Petition for Writ of Certiorari — Frates v. Weinshienk, 110 S. Ct. 1297 (1990) (No. 89-1046)

89x 046 * —ae

A

IN THE

, be Sth 3 19%

Supreme Court of the Anite’ ar

OCTOBER TERM, 1989

~--—~

JOSEPH A. FRATES, CHARLES S. HOLMES, ROBERT E.

MERRICK, STAN P. DoyLe, P. PETER PRUDDEN., III. J.

ANTHONY FRATES, STEPHEN I. FRATES, EQUIVEST

ASSOCIATES, DoYLE & HOLMES, EQUIVEST MANAGEMENT AND

FINANCIAL SERVICES, LTD., JOHN L. FARRELL, JR., ASSET

MANAGEMENT, INC., MONTY H. RIAL, PERMA RESOURCES

CORPORATION, PERMA MINING CORPORATION, PERMA PACIFIC.

INc., CALDER & COMPANY, CHIMNEY Rock COAL COMPANY.

ENERGY CAPITAL, LTp., AZTEC, LTD., COLORADO COAL

RESOURCES COMPANY AND COLORADO COAL MINING.

Petitioners,

wa

HONORABLE ZITA L. WEINSHIENK, UNITED STATES DISTRICT

JUDGE, HONORABLE CHARLES E. MATHESON, UNITED STATES

BANKRUPTCY JUDGE, KAISER STEEL CORPORATION AND

KAISER COAL CORPORATION,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

PAUL F. HULTIN ALAN L. BUGG

Counsel of Record 102 North Cascade

CHERYL BURNSIDE Suite 502

PARCEL, MAURO, HULTIN P. O. Box 950

& SPAANSTRA, P.C. 5 Colorado Springs, Colorado 80903

1801 California Street Telephone: (719) 471-3700

Suite 3600

Denver, Colorado 80202

Telephone: (303) 292-6400

Marcus W. SIsk. JR.

DEMPSEY, BASTIANELLI.

BROWN & TOUHEY

RICHARD P. SLIVKA 2828 Pennsylvania Avenue, N.W.

Davip L. DAIN Suite 203

VINTON, SLIVKA & PANASCI Washington, D.C. 20007

1600 Stout Street Telephone: (202) 338-8088

Suite 1300

Denver, Colorado 80202

Telephone: (303) 534-4499

a a I RR

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

Attorneys for Petitioners

QUESTIONS PRESENTED

1. In determining whether a bankruptcy judge’s

“Impartiality might reasonably be aquestioned’’ under

28 U.S.C. §455(a) because the bankruptcy judge con-

tinued to preside over adversary proceedings after

having approved a plan of reorganization which de-

pends upon successful prosecution of the adversary

proceedings, may an appellate court refuse to assess

an appearance of partiality from the viewpoint of a

reasonable person, and instead adopt a technical and

legalistic test ‘“‘whether the judge appears to have

prejudged adversarial proceedings or to have placed

himself in a position where it appears he will be forced

to decide one or more of the adversary proceedings

in {the debtor’s] favor’’?

2. Under 28 U.S.C. §455(a), may an appellate court

refuse to consider the facts as they existed at the

time the recusal motion was made, and instead con-

sider facts arising after the motion for recusal _was

denied?

3. May an appellate court allow a bankruptcy judge,

who has approved a plan for reorganization of a Chap-

ter 11 debtor, to deny recusal in related adversary

proceedings commenced by the debtor, where the only

source of funds to pay the accrued costs and expenses

of the reorganization is recovery from the adversary

proceedings?

il

PARTIES

All parties in interest are named in the caption.

Equivest Management and Financial Services, Ltd.

and Asset Management, Inc. have no parent or sub-

sidiary corporations. Pursuant to Rule 12.4,

Petitioners hereby notify the Clerk of this Court of

their belief that Charles S. McNeil, a party to the

proceeding below, has no interest in the outcome of

the petition for the reason that Mr. McNeil has

reached a settlement of the underlying adversary pro-

ceedings.

il

TABLE OF CONTENTS

Page

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REASONS FOR GRANTING THE WRIT .................. 7

I. THE TENTH CIRCUIT’S OPINION CON-

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A. The Tenth Circuit Test Is Contrary to the

Liljeberg Reasonable Person Test .......... 8

B. The Tenth Circuit Improperly Considered

Facts which Arose after Denial of the Re-

os cnbicaiibaniinnes 10

Il. THE TENTH- CIRCUIT’S OPINION CON-

FLICTS WITH OTHER CIRCUITS .................. ll

III. THE ISSUES PRESENTED IN THIS CASE

ARE IMPORTANT TO THE ADMINISTRA-

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TABLE OF AUTHORITIES

CASES Page

American Employers’ Insurance Co. v. King Re-

sources Co., 545 F.2d 1265 (10th Cir. 1976) ... passim

Easley v. University of Michigan Board of Regents,

S53 F.2d 1351 (Gti Ci, TOBE) .c........0cccccc0s..0-. 12,13

Hinman v. Rogers, 831 F.2d 937 (10th Cir.

SINE: spidacicephatieacuunemen anal eansiamaraseanaicncllinaaans 13

In re Cash Currency Exchange, Inc., 85 B.R. 797

SI Ie Sachin tates cdi bciabtaiadadsunannanianahens 6

In re Drexel Burnham Lambert, Inc., 861 F.2d 1307

(2d Cir. 1988), cert. denied, __. U.S. __. , 109

Sas I SI ndkinkndsitvenacsanccasccdaidexeneianinniians 13

In re Johns-Manville Corp., 48 B.R. 765 (S.D.N.Y.

DEINE Siri kcedhaceitsisediaaicianiahsiianalanaeiensadistascneniiaiesiaunenaie 6

In re Manoa Finance Co., 781 F.2d 1370 (9th Cir.

1986), cert. denied, 479 U.S. 1064 (1987) ..... 8,12,13

In re The Ohio Corrugating Co., 91 B.R. 480 (Bankr.

SIE PINE: SII cectdcneiccibnach cececnochideinbiahaticcencdsin 13

In re United States, 666 F.2d 690 (1st Cir.

STINET cai eibstdesagseiacocelhGadeeceabuiaidre hai tlenialinaneiiomonsits 11,13

In re Virginia Electric and Power Co., 539 F.2d

Ee I Re UI ceacsintcc cities htncienivcsskiveanacen 13

“et v. Health Services Acquisition Corp., 486

Um BOT, TGR GCE. SEOE CUGGB) onceeccccessces.s: passim

Moody v. Simmons, 858 F.2d 187 (3d Cir. 1988),

cert. denied, __ U.S. __., 109 S.Ct. 1529

PI chia annek ns calciicas olaui is Uatecasilcdandiaekeaiceiees 11,12,13

New York City Housing Development Corp. v. Hart,

TOO BBE SFG CT Cie. TRG) ccscsceccovcesnssossecnss. 13

Potashnick v. Port City Construction Co., 609 F.2d

1101 (5th Cir.), cert. denied, 449 U.S. 820

2 RENN ERSES ESRI er ester 1e LaTr Ae ge onnTy pC RI 8,12,13

U.S. v. Balistriem, 779

cert. denied, 477 U.S. 908 (1986) ....... 13

Tabie of Authorities Continued

Page

U.S. v. Hines, 696 F.2d 722 (10th Cir. 1982) ....... 13

U.S. v. Murphy, 768 F.2d 1518 (7th Cir. 1985), cert.

dameed, 475 U.S. TOUR (UGG) civcsscscssiscssseessvans 12,13

U.S. v. Torkington, 874 F.2d 1441 (11th Cir.

AGIDOD tiki vssriiihinitniciecaiat mena: paeroer 12,13

United Family Life Insurance Co. v. Barrow, 452

Poe er Clee Ge. TBF) cincanncinucukiee passim

Wieboldt Stores, Inc. v. Schottenstern, 94 B.R. 488

DEER. Th. TIED ..cenccisicnistenincoteaseineas 13

STATUTES

TB UBS FI cxsteinistinieninmammanaeeee 5

26 U.S. GH seviktiicksneicntseeeeeeeee passim

SS SA. SD cdccitinecinssticcasnensveeidionaibigiaienes 9

26 UB. FIRS) doiiindiicineemnaaen 2

TB UR. QBS Kccsisinvinivcioencnneseananaeen 6

Bankruptcy Reform Act of 1978, 11 U.S.C. §§101-

SITS: tivinicscoisicciemninsedane ane 5

OTHER AUTHORITIES =

Bamkeratey Bee BOG). vvsussiiecsscemnccnives 5

Rule 21, Federal Rules of Appellate Procedure .... 6

Supreme Coalt Bele 15:6 wncannsicmnnnncn il

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1989

No. —__—

JOSEPH A. FRATES, CHARLES S. HOLMES, ROBERT E.

