a celebration of liberty and justice for all: the ... · judge böhm was appointed to the u.s....

A CELEBRATION OF LIBERTY AND JUSTICE FOR ALL: THE BICENTENNIAL OF THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

THE DISTRICT’S FINANCIAL COURTS: BANKRUPTCY AND THE ECONOMY OF WESTERN PENNSYLVANIA

Panelists: Moderator:

The Honorable Joy Flowers Conti The Honorable Jeffery A. Deller Chief United States District Judge Chief United States Bankruptcy Judge

The Honorable Judith K. Fitzgerald Shareholder, Tucker Arensberg, P.C. and formerly United States Bankruptcy Judge

The Honorable Carlota M. Böhm United States Bankruptcy Judge

Douglas A. Campbell, Esq. Member, Campbell & Levine, LLC

Ronald Schuler, Esq. Partner, Spilman Thomas & Battle, PLLC

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BIOGRAPHIES

The Honorable Joy Flowers Conti

Judge Conti is the Chief Judge of the United States District Court for the Western District of Pennsylvania. Prior to her appointment, she was a shareholder with the Pittsburgh office of Buchanan Ingersoll, Professional Corporation, now Buchanan Ingersoll Rooney ("Buchanan"), and prior to joining Buchanan she was a partner with Kirkpatrick, Lockhart, Johnson & Hutchison, now known as K&L Gates LLP. Judge Conti was a Professor of Law at Duquesne University and taught courses on civil procedure, corporations, corporate finance, corporate reorganizations and bankruptcy. She authored several articles and chapters in treatises dealing with bankruptcy and corporate law and was a frequent lecturer at seminars on those matters. Judge Conti is a former President of the Allegheny County Bar Association (1993), is listed in Who's Who in America and Who's Who in American Law, and while practicing law was listed in The Best Lawyers in America. She is a member of the prestigious American Law Institute and the American College of Bankruptcy. She also was Governor-at-Large of the Pennsylvania Bar Association ("PBA"), was the Chair of the PBA's Business Law Section, and received the PBA's 1995 Anne X. Alpern Award, which annually recognizes one outstanding woman lawyer. She was the President of the Third Circuit Historical Society. Judge Conti is a summa cum laude graduate of the Duquesne University School of Law, where she served as Editor-in-Chief of the Duquesne Law Review. Judge Conti was a member of the Judicial Conference of the United States, and is a former Chair of the Judicial Conference Committee on the Administration of the Bankruptcy System. She served as the Chair of the Local Rules Committee for the United States District Court for the Western District of Pennsylvania from 2003 to September 2010 and as the Chair of the Alternative Dispute Resolution Committee for the United States District Court for the Western District of Pennsylvania from September 2010 until September 2013. Judge Conti is Chair of the Western District of Pennsylvania's U.S. Probation Job Development & Educational Services Advisory Committee. She also received the American Inns of Court 2009 Professionalism Award for the Third Circuit and the W. Edward Sell Business Lawyer Award on November 15, 2016.

The Honorable Judith K. Fitzgerald

Judge Fitzgerald (Ret.) has more than 25 years of experience as a Bankruptcy Judge, having presided over matters in the Western District of Pennsylvania (where she was chief judge for five years) as well as in the District of Delaware (20 years), the Eastern District of Pennsylvania (8 years) and the U.S. Virgin Islands (9 years). During her tenure as a bankruptcy judge, Fitzgerald presided over many significant corporate cases including: Flintkote, Kaiser Aluminum, Corp., Owens Corning, W.R. Grace, Pittsburgh Corning Corporation, Armstrong World Industries, United States Mineral Products, U.S.G., Specialty Products Holding Corp., Maronda Homes, Fleming Steel Company, Federal-Mogul Global, Innovative Communications Corp., Just For Feet, Inc., WorldClass Processing, Inc., Combustion Engineering, Inc., Peregrine Systems,

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American Pad & Paper Co., PHP Healthcare Corporation, Color Tile, Inc., Italian Oven, Shannopin Mining, Busy Beaver Bldg. Centers, and Papercraft Corporation.

Judi has unique experience in mass tort bankruptcies, having adjudicated more cases involving section 524(g) asbestos trusts than any other bankruptcy judge in the country. She has an extensive trial background and frequently served as a settlement judge and mediator. She was the sole judge hearing all chapter 13 cases in the Western District of Pennsylvania and Delaware for many years. She has completed several mediation training courses, including the intensive, 40-hour Bankruptcy Mediation Training course offered by St. John’s University and the American Bankruptcy Institute and courses provided by the PA Council of Mediators and the Western PA Council of Mediators, and now serves as a mediator and arbitrator.

In addition to her services as an expert witness and consultant, Judi represents debtors and creditors in bankruptcy. She is a Professor in the Practice of Law at the University of Pittsburgh School of Law where she teaches Bankruptcy and Advanced Bankruptcy Law. Judi is a member of the Tucker Arensberg Board of Directors.

The Honorable Carlota M. Böhm

Judge Böhm was appointed to the U.S. Bankruptcy Court for the Western District of Pennsylvania in 2011. Judge Böhm started her career as a law clerk to two Bankruptcy Judges and was in private practice in the bankruptcy/commercial law area since 1981. She was a Bankruptcy Trustee for over 30 years and a mediator. She practiced law at Houston Harbaugh, P.C. from 1992 – 2011 and was a partner in Schaffler & Böhm prior to that. She is fluent in Spanish, being born in Buenos Aires, Argentina; graduated from the University of Pittsburgh with a B.S. and received an M.A. and J.D. Degree from Duquesne University. Judge Böhm was admitted to the Pennsylvania Bar, the U.S. District Court for the Western District of Pennsylvania and the Supreme Court of the United States. She is very active in numerous organization, including; the Allegheny County Bar Association, Commercial Law League Association, The Judith K. Fitzgerald Western Pennsylvania Bankruptcy American Inn of Court, Turnaround Management Association, International Women’s Insolvency & Restructuring Confederation and the National Conference of Bankruptcy Judges. She is a frequent lecturer on various topics, including bankruptcy, legal ethics, and commercial law.

Douglas A. Campbell, Esq.

Douglas Campbell is a founding member of Campbell & Levine, LLC, a law firm with offices in Pittsburgh, Pennsylvania and Wilmington, Delaware, established in 1981. His practice focuses on counseling clients with regard to issues and disputes related to substantial financial obligations, as well as the management of multi-billion dollar asbestos-related personal injury settlement trusts.

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Doug obtained a J.D. degree from Harvard Law School in 1976, and a B.A. degree from Carnegie-Mellon University in 1973. During the 1990s, he drafted, negotiated and obtained court confirmation of a plan of reorganization for one of the first asbestos manufacturers to emerge from Chapter 11, H.K. Porter Company; and did the same in the chapter 11 case for the Pittsburgh Penguins in 1999 while representing the team’s major unsecured creditor, Mario Lemieux

Ronald Schuler, Esq.

Ron Schuler is the Member in Charge of the Pittsburgh office of Spilman Thomas & Battle, and has been practicing corporate, technology and securities law in Pittsburgh for 30 years. A native Southern Californian and a graduate of Pomona College and Cornell Law, Schuler was a lead member of the team that represented the City of Pittsburgh with regard to the Pittsburgh Pirates and the planning and construction of PNC Park, and was the author of the Forbes Field II Task Force Final Report (1996), the urban planning justification for the location of the ballpark. Named Best Lawyers’ Pittsburgh “Lawyer of the Year” for Mergers and Acquisitions, Schuler has also served as a senior operating officer of a $100 million oil and gas company, and is the founding chairman of Pittsburgh Public Media, which owns Pittsburgh’s community-supported jazz radio station, WZUM-FM/AM. He is the author of a soon-to-be-published history of the legal profession in Pittsburgh, The Steel Bar: Pittsburgh Lawyers and the Making of Modern America. From the constitutional crisis of the Whiskey Rebellion through the bloody Homestead Strike, to the Johnstown Flood, the creation of the world’s largest corporation, and the witch hunts against anarchists in the 1910s and Communists in the 1950s, to a seminal constitutional battle over the rights of workers, the prejudices against women and African Americans in the profession, a 20-year long federal antitrust prosecution, the suspicious suicide of a district attorney accused of graft, and the renaissance of the city after the decline of the steel industry, Schuler's Steel Bar is an epic story of the rise and fall and rebirth of the Pittsburgh lawyer.

The Honorable Jeffery A. Deller

The Honorable Jeffery A. Deller is the Chief U.S. Bankruptcy Judge for the Western District of Pennsylvania. In addition to serving as Chief Judge, Judge Deller has volunteered as a member of the Chief Judge Advisory Committee with the Federal Judicial Center in Washington, D.C. and has previously served as the Editor-in-Chief of the prestigious American Bankruptcy Law Journal. He has also taught classes at Duquesne University and the University of Pittsburgh.

Prior to his appointment to the bench in 2005, Chief Judge Deller practiced law at the firm of Klett Rooney Lieber & Schorling (now known as Buchanan Ingersoll & Rooney).

Chief Judge Deller is a Past President of the Bankruptcy and Commercial Law Section of the Allegheny County Bar Association (ACBA). He is the recipient of various honors including: the Outstanding Achievement Award by the Duquesne University Law Alumni Association, the Outstanding Young Lawyer Award by the ACBA, the Cornell High School Wall of Fame, and is a Fellow to the American College of Bankruptcy.

982 160 FEDERAL REPORTER, 3d SERIES

underwent an extended period of renewedaddiction while he was entrusted with a posi-tion of responsibility at Circuit City. It ispraiseworthy that he sought treatment forhis addiction before he was discovered, butthere is no evidence that his addiction, asopposed to his drug-related misconduct,caused Circuit City to fire him. The judg-ment of the District Court will be affirmed.

,

CITICORP VENTURE CAPITAL, LTD.,a New York Corporation

v.

COMMITTEE OF CREDITORS HOLD-ING UNSECURED CLAIMS, and Com-mittee of Creditors Holding UnsecuredClaims as Estate Representative of Pa-percraft Corporation (D.C. Civil No. 95–cv–01872).

COMMITTEE OF CREDITORS HOLD-ING UNSECURED CLAIMS, and Com-mittee of Creditors Holding UnsecuredClaims as Estate Representative of Pa-percraft Corporation,

v.

CITICORP VENTURE CAPITAL, LTD.,a New York Corporation (D.C. Civil

No. 95–cv–01886).

Nos. 97–3518, 97–3519.

United States Court of Appeals,Third Circuit.

Argued July 21, 1998.

Decided Nov. 24, 1998.

Unsecured creditors committee broughtadversary proceeding against fiduciary ofChapter 11 debtor, objecting to allowance ofclaims against debtor that fiduciary pur-chased and seeking claims’ equitable subordi-nation. The Bankruptcy Court, Judith K.Fitzgerald, 187 B.R. 486, limited fiduciary’srecovery on claims, but declined to equitablysubordinate them. Parties cross-appealed.The United States District Court for theWestern District of Pennsylvania, Cindrich,J., 211 B.R. 813, reversed and remanded.

Parties cross-appealed. The Court of Ap-peals, Stapleton, Circuit Judge, held that: (1)findings regarding fiduciary’s purchase ofclaims established inequitable conduct sup-porting equitable subordination; (2) fiduciarybreached its duty by purchasing debtor’snotes without requisite notice to board andcommittee; (3) evidence supported findingsthat fiduciary was motivated primarily byself-interest in acquiring claims against debt-or; and (4) subordination of claims beyondthat required to deprive fiduciary of profithad to be supported by findings that justifiedremedy chosen by reference to equitableprinciples.

Affirmed.

1. Bankruptcy O2968Findings regarding fiduciary’s purchase

of claims against Chapter 11 debtor estab-lished inequitable conduct supporting equita-ble subordination remedy, including findingsthat notes were purchased for dual purposeof making profit for fiduciary and influencingreorganization in its self-interest, were pur-chased with benefit of non-public informationacquired as fiduciary, and were acquiredwithout disclosure to bankruptcy court, debt-or’s board of directors, unsecured creditorscommittee, or selling noteholders.

2. Bankruptcy O2968Opportunity to purchase Chapter 11

debtor’s notes at discount was corporate op-portunity, and therefore failure of fiduciarythat purchased notes to provide requisitenotice to debtor’s board and unsecured credi-tors committee was breach of fiduciary dutysupporting subordination depriving fiduciaryof its profit from transactions, despite fidu-ciary’s claims that debtor could not havepurchased notes and committee membershad no interest in doing so.

3. Bankruptcy O2968Fiduciary of Chapter 11 debtor failed to

show that unsecured creditors committee hadknowledge that fiduciary was purchasingclaims against debtor until after fiduciaryannounced its competing reorganizationclaim, and thus that its conduct in acquiringclaims without notice to committee did not

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983CITICORP VENTURE v. COMMITTEE OF CREDITORS HOLDINGCite as 160 F.3d 982 (3rd Cir. 1998)

support equitable subordination; althoughminutes of committee conference call re-flected mention of rumor that fiduciary hadpurchased one creditor’s claims, committeechair’s testimony, which bankruptcy courtcredited, indicated that discussion lasted 30seconds and that such rumors were common-place and generally did not warrant furtherinquiry.

4. Bankruptcy O2904Findings that fiduciary of Chapter 11

debtor intended to profit from purchasingdebtor’s notes at discount and to gain controlof debtor’s reorganization through purchases,and thus was motivated primarily by self-interest, were supported by testimony of fi-duciary’s representative on debtor’s board ofdirectors that he expected to make profitfrom purchases and of fiduciary’s chairmanthat purchases would help fiduciary ‘‘influ-ence something.’’

5. Bankruptcy O2904Findings that fiduciary of Chapter 11

debtor had access to material, non-public in-formation as insider that influenced its pur-chases of debtor’s notes was supported byevidence that debtor’s former chief financialofficer conducted valuations of debtor whichwere based on fiduciary’s proposed assetpurchase and which were not provided tounsecured creditors committee, and fiducia-ry’s use of special information it obtained inpurchasing claims and preparing purchaseoffer.

6. Bankruptcy O2968Equitable subordination of claims pur-

chased by fiduciary of Chapter 11 debtor wasjustified by injuries suffered by selling note-holders as result of being deprived of abilityto make fully informed decision to sell, dilu-tion of voting rights and costs of delay inconfirmation of debtor’s reorganization plansuffered by members of unsecured creditorscommittee, and conflict of interest created byfiduciary’s actions that jeopardized its abilityto make decisions in debtor’s best interests.

7. Bankruptcy O2967.5Remedy of equitable subordination must

not be inconsistent with other provisions ofthe Bankruptcy Code. Bankr.Code, 11U.S.C.A. § 510(c).

8. Bankruptcy O2968Availability of alternative remedies did

not make equitable subordination of claimspurchased by Chapter 11 debtor’s fiduciary,in breach of its fiduciary obligation, incompa-tible with Bankruptcy Code. Bankr.Code, 11U.S.C.A. § 510(c).

9. Bankruptcy O2968, 3790Although, at a minimum, remedy for

fiduciary’s inequitable conduct in buyingclaims against Chapter 11 debtor at discountwithout notice to debtor or creditors had todeprive fiduciary of its profit on claims, fur-ther subordination was appropriate only ifsupported by findings that justified remedychosen by reference to equitable principles,and the absence of such findings necessitatedremand. Bankr.Code, 11 U.S.C.A. § 510(c).

10. Bankruptcy O2967.1In imposing subordination remedy be-

yond disgorgement of profit in cases inwhich it is not feasible to quantify loss suf-fered by those benefitting from subordina-tion, bankruptcy court should attempt toidentify nature and extent of harm it intendsto compensate in a manner that will permitjudgment to be made regarding proportion-ality of remedy to injury suffered, and, ifthat is not possible, the court should specifi-cally so find. Bankr.Code, 11 U.S.C.A.§ 510(c).

11. Bankruptcy O2967.5Equitable subordination should not re-

sult in a windfall to those benefitted by itbased on injury to others outside the benefit-ted class. Bankr.Code, 11 U.S.C.A. § 510(c).

12. Bankruptcy O2968Given that injury suffered by those who

sold their claims against Chapter 11 debtorto debtor’s fiduciary would not be benefittedby equitable subordination of such claims,any injury suffered by sellers could play norole in determination of extent to whichclaims should be subordinated. Bankr.Code,11 U.S.C.A. § 510(c).

Amy M. Tonti, Klett, Lieber, Rooney &Schorling, Pittsburgh, PA, Paul K. Vey, Piet-ragallo, Bosick & Gordon, Pittsburgh, PA,

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Lawrence J. Slattery (Argued), Citibank Le-gal Affairs Office, New York City, for Citi-corp Venture Capital, Ltd.

Philip E. Beard, Stonecipher, Cunningham,Beard & Schmitt, Pittsburgh, PA, StephanM. Ray (Argued) and K. John Shaffer, Stut-man, Treister & Glatt, Los Angeles, CA, forCommittee of Creditors Holding UnsecuredClaims and Committee of Creditors HoldingUnsecured Claims as Estate Representativeof Papercraft Corporation.

BEFORE: STAPLETON and ROSENN,Circuit Judges, and RESTANI,* Judge

OPINION OF THE COURT

STAPLETON, Circuit Judge:

This appeal is from a decision in an adver-sary proceeding brought by plaintiff-appel-lant/cross-appellee Committee of CreditorsHolding Unsecured Claims (the ‘‘Commit-tee’’) against defendant-appellee/cross-appel-lant Citicorp Venture Capital, Ltd. (‘‘CVC’’).The action arises out of the chapter 11 reor-ganization of Papercraft Corporation filed inthe Western District of Pennsylvania. TheCommittee claims that CVC, while a fiducia-ry of Papercraft, secretly purchased millionsof dollars of claims against Papercraft at adiscount, seeking to control Papercraft’s as-sets and make a profit at the expense ofPapercraft’s other creditors. CVC contendsthat the claims were properly purchased andthat it acted in the best interests of both thecompany and its creditors. After a trial, thebankruptcy court entered a judgment againstCVC, allowing CVC’s purchased claims onlyto the extent of the discounted amount CVCpaid for them and limiting its recovery to thepercentage distribution provided in the planmultiplied by that discounted amount. Onappeal, the district court agreed with thebankruptcy court’s finding that CVC hadbreached its fiduciary duties, acted inequit-ably, and caused injury to Papercraft and itscreditors. It disagreed, however, with thebankruptcy court’s chosen remedy and re-manded for a redetermination regarding theappropriate remedial action. This appeal fol-lowed.

I. THE FACTS FOUND BY THEBANKRUPTCY COURT*

In 1985, Papercraft completed a leveragedbuyout in which CVC invested $5.8 million.As a result of this transaction, CVC wasgiven a 28% equity interest in Papercraft’sdirect parent, Amalgamated InvestmentCorp., and the right to seat one representa-tive on the boards of directors of Amalgamat-ed, Papercraft, and Papercraft’s wholly-owned operating subsidiaries, Barth & Drey-fuss of California and Knomark, Inc. CVC’svice president, M. Saleem Muqaddam, be-came CVC’s representative on these boardsof directors, and he remained such duringthe time period relevant to this appeal.

Papercraft ran into financial difficulties afew years after the transaction, which forceda restructuring of the leveraged buyout(‘‘LBO’’) debt. As part of the restructuring,Papercraft exchanged about 98% of its in-debtedness for new First Priority Notes andSecond Priority Notes. However, beginningin 1990, Papercraft was unable to meet theterms of the notes and sought to negotiate asecond restructuring of its unsecured debt.An informal committee of major Papercraftcreditors was formed and, after severalmonths of negotiations, an agreement wasreached on a restructuring plan. The plan,known as the ‘‘BDK plan,’’ called for a merg-er of Papercraft’s operating subsidiaries(Barth & Dreyfuss and Knomark) into asingle entity, BDK Holdings, Inc., as part ofa voluntary chapter 11 petition to be filed byPapercraft. The creditors’ claims againstPapercraft would then be converted into‘‘BDK Units’’ consisting of stock and bondsissued by the new venture. The BDK planwas approved unanimously by Papercraft’sdirectors, including CVC’s Muqaddam, inMarch 1991.

