In Re PWS Holding Corp.

Opinions of the United

2000 Decisions States Court of Appeals

for the Third Circuit

9-18-2000

In Re: PWS Holding

Precedential or Non-Precedential:

Docket 00-5042

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Recommended Citation

"In Re: PWS Holding" (2000). 2000 Decisions. Paper 199.

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Filed September 18, 2000

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 00-5042 and 00-5074

In re: PWS HOLDING CORPORATION

BRUNO'S, INC; FOOD MAX OF MISSISSIPPI, INC;

A.F. STORES, INC; BR AIR, INC.;

FOOD MAX OF GEORGIA, INC;

FOOD MAX OF TENNESSEE, INC;

FOODMAX, INC; LAKESHORE FOODS, INC;

BRUNO'S FOOD STORES, INC; GEORGIA SALES

COMPANY; SSS ENTERPRISE, INC

W.R. Huff Asset Management Co., L.L.C.,

Appellant in 00-5042

HSBC BANK USA, as Indenture Trustee for

the 10.5% Senior Subordinated Notes,

Appellant in 00-5074

On Appeal From the United States District Court

for the District of Delaware

(D.C. Civ. No. 98-cv-00212)

District Judge: Honorable Sue L. Robinson

Argued: March 10, 2000

Before: BECKER, Chief Judge, SCIRICA and

NYGAARD Circuit Judges.

(Filed: September 18, 2000)

EDWARD S. WEISFELNER,

ESQUIRE (ARGUED)

ANDREW DASH, ESQUIRE

JOHN P. BIEDERMANN, ESQUIRE

Berlack, Israels & Liberman

120 West 45th Street

New York, NY 10036

STEVEN K. KORTANEK, ESQUIRE

JOANNE B. WILLS, ESQUIRE

Klehr, Harrison, Harvey, Branzburg

& Ellers, LLP

919 Market Street, Suite 1000

Wilmington, DE 19801

Counsel for Appellant

W.R. Huff Asset Management Co.

PETER D. WOLFSON, ESQUIRE

(ARGUED)

CAROL NEVILLE, ESQUIRE

Pryor, Cashman, Sherman & Flynn,

LLP

410 Park Avenue

New York, NY 10022-4441

JEFFREY C. WISLER, ESQUIRE

Connolly, Bove, Lodge & Hutz

1220 Market Building

P.O. Box 2207

Wilmington, DE 19899

Counsel for Appellant

HSBC Bank USA, Indenture Trustee

HARVEY R. MILLER, ESQUIRE

(ARGUED)

LORI R. FIFE, ESQUIRE

MARC D. PUNTUS, ESQUIRE

Weil, Gotshal & Manges, LLP

767 Fifth Avenue

New York, NY 10153

2

THOMAS L. AMBRO, ESQUIRE

DANIEL J. DeFRANCESCHI,

ESQUIRE

One Rodney Square

P.O. Box 551

Wilmington, DE 19899

Counsel for Appellees PWS Holding

Corp.; Bruno's, Inc.; Food Max of MI,

Inc.; AF Stores, Inc.; BR Air, Inc.;

Food Max of GA, Inc.; Food Max of

TN, Inc.; Foodmax Inc.; Lakeshore

Foods, Inc.; Brunos Food Stores;

Georgia Sales Co.; SSS Entr, Inc.

HAROLD S. NOVIKOFF, ESQUIRE

(ARGUED)

AMY R. WOLF, ESQUIRE

Wachtell, Lipton, Rosen & Katz

51 West 52nd Street

New York, NY 10019

EDWARD G. BIESTER, III, ESQUIRE

Duane, Morris & Heckscher

4200 One Liberty Place

Philadelphia, PA 19103-7396

TERESA K.D. CURRIER, ESQUIRE

Duane, Morris & Heckscher

1201 Market Street, Suite 1500

P.O. Box 195

Wilmington, DE 19899

Counsel for Appellee

Chase Manhattan Bank

DENNIS S. KAYES, ESQUIRE

(ARGUED)

STUART E. HERTZBERG, ESQUIRE

I. WILLIAM COHEN, ESQUIRE

Pepper, Hamilton, LLP

100 Renaissance Center, 36th Floor

Detroit, MI 48243

3

DAVID M. FOURNIER, ESQUIRE

MONICA LEIGH LOFTIN, ESQUIRE

Pepper, Hamilton, LLP

1201 Market Street, Suite 1600

Wilmington, DE 19801

Counsel for Appellee Official

Committee of Unsecured Creditors

OPINION OF THE COURT

BECKER, Chief Judge.

W.R. Huff Asset Management Co., L.L.C. ("Huff "), and

HSBC Bank USA ("HSBC") appeal from the order of the

District Court confirming a reorganization plan for Bruno's,

Inc., (Bruno's), and several affiliates.1 Bruno's is based in

Alabama and operates a chain of supermarkets in the

southeastern United States. Huff was the holder of $290

million in Bruno's subordinated notes; HSBC was the

indenture trustee for the subordinated notes (we refer to

them together as Huff). They argue that the District Court

should not have confirmed the plan for a host of reasons,

most notably because it contains releases that violate the

absolute priority rule of 11 U.S.C. S 1129(b)(2)(B)(ii) and are

thus impermissible under the Bankruptcy Code.

Three separate interests have appeared to defend the

plan: the debtors and debtors-in-possession (referred to

throughout as the Debtors); the Chase Manhattan Bank,

representing the group of banks (the Banks) that were the

senior lenders to Bruno's before the reorganization; and the

Official Unsecured Creditors' Committee. Together they

contend that the plan does not violate the absolute priority

rule because the releases were not granted "on account of "

the interests of the released parties, but rather the claims

released had little or no value.

_________________________________________________________________

1. The affiliates are PWS Holding Corp., Food Max of Mississippi, Inc,

A.F. Stores, Inc., BR Air, Inc., Food Max of Georgia, Inc., Food Max of

Tennessee, Inc., FoodMax, Inc., Lakeshore Foods, Inc., Bruno's

Foodstores, Inc., Georgia Sales Co., and SSS Enterprises, Inc.

4

The absolute priority rule, found in 11 U.S.C.

S 1129(b)(2)(B)(ii), provides that "the holder of any claim or

interest that is junior to the claims of [a class of unsecured

claims] will not receive or retain under the plan on account

of such junior claim or interest any property." In Bank of

America National Trust and Savings Association v. 203

North LaSalle Street Partnership, 526 U.S. 434 (1999), the

Supreme Court interpreted the "on account of " language in

S (b)(2)(ii). The Court rejected arguments that "on account

of " means "in satisfaction of " the interest or "in exchange

for" the interest and concluded that it means"because of "

the interest. Id. at 450-51. Accordingly, a causal connection

between holding the prior claim or interest, and receiving or

retaining property, will trigger the absolute priority rule.

Huff submits that this plan, by releasing claims held by the

bankrupt entity that arose out of the leveraged

recapitalization, essentially transferred property to holders

of junior equity in violation of the absolute priority rule.

Huff argues that the release was a transfer to junior equity

because the potential claims included claims against junior

equity--affiliates of Kohlberg, Kravis, Roberts & Co., L.L.C.

(KKR), and other participants in the recapitalization. Huff

contends that the transfer violated the absolute priority

rule because senior creditors (including Huff) had not been

paid in full.

We conclude that the District Court did not err in the

challenged respects.2 The Examiner appointed by the

District Court under 11 U.S.C. SS 1104(c) and 105(a) at the

behest of Huff found in a comprehensive report that the

claims released had little potential merit. We find no error

in the District Court's decision to accept the Examiner's

findings and legal conclusions regarding the viability of the

claims, and we reject Huff 's contention that the releases

were granted "on account of " old equity's interest. We also

reject the Debtors' contention that the challenge to

confirmation is equitably moot under In re Continental

Airlines, 91 F.3d 553, 559 (3d Cir. 1996) (en banc).

_________________________________________________________________

2. Because the order of reference to the Bankruptcy Court was

withdrawn in the District of Delaware, this case was heard initially in

the

District Court.

5

Huff 's other challenges to confirmation include that the

plan should not have been confirmed because the District

Court erred in determining that it was proposed in good

faith as required by 11 U.S.C. S1129(a)(3). Huff has not

offered anything but innuendo to support its contention

that the Debtors violated this portion of the Code, and we

find no error in the District Court's conclusion that the

plan was proposed in good faith.

Additionally, Huff contends that the plan should not have

been confirmed because it violates the following sections of

the Bankruptcy Code: 11 U.S.C. S 510(a), which provides

that a "subordination agreement is enforceable in a case

under this title to the same extent that such agreement is

enforceable under applicable nonbankruptcy law;" 11

U.S.C. S 524(e), which provides that "[e]xcept as provided in

subsection (a)(3) of this section, discharge of a debt of the

debtor does not affect the liability of any other entity on, or

the property of any other entity for, such debt;" 11 U.S.C.

S 363, which governs the sale of assets outside of the

reorganization plan; 11 U.S.C. S 1129(a)(2), which provides

that a court shall confirm a plan only if "[t]he proponent of

the plan complies with the applicable provisions of this

Title;" and 11 U.S.C. S 1129(a)(7), which provides that a

court shall confirm a plan only if the debtor demonstrated

at the Confirmation Hearing that creditors rejecting the

plan would not receive a greater recovery in a Chapter 7

liquidation.