MERRICK, STAN P. DOYLE, P. PETER PRUDDEN, III, J.

ANTHONY FRATES, STEPHEN I. FRATES, EQUIVEST

ASSOCIATES, DOYLE & HOLMES, EQUIVEST MANAGEMENT AND

FINANCIAL SERVICES, LTD., JOHN L. FARRELL, JR., ASSET

MANAGEMENT, INC., MONTY H. RIAL, PERMA RESOURCES

CORPORATION, PERMA MINING CORPORATION, PERMA PACIFIC,

INC., CALDER & COMPANY, CHIMNEY Rock COAL COMPANY,

ENERGY CAPITAL, LTD., AZTEC, LTD., COLORADO COAL

RESOURCES COMPANY AND COLORADO COAL MINING,

Petitioners,

Wa

HONORABLE ZITA L. WEINSHIENK, UNITED. STATES DISTRICT

JUDGE, HONORABLE CHARLES E. MATHESON, UNITED STATES

BANKRUPTCY JUDGE, KAISER STEEL CORPORATION AND

KAISER COAL CORPORATION,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

Petitioners respectfully request that a writ of

certiorari issue to review the judgment of the United

States Court of Appeals for the Tenth Circuit in this

case.

fo

OPINIONS BELOW

The order of the United States Court of Appeals

for the Tenth Circuit denying rehearing is reprinted

in the appendix to this petition at Pet. App. la-2a.

The opinion of the Tenth Circuit denying mandamus

is reported at 882 F.2d 1502 and is reprinted at Pet.

App. 3a-lla. The unreported opinion of the United

States District Court for the District of Colorado is

reprinted at Pet. App. 12a-13a. The transcript from

the bench ruling of the United States Bankruptcy

Court for the District of Colorado is reprinted at Pet.

App. 14a-21a.

JURISDICTION

The judgment of the court of appeals was entered

on August 16, 1989. A Petition for Rehearing before

the panel and a Suggestion for Rehearing en banc

was denied on October 5, 1989. The jurisdiction of

this Court is invoked under 28 U.S.C. §1254(1).

STATUTE INVOLVED

The statutory provision involved herein is 28 U.S.C.

§455(a), which provides as follows:

Any justice, judge or magistrate of the

United States shall disqualify himself in any

proceeding in which his impartiality might

reasonably be questioned.

STATEMENT OF THE CASE

These proceedings arise out of the Chapter 11 bank-

ruptcy of Kaiser Stee! Corporation (‘‘Kaiser’’), which

was filed by Kaiser in February 1987. Kaiser’s bank-

ruptcy was preceded by a leveraged buyout (‘‘LBO’’)

of Kaiser which closed in February 1984. The alleged

failure of the Kaiser LBO and the nationwide fraud-

ulent conveyance litigation it spawned present im-

portant issues regarding the administration of justice

in the bankruptcy courts.

Immediately after filing its Chapter 11 petition,

Kaiser commenced five adversary proceedings in the

bankruptcy court, all of which arise out of the Kaiser

LBO. Only two of these adversary proceedings had

been actively pursued by Kaiser when Petitioners

moved for recusal of the bankruptcy judge in Novem-

ber, 1988: Kaiser Steel Corp., et al. v. Joseph A.

Frates, et al., Adversary Proceeding No. 87-E-135

(Bankr. D. Colo.), and Kaiser Steel Corp., et al. v.

Monty H. Rial, et al., Adversary Proceeding No. 87-

E-437 (Bankr. D. Colo.) (the ‘Adversary Proceed-

ings’’). Petitioners, who had participated as investors

in the LBO, are defendants in both Adversary Pro-

ceedings. Kaiser seeks damages in the Adversary Pro-

ceedings in excess of $100 million.

On October 4, 1988, Chief Bankruptcy Judge

Charles E. Matheson approved Kaiser’s Plan of Re-

organization, which depended on recoveries from the

Adversary Proceedings for the payment of adminis-

trative expenses and for distributions to unsecured

creditors. As part of the reorganization plan, Bank-

ruptcy Judge Matheson entered an order allowing

Kaiser to borrow $4 million for the sole purpose of

funding the Adversary Proceedings and other litiga-

tion related to the LBO.

Petitioners, among others, filed their motion under

28 U.S.C. §455(a) for recusal of Bankruptcy Judge

Matheson from the Adversary Proceedings on No-

vember 4, 1988, one month after he had approved

Kaiser’s Plan of Reorganization. Petitioners requested

the bankruptcy judge to recuse himself on the grounds

that his impartiality might reasonably be questioned

if he continued to preside over the Adversary Pro-

ceedings after having approved a reorganization plan

which depended for its success on recovery from those

proceedings.

In support of their motion, Petitioners cited the

admission by Kaiser that the reorganization plan de-

pended on successful prosecution of the Adversary

Proceedings. Bruce E. Hendiy, who served as Kai-

ser’s Chairman and Chief Executive Officer during

the Chapter 11 proceeding, testified as follows:

Question: [I]sn’t it a fact, Mr. Hendry,

that if these lawsuits are not

successful, the unsecured cred-

itors will not receive—are not

likely to receive any cash dis-

tributions as a result of the re-

organization?

Mr. Hendry: That’s correct.

Question: And isn’t it also a fact that

these lawsuits need to be suc-

cessfully prosecuted in order for

Kaiser to be able to pay its ad-

ministrative expenses as a re-

sult of the reorganization?

Mr. Hendry: Yes. In order to pay those fees,

we have to have a successful

litigation effort, that’s correct.

Pet. App. 24a-27a. Public information subsequently

released by Kaiser confirmed Mr. Hendry’s testimony.

Pet. App. 35a-41a.

As a legal basis for their recusal motion, Petitioners

relied on this Court’s decision in Liljeberg v. Health

Services Acquisition Corp., 486 U.S. 847, 108 S.Ct.

2194 (1988) (‘‘Liljeberg’’), which establishes the ‘‘rea-

sonable person’ test for assessing the appearance of

partiality under 28 U.S.C. §455(a). Petitioners also

relied on the Tenth Circuit decisions in United Family

Life Insurance Co. v. Barrow, 452 F.2d 997 (1971)

(‘Barrow’) and American Employers’ Insurance Co.

v. King Resources Co., 545 F.2d 1265 (1976) (“King

Resources’’), which establish that a judge who presides

over a debtor’s reorganization cannot also adjudicate

litigation on which the reorganization depends. The

principles laid down in these cases assure both the

fact and appearance of impartiality in the bankruptcy

courts, and they have assumed increasing importance

as highly leveraged corporate transactions of the

1980’s have reached the bankruptcy courts.

On December 16, 1988, Bankruptcy Judge Mathe-

son denied all motions for recusal without reference

to the Liljeberg decision. The bankruptcy judge con-

cluded that the Tenth Circuit law contained in Barrow

and King Resources no longer applied to cases filed

after the Bankruptcy Reform Act of 1978, 11 U.S.C.

§§101-151326. Pet. App. 14a-2la. Despite a specific

request from Petitioners’ counsel, the bankruptcy

judge declined to make any finding as to whether

there was an appearance of partiality. Pet. App. 19a-

21a. Following denial of the motion for recusal, some

of the defendants in the Adversary Proceedings en-

tered into settlements with Kaiser in order to avoid

trial before Bankruptcy Judge Matheson.

On January 6, 1989, pursuant to 28 U.S.C. §158(a)

and Bankruptcy Rule 8001(b), Petitioners filed with

the bankruptcy court their motions for certification,

notices of appeal and motions for leave to appeal from

Bankruptcy Judge Matheson’s denial of the recusal

motions. Because of the conflicting decisions among

the courts as to the proper procedure by which to

obtain immediate review of an order denying a motion

for recusal,| on January 13, 1989, pursuant to 28

U.S.C. §1651, Petitioners also filed a petition for writ

-of mandamus with the district court on the recusal

issue. On February 13, 1989, District Judge Wein-

shienk entered orders denying Petitioners’ motion for

certification, motion for leave to appeal and manda-

mus petition. Finding only ‘“‘no error’ in the decisions

below, Judge Weinshienk provided no opinion to ex-

plain her orders. Pet. App. 12a-13a.