Papercraft filed its voluntary petition un-der chapter 11 on March 22, 1991. As of thefiling date, Papercraft had outstanding $90.7million in First Priority Notes and $56.3million in Second Priority Notes, none ofwhich were held by CVC. Pursuant to theagreement among the creditors, Papercraft

* Hon. Jane A. Restani, Judge of the United StatesCourt of International Trade, sitting by designa-

tion.

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filed the BDK plan with the chapter 11 peti-tion and an official Committee was formed torepresent the interests of unsecured credi-tors.

Though the chapter 11 petition and BDKplan were filed in March 1991, the requiredPapercraft disclosure statement, a prerequi-site to confirmation of the plan, was not fileduntil October 1991. During this delay, CVCmanaged to purchase over 40% of the out-standing notes, at a significant discount.CVC, despite its earlier support of the BDKplan, then objected to the confirmation ofthat plan and offered its own competing plan,which called for a CVC purchase of Paper-craft’s assets. An account of the specificcircumstances under which CVC took theseactions follows.

In March 1991, Muqaddam, in a memoran-dum to CVC’s Investment Committee, soughtauthorization to spend up to $10 million pur-chasing Papercraft notes. CVC officialsgranted the request in April 1991. Muqad-dam, acting for CVC, then began makinganonymous purchases of notes through vari-ous brokers. Between April and August1991, CVC purchased $60,849,575.72 face val-ue of the Papercraft notes for $10,553,541.88.These purchases represented a significantproportion of the outstanding Papercraftdebt: CVC managed to acquire 38.3% ofPapercraft’s outstanding First Priority Notesand 46.4% of outstanding Second PriorityNotes. In all, CVC’s purchases amounted to40.8% of Papercraft’s total unsecured claims.It thus achieved a ‘‘blocking’’ position in theproposed reorganization. Although Muqad-dam was a member of Papercraft’s board,and therefore a fiduciary to the company andits creditors, neither he nor anyone else fromCVC requested or obtained the approval ofthe board, the Committee, or the court be-fore purchasing the notes. Nor did CVCdisclose to any of the selling creditors itsidentity as buyer or its fiduciary status.

At the same time CVC was surreptitiouslypurchasing claims, it also requested or other-wise obtained confidential information aboutPapercraft’s financial stability and assets, in-cluding information that was not shared withPapercraft’s other creditors. In early 1991,at Muqaddam’s direction, two CVC employ-ees visited the headquarters of Papercraft’sBarth & Dreyfuss subsidiary to obtain infor-

mation. During that visit, CVC copied finan-cial statements, looked at the company’sproduct lines, held meetings with manage-ment, and toured the facilities. A writtenreport was subsequently completed by CVC,drafts of which were shared with Papercraftpersonnel. Indeed, Frank Kane, Paper-craft’s Chief Financial Officer, reviewed thereport and gave comments directly to Mu-qaddam. None of this information wasshared with the Committee. Papercraft per-sonnel also forwarded a number of financialanalyses and other documents directly toCVC, including a tax analysis that had beencompleted by a consulting firm at Muqad-dam’s request. In addition, a valuation ofPapercraft assets and a distressed sale anal-ysis completed by Chanin and Company, theCommittee’s own financial advisor, was givento CVC by Papercraft personnel.

As CVC accumulated Papercraft debt andinformation between April and August 1991,it also formulated a reorganization plan de-signed to compete with the previously filedBDK plan. Muqaddam and his staff pre-pared a series of reports evaluating the pos-sibility of a CVC asset purchase offer.These reports were based, in large part, onthe information about Papercraft that hadbeen forwarded to CVC by Kane. In thecourse of preparing an asset purchase offer,Muqaddam held a meeting with Kane andthe Bank of New York Credit Corporation(‘‘BNYCC’’) to discuss financing for a CVCasset purchase offer. Muqaddam then pre-pared a memorandum to CVC’s InvestmentCommittee requesting authorization to pur-chase Papercraft’s assets. This authoritywas granted to Muqaddam in August 1991.

In early September 1991, CVC formalizedan asset purchase offer by sending a letter toPapercraft detailing the plan and announcinga financing arrangement with BNYCC.Shortly before this announcement, Muqad-dam informed the Committee, for the firsttime, that CVC had been purchasing claims.Soon after the asset purchase offer was an-nounced, it was filed as a plan of reorganiza-tion by Papercraft. Papercraft also filed dis-closure statements for both the BDK planand the CVC plan in October 1991.

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The BDK plan disclosure statement wasapproved by the bankruptcy court at a hear-ing in December 1991. Shortly thereafter,CVC withdrew its plan of reorganization, butthen filed objections to confirmation of theBDK plan. The bankruptcy court overruledthose objections and confirmed the BDK planin January 1992.

II. THE PRIOR PROCEEDINGS

In October 1991, the Committee initiatedthis adversary proceeding against CVC, ob-jecting to the allowance of the claims CVChad purchased and seeking equitable subor-dination of those claims. After extensivediscovery, a trial was held over two days inNovember 1994. After reviewing the testi-mony and evidence, the bankruptcy courtruled in favor of the Committee. The courtheld that CVC had failed to meet its fiducia-ry obligation to act in the best interest ofPapercraft and its creditors. See In re Pa-percraft Corp., 187 B.R. 486, 497 (Bankr.W.D.Pa.1995). It identified three adverseeffects from CVC’s breaches of its fiduciaryduty. First, the bankruptcy court noted thatthe note holders who sold their claims toCVC ‘‘were deprived of the ability to make afully informed decision concerning the sale oftheir claims.’’ Id. Although they might havestill decided to sell after full disclosure, ‘‘[t]heharm lies in the fact that the selling note-holders had no opportunity to consider perti-nent information.’’ Id.

Second, the court concluded that ‘‘CVC’sactions diluted the voting rights of prepeti-tion creditors and resulted in CVC’s attemptto wrest from the prepetition creditors thevaluable assets of [Papercraft].’’ Id. ThoughCVC did not ultimately vote its claims, thecourt concluded that ‘‘[n]onetheless, its acqui-sition of claims placed it in the controllingseat in its class,’’ id. at 499 n. 10, and thatCVC was able to influence the negotiationssurrounding the terms of the plan despite itsultimate election not to vote.

Finally, the bankruptcy court decided thatCVC’s actions created a conflict of interestwhich jeopardized its ability ‘‘to make future

decisions on claims as a director free of [its]own personal interests as [an] owner ofclaims. Adding to the conflict is the fact thatthese purchases were made at a discountfrom present value. This brings into play aprofit motive, accentuating [its] personal in-terests.’’ Id. at 500 (quoting In re Cumber-land Farms, Inc., 181 B.R. 678, 680 (Bankr.D.Mass.1995)).

To remedy the adverse consequences ofCVC’s behavior, the bankruptcy court ap-plied a ‘‘per se rule’’ that when a claim ispurchased by an insider at a discount withoutadequate disclosure to the debtor and credi-tors, ‘‘the insider’s newly acquired claim willbe limited to the amount paid by the acquir-ing insider and recovery on the claim will belimited to the percentage distribution provid-ed in the plan, as applied to the allowedclaim.’’ Id. at 491. However, the bankrupt-cy court declined to equitably subordinateCVC’s claims.

On appeal, the district court first reviewedthe findings of fact made by the bankruptcycourt and found none of them clearly errone-ous. Applying the facts to the test for equi-table subordination, the district court agreedthat CVC had acted inequitably and that thisbehavior had injured creditors. As for aremedy, the district court held that CVC’srecovery should, at a minimum, be limited tothe amount paid for its claims so as to elimi-nate any potential profits from the purchaseof the notes. It disapproved of the bank-ruptcy court’s per se rule, however, and re-manded to the bankruptcy court for a deter-mination of ‘‘the amount CVC’s claims shouldbe subordinated.’’ Id.1

III. THE RIGHT TO RELIEF

Before ordering equitable subordination,most courts have required a showing involv-ing three elements: (1) the claimant musthave engaged in some type of inequitableconduct, (2) the misconduct must have result-ed in injury to the creditors or conferred anunfair advantage on the claimant, and (3)

1. The bankruptcy court had jurisdiction over thisadversary proceeding pursuant to 28 U.S.C.§§ 157(b) & 1334(b). The district court had ap-pellate jurisdiction over the bankruptcy court’sfinal judgment pursuant to 28 U.S.C. § 158(a)(1).

We have jurisdiction over the final decision ofthe district court pursuant to 28 U.S.C. § 158(d).See In re Indian Palms Associates, Ltd., 61 F.3d197, 199 n. 2 (3d Cir.1995).

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equitable subordination of the claim must notbe inconsistent with the provisions of thebankruptcy code. U.S. v. Noland, 517 U.S.535, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996)(describing existing case law as consistentwith the three part test identified in In reMobile Steel Co., 563 F.2d 692, 700 (5thCir.1977)).2

A. Inequitable Conduct

1. The Legal Sufficiency of the Findingsof the Bankruptcy Court

[1] CVC acknowledges that it and itsrepresentative, Muqaddam, owed a fiduciaryduty to Papercraft and its creditors at alltimes relevant here. It asserts, however,that neither breached a fiduciary duty. Itinsists that it is not improper per se for afiduciary to purchase claims against the debt-or in a bankruptcy at a discount and itstresses that the bankruptcy court made nofinding that the prices paid for the Paper-craft notes were unfair or inequitable at thetime of the purchases.

We accept, arguendo, that the purchase ofnotes at a discount by a fiduciary of a debtorin bankruptcy is not improper under all cir-cumstances,3 and we acknowledge the ab-sence of a finding on the fairness of thepurchase price. The bankruptcy courtfound, however, that the Papercraft notes (1)were purchased for the dual purpose of mak-ing a profit for CVC on the notes and ofbeing able to influence the reorganization inits own self-interest, (2) were purchased withthe benefit of non-public information ac-quired as a fiduciary, and (3) were acquiredwithout disclosure of its purchasing plans tothe bankruptcy court, the Papercraft board,the Committee, or the selling note holders.

The bankruptcy court further pointed outthat under Brown v. Presbyterian Ministers,484 F.2d 998, 1005 (3d Cir.1973), the opportu-nity to purchase the notes was a corporateopportunity of which CVC could not availitself, consistent with its fiduciary duty, with-out giving the corporation and its creditorsnotice and an opportunity to participate.

CVC primarily protests that the bankrupt-cy court’s findings of fact concerning inequi-table conduct on its part are clearly errone-ous. We will address that contention in thefollowing section. We hold here, however,that the above noted findings reflect ampleinequitable conduct to support a subordina-tion remedy. Indeed, those findings makethis a paradigm case of inequitable conductby a fiduciary as that concept has been devel-oped in the case law, and we believe furtherelaboration is not required. Before turningto an analysis of the record support for thesefindings, we will only comment briefly on twoof CVC’s justifications for its conduct.

[2] CVC insists that the opportunity topurchase the notes was not a corporate op-portunity, and that notice to Papercraft’sBoard and the Committee was not requiredbecause Papercraft could not have purchasedthe notes at discount and the members of theCommittee had no interest in doing so. Weagree with the Committee, however, thatCVC’s argument is fundamentally at oddswith our decision in Brown.

In Brown, we held that the availability ofclaims for purchase at a discount constitutesa corporate opportunity. After noting that adirector of a solvent corporation may takeadvantage of a corporate opportunity only ifhe discloses the opportunity to the corpora-

2. This court, in In re Burden v. United States, 917F.2d 115, 120 (3d Cir.1990), concluded that‘‘creditor misconduct is not [always] a prerequi-site for equitable subordination.’’ Burden in-volved subordination of a tax penalty in the ab-sence of government misconduct. The SupremeCourt, in two recent cases regarding the stan-dards for tax penalty subordination, has refusedto decide whether misconduct is required under§ 510(c), resolving each case on the principlethat ‘‘categorical’’ subordination is not permissi-ble. See United States v. Reorganized CF & IFabricators of Utah, Inc., 518 U.S. 213, 229, 116S.Ct. 2106, 135 L.Ed.2d 506 (1996); Noland, 517U.S. at 543, 116 S.Ct. 1524. We need not hereresolve the issue of whether misconduct is al-

ways a prerequisite to equitable subordinationbecause the bankruptcy court properly foundmisconduct.

3. There is authority arguably to the contrary, but,in light of the findings of the bankruptcy court,we need not, and do not, resolve the issue here.In Manufacturers Trust Co. v. Becker, 338 U.S.304, 313–14, 70 S.Ct. 127, 94 L.Ed. 107 (1949)the court observed, ‘‘TTT [I]f it is clear [as it is]that a fiduciary may ordinarily purchase debtclaims in fair transactions during the solvency ofthe corporation, the lower federal courts seemagreed that he cannot purchase after judicialproceedings for the relief of a debtor are expect-ed or have begun.’’ (citing cases).

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tion, we further held that a director of acorporation in bankruptcy owes a fiduciaryduty to creditors and cannot seize a corpo-rate opportunity without disclosure to thecreditors or their representative. Eventhough the director in Brown had purchaseda note at discount with the consent of thecorporation and its stockholders, we conclud-ed that a breach of fiduciary duty had oc-curred: ‘‘The opportunity should have beendisclosed to the receiver as representative ofthe creditors.’’ Id. at 1005.

CVC contends that Brown is distinguish-able because Papercraft was not in a finan-cial or legal position to purchase the notesand because the members of the Committeemust have been well aware that a marketexisted in Papercraft debt. It necessarilyfollows, according to CVC, that neither couldhave been injured by its purchases. Webelieve this argument more relevant to theremedy issue than to whether a breach offiduciary duty occurred. That duty requiredthat it share everything that it knew withPapercraft’s board and the Committee be-fore commencing its purchases. Its failureto do so would alone support a subordinationdepriving it of its profit from the note trans-actions. The absence of a disclosure in cir-cumstances of this kind makes it extremelydifficult to say with confidence what wouldhave happened had no breach of duty oc-curred4 and that, in itself, is a compellingreason for insisting on disclosure.

CVC also argues that its failure to discloseits identity to note sellers was not inequitablebecause its identity was not material to thepurchases. It stresses that no note sellershave thus far complained. We agree withthe bankruptcy court, however, that CVC’sidentity and purchasing plans were clearlymaterial to the purchase transaction. Thefact that CVC, a party with access to insideinformation, was seeking to purchase over$10 million in Papercraft debt and to steerthe reorganization towards a sale to it ofPapercraft’s assets would certainly have been

of interest to a creditor considering a CVCoffer to purchase in the summer of 1991.

In short, we agree with the bankruptcycourt, the district court, and the Committeethat CVC violated its fiduciary duty in anumber of significant respects.

2. Record Support for the BankruptcyCourt’s Findings

[3] CVC’s most fundamental challenge tothe factual findings of the bankruptcy courtrelates to the disclosure issue. It assertsthat the court clearly erred in concludingthat CVC anonymously purchased the Paper-craft notes. While CVC makes no claim thatit acted affirmatively to notify anyone of itspurchases prior to the consummation of itspurchasing plan, it maintains that the sophis-ticated investors on the Committee knewthat CVC was buying claims and chose tokeep quiet about it in order to gain a ‘‘litiga-tion windfall’’ by filing suit once CVC an-nounced its position. Specifically, CVCclaims that the courts below clearly erred infinding that the Committee had no knowl-edge of CVC’s claims purchases until afterCVC announced its competing reorganizationplan.

To support its argument, CVC relies uponminutes of a conference call held by theCommittee on April 15, 1991. Those minutesreflect that ‘‘there was mention of the factthat American Money [a creditor of Paper-craft] had sold its notes to Citicorp.’’ App. at1558. In addition, CVC points to testimonyof the Committee’s chair, Pamela Cascioli,that she had been made aware of rumorsthat CVC had purchased American Money’sclaims. However, the minutes of the confer-ence call and the testimony of Cascioli wereilluminated by witnesses at trial, who testi-fied that the discussion during the conferencecall lasted thirty seconds and that such ru-mors are commonplace, generally unfounded,and would not normally warrant additionalinquiry. The bankruptcy court credited thistestimony and specifically found that, other

4. If the attention of the Papercraft board and theCommittee had been focused on the potentialCVC perceived in its note purchases, it is not atall clear that Papercraft or its creditors wouldhave been unable to tap additional resources, justas CVC did. Either or both might have been

able to seize or participate in the opportunitythrough borrowing, court approved purchases oramendment to the plan of reorganization to in-clude a cash-out option. See, e.g., In re Cumber-land Farms, Inc., 181 B.R. 678 (Bankr.D.Mass.1995).

73


than the rumor, the ‘‘committee heard nomore about [claims purchasing activity] untilCVC made its asset purchase offer in Sep-tember of 1991.’’ 187 B.R. at 492. It ap-pears that the bankruptcy court weighed theeffect of the rumor in light of the explanatorytestimony and credited the Committee’s ex-planation. CVC provides no convincing rea-son to conclude that this determination wasclearly erroneous.5

[4] CVC next challenges the court’s find-ing as to its motive in purchasing the notes.It suggests that it was acting in the bestinterest of the company by offering a cash-out option to creditors that was not availableunder the BDK plan. As we have noted,however, the court found that CVC intendedto profit not only from the purchase of thenotes at discount but also from gaining con-trol of the reorganization. These findingswere supported, inter alia, by the testimonyof CVC’s own people. Muqaddam admittedthat he expected to make a profit from thenote purchases, and the chairman of CVCstated that those purchases would help CVC‘‘influence something.’’ Id. at 495–96, 500.The evidence clearly permits an inferencethat CVC was primarily motivated by its ownself-interest in purchasing claims. Accord-ingly, the court did not clearly err in drawingthat inference.

[5] CVC also contests the court’s deter-mination that its access to material, non-public information as an insider influenced itspurchases of Papercraft notes. The courtrelied upon evidence establishing that Paper-craft’s then-Chief Financial Officer, FrankKane, conducted valuations of the companybased on CVC’s proposed asset purchase—analyses that were not provided to the Com-mittee. In addition, the court found thatsome of CVC’s information was not publicwhen received, and that CVC was given pri-ority treatment by Papercraft in respondingto requests for information. As the courtaccurately put it, ‘‘CVC had virtually unre-stricted access to inside information and sig-nificant assistance from [Papercraft] through

its employees and staff and its control overemployees.’’ Id. at 496.

CVC argues that though it was an insider,the information it received did not differmaterially from that available to the othercreditors, who were all sophisticated institu-tional investors. The bankruptcy court’sconclusion to the contrary is supported, how-ever, by evidence that CVC obtained specialfinancial information and financial and taxvaluations in order to evaluate its own assetpurchase proposal, which was itself directlysupported by the note purchases. CVC’sargument that the special analyses it re-ceived were immaterial rings hollow in lightof its use of that information in purchasingclaims and preparing its asset purchase offer.

In short, our review of the record con-vinces us that the crucial findings we havereferenced as demonstrating inequitable con-duct are not clearly erroneous.

B. Injury or Unfair Advantage

[6] As we have noted, the bankruptcycourt identified three areas of injury or un-fair advantage suffered by the Committeeand Papercraft as a result of CVC’s secretpurchase of claims at a discount. First, thecourt found that selling note holders weredeprived of the ability to make a fully in-formed decision to sell their claims. Second,the court concluded that CVC diluted thevoting rights of members of the Committee.Though CVC ultimately did not vote itsclaims, the court indicated that its purchasedclaims secured a position of influence overthe reorganization negotiations. Finally, thecourt held that CVC’s actions created a con-flict of interest which jeopardized its abilityto make decisions in the best interest of thecompany, free from its competing profit mo-tive.

The district court also found these ‘‘inju-ries and unfair advantages’’ to be sufficientto warrant an equitable subordination reme-dy. It emphasized that CVC had ‘‘engagedin a comprehensive information collection ef-

5. CVC strenuously argues that the bankruptcycourt should not be allowed to simply rest on acredibility determination when documentary evi-dence supports a different conclusion. However,in this case the documentary evidence was ex-

plained by the testimony at trial, which the courtfound credible. There is nothing unusual abouta court finding credible one plausible explana-tion of the significance of documentary evidence.