We reject Huff 's argument under S 510(a) because the

subordinated noteholders' rights under the agreement do

not arise until the senior indebtedness is paid in full, which

has not happened under the plan. We reject the S 524(e)

argument because we conclude that the limited release in

Paragraph 58 of the plan does not come within the meaning

of S 524(e) and is consistent with the standard of liability

under the Code. We reject Huff 's S 363 argument because

we do not agree with the contention that the Plan triggered

a duty to fully market the company. We conclude that Huff

does not have standing to raise the challenge under

S 1129(a)(2) because third-party standing is limited on

appeal in bankruptcy cases and Huff cannot show that it

was personally aggrieved by any alleged failure of

6

disclosure. Finally, because we are satisfied that the

Debtors met the S 1129(a)(7) burden of demonstrating that

the creditors would not receive a greater recovery under

Chapter 7, we reject the challenge under this section as

well. We will therefore affirm the order of the District Court

confirming the plan.

I. Factual & Procedural Background

As of the commencement date of the Chapter 11 cases,

Bruno's was a chain of about 200 supermarkets operating

in the southeastern United States (principally in Alabama).

In 1995, affiliates of KKR acquired an 83.33% interest in

Bruno's in a leveraged recapitalization. As part of this

transaction, then existing shareholders of Bruno's were

bought out for approximately $880 million. The leveraged

recapitalization was financed by a revolving credit and term

loan facility provided by the Banks, an equity contribution

of $250 million by KKR through Crimson Associates LLP,

and the issuance by Bruno's of $400 million in notes due

in 2005 pursuant to an indenture. Section 9 of the

indenture contains a subordination clause that provides

that the noteholders' claims are fully subordinated to the

payment in full (including interest) of the claims of the

senior lenders (the Banks).

For at least two years following the leveraged

recapitalization, Bruno's paid all of its debts as they

matured (including $97.5 million in interest payments on

the subordinated notes). In the summer of 1997, the

Debtors were able to refinance the Bank debt relating to the

recapitalization at a lower interest rate and on terms more

favorable than the original terms. But by the second half of

1997, as a result of either mismanagement by the directors

selected by KKR and a controversial change in pricing

policy (according to Huff), or as a result of a greatly

increased level of competition in the market (according to

the Debtors), Bruno's began to falter. Bruno's had difficulty

in meeting payment obligations from the recapitalization

and in paying its suppliers and other creditors. On

February 2, 1998, it filed a voluntary petition for relief

under Chapter 11 of the Bankruptcy Code. Since thefiling

date, the Debtors have remained in possession.

7

As of the filing date, Bruno's owed approximately $462

million to the Banks, $135 million to trade vendors,

suppliers, and other unsecured creditors, and $421 million

on the subordinated notes. In the 90 days prior tofiling for

relief, it made payments to a variety of creditors and

suppliers amounting to more than $600 million, including

to firms that provided professional services to the Debtors.3

However, the only preference action the Debtors pursued

was an action against the Banks seeking to avoid liens

granted to the prepetition lenders in December 1997.

In February 1998, the Bankruptcy Trustee appointed a

nine member "Official Unsecured Creditor's Committee" (the

Committee). Huff, holder of $290 million in subordinated

notes, was the largest creditor of the estate and was elected

co-chair of the Committee. The other members of the

Committee included four representatives of the Banks,

three representatives from the trade, and one representative

of the other subordinated noteholders. A representative

from the United Food and Commercial Workers Union,

which represented supermarket employees of Bruno's, was

appointed to serve on the Committee from March 1998 to

April 1999.

In October 1998, the Debtors presented a business plan

to the Committee. The Committee rejected this plan and

then appointed a subcommittee, the "Strategic Alternatives

Committee," to work with the Debtors to develop a new

plan. This Subcommittee conducted a test marketing of the

enterprise and sent out a summary information package to

two different sets of potential buyers (neither of which

included financial buyers). The Subcommittee did not

believe that there would be interest in purchasing the

enterprise, and indeed none of the companies contacted

expressed an interest. By January 1999, the Debtors

concluded that no potential buyers had an interest in the

acquisition.

_________________________________________________________________

3. For example, payments to suppliers included approximately $19

million to Kraft Foods, $4.1 million to Frito-Lay, and $750,000 to

Pillsbury. Payments to providers of professional services included

$225,551.69 to Cravath, Swaine & Moore, $1.2 million to KKR, and

$232,838.71 to Wasserstein Perella & Co.

8

Throughout the spring of 1999, the Committee and

subgroups of the Committee convened several times to

develop a reorganization plan. Huff asserts that it was

excluded from these meetings and that many of the

conferees pursued some interest other than maximizing the

size of the bankruptcy estate. In March 1999, the Debtors'

law firm determined that legal claims arising out of the

leveraged recapitalization (primarily fraudulent transfer

claims) were not worth pursuing because they believed that

the claims were unlikely to succeed and that litigation

would be expensive, time consuming, complicated,

protracted and vigorously defended, and likely would delay

the confirmation of the reorganization plan. In April 1999,

the Committee voted to deny funds to pursue the claims,

while preserving the claims for further consideration. In

response, Huff successfully moved for the appointment of

an independent examiner to evaluate the claims. The

Debtors presented the first version of the new plan in May

1999. It was revised several times between May and

December 1999.

As a part of the negotiations regarding reorganization,

three independent entities (Wasserstein Perella & Co. (for

the Debtors), PricewaterhouseCoopers (for the Committee),

and Chilimark Partners (for the Banks)) conducted

assessments of the Debtors and reported current value

estimations ranging between $260 and $315 million. Huff 's

expert argued for a valuation at $580 million, but this

valuation was rejected by the District Court, and Huff

appears to have abandoned any argument for it on appeal.

HSBC still appears to contend that the reorganized

enterprise was "significantly undervalued by the Debtors

and the Bank Group." HSBC does not, however, argue that

the District Court committed clear error in determining that

the reorganization value of the Debtors was "substantially

below the amount necessary to allow for the satisfaction in

full of the Bank claims" and thus that Huff and the other

holders of subordinated notes were substantially out of the

money (by about $300 million). The interests of the holders

of the subordinated notes, including Huff and HSBC, were

thus wiped out and, by operation of the Code, 11 U.S.C.

S 1126(g), the holders are deemed to have rejected the plan.

9

Huff and HSBC challenge three separate releases of legal

claims included in the plan. We describe the different

releases in the three following subsections, sections I.A-C.

A.

The first releases pertain to the estate's claims arising

out of the leveraged recapitalization. These releases include

"avoidance claims" that, if successful, could have allowed

the Debtors to avoid certain aspects of the 1995 leveraged

recapitalization. In late 1998, the Debtors, with the consent

of the Committee, undertook a review of the leveraged

recapitalization to determine if any viable fraudulent

transfer claims existed and should be pursued. In March

1999, the Debtors' counsel Weil, Gotshal & Manges

completed a 100 page report analyzing the claims,

concluding that the transaction was not a fraudulent

transfer and that there were no viable claims against any of

its participants. In April 1999, the Committee nevertheless

voted to preserve these causes of action in the plan. One

month later, however, the Committee reversed its position

and, with the support of the trade representatives and the

Banks, voted to support the plan releasing the claims.

Huff and HSBC objected to these releases and, as noted,

successfully moved the District Court for the appointment

of an Examiner to evaluate the claims. The District Court

appointed Harrison J. Goldin as Examiner. The Examiner's

Final Report, prepared with the aid of eminent counsel,

made extensive findings of fact regarding the leveraged

recapitalization.4 The Examiner adopted a model for

assessing the viability of the claims that broke the

probability of success into five categories. Under the model,

the Examiner concluded that a claim was "highly likely" to

succeed if he believed that it had an 80% or greater chance

of success; "likely" if the Examiner believed that it had a

60% to 80% chance of success; "reasonable" if the

Examiner believed that the likelihood of success was

between 40% and 60%; "unlikely" if the Examiner believed

its chance of success was only between 20% and 40%; and

_________________________________________________________________

4. The Examiner interviewed 19 people and reviewed approximately

75,000 pages of documents relating to the transaction.

10

"remote" if the Examiner concluded that there was less

than a 20% chance of success.

As the report details, in August 1995, certain affiliates of

KKR, including an Alabama corporation formed for the

transaction, Crimson Associates LLP (of which KKR is the

general partner), acquired 83.33% of the stock of Bruno's.

To pay for this transaction, Bruno's and its affiliated

Debtors obtained cash and credit through the issuance of

$400 million in notes, a $475 million term loan facility from

Chemical Bank, and a $125 million revolving credit facility

from Chemical Bank (from which approximately $10 million

was drawn to fund the 1995 transaction). KKR and its

affiliates contributed $250 million, and Bruno's applied $20

million of its existing cash to the transaction.

The net cash proceeds were allocated to the following

principal uses: (1) payment of $880.1 million of cash

merger consideration to the pre-closing shareholders (the

purchase of Bruno's pre-transaction outstanding common

stock at $12.00 per share); (2) repayment of $200 million

plus accrued interest in pre-transaction indebtedness; and

(3) payment of approximately $40 million in fees and

expenses related to the merger.5 The Examiner hired Goldin

Associates, L.L.C., to perform a detailed financial analysis

of the recapitalization. The analysis covered two principal

issues regarding Bruno's at the time of the recapitalization:

the solvency of Bruno's, and the adequacy of Bruno's'

capital resources to meet its future needs, including its

ability to pay its debts and satisfy its liabilities as due.

These issues are important to analyzing the claims arising

out of the recapitalization because the viability of the

claims depends on whether the recapitalization left Bruno's

insolvent or with an unreasonably small amount of assets

in relation to the business or the transaction. If the value

of the assets acquired in the recapitalization does not

exceed the debt incurred, or if the business was left with

unreasonably small capital, the transaction may be a

_________________________________________________________________

5. These fees and expenses included $15 million in fees to KKR, more

than $14 million to Chase, and more than $10 million to BT Securities

for underwriting fees and intrabank funding costs.