On February 21, 1989, pursuant to Rule 21 of the

Federal Rules of Appellate Procedure and 28 U.S.C.

§1651, Petitioners filed their petition for writ of man-

damus with the Court of Appelas for the Tenth Cir-

cuit. The mandamus petition cited the failure of the

bankruptcy court to follow Liljeberg or to apply the

Tenth Circuit precedents in Barrow and King Re-

sources. Oral argument was held on May 11, 1989,

and the Tenth Circuit Panel issued its opinion denying

mandamus on August 16, 1989.

The Panel opinion made no attempt to apply the

Liljeberg ‘‘reasonable person”’ test for the appearance

of partiality. Instead, the Panel applied its own le-

‘Compare, e.g., In re Cash Currency Exchange, Inc., 85 B.R.

797 (N.D. Ill. 1988) (writ of mandamus is only remedy for review

of denial of a motion to recuse under 28 U.S.C. §455(a)) with

In re Johns-Manville Corp., 43 B.R. 765 (S.D.N.Y. 1984) (motion

for leave to appeal pursuant to B.R. 8003 is proper procedure

for seeking review of denial of motion to recuse).

~

galistic test and determined that recusal is necessary

only where there is evidence of actual bias or an

appearance that the bankruptcy judge has “pre-

judged” adversarial proceedings or been ‘‘boxed in’’

by prior rulings such that he will be forced to reach

a certain result in an adversarial proceeding regard-

less of the merits. Pet. App. 5a-6a. While ruling that

Barrow and King Resources were applicable, the Panel

failed to apply the principles of those cases in ac-

cordance with the test required by Liljeberg.

Rather than considering the facts as they appeared

at the time the recusal motion was made, the Panel

concluded that the Kaiser reorganization did not de-

pend on success in the Adversary Proceedings, cur-

iously relying on the payment of accrued

administrative and reorganization expenses from set-

tlements in the Adversary Proceedings entered into

after the denial of recusal. Pet. App. 8a. Thus, the

Panel, with questionable use of hindsight analysis, up-

held Bankruptcy Judge Matheson without any analysis

of the facts as they existed at the time the Motion

for Recusal was filed.

Petitioners filed their petition for rehearing and

suggestion for rehearing en banc on August 30, 1989.

The Tenth Circuit issued its order denying rehearing

on October 5, 1989.

REASONS FOR GRANTING THE WRIT

The Court should grant certiorari in this case be-

cause the opinion of the Tenth Circuit conflicts with

Liljeberg and with opinions of other circuit courts of

appeals. In addition, the unsettled issues presented

here regarding judicial conflicts in reorganization

cases are important to the administration of justice

in federal bankruptcy matters and should be clarified

by this Court.

I. THE TENTH CIRCUIT’S OPINION CONFLICTS WITH

LILJEBERG.

The opinion of the Tenth Circuit conflicts with Lil-

jeberg by failing to apply a reasonable person standard

for the appearance of partiality. Instead, the Tenth

Circuit applied its own legalistic test, requiring ‘‘pre-

judgment”’ or prior decisions which ‘‘boxed in’ the

bankruptcy judge. The Tenth Circuit fell into further

conflict with Liljeberg by considering the facts as they

existed at the time of appeal instead of the time

recusal was sought.

A. The Tenth Circuit Test Is Contrary to the Liljeberg

Reasonable Person Test.

The proper test to determine whether recusal is

required under §455(a) is whether a reasonable per-

son, knowing all of the relevant facts, would harbor

doubts about the judge’s impartiality. Liljeberg, su-

pra, 108 S.Ct. at 2202; Potashnick v. Port City Con-

struction Co., 609 F.2d 1101 (5th Cir.), cert. denied,

449 U.S. 820 (1980); In re Manoa Finance Co., 781

F.2d 1370 (9th Cir. 1986), cert. denied, 479 U.S. 1064

(1987). In its opinion, the Tenth Circuit did not refer

to, or even purport, to apply, the “‘reasonable person’’

test. Instead, the Tenth Circuit created its own le-

galistic test requiring analysis from the perspective

of one in‘imately familiar with the intricacies of bank-

ruptcy practice:

[R]ecusal is necessary if there is evidence of

actual bias, if the bankruptcy judge by words

or actions reasonably appears to have pre-

judged adversarial proceedings over which he

is to preside, or if the judge appears ‘boxed

in’ by prior rulings such that he will be forced

to reach a certain result in an adversarial

proceeding regardless of the merits.

Pet. App. 5a-6a. The Tenth Circuit cited no authority

for this rule.

A reasonable person plays no part in the Tenth

Circuit’s analysis. The only person with the ability to

apply the Tenth Circuit test would be a lawyer or

businessman with expertise in bankruptcy, and only

then after a thorough review of the thousands of

pleadings that have been filed in the Kaiser Chapter

11 case and the Adversary Proceedings.

The test applied by the Tenth Circuit flies squarely

in the face of the standard set out in Liljeberg and

ignores the important differences between §455(a) and

§455(b). The goal of §455(a) is to avoid even the ap-

pearance of partiality, as determined by a “‘‘reasonable

person.” Liljeberg, supra, 108 S.Ct. at 2022. Although

it purported to apply §455(a), the Tenth Circuit nei-

ther cited Liljeberg nor analyzed whether a reasonable

person with knowledge of all the circumstances might

question Bankruptcy Judge Matheson’s impartiality.

Instead, the Tenth Circuit began its analysis by stat-

ing that, because there was no claim of actual bias,

the “‘prejudgment”’ and ‘“‘boxed in”’ tests would have

to be applied. Pet. App. 6a.

While §455(b) contemplates recusal if the judge has

actual personal bias or prejudice, §455(a) requires re-

cusal if the circumstances are such that the judge’s

“impartiality might be reasonably questioned’ by

other persons. See Liljeberg, supra, 108 S.Ct. at 2202.

The Tenth Circuit simply ignored this distinction by

10

analyzing whether the bankruptcy judge appeared to

have prejudged the Adversary Proceedings or to have

placed himself in a position of being forced to decide

one or more of the Adversary Proceedings in Kaiser’s

favor. Both of these questions go directly to evidence

of predisposition or actual bias. No claim of actual!

bias was made by Petitioners, and no such test for

§455(a) claims is contemplated by Liljeberg.

The principles of Liljeberg, Barrow and King Re-

sources have assumed new importance in the admin-

istration of justice in the federal bankruptcy system

as more plans of reorganization for highly leveraged

companies are largely plans for litigating claims of

the debtor. Congress’ attempt to elevate bankruptcy

judges to status comparable to the Article III judici-

ary requires that the bankruptcy court’s function in

presiding over a corporate reorganization be sepa-

rated from adversary litigation upon which the suc-

cess of the reorganization depends. Review by this

Court is necessary to assure proper application of the

Liljeberg ‘“‘reasonable person”’ test in bankruptcy pro-

ceedings.

B. The Tenth Circuit Improperly Considered Facts which

Arose after Denial of the Recusal Motion.

The Tenth Circuit considered the facts of this case

as they appeared at the time of the appeal from denial

of the recusal motion, rather than as they appeared

at the time the recusal motion was made. Pet.

App. 8a. Specifically, the court below concluded that,

because settlements arising out of the Adversary Pro- -

ceedings reached after the recusal motion was denied

provided sufficient funds for Kaiser to pay its accrued

administrative and litigation costs, the reorganization

11]

did not depend on further recoveries from the Ad-

versary Proceedings.

Under Liljeberg, the settlements reached after the

recusal motion was made were improperly considered

by the court below. The settlements and the fact that

the first $15 million in settlement proceeds went to

pay accrued administrative and litigation expenses

were announced in Kaiser’s Annual Report on Form

10-K filed with the Securities and Exchange Com-

mission after the Tenth Circuit issued a stay of the

trial of the Adversary Proceedings. The 10-K report,

which Petitioners submitted to the court of appeals,

is a further admission that Kaiser’s Plan of Reor-

ganization depended upon successful prosecution of

the Adversary Proceedings. Pet. App. 41a.

Even if consideration of the settlements had been

proper, the impact of such settlements was erro-

neously analyzed by the Tenth Circuit. The court’s

assertion that the settlements from the Adversary

Proceedings provided funds necessary for Kaiser to

cover unpaid reorganization and litigation expenses

simply confirms that, but for recoveries arising out

of the Adversary Proceedings, the reorganization

would have failed. See Pet. App. 8a,35a-41a.