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fort made possible by its position on Paper-craft’s Board TTT and then used this informa-tion to prepare its own asset purchase offerwhich directly competed with the BDK plan.’’Op. at 21. While the district court makes noexpress reference to it, the Committee pointsus to trial testimony from its financial advis-or indicating that this competing reorganiza-tion plan and CVC’s associated objections tothe BDK plan resulted in confirmation delaythat inflicted substantial injury on Paper-craft’s non-selling creditors.

The bankruptcy court did not attempt toquantify the harms caused in economicterms, and CVC characterizes them as ‘‘non-economic’’ harms. We do not agree with thischaracterization, however, and, like the bank-ruptcy and district courts, we conclude thatthey are sufficient to justify subordination.

C. Consistency with the Code

[7, 8] Finally, a remedy of equitable sub-ordination under § 510(c) must not be incon-sistent with other provisions of the bankrupt-cy code. This requirement ‘‘has been read asa ‘reminder to the bankruptcy court thatalthough it is a court of equity, it is not freeto adjust the legally valid claim of an inno-cent party who asserts the claim in goodfaith merely because the court perceives theresult is inequitable.’ ’’ Noland, 517 U.S. at539, 116 S.Ct. 1524 (quoting DeNatale &Abram, The Doctrine of Equitable Subordi-nation as Applied to Nonmanagement Cred-itors, 40 Bus. Law 417, 428 (1985)).

CVC makes the argument that other provi-sions of the bankruptcy code, including thoserelated to voting of claims and transfer ofclaims, provide all the remedy necessary forinappropriate insider activity. While theseprovisions may also be applicable, we per-ceive no reason why the availability of alter-native remedies makes equitable subordina-tion under § 510(c) incompatible with theCode under the circumstances of this case.

IV. THE REMEDY

[9] The bankruptcy court and the districtcourt agreed that CVC’s inequitable conductwarranted a remedy and that, at a minimum,it should not be permitted to profit by itspurchase of Papercraft notes. Their agree-ment ended there, however. The bankruptcycourt applied a per se rule that whenever an

insider purchases a claim of a debtor withoutdisclosure to the debtor and its creditors,that claim will be ‘‘allowed’’ under § 201 onlyto the extent of the amount paid and ‘‘recov-ery on the claim will be limited to the per-centage distribution provided in the plan, asapplied to the allowed claim.’’ 187 B.R. at491. Having imposed that remedy, the bank-ruptcy court concluded that equitable subor-dination of CVC’s entire claim would ‘‘not[be] consistent with the Code.’’ Id. at 502.As it explained:

In the instant case we find that the firsttwo[elements of equitable subordination]have been met but, because of our limita-tion on the allowance of CVC’s claims,equitable subordination is not consistentwith the Code. We have previously heldthat ‘‘principles of fairness would be violat-ed if insiders who create an unfair advan-tage for themselves were permitted toshare equally with other creditors.’’ In reI.D. Craig Service Corp., 1991 WL 155750at *7 (Bankr.W.D.Pa. August 8, 1991).Because we are limiting the allowedamount of CVC’s claim to the amount itpaid for the claims, with recovery underthe plan gauged to that amount, we haveadhered to principles of fairness withoutthe necessity of subordinating CVC’sclaim.

Id. at 502.

The district court held that the bankruptcycourt’s per se remedy did more than depriveCVC of its profit on its investment in Paper-craft notes, an objective that could be accom-plished by subjecting CVC claims to subordi-nation to the extent necessary to limit itsrecovery to the amount paid. The districtcourt estimated that the remedy imposed bythe bankruptcy court would reduce CVC’srecovery approximately $7.5 million belowthe amount necessary to deprive it of profit.While it acknowledged that subordination be-yond that necessary to deprive CVC of profitmight be warranted here, it declined to ap-prove further subordination in the absence ofappropriate findings. The court thus held:

[B]ecause it adopted a per se rule, theBankruptcy Court did not have the oppor-tunity to make factual findings as to howan additional $7,489,941.88 reduction in

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CVC’s recovery comports with the princi-ples of equitable subordination. We do notconclude today, however, that CVC’sclaims may not be subordinated by such anamount but only that any amount of subor-dination beyond the limitation of CVC’srecovery to the amount paid for suchclaims should be supported by factual find-ings and reconciled with the principles ofequity. We believe this to be a finding offact best left to the Bankruptcy Court, notthis Court sitting as a court of appeal.Accordingly, we will remand the case tothe Bankruptcy Court for a finding on theamount CVC’s claims should be subordi-nated pursuant to the principles of equita-ble subordination.

Op. at 26–27.We agree with the district court. At a

minimum, the remedy here should depriveCVC of its profit on the purchase of thenotes. That can be accomplished by subordi-nating CVC’s claim under § 510(c) to theextent necessary in order to limit its recov-ery to the purchase price of the notes.6 Fur-ther subordination may be appropriate, butonly if supported by findings that justify theremedy chosen by reference to equitableprinciples.7 In the absence of such findings,neither the district court nor we are in aposition to fulfill our assigned responsibilityof review.

[10] By so concluding, we do not suggestthat a bankruptcy court can never impose asubordination remedy beyond disgorgementof profit without putting a specific price tagon the loss suffered by those who will benefitfrom the subordination. Such quantificationmay not always be feasible and, where that isthe case, it should not redound to the benefit

of the wrongdoer. A bankruptcy courtshould, however, attempt to identify the na-ture and extent of the harm it intends tocompensate in a manner that will permit ajudgment to be made regarding the propor-tionality of the remedy to the injury that hasbeen suffered by those who will benefit fromthe subordination. If that is not possible, thecourt should specifically so find.

[11, 12] Inherent in what we have justsaid is the equitable principle that any subor-dination should not result in a windfall tothose benefitted by it based on injury toothers outside the benefitted class. Stoum-bos v. Kilimnik, 988 F.2d 949, 960 (9th Cir.1993) (‘‘A claim will be subordinated only tothe claims of other creditors whom the ineq-uitable conduct has disadvantaged.’’); Matterof Herby’s Foods, Inc., 2 F.3d 128, 131 (5thCir.1993) (subordination proper only to theextent necessary to offset the harm the cred-itors suffered as a result of the inequitableconduct). This principle is applicable herebecause the Papercraft creditors who soldtheir claims to CVC will not benefit from anysubordination. Accordingly, any injury tothem must play no role in determining theextent of any subordination here of CVC’sclaims. If they consider themselves ag-grieved, they must be left to the other reme-dies afforded them by law.

While we agree with CVC’s criticism of thebankruptcy court’s remedy, we decline toaccept its argument that the record is devoidof any evidence that would support a remedygoing beyond disgorgement of profit. With-out limiting the inquiry of the bankruptcycourt in any way, we note that there isevidence which would support a finding that

6. We do not read the case law cited by theCommittee and the bankruptcy court to suggestthe contrary.

7. In the course of reaching its holding, the dis-trict court concluded that § 510(c) is the exclu-sive remedy available to a bankruptcy court incircumstances like these and that the bankruptcycourt was accordingly without authority to fash-ion a ‘‘disallowance’’ remedy. We do not en-dorse that conclusion. In Pepper v. Litton, 308U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939), theSupreme Court held that the bankruptcy courtexercised its statutory responsibilities as a courtof equity and indicated that a purchase of claimsagainst a debtor in bankruptcy by a fiduciary,

when consistent with principles of equity, mayproperly lead either to the ‘‘disallowance’’ of thefiduciary’s claim or to the subordination thereof.The rationale of Pepper would suggest that underpre-Code law a bankruptcy court was authorizedto disallow a portion of the fiduciary’s claimwhen that would produce an equitable result.We find it unnecessary here to resolve the issueas to whether equitable ‘‘disallowance’’ remainsan available remedy. The Committee soughtsubordination under § 510(c), the district courthas appropriately remanded this matter to thebankruptcy court for application of § 510(c), andneither side maintains that the authority grantedby that section cannot be utilized to fashion ajust remedy.

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the non-selling Papercraft creditors sufferedinjury from CVC’s attempt to control thereorganization. While the bankruptcy courtheld, with record support, that the delaybetween the filing of the petition and thefiling of the disclosure statement was notattributable to CVC’s machinations, it madeno similar finding with respect to the periodof delay between the filing of the disclosurestatement and confirmation of the BDK plan.Moreover, while the bankruptcy court found‘‘no evidence that CVC engaged in conductdesigned to delay the plan process,’’ if CVC’spursuit of its own interest in fact resulted indelay of the confirmation, we do not readthat finding as inconsistent with subordina-tion based on injury resulting from that de-lay. On remand, the bankruptcy courtshould consider whether the record supportsthe proposition that the non-selling creditorssuffered loss as a result of a delay in confir-mation caused by CVC advocacy of its com-peting plan and objections to the BDK plan.

V. CONCLUSION

The judgment of the district court will beaffirmed. In accordance with that judgment,this case will be remanded to the bankruptcycourt for further proceedings consistent withthis opinion.

,

BANCA DEL SEMPIONE,Plaintiff–Appellee,

v.

PROVIDENT BANK OF MARYLAND,Defendant–Appellant,

and

Suriel Finance N.V., Defendant,

Jeanne Farnan, Party in Interest.

United States Council on InternationalBanking, Incorporated, Amicus

Curiae.

No. 97–2025.

United States Court of Appeals,Fourth Circuit.

Argued April 10, 1998.

Decided Nov. 12, 1998.

Transferee of standby letter of creditsued issuer of letter of credit for breach ofcontract, wrongful dishonor, negligent mis-representation, and anticipatory breach. Is-suer moved for summary judgment. TheUnited States District Court for the Districtof Maryland, Walter E. Black, Jr., ChiefJudge, 852 F.Supp. 417, granted motion.Transferee appealed. The Court of Appeals,75 F.3d 951, reversed and remanded. Follow-ing bench trial, the District Court, J. Freder-ick Motz, Chief District Judge, entered judg-ment in transferee’s favor. Issuer appealed.The Court of Appeals, Butzner, Senior Cir-cuit Judge, held that: (1) issuer amendedletter of credit to make it available to trans-feree for life of loan for which it securedinterest payments; (2) first beneficiary didnot act as transferee’s agent when it passedalong to issuer letter of credit terms requiredby transferee; (3) transferee took credit freeof all defenses that issuer had against firstbeneficiary; (4) transferee’s sale of zero cou-pon bonds pursuant to loan agreement wasnot sale of collateral and did not reduceunpaid loan amount; and (5) transferee wasentitled to recover from issuer at defaultinterest rate set by loan agreement, followingborrower’s default, subject to letter of cred-it’s annual cap.

Affirmed.

1. Banks and Banking O191.10Under Maryland’s version of Uniform

Commercial Code (UCC), issuer of standbyletter of credit (LOC) amended LOC to makeit available to beneficiary’s transferee for lifeof loan for which it secured interest pay-ments when issuer provided letter thatchanged LOC’s terms from one year as origi-

77

625IN RE PAPERCRAFT CORP.Cite as 247 B.R. 625 (Bkrtcy.W.D.Pa. 2000)

decision at the forthcoming continued con-firmation hearing of April 27, 2000.

D. CONCLUSIONAn order consistent with our foregoing

conclusions will be entered.

,

In re PAPERCRAFT CORPORATION,Debtors.

Committee of Creditors Holding Unse-cured Claims and Committee of Credi-tors Holding Unsecured Claims as Es-tate Representative of Papercraft,Plaintiffs,

v.Citicorp Venture Capital, Ltd. a New

York corporation, Defendants.Bankruptcy No. 91–20903 JKF.

Adversary No. 91–2642.

United States Bankruptcy Court,W.D. Pennsylvania,Pittsburgh Division.

April 20, 2000.

Unsecured creditors’ committeebrought adversary proceeding against al-leged insider in corporate Chapter 11debtor, for equitable subordination ofclaims that insider had purchased againstdebtor’s estate. The Bankruptcy Court, Ju-dith K. Fitzgerald, Chief Judge, 187 B.R.486, limited defendant’s recovery onclaims, but declined to equitably subor-dinate them, and parties cross-appealed.The United States District Court, Cind-rich, J., 211 B.R. 813, reversed and re-manded, and parties again appealed. TheCourt of Appeals, Stapleton, 160 F.3d 982,affirmed and remanded for additional find-ings. On remand, the Bankruptcy Court,Fitzgerald, Chief Judge, held that: (1) sub-ordination of insider’s claim was consistentwith the Bankruptcy Code and appropriateunder facts of case, and (2) subordinationof insider’s claim, not just to extent neces-sary to prevent insider from recovering

more than discount price which it paid topurchase claims, but to compensate non-selling creditors for lost interest, and forreduction in amounts available to creditorsdue to increased administrative and pro-fessional fees and expenses and to postcon-firmation United States Trustee fees thatdebtor was required to pay, was appropri-ate remedy for insider’s fiduciary breach.

Claim subordinated.

1. Bankruptcy O2968

Partial subordination of corporate in-sider’s claim, to extent necessary to pre-vent insider from recovering more thanthe discount price that it paid to purchaseclaims against Chapter 11 debtor, wasminimum remedy that could be imposedfor insider’s breach of fiduciary duty, inusing knowledge that it had based upon itsequity position in debtor’s parent to ac-quire such claims in effort to promote itsown interests, without ever disclosing itsidentity and status as insider; subordina-tion of insider’s claim was consistent withthe Bankruptcy Code and appropriate un-der facts of case. Bankr.Code, 11U.S.C.A. § 510(c).

2. Bankruptcy O2968

Subordination of insider’s claim, notjust to extent necessary to prevent insiderfrom recovering more than the discountprice which it paid to purchase claimsagainst Chapter 11 estate, but to compen-sate nonselling creditors for lost interest,and for reduction in amounts available tocreditors due to increased administrativeand professional fees and expenses and topost-confirmation United States Trusteefees that debtor was required to pay, wasappropriate remedy for insider’s breach offiduciary duty in using knowledge that itacquired, based on its equity position indebtor’s parent, to purchase such claims ineffort to promote its own interests; insid-er’s actions had significantly delayed reor-ganization process and had resulted,among other things, in administrative ex-

78

626 247 BANKRUPTCY REPORTER

penses of more than $1.2 million. Bankr.Code, 11 U.S.C.A. § 510(c).

Stephan M. Ray, K. John Shaffer, Stut-man, Treister & Glatt, P.C., Los Angeles,CA, Philip E. Beard, Stonecipher, Cun-ningham, Beard & Schmitt, Pittsburgh,PA, for the Committee.

Amy Tonti, Klett, Lieber, Rooney &Schorling, Pittsburgh, PA, Jeffrey Deller,Lawrence J. Slattery, Citicorp Legal Af-fairs, New York City, for Citicorp VentureCapital, Ltd.

Paul K. Vey, Pietragallo, Bosick & Gor-don, Pittsburgh, PA.

George Cheever, Kirkpatrick & Lock-hart, Pittsburgh, PA.

MEMORANDUM OPINION 1

JUDITH K. FITZGERALD, ChiefJudge.Introduction

This matter is before me on remandfrom the Court of Appeals. The facts havebeen detailed in my earlier opinion, 187B.R. 486 (Bankr.W.D.Pa.1995), the DistrictCourt’s opinion, 211 B.R. 813 (W.D.Pa.1997), and the Court of Appeals’ opinion,160 F.3d 982 (3d Cir.1998), and will not berepeated here except to note that CiticorpVenture Capital (‘‘CVC’’), an insider of theDebtor owning a 28 percent equity interestin Debtor’s parent company, bought notesfrom creditors of Debtor through brokerswithout disclosing its identity as a fiducia-ry and insider of the Debtor. My findingsof fact were upheld on appeal by the Dis-trict Court and the Court of Appeals. TheDistrict Court, however, reversed with re-spect to the remedy imposed. The Courtof Appeals affirmed the District Court.The matter is before me now on remandfor consideration of the appropriate reme-

dy in light of the harm visited by CVC’sconduct.

This court ruled that the amount ofCVC’s claim would be limited to theamount it paid for the claims, not to theface value of the notes purchased whichconstituted the claims. I also held thatdistribution to CVC on its reduced claimwould be limited to the percentage distri-bution provided in Debtor’s plan, as ap-plied to the allowed claim. In re Paper-craft Corporation, 187 B.R. 486, 491(Bankr.W.D.Pa.1995).

The District Court, while agreeing thatCVC should not profit from its conduct,reversed on the basis that I had created aper se rule to apply to all insider tradingundertaken without disclosure and had noauthority to do so. The District Courtnoted that § 510 of the Bankruptcy Codeexists to address inequitable conduct byinsiders and that a per se rule ‘‘removesthe principles of equity and applies insteada universal penalty for any instance ofnoncompliance.’’ In re Papercraft Corpo-ration, 211 B.R. 813, 822–24 (W.D.Pa.1997).

The District Court held that my findingof injury to creditors or unfair advantageto CVC based on its inequitable conductwas supported by the evidence and notclearly erroneous. The District Court in-structed me to make findings as to theappropriate amount of the limitation onCVC’s claim, finding that I did not suffi-ciently support the amount of the limita-tion I imposed on CVC’s recovery and didnot reconcile the limitation with the princi-ples of equity. The District Court did

not conclude TTT, however, that CVC’sclaims may not be subordinated by suchan amount but only that any amount ofsubordination beyond the limitation ofCVC’s recovery to the amount paid for

1. The court’s jurisdiction was not at issue.This Memorandum Opinion constitutes myfindings of fact and conclusions of law. Iincorporate the findings made on the recordon July 7, 1999, at the hearing on argumentsto determine whether the record should bereopened on remand. I conclude that there is

no need to reopen the record inasmuch as theparties were afforded the opportunity to liti-gate all issues at trial. Moreover, the recordcontains sufficient evidence of quantifiableharm to subordinate CVC’s claim beyond sim-ply removing its profit, as is explained in theOpinion proper.

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such claims should be supported by fac-tual findings and reconciled with theprinciples of equity.

In re Papercraft Corporation, 211 B.R.813, 827 (W.D.Pa.1997).

The Court of Appeals held that

(1) my findings of inequitable conductwere not clearly erroneous. In fact, theCourt of Appeals held that those ‘‘findings[of fact] make this a paradigm case ofinequitable conduct by a fiduciary as thatconcept has been developed in the caselawTTTT’’, Citicorp Venture Capital, Ltd. v.Committee of Unsecured Creditors (Paper-craft Corp.), 160 F.3d 982, 987 (3d Cir.1998);

(2) the injury or unfair advantage thatwas found to exist by the bankruptcy anddistrict courts was sufficient to justify eq-uitable subordination of CVC’s claim; and

(3) equitable subordination as a remedyis consistent with the Bankruptcy Code.

The Court of Appeals agreed with theDistrict Court that CVC should be de-prived of its profit and ‘‘[t]hat can beaccomplished by subordinating CVC’sclaim under § 510(c) to the extent neces-sary in order to limit its recovery to thepurchase price of the notes.’’ 160 F.3d at991. The Court further stated, however,that it was not requiring ‘‘a specific pricetag’’ to justify every remedy beyond dis-gorgement of profit, id., and that furthersubordination had to be ‘‘supported byfindings that justify the remedy chosen byreference to equitable principlesTTTT’’ sothat an appellate court can determine theproportionality of the remedy to the injurysuffered by those benefitting from the sub-ordination. Id.

The Court of Appeals disagreed with theDistrict Court’s conclusions that § 510(c)is necessarily the exclusive remedy avail-

able to me and disagreed that I am with-out authority to fashion a disallowanceremedy. 160 F.3d at 988, n. 7, citingPepper v. Litton, 308 U.S. 295, 60 S.Ct.238, 84 L.Ed. 281 (1939), a pre-Code case.

However, the Court of Appeals requiredthat the

bankruptcy court should TTT attempt toidentify the nature and extent of theharm it intends to compensate in a man-ner that will permit a judgment to bemade regarding the proportionality ofthe remedy to the injury that has beensuffered by those who will benefit fromthe subordination. If that is not possi-ble, the court should specifically so find.

160 F.3d at 991. The Court held thatinjury to the selling noteholders was not afactor to be considered. It also noted theexistence of evidence that would support afinding that the nonselling noteholderswere injured by CVC’s conduct whichcaused the delay in the confirmation of theplan.