11

"fraudulent transfer." Transactions in violation of the

prohibition on fraudulent transfers can be avoided. 6

The test of solvency is whether, at the time of the

recapitalization, the company's assets exceeded its

liabilities. There are two basic approaches to this

evaluation: asset by asset evaluation, which ascribes value

to each asset and determines solvency by comparing the

sum of those assets to total liabilities, and enterprise

valuation, which values the business as a going concern

and includes intangibles such as relationships with

customers and suppliers, and the name, profile, and

reputation of the business.7 The Examiner concluded that

it was likely (i.e., that there was a 60-80% chance) that a

court would apply the business enterprise analysis. The

Examiner believed that the business enterprise evaluation

was the appropriate measure of solvency because KKR

acquired Bruno's as a going concern.

Under the business enterprise evaluation, the Examiner

performed three separate analyses: a comparable public

company analysis, a comparable acquisitions analysis, and

a discounted cash flow analysis. The Examiner found that

in all but one of the relevant formulations, Bruno's was

solvent at the time of the recapitalization. The approach

favored by the Examiner, comparing enterprise value

derived from a discounted cash flow analysis to long-term

debt, reflected that the enterprise value of Bruno's exceeded

its long-term debt by approximately $270 million to $690

million. The valuation is a range because the Examiner

used three earnings amounts: sales, EBITDA (earnings

_________________________________________________________________

6. Fraudulent transfer actions may be brought by a debtor-in-possession

under S 548 of the Code, see 11 U.S.C.S 548, and, pursuant to S 544(b)

of the Code, under applicable state fraudulent transfer statutes, see 11

U.S.C. S 544(b). Because the recapitalization occurred approximately two

and one-half years before the commencement of the Chapter 11 cases,

S 548 is inapplicable, and hence any fraudulent transfer claims would

have to be brought under state law through S 544(b) of the Code.

7. In assessing liabilities, the Examiner considered the bank loans,

subordinated notes, capital lease obligations, deferred tax liability, and

contingent and other off-balance sheet liabilities. The Examiner

concluded that no material adjustments to the balance sheet liabilities

were required for purposes of the solvency analysis.

12

before interest, taxes, depreciation, and amortization), and

EBIT (earnings before interest and taxes). The trading

market enterprise value is divided by these earning

amounts to derive multiples, which are applied to Bruno's'

earnings totals to derive valuation.

The other methods of analyzing solvency also resulted in

a range because the Examiner considered multiple earnings

amounts. The "assets to liabilities" construct, comparing

total adjusted enterprise value derived from a discounted

cash flow analysis to total liabilities, showed that Bruno's

was solvent by approximately $215 to $635 million. The

acquisition multiples test, which gives greater weight to an

acquisition premium, also indicated that Bruno's was

solvent, with assets of approximately $188 million to $250

million, using multiples of EBITDA and EBIT, respectively

(and higher if the multiple of sales is applied). 8 The market

multiples solvency test, which does not include a control

premium, produced lower margins of solvency ranging from

approximately $27 to $104 million. The only test which

indicated insolvency applied a southeast sales multiple.

Under this test, the Examiner considered the sales earnings

amount for comparable enterprises operating in the

southeastern United States only.

The Examiner concluded that the southeast sales test

was an inappropriate means of measuring the solvency of

Bruno's and, in any event, should be given less weight than

the other valuations standards. The Examiner also noted

that the purchase price itself was probative of Bruno's'

value (and thus solvency). The purchase price indicated an

enterprise value of $1.2 billion, which exceeded long-term

debt by approximately $245 million. Adding current

liabilities of $156.4 million, the sum exceeded total

liabilities by about $90 million.9 Although he deemed it

unlikely that a court would apply the asset-by-asset test,

_________________________________________________________________

8. The Examiner considered the sales multiple to be a less appropriate

measure of solvency than EBITDA and EBIT.

9. The Examiner's Report appears to contain an arithmetical or

typographical error in that it concludes from the above numbers that the

sum exceeded total liabilities by over $190 million, rather than $90

million. Nothing in this case turns on this point, however.

13

the Examiner also conducted an analysis under the asset-

by-asset methodology. The sum of Bruno's assets, valued

piecemeal, was $1,024.8 million. The assets did not exceed

the total of liabilities, which were $1,114.1 million.

Additionally, the Examiner analyzed whether the

recapitalization left Bruno's with unreasonably small

capital. The critical question is whether the parties'

projections were reasonable at the time of the transaction.

The analysis looked at historical data, such as cashflow,

net sales, gross profit margins, and net profits and losses,

and whether the parties considered difficulties that might

arise, such as interest rates fluctuations and market

downturns, to gauge the reasonableness of the projections

in light of working capital needs in the industry and actual

cash available to service needs. Actual performance of the

debtor following the transaction is evidence of whether the

parties' projections were reasonable.

The Examiner opined that Bruno's was not

undercapitalized. He concluded that at the time of the

recapitalization Bruno's was a viable enterprise capable of

substantial improvement, and that the parties' projections,

although aggressive in some areas, were conservative in

others. The enterprise failed, in his opinion, not because of

inadequate capital, but because a series of unfortunate

decisions, including a change in pricing strategy and a

decision to close one distribution center, caused substantial

erosion in the company's customer base. Declining demand

for Bruno's' services resulted in declining revenue, which

led to the bankruptcy.

In part because of these conclusions, the Examiner

opined that any claims arising out of the recapitalization

were unlikely to succeed (i.e., that they had only a 20-40%

chance of success). He reasoned that "the Recapitalization

differed fundamentally from prior-leveraged transactions

that have been found to be unlawful; among other things,

the risks of the transaction were borne by the acquirer

(KKR) and the lenders (who were unsecured), rather than

shifted onto pre-transaction creditors." The Examiner also

concluded that the claims were "not promising," were

"limited and speculative," that "significant defenses" were

available to each of the principal participants, the former

14

shareholders, the Banks, the subordinated noteholders,

and KKR in the recapitalization, and that

[i]n light of the multiple legal and factual obstacles to

any substantial fraudulent transfer or illegal

distribution recovery by the Debtors [relating to the

recapitalization], the examiner believes that the

prosecution of such claims is extremely difficult to

justify . . . . As a legal matter, the laws of the governing

jurisdiction (Alabama, and, if suit is filed in Delaware,

the Third Circuit) present formidable obstacles to

recovery from the principal defendants.

The releases of these claims do not cover any direct,

personal, non-derivative claims held by creditors against

non-debtor third parties. The releases do extinguish many

if not all of the claims arising out of the recapitalization

that could have been pursued by the Debtors or on their

behalf. The parties do not dispute the findings of fact

included in the Examiner's Final Report. Huff and HSBC

argue, however, that the Examiner's (and the District

Court's) conclusion that there was little value to be had

from the claims was flawed because it depended on the

Examiner's conclusion that Bruno's was left solvent after

the recapitalization. Huff argues that the Examiner erred in

adopting the enterprise valuation approach.

B.

The second issue regarding the releases has to do with

Paragraph 58 of the Confirmation order, which releases

Committee members and professionals who provided

services after the petition date from certain liability for their

work in the reorganization. The release in Paragraph 58 is

limited to claims brought in connection with work on the

bankruptcy reorganization plan, and it does not eliminate

liability but rather limits it to willful misconduct or gross

negligence. Huff and HSBC nevertheless argue that this

release violates S 524(e) of the Bankruptcy Code because it

affects the liability of another entity for the debt of the

Debtors. The Debtors respond that the releases do not

come within the meaning of S 524(e) and were consistent

with the standard of liability under the Code.

15

C.

The third set of claims concern the waiver of preferences,

i.e., preference claims to recover from trade creditors and

suppliers for payments made in the 90 days prior tofiling

for bankruptcy. As noted above, the Debtors paid out

substantial sums of money during this period. Under

bankruptcy law, such payments can be recovered by the

estate; S 547 of the Bankruptcy Code vests exclusive

discretion to prosecute or not prosecute preference claims

with the trustee or debtor-in-possession. Afterfiling, the

Debtors pursued a preference action against the Banks,

seeking to avoid certain liens granted to the Banks within

90 days of the filing. The action settled; the Banks agreed

to release the liens granted just prior to the bankruptcy

filing against property and assets of the Debtors and, in

exchange, the Debtors agreed to pay the fees and expenses

of the Banks' attorneys throughout the Chapter 11 case.

The Debtors waived many other preference actions. The

Debtors represent that they decided to waive these claims

as a part of the reorganization plan in order to facilitate

and rehabilitate post-reorganization relationships with key

suppliers.

D.

The District Court confirmed the Debtors' reorganization

plan after a three day hearing. The confirmation order was

issued by the District Court pursuant to 28 U.S.C.S 1334,

which grants jurisdiction to the district courts over

bankruptcy matters. Because this is an appeal from a

district court exercising original jurisdiction in bankruptcy,

our jurisdiction stems from 28 U.S.C. S 1291 rather than

28 U.S.C. S 158(d). See In re Marvel Entertainment Group,

Inc., 140 F.3d 463, 470 (3d Cir. 1998). The confirmation

order was a final appealable order. See id. at 469. We

review the District Court's legal determinations de novo, its

factual findings for clear error, and its exercise of discretion

for abuse thereof. See In re Environmental Energy, Inc., 188

F.3d 116, 122 (3d Cir. 1999).