Il. THE TENTH CIRCUIT’S OPINION CONFLICTS WITH

OTHER CIRCUITS.

The test for recusal applied by the Tenth Circuit

does not appear in the opinion of any other circuit

which has considered the issue under 28 U.S.C.

§455(a). See, e.g., In re United States, 666 F.2d 690

(1st Cir. 1981); Moody v. Simmons, 858 F.2d 137 (8rd

Cir. 1988), cert. denied, __ U.S. ___ , 109 S.Ct. 1529

12

(1989); Potashnick v. Port City Construction Co., su-

pra; Easley v. University of Michigan Board of Re-

gents, 853 F.2d 1351 (6th Cir. 1988); U.S. v. Murphy,

768 F.2d 1518 (7th Cir. 1985), cert. dented, 475 U.S.

1012 (1986); In Re Manoa Finance Co., supra; King

Resources, supra; U.S. v. Torkington, 874 F.2d 1441

(11th Cir. 1989). All of the foregoing cases follow the

reasonable person test.

While ignoring Liljeberg and purporting to apply

Barrow and King Resources, the Tenth Circuit cre-

ated yet another test under §455(a), thereby leaving

litigants in the circuit with confusing and conflicting

standards for recusal. Although Bankruptcy Judge

Matheson concluded that Barrow and King Resources

were no longer good law, the Tenth Circuit specifi-

cally held that those decisions “‘survived the recodi-

fication of bankruptcy law and are the law of this

Circuit.’’ Pet. App. 5a. However, the court of appeals

failed to remand the issue to the bankruptcy court

for application of the correct rule of law. In deciding

the issue on its own, the court below denied

petitioners the opportunity for a proper assessment

of the appearance of partiality by the bankruptcy

judge? and erroneously interpreted its own precedents

without regard for the Liljeberg standard.

Finally, by relying on the facts which arose after

denial of the recusal motion, the Tenth Circuit placed

itself in conflict with thae line of decisions in other

circuits which uniformly recognize that the proper

time frame for consideration of relevant facts is when

> Cf. Moody v. Simmons, supra, 858 F.2d at 142. (‘‘Appellate

courts will be most deferential to the finding of a trial judge

that there is an appearance of impropriety in his continuing to

sit on a case.’’)

13

the trial court is presented with a motion for recusal.

See, e.g., In re United States, supra; In re Drexel

Burnham Lambert, Inc., 861 F.2d 1307 (2d Cir. 1988),

cert. denied, __U.S.__, 109 S.Ct. 2458 (1989);

Moody v. Simmons, supra; In re Virginia Electric

and Power Co., 539 F.2d 357 (4th Cir. 1976); Po-

tashnick v. Port City Construction Co., supra; Easley

v. University of Michigan Board of Regents, supra;

New York City Housing Development Corp. v. Hart,

796 F.2d 976 (7th Cir. 1986); U.S. v. Murphy, supra;

U.S. v. Balistriert, 779 F.2d 1191 (7th Cir. 1985),

cert. denied, 477 U.S. 908 (1986); In re Manoa F'-

nance Co., supra; U.S. v. Hines, 696 F.2d 722 (10th

Cir. 1982); Hinman v. Rogers, 831 F.2d 937 (10th

Cir. 1987); U.S. v. Torkington, supra.

III. THE ISSUES PRESENTED IN THIS CASE ARE IM-

PORTANT TO THE ADMINISTRATION OF JUSTICE.

Kaiser’s Chapter 11 case and related adversary pro-

ceedings are just one example of many LBO’s that

have ended in bankruptcy court and major litigation.

See, e.g., Wieboldt Stores, Inc. v. Schottenstein, 94

B.R. 488 (N.D. Ill. 1988) (suit against shareholders

who participated in LBO on claims of fraudulent con-

veyance); In re The Ohio Corrugating Co., 91 B.R.

430 (Bankr. N.D. Ohio 1988) (suit filed by official

creditors committee to avoid transfers and obligations

incurred by debtor in connection with an LBO as

fraudulent conveyances). Because LBO’s often involve

huge sums of money and have been widely utilized

in many industries, the potential for the issues pre-

sented here to arise in other cases is highly probable.

The Kaiser bankruptcy and Adversary Proceedings

alone have produced over 5,000 pleadings and ex-

penditures in excess of $25 million for attorneys fees

14

and settlements. The size and high visibility of these

proceedings dramatically focus the public interest in

the appearance of impartiality on bankruptcy judges.

By entertaining the issues presented herein, this Court

can provide a rule to guide the parties to this case

as well as litigants in similar proceedings certain to

arise.

CONCLUSION

For the foregoing reasons, the petition for a writ

of certiorari should be granted.

Respectfully submitted,

PAUL F. HULTIN

Counsel of Record

CHERYL BURNSIDE

PARCEL, MAURO, HULTIN & SPAANSTRA, P.C.

1801 California Street, Suite 3600

Denver, Colorado 80202

Telephone: (303) 292-6400

RICHARD P. SLIVKA

DaviID L. DAIN

VINTON, SLIVKA & PANASCI

1600 Stout Street

Suite 1300

Denver, Colorado 80202

Telephone: (303) 534-4499

ALAN L. BUGG

102 North Cascade

Suite 502

P. O. Box 950

Colorado Springs, Colorado 80903

Telephone: (719) 471-3700

Marcus W. SISK, JR.

DEMPSEY, BASTIANELLI, BROWN & TOUHEY

2828 Pennsylvania Avenue, N.W., Suite 203

Washington, D.C. 20007

Telephone: (202) 338-8088

January 1990.

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APPENDIX

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APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

No. 89-1046

JOSEPH A. FRATES, et al,

Petitioners,

v.

HONORABLE ZITA L. WEINSHIENK, United States Dis-

trict Judge and HONORABLE CHARLES E. MATHESON,

United States Bankruptcy Judge,

Respondents.

FILED

United States Court of Appeals

Tenth Circuit

OCT 5 1989

ROBERT L. HOECKER

Clerk

ORDER

Before HOLLOWAY, Chief Judge, McKAY, LOGAN, SEY-

MOUR, MOORE, ANDERSON, TACHA, BALDOCK, BRORBY,

and EBEL, Circuit Judges.

This matter comes on for consideration of petitioner’s

petition for rehearing, with suggestion for rehearing en

bane, filed in the captioned matter.

Upon consideration whereof, the petition for rehearing

is denied by the panel that rendered the decision.

In accordance with Rule 35(b), Federal Rules of Appel-

late Procedure, the petition for rehearing and suggestion

2a

for rehearing en banc were transmitted to all of the judges

who are in regular active service. No member of the pane!

and no judge in regular active service on the court having

requested that the court be polled on rehearing en banc,

Rule 35, Federal Rules of Appellate Procedure, the sug-

gestion for rehearing en banc is denied.

Entered for the Court

/s/ Robert L. Hoecker

ROBERT L. HOECKER, Clerk

3a

APPENDIX B

PUBLISH

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

No. 89-1046

JOSEPH A. FRATES; CHARLES S. HOLMES; ROBERT E.

MERRICK; STAN P. DOYLE; P. PETER PRUDDEN, III: J.

ANTHONY FRATES; STEPHEN I. FRATES; EQUIVEST AS-

SOCIATES; DOYLE & HOLMES; EQUIVEST MANAGEMENT

AND FINANCIAL SERVICES, LTD.; JOHN L. FARRELL,

JR.; ASSET MANAGEMENT, INC.; CHARLES S. MCNEIL;

MONTY H. RIAL; PERMA RESOURCES CORPORATION:

PERMA MINING CORPORATION; PERMA PACIFIC, INC.;

PERMA PACIFIC PROPERTIES; CALDER & COMPANY:

CHIMNEY ROCK COAL COMPANY; ENERGY CAPITAL,

LTD.; AZTEC, LTD.; COLORADO COAL RESOURCES COM-

PANY; and COLORADO COAL MINING;

: Petitioners,

v.

HONORABLE ZITA L. WEINSHIENK, United States Dis-

trict Judge; and HONORABLE CHARLES E. MATHESON,

United States Bankruptcy Judge,

Respondents.

FILED

United States Court of Appeals

Tenth Circuit

AUG 16 1989

ROBERT L. HOECKER

Clerk

4a

Petition for a Writ of Mandamus

Paul F. Hultin of Parcel, Mauro, Hultin & Spaanstra, Den-

ver, Colorado, and Alan Bugg, Colorado Springs, Colorado

(Marcus L. Squarrell and Cheryl Burnside, of Parcel,

Mauro, Hultin & Spaanstra, Denver, Colorado; Thomas E.