With respect to the elements of equita-ble subordination, the Court of Appealsrecited:

Before ordering equitable subordination,most courts have required a showinginvolving three elements: (1) the claim-ant must have engaged in some type ofinequitable conduct, (2) the misconductmust have resulted in injury to the cred-itors or conferred an unfair advantageon the claimant, and (3) equitable subor-dination of the claim must not be incon-sistent with the provisions of the bank-ruptcy code.

Papercraft Corporation, 160 F.3d 982,986–87 (3d Cir.1998), citing U.S. v. Noland,517 U.S. 535, 116 S.Ct. 1524, 134 L.Ed.2d748 (1996).2 In my opinion of October 12,

2. 11 U.S.C. § 510(c) provides:Notwithstanding subsections (a) and (b)

of this section, after notice and a hearing,the court may—

(1) under principles of equitable subordi-nation, subordinate for purposes of distri-bution all or part of an allowed claim to allor part of another allowed claim or all or

part of an allowed interest to all or part ofanother allowed interest; or

(2) order that any lien securing such asubordinated claim be transferred to theestate.

Only subsection (1) is applicable in the matterbefore us.

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1995, I found the first two elements tohave been satisfied but withheld subordi-nation on the third element because of theform of per se remedy I imposed. In thisopinion, therefore, I address the evidenceto determine whether subordination is con-sistent with the Bankruptcy Code.

[1] An examination of the evidence andthe Court of Appeals’ decision in this caseleaves no question that subordination ofCVC’s claim is consistent with the Bank-ruptcy Code and appropriate under thefacts of this case. Subordination to theextent that it permits CVC to recover nomore than the amount it paid for its claimsis the minimum remedy to be imposed.The Court of Appeals held that CVC’sfiduciary duty required it to ‘‘share every-thing it knew with Papercraft’s board andthe Committee before commencing its pur-chases’’ and that ‘‘[i]ts failure to do sowould alone support a subordination de-priving it of its profit from the note trans-actions.’’ 160 F.3d at 988. At this pointmy task is to identify specific harm, if any,supporting a remedy more drastic thansubordination of the claim beyond remov-ing all profit.

The Court of Appeals opined that wherethe harm to be redressed is not quantifia-ble, ‘‘it should not redound to the benefit ofthe wrongdoer’’ but the court ‘‘should,however, attempt to identify the natureand extent of the harm it intends to com-pensate in a manner that will permit ajudgment to be made regarding a propor-tionality of the remedy to the injury thathas been suffered by those who will benefitfrom this subordination’’, if possible. 160F.3d at 991.Discussion

[2] On the issue of what facts supportequitable subordination and what harm isquantifiable, I find from the trial record as

supplemented by the court’s docket, ofwhich I take judicial notice, that CVC’sconduct resulted in three categories of eco-nomic harm to non-selling noteholder cred-itors. The first two encompass (a) thedelay in confirming the plan which result-ed in harm that is quantifiable in terms ofdollars and (b) the uncertainty over theamount of CVC’s claim distribution there-on that is not easily quantifiable. Thethird relates to the filing of this adversarywhich, through the appellate and remandprocess, has created a delay in fully imple-menting the confirmed plan of over fouryears from the date of my initial opinion(October 12, 1995) to today and of eightyears since this adversary was filed onOctober 31, 1991. At the very least, whilethis adversary has been pursued throughthree courts and five proceedings,3 thisdelay has caused Debtor to incur profes-sional fees and expenses and additionalU.S. Trustee quarterly fees which must bepaid until the case is, inter alia, closed.See 28 U.S.C. § 1930(a)(6); United StatesTrustee v. Gryphon at the Stone Mansion,Inc., 166 F.3d 552, 554 (3d Cir.1999).

1. Delay in Plan Confirmation

In my 1995 opinion I stated that ‘‘[t]herewas no evidence that CVC engaged inconduct designed to delay the plan pro-cess’’, 187 B.R. at 501, and that ‘‘[t]herewas insufficient evidence to establish thatCVC purchased claims with the intent toharm Debtor or defraud its creditors.’’ Id.Notwithstanding lack of evidence thatCVC’s INTENT was to delay the processin order to harm creditors, there was morethan enough evidence to establish thatCVC’s conduct did, in fact, delay it andthat CVC’s intent was to benefit itself overand above other creditors to whom it oweda fiduciary duty not to self-deal. In re-quiring Debtor to furnish the financial in-

3. The motion for summary judgment, twoopinions by this court (excluding this one)and a trial, two appeals, and the hearing afterremand in which the parties presented argu-ments to determine whether the recordshould be reopened in light of the Court ofAppeals’ opinion. After argument and con-sideration of the parties’ briefs and the rec-

ord, I conclude that the record need not bereopened. All of this, however, has resultedin increased attorneys’ fees and costs andincreased post-confirmation U.S. Trustee fees.In addition to litigation expenses, professionalfees have been increased in fulfilling thiscourt’s requirement that status reports befiled during the pendency of the appeals.

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formation described below, CVC causedDebtor to divert its resources from reorga-nization activities it should have undertak-en, i.e., preparing the disclosure statementthat was to accompany what is now calledthe BDK plan of reorganization filed at theoutset of the case.

When a chapter 11 plan which has beenapproved by creditors prepetition is filedearly in the case, a disclosure statementexplaining the basis for the plan should befiled with that plan or shortly thereafter.In fact, the record shows that this was theexpectation of all parties when the casewas filed. The expectation was not real-ized in this case because CVC used itsinsider position to get information fromthe Debtor that it needed in order to facili-tate its claim purchasing. Its claim pur-chases gave CVC leverage in the reorgani-zation process and enabled it to controlvotes which, in turn, facilitated its pur-chase offer. The purchase offer was me-morialized in the unusual occurrence ofDebtor’s filing a competing plan of reorga-nization (the CVC plan) that proposed anentirely different reorganization (i.e., asale to Citicorp) from the BDK plan origi-nally filed by Debtor and which Debtor didnot withdraw. The Committee’s requestsfor information which would enable it toassist Debtor in drafting the disclosurestatement were stymied while Debtor pro-vided information to CVC and delayed pro-viding it to the Committee. See Declara-tion of Samuel M. Victor In Support ofEquitable Subordination of CVC’s Claims(hereafter ‘‘Victor Declaration’’), Adv.Docket # 116 attached to Appendix ofOpening Brief of Committee, Adv. Docket# 189 at ¶ 14. In that way, CVC causedthe delay in Debtor’s filing of the disclo-sure statement for the initial BDK planand created significant unnecessary ex-pense to this estate—in the millions ofdollars in terms of a combination of profes-sional fees, litigation expenses and U.S.Trustee quarterly fees due as the result ofa statutory amendment to 28 U.S.C.§ 1930(a)(6) and the Third Circuit Court ofAppeals’ decision in United States Trusteev. Gryphon at the Stone Mansion, Inc.,

166 F.3d 552 (3d Cir.1999). CVC’s willfulconduct in its own self interest in violationof its fiduciary duties to Debtor, the estateand its creditors is sufficient justificationfor further subordination of its claim toaccount for the increased costs and ex-penses it caused the estate so that itsrecovery is reduced beyond mere removalof its profit.

While CVC was maneuvering behind thescenes, it was tying up Debtor’s resourcesby having Debtor modify financial projec-tions that Debtor had prepared for theCommittee and had turned over to CVC.CVC also obtained projections of workingcapital and income distributions and askedfor a monthly model for an income state-ment, balance sheet and cash flow so thatCVC would know the working capitalchanges and income statement movementwithin a prescribed period of time withrespect to the two valuable operating sub-sidiaries of Debtor (Barth & Dreyfuss andKnomark). 187 B.R. at 493, 496 n. 8. Byvirtue of CVC’s position in having a di-rector on Debtor’s board, CVC’s requestsfor information always received priorityover the Committee’s.

Postpetition, Debtor repeatedly soughtextension of the exclusive period of§ 1121(b). It was during this delay thatCVC purchased sufficient claims to garnera blocking position for the BDK plan andobtained the information upon which tobase its asset purchase offer contained inthe CVC plan it caused Debtor to file.Although there was an attempt to blamethe delay in filing the BDK disclosurestatement on what has been called theSecond Pennsylvania litigation, (essentiallya landlord-tenant dispute) once the disclo-sure statement was filed that litigation re-solved. This court stated several timesduring the case before the disclosure state-ment was filed that there was no reasonfor the Second Pennsylvania litigation tostall the filing of the disclosure statement.Also involved was an issue regardingAmerican Technical Industries, Inc.(‘‘ATI’’) which affected Debtor’s restruc-turing. However, the plan was filed al-most simultaneously with the bankruptcy

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petition, so the ATI issue must have beenconsidered prepetition. See 187 B.R. at501. The ramifications of both issuescould have been explained in the disclosurestatement and treated in the alternative(or as a range of distributions dependingupon the outcome of the litigation) in theplan. Accordingly, there was no basisupon which to delay the filing of the disclo-sure statement caused by either the Sec-ond Pennsylvania or ATI issues. CVC’sconduct, not the Second Pennsylvania liti-gation or ATI issues, caused the delay inplan confirmation.

I find that CVC caused the delay be-tween the filing of the BDK disclosurestatement and the confirmation of theBDK plan. CVC objected to confirmationof the BDK plan, even though it was onewhich CVC helped negotiate prepetition asa member of Debtor’s board of directors.The credible evidence supports the conclu-sion that CVC instigated the stall in orderto further pursue its self interest in havingDebtor present CVC’s alternative plan.This caused specific economic harm andfurther litigation and attendant profession-al fees and costs.

2. Quantifiable Economic Harm

The evidence related to the quantifiableharm includes the following. In his decla-ration submitted with respect to the trial,Samuel Victor of Chanin & Co., financialadvisor to the Committee, stated that inhis opinion the value of BDK (the reorga-nized debtor) stock was depressed due toCVC’s disputed claim to approximately 40percent of the reorganized Debtor. See

Supplemental Remand Brief of the Com-mittee, Adv. Docket # 199, at 13, 16; Vic-tor Declaration at ¶ 22. He also statedthat the delay in confirmation resulted in‘‘foregone interest income on their debtsecurities distributed pursuant to the BDKPlan.’’ Victor Declaration at ¶ 26.4

The trial record reflects that as of Octo-ber, 1994, administrative expenses duringthe delay in plan confirmation totaled$1,248,000.5 Victor Declaration at ¶ 26.Mr. Victor included all administrative costsincurred during the four month delay inthis total because the Committee was notaware of CVC’s actions in purchasing itsclaims. Thus, the Committee was unableto factor out any particular task for whicha fee was incurred as attributable to some-thing other than the delay. See TrialTranscript of November 14, 1995, at 71–72.Moreover, once the CVC plan was filed itbecame necessary for the Committee toaddress it. Any fees and expenses in-curred in connection with the CVC plan,therefore, are attributable to CVC’s undis-closed claims purchases and constitute adirect economic harm to the estate.

The trial evidence also established thatcreditors lost ‘‘approximately $956,250 ontheir debt securities distributed pursuantto the BDK plan.’’ 6 Id. See note 4, supra.At trial Mr. Victor explained that the in-terest was lost because creditors could notreceive their new securities and, therefore,were unable to earn interest. Trial Tran-script of November 14, 1995, at 76–77.

CVC’s willful conduct in its own selfinterest in violation of its fiduciary duties

4. Mr. Victor calculated the interest as follows:‘‘In connection with the BDK Plan, credi-tors received new debt securities with aface value of $33,750,000 with an annualinterest rate on the debt securities of 8.5%.On a monthly basis, this translates into$239,062 of lost income incurred as a resultof the delay in confirming the BDK Plan.Again, assuming a four month delay due tothe actions of CVC, the cost to creditors inthe aggregate is $956,250.’’

Victor Declaration, supra, at ¶ 26b.

5. The figures used herein are based on anestimate of a delay of four months. See Vic-

tor Declaration at ¶ 26. I find the four monthdelay to be a conservative estimate inasmuchas the BDK plan was filed shortly after thebankruptcy case was filed in March of 1991and the plan was not confirmed until January21, 1992.

6. This figure was increased in the Commit-tee’s Supplemental Remand Brief to over $1million in lost interest and dividends andmore than $2 million in postconfirmation at-torneys fees and expenses. However, we ac-cept the trial record as the evidence.

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to Debtor, the estate and the creditors is asufficient basis upon which to further sub-ordinate its claim so that its recovery isreduced beyond the amount it paid for theclaims to account for the increased costs,expenses, and lost interest it caused to theestate.

3. Uncertainty Over the Amount ofCVC’s Claim

This harm is not quantifiable but resultsfrom the creditors of the estate not know-ing what their final distribution will beand, to the extent potential investors in theReorganized Debtor exist, uncertaintywith respect to the extent of CVC’s inter-est in the new company. The latter hasthe potential to affect both existing share-holders and/or purchasers’ negotiatingstrategies and investors’ decisions with re-spect to the new entity. For example,even if there were a market for shares ofthe Reorganized Debtor, and I make nofindings on this point, that market wouldbe adversely affected because no share-holder can know the extent of his holdingsuntil the proceedings in this adversaryconclude and the amount of CVC’s claim isdetermined once and for all.

4. The Adversary and Resulting Litiga-tion

The third type of economic harm causedby CVC’s undisclosed claims purchasingrelates directly to this adversary. TheCommittee filed it to redress the harmcaused by CVC and the fees and costsincurred for its prosecution have furtherminimized available funds in the reorga-nized entity. I cannot calculate the totaldollar cost from the existing record. I willrequire additional submissions to permitthat calculation.

During the pendency of the appealsfrom my 1995 order I required the filing ofperiodic reports with respect to theamount of compensation paid and expensesreimbursed to professionals for servicesrendered to the Committee. The Twenty–Fifth Report on Compensation Paid andExpenses Reimbursed, Bankruptcy casedocket # 950, reflects a total of $3,242,-396.73 incurred post-confirmation in pro-fessional fees and expenses on behalf ofthe Committee from February 15, 1992,7

through January, 2000. From the reports,which set out only amounts paid but not anitemization of the nature of the servicesperformed, I cannot discern whether allthese fees and expenses are attributable tothis Adversary. However, to the extentthey are, CVC’s distribution under theplan should be further subordinated bythat amount. The reports do not includeU.S. Trustee post-confirmation quarterlyfees which have been paid, according tothe docket, through the third quarter of1999.8 See Statement of United StatesTrustee in Response to 08/26/99 Order ofCourt, filed September 24, 1999, maindocket # 948. The Committee will be giv-en an opportunity to file a statement offees and expenses related to this adver-sary, incurred through the date of thisopinion. The Committee also shall be re-quired to obtain and file a statement ofU.S. Trustee post-confirmation quarterlyfees paid. CVC shall have an opportunityto respond to the Committee’s submissionwith respect to the fees and expenses in-curred from the date the adversary wasfiled.9

Other Issues

There are two other issues to be ad-dressed that have been raised by CVC on

7. The plan was confirmed on January 21,1992.

8. The total amount of the U.S. Trustee post-confirmation quarterly fees is not of record atthis time.

9. CVC has no basis upon which to challengethe amount of the U.S. Trustee post-confirma-

tion quarterly fees inasmuch as those fees arestatutory and their accrual is directly causedby CVC’s conduct. That is, but for CVC’swrongdoing, this bankruptcy case would havebeen closed shortly after plan confirmation onJanuary 21, 1992, well before Congressamended 28 U.S.C. § 1930 to require pay-ment of post-confirmation fees.

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this remand. CVC would like me to re-evaluate the value of the BDK units (whatthe confirmed plan provides creditors inclasses 4 and 8 in lieu of cash) 10 in light oftheir fair market value as now evidencedby, CVC alleges, the fact that (1) BDK, thereorganized Debtor, has not yet been solddespite confirmation of the plan eightyears ago and (2) CVC would not be ableto sell its BDK units if it had receivedthem and, therefore, CVC has not receiveda profit. I reject this method of valuationin this instance. Valuation of BDK unitswas determined at the time of plan confir-mation to be $1,228 per unit and no differ-ent valuation was presented at the trial ofthis Adversary even though one issue triedwas equitable subordination. Other (non-selling) creditors have received distribu-tion based on that valuation. It wouldexacerbate the harm to these creditors ifBDK units were valued differently nowand only for CVC’s claim. The operativedate of valuation for plan purposes and forpurposes of this adversary was the date ofplan confirmation. CVC must live withthe situation it created. The DistrictCourt, in examining CVC’s profit, alsoused the values established at the planconfirmation hearing. Accordingly, the

original analysis showing that CVC paid$10,553,541.88 for what turned out to be$15,987,600 in value (BDK Units) underthe plan is adopted for purposes of thisopinion.11

CVC contends that my initial findingthat CVC’s conduct constituted improperusurpation of a corporate opportunity can-not stand unless the committee shows thatthe corporate opportunity would have beentaken advantage of by appropriate parties.I need not consider this matter as all ofmy findings have been sustained on appealand the only issue on remand is whetherCVC’s claim should be equitably subordi-nated beyond removal of its profit. How-ever, I note that whether another entitywould have availed itself of the opportunityis irrelevant. As the Court of Appealspointed out in its opinion,

under Brown v. Presbyterian Ministers,484 F.2d 998, 1005 (3d Cir.1973), theopportunity to purchase the notes was acorporate opportunity of which CVCcould not avail itself, consistent with itsfiduciary duty, without giving the corpo-ration and its creditors notice and anopportunity to participate.

160 F.3d at 987.12

Based on the foregoing, we find thatCVC’s claim should be subordinated so

10. Class 8 consists of all allowed claims thatare equitably subordinated. Class 4 containsall allowed prepetition unsecured claims nototherwise classified in Classes 1, 3, 5, 6, or 7relating to First and Second Priority Notesexcept for equitably subordinated claims. SeeBDK Plan at 9–10, Bankr.No. 91–20903,Docket # 545.

11. In its Reply Brief to the Committee’s Sup-plemental Brief CVC argues that the cashvalue of its claim and recovery should be theappropriate measurement of any profit. CVCfurther asserts that because it did not receivecash and because the valuation of BDK unitsat plan confirmation was only for the purposeof arriving at an enterprise value of the reor-ganized Debtor, it is now necessary to recal-culate value to determine CVC’s profit. ReplyBrief of Citicorp Venture Capital, Ltd. to Sup-plemental Brief of Committee, Docket # 201,at 3–5 and note 11 thereto. CVC has provid-ed no authority for its argument that its claimshould be valued on a basis different from

that of all other creditors. To do so would beinequitable to other creditors, at least underthe circumstances of this case. To achieveparity in distribution in these classes as theBankruptcy Code requires, the court mustmaintain the same valuation method utilizedfor all distributions of BDK units to creditorsin classes entitled to them. All creditors inthe affected classes will sustain the same in-crease or diminution in the value of theirholdings as CVC. Moreover, the parties had afull opportunity to litigate all issues at trialand specifically requested, prior to trial, that Iwithdraw my opinion on summary judgmentso that the equitable subordination issuescould be addressed. I did so and the casewas tried in November of 1994 to addressthese issues. Reopening the record over 5years after trial concluded would violate prin-ciples of finality and create a never-endinground robin of litigation.

12. The court of appeals accepted ‘‘arguendo,that the purchase of notes at a discount by a

85

633IN RE MOUNTAINEER COAL CO., INC.Cite as 247 B.R. 633 (Bkrtcy.W.D.Va. 2000)

that its profit is removed and the nonsell-ing creditors are compensated for (1) lostinterest, (2) the reduction in amounts avail-able to creditors as reflected in the in-creased administrative and professionalfees and expenses and (3) post-confirma-tion U.S. Trustee fees the Debtor wasrequired to pay. To the extent CVC hasan allowed Class 4 (unsubordinated) claimand receives BDK units, it will share in thedistribution to that class.

,

In re MOUNTAINEER COALCOMPANY, INC.,

Debtor.

Mountaineer Coal Company,Inc., Plaintiff,

v.

Liberty Mutual InsuranceCo., Defendant.

Bankruptcy No. 7–94–00229–WSB–11.Adversary No. 7–96–00097.

United States Bankruptcy Court,W.D. Virginia,

Roanoke Division.

April 11, 2000.