II. Equitable Mootness

Under the doctrine of equitable mootness, an appeal

should be dismissed, even if the court has jurisdiction and

16

could fashion relief, if the implementation of that relief

would be inequitable. See In re Continental Airlines, 91 F.3d

553, 559 (3d Cir. 1996) (Continental I). As we noted in

Continental I, "[t]he use of the word`mootness' as a

shortcut for a court's decision that the fait accompli of a

plan confirmation should preclude further judicial

proceedings has led to unfortunate confusion" between

equitable mootness and constitutional mootness. Id.

Constitutional mootness implicates the Article III case or

controversy requirement; an appeal is moot in the

constitutional sense only if events have taken place that

make it "impossible for the court to grant `any effectual

relief whatever.' " Church of Scientology of Calif. v. United

States, 506 U.S. 9, 12 (1992) (citation omitted). Equitable

mootness is a broader concept that has developed in

bankruptcy law. It provides that that "[a]n appeal should

. . . be dismissed as moot when, even though effective relief

could conceivably be fashioned, implementation of that

relief would be inequitable." Continental I , 91 F.3d at 558

(citing In re Chateaugay Corp., 988 F.2d 322, 325 (2d Cir.

1993)).

In Continental I, we dismissed the appeal after finding it

equitably moot because the appeal had an "integral nexus"

with the feasibility of the Continental Debtors' plan of

reorganization. Id. at 564. The Court identified prudential

factors with which to evaluate equitable mootness,

including whether the plan has been substantially

consummated or stayed, whether the requested relief would

affect the rights of other parties, whether the requested

relief would affect the success of the plan, and whether it

would further the public policy of affording finality to

bankruptcy judgments. See id. at 560. These factors are

given varying weight, depending on the particular

circumstances, but the foremost consideration is whether

the reorganization plan has been substantially

consummated. See id. "This is especially so where the

reorganization involves intricate transactions . . . or where

outside investors have relied on the confirmation of the

plan." Id. at 560-61 (citations omitted). We have also noted,

however, that the doctrine is "limited in scope and [should

be] cautiously applied," id. at 559, and that it involves "a

17

discretionary balancing of equitable and prudential factors,"

id. at 560.

The Debtors here argue that, since the stay was denied

and the reorganization has gone forward, this appeal is

equitably moot. They argue that the appeal, if successful,

would necessitate the reversal or unraveling of the entire

plan of reorganization. We disagree. There are intermediate

options. The releases (or some of the releases) could be

stricken from the plan without undoing other portions of it.

We draw instruction in this regard from In re Chateaugay

Corp., 167 B.R. 776, 780 (S.D.N.Y. 1994), in which the

court stated that

[i]t is difficult to conceive how a potential liability of, at

most, several million dollars could unravel the Debtors'

reorganization, which involved the transfer of billions of

dollars, and which has resulted in the revival of

Debtors into a multibillion dollar operation with $200

million in working capital . . . appellees have made no

showing that it would "knock the props out from under

the authorization for every transaction that has taken

place and create an unmanageable, uncontrollable

situation for the Bankruptcy Court."

(quoting In re Chateaugay Corp., 10 F.3d 944, 952 (2d Cir.

1993)).

In balancing the policy favoring finality of bankruptcy

court judgments--particularly reorganization plans--

against other considerations, we conclude that the equities

here do not require dismissal. Huff has clearly been an

active participant in the reorganization and was heard at

length in the confirmation hearing, and in that sense has

had its day in court. It seeks to invalidate releases that

affect the rights and liabilities of third parties. The plan has

been substantially consummated, but, as noted above, the

plan could go forward even if the releases were struck, and

Huff 's reply brief suggests that it now seeks only

alterations to the plan rather than an unraveling of the

reorganization. Cf. In re Continental Airlines , 203 F.3d 203,

210 (3d Cir. 2000) (Continental II) (rejecting equitable

mootness argument as inadequately pled, but noting also

that the argument was unlikely to succeed because"[n]o

18

evidence or arguments have been presented that Plaintiffs'

appeal, if successful, would necessitate the reversal or

unraveling of the entire plan of reorganization"). We

therefore hold that this appeal should not be dismissed for

equitable mootness.

III. The Absolute Priority Rule

Section 1129(b)(2) of the Bankruptcy Code requires that

creditors be paid in full before holders of equity receive any

distribution. It reads in pertinent part:

(2) For the purpose of this subsection, the condition

that a plan be fair and equitable with respect to a class

includes the following requirements:

. . .

(b) With respect to a class of unsecured claims--

. . .

(ii) the holder of any claim or interest that is junior to

the claims of such class will not receive or retain under

the plan on account of such junior claim or interest

any property.

11 U.S.C. S 1129(b)(2). This provision is the"absolute

priority rule." Huff contends that the District Court erred in

confirming the plan because, by releasing the claims arising

out of the recapitalization, the plan awarded an interest to

old equity (KKR and the other participants in the

reorganization) "on account of " their interest in the estate

in violation of the absolute priority rule. Huff 's theory has

several components. First, it makes the legal argument that

under Bank of America National Trust and Savings

Association v. 203 North LaSalle Street Partnership , 526

U.S. 434 (1999), the Supreme Court's most recent case

construing S 1129(b)(2), no junior class of creditors or

interest holders may receive or retain any property under a

plan in which a rejecting class of creditors is not being paid

in full. Second, Huff submits that the District Court erred

in concluding that the claims were eliminated because they

were unlikely to succeed and potentially costly to the

debtors to pursue. The success of this contention depends

19

on Huff 's ability to establish that the Examiner and the

District Court erred in concluding that the claims were

unlikely to succeed. We begin by discussing 203 North

LaSalle.

A.

In 203 North LaSalle, 526 U.S. 434 (1999), the Supreme

Court held that, even if it is assumed that there is a new

value corollary to the absolute priority rule (which would

allow old equity to contribute new value and receive interest

in the reorganized entity in exchange), allowing junior

interest holders to have an exclusive opportunity to obtain

an interest in a reorganized entity by providing new value,

free from competition and without market valuation,

violates S 1129(b)(2)(B)(ii). See id. at 458.10 This is because

the exclusive opportunity to invest in the reorganized entity

(and receive equity in it thereby) must be considered

property received "on account of " the junior claim (the

equity interest). Id. Huff argues that the plan, by releasing

the claims arising out of the leveraged recapitalization held

by the bankrupt entity against holders of junior equity

(such as KKR) even though senior creditors were not paid

in full, essentially transferred property to those holders of

junior equity in violation of the absolute priority rule.

There can be little doubt that a legal claim is property

within the meaning of the Bankruptcy Code. See Northview

Motors, Inc. v. Chrysler Motors Corp., 186 F.3d 346, 350 (3d

Cir. 1999) (treating estate's legal claims as estate property

within the meaning of the Code). Similarly, a release of

liability has value cognizable under the Code. Accordingly,

when the Debtors extinguished the claims arising out of the

_________________________________________________________________

10. For some time, there has been a split of authority regarding whether

there is a "new value" exception or corollary to the absolute priority

rule.

Such a corollary would mean that, when old equity provides new value

under the reorganization plan, any property it receives under the plan

would not be considered to be received "on account of " the old equity

interest and therefore would not violate the absolute priority rule. The

Supreme Court declined to decide whether there is a new value corollary

in 203 North LaSalle, 526 U.S. at 454 (1999), and that issue is not

presented in this case.

20

recapitalization, KKR received something of value even

though some creditors senior to the equity holder had not

been paid in full. KKR is a key potential object of the

avoidance claims because it was a moving force in the

reorganization, and a holder of equity in the Debtors. Thus,

if KKR benefitted from the releases "on account of " its

interest in the Debtors, then the plan violated the absolute

priority rule.

In 203 North LaSalle, the Supreme Court interpreted the

"on account of " language in S 1129(B)(2)(b)(ii). The Court

rejected arguments that "on account of " means "in

satisfaction of " the interest or "in exchange for" the interest

and concluded that it means "because of " the interest. 526

U.S. at 450-51. Accordingly, a causal connection between

holding the prior claim or interest, and receiving or

retaining property, will trigger the absolute priority rule.

The degree of causation required is not defined specifically

in 203 North LaSalle, because the Court concluded that on

either of several views the creditor's objection in that case

would require rejection of the plan at issue. See id. at 454.

Nevertheless, the Court provided a few points of reference

for defining prohibited "on account of " transactions.

First, the Court rejected the amicus curiae position of the

United States, which had contended that, under a

reorganization plan, old equity should not be allowed to

take any property of the debtor if creditors are not paid in

full. See id. at 451. The Court said that this "starchy"

position could not be correct because, under this view of

the absolute priority rule, Congress would have omitted

entirely the phrase "on account of." Id. at 451-52. This

confirms that there are some cases in which property can

transfer to junior interests not "on account of " those

interests but for other reasons.

Second, in considering the necessary level of causation,

the Court looked to the two basic goals of Chapter 11:

those of "preserving going concerns and maximizing

property available to satisfy creditors." Id. at 453. While

emphasizing that it was not providing "an exhaustive list of

the requirements," id., the Court explained:

Causation between the old equity's holdings and

subsequent property substantial enough to disqualify a

21

plan would presumably occur on this view of things

whenever old equity's later property would come at a

price that failed to provide the greatest possible

addition to the bankruptcy estate, and it would always

come at a price too low when the equity holders

obtained or preserved an ownership interest for less

than someone else would have paid.

Id. at 453 (citations omitted).

B.

