3d 203, 211 (3d Cir. 2000) (Continental II ) (citations
omitted). Section 524(e), by its terms, only provides that a
discharge of the debtor does not affect the liability of non-
debtors on claims by third parties against them for the debt
discharged in bankruptcy. Thus, for example, S 524(e)
makes clear that a discharge in bankruptcy does not
_________________________________________________________________
collect or recover from, or offset against, property of the debtor
of
the kind specified in section 541(a)(2) of this title that is
acquired
after the commencement of the case, on account of any allowable
community claim, except a community claim that is excepted from
discharge under section 523, 1228(a)(1), or 1328(c)(1) of this
title, or
that would be so excepted, determined in accordance with the
provisions of sections 523(c) and 523(d) of this title, in a case
concerning the debtor's spouse commenced on the date of the filing
of the petition in the case concerning the debtor, whether or not
discharge of the debt based on such community claim is waived.
11 U.S.C. 524(a)(3).
21. HSBC argues more generally that "[t]he most obvious defect of the
Plan is that it incorporates releases and provides for extinction of
causes
of action against non debtor third parties for no consideration." It
argues
that under In re Continental Airlines, 203 F.3d 203, 211 (3d Cir. 2000),
a plan with releases is unconfirmable as a matter of law. HSBC reads
S 524(e) and Continental II too broadly. Section 524(e) provides that the
bankruptcy discharge of the debtor does not operate to relieve non-
debtors of their liabilities, but by its terms it does not govern
provisions
in a plan by which a debtor releases its own claims against third parties.
34
extinguish claims by third parties against guarantors or
directors and officers of the debtor for the debt discharged
in bankruptcy. Indeed, Continental II held that a plan that
enjoined plaintiffs' actions against the debtor's directors
and officers who "ha[d] not formally availed themselves of
the benefits and burdens of the bankruptcy process," id. at
211, violated S 524(e), id. at 214. The injunction in that
plan protected directors and officers from actions taken
prior to bankruptcy that allegedly violated the securities
laws and thus abrogated the liability of third parties.
Paragraph 58 does not similarly affect the liability of
third parties. Paragraph 58 provides that
[n]one of the Debtors, the Reorganized Debtors, New
Bruno's, the Creditor Representative, the Committee or
any of their respective members, officers, directors,
employees, advisors, professionals or agents shall have
or incur any liability to any holder of a Claim or Equity
Interest for any act or omission in connection with,
related to, or arising out of, the Chapter 11 Cases, the
pursuit of confirmation of the Plan, the consummation
of the Plan or the Administration of the Plan or the
property to be distributed under the Plan, except for
willful misconduct or gross negligence, and, in all
respects, the Debtors, the Reorganized Debtors, New
Bruno's, the Creditor Representative, the Committee
and each of their respective members, officers,
directors, employees, advisors, professionals and
agents shall be entitled to rely upon the advice of
counsel with respect to their duties and responsibilities
under the plan.
Under Paragraph 58, members of the Committee and
professionals who provided services to the Debtors remain
liable for willful misconduct or gross negligence. Because
we conclude that this standard of liability is the standard
that already applies in this situation, we believe that
Paragraph 58 affects no change in liability.
Section 1103(c) of the Bankruptcy Code, which grants to
the Committee broad authority to formulate a plan and
perform "such other services as are in the interest of those
represented," 11 U.S.C. S 1103(c), has been interpreted to
35
imply both a fiduciary duty to committee constituents and
a limited grant of immunity to committee members, see In
re L.F. Rothschild Holdings, Inc., 163 B.R. 45, 49 (S.D.N.Y.
1994); In re Drexel Burnham Lambert Group, Inc. , 138 B.R.
717, 722 (Bankr. S.D.N.Y. 1992), aff 'd, 140 B.R. 347
(S.D.N.Y. 1992); In re Tucker Freight Lines, Inc., 62 B.R.
213, 216, 218 (Bankr. W.D. Mich. 1986); Lawrence P. King,
Collier on Bankruptcy P 1103.05[4], 1103-32-33 (15th ed.
rev. 1996) ("[A]ctions against committee members in their
capacity as such should be discouraged. If members of the
committee can be sued by persons unhappy with the
committee's performance during the case or unhappy with
the outcome of the case, it will be extremely difficult to find
members to serve on an official committee.").