English of English, Jones & Faulkner, Tulsa, Oklahoma;

Richard P. Slivka and David Dain of Vinton, Slivka &

Panasci, Denver, Colorado; and Julia T. Waggener, Den-

ver, Colorado, with them on the briefs) for petitioners.

James P. McCarthy (Melvin I. Orenstein and Daryle L.

Unhoff also of Lindquist & Vennum, Minneapolis, Min-

nesota; H. Thomas Coghill and David J. Richman of Coghill

and Goodspeed, Denver, Colorado with him on the brief)

for Kaiser Steel Corporation and Kaiser Coal Corporation.

Before LOGAN, SEYMOUR, and BRORBY, Circuit

Judges.

LOGAN, Circuit Judge.

This is an original proceeding in the nature of manda-

mus. Petitioners seek an order of this court compelling

the respondent bankruptcy judge, who approved a Chapter

11 reorganization plan for Kaiser Steel Corporation (Kai-

ser), to disqualify himself from presiding over two adver-

sary proceedings (the Frates and Rial proceedings)

commenced by Kaiser in which Perma Pacific Properties

(Perma) was a named defendant, and from serving as pre-

siding judge in the Perma reorganization. In addition,

petitioners ask us to direct the respondent district judge

to vacate her refusal to order the bankruptcy judge to

recuse. The F’rates and Rial proceedings, in which Kaiser

seeks rescission, avoidance of liens, and millions of dollars

in damages, involve transactions and transfers of property

that antedate commencement of the Kaiser reorganization

proceedings.

I

Petitioners seek recusal of the bankruptcy judge prin-

cipally under 28 U.S.C. § 455(a); on the basis that the

judge’s continued participation in the proceedings presents

the appearance of partiality. They rely upon two Tenth

Circuit cases, United Family Insurance Co. v. Barrow, 452

F.2d 997 (10th Cir. 1971), and American Employers’ In-

surance Co. v. King Resources Co., 545 F.2d 1265 (10th

Cir. 1976). The bankruptcy judge, in denying the motions

for recusal, expressed the view that those two decisions

would have been decided differently had they arisen under

the current bankruptcy code.

Some of the practices that concerned us in those cases

have been eliminated, and we might have used slightly

different language had the current bankruptcy code been

in effect when we decided those cases. But the principles

in Barrow and King Resources, properly understood, sur-

vived the recodification of bankruptcy law and are the law

of this Circuit.

A bankruptcy judge may preside over both the admin-

istrative and adversarial portions of a bankruptcy case.

See 28 U.S.C. § 157. But recusal is necessary if there is

evidence of actual bias, if the bankruptcy judge by words

or actions reasonably appears to have prejudged adver-

sarial proceedings over which he is to preside, or if the

judge appears “‘boxed in’’ by prior rulings such that he

will be forced to reach a certain result in an adversarial

proceeding regardless of the merits. We do not, however,

read our cases or any other authorities to require a judge

who approves a Chapter 11 reorganization plan automat-

ically to disqualify himself from presiding over adversarial

proceedings that will affect the total recovery of the bank-

rupt’s creditors. See Klenske v. Goo (In re Manoa Finance

a

6a

Co.), 781 F.2d 1370, 1373 (9th Cir. 1986), cert. denied, 479

U.S. 1064 (1987).

Here, there is no claim of actual bias. Therefore, we

must determine whether the judge appears to have pre-

judged adversarial proceedings or to have placed himself

in a position where it appears he will be forced to decide

one or more of the adversary proceedings in Kaiser’s fa-

vor.

II

To show the appearance of partiality, petitioners rely in

part upon the judge’s approval of Kaiser’s Chapter 11 plan,

which required him to find that “‘[c]onfirmation of the plan

is not likely to be followed by the liquidation, or the need

for further financial reorganization, of the debtor.’ 11

U.S.C. § 1129(aX11). They also rely upon the judge’s state-

ments that without successful prosecution of the litigation

there likely would be no significant cash payout for un-

secured creditors. See Trans. Sept. 23, 1988 Hearing at

14, contained in Kaiser’s Mem. in Opposition to

Defendant’s Motions to Stay, Ex. B (Sept. 23 hearing).

Kaiser’s Chapter 11 plan has both long- and short-term

aspects. The long-term focuses on four principal Kaiser

assets: the Eagle Mountain mine property and railroad,

contemplated to be used as a landfill for southern Cali-

fornia cities; the stock in Fontana Water Union Company,

which owns valuable water rights, proposed to be sold or

leased; the Fontana waste treatment property, thought to

be operable as a hazardous waste disposal facility; and the

Fontana steel mill site, contemplated to be sold as valuable

development real estate after environmental cleanup. The

short-term aspects encompass the immediate sale of cer-

tain other assets and the pursuit of the litigation.

The court clearly believed that the long-term program

was viable and not dependent upon the success of the

litigation. The litigation was regarded as a possible source

of funds that could be used for immediate payout to un-

secured creditors. The bankruptcy judge explicitly found

that ‘“‘without the prosecution of the litigation, the oppor-

tunity for a significant payout might not arise, but the

underlying business programs through MRC [the waste

disposal project] and Lusk [the mill site cleanup project]

and the water stock and the aqueous treatment programs

remain and could be operated.’’ Jd. Apparently the un-

secured creditors own all of the stock of the reorganized

Kaiser Corporation, see Brief of Kaiser Steel Corporation

at 35; and the Retiree Medical Benefits Trust and the

Pension Benefit Guaranty Corporation (PBGC) hold a ma-

jority of those shares. Thus, there will be recovery for the

unsecured creditors through their equity ownership if long-

term projects succeed. Thus, we hold that neither the ap-

proval of Kaiser’s Chapter 11 plan nor the judge’s com-

ments on cash pay out for unsecured creditors gives the

appearance of prejudgment of the litigation or so corners

the judge that he seems to be required to decide the lit-

igation in a particular manner.

III

Petitioners also cite the court’s approval of a $4 million

loan from PBGC to Kaiser to fund litigation, including

Kaiser’s pursuit of the F’rates and Rial cases, as an in-

dication of the judge’s apparent partiality, or as support

for the proposition that he will be forced to decide some

litigation in favor of Kaiser to enable it to repay that loan.

We see nothing ominous in the approval of the loan from

PBGC to fund the litigation. PBGC is a twenty-eight per-

cent shareholder in the reorganized company. It is both a

secured and unsecured creditor. It is not unusual for a

creditor to loan a bankruptcy estate money to pursue lit-

igation claims; indeed, in particular circumstances we re-

cently held it to be an abuse of discretion for a district

court not to allow a creditor to fund litigation to recover

assets for a bankruptcy estate. See Bank of Woodward v.

8a

Fox (In re Reiss), No. 88-1992, slip op. at 6-7 (10th Cir.

July 28, 1989). The bankruptcy judge in the instant case

stated explicitly, “I don’t think anyone has testified that

without the PBGC funds the debtor would be without

means to prosecute the litigation. It might be more costly,

there may be more contingent fee arrangements, but |

have not heard, that I can recall, that without those funds,

the plan will fail.’’ Sept. 23 Hearing at 13-14. Thus, we

cannot regard approval of a loan to pursue litigation to

be a prejudgment that the litigation will succeed.

Further, because we consider the facts as they appear

at the time we are considering the mandamus request, we

note that settlements already have been approved with

persons other than petitioners bringing in more than $21

million, a sum apparently sufficient to cover all adminis-

trative and litigation costs, and to permit distributions to

unsecured creditors. See Kaiser Steel Resources, Inc., 1988

Annual Report on SEC Form 10-K at 67 (1989), contained

in Addendum to Reply Brief of Petitioners at 67. Thus,

it seems quite apparent that the judge need not decide

against the Frates and Rial petitioners to ensure that the

reorganized company has the funds to pay administrative

and litigation costs.

IV

More bothersome is petitioner’s argument that the bank-

ruptcy judge already has decided specific issues in the

Kaiser bankruptcy proceedings that indicate prejudgment

or would essentially force the judge to make rulings in

the Frates and Rial proceedings in favor of Kaiser.

Petitioners cite several such instances: approving rejection

of leases and executory contracts, consenting to settlement

agreements, and finding alleged assets to be of small or

no value. See Supplemental Brief of Petitioners at 14-24.

Petitioners say that Kaiser’s financial condition, including

the value of its assets at the time of the transactions

challenged in Frates and Rial, is crucial to their defense.