We do not believe that these releases were made"on

account of " KKR's junior interest as that phrase is

construed in 203 North LaSalle. What doomed the plan in

203 North LaSalle was not that old equity received property

under the plan, but the "exclusivity" that old equity

enjoyed, which suggested that old equity might have

obtained the interest for less than someone else might have

paid.11 Under the 203 North LaSalle plan, old equity set the

price for the interest it obtained under the plan, and the

right to set this price amounted to a property right in itself:

Hence it is that the exclusiveness of the opportunity

with its protection against the market's scrutiny of the

purchase price by means of competing bids or even

competing plan proposals, renders the partners' right a

property interest extended "on account of " the old

equity position and therefore subject to an unpaid

senior creditor class's objection.

Id. at 456.

In this case, to the extent that KKR and the other entities

that benefitted from the releases had an exclusive

_________________________________________________________________

11. Huff argues that 203 North LaSalle's prohibition on exclusive

opportunities was violated here because the Debtors had the exclusive

opportunity to dispose of the Debtors' property. However, to read 203

North LaSalle so broadly would be to undermine the express statutory

provision for exclusivity in S 1121(b), which provides "[e]xcept as

otherwise provided in this section, only the debtor may file a plan until

after 120 days after the date of the order for relief under this chapter."

See In re Zenith Electronics, 241 B.R. 92, 106 (Bankr. D. Del. 1999)

(making this point). This we decline to do.

22

opportunity to gain the release in the reorganization, it was

only because they were on the radar screen as potentially

liable parties. Huff has adduced no evidence that they

sought out the releases or set a price for them; indeed, Huff

itself made several offers for the claims, which were

considered and rejected, demonstrating that KKR enjoyed

no exclusivity of opportunity.12

The District Court held that the decision to extinguish

the claims arising out of the recapitalization was made

because the claims were adjudged to have a negative value

to the estate and not because the junior creditors

persuaded the Debtors to release them "on account of "

their interest in the Debtors and in violation of the absolute

priority rule. It concluded that the claims were extinguished

for three reasons. First, it was persuaded by the Examiner's

conclusion that there was a low likelihood of recovery on

the claims. At the stay hearing, the Court noted that

I have to say I was sitting at the end of the

confirmation hearing, still waiting to hear the facts that

would convince me that there . . . was value to be had

. . . and I never heard that. And I remain convinced

that there was every opportunity to make that record,

and that record was not made.

The Examiner concluded that the prospects for successfully

prosecuting the claims were "not promising." He noted that,

as a factual matter, the recapitalization transaction differed

markedly from prior highly leveraged transactions that had

been found to be unlawful insofar as the risks of the

transaction were born by the acquirer (KKR) and other

unsecured creditors and not by pre-transaction creditors.

Second, the Court concluded that the potential cost to the

_________________________________________________________________

12. Huff has argued that its own willingness to buy the claims from the

bankruptcy estate shows that the claims did have value (and thus, by

implication, that they were extinguished not because they lacked value

but because they had value that the junior creditors saw and managed

to capture in violation of the absolute priority rule). But Huff offered

only

$100,000 plus some portion of any future recovery. We do not think that

relatively meager and arguably strategic offer demonstrates that the

claims would have had more value to the estate if they had been

preserved or sold to Huff than they did under the reorganization plan.

23

estate of prosecuting the action and defending and paying

indemnification claims, cross claims, and counterclaims

arising out of the prosecution was high. Third, the Court

believed that there was some likelihood that the Banks and

the subordinated noteholders, as participants in the

leveraged recapitalization, would be estopped from

recovering on the claims.

Huff and HSBC do not challenge the Examiner's (and the

District Court's) factual findings, which, at all events, are

well supported, but contend that the Examiner's analysis of

the value of the claims was flawed because he made a legal

error in determining that a court would evaluate the claims

on an enterprise evaluation basis, and thus he incorrectly

concluded that the claims were unlikely to succeed. It is on

this basis that they challenge the finding made by the

Examiner and accepted by the District Court that the

claims were of little value to the estate. Their theory is that

the claims did have substantial value and thus that the

District Court erred in concluding that the claims were

released because they were adjudged to be unlikely to

succeed.

C.

The Examiner analyzed the viability of any claims arising

out of the recapitalization primarily under Alabama law.13

Two types of fraudulent transfers, actual and constructive,

are within the scope of the Alabama Fraudulent Transfer

Act, ALA. CODE 1975, S 8-9A-1 et seq. See McPherson Oil Co.,

Inc. v. Massey, 643 So.2d 595, 596 (Ala. 1994). An actual

fraudulent transfer is one made by a debtor who transfers

assets "with actual intent to hinder, delay, or defraud any

creditor of the debtor." ALA. CODE 1975, S 8-9A-4(a). The

trial court considers several factors in determining whether

the debtor possessed the requisite intent, including to

_________________________________________________________________

13. Huff does not challenge the decision to analyze claims arising out of

the recapitalization under Alabama law. The Examiner canvassed choice

of law rules and determined that Alabama law would apply to the claims

whether suit was filed within the Third Circuit or in Alabama because

Alabama's contacts with Bruno's generally, and with the recapitalization

specifically, exceeded all others in quantity, substance, and

significance.

24

whom the transfer was made, the amount of assets

transferred, and the financial condition of the debtor before

and after the transfer. See id., S8-9A-4(b); McPherson Oil,

643 So.2d at 596. A constructive fraudulent transfer occurs

when a debtor transfers assets to another without

consideration, and the debtor was, or became, insolvent at

the time of the transfer. See ALA. CODE 1975, S 8-9A-5(a);

McPherson Oil, 643 So.2d at 596; Champion v. Locklear,

523 So.2d 336, 338 (Ala. 1988).

The parties have focused on potential constructive

fraudulent transfer claims.14 To succeed on a claim of

constructive fraudulent transfer arising out of the

recapitalization, a claimant would have to show that

Bruno's was insolvent or left with unreasonably small

capital at the time of the recapitalization.15 Based on the

conclusion that the leveraged recapitalization did not

render Bruno's insolvent or leave it with unreasonably

small capital, the Examiner concluded that the claims had

little value.16 He noted as well that, because KKR bore most

of the risk of the transaction, the chance that KKR would

be held liable for constructive fraudulent transfer was

remote.

Huff would have us reject the Examiner's conclusions

that Bruno's was solvent after the recapitalization on the

basis that the Examiner used an incorrect method to

evaluate solvency. Huff argues that the Examiner erred by

evaluating solvency on a "business enterprise" method

rather than a "piecemeal or asset-by-asset" valuation

method (which does not take goodwill into account except

_________________________________________________________________

14. The Examiner concluded that the chances that a claim for actual

fraudulent transfer would succeed were remote.

15. The Examiner concluded that the fraudulent transfer claims would

not be barred under the applicable statutes of limitations, and no one

has challenged that conclusion.

16. The Examiner also concluded that there was a reasonable possibility

that the subordinated noteholders and the Banks would be estopped

from sharing in any fraudulent transfer recoveries. In this regard, it is

significant that 87% of the debtors' creditors (i.e. the senior lenders

and

the subordinated noteholders) participated in the recapitalization.

25

insofar as the entity includes separately saleable

intangibles).17

The Examiner used the business enterprise method, as

opposed to the asset-by-asset method, after extensive

analysis of the case law. He concluded that it was unlikely

that a court would analyze fraudulent conveyance claims

under the asset-by-asset test and that the business

enterprise method was consistent with generally accepted

accounting principles (GAAP) and appropriate under the

circumstances. We conclude that the District Court's

decision to credit the Examiner's Report, which concluded

that the business enterprise approach was the appropriate

measure of solvency, was not error. The Alabama

Fraudulent Transfer Act does not appear to require an

asset-by-asset approach.18 The statute limits the definition

of assets without excluding assets, such as goodwill, that

are typically included in the business enterprise analysis

_________________________________________________________________

17. The Examiner actually used an "adjusted business enterprise"

method, in which he considered short-term liabilities, which are often

left out of a business enterprise analysis. He did so because he

concluded that a court analyzing fraudulent transfer would include short

term liabilities in an assessment of liabilities. The Examiner also

considered contingent and off-balance sheet liabilities for the same

reason.

18. The statute provides that

(a) A debtor is insolvent if the sum of the debtor's debts is

greater

than all of the debtor's assets at a fair valuation.

(b) A debtor who is generally not paying his debts as they become

due is presumed to be insolvent.

***

(d) Assets under this section do not include property that has been

transferred, concealed, or removed with intent to hinder, delay, or

defraud creditors or that has been transferred in a manner making

the transfer voidable under this chapter.

(e) Debts under this section do not include an obligation to the

extent it is secured by a valid lien on property of the debtor not

included as an asset.

ALA. CODE 1975 S 8-9A-2. No evaluation method is specified by the

statute, which does not define "fair valuation."

26

but not in an asset-by-asset evaluation. See ALA. CODE 1975

S 8-9A-2.

Moreover, however value is analyzed, it is clear that

Bruno's functioned soundly for several years after the

recapitalization, paying its debts (including all interest

payments) and successfully renegotiating the interest rates

on some of its loans. Huff has given us no reason to

conclude that the Examiner incorrectly determined that

Bruno's was solvent at the time of the recapitalization. Huff

itself initially invested in Bruno's in December 1995 (four

months after the recapitalization). It made additional

investments in 1996 and early 1997, and in October 1997

Huff 's analysts were still recommending Bruno's as a

"buy." Importantly, and as the District Court noted, at the

time of the recapitalization Huff 's own experts agreed that

Bruno's was solvent:

The credit analysis prepared by Huff 's financial

analyst, Allen Gurevich, in August 1995 (Debtor's

Exhibit 18) and the testimony of Huff 's portfolio

manager (tr. pp 122-123) and Huff 's inside attorney

Bryan Bloom (tr. 166-0167) that the fair market value

of Bruno's at the time of the Leveraged Recapitalization

in August 1995 approximated 1.1 billion.