Chapter 11 debtor brought adversaryproceeding to recover, among other things,for workers’ compensation carrier’s allegedviolation of automatic stay. The Bankrupt-cy Court, William F. Stone, Jr., J., heldthat: (1) carrier improperly exercised con-trol over property of estate in willful viola-tion of automatic stay; (2) carrier did notviolate stay simply by failing, even withoutgood cause, to pay over to debtor-in-pos-session or trustee a debt which it owed to

estate; and (3) debtor was not entitled topunitive damages.

So ordered.

1. Workers’ Compensation O1063Employer whose unfavorable loss his-

tory prevented it from obtaining workers’compensation coverage on its own, andwhich succeeded in obtaining coverageonly by having a sister company obtainpolicy and then having itself added as ad-ditional insured, had to be deemed jointlyand severally liable, along with sister com-pany, for premiums that became due pre-petition; employer received substantialbenefit, given its own inability to obtaininsurance, by being added as additionalinsured on sister company’s policy, andnever objected to insurer’s issuance ofjoint premium statements, in which premi-ums were calculated based on total num-ber of persons employed by both compa-nies.

2. Bankruptcy O2837Though related companies that were

named as insureds on workers’ compensa-tion insurance policy had to be regarded asjointly and severally liable for any premi-ums that became due prepetition, onceChapter 11 petitions were filed and sepa-rate bankruptcy estate was created foreach company, insurer was on notice ofneed to treat each company separately,and had no right to apply overpayment byone company postpetition to reduce itsclaim against the other company for pre-mium associated with its postpetition oper-ations.

3. Bankruptcy O2588Premium payments which Chapter 11

debtor made postpetition to its workers’compensation carrier, subject to contractu-

fiduciary of a debtor in bankruptcy is notimproper under all circumstances.’’ 160F.3d at 987. However, it recognized that‘‘[t]here is authority arguably to the contrary,but, in light of the findings of the bankruptcycourt, we TTT do not[ ] resolve the issuehereTTTT [I]t is clear TTT that a fiduciary may

ordinarily purchase debt claims in fair trans-actions during the solvency of the corpora-tion.’’ Id. at note 3 (citations omitted). How-ever, ‘‘the lower federal courts seem agreedthat he cannot purchase after judicial pro-ceedings for the relief of a debtor are expect-ed or have begun.’’ Id.

86

In re Papercraft Corp., Not Reported in F.Supp.2d (2002)

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 1

2002 WL 34702177Only the Westlaw citation is currently available.

United States District Court,W.D. Pennsylvania.

In re PAPERCRAFT CORPORATION,a Pennsylvania corporation, Debtor.

Citicorp Venture Capital, Ltd., aNew York corporation, Appellant,

v.Committee of Creditors Holding UnsecuredClaims, and Committee of Creditors HoldingUnsecured Claims as Estate Representative

of Papercraft Corporation, Appellee.

Civil Action No. 00–2181.|

Bankruptcy No. 91–20903 JKF.|

Adversary Proc. No. 91–2642.|

Feb. 20, 2002.

MEMORANDUM ORDER

ROBERT J. CINDRICH, District Judge.

*1 This action arises from an April 20, 2000 andSeptember 21, 2000 Memorandum Opinion and Orderof the United States Bankruptcy Court for the WesternDistrict of Pennsylvania (the “Bankruptcy Court”),Bankruptcy Judge Judith K. Fitzgerald presiding. In rePapercraft Corp., 247 B.R. 625 (Bankr.W.D.Pa. Apr.20,2000) (“April 20 Order”) (cited as “247 B.R. at ___”); Inre Papercraft Corp., 253 B.R. 385 (Bankr.W.D.Pa. Sep.21,2000) (“September 21 Order”) (cited as “253 B.R. at ___”).Pending before the Court is an appeal of the April 20and September 21 Orders by Appellant Citicorp VentureCapital, Ltd. (“CVC”). This Court has jurisdiction overthis matter pursuant to 28 U.S.C. Section 158(a) (1) andin accordance with Bankruptcy Rule 8001 as the appealarises out of a final judgment entered by the BankruptcyCourt.

I. BackgroundThis appeal arises out of the chapter 11 case of PapercraftCorporation (“Papercraft” or “Debtor”), which was filed

in March 1991 in the United States Bankruptcy Courtfor the Western District of Pennsylvania (Fitzgerald, J.).The Committee of Creditors Holding Unsecured Claimsand Committee of Creditors Holding Unsecured Claimsas Estate Representative of Papercraft Corporation (the“Committee”), the official unsecured creditors' committee

in Papercraft's chapter 11 case, 1 commenced this actionin October 1991 alleging that CVC, while an insider

and fiduciary of Papercraft, 2 attempted to take controlof Papercraft's assets and reap a significant profit atthe expense of other creditors by secretly purchasing$60,849,299.10 in claims against Papercraft for the deeplydiscounted amount of $10,553,541.88. The Committeecontend that CVC breached its fiduciary duty toPapercraft and Papercraft's creditors by engaging in suchself-dealing, and therefore sought to have CVC's claimsequitably subordinated pursuant to Section 510(c) of theBankruptcy Code, 11 U.S.C. Section 510(c).

After the close of a three-day trial, the BankruptcyCourt issued an October 12, 1995 Memorandum Opinionand Order, In re Papercraft Corp., 187 B.R. 486(Bankr.W.D.Pa.1995) (cited as “187 B.R. at ___”) whereinthe Court made detailed findings of fact. In brief,Papercraft was experiencing difficulty meeting the termsof certain debt obligations in the fall of 1999. An informalcommittee of Papercraft creditors was formed and aftermonths of negotiations, the committee and Papercraftreached an agreement on a restructuring plan known asthe “BDK plan” which was to be filed in conjunctionwith a voluntary chapter 11 petition. The creditor's claimsagainst Papercraft would then be converted into “BDKunits”, consisting of stock and bonds issued by the newventure, in proportion to an estimated value of suchunits. Papercraft's directors, including CVC, unanimouslyapproved the BDK plan in March 1991. Although thechapter 11 petition and BDK plan were filed in March1991, the required Papercraft disclosure statement, aprerequisite to confirmation of the plan, was not fileduntil October 1991. CVC secretly purchased the $60.8million in claims during this delay, more than 40% ofthe outstanding unsecured claims of Papercraft. Despiteits earlier support of the BDK plan, CVC objected tothe confirmation of the BDK plan and offered its owncompeting plan calling for a CVC purchase of Papercraft'sassets.

*2 The Bankruptcy Court found that CVC's purchasesat a discount, without disclosure, while an insider,

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constituted breaches of CVC's fiduciary duty to Papercraftand its creditors. 187 B.R. at 498–99. As a result, theBankruptcy Court created and applied a per se ruleprohibiting a debtor's insider from purchasing claimsagainst it without disclosing his or her identity andrelationship with the debtor. The Court held that whenclaims are purchased by insiders without making suchdisclosures to the debtor and creditors, “the insider'snewly acquired claim will be limited to the amount paidby the acquiring insider and recovery on the claim willbe limited to the percentage distribution provided inthe plan, as applied to the allowed claim.” Id. at 491.Under the Bankruptcy Court's holding, which limitedCVC's allowed claim to the $10,553,541.88 price withrecovery under the plan gauged to this amount, CVCwould recover only about $3,063,600 in BDK units onits claims, approximately $7,489,941.88 less than what itpaid. If CVC's claims were allowed at face, however, itwould recover approximately $15,987,600 in BDK units,using the BDK plan's estimated value of BDK units. Thus,using the BDK plan's estimated value of BDK units, CVCstood to gain $5,434,058.12 in profit on the claims.

The Bankruptcy Court held that further subordinationof CVC's claims pursuant to the principles of equitablesubordination codified at 11 U.S.C. Section 510(c) wasnot appropriate. Id. at 501. The Court correctly notedthat equitable subordination of a creditor's claim is proper'when (1) the creditor has engaged in inequitable conduct;(2) such misconduct caused injury to other creditors or thedebtor or resulted in an unfair advantage to the creditor;and (3) subordination of the creditor's claim is consistentwith the Bankruptcy Code. Id. at 502 (citing Matter ofMobile Steel Co., 563 F.2d 692, 700 (5th Cir.1977). TheBankruptcy Court found that the first two elements hadbeen satisfied. Id. at 502. As to the third element, however,the court concluded that the principles of fairness hadalready been adhered to because it was limiting CVC'sallowed claim to the amount it paid for such claim. Id.Thus, further subordination of CVC's claim would not beconsistent with the Bankruptcy Code. Id.

On appeal, we affirmed the Bankruptcy Court's factualfindings, i.e., that CVC breached its fiduciary duties,acted inequitably, caused injury to Papercraft and itscreditors and gained an unfair advantage. In re PapercraftCorp., 211 B.R. 813 (W.D.Pa.1997) (cited as “211 B.R. at___”). Although we agreed that pursuant to Section 510(c)CVC's recovery should at a minimum be limited to the

amount paid for such claims to eliminate any potentialprofits on the claims, we reversed the Bankruptcy Court'sruling as to the application of a per se rule finding noauthority for the creation of such a rule. Id. at 821, 826.Accordingly, we remanded the case to the BankruptcyCourt for a further finding on the amount CVC's claimsshould be subordinated beyond the amount paid for suchclaims, if at all, pursuant to the principles of equitablesubordination. Id. at 827. Both parties appealed ourdecision.

*3 The United States Court of Appeals for the ThirdCircuit affirmed our decision concluding that CVCviolated its fiduciary duty in a number of significantrespects and that CVC's misconduct caused harmjustifying subordination. Citicorp Venture Capital, Ltd. v.Committee of Creditors Holding Unsecured Claims, 160F.3d 982, 988–90 (3d Cir.1998) (cited as “160 F.3d at___”). The Court of Appeals affirmed the BankruptcyCourt's findings of fact concluding that such “findingsmake this a paradigm case of inequitable conduct bya fiduciary as that concept has been developed in thecase law, and we believe that further elaboration is notrequired.” Id. at 987. The Court of Appeals further held:

At a minimum, the remedy here should deprive CVCof its profit on the purchase of the notes. That canbe accomplished by subordinating CVC's claims underSection 510(c) to the extent necessary in order tolimit its recovery to the purchase price of the notes.Further subordination may be appropriate, but only ifsupported by findings that justify the remedy chosen byreference to equitable principles.

By so concluding, we do not suggest that a bankruptcycourt can never impose a subordination remedy beyonddisgorgement of profit without putting a specific pricetag on the loss suffered by those who will benefit fromthe subordination. Such quantification may not alwaysbe feasible and, where that is the case, it should notredound to the benefit of the wrongdoer. A bankruptcycourt should, however, attempt to identify the natureand extent of the harm it intends to compensate ina manner that will permit a judgment to be maderegarding the proportionality of the remedy to theinjury that has been suffered by those who will benefitfrom the subordination.

* * *

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While we agree with CVC's criticism of the bankruptcycourt's remedy, we decline to accept its argumentthat the record is devoid of any evidence that wouldsupport a remedy going beyond disgorgement of profit.Without limiting the inquiry of the bankruptcy courtin any way, we note, that there is evidence whichwould support a finding that the non-selling Papercraftcreditors suffered injury from CVC's attempt to controlthe reorganization. While the bankruptcy court held,with record support, that the delay between the filingof the petition and the filing of the disclosure statementwas not attributable to CVC's machinations, it madeno similar finding with respect to the period ofdelay between the filing of the disclosure statementand confirmation of the BDK plan. Moreover, whilethe bankruptcy court found “no evidence that CVCengaged in conduct designed to delay the plan process,”if CVCs pursuit of its own interest in fact resulted indelay of the confirmation, we do not read that findingas inconsistent with subordination based on injuryresulting from that delay. On remand, the bankruptcycourt should consider whether the record supports theproposition that non-selling creditors suffered loss asa result of a delay in confirmation caused by CVCadvocacy of its competing plan and objections to theBDK plan.

*4 Id. at 991–92.

On remand, the Bankruptcy Court found that inaccordance with the opinion of the Court of Appeals,CVC's maximum recovery cannot exceed $10,553,541.88,i.e., the cost of CVC's claims. 253 B.R. at 390. TheBankruptcy Court also found that:

CVC's conduct resulted in threecategories of economic harm to non-selling noteholder creditors. Thefirst two encompass (a) the delay inconfirming the plan which resultedin harm that is quantifiable in termsof dollars and (b) the uncertaintyover the amount of CVC's claimdistribution thereon that is not easilyquantifiable. The third relates tothe filing of this adversary which,through the appellate and remandprocess, has created a delay in fullyimplementing the confirmed plan of

over four years from the date of mayinitial opinion (October 12, 1995) totoday and of eight years since thisadversary was filed on October 31,1991. At the very least, while thisadversary has been pursued throughthree courts and five proceedings,this delay has caused debtor to incurprofessional fees and expenses andadditional U.S. Trustee quarterlyfees which must be paid until thiscase is, inter alia, closed.

247 B.R. at 628 (footnote and citations omitted).The Bankruptcy Court further found that CVC'smisconduct resulted in at least a four month delay inconnection with the first category of harm—delay inconfirmation of the BDK plan. Id. at 630. The BankruptcyCourt held, therefore, that CVC's recovery would befurther subordinated by (1) $1,248,000 for additionaladministrative expenses incurred during the four monthdelay; (2) $956,250 for interest and dividends lost bycreditors during the delay; (3) $4,750 in United StatesTrustee fees incurred and/or paid by the Papercraftbankruptcy estate (the “Estate”) from the date ofconfirmation through May 2, 2000; and (4) $2,974,373.15for professional fees and expenses incurred and/or paidby the Estate or BDK through April 30, 2000 for atotal additional subordination of $5,183,373.15. 253 B.R.at 390. With a starting point of $10,553,541.88 (CVC'sactual investment), minus $5,183,373.15 in additionalsubordination, CVC's total unsubordinated distributionequals $5,370,168.73. Id.

II. Standard of ReviewWhile acting as an appellate court for a bankruptcyappeal, we may not set aside the BankruptcyCourt's factual findings unless we conclude that thedetermination was “clearly erroneous.” Bankruptcy Rule8013; Fellheimer, Eichler & Braverman, P.C. v. CharterTechnologies, Inc., 57 F.3d 1215, 1223 (3d Cir.1995);First Jersey Nat'l Bank v. Brown (In re Brown),951 F.2d 564, 567 (3d Cir.1991). Consequently, weaccept the ultimate determination of the fact finder“unless that determination either is completely devoidof minimum evidentiary support displaying some hueof credibility or bears no rational relationship to thesupportive evidentiary data.” Hoots v. Commonwealthof Pennsylvania, 703 F.2d 722, 725 (3d Cir.1983). In

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considering the evidence, “due regard shall be giventhe opportunity of the bankruptcy court to judge thecredibility of the witnesses.” Bankruptcy Rule 8013;Fellheimer, 57 F.3d at 1223.

*5 Our review of the legal determinations made by theBankruptcy Court is plenary. Brown v. Pennsylvania St.Employees Credit Union (In re Brown), 851 F.2d 81, 84(3d Cir.1988). Mixed questions of law and fact must bedivided into their component parts and the appropriatestandard applied to each. See Universal Minerals, Inc. v.C.A. Hughes & Co., 669 F.2d 98, 101–103 (3d Cir.1981).

III. AnalysisCVC raises numerous issues in its appeal which we addressin turn.

A. American RuleCVC argues that the Bankruptcy Court erred inthe subordination of its claims for $2,974,373.15 inprofessional fees and expenses incurred and/or paid bythe Estate. CVC contends that absent some statutory orcontractual authorization, the American Rule requireslitigants to bear their own attorneys' fees.

As the Bankruptcy Court rightly reasoned, the AmericanRule does not apply under the circumstances of the instantcase. The Committee is not asking for the payment ofattorneys' fees as such. The fees and expenses at issuedepleted funds that otherwise would have been availableto creditors but for CVC's misconduct in breaching itsfiduciary duty. To ensure the distribution creditors shouldhave received absent CVC's misconduct, it is necessaryto restore the Estate's furds “by subordinating CVC'sshare of distribution by the amount of fees and expensesincurred by professionals who are to be paid from estateassets that would not have been incurred but for CVC'sbreach of its fiduciary duty.” 253 B.R. at 391.

CVC argues in the alternative that even if fees areproperly recoverable, the Bankruptcy Court failed tomake a finding that the fees awarded were reasonable.CVC contends that the party seeking fees has the burdenof establishing that the fees sought are reasonable andthat the court must make a finding that such fees arereasonable before making an award.

In contrast to the typical cases involving fee-shiftingstatutes, such as federal employment discrimination andcivil rights cases where a successful plaintiff is entitled toan award of reasonable attorneys' fees, the BankruptcyCourt determined that it was appropriate to subordinateCVC's claims by the fees and expenses actually incurredas a result of the instant litigation to put Papercraft'screditors in the position they would have been in but forCVC's misconduct. Somewhat akin to the legal maximthat a tortfeasor takes his victim as he finds him, CVCmust live with the fees actually incurred by the Estate evenif those fees, in hindsight, were high in comparison to somegeneral market rate.

In any event, there is nothing that would indicate thatthe $2.9 million figure is unreasonable. The BankruptcyCourt required the Committee to file a statement of feesand expenses that had been incurred in connection withthe adversary proceeding and gave CVC an opportunityto file objections to the same. Other than one conclusory,general objection to the amount of one category of fees,however, CVC does not identify any specific rates orhours that it objects to as being unreasonable. Indeed,given the protracted litigation surrounding this 1991 case,which entailed numerous hearings, a full evidentiary trial,three appeals and filings measured by the yard, all ofwhich was caused by CVC's illegal self-dealing, the $2.9million in fees and expenses is not out of line withfigures we have seen in cases of similar duration andvolume of filings and proceedings. CVC also argues thatseveral categories of fees should not be allowed becausethey cannot be attributed to any conduct by it. CVCmade this same argument before the Bankruptcy Courtwhich held in response “that none of the amount at issueincurred during preconfirmation delay or associated withthe Adversary would have been incurred but for CVC'sconduct. Therefore, all of it is attributable to CVC andCVC's claim is to be subordinated by that amount.” 253B.R. at 390. This is a finding of fact by the BankruptcyCourt which we must accept unless such determinationis either “completely devoid of minimum evidentiarysupport displaying some hue of credibility or bears norational relationship to the supportive evidentiary data.”Hoots, 703 at 725. The Bankruptcy Court's finding mostcertainly bears a rational relationship to the evidence. Forexample, CVC used its position on Papercraft's boardof directors to arrange for the preparation of financialreports and other information by Papercraft personnel,without the Committee's knowledge, to use in preparation

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of a competing plan. 247 B.R. at 628–29. As a result,the Committee's requests for information were stymiedwhile Papercraft was providing information to CVC. Id.at 629. All the while, CVC was surreptitiously purchasingclaims. 160 F.3d at 985. CVC submitted its competing planonly to withdraw it shortly after the Bankruptcy Courtapproved the BDK plan. Id. CVC then filed objections tothe BDK plan. Id. Indeed, based on the facts as found bythe Bankruptcy Court, and later affirmed by this court andthe Court of Appeals, it is quite clear that CVC has actedat every turn to stymie the fair and efficient administrationof the Estate in an effort to capitalize on its self-dealing.

*6 Lastly, CVC maintains that it should not beresponsible for any of the fees and expenses associatedwith the various appeals and should only be accountablefor fees and expenses incurred during proceedings beforethe Bankruptcy Court. We disagree. None of theseproceedings would have been necessary, including theseappeals, but for CVC's misconduct. Papercraft's creditor'sshould not have to bear the expanse of these appeals whichwere caused solely by CVC's actions. Subordination ofCVC's claims for these fees is necessary to make the Estatewhole.

Accordingly, the Bankruptcy Court's decision tofurther subordinate CVC's claims by $2,974,373.15 forprofessional fees and expenses will be affirmed.

B. Delay Costs

1. Delay Between Filing of Petition and DisclosureStatement

CVC argues that the Bankruptcy Court did not makesufficient findings to support subordination of its claimsfor the delay between the filing of the bankruptcy petitionand the disclosure statement. CVC further contendsthat the evidence does not support a finding that it isresponsible for any such delay.