9a

Kaiser makes various responses. First, it points out that

all of these cited rulings were made more than a year

before petitioners sought the recusal. We do not regard

the delay as fatal to petitioners’ cause, because a recusal

motion should be permitted at any time it becomes ap-

parent that a judge is biased or suffers from the appear-

ance of bias: But the delay does indicate that petitioners

did not regard these rulings as greatly debilitating to their

cases. We also must recognize that “familiarity with

defendants and/or the facts of a case that arises from

earlier participation in judicial proceedings is not sufficient

to disqualify a judge from presiding at a later trial.’’ In

re Corrugated Container Antitrust Litigation, 614 F.2d

958, 965 (5th Cir.) (footnote omitted), cert. denied 449 U.S.

888 (1980). In many ordinary litigation situations judges

make preliminary decisions on offers of evidence, or make

decisions otherwise affecting the parties, that familiarize

the judge with the facts in that case or in related cases

in which the judge must rule. Kaiser correctly points out

that 28 U.S.C. § 157, by permitting the presiding judge in

a reorganization to preside over adversary proceedings af-

fecting the assets, contemplates that bankruptcy judges

will encounter situations similar to that before us with

some frequency.

Further, Kaiser asserts that many of the rulings were

in uncontested proceedings and, therefore, the judge acted

without hearings or rejected objections on different grounds

than would be in issue in Frates or Razl (e.g., the judge

rejected executory mining consulting contracts with Perma

because Kaiser was not in need of the services under the

agreements). Kaiser also challenges petitioners’ assumption

that these rulings are connected to the Frates and Rail

proceedings. Although we are handicapped by not having

all of the bankruptcy court and district court records, we

have carefully reviewed the briefs and exhibits provided

us, and we see nothing which convinces us that the bank-

ruptcy judge appears to have prejudged issues involved in

10a

the Frates and Rial litigation or has placed himself in

such a position that he will be forced to decide an issue

in favor of Kaiser regardless of the evidence presented to

him in that litigation.

Vv

With respect to Perma’s separate motion for recusal, at

first blush it would appear that the bankruptcy judge

should not oversee the Chapter 11 reorganizations of two

parties that are opposing each other in litigation before

him. The bankruptcy judge, however, has approved a Chap-

ter 11 plan only for Kaiser, and has found that the success

of that plan is not dependent upon the success of Kaiser’s

lawsuit against Perma. Perma, on the other hand, appar-

ently had not reason to file bankruptcy except for the suit

filed against it by Kaiser, which seeks return to Kaiser of

Perma’s major asset. By filing, Perma used the bankruptcy

to obtain an automatic stay of Kaiser’s litigation against

it. The bankruptcy court apparently has not yet approved

a Chapter 11 plan for Perma.

Perma in effect has forced Kaiser to pursue its suit as

an ordinary claim under 11 U.S.C. §502 in the Perma

bankruptcy case. While Perma has sold some assets, with

court approval, the proceeds were placed in an escrow

account, apparently at Perma’s request, pending the out-

come of Kaiser’s claim. Perma apparently has not sought

approval of any loan for litigation expenses or approval

of expenditures to defend against Kaiser’s claim. Thus, we

do not see that the bankruptcy judge has as yet acted in

any way that might be considered prejudging the litigation

or prejudicing Perma. In refusing Perma’s motion for his

recusal, the judge stated that the time might come when

he would have to recuse. That time may come soon. But

considering the current status of the Kaiser-Perma liti-

gation and the Perma bankruptcy, that moment is not yet

upon us.

NE eEeeEeEeEeEe—e—EeEeEeEEEEeEeEe

a *

VI

In conclusion, we hold that petitioners have not estab-

lished actual bias by the bankruptcy judge or an appear-

ance of such partiality as to require recusal in the Frates

and Rial litigation nor, as yet, has it been shown in the

Perma Chapter 11 proceeding. We also have been shown

no rulings convincing us that the judge has placed himself

in a position in which he must decide an adversarial pro-

ceeding in favor of any one party to vindicate some prior

action he has taken.

The petition for a writ of mandamus is DENIED.

12a

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLORADO

Civil Action No. 89-Z-86

JOSEPH A. FRATES, CHARLES S. HOLMES, ROBERT E.

MERRICK, STAN Y. DOYLE, P. PETER PRUDDEN, III, J.

ANTHONY FRATES, STEPHEN I. FRATES, EQUIVEST AS-

SOCIATES, DOYLE & HOLMES, EQUIVEST MANAGEMENT

AND FINANCIAL SERVICES, LTD., JOHN L. FARRELL,

JR., ASSET MANAGEMENT, INC., CHARLES S. McNEIL,

MONTY H. RIAL, DONALDSON, LUFKIN & JENRETTE SE-

CURITIES CORPORATION, CHARLES H. BLACK, CLIF-

FORD V. BROKAW, MIII, PERMA RESOURCES

CORPORATION, PERMA MINING CORPORATION, PERMA

PACIFIC, INC., PERMA PACIFIC PROPERTIES, CALDER

& COMPANY, CHIMNEY ROCK COAL COMPANY, ENERGY

CAPITAL, LTD., AZTEC, LTD., COLORADO COAL RE-

SOURCES COMPANY, and COLORADO COAL MINING,

Petitioners,

v.

CHIEF BANKRUPTCY JUDGE CHARLES E. MATHESON,

Respondent.

FILED

UNITED STATES DISTRICT COURT

DENVER, COLORADO

FEB 13 1989

JAMES R. MANSPEAKER

CLERK

BY

DEP. CLERK

13a

ORDER

The matters before the Court are a Petition For Writ

of Mandamus and petitioner’s Motion For Stay Pending

Decision On Petition For Writ Of Mandamus.

Because the Court can find no error in the decision

below, it is

ORDERED that the Petition For Writ Of Mandamus is

denied. It is

FURTHER ORDERED that petitioner’s Motion For

Stay Pending Decision On Petition For Writ Of Mandamus

is denied. It is

FURTHER ORDERED that the cause of action is dis-

missed.

DATED at Denver, Colorado, this 18th day of February,

1989.

BY THE COURT:

/s/ Zita L. Weinshienk

ZITA L. WEINSHIENK,

Judge

United States District Court

l4a

APPENDIX D

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF COLORADO

Case No. 87-B-1553E

Chapter 11 Case

(Jointly Administered)

In re:

KAISER STEEL CORPORATION,

Debtor.

Adversary Proceeding

No. 87 E 135

KAISER STEEL CORPORATION, et al.,

Plaintiffs,

vs.

JOSEPH A. FRATES, et al.,

Defendants.

Adversary Proceeding

No. 87 E 437

KAISER STEEL CORPORATION, et al.,

Plaintiffs,

vs.

MONTY H. RIAL, et al.,

Defendants.

ld5a

TRANSCRIPT OF HEARING

December 16, 1988

APPEARANCES:

PARCEL, MAURO, HULTIN & SPAANSTRA

By Paul F. Hultin, Esq.

and

Jamie Harrison, Esq.

and

Cheryl Burnside, Esq.

1801 California Street, Suite 3600

Denver, Colorado 80202

Appearing on behalf of Defendants

Joseph A. Frates, Charles S. Holmes,

Robert E. Merrick, Equivest Associates,

a partnership, Stan P. Doyle,

J. Anthony Frates, P. Peter Prudden, III,

Stephen I. Frates, John L. Farrell,

Equivest Management and Financial

Services, Ltd., and Asset Management, Inc.

THE COURT: I take some slight exception to the char-

acterization of what the motion is and to the suggestion

by Mr. Hultin that the motions are framed other than on

the proposition that as to the reorganization case, as the

judge who has confirmed the plan in that case, as a matter

of law, I have to be disqualified. The Motion for Recusal

states, ‘‘This request is based on the well established rule

in this circuit that the judicial officer who presides over

reorganization proceedings should not also hear actions

that may have a significant impact on the reorganization.”’

That was the proposition.

Not that I’ve heard matters that would give rise to

prejudice or taken other actions in that case, but on the

proposition that the law in this circuit mandates that I

should recuse myself in these adversaries because I’m the

l6a

case judge in the reorganization case. That was the motion,

Mr. Hultin.

The argument was that the judicial officer who presides

over a debtor’s reorganization proceeding should also not

hear actions on which the success of failure of the reor-

ganization might depend. That was the argument. That

was the proposition and that’s the only proposition of this

matter and that’s the proposition that’s before me.