And as the Examiner noted, "in connection with the

transaction, other sophisticated financial inst[itutions]

relied on KKR's projections. From interviews with

representatives of all of these institutions and a review of

thousands of documents, the Examiner is aware of no

instance in which these institutions contemporaneously

challenged the reasonableness of KKR's projections for

Bruno's." Huff 's challenge to the Examiner's and the

District Court's finding that the leveraged recapitalization

did not render Bruno's insolvent is unavailing.

As noted above, Huff does not challenge the Examiner's

factual findings, and we find no error in District Court's

decision to accept the Examiner's decision to evaluate the

claims using the business enterprise method. Huff 's

remaining argument that the release of the claims was on

account of the interest amounts to an argument from res

ipsa loquitur: KKR had an equity interest in the corporation,

27

and therefore the Debtors must have made the releases for

that reason. If we were to accept this position, without

some evidence of a causal relationship, any time that old

equity received anything of value under a reorganization

plan we would have to conclude that it was received"on

account of " the interest--the position rejected by the

Supreme Court in 203 North LaSalle. See 526 U.S. at 451-

52. In this regard, it is significant that claims against all

participants in the recapitalization, and not just KKR, were

extinguished, including all claims against the noteholders

(including Huff) and all claims against the shareholders

who were bought out in the recapitalization (who were the

managers of the company when it made the deal for the

reorganization).

The evidence compels the conclusion that the claims

were extinguished because, in the judgment of the plan

proponents, extinguishment was the approach most likely

to provide the greatest possible addition to the bankruptcy

estate. To be sure, the releases were not subjected to a

formal "market test," as 203 North LaSalle suggests may be

required. However, in these circumstances, the Examiner's

finding that the claims had little to no value, which was

accepted by the District Court, was an appropriate

surrogate for a market test and an acceptable safeguard.

We thus conclude that the District Court did not err in

concluding that the potential cost of defending and paying

indemnification claims, cross claims, and counterclaims

arising out of the prosecution of the claims was high, and

that the claims were extinguished not on account of KKR's

interest in the Debtors, but because the Debtors

determined that they were unlikely to have any value. The

Examiner's and the District Court's conclusions that the

claims were unlikely to succeed and were potentially costly

to pursue are legally and factually supported. Huff has

failed to demonstrate the requisite causal relationship

between the transfer of value and KKR's interest in the

Debtors. Therefore, we conclude that the plan did not

violate the absolute priority rule.

This is not to say that a reorganization plan can transfer

assets whenever the Trustee or the Debtor-in-Possession

judges that to do so would be in the best interest of the

28

reorganized entity. Rather, we announce a narrow rule that,

without direct evidence of causation, releasing potential

claims against junior equity does not violate the absolute

priority rule in the particular circumstance in which the

estate's claims are of only marginal viability and could be

costly for the reorganized entity to pursue.

IV. Good Faith

Huff contends that the plan should not have been

confirmed because the District Court erred in determining

that it was proposed in good faith. Section 1129(a)(3)

provides that the court shall confirm a plan only if "[t]he

plan has been proposed in good faith and not by any means

forbidden by law." 11 U.S.C. S 1129(a)(3)."[F]or purposes of

determining good faith under section 1129(a)(3) . . . the

important point of inquiry is the plan itself and whether

such a plan will fairly achieve a result consistent with the

objectives and purposes of the Bankruptcy Code." In re

Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 150 n.5

(3d Cir. 1986) (quoting In re Madison Hotel Assocs., 749

F.2d 410, 425 (7th Cir. 1984)) (alteration in original). The

District Court's determinations of fact pertaining to good

faith are reviewed for clear error. Cf. Abbotts Dairies, 788

F.2d at 147 (holding that the standard of review for good

faith under S 363(m) of the Code is mixed:"we exercise

plenary review of the legal standard applied by the district

and bankruptcy courts, but review the latter court's

findings of fact on a clearly erroneous standard") (citations

omitted).

Huff contends that the plan was not proposed in good

faith because the releases from any claims arising out of

the recapitalization were made in a collusive quid pro quo

for the waiver of preferences. Huff 's theory of bad faith is

that KKR orchestrated the reorganization and controlled the

Debtors throughout the reorganization in order to avoid

potential liability arising out of the leveraged

recapitalization, and that it persuaded the other creditors to

agree to the reorganization plan by including the waiver of

preferences.

As the District Court found, however, the timing of the

releases belies this argument; there is scant evidence tying

29

the release of the claims arising out of the recapitalization

to the waiver of preferences. The Debtors decided not to

pursue the preferences on March 17, 1999. One month

later, the Committee passed a resolution preserving the

claims arising out of the recapitalization until further

information could be gathered about them. This shows that

a month after the Debtors decided not to pursue the

preferences, the Committee had not decided whether to

release the claims arising out of the recapitalization plans.

At the confirmation hearing, Ms. Schirmang, co-chair of

the Committee, testified that the Debtors did not release

the claims arising out of the leveraged recapitalization in a

quid pro quo deal for the preference claims. She testified

that, when the Committee decided to release the claims in

May 1999, it did so "in the interest of getting the plan into

the hands of creditors and hopefully getting a distribution

as soon as possible and getting the Debtor out of

bankruptcy." Ms. Schirmang also testified that the

preference waivers were intended to maintain and

rehabilitate post-petition relationships within the trade, and

that there was nothing unusual about the waiver of

preferences: "to be honest with you, I have never seen a

reorganized debtor pursuing preference actions." The trade

creditors who benefitted from the waivers included key

suppliers to the business. See note 3, supra. Huff has not

presented anything but innuendo in support of its

argument that the Debtors failed to act in good faith. Given

the record evidence, we conclude that the District Court's

finding that the plan was proposed in good faith was not in

error.

V. Conformity to Applicable Provision of

Title II of the Code

Section 1129(a)(1) provides that the court shall confirm a

plan if it "complies with the applicable provisions of this

title." 11 U.S.C. S 1129(a)(1). This requires that the plan

conform to the applicable provisions of Title II. See

Lawrence P. King, Collier on BankruptcyP 1129.03[1], 1129-

25 (15th ed. rev. 1996). Huff argues that the plan should

not have been confirmed because it violates several

provisions of Title II.

30

A. Section 510(a)

Section 510(a) provides that a "subordination agreement

is enforceable in a case under this title to the same extent

that such agreement is enforceable under applicable

nonbankruptcy law." Huff argues that it had subrogation

rights under the indenture which are violated by the terms

of the plan. The relevant provision of the indenture provides

that

[a]fter all senior indebtedness has been paid in full

. . . . Holders shall be subrogated . . . to the rights of

holder of Senior Indebtedness to receive distributions

[from the debtors] applicable to Senior Indebtedness to

the extent that distributions otherwise payable to the

Holders have been applied to the payment of Senior

Indebtedness. No payments or distributions to the

holders of Senior Indebtedness to which the Holders of

the Securities or the Trustee would be entitled except

for the provisions of this Article . . . shall, as between

the Company, its creditors other than holders of the

Senior Indebtedness and the Holders of the Securities,

be deemed to be a payment by the Company to or on

account of Senior Indebtedness.

The subordination agreement is an intercreditor

arrangement between the Banks (the senior indebtedness)

and the subordinated noteholders. It does not relieve the

Debtors of their payment obligations on the subordinated

notes. But the subordinated noteholders' subrogation rights

under the indenture described in these provisions never

arose because the Banks' claims were not paid in full under

the plan. There is no question that the Banks were not paid

in full under the reorganization plan, because the

reorganized entity was worth at most $340 million, whereas

the Banks had claims of $421 million.

Huff argues that the subordinated noteholders had a

right under this provision to subrogation. More specifically,

Huff argues that it should be awarded warrants to

purchase common stock if and when the reorganized

company reaches a value of $421 million. But the

bankruptcy estate is evaluated and distributions made at

the time of the effective date of the reorganization plan. See

31

11 U.S.C. S 1129(b)(2)(B)(i) (referring to"value, as of the

effective date of the plan"). After that date, there are no

remaining claims under which Huff could assert

subrogation rights. This contention therefore fails.

Huff also argues that under an additional clause, the so-

called X clause, the subordinated noteholders should get

securities in the new entity subordinated to the Banks'

interests to the same extent that they had an interest in the

old entity.19 The clause states that

[u]ntil all Obligations with respect to Senior

Indebtedness (as provided in Subsection above) are

paid in full in cash or cash equivalent, any distribution

to which holders would be entitled but for this article

shall be made to holders of Senior Indebtedness (except

that Holder may receive (i) securities that are

subordinated to at least the same extent as the

Securities to (a) Senior Indebtedness and (b) any

securities issue in exchange for Senior Indebtedness),

as their interests may appear.

This clause does not apply to the current situation. The

clause requires that, if the Debtors distribute securities to

the subordinated noteholders, the general obligation to turn

over distributions to Senior Indebtedness is waived so long

as the new securities are subordinated "to the same extent

as" the existing subordinated debt.