In its initial decision, the Bankruptcy Court commentedthat it had found no evidence that CVC had engaged inconduct designed to delay the plan process. 187 B.R. at501. The Court of Appeals held, however, that althoughthe Bankruptcy Court had already made a finding of nodesigned delay, “if CVC's pursuit of its own interest infact resulted in delay of the confirmation, we do not readthat finding as inconsistent with subordination based onthe delay.” 160 F.3d at 992. The Bankruptcy Court was

instructed to consider on remand, therefore, “whetherthe record supports the proposition that the non-sellingcreditors suffered loss as a result of a delay in confirmationcaused by CVC advocacy of its competing plan andobjections to the BDK plan.” Id. The Bankruptcy Courtdid just that.

The Bankruptcy Court explained its ruling as follows:

When a chapter 11 plan whichhas been approved by creditorsprepetition is filed early in the case,a disclosure statement explainingthe basis for the plan should befiled with that plan or shortlythereafter. In fact, the record showsthat this was the expectation ofall parties when the case was filed.The expectation was not realizedin this case because CVC used itsinsider position to get informationfrom the Debtor that it neededin order to facilitate its claimpurchasing. Its claim purchases gaveCVC leverage in the reorganizationprocess and enabled it to controlvotes which, in turn, facilitated itspurchase offer. The purchase offerwas memorialized in the unusualoccurrence of Debtor's filing acompeting plan of reorganization(the CVC plan) that proposedan entirely different reorganization(i.e., a sale to Citicorp) fromthe BDK plan originally filed byDebtor and which Debtor didnot withdraw. The Committee'srequests for information whichwould enable it to assist Debtorin drafting the disclosure statementwere stymied while Debtor providedinformation to CVC and delayedproviding it to the Committee. SeeDeclaration of Samuel M. Victor InSupport of Equitable Subordinationof CVC's Claims (hereafter “VictorDeclaration”), Adv. Docket # 116attached to Appendix of OpeningBrief of Committee, Adv. Docket #189 at P 14. In that way, CVC caused

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the delay in Debtor's filing of thedisclosure statement for the initialBDK plan and created significantunnecessary expense to this estate—in the millions of dollars in terms ofa combination of professional fees,litigation expenses and U.S. Trusteequarterly fees due as the result of astatutory amendment to 28 U.S.C.Section 1930(a)(6) and the ThirdCircuit Court of Appeals' decisionin United States Trustee v. Gryphonat the Stone Mansion, Inc., 166 F.3d552 (3d Cir.1999).

*7 247 B.R. at 629.

Federal Rule of Civil Procedure 52(a) requires aBankruptcy Court to “find the facts specifically and stateseparately its conclusions of law thereon ....“

One of its chief purposes is to ‘aid the appellatecourt by affording it a clear understanding of theground or basis of the decision of the trial court.’ 9C. WRIGHT & A. MILLER, FEDERAL PRACTICEAND PROCEDURE, Section 2571, at 679. Wherethe trial court provides only conclusory findings,unsupported by subsidiary findings or by an explicationof the court's reasoning with respect to relevant facts, areviewing court simply is unable to determine whetheror not those findings are clearly erroneous.

Lyles v. United States, 759 F.2d 941 (D.C.Cir.1985)(citations and footnote omitted). Despite CVC'scontention to the contrary, the Bankruptcy Court'sdetailed findings as to the delay are very specific and mostcertainly satisfies Rule 52(a)'s requirements. A reviewingcourt would have a clear understanding of the groundor basis of the Bankruptcy Court's decision and the factswhich the court relied on.

As to the sufficiency of the evidence, CVC selectivelycites certain facts in support of its version of eventsand argues that its activities did not cause a delay.The Bankruptcy Court, however, is the fact finder inthis case and reached a different conclusion. Indeed, theBankruptcy Court made detailed findings of fact as toCVC's covert commandeering of Papercraft's resources toassist in the preparation of a competing plan and citestestimonial evidence of Samuel M. Victor indicating that

CVC's actions caused a delay. Although CVC would haveus weigh this evidence differently, we cannot say thatthe Bankruptcy Court's finding on this point was clearly

erroneous. 3

We find, therefore, that the Bankruptcy Court's decisionto subordinate CVC's claims for the delay between thefiling of the bankruptcy petition and plan confirmationwas not clearly erroneous. Accordingly, the BankruptcyCourt's ruling on this issue will be affirmed.

2. Delay Between Filing of Disclosure Statement andPlan Confirmation

CVC argues that the there is insufficient evidence to find'that it is responsible for any delay between the time ofthe filing of the disclosure statement and confirmation ofthe BDK plan. More specifically, CVC contends that theBankruptcy Court's finding that CVC instigated a stallin order to pursue its self-interest in having Papercraftpresent its competing plan was based solely on the fact thatit objected to the BDK plan. CVC contends, therefore,that the only fact cited in support of the finding thatit was responsible for the delay was renounced by theBankruptcy Court.

We disagree with CVC's assessment of the significanceof the Bankruptcy Court's comment. The BankruptcyCourt did state in its April 2000 opinion that CVC causedthe delay, but subsequently stated in its September 2000opinion that CVC's objections “did not necessarily causea delay.” 253 B.R. at 389 n. 8; see 247 B.R. at 630. In itsSeptember 2000 opinion, the Court stated:

*8 After the BDK disclosurestatement was approved, theplan confirmation hearing wasset but CVC used its newposition as a noteholder to assertobjections to the plan, despitehaving participated in approvingit prepetition. Although CVC'sassertion of objections to the plandid not necessarily cause a delaybetween the filing of the disclosurestatement and confirmation of theplan, its conduct led to increasedprofessional fees in this case becauseits objections had to be addressedand plan language changed to

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reflect a compromise reached by theparties. 253 B.R. at 389 n. 8. Thus,CVC put itself in a position viaself-dealing in Papercraft claims toraise objections to the BDK planin pursuit of its self-interest. CVC'sobjections, in turn, caused the Estateto incur additional fees and expensesto the detriment of the non-sellingcreditors separate and apart fromany expenses caused by a delay. Inother words, CVC would not havebeen in a position to pursue its self-interest by raising objections to theBDK plan absent its self-dealing.Thus, the added fees and expensesthe Estate was forced to incur asa result of CVC's objections, werefairly included in the subordinationof CVC's claims.

Moreover, we do not interpret the September 2000opinion as a retraction of the Bankruptcy Court's earlierfinding that CVC caused a delay in plan confirmation. TheCourt stated in the April 2000 opinion:

I find that CVC caused thedelay between the filing of theBDK disclosure statement and theconfirmation of the BDK plan.CVC objected to confirmation ofthe BDK plan, even though it wasone which CVC helped negotiateprepetition as a member of Debtor'sboard of directors. The credibleevidence supports the conclusionthat CVC instigated the stall inorder to further pursue its selfinterest in having the Debtor presentCVC's alternative plan. This causedspecific economic harm and furtherlitigation and attendant professionalfees and costs.

247 B.R. at 630. The Court's discussion of delay in theSeptember 2000 opinion, with regard to delay betweenthe filing of the petition and disclosure statement anddelay between the filing of the disclosure statement andplan confirmation, appears under the heading “Delay in

Confirmation.” 253 B.R. at 388–89. The Court opinedthat,

[t]he fair inference from the eventsis that CVC used its statuson Debtor's board of directorsand on Debtor's affiliates' boardof directors, together with itsthen newly acquired vote blockingposition for the BDK plan toinfluence Debtor to file the CVCplan, thereby delaying the entireprocess.

253 B.R. at 388 n. 7. 4 Shortly thereafter, the Courtmakes the statement that CVC's assertion of objections“did not necessarily cause a delay” as quoted in fullabove. See 253 B.R. at 388–89. In this context, thestatement “did not necessarily cause a delay” is more fairlyinterpreted as conveying the opinion that CVC's conductcaused economic harm regardless of whether such conductactually caused a delay. Indeed, as we explain above,CVC's objections to the BDK plan did cause economicharm to the non-selling creditors regardless of whetherthose objections caused any delay between the filing of thedisclosure statement and plan confirmation.

*9 We find, therefore, that the Bankruptcy Court'sdecision to subordinate CVC's claims for the delaybetween the filing of the bankruptcy petition and planconfirmation was not clearly erroneous. Accordingly, theBankruptcy Court's ruling on this issue will be affirmed.

C. Calculation of DamagesCVC argues that the Bankruptcy Court's calculation ofdamages was erroneous.

1. Pre–Confirmation Administrative ExpensesCVC argues that the Bankruptcy Court erroneouslyassessed all of the $1,248,000 in administrative expensesagainst its claims. More specifically, CVC referencesvarious categories of expenses arguing that certain chargesare not attributable to any delay caused by it and/orwould have been incurred regardless of any delay. CVCmaintains that it is responsible for at most $584,812.19 forthese expenses.

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The Bankruptcy Court's finding on administrativeexpense is subject to a clearly erroneous standard. Thus,we must accept the Bankruptcy Court's finding unlessit is completely devoid of minimum evidentiary supportor bears no rational relationship to the supportiveevidentiary data. The Bankruptcy Court concluded asfollows in connection with administrative expenses:

The trial record reflects that as of October,1994, administrative expenses during the delay inplan confirmation totaled $1,248,000.[F N5] VictorDeclaration at P 26. Mr. Victor included alladministrative costs incurred during the four monthdelay in this total because the Committee was not awareof CVC's actions in purchasing its claims. Thus, theCommittee was unable to factor out any particulartask for which a fee was incurred as attributable tosomething other than the delay. See Trial Transcript ofNovember 14, 1995, at 71–72. Moreover, once the CVCplan was filed it became necessary for the Committee toaddress it. Any fees and expenses incurred in connectionwith the CVC plan, therefore, are attributable to CVC'sundisclosed claims purchases and constitute a directeconomic harm to the estate.

[F N5] The figures used herein are based on an estimateof a delay of four months. See Victor Declaration atP 26. I find the four month delay to be a conservativeestimate inasmuch as the BDK plan was filed shortlyafter the bankruptcy case was filed in March of 1991and the plan was not confirmed until January 21, 1992.

247 B.R. at 630. Thus, the Bankruptcy Court arrived atthe $1.2 million dollar figure based on the supportiveevidence of record. Contrary to CVC's position, theBankruptcy Court did not have to arrive at this figurewith precise accuracy. See 160 F.3d at 991 (“[W]edo not suggest that a bankruptcy court can neverimpose a subordination remedy beyond disgorgement ofprofit without putting a specific price tag on the losssuffered ....”). CVC's surreptitious self-dealing inhibitedthe Committee's ability to factor out any particular taskfor which a fee was incurred as attributable to somethingother than the delay. Thus, the difficulty at arriving at suchquantification should not redound to the benefit of CVC—the wrongdoer in this case. Id. (Specific “quantificationmay not always be feasible and, where that is the case, itshould not redound to the benefit of the wrongdoer.”).

*10 We find, therefore, that the Bankruptcy Court'sdecision to subordinate CVC's claims for $1,248,000in administrative expenses was not clearly erroneous.Accordingly, the Bankruptcy Court's finding on this issuewill be affirmed.

2. Lost InterestCVC argues that the Bankruptcy Court erroneouslycalculated the amount of lost interest income attributable

to the delay. 5

Under the BDK plan, creditors expected to receive onconfirmation, and did receive, new debt securities witha face value of $33,750,000 bearing interest at the rateof 8.5% for ten years. The Bankruptcy Court foundthat CVC's actions caused a four month delay in planconfirmation, which in turn resulted in a four monthdelay in the issuance of the new debt securities. TheBankruptcy Court concluded, therefore, that the amountof lost interest attributable to the delay was $965,250, theamount of interest that would have been earned on thenew notes over a four month period. The calculation wasas follows:

— $33,750,000 x 8.5% = $2,868,750 interest per year

— $2,868,750 / 12 months = $239,062.50 interest permonth

— $239,062.50 x 4 months = $956,250

253 B.R. at 389.

CVC contends that the new debt securities issued underthe BDK plan were ten year notes, and were alwaysintended to be ten year notes. Thus, the creditors expectedto receive on confirmation, and did receive, a note bearinginterest at the rate of 8.5% for ten years, not nine yearsand eight months. CVC argues, therefore, that the fourmonth delay only resulted in the loss of the time value ofthe first four months of interest on the new debt securities.We agree.

The creditors expected to receive, and did receive, ten yearnotes bearing interest at 8.5%. In other words, the totalamount of interest that the creditors will receive on thesenotes would not be different regardless of whether theyhad been issued four months earlier. If the four monthdelay had not occurred, for example, the creditors would

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not have received $33,750,000 in notes bearing interest ata rate of 8.5% for ten years and four months. Likewise, asCVC points out, the creditors did not receive notes bearinginterest at a rate of 8.5% interest for a period of nine yearsand eight months because of the delay. Thus, the onlyharm the creditors could have suffered as a result of thefour month delay was the loss of the time value moneyon the accrual of the first four months of interest earnedon the notes. We agree with CVC that the simplest wayto calculate this amount is to take the monthly interestof $239,062 and calculate the interest that would haveaccrued had the first semi-annual installment been madefour months earlier. Taking the rate assigned to the notes,8.5% per annum, times the four month interest “payment”of $956,250, you arrive at $81,281.25 as the “annualinterest”, divided by three [four months of the year is one-third], equals $27,093.75. Because it is now approximatelyten years later than the expected confirmation date, thelost interest of $27,093.75 should be multiplied by 8.5% todetermine the interest that could have been earned on the

lost interest over one year, 6 which totals $2,302.97, which

in turn should be multiplied by ten years 7 for a total of$23,029.70. Thus, the creditors' total time value loss of thefirst four months of interest equals $50,123.45 ($27,093.75+ $23,029.70).

*11 We find, therefore, that the Bankruptcy Court'scalculation of the amount of lost interest incomeattributable to the four month delay was clearlyerroneous. Accordingly, the Bankruptcy Court's decisionon this issue will be reversed and the case remanded to theBankruptcy Court for the entry of an order subordinatingCVC's claims for lost interest income in the amount of$50,123.45.

3. Post–Confirmation U.S. Trustee FeesCVC argues that although there were other openmatters affecting the accrual of U.S. Trustee fees post-confirmation, the Bankruptcy Court attributed the entirefirst post-confirmation quarter fees of $4,750 to CVC's

conduct. 8

The Bankruptcy Court held as follows in connection withthe U.S. Trustee Fees:

CVC has no basis upon which tochallenge the amount of the U.S.Trustee post-confirmation quarterly

fees inasmuch as those fees arestatutory and their accrual is directlycaused by CVC's conduct. Thatis, but for CVC's wrongdoing,this bankruptcy case would havebeen closed shortly after planconfirmation on January 21, 1992 ....

247 B.R. at 631 n. 9. In support of its objection tothe Bankruptcy Court's determination, CVC merely cites“General Bankruptcy Court Docket” and conclusivelyargues that the trustee fees would have been incurredregardless of its actions due to other pending matters.CVC's Br. (Doc. No. 2) p. 29. CVC does not specify,however, what those matters were and how they affectedthe continuation of the bankruptcy case. We cannot findthat the Bankruptcy Court's ruling on the trustee fees wasclearly erroneous based on such a vague objection.

Accordingly, the Bankruptcy Court's decision tosubordinate CVC's claims for $4,750 in U.S. Trustee feeswill be affirmed.

D. Fair Market Value of BDK UnitsCVC argues that the Bankruptcy Court erred in findingthat it profited from the purchases of Papercraft claimsbecause the court failed to consider the fair marketvalue of the BDK units disbursed under the BDK planin exchange for those claims. More specifically, CVCcontends that the parties agree that the proper date fordetermining whether it made a profit is January 1992,when the BDK plan was confirmed. CVC maintains thatalthough it purchased its claims for approximately $10.5million in cash, the BDK plan provided a distribution ofBDK units to creditors instead of cash. CVC contends,therefore, that calculation of profit must be based on thecash equivalent of BDK units as of January 1992, whichreveals that it made no profit on its purchases.

The Bankruptcy Court rejected CVC's argument that itsclaims should be revalued to calculate CVC's profit. TheBankruptcy Court explained:

I reject this method of valuation in this instance.Valuation of BDK units was determined at the timeof plan confirmation to be $1,228 per unit andno different valuation was presented at the trialof this Adversary even though one issue tried wasequitable subordination. Other (nonselling) creditors

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have received distribution based on that valuation. Itwould exacerbate the harm to these creditors if BDKunits were valued differently now and only for CVC'sclaim. The operative date of valuation for plan purposesand for purposes of this adversary was the date ofplan confirmation. CVC must live with the situation itcreated.... [FN 11]

*12 * * *

FN11.... CVC has provided no authority for itsargument that its claim should be valued on a basisdifferent from that of all other creditors. To do sowould be inequitable to other creditors, at least underthe circumstances of this case. To achieve parity indistribution in these classes as the Bankruptcy Coderequires, the court must maintain the same valuationmethod utilized for all distributions of BDK units tocreditors in classes entitled to them. All creditors inthe affected classes will sustain the same increase ordiminution in the value of their holdings as CVC.Moreover, the parties had a full opportunity to litigateall issues at trial and specifically requested, priorto trial, that I withdraw my opinion on summaryjudgment so that the equitable subordination issuescould be addressed. I did so and the case was tried inNovember of 1994 to address these issues. Reopeningthe record over 5 years after trial concluded wouldviolate principles of finality and create a never-endinground robin of litigation.

247 B.R. at 632.

The Committee makes a persuasive argument that underres judicata principles CVC is precluded from arguingfor a revaluation of its claims to calculate profits. As theCommittee correctly points out, the existence and amountof profit attributable to CVCs claims purchasing has beenat the heart of this litigation from its inception. The partiesand the courts have always proceeded on the assumptionthat the value of BDK units as described in the BDK planis the value upon which CVCs profits are calculated. Thisis the first time CVC has argued that its BDK units shouldbe revalued. Apparently, CVC did not appeal the orderconfirming the BDK plan and accepted a distribution of

BDK units based on the values established therein. 9 Thevalue of the BDK units and the methodology for theirdistribution under the BDK plan were at issue duringplan confirmation proceedings and the final disposition ofthose issues should be binding on CVC under res judicata

principles. See, e.q., Laborer's Int'l Union, AFL–CIO v.Foster Wheeler Corp., 26 F.3d 375, 396–97 n. 24 (3dCir.1994) (“If an appeal is taken from only part of thejudgment, the remaining part is res judicata ....“ (citationomitted)).

In any event, we agree with the Bankruptcy Court and theCommittee in that CVC's profits should be calculated inrelation to the estimated value of BDK units appearingin the BDK plan. The Bankruptcy Code provides thata reorganization plan cannot be confirmed unless eachcreditor will receive at least as much in reorganization asit would in liquidation. See 11 U.S.C. Section 1129(a)(7)(A)(ii). Thus, the BDK units had to be valued in order toconfirm the BDK plan. The valuation method used forthe BDK units, a discounted cash flow analysis based onforward-looking income projections, is the methodologytypically employed for such valuations and satisfies the

Bankruptcy Code. 10

*13 After an appropriate valuation, Section 1129 of theBankruptcy Code requires parity in distribution amongthe different classes of creditors. The same valuationmethod must be used for all distributions of BDK unitsto achieve such parity. As a result, all creditors will besubject to the same increase or diminution in value oftheir interest in the reorganized entity. If the court wereto accept CVC's revaluation argument, however, CVCwould in essence receive a cash distribution for its BDKunits while the remaining non-selling creditors bear therisk of receiving less in value than what they paid for theirclaims. Thus, revaluing only CVC's claims would subvertthe parity achieved in distribution and expose the non-selling creditors to even greater harm. In other words, thenon-selling creditors' exposure to a diminution in valueof their claims caused by normal market risk would beexacerbated by a reduction in their proportionate share ofthe reorganized entity as a result of CVC's claims beingassigned a higher cash value. This cannot be. As theBankruptcy Court noted, CVC, the wrongdoer here, mustlive with the situation it created.

Accordingly, the Bankruptcy Court's decision not torevalue CVC's claims to calculate its profits will beaffirmed.