On that proposition, there is a significant question of

whether the Motions for Recusal are timely because that

proposition has been known from day one. Under 455/(a),

as counsel has pointed out, the Court is obligated to recuse

itself if the impartiality of the Court can reasonably be

questioned. There is a flip side to that in that the Court

is also admonished that it ought not to recuse itself merely

upon every assertion that may be brought in, but that

some party claims that they have some feeling that the

judge may not be impartial. There is an obligation of this

Court to_hear its cases and not foster them off onto other

judges in the bankruptcy court who are equally as busy.

The suggestion brought forward, I think, is one that

would be somewhat startling to almost any bankruptcy

judge across the country. And if liberally and literally ap-

plied, would almost effectively mandate that the case judge

hear nothing else except the hearing on the plan for re-

organization, because virtually anything else that the judge

hears is going to have an impact on the case and on the

creditors.

Congress recognized the problem very clearly. Under the

pankruptcy Act, as cases were administered, the bank-

ruptcy referee or judge, as they finally became known,

were very heavily involved in the administration of the

case. They heard every creditors’ meeting at which a wide

variety of matters were discussed freely concerning the

debtors’ affairs and the representations made, et cetera.

The case judge signed all the checks for the debtor, set

17a

the officers’ salaries. The case judge ruled on whether—

in the Chapter 1ls and Chapter 10s even, to the given

dollar amount, whether the debtor in possession ought to

remain in operation and, if so, the scope of those opera-

tions.

The case judge appointed the trustee, as Judge Winter

did in the King Resources case, when he appointed Charles

Baird. That kind of involvement was talked about very

explicitly in the legislative history in the enactment of the

Bankruptcy Code in the House Report 95-595. The House

Report talks about the cronyism, charges of cronyism,

problems with the close relationships between the bank-

ruptcy judges and those who were regularly appearing in

front of them representing trustees and debtors, and makes

note of what Congress was seeking to do in the enactment

of the Bankruptcy Code and the changing of the Judicial

system in which matters were to be heard.

The House Report states at Page 107, ‘“‘These changes

in the present bankruptcy administrative system will ac-

complish the separation of judicial and administrative func-

tions currently performed by the bankruptcy judges. The

judges will become passive arbiters in disputes that arise

in bankruptcy cases. United States Trustees will assume

the bankruptcy judges’ current supervisory roles over the

conduct of bankruptcy cases and over individuals servicing

in the bankruptcy system. More responsibility for admin-

istration of cases will be shifted to the trustees that serve

in cases, whether they are private members of the panel

or the United States trustee. Another change proposed by

the bill facilitates the shift of responsibility and the place-

ment of the bankruptcy judge in the dispute deciding role.”

And at Page 108, “‘This concept embodied in the phrase

after notice and hearing will free the judge from ruling

on the many undisputed administrative decisions that must

be made in a case and will involve the judge only when

there’s an actual dispute to be resolved. It should eliminate

18a

the need for continual requests for instructions by the

trustee and should significantly reduce, if not eliminate,

the amount of exparte contacts currently required between

the bankruptcy judge and the trustee. In sum, the bank-

ruptcy judge will be separated from the administration of

the case and his duties will be solely judicial.”’

On Page 228, in discussing the requirements of 1125 of

the Code, “First and most important, the Court will be

required to approve a disclosure statement before there

may be any solicitation of acceptances or rejections of a

plan. With the bankruptcy judges under this bill less in-

volved in the administration of the reorganization cases

than they are under current law, they will be fair arbiters

in compliance with the statutory standards. They will no

longer have the same interests they have today in seeing

that each reorganization is successful. An interest which

has led to a suspicion of bias on the part of many dealing

with the Bankruptcy Court.”

The cases that have been cited arose under the Bank-

ruptcy Act, an act that was flawed and that Congress

recognized the flaws. Flaws that led to the appearance of

impartiality or lack of impartiality on behalf of the case

judge, and took steps to correct that. I would be bound,

without question, by the Tenth Circuit decisions if this

were an Act case by the law that is espoused in those

decisions. I would be bound now unless there was a rea-

sonable basis to believe that the Tenth Circuit, in light of

the policies explicitly voiced by Congress in the enactment

of the Bankruptcy Code and the changes that have been

made in that Code, would not follow the precedent estab-

lished in those decisions. And I sincerely believe that was

the intent and the purpose of the law in the code, and

for that reason, as to the adversary matters, I will not

recuse myself.

As to the Perma Pacific reorganization case, there may

come a time, Mr. Bugg, when because of the interrela-

19a

tionship of those two proceedings and matters that are

going on in those two cases, that it would be proper for

me to consider recusal. I do not believe there are any such

matters pending now other than the existence of this ad-

versary proceeding and, therefore, I don’t think that it is

necessary for me to act on that at the present time.

There is no authority that has been cited that would

indicate that I must, as the presiding judge in one pro-

ceeding, recuse myself from acting as the presiding judge

in another proceeding because the two proceedings are

interrelated. A fairly common occurrence before this Court.

And since there is no affidavit or charge of actual im-

partiality or partiality or bias, I will not enter an order

for recusal in the underlying reorganization case for Perma.

~ * *

MR. HULTIN: Your Honor, if I may interject myself

just briefly. For the record, I would note our motion that

you stayed in consideration of any further motions, and I

would like to ask one point of clarification, Your Honor,

on the basis of your ruling.

Is Your Honor making an explicit finding that a rea-

sonable person would be knowledgeable about the legis-

lative history that Your Honor has cited here and would

ignore the facial conflict between the adversary proceed-

ings, the Kaiser reorganization and the Perma reorgani-

zation?

I think that’s very pertinent to any appellate review of

your ruling, Your Honor, based on the Liljeberg case and

many other Court of Appeals cases construing 455.

THE COURT: Once again, Mr. Hultin, I addressed the

motion that you filed, which was that the law in this circuit

established that the reorganization case judge could not

be viewed as being impartial to hear other matters or

proceedings that could have a bearing on the reorgani-

zation.

20a

MR. HULTIN: Your Honor, I think the motion speaks

for itself.

THE COURT: I think it does, too.

MR. HULTIN: And the argument here speaks for itself

and I would ask Your Honor to clarify that point.

THE COURT: I believe I’ve ruled on your motion, Mr.

Hultin. .

MR. HULTIN: Are you refusing to make that finding,

Your Honor?

THE COURT: I believe I made my grounds and my

findings in response to the motion that, by reason of taking

the reorganization judge out of the administrative affairs

of the estate, it was the intention of Congress to create

a judicial body and that there has been no authority cited

that would establish that a judge, under those circum-

stances, is automatically subject to recusal for the ap-

pearance of partiality.

MR. HULTIN: I understand that, Your Honor. You also

found that but for the ‘84 amendments, you would be

bound by Tenth Circuit authority to recuse yourself; is

that correct?

THE COURT: No, I found that if this were an Act case,

the Tenth Circuit decisions would be binding on me and

1 would have to follow those decisions if I thought—and

I would have to follow them now if I thought that the

law had remained the same. But that the law has not

remained the same and, therefore, I do not feel the Tenth

Circuit confronted with the same facts and circumstances,

would rule similarly.

MR. HULTIN: But for that change in the law, though,

Your Honor would rule that Your Honor would have to

recuse himself: is that correct?

THE COURT: Mr. Hultin, do not put words in my

mouth.

LL eee

2la

MR. HULTIN: I think it’s unclear, Your Honor.

THE COURT: I will state my findings and my rulings

and do not state them for me.

MR. HULTIN: I’m not purporting to, Your Honor. I’m

attempting to understand Your Honor’s rulings and Your

Honor’s comments in that regard and I think any appellate

court would like to understand that as well because it is

our intent to appeal, Your Honor.

THE COURT: I think that’s fine. I think any appellate

court will understand my rulings.

MR. HULTIN: Your Honor, we would ask for a ruling

on our motion to stay any further actions in this case so

we could immediately seek, by way of writ of mandamus,

an immediate appeal of review of your decision here today.

THE COURT: That motion will be denied, Mr. Hultin.

I feel rather strongly on the point of law that is involved

and on what Congress intended to create—has created,

and because of that, I think it would be intolerable to let

these proceedings sit in limbo for some extended period

of time while the appellate process works, so we'll go

forward.

MR. HULTIN: Thank you, Your Honor.

~ * *

22a

APPENDIX E

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF COLORADO

Case No. 87 B 1552 E

(Jointly Administered Chapter 11 Case)

In re: KAISER STEEL CORPORATION,

: Debtor,

Adversary Proceeding

No. 87 E 135

KAISER STEEL CORPORATION, et al.,

Plaintiffs

v.