As the Seventh Circuit has explained, these clauses are

quite common, and are intended to avoid a procedure of

requiring junior creditors to turn over securities and then

receive them back once senior creditors are paid in full:

[s]uch clauses are common in bond debentures,

although there is no standard wording. Without the

clause, the subordination agreement that it qualifies

would require the junior creditors to turn over to the

senior creditors any securities that they had received

as a distribution in the reorganization, unless the

senior creditors had been paid in full. Then,

_________________________________________________________________

19. The Debtors argue that this issue was not raised in the District

Court, but we are satisfied that it was raised in HSBC's objections to the

plan, and in Huff 's argument to the District Court.

32

presumably, if the senior creditors obtained full

payment by liquidating some of the securities that had

been turned over, the remaining securities would be

turned back over to the junior creditors. The X Clause

shortcuts this cumbersome procedure and enhances

the marketability of the securities received by the

junior creditors, since their right to possess (as distinct

from pocket the proceeds of) the securities is

uninterrupted.

In the Matter of Envirodyne Indus., Inc., 29 F.3d 301, 306

(7th Cir. 1994). We agree. The clause is not a requirement

that the Debtors distribute to the subordinated noteholders

subordinated securities, or warrants to purchase securities,

if the reorganized entity does well in the future so that the

Banks (the Senior Indebtedness) make back their losses, in

proportion to any securities distributed to Senior

Indebtedness.

Huff makes one final argument under this section--that

the provision of the indenture that states that"nothing in

the indenture shall impair, as between the Company and

the holders, the obligation of the Company, which is

absolute and unconditional, to pay principal of and interest

on the Securities in accordance with their terms," requires

the Debtors to preserve a recovery for the noteholders with

the issuance of securities junior to the common stock. This

is a misreading of the provision, which simply provides that

the subordination agreement is an intercreditor

arrangement, i.e., an arrangement between the Banks (the

senior indebtedness) and the subordinated noteholders,

and does not relieve the Debtors of their payment

obligations on the subordinated notes.

B. Section 524(e)

Section 524(e) provides that "[e]xcept as provided in

subsection (a)(3) of this section,[20 ] discharge of a debt of

_________________________________________________________________

20. Subsection (a)(3) provides that a discharge of a case under Title II

operates as an injunction against the commencement or

continuation of an action, the employment of process, or an act, to

33

the debtor does not affect the liability of any other entity

on, or the property of any other entity for, such debt." 11

U.S.C. S 524(e). Huff argues that the release in Paragraph

58 of the confirmation order violates S 524(e), because it

affects the liability of the members of the Committee and

professionals who provided services to the Debtors to third

parties. However, we believe that Paragraph 58, which is

apparently a commonplace provision in Chapter 11 plans,

does not affect the liability of these parties, but rather

states the standard of liability under the Code, and thus

does not come within the meaning of 524(e).21

Section 524(e) "makes clear that the bankruptcy

discharge of the debtor, by itself, does not operate to relieve

non-debtors of their liabilities." In re Continental Airlines,

203 F.3d 203, 211 (3d Cir. 2000) (Continental II ) (citations

omitted). Section 524(e), by its terms, only provides that a

discharge of the debtor does not affect the liability of non-

debtors on claims by third parties against them for the debt

discharged in bankruptcy. Thus, for example, S 524(e)

makes clear that a discharge in bankruptcy does not

_________________________________________________________________

collect or recover from, or offset against, property of the debtor

of

the kind specified in section 541(a)(2) of this title that is

acquired

after the commencement of the case, on account of any allowable

community claim, except a community claim that is excepted from

discharge under section 523, 1228(a)(1), or 1328(c)(1) of this

title, or

that would be so excepted, determined in accordance with the

provisions of sections 523(c) and 523(d) of this title, in a case

concerning the debtor's spouse commenced on the date of the filing

of the petition in the case concerning the debtor, whether or not

discharge of the debt based on such community claim is waived.

11 U.S.C. 524(a)(3).

21. HSBC argues more generally that "[t]he most obvious defect of the

Plan is that it incorporates releases and provides for extinction of

causes

of action against non debtor third parties for no consideration." It

argues

that under In re Continental Airlines, 203 F.3d 203, 211 (3d Cir. 2000),

a plan with releases is unconfirmable as a matter of law. HSBC reads

S 524(e) and Continental II too broadly. Section 524(e) provides that the

bankruptcy discharge of the debtor does not operate to relieve non-

debtors of their liabilities, but by its terms it does not govern

provisions

in a plan by which a debtor releases its own claims against third parties.

34

extinguish claims by third parties against guarantors or

directors and officers of the debtor for the debt discharged

in bankruptcy. Indeed, Continental II held that a plan that

enjoined plaintiffs' actions against the debtor's directors

and officers who "ha[d] not formally availed themselves of

the benefits and burdens of the bankruptcy process," id. at

211, violated S 524(e), id. at 214. The injunction in that

plan protected directors and officers from actions taken

prior to bankruptcy that allegedly violated the securities

laws and thus abrogated the liability of third parties.

Paragraph 58 does not similarly affect the liability of

third parties. Paragraph 58 provides that

[n]one of the Debtors, the Reorganized Debtors, New

Bruno's, the Creditor Representative, the Committee or

any of their respective members, officers, directors,

employees, advisors, professionals or agents shall have

or incur any liability to any holder of a Claim or Equity

Interest for any act or omission in connection with,

related to, or arising out of, the Chapter 11 Cases, the

pursuit of confirmation of the Plan, the consummation

of the Plan or the Administration of the Plan or the

property to be distributed under the Plan, except for

willful misconduct or gross negligence, and, in all

respects, the Debtors, the Reorganized Debtors, New

Bruno's, the Creditor Representative, the Committee

and each of their respective members, officers,

directors, employees, advisors, professionals and

agents shall be entitled to rely upon the advice of

counsel with respect to their duties and responsibilities

under the plan.

Under Paragraph 58, members of the Committee and

professionals who provided services to the Debtors remain

liable for willful misconduct or gross negligence. Because

we conclude that this standard of liability is the standard

that already applies in this situation, we believe that

Paragraph 58 affects no change in liability.

Section 1103(c) of the Bankruptcy Code, which grants to

the Committee broad authority to formulate a plan and

perform "such other services as are in the interest of those

represented," 11 U.S.C. S 1103(c), has been interpreted to

35

imply both a fiduciary duty to committee constituents and

a limited grant of immunity to committee members, see In

re L.F. Rothschild Holdings, Inc., 163 B.R. 45, 49 (S.D.N.Y.

1994); In re Drexel Burnham Lambert Group, Inc. , 138 B.R.

717, 722 (Bankr. S.D.N.Y. 1992), aff 'd, 140 B.R. 347

(S.D.N.Y. 1992); In re Tucker Freight Lines, Inc., 62 B.R.

213, 216, 218 (Bankr. W.D. Mich. 1986); Lawrence P. King,

Collier on Bankruptcy P 1103.05[4], 1103-32-33 (15th ed.

rev. 1996) ("[A]ctions against committee members in their

capacity as such should be discouraged. If members of the

committee can be sued by persons unhappy with the

committee's performance during the case or unhappy with

the outcome of the case, it will be extremely difficult to find

members to serve on an official committee.").

This immunity covers committee members for actions

within the scope of their duties. The committee members

and the debtor are entitled to retain professional services to

assist in the reorganization. In Pan Am Corp. v. Delta

Airlines, Inc., 175 B.R. 438, 514 (S.D.N.Y. 1994), it was held

that committee members and those professionals who

provide services to the debtor with respect to

reorganization, or to the committee members in their

capacity as committee members, however, do remain liable

for willful misconduct or ultra vires acts.

We agree with this interpretation of S 1103(c) and hold

that it limits liability of a committee to willful misconduct

or ultra vires acts. The release in Paragraph 58 sets forth

the appropriate standard for liability that would apply to

actions against the committee members and the entities

that provided services to the Committee in the event that

they were sued for their participation in the reorganization.22

_________________________________________________________________

22. Huff also argues that the failure of the Debtors to enforce the

subordinated noteholders' subrogation rights violates S 524(e) and calls

this a provision "extinguish[ing] the Noteholders' rights to seek

recoveries

directly against the Banks," which constitutes an impermissible non-

consensual third-party release. However, this argument is specious for

the same reason that Huff 's main argument about the surbordination

agreement is specious: the subordinated noteholders' subrogation rights

only arise when the senior lenders are paid in full. As noted above, the

senior creditors in this case were not paid in full under the plan.

36

It does not affect the liability of another entity on a debt of

the debtor within the meaning of S 524(e).

Nothing in our recent opinion in Continental II is to the

contrary. In that case, we held that a plan that enjoined

plaintiffs' actions against Continental's directors and

officers violated S 524(e). Id. at 214. The release in question

here differs from that in Continental II in a fundamental

way: it sets forth the applicable standard of liability under

S 1103(c) rather than eliminating it altogether. In

Continental II, we concluded that it was clear under any

rule that the court might adopt that the releases at issue

were impermissible because "the hallmarks of permissible

non-consensual releases--fairness, necessity to the

reorganization, and specific factual findings to support

these conclusions--are all absent here." Id. at 214. We did

not treat S 524(e) as a per se rule barring any provision in

a reorganization plan limiting the liability of third parties.

See id. Because of the differences between the releases in

the two cases, Continental II does not compel the

conclusion that this release is impermissible. Indeed,

because this release does not affect the liability of third

parties, but rather sets forth the appropriate standard of

liability, we believe that this release is outside the scope of

S 524(e).