E. Other Purchasers

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http://www.westlaw.com/Link/Document/FullText?findType=L&pubNum=1000546&cite=11USCAS1129&originatingDoc=I566b8ab1238011e1a1fbb12042fe3ee4&refType=RB&originationContext=document&vr=3.0&rs=cblt1.0&transitionType=DocumentItem&contextData=(sc.UserEnteredCitation)#co_pp_b6a30000145e2

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CVC contends that neither Papercraft nor members ofthe Committee could have or would have purchased theclaims it purchased. CVC maintains, therefore, that it didnot divert a corporate opportunity when it purchased theclaims, and thus did not cause harm to the Estate.

With regard to this issue, the Bankruptcy Court stated:

I need not consider this matter as all of my findingshave been sustained on appeal and the only issue onremand is whether CVC's claim should be equitablysubordinated beyond removal of its profit. However,I note that whether another entity would have availeditself of the opportunity is irrelevant. As the Court ofAppeals pointed out in its opinion,

under Brown v. Presbyterian Ministers, 484 F.2d 998,1005 (3d Cir.1973), the opportunity to purchase thenotes was a corporate opportunity of which CVCcould not avail itself, consistent with its fiduciaryduty, without giving the corporation and its creditorsnotice and an opportunity to participate.

247 B.R. at 632 (quoting 160 F.3d at 987). We agreewith the Bankruptcy Court's assessment of the narrowissue that was to be considered on remand and also agreethat CVC's corporate opportunity argument should not berevisited. CVC made the same argument, and lost, both attrial and on appeal to this court and the Court of Appeals.

Based on a partial quote from the Court of Appeals'decision, however, CVC argues that the corporateopportunity issue is still a live issue because it concernsthe matter of what is an appropriate remedy. CVC citesthe Court of Appeals as stating that “[w]e believe [CVC'scorporate] opportunity argument more relevant to theremedy issue than to whether a breach of fiduciary dutyoccurred.” 160 F.3d at 988.

*14 CVC's partial quote of the Court of Appeals'discussion is somewhat misleading. A more completequote reads as follows:

CVC contends that Brown isdistinguishable because Papercraftwas not in a financial orlegal position to purchase thenotes and because the membersof the Committee must havebeen well aware that a market

existed in Papercraft debt. Itnecessarily follows, according toCVC, that neither could havebeen injured by its purchases.We believe this argument morerelevant to the remedy issue thanto whether a breach of fiduciaryduty occurred. That duty requiredthat it share everything that itknew with Papercraft's board andthe Committee before commencingits purchases. Its failure to do sowould alone support a subordinationdepriving it of its profits from the notetransactions.

160 F.3d at 988 (emphasis added). The Court went on toconclude that “[a]t a minimum, the remedy here shoulddeprive CVC of its profits on the purchase of the notes....Further subordination may be appropriate, but only ifsupported by findings that justify the remedy chosen byreference to equitable principles.” Id. at 991. As previouslynoted, therefore, the Court held that “[o]n remand, thebankruptcy court should consider whether the recordsupports the proposition that the non-selling creditorssuffered loss as a result of a delay in confirmation causedby CVC advocacy of its competing plan and objections tothe BDK plan.” Id. at 992.

Thus, as the Court of Appeals makes quite clear, CVC'sconduct in breaching its fiduciary duty requires at aminimum the remedy of disgorgement of CVC's profit,regardless of whether any one else could have or wouldhave purchased the claims in lieu of CVC. The Courtgoes on to explain that CVC's conduct in pursuing itsown interest in advocating a competing plan may havecaused harm to creditors in the nature of delay in planconfirmation. Indeed, harm caused by CVC's attemptto control the reorganization was the only matter theBankruptcy Court was to consider on remand. This typeof harm, which the Bankruptcy Court properly foundwas caused by CVC's conduct, is distinct from the harmcaused by a usurpation of a corporate opportunity. Inother words, it was CVC's self-dealing and related conductin advocating a competing plan that caused harm in theform of delay regardless of whether any one else couldhave purchased the claims.

Accordingly, the Bankruptcy Court's decision to rejectCVC's corporate opportunity argument will be affirmed.

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On a final note, we think it necessary to address atroubling comment contained in CVC's brief. CVC states:

In its Final Order, however,the Bankruptcy Court, apparentlystraining to find a basis to subordinateCVC's claim beyond any factualjustification, asserted that CVC'srequest for financial information—most of which were made beforethe bankruptcy proceeding wascommenced—somehow delayed thefiling of the disclosure statementby diverting Debtor's resourcesfrom preparation of the disclosurestatement.

*15 CVC's Br. (Doc. No. 2) pp. 20–21 (emphasisadded). CVC's comment could be interpreted as a thinlyveiled attack on the Bankruptcy Judge's integrity and/or impartiality. We want to make it clear that based onour review of the extensive record and court opinions inthis case, we believe that the Bankruptcy Judge has at alltimes acted impartially and fairly to all parties concerned.If CVC reasonably believes that the Bankruptcy Judgeis unfairly biased against it, there is a proper way toaddress that concern. Such allegation must, of course,have evidentiary support other than the fact that the

Judge's rulings have not gone its way. See Fed.R.Civ.P.11. Otherwise, CVC's comment, standing alone, mightbe taken by the reviewing court as an attack on adistinguished judge based on nothing more than CVC'sdispleasure with her rulings. Needless to say, pouting ofthis sort is not persuasive and does nothing to furtherCVC's position on the legal issues.

For the foregoing reasons, IT IS HEREBY ORDEREDthat the April 20, 2000 and September 21, 2000 ordersof the Bankruptcy Court are REVERSED as to thesubordination of CVC's claims for lost interest income inthe amount of $956,250. The balance of the April 20, 2000and September 21, 2000 orders are AFFIRMED. IT ISFURTHER ORDERED that this case is REMANDEDto the Bankruptcy Court for the entry of an ordersubordinating CVC's claims for lost interest income in theamount of $50,123.45.

SO ORDERED this 20 day of February, 2002.

The Clerk is directed to mark Civil Action No. 00–2181CLOSED.

160 F.3d at 990.

All Citations

Not Reported in F.Supp.2d, 2002 WL 34702177

Footnotes1 The Committee is the official unsecured creditors' committee in Papercraft's chapter 11 case, whose members were duly

appointed by the United States Trustee under section 1102 of title 11 of the United States Code (“Bankruptcy Code”).The Committee has sued CVC not just in its capacity as a committee entitled to bring suit by virtue of sections 502, 1103,and 1109 of the Bankruptcy Code, but as “Estate Representative” which, under the provisions of the confirmed plan ofreorganization, is entitled to enforce the rights of the estate and is empowered by section 1123(b)(3)(B) of the BankruptcyCode to do so. Brief of Appellee Committee Of Creditors Holding Unsecured Claims And Committee Of Creditors HoldingUnsecured Claims As Estate Representative Of Papercraft Corporation (“Committee's Br.”) (Doc. No. 4) at 1 n. 1.

2 A representative of CVC sat on the boards of directors of Papercraft and Papercraft subsidiaries Barth & Dreyfuss andKnomark.

3 CVC makes much of the Bankruptcy Judge's comments at an August 29, 1991 hearing regarding certain satellite litigationthat she believed necessitated the granting of an extension of time to file the disclosure statement. CVC argues that theBankruptcy Judge improperly ignored these prior comments when later finding that CVC was responsible for the delayedfiling of the disclosure statement. The Bankruptcy Judge's prior comments and instant findings are not inconsistent. At thesubsequent trial in this matter, the Bankruptcy Judge heard extensive evidence and concluded that the delay in the filingof the disclosure statement was not caused by the satellite litigation. See 253 B.R. at 388. Contrary to CVC's position, theBankruptcy Judge was not bound by her prior comments in connection with the extension of time when making a findingas to the cause of the delay after a full trial. Indeed, as the Bankruptcy Court points out, “at the August, 1991, hearingneither Debtor nor CVC disclosed CVC's efforts to acquire financial information and its trading in claims. Thus, the courtwas not given the complete picture of the circumstances that caused delay at that time.” 253 B.R. at 388 n. 7.

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4 It is certainly a fair inference that CVC took unfair advantage of its position to push the CVC plan resulting in a delay in planconfirmation. In fact, the Court of Appeals indicated that the evidence of record was sufficient to support subordinationof CVC's claims because of the delay. The Court stated:

[T]he Committee points us to trial testimony from its financial advisor indicating that this competing reorganizationplan and CVC's associated objections to the BDK plan resulted in confirmation delay that inflicted substantial injuryon Papercraft's non-selling creditors.The bankruptcy court did not attempt to quantify the harms caused in economic terms, and CVC characterizes themas “nonecomonic” harms. We do not agree with this characterization, however, and, like the bankruptcy and districtcourts, we conclude that they are sufficient to justify subordination.

5 CVC also contends that it should not have been charged for any lost interest because it is not responsible for any delay.We have already held that the Bankruptcy Court's finding that CVC caused a delay in plan confirmation is not clearlyerroneous. Thus, we need not address CVC's delay argument again here.

6 The 8.5% time value rate should equal the actual market rate of interest that could have been earned on the funds. Thereis no evidence of record as to what the actual market rate was during the relevant time period. Thus, the market rate couldhave been more or less than 8.5% at various points in time. However, because CVC used this rate and the Committeedid not object to, we will accept the 8.5% rate.

7 CVC uses nine years in its calculation which was the correct number at the time its brief was filed. As of the date of thismemorandum order, however, more than ten years has elapsed since the expected confirmation date.

8 CVC also argues that its claims should not be charged with any U.S. Trustee fees incurred pre-confirmation, because itis not responsible for any delay. We have already held that the Bankruptcy Court's finding that CVC caused a delay inplan confirmation is not clearly erroneous. Thus, we need not address CVC's delay argument again here.

9 Indeed, the Committee notes that the CVC's competing cash offer provided that CVC would pay approximately $40 millionfor Papercraft as an alternative to the BDK plan, which CVC represented was a fair value for the company. Committee'sBr. (Doc. No. 4) pp. 25–26. The BDK plan's valuation of $40,052,000 is nearly identical to CVC's $40 million offer. Id.at p. 26.

10 See Consolidated Rock Prods. Co. v. DuBois, 312 U.S. 510, 525–26, 61 S.Ct. 675, 85 L.Ed. 982 (1941):Findings as to the earning capacity of an enterprise are essential to a determination of the feasibility as well as thefairness of a plan of reorganization. Whether or not the earnings may reasonably be expected to meet the interestand dividend requirements of the new securities is a sine qua non to a determination of the integrity and practicabilityof the new capital structure. It is also essential for satisfaction of the absolute priority rule ....[T]he commercial value of property consists in the expectation of income from it.... Such criterion is the appropriateone here, since we are dealing with the issue of solvency arising in connection with reorganization plans involvingproductive properties. It is plain that valuations for other purposes are not relevant to or helpful in a determination ofthat issue, except as they may indirectly bear on earning capacity. The criterion of earning capacity is the essentialone if the enterprise is to be freed from the heavy hand of past errors, miscalculations or disaster, and if the allocationof securities among the various claimants is to be fair and equitable. Since its application requires a prediction as towhat will occur in the future, an estimate, as distinguished from mathematical certitude, is all that can be made. Butthat estimate must be based on an informed judgment which embraces all facts relevant to future earning capacityand hence to present worth, including, of course, the nature and condition of the properties, the past earnings record,and all circumstances which indicate whether or not that record is a reliable criterion of future performance. A sumof values based on physical factors and assigned to separate units of the property without regard to the earningcapacity of the whole enterprise is plainly inadequate.(citations and quotations omitted).

End of Document © 2018 Thomson Reuters. No claim to original U.S. Government Works.

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amount to an assumption of control orauthority over the Trust FundsTTTT’’).Therefore, the failure to establish a rec-ord-keeping system is not evidence of anexercise of authority or control either.

I, therefore, dissent.

,

CITICORP VENTURE CAPITAL,LTD., a New York Corporation,

Appellant

v.

COMMITTEE OF CREDITORS HOLD-ING UNSECURED CLAIMS, andCommittee of Creditors Holding Unse-cured Claims as Estate Representativeof Papercraft Corporation

Citicorp Venture Capital, Ltd.,a New York Corporation,

v.

Committee of Creditors Holding Unse-cured Claims, and Committee of Cred-itors Holding Unsecured Claims asEstate Representative of PapercraftCorporation Appellant.

No. 02–1815, 02–1905.


Argued Dec. 16, 2002.

Filed March 19, 2003.

Unsecured creditors committeebrought adversary proceeding against in-sider of Chapter 11 debtor-corporation,seeking equitable subordination of insid-er’s claims for its alleged breach of itsfiduciary duties. After the courts deter-

mined that subordination was warranted,on remand, the United States BankruptcyCourt for the Western District of Pennsyl-vania, Judith K. Fitzgerald, Chief Judge,253 B.R. 385, found that additional subor-dination was justified. Insider appealed.The District Court, Robert J. Cindrich, J.,affirmed, but reduced the lost interest in-come component of the subordination. In-sider appealed, and committee filed cross-appeal. The Court of Appeals, Nygaard,Circuit Judge, held that: (1) bankruptcycourt did not violate the ‘‘American Rule’’by subordinating attorney fees; (2) districtcourt did not err by holding that insiderwas responsible for all fees incurred dur-ing delay in the plan process; (3) districtcourt did not err by affirming bankruptcycourt’s calculation of insider’s profit; and(4) district court did not err by calculatinglost interest by a four-month delay of theten years of interest.

Affirmed.

1. Bankruptcy O3782

Court of Appeals exercises plenary re-view over legal determinations of a districtcourt sitting as an appellate court in abankruptcy proceeding.

2. Bankruptcy O3786

Court of Appeals may only overturnfactual findings if they are clearly errone-ous. Fed.Rules Bankr.Proc.Rule 8013, 11U.S.C.A.

3. Bankruptcy O3786

Court of Appeals must accept districtcourt’s factual findings unless they arecompletely devoid of a credible evidentiarybasis or bear no rational relationship tothe supporting data.

4. Bankruptcy O2183

Pursuant to the American Rule, pre-vailing litigant is ordinarily not entitled to

100

229CITICORP VENTURE CAP v. COMMITTEE CREDITORSCite as 323 F.3d 228 (3rd Cir. 2003)

collect reasonable attorney fees from theloser.

5. Bankruptcy O2183

Element of all American Rule excep-tions is a determination that the litigant‘‘prevailed’’ and should be awarded attor-ney fees.

6. Bankruptcy O2125, 2967.5

In the exercise of its powers as acourt of equity, bankruptcy court may sub-ordinate claims for cause, applying tradi-tional principles of equitable subordination.Bankr.Code, 11 U.S.C.A. § 510(c).

7. Bankruptcy O2967.5

Although the Bankruptcy Code codi-fies the doctrine of equitable subordina-tion, it does not detail the requirements ofsuch subordination, instead merely statingthat the doctrine is to be applied under theprinciples of equitable subordination.Bankr.Code, 11 U.S.C.A. § 510(c).


Doctrine of equitable subordination isremedial, and the goal is to undo or tooffset any inequality in the claim positionof a creditor that will produce injustice orunfairness to other creditors in terms ofthe bankruptcy results. Bankr.Code, 11U.S.C.A. § 510(c).


Through the doctrine of equitable sub-ordination, bankruptcy court has the pow-er to sift the circumstances surroundingany claim to see that injustice or unfair-ness is not done in the administration ofthe bankruptcy estate. Bankr.Code, 11U.S.C.A. § 510(c).


Inequitable conduct, justifying equita-ble subordination, may arise out of anyunfair act by the creditor as long as theconduct affects the bankruptcy results of

the other creditors. Bankr.Code, 11U.S.C.A. § 510(c).


Because equitable subordination is re-medial rather than penal, a claim shouldbe equitably subordinated only to the ex-tent necessary to offset the harm sufferedby debtor and its creditors as a result ofthe inequitable conduct. Bankr.Code, 11U.S.C.A. § 510(c).


Remedy of equitable subordinationmust remain sufficiently flexible to dealwith manifest injustice resulting from vio-lation of the rules of fair play. Bankr.Code, 11 U.S.C.A. § 510(c).


Where ingenuity spawns unprecedent-ed vagaries of unfairness, bankruptcycourts should not decline to recognize theirmarks, nor hesitate to turn the twilight foroffending claimants into a new dawn forother creditors, through use of equitablesubordination. Bankr.Code, 11 U.S.C.A.§ 510(c).

14. Bankruptcy O2183, 2968

Bankruptcy court did not violate theAmerican Rule, which provides that pre-vailing litigant is ordinarily not entitled tocollect attorney fees from the loser, bysubordinating debtor’s insider’s attorneyfees; bankruptcy court did not award amoney judgment for attorney fees to pe-nalize insider but, rather, the court ana-lyzed the record facts, found specific dam-ages, and used its equitable powers toreturn non-selling creditors to the positionthey would have been in had insider notacted inequitably, by subordinating insid-er’s share of distribution by the amount offees and expenses incurred by profession-als who were to be paid from estate assetsthat would not have been incurred but for

101


insider’s breach of its fiduciary duty.Bankr.Code, 11 U.S.C.A. § 510(c).

15. Bankruptcy O2967.5Although the pursuit of one’s legal

rights may not be grounds for equitablesubordination, protracted and unjustifiedlitigation tactics that harm the estate bycausing it to incur fees may justify subor-dination. Bankr.Code, 11 U.S.C.A.§ 510(c).

16. Bankruptcy O2968Debtor’s insider was responsible for

all fees incurred during delay in plan pro-cess, as warranted equitable subordinationof its claim by such amount, where conductof insider in pursuing its own interest overand above other creditors to whom it oweda fiduciary duty not to self-deal delayedplan confirmation by at least four months,to the detriment of non-selling creditors.Bankr.Code, 11 U.S.C.A. § 510(c).

17. Bankruptcy O2972Evidence of reorganization value at

time of plan confirmation supported find-ing that debtor’s insider made a profit onclaims against debtor that it secretly pur-chased, for purposes of equitable subordi-nation of insider’s claims. Bankr.Code, 11U.S.C.A. § 510(c).

18. Bankruptcy O2968Where debtor’s insider’s pursuit of its

own interest over and above other credi-tors to whom it owed a fiduciary duty notto self-deal delayed plan confirmation by atleast four months, district court properlyreduced the equitable subordination of in-sider’s claim on account of lost interestincome from $956,250.00, which figure rep-resented the $239,062.00 in monthly inter-est on all the debt securities multiplied byfour, to $50,123.00; the securities were ten-year notes that would provide unsecuredcreditors committee ten years of interestregardless of when they were issued, and

so district court did not err by calculatingthe lost interest by a four-month delay ofthe ten years of interest. Bankr.Code, 11U.S.C.A. § 510(c).

Lawrence J. Slattery, (Argued), Morgan,Lewis & Bockius, New York, NY, Amy M.Tonti, Reed Smith, Pittsburgh, PA, forAppellant/Cross Appellee.

Philip E. Beard, Stonecipher, Cunning-ham, Beard & Schmitt, Pittsburgh, PA,Stephen M. Ray, (Argued), Stutman,Treister & Glatt, Los Angeles, CA, forAppellee/Cross Appellant.

Before NYGAARD, ALITO, andRENDELL, Circuit Judges.

OPINION OF THE COURT

NYGAARD, Circuit Judge.

This case arises out of the Chapter 11filing of Papercraft Corporation and thesubsequent litigation. Here, in our secondreview of determinations made by theBankruptcy Court and the District Court,we must assess justifications for the subor-dination of several of Citicorp VentureCapital’s (‘‘CVC’’) claims, and we mustevaluate the accompanying calculations.First, CVC argues that the District Courterroneously upheld the BankruptcyCourt’s subordination of certain adminis-trative costs and professional fees. Sec-ond, CVC contends that the District Courterroneously upheld the BankruptcyCourt’s subordination of CVC’s claim byan additional amount incurred during adelay in the plan process. Third, CVCasserts that the finding that CVC made aprofit on its note purchases is error. Fi-nally, in a cross appeal, the Committee ofCreditors Holding Unsecured Claims andCommittee of Creditors Holding Unse-

102


cured Claims as Estate Representative ofPapercraft Corporation (the ‘‘Committee’’)argues that the District Court erred inreducing the Bankruptcy Court’s equitablesubordination remedy on account of lostinterest income. We hold that the ‘‘Ameri-can Rule’’ should not be applied to thesubordination of the administrative andprofessional costs, and that the DistrictCourt’s findings are not clearly erroneous.We will affirm.