This immunity covers committee members for actions
within the scope of their duties. The committee members
and the debtor are entitled to retain professional services to
assist in the reorganization. In Pan Am Corp. v. Delta
Airlines, Inc., 175 B.R. 438, 514 (S.D.N.Y. 1994), it was held
that committee members and those professionals who
provide services to the debtor with respect to
reorganization, or to the committee members in their
capacity as committee members, however, do remain liable
for willful misconduct or ultra vires acts.
We agree with this interpretation of S 1103(c) and hold
that it limits liability of a committee to willful misconduct
or ultra vires acts. The release in Paragraph 58 sets forth
the appropriate standard for liability that would apply to
actions against the committee members and the entities
that provided services to the Committee in the event that
they were sued for their participation in the reorganization.22
_________________________________________________________________
22. Huff also argues that the failure of the Debtors to enforce the
subordinated noteholders' subrogation rights violates S 524(e) and calls
this a provision "extinguish[ing] the Noteholders' rights to seek
recoveries
directly against the Banks," which constitutes an impermissible non-
consensual third-party release. However, this argument is specious for
the same reason that Huff 's main argument about the surbordination
agreement is specious: the subordinated noteholders' subrogation rights
only arise when the senior lenders are paid in full. As noted above, the
senior creditors in this case were not paid in full under the plan.
36
It does not affect the liability of another entity on a debt of
the debtor within the meaning of S 524(e).
Nothing in our recent opinion in Continental II is to the
contrary. In that case, we held that a plan that enjoined
plaintiffs' actions against Continental's directors and
officers violated S 524(e). Id. at 214. The release in question
here differs from that in Continental II in a fundamental
way: it sets forth the applicable standard of liability under
S 1103(c) rather than eliminating it altogether. In
Continental II, we concluded that it was clear under any
rule that the court might adopt that the releases at issue
were impermissible because "the hallmarks of permissible
non-consensual releases--fairness, necessity to the
reorganization, and specific factual findings to support
these conclusions--are all absent here." Id. at 214. We did
not treat S 524(e) as a per se rule barring any provision in
a reorganization plan limiting the liability of third parties.
See id. Because of the differences between the releases in
the two cases, Continental II does not compel the
conclusion that this release is impermissible. Indeed,
because this release does not affect the liability of third
parties, but rather sets forth the appropriate standard of
liability, we believe that this release is outside the scope of
S 524(e).
C. Sections 363 and 1123
Section 363 governs the sale of assets outside of the
reorganization plan. It permits the trustee (or the debtor-in-
possession), after notice and a hearing, to use, sell, or lease
property of the estate outside of the ordinary course of
business. See 11 U.S.C. S 363(b)(1); In re Rickel Home
Centers, 209 F.3d 291, 297 (3d Cir. 2000). Section
1123(b)(4) provides that a plan may "provide for the sale of
all or substantially all of the property of the estate, and the
distribution of the proceeds of such sale among holders of
claims or interests." 11 U.S.C. S 1123(b)(4). Huff
characterizes the reorganization plan as involving a sale of
assets and tries to transform these two sections of the
Bankruptcy Code into a general duty to fully market the
company, similar to the duty recognized by the Delaware
Supreme Court in the context of corporate change in
37
control transactions. See Paramount Communications v.
QVC Network, 637 A.2d 34, 43 (Del. 1994); Revlon, Inc. v.
MacAndrews & Forbes Holdings, 506 A.2d 173, 182 (Del.
1986).
This argument fails because these provisions of the Code,
even if they do impose a duty to fully market assets in
some circumstances (a question we do not address), are
simply inapplicable to this situation. The plan wiped out
old equity and issued new stock to the creditors. For tax
purposes, this transaction was accomplished by
transferring substantially all of the assets of the Debtors to
a creditors' representative and immediately thereafter to the
newly created Bruno's Supermarkets, a corporation whose
equity is owned by the senior lenders. But just because a
transaction is a sale or exchange for tax purposes does not
mean that it is a sale within the meaning of the Code. See
In re PCH Assocs., 804 F.2d 193, 201 (2d Cir. 1986)
(looking to the economic substance of the transaction to
determine whether it was a sale or a lease within the
meaning of the Code). In a similar case, Major's Furniture
Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 546 (3d Cir.