C. Sections 363 and 1123

Section 363 governs the sale of assets outside of the

reorganization plan. It permits the trustee (or the debtor-in-

possession), after notice and a hearing, to use, sell, or lease

property of the estate outside of the ordinary course of

business. See 11 U.S.C. S 363(b)(1); In re Rickel Home

Centers, 209 F.3d 291, 297 (3d Cir. 2000). Section

1123(b)(4) provides that a plan may "provide for the sale of

all or substantially all of the property of the estate, and the

distribution of the proceeds of such sale among holders of

claims or interests." 11 U.S.C. S 1123(b)(4). Huff

characterizes the reorganization plan as involving a sale of

assets and tries to transform these two sections of the

Bankruptcy Code into a general duty to fully market the

company, similar to the duty recognized by the Delaware

Supreme Court in the context of corporate change in

37

control transactions. See Paramount Communications v.

QVC Network, 637 A.2d 34, 43 (Del. 1994); Revlon, Inc. v.

MacAndrews & Forbes Holdings, 506 A.2d 173, 182 (Del.

1986).

This argument fails because these provisions of the Code,

even if they do impose a duty to fully market assets in

some circumstances (a question we do not address), are

simply inapplicable to this situation. The plan wiped out

old equity and issued new stock to the creditors. For tax

purposes, this transaction was accomplished by

transferring substantially all of the assets of the Debtors to

a creditors' representative and immediately thereafter to the

newly created Bruno's Supermarkets, a corporation whose

equity is owned by the senior lenders. But just because a

transaction is a sale or exchange for tax purposes does not

mean that it is a sale within the meaning of the Code. See

In re PCH Assocs., 804 F.2d 193, 201 (2d Cir. 1986)

(looking to the economic substance of the transaction to

determine whether it was a sale or a lease within the

meaning of the Code). In a similar case, Major's Furniture

Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 546 (3d Cir.

1979), we stated that

[i]t is apparent to us that on this record none of the

risks present in a true sale is present here. Nor has the

custom of the parties or their relationship, as found by

the district court, given rise to more than a

debtor/creditor relationship in which Major's' debt was

secured by a transfer of Major's' customer accounts to

Castle . . . . Accordingly, we hold that on this record

the district court did not err in determining that the

true nature of the transaction between Major's and

Castle was a secured loan, not a sale.

That the assets passed though the hands of a creditors'

representative before being returned to the reorganized

Debtors does not transform this plan from a stand-alone,

internally generated plan of reorganization to a sale of

assets to a third party. To hold otherwise would be to read

S 1129 of the Code as characterizing the many

reorganizations involving the transfer of control from a

corporation's old equity to its creditors as involving a sale,

a position without support in our jurisprudence.

38

D. Section 1129(a)(2)

Section 1129(a)(2) provides that the court shall confirm a

plan only if "[t]he proponent of the plan complies with the

applicable provisions of this Title." 11 U.S.C.S 1129(a)(2).

We agree with the District Court's conclusion that

S 1129(a)(2) requires that the plan proponent comply with

the adequate disclosure requirements of S 1125.23 Title 11

U.S.C. S 1125(b) mandates the filing of a disclosure

statement containing "adequate information." Huff argues

that the plan proponents failed to comply with the

disclosure requirements by failing to provide adequate

information regarding the release of the preferences. The

Debtors respond that Huff does not have standing to raise

this argument.

Appellate standing in bankruptcy cases is more limited

than standing under Article III or the prudential

requirements associated therewith. "Generally, litigants in

federal court are barred from asserting the constitutional

rights of others." Kane v. Johns-Manville Corp., 843 F.2d

636, 643 (2d Cir. 1988) (citing Warth v. Seldin , 422 U.S.

490, 499, 509 (1975)). The court in Kane explained why

limits on third-party standing are particularly relevant to

appellate standing in bankruptcy proceedings:

Bankruptcy proceedings regularly involve numerous

parties, each of whom might find it personally

expedient to assert the rights of another party even

though that other party is present in the proceedings

and is capable of representing himself. Third-party

standing is of special concern in the bankruptcy

context where, as here, one constituency before the

_________________________________________________________________

23. Other courts also have found S 1125 to be one of the applicable

provisions of the Code referenced to in S 1129. See, e.g., Tenn-Fla

Partners v. First Union Nat'l Bank of Fla., 229 B.R. 720, 732 (W.D. Tenn.

1999); In re Trans World Airlines, Inc., 185 B.R. 302, 313 (Bankr.

E.D.Mo. 1995) ("The principal purpose of section 1129(a)(2) of the

Bankruptcy Code is to assure that the plan proponents have complied

with the disclosure requirements of section 1125 of the Bankruptcy Code

in connection with the solicitation of acceptances of the plan."); see

also

Lawrence P. King, Collier on BankruptcyP 1129.03[2] at 1126-26.1 &

n.14 (15th ed. rev. 1996).

39

court seeks to disturb a plan of reorganization based

on the rights of third parties who apparently favor the

plan. In this context, the courts have been

understandably skeptical of the litigant's motives and

have often denied standing as to any claim that asserts

only third-party rights.

Id. at 644; see also Travelers Ins. Co. v. H.K. Porter Co.,

Inc., 45 F.3d 737, 741 (3d Cir. 1995) (adopting the

reasoning of Kane).

Title 11 U.S.C. S 1109(b)--which provides that "[a] party

in interest, including the debtor, the trustee, a creditors'

committee, an equity security holders' committee, a

creditor, an equity security holder, or any indenture

trustee, may raise and may appear and be heard on any

issue in a case under this chapter"--confers broad standing

at the trial level. However, courts do not extend that

provision to appellate standing:

This rule of appellate standing is derived from former

section 39(c) of the Bankruptcy Act of 1898, which

permitted only a "person aggrieved" to appeal an order

of the bankruptcy court. 11 U.S.C. S 67(c) (1976)

(repealed 1978). Although the present Bankruptcy

Code does not contain any express restrictions on

appellate standing, courts have uniformly held that the

"person aggrieved" standard is applicable to cases

under the Code.

Kane, 843 F.2d at 641-42.

This court has emphasized that appellate standing in

bankruptcy cases is limited to "person[s] aggrieved."

Travelers Ins. Co., 45 F.3d at 741. We consider a person to

be aggrieved only if the bankruptcy court's order

"diminishes their property, increases their burdens, or

impairs their rights." In re Dykes, 10 F.3d 184, 187 (3d Cir.

1993) (citation omitted). Thus, only those "whose rights or

interests are directly and adversely affected pecuniarily" by

an order of the bankruptcy court may bring an appeal. Id.

(internal quotation marks and citation omitted). The

"person aggrieved" standard is more stringent than the

constitutional test for standing. In re O'Brien Envtl. Energy,

Inc., 181 F.3d 527, 530 (3d Cir. 1999).

40

Huff contends that Bruno's failed to disclose that it had

not done a thorough analysis of preference claims before

deciding not to pursue them. But Huff itself was aware of

this alleged failing at the time and pointed it out to the

other creditors when it opposed the plan. Huff clearly would

not have acted any differently if the disclosure had been

made as it now argues it should have been. Similarly,

because Huff pointed out the alleged failure to disclose in

its statements protesting the plan, it cannot show that it

was personally aggrieved because other creditors might

have voted differently if they had had the information

allegedly missing from the disclosure. Since Huff cannot

show that it was personally aggrieved by any failure to

disclose, we conclude that Huff does not have standing to

raise this claim. See In re Middle Plantation of Williamsburg,

Inc., 47 B.R. 884, 891 (E.D. Va. 1984) ("Holders of impaired

claims who have been induced to vote in favor of a plan are

the only ones who may raise the issue of the adequacy of

the Disclosure Statement."), aff 'd, 755 F.2d 928 (4th Cir.

1985).

We do not foreclose the possibility that, in another case,

a creditor objecting to a plan for lack of disclosure that

actually had the information it complains is missing from

the disclosure might nevertheless have standing if it could

show that there is a possibility that other creditors would

have acted differently (thus benefitting the protesting

creditor) if they had had the same information. See In re

Perez, 30 F.3d 1209, 1217 (9th Cir. 1994) (concluding that

a creditor had standing on this theory). But in this case,

because Huff itself made the information available to the

other creditors, it has not made such a showing. The

chance that the other creditors would have acted differently

is simply too speculative to be a basis for third party

standing here.

E. Section 1129(a)(7)

Section 1129(a)(7) provides that a court shall confirm a

plan only if

With respect to each impaired class of claims or

interests--

41

(A) each holder of a claim or interest of such class--

(i) has accepted the plan; or

(ii) will receive or retain under the plan on account of

such claim or interest property of a value, as of the

effective date of the plan, that is not less than the

amount that such holder would so receive or retain

if the debtor were liquidated under chapter 7 of this

title on such date; or

(B) if section 1111(b)(2) of this title applies to the

claims of such class, each holder of a claim of such

class will receive or retain under the plan on account

of such claim property of a value, as of the effective

date of the plan, that is not less than the value of such

holder's interest in the estate's interest in the property

that secures such claims.

11 U.S.C. S 1129(a)(7). The District Court found that the

Debtors have demonstrated at the Confirmation Hearing

that creditors rejecting the plan would not receive a greater

recovery in a Chapter 7 liquidation. We review this factual

finding for clear error.

Huff failed to challenge the Debtors' liquidation analysis.

Huff also did not introduce evidence to demonstrate that

the recapitalization claims have significant value or that it

was in the best interests of the estate to pursue the

preference claims. And as noted above, the Examiner's

District Court findings to the contrary are well supported.

Accordingly, the District Court did not commit clear error in

holding that the Debtors met their burden under

S 1129(a)(7).

VI. Conclusion

For the foregoing reasons, the Order of the District Court

confirming the Debtor's Second Amended Joint Plan of

Reorganization under Chapter 11 of the Bankruptcy Code

will be affirmed.

42

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

43