I. Background

In 1991, an informal committee of Pa-percraft creditors and Papercraft agreedto a restructuring plan known as the‘‘BDK plan,’’ which was to be filed in con-junction with a voluntary Chapter 11 peti-tion. The creditors’ claims against Paper-craft would be converted into ‘‘BDK units,’’consisting of stock and bonds issued by thenew venture, in proportion to an estimatedvalue of such units. Papercraft’s di-rectors, including CVC, approved the BDKplan, and the Chapter 11 petition and theBDK plan were filed.

The Committee commenced litigation,alleging that CVC, while an insider andfiduciary of Papercraft, attempted to takecontrol of Papercraft’s assets and reap sig-nificant profit at the expense of other cred-itors by withdrawing its support for theBDK plan and offering a competing plan,secretly purchasing $60,849,299.10 inclaims against Papercraft for the discount-ed amount of $10,553,541.88, and delayingconfirmation of the original plan. TheCommittee asserted that because CVCbreached its fiduciary duty to Papercraftand Papercraft’s creditors by engaging insuch self-dealing, CVC’s claims should beequitably subordinated pursuant to§ 510(c) of the Bankruptcy Code, 11U.S.C. § 510(c).

The Bankruptcy Court issued an Octo-ber 12, 1995, Memorandum Opinion and

Order, finding that CVC’s purchases at adiscount, without disclosure, while an in-sider, constituted breaches of CVC’s fidu-ciary duty to Papercraft and its creditors.In re Papercraft Corp., 187 B.R. 486, 498–99 (Bankr.W.D.Pa.1995). The BankruptcyCourt limited CVC’s allowed claim to the$10,553,541.88 price, and held that furthersubordination of CVC’s claims pursuant tothe principles of equitable subordinationcodified at 11 U.S.C. § 510(c) was not ap-propriate because the Bankruptcy Courtwas already limiting CVC’s allowed claimto the amount it paid for such claim. Id.at 501–02.

On appeal, the District Court affirmedthe Bankruptcy Court’s factual findingsthat CVC breached its fiduciary duties,acted inequitably, caused injury to Paper-craft and its creditors and gained an unfairadvantage. In re Papercraft Corp., 211B.R. 813 (W.D.Pa.1997). However, theDistrict Court remanded the case to theBankruptcy Court for a further finding onthe amount CVC’s claims should be subor-dinated beyond the amount paid for suchclaims, if at all, pursuant to the principlesof equitable subordination. Id. at 827.Both parties appealed.

We affirmed the District Court’s opin-ion, finding that CVC violated its fiduciaryduty in a number of significant respectsand that CVC’s misconduct caused harmjustifying subordination. In re PapercraftCorp., 160 F.3d 982, 988–90 (3d Cir.1998).We explicitly stated that the findings offact ‘‘make this a paradigm of inequitableconduct by a fiduciary as that concept hasbeen developed in the case law, and webelieve that further elaboration is not re-quired.’’ Id. at 987. We explained that,

Further subordination may be appropri-ate, but only if supported by findingsthat justify the remedy chosen by refer-ence to equitable principlesTTTT Whilethe bankruptcy court held, with record

103


support, that the delay between the fil-ing of the petition and the filing of thedisclosure statement was not attribut-able to CVC’s machinations, it made nosimilar finding with respect to the periodof delay between the filing of the disclo-sure statement and confirmation of theBDK plan. Moreover, while the bank-ruptcy court found ‘‘no evidence thatCVC engaged in conduct designed todelay the plan process,’’ if CVC’s pursuitof its own interest in fact resulted indelay of the confirmation, we do notread that finding as inconsistent withsubordination based on injury resultingfrom that delay. On remand, the bank-ruptcy court should consider whetherthe record supports the proposition thatnon-selling creditors suffered loss as aresult of a delay in confirmation causedby CVC advocacy of its competing planand objections to the BDK plan.

Id. at 991–92. Our mandate to the Bank-ruptcy Court was clear: determine wheth-er the record supports the additional sub-ordination of CVC’s claims.

On remand, the Bankruptcy Court foundthree kinds of economic harm to non-sell-ing noteholder creditors: (1) the quantifia-ble monetary harm that resulted from thedelay in confirming the plan; (2) the harmthat resulted from the uncertainty over theamount of CVC’s claim distribution; and(3) the harm that resulted from the delayin fully implementing the confirmed 1991plan that can be measured by the profes-sional fees and expenses of three courtsand five proceedings. In re PapercraftCorp., 247 B.R. 625, 628 (Bankr.W.D.Pa.Apr.20, 2000). The Bankruptcy Courtheld, therefore, that CVC’s recovery wouldbe further subordinated by (1) $1,248,000for additional administrative expenses in-

curred during the four-month delay; (2)$956,250 for interest and dividends lost bycreditors during the delay; and (3)$2,974,373.15 for professional fees and ex-penses incurred and/or paid by the Estateor BDK through April 30, 2000.1 In rePapercraft Corp., 253 B.R. 385, 390(Bankr.W.D.Pa.2000).

The District Court affirmed the Bank-ruptcy Court’s decision, except that it re-duced the lost interest income componentof the subordination from $956,250 to$50,123.45. Memorandum Order at 36.CVC filed a timely appeal.

II. Jurisdiction and Standard of Review

The District Court had subject matterjurisdiction over the appeal below pursu-ant to 28 U.S.C. § 158(a) and appellatejurisdiction in accordance with LocalBankruptcy Appellate Rule 8007.1. Wehave jurisdiction pursuant to 28 U.S.C.§§ 158(d) and 1291.

[1–3] We exercise plenary review overlegal determinations of a district court sit-ting as an appellate court in a bankruptcyproceeding. Fellheimer, Eichen & Brav-erman, P.C. v. Charter Techs., Inc., 57F.3d 1215, 1223 (3d Cir.1995). We mayonly overturn factual findings, however, ifthey are ‘‘clearly erroneous.’’ Id; Fed. R.Bankr.P. 8013. We must accept the Dis-trict Court’s factual findings ‘‘unless theyare ‘completely devoid of a credible eviden-tiary basis or bear[ ] no rational relation-ship to the supporting data.’ ’’ Moody v.Security Pac. Bus. Credit, Inc., 971 F.2d1056, 1063 (3d Cir.1992) (citation omitted).

III. Discussion

First, CVC argues that the BankruptcyCourt violated the American Rule by su-

1. The Bankruptcy Court also held that CVC’srecovery would be further subordinated by$4,750 in United States Trustee fees incurred

and/or paid by the Papercraft bankruptcy es-tate from the date of confirmation throughMay 2, 2000. 247 B.R. at 630.

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bordinating the attorneys’ fees. We dis-agree.

[4, 5] The expression of the AmericanRule is found in Alyeska Pipeline ServiceCo. v. Wilderness Soc’y, where the Su-preme Court explained that, ‘‘[i]n the Unit-ed States, the prevailing litigant is ordi-narily not entitled to collect a reasonableattorneys’ fee from the loser.’’ 421 U.S.240, 247, 95 S.Ct. 1612, 44 L.Ed.2d 141(1975). There are, however, numerous ex-ceptions to this rule. An element of allAmerican Rule exceptions is a determina-tion that the litigant ‘‘prevailed’’ andshould be awarded attorneys’ fees. Forexample, 42 U.S.C. § 1988 was enactedwith the express intent of negating theeffect of the Alyeska decision in statutorycivil rights cases. 1976 U.S.C.C.A.N.5908–09 (‘‘[T]he purpose of this amend-ment is to remedy anomalous gaps in ourcivil rights laws created by the UnitedStates Supreme Court’s recent decision inAlyeska Pipeline TTTT’’). Under § 1988, aparty must show it ‘‘prevailed’’ in the un-derlying action.

The District Court affirmed the Bank-ruptcy Court’s subordination of attorneys’fees, explaining:

The Committee is not asking for thepayment of attorneys’ fees as such. Thefees and expenses at issue depletedfunds that otherwise would have beenavailable to creditors but for CVC’s mis-conduct in breaching its fiduciary duty.To ensure the distribution creditorsshould have received absent CVC’s mis-conduct, it is necessary to restore theEstate’s funds ‘by subordinating CVC’sshare of distribution by the amount offees and expenses incurred by profes-sionals who are to be paid from estateassets that would not have been in-curred but for CVC’s breach of its fidu-ciary duty.’

In re Papercraft Corp., Memorandum Or-der *11 (W.D.Pa. February 20, 2002). Weagree with the District Court’s logic.

[6, 7] In the exercise of its powers as acourt of equity, the bankruptcy court maysubordinate claims for cause, applying tra-ditional principles of equitable subordina-tion. 11 U.S.C. § 510(c); Pepper v. Lit-ton, 308 U.S. 295, 307–11, 60 S.Ct. 238, 84L.Ed. 281 (1939); Taylor v. Standard Gas& Elec. Co., 306 U.S. 307, 322, 59 S.Ct. 543,83 L.Ed. 669 (1939); see also Comstock v.Group of Institutional Investors, 335 U.S.211, 229, 68 S.Ct. 1454, 92 L.Ed. 1911(1948) (narrowing the application of equita-ble subordination to situations in whichbad faith by the claimant is found). Al-though § 510(c) codifies the doctrine ofequitable subordination, it does not detailthe requirements of such subordination.Instead, it merely states that the doctrineis to be applied ‘‘under the principles ofequitable subordination,’’ and the legisla-tive history states that Congress intendedthat the courts develop these principles.124 Cong. Rec. 32,398 (1978) (statement ofco-sponsor Rep. Edwards); 124 Cong. Rec.33,998 (statement of co-sponsor Sen. De-Concini); Burden v. United States, 917F.2d 115, 118 (3d Cir.1990).

[8–15] The doctrine of equitable subor-dination is remedial, and the goal ‘‘is toundo or to offset any inequality in theclaim position of a creditor that will pro-duce injustice or unfairness to other credi-tors in terms of the bankruptcy results.’’ ’Burden, 917 F.2d at 117 (citation omitted);see also In re Papercraft Corp., 160 F.3d982, 991 (3d Cir.1998) (stating that thepurpose of equitable subordination is ‘‘tocompensate in a manner that will permit aTTT remedy to the injury that has beensuffered by those [creditors] who will ben-efit from the subordination’’). ‘‘ ‘[T]hebankruptcy court has the power to sift thecircumstances surrounding any claim to

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see that injustice or unfairness is not donein the administration of the bankrupt es-tate.’ ’’ Burden, 917 F.2d at 117 (quotingPepper, 308 U.S. at 307–08, 60 S.Ct. 238).The inequitable conduct may arise out ofany unfair act by the creditor as long asthe conduct affects the bankruptcy resultsof the other creditors. Matter of MobileSteel Co., 563 F.2d 692, 700 (5th Cir.1977).Because equitable subordination is remedi-al rather than penal, a claim should beequitably subordinated only to the extentnecessary to offset the harm suffered bythe debtor and its creditors as a result ofthe inequitable conduct. Mobile Steel, 563F.2d at 701. A New York bankruptcy courthas eloquently stated:

The remedy of equitable subordinationmust remain sufficiently flexible to dealwith manifest injustice resulting fromthe violation of the rules of fair playTTTT ‘where ingenuity spawns unprece-dented vagaries of unfairness, [bank-ruptcy courts] should not decline to rec-ognize their marks, nor hesitate to turnthe twilight for [offending claimants]into a new dawn for other creditors.’

In re Teltronics Servs., Inc., 29 B.R. 139,172 (Bankr.E.D.N.Y.1983) (citations omit-ted). We hold that because the Bank-ruptcy Court subordinated attorneys’ feespursuant to its equitable powers, theAmerican Rule is not implicated. TheBankruptcy Court did not award a moneyjudgment for attorneys’ fees to penalizeCVC. Rather, the Bankruptcy Court ana-lyzed the record facts, found specific dam-ages, and used its equitable powers toreturn the non-selling creditors to the po-sition they would have been in had CVCnot acted inequitably.

We directed the Bankruptcy Court tomake findings as to the amount of CVC’sclaims that should be subordinated pursu-ant to the principles of equitable subordi-nation, and to identify specific harm re-

sulting from CVC’s wrongdoing. In rePapercraft Corp., 160 F.3d at 991. TheBankruptcy Court did so, and concludedthat CVC’s inequitable conduct justifiessubordination of attorneys’ fees. We holdthat the finding is not clearly erroneous.

At trial, the Bankruptcy Court statedthat ‘‘none of these litigation costs wouldhave been incurred’’ but for CVC’s inequi-table conduct, 5 app. at 1364, and that‘‘some reasonable litigation costs may actu-ally be a direct consequence of CVC’s ac-tivities in this case.’’ 5 app. at 1365. TheBankruptcy Court found that, but forCVC’s inequitable conduct, the Committeewould not have incurred such substantialfees and costs. In re Papercraft Corp.,247 B.R. at 628; 28 app. at 8004–05. TheBankruptcy Court analyzed the depletionof available funds in the reorganized enti-ty, and determined that the economicharm is directly attributable to CVC’s in-equitable actions. In re Papercraft Corp.,247 B.R. at 628; 29 app. 8326. The Bank-ruptcy Court also found that the fees andcosts related to the litigation were a ‘‘thirdtype of economic harm caused by CVC’sundisclosed claims purchasing.’’ In re Pa-percraft Corp., 247 B.R. at 631. Theamount of attorneys’ fees does not includeall litigation costs of the Committee.Rather, more than $700,000 is deductedfrom the attorneys’ fee award for fees andcosts that are unrelated to CVC’s inequita-ble conduct. 29 app. 8211–48.

CVC’s inequitable conduct includes re-peatedly litigating issues that were decidedagainst it by our earlier decision, as well asearlier decisions of the District Court andthe Bankruptcy Court. For example, inthis case, CVC has incessantly relitigatedthe issue of whether it profited from itsillegal claims trading, even though thisissue had already been decided against itin the District Court, and reviewed by us.In re Papercraft Corp., 165 B.R. 980, 983–

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84 (Bankr.W.D.Pa.1994); In re PapercraftCorp., 187 B.R. 486, 492, 498–99 (Bankr.W.D.Pa.1995); In re Papercraft Corp., 211B.R. 813, 825 n. 12 (W.D.Pa.1997); In rePapercraft Corp., 160 F.3d 982, 990–91 (3dCir.1998). Also, in the briefs filed with theBankruptcy Court on remand, 29 app.8133–87, CVC attempted to relitigate thatit did not usurp a corporate opportunity,even though all three courts had alreadyfound against CVC on this issue in previ-ous In re Papercraft Corp. decisions. 160F.3d at 987–88. Finally, CVC’s collateralproceedings, for which CVC only hadstanding because it illegally purchasedclaims against Papercraft, were aimed atpreventing the reorganized debtor fromengaging in a value-enhancing sale trans-action, and depleted monies that wouldhave otherwise been available to the credi-tors. 29 app. 8216–17, 8245–46.

The Bankruptcy Court also determinedthat the testimony of CVC’s representa-tives during the litigation was not credible.In re Papercraft, 187 B.R. at 493 n. 3(finding that all other credible testimonyand evidence shows that the testimony ofCVC’s Saleem Muqaddam is false); id. at497 (dismissing the testimony of CVC’sWilliam Comfort, which contradicted otherevidence); id. (disbelieving testimony ofMuqaddam). Each of these instances ofinequitable conduct resulted in legal feesand costs that decreased the funds avail-able the non-selling creditors.

The Bankruptcy Court spent a substan-tial amount of time and effort consideringthe narrow issue of whether to include theprofessional fees and expenses in the sub-ordination, 28 app. 8004–05; 29 app. 8288–335, and ruled on the issue in two writtenopinions. In re Papercraft Corp., 247 B.R.at 631; In re Papercraft Corp., 253 B.R. at387–90. We conclude that the BankruptcyCourt found facts sufficient to establishthe egregious conduct warranting subordi-nation of CVC’s claims, and those facts are

not clearly erroneous. Although the pur-suit of one’s legal rights may not begrounds for equitable subordination, pro-tracted and unjustified litigation tacticsthat harm the estate by causing it to incurfees may justify subordination. The Bank-ruptcy Court has been involved in oversee-ing this litigation for a decade and has hadthe best opportunity to observe first handCVC’s conduct and evaluate its motives.We are hard-pressed to disagree with itsdeterminations based on the extensive rec-ord and proceedings before it, and its obvi-ous familiarity with what we previouslytermed CVC’s ‘‘machinations.’’

We reject CVC’s other two arguments,as well as the Committee’s argument oncross-appeal.

[16] First, we conclude that the Dis-trict Court did not err by holding thatCVC was responsible for all fees incurredduring a delay in the plan process. In ourprevious decision, we indicated that CVC’sactions could have led to the delay in theBDK Plan’s confirmation:

Without limiting the inquiry of the bank-ruptcy court in any way, we note thatthere is evidence which would support afinding that the non-selling Papercraftcreditors suffered injury from CVC’s at-tempt to control the reorganizationTTTT

[I]f CVC’s pursuit of its own interest infact resulted in delay in the confirma-tion, we do not read that finding asinconsistent with subordination based oninjury resulting from that delay.

In re Papercraft, 160 F.3d at 991–92. TheBankruptcy Court evaluated the evidence,and found ample support to establish thatCVC’s conduct delayed the plan process byat least four months, and that CVC’s in-tent was to benefit itself over and aboveother creditors to whom it owed a fiducia-ry duty not to self-deal. In re Papercraft,247 B.R. at 628. We have determined thatthe Bankruptcy Court’s findings are notclear error.

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[17] Second, we conclude that the Dis-trict Court did not err by affirming theBankruptcy Court’s calculation of CVC’sprofit. CVC argues that because it couldonly have realized a profit on the claimpurchases if the cash equivalent of theBDK Units that it could receive under theBDK Plan exceeded the $10.5 million thatCVC paid for the claims, the calculationmust be the fair market value of thoseBDK Units. More than sufficient evidencedemonstrates that the Bankruptcy Courtdid not err by valuing CVC’s profit basedon the reorganization value at the time ofthe BDK Plan confirmation. All of thecreditors, including CVC, were to receiveBDK Units on an equal basis, determinedby their proportional share of interests inthe reorganized entity, and we uphold theDistrict Court’s affirmation of the Bank-ruptcy Court’s calculations.

[18] Finally, the Committee arguesthat the District Court erred by reducingthe subordination on account of lost inter-est income from $956,250 to $50,123. Thisargument is meritless. Because there wasa four-month delay in the issuance of thedebt securities, the Bankruptcy Courtcame to the $965,250 figure by multiplyingthe $239,062 in monthly interest on all thedebt securities by four. The DistrictCourt correctly noted that the securitieswere ten-year notes, which would providethe Committee ten years of interest re-gardless of when they were issued. Mem.Order (Feb. 20, 2002), at 24–25. Wetherefore conclude that the District Courtdid not err by calculating the lost interestby a four-month delay of the ten years ofinterest.

For the foregoing reasons, we will af-firm the judgment of the District Court.

,

Richard X. SUTTON; Robert X. Wise;Michael X. Walker, Appellants

v.

Imam Adeeb RASHEED; James Smith,Chaplain; Francis Menei, Chaplain;John Palakovich; Kenneth Kyler;Martin F. Horn;

United States of America (Intervenorin District Court).

No. 97–7096.


Argued March 6, 2002.

Filed March 19, 2003.

State prisoners brought §1983 actionagainst personnel of Pennsylvania Depart-ment of Corrections alleging infringementupon their rights under free exerciseclause of First Amendment. The UnitedStates District Court for the Middle Dis-trict of Pennsylvania, Edwin M. Kosik, J.,granted summary judgment for defen-dants. Prisoners appealed. The Court ofAppeals, held that: (1) prisoners’ claims fordeclaratory and injunctive relief weremoot; (2) prisoners had justiciable claimfor damages; (3) prisoners stated claim fordamages against administrator of religiousservices; (4) regulation was invalid as ap-plied to restrictive status prisoners; (5)prisoners’ requests for Nation of Islamtexts stemmed from constitutionally pro-tected interest; and (6) defendants wereprotected by qualified immunity from pris-oners’ claims for damages.

Affirmed.

Scirica, Circuit Judge, filed a concur-ring opinion.

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