1979), we stated that
[i]t is apparent to us that on this record none of the
risks present in a true sale is present here. Nor has the
custom of the parties or their relationship, as found by
the district court, given rise to more than a
debtor/creditor relationship in which Major's' debt was
secured by a transfer of Major's' customer accounts to
Castle . . . . Accordingly, we hold that on this record
the district court did not err in determining that the
true nature of the transaction between Major's and
Castle was a secured loan, not a sale.
That the assets passed though the hands of a creditors'
representative before being returned to the reorganized
Debtors does not transform this plan from a stand-alone,
internally generated plan of reorganization to a sale of
assets to a third party. To hold otherwise would be to read
S 1129 of the Code as characterizing the many
reorganizations involving the transfer of control from a
corporation's old equity to its creditors as involving a sale,
a position without support in our jurisprudence.
38
D. Section 1129(a)(2)
Section 1129(a)(2) provides that the court shall confirm a
plan only if "[t]he proponent of the plan complies with the
applicable provisions of this Title." 11 U.S.C.S 1129(a)(2).
We agree with the District Court's conclusion that
S 1129(a)(2) requires that the plan proponent comply with
the adequate disclosure requirements of S 1125.23 Title 11
U.S.C. S 1125(b) mandates the filing of a disclosure
statement containing "adequate information." Huff argues
that the plan proponents failed to comply with the
disclosure requirements by failing to provide adequate
information regarding the release of the preferences. The
Debtors respond that Huff does not have standing to raise
this argument.
Appellate standing in bankruptcy cases is more limited
than standing under Article III or the prudential
requirements associated therewith. "Generally, litigants in
federal court are barred from asserting the constitutional
rights of others." Kane v. Johns-Manville Corp., 843 F.2d
636, 643 (2d Cir. 1988) (citing Warth v. Seldin , 422 U.S.
490, 499, 509 (1975)). The court in Kane explained why
limits on third-party standing are particularly relevant to
appellate standing in bankruptcy proceedings:
Bankruptcy proceedings regularly involve numerous
parties, each of whom might find it personally
expedient to assert the rights of another party even
though that other party is present in the proceedings
and is capable of representing himself. Third-party
standing is of special concern in the bankruptcy
context where, as here, one constituency before the
_________________________________________________________________
23. Other courts also have found S 1125 to be one of the applicable
provisions of the Code referenced to in S 1129. See, e.g., Tenn-Fla
Partners v. First Union Nat'l Bank of Fla., 229 B.R. 720, 732 (W.D. Tenn.
1999); In re Trans World Airlines, Inc., 185 B.R. 302, 313 (Bankr.
E.D.Mo. 1995) ("The principal purpose of section 1129(a)(2) of the
Bankruptcy Code is to assure that the plan proponents have complied
with the disclosure requirements of section 1125 of the Bankruptcy Code
in connection with the solicitation of acceptances of the plan."); see
also
Lawrence P. King, Collier on BankruptcyP 1129.03[2] at 1126-26.1 &
n.14 (15th ed. rev. 1996).
39
court seeks to disturb a plan of reorganization based
on the rights of third parties who apparently favor the
plan. In this context, the courts have been
understandably skeptical of the litigant's motives and
have often denied standing as to any claim that asserts
only third-party rights.
Id. at 644; see also Travelers Ins. Co. v. H.K. Porter Co.,
Inc., 45 F.3d 737, 741 (3d Cir. 1995) (adopting the
reasoning of Kane).
Title 11 U.S.C. S 1109(b)--which provides that "[a] party
in interest, including the debtor, the trustee, a creditors'
committee, an equity security holders' committee, a
creditor, an equity security holder, or any indenture
trustee, may raise and may appear and be heard on any
issue in a case under this chapter"--confers broad standing
at the trial level. However, courts do not extend that
provision to appellate standing:
This rule of appellate standing is derived from former
section 39(c) of the Bankruptcy Act of 1898, which
permitted only a "person aggrieved" to appeal an order
of the bankruptcy court. 11 U.S.C. S 67(c) (1976)
(repealed 1978). Although the present Bankruptcy
Code does not contain any express restrictions on
appellate standing, courts have uniformly held that the
"person aggrieved" standard is applicable to cases
under the Code.
Kane, 843 F.2d at 641-42.
This court has emphasized that appellate standing in
bankruptcy cases is limited to "person[s] aggrieved."
Travelers Ins. Co., 45 F.3d at 741. We consider a person to
be aggrieved only if the bankruptcy court's order
"diminishes their property, increases their burdens, or
impairs their rights." In re Dykes, 10 F.3d 184, 187 (3d Cir.
1993) (citation omitted). Thus, only those "whose rights or
interests are directly and adversely affected pecuniarily" by
an order of the bankruptcy court may bring an appeal. Id.
(internal quotation marks and citation omitted). The
"person aggrieved" standard is more stringent than the
constitutional test for standing. In re O'Brien Envtl. Energy,
Inc., 181 F.3d 527, 530 (3d Cir. 1999).
40
Huff contends that Bruno's failed to disclose that it had
not done a thorough analysis of preference claims before
deciding not to pursue them. But Huff itself was aware of
this alleged failing at the time and pointed it out to the
other creditors when it opposed the plan. Huff clearly would
not have acted any differently if the disclosure had been
made as it now argues it should have been. Similarly,
because Huff pointed out the alleged failure to disclose in
its statements protesting the plan, it cannot show that it
was personally aggrieved because other creditors might
have voted differently if they had had the information
allegedly missing from the disclosure. Since Huff cannot
show that it was personally aggrieved by any failure to
disclose, we conclude that Huff does not have standing to
raise this claim. See In re Middle Plantation of Williamsburg,
Inc., 47 B.R. 884, 891 (E.D. Va. 1984) ("Holders of impaired
claims who have been induced to vote in favor of a plan are
the only ones who may raise the issue of the adequacy of
the Disclosure Statement."), aff 'd, 755 F.2d 928 (4th Cir.
1985).
We do not foreclose the possibility that, in another case,
a creditor objecting to a plan for lack of disclosure that
actually had the information it complains is missing from
the disclosure might nevertheless have standing if it could
show that there is a possibility that other creditors would
have acted differently (thus benefitting the protesting
creditor) if they had had the same information. See In re
Perez, 30 F.3d 1209, 1217 (9th Cir. 1994) (concluding that
a creditor had standing on this theory). But in this case,
because Huff itself made the information available to the
other creditors, it has not made such a showing. The
chance that the other creditors would have acted differently
is simply too speculative to be a basis for third party
standing here.
E. Section 1129(a)(7)
Section 1129(a)(7) provides that a court shall confirm a
plan only if
With respect to each impaired class of claims or
interests--
41
(A) each holder of a claim or interest of such class--
(i) has accepted the plan; or
(ii) will receive or retain under the plan on account of
such claim or interest property of a value, as of the
effective date of the plan, that is not less than the
amount that such holder would so receive or retain
if the debtor were liquidated under chapter 7 of this
title on such date; or
(B) if section 1111(b)(2) of this title applies to the
claims of such class, each holder of a claim of such
class will receive or retain under the plan on account
of such claim property of a value, as of the effective
date of the plan, that is not less than the value of such
holder's interest in the estate's interest in the property
that secures such claims.
11 U.S.C. S 1129(a)(7). The District Court found that the
Debtors have demonstrated at the Confirmation Hearing
that creditors rejecting the plan would not receive a greater
recovery in a Chapter 7 liquidation. We review this factual
finding for clear error.
Huff failed to challenge the Debtors' liquidation analysis.
Huff also did not introduce evidence to demonstrate that
the recapitalization claims have significant value or that it
was in the best interests of the estate to pursue the
preference claims. And as noted above, the Examiner's
District Court findings to the contrary are well supported.
Accordingly, the District Court did not commit clear error in
holding that the Debtors met their burden under
S 1129(a)(7).
VI. Conclusion
For the foregoing reasons, the Order of the District Court
confirming the Debtor's Second Amended Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code
will be affirmed.
42
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
43