JOSEPH A. FRATES, et al.,

Defendants

Adversary Proceeding

No. 87 E 437

KAISER STEEL CORPORATION, et ai.,

Plaintiffs,

v.

MONTY H. RIAL, et al.,

Defendants.

FILED

UNITED STATES BANKRUPTCY COURT

DISTRICT OF COLORADO

DEC 16 1988

a

23a

BY BRADFORD L. BOLTON, Clerk

DEPUTY CLERK

SUPPLEMENTAL MEMORANDUM IN SUPPORT OF

MOTION FOR RECUSAL

Defendants Joseph A. Frates, Robert E. Merrick,

Charles S. Holmes, and Stan P. Doyle (the ‘“Frates

Defendants’’), respectfully submit this Supplemental Mem-

orandum in Support of the Motion for Recusal filed by

Defendants Joseph A. Frates, Charles S. Holmes, Robert

E. Merrick, Stan P. Doyle, P. Peter Prudden, III, J. An-

thony Frates, Stephen I. Frates, Equivest Associates,

Doyle & Holmes, Equivest Management and Financial Ser-

vices, Ltd., John L. Farrell, Asset Management, Inc., Wil-

liam R. Gould, Howard P. Allen, Charles S. McNeil, Monty

H. Rial, Donaldson, Lufkin & Jenrette, Dr. Eustace H.

Winn, Jr., Charles H. Black, Richard N. Gary, Stephen A.

Girard, Lloyd G. Hansen, Clifford V. Brokaw, III, and

Miles B. Yeagley on November 4, 1988 to provide newly

discovered evidence in support of the Motion for Recusal.

Defendants state:

1. Bruce E. Hendry, a current member of the Board of

Directors of Kaiser and Chairman and Chief Executive

Officer of Kaiser during the course of its Chapter XI pro-

ceedings, was deposed by certain defendants on December

14, 1988.

2. In his deposition, Mr. Hendry made clear the fact

that Kaiser’s success in these adversary proceedings is

critical to the success of Kaiser’s Plan of Reorganization

and that proceeds from these adversary proceedings are

the only potential source of funds available to pay $3-4

million in unpaid administrative expenses incurred in the

reorganization process, and are the only source of funds

24a

from which the unsecured creditors can hope to be paid.

Mr. Hendry responded to questions as follows:

Question: [I]sn’t it a fact, Mr. Hendry, that if these

lawsuits are not successful, the unsecured

creditors will receive—are not likely to re-

ceive any cash distributions as a result of

the reorganization?

Mr. Hendry: That’s correct.

Question: And isn’t it also a fact that these lawsuits

need to be successfully prosecuted in order

for Kaiser to be able to pay its adminis-

trative expenses as a result of the reor-

ganization? :

Mr. Hendry: Yes. In order to pay those fees, we have

to have a successful litigation effort, that’s

correct.

Question: Would it be fair to say that the economics

of that development [The Kaiser Lusk

Joint Venture] are significantly impacted

by whether or not Kaiser can deliver the

West End property?

Mr. Hendry: Yes, that would be correct.

Transcript of excerpt of Deposition of Bruce E. Hendry,

December 14, 1988, pp. 4, 8. A portion of the transcript

dealing with Mr. Hendry’s testimony regarding the critical

role of these adversary proceedings to the success of Kai-

ser’s Plan of Reorganization is attached hereto as Exhibit

A and incorporated herein by this reference.

3. Mr. Hendry also testified regarding the Kaiser/Lusk

Joint Venture that: 1) the Lusk Company has the discre-

tionary right to withdraw at anytime from its agreement

with Kaiser to joint venture the development of Kaiser’s

Fontana property; 2) the West End is the only property

in the Joint Venture which is environmentally safe; 3) the

SS a

25a

West End is the only large property which is immediately

developable; and 4) without the West End property, the

ownership of which Kaiser is attempting to regain in these

adversary proceedings, the prospect of revenues to the

joint venture would be limited to cleaning up one section

of the site, selling it, cleaning up another section, and so

on. Mr. Hendry testified that absent the West End prop-

erty, it is unlikely there will be any surplus cash flow from

the joint venture that would be available to go to any

shareholders of the reorganized Kaiser and, as noted above,

that without the West End Property the project economics

are significantly impacted. (Exhibit A pp. 6-8).

4. Mr. Hendry further testified that Kaiser’s cash flow

from sources other than the litigation wil! not go to an-

ything other than to “keep the door open.’’ (Exhibit A,

p. 9). Mr. Hendry’s testimony unquestionably confirms

Defendants’ assertion that Kaiser’s successful reorganiza-

tion is dependent upon Kaiser prevailing in these adver-

sary proceedings.

5. Under the facts established by Mr. Hendry’s testi-

mony, the Tenth Circuit cases cited by Defendants in the

Motion for Recusal are dispositive: where the success of

a reorganization is dependent upon the success of related

litigation in which the debtor is a party, a single judge

may not preside over both proceedings. See American Em-

ployers’ Insurance Company v. King Resources Co., 545

F.2d 1265 (10th Cir. 1976) and United Family Life In-

surance Co. v. Barrow, 452 F.2d 997 (10th Cir. 1971).

WHEREFORE, the Frates Defendants submit that

based on the attached testimony of Bruce E. Hendry that

the Motion for Recusal must be granted.

26a

Respectfully submitted this 16th day of December, 1988.

PARCEL, MAURO, HULTIN & SPAANSTRA

By /s/ Paul Hultin

Paul F. Hultin

Marcus L. Squarre!l

David A. Bailey

1801 California Street, #3600

Denver, CO 80202

~ Telephone: (303) 292-6409

ATTORNEYS FOR DEFENDANTS JOSEPH

A. FRATES CHARLES S. HOLMES,

ROBERT E. MERRICK, STAN P. DOYLE

27a

Pursuant to Notice and the Federal Rules of Civil Pro-

cedure, the deposition of BRUCE E. HENDRY, called by

Defendants the Frates Group, was taken on Wednesday,

December 14, 1988, commencing at 10:15 a.m., at 633 -

17th Street, Denver, Colorado, before Judi Walker, Reg-

istered Professional Reporter and Notary Public within and

for the State of Colorado.

PROCEEDINGS

BRUCE E. HENDRY,

being first duly sworn in the above cause, was examined

and testified as follows:

EXAMINATION

BY MR. HULTIN:

Q. Now, isn’t it a fact, Mr. Hendry, that if these lawsuits

are not successful, the unsecured creditors will receive—

are not likely to receive any cash distributions as a result

of the reorganization?

A. That’s correct.

Q. And isn’t it also a fact that these lawsuits need to be

successfully prosecuted in order for Kaiser to be able to

pay its administrative expenses as a result of the reor-

ganization?

A. Yes. In order to pay those fees, we have to have a

successful litigation effort, that’s correct.

Q. What is the amount of the current outstanding admin-

istrative expenses that have not yet been paid?

A. I don’t know the final figure. I can give you the ball-

park range, but I don’t know the specific figure.

Q. Please give me the ballpark.

A. 3 to $4 million.

28a

Q. And those aren’t going to get paid unless there’s some

money out of these cases, right?

A. That’s correct.

Q. Now, tell me about the Lusk joint venture.

A. Well, we have a joint venture with Mr. Lusk to develop

the old steel mill site and industrial development real es-

tate—industrial development project.

We've talking earlier about the West End property.

Yes.

Who is the current owner of the West End property?

I believe Perma is still the current owner.

Is that Perma Pacific, Inc.?

I believe that’s correct.

They’re in bankruptcy, are they not?

Yes, they are.

ieee Eau cos

And isn’t it a fact that Kaiser is trying to recover the

West End property from Perma Pacific?

A. That is correct, yes.

Q. And isn’t it a fact that that property is essential for

the Lusk joint venture?

A. No, that is not.

Q. Is it important to the Lusk joint venture?

A. Is important.

Q. Describe to me the role it plays in the Lusk joint ven-

ture.

A. The West End property is the property that is essen-

tially environmentally safe and, of course, the reason why

it was transferred out of Kaiser Steel’s ownership was

because it didn’t have the environmental problems on it

7

29a

and as a result of that, the property is essentially devel-

opabie right now where the remaining Kaiser properties

are not developable because of the environmental damage

on them.

Q. So of the properties that are subject to the joint ven-

ture with Lusk, the West End would be the only property

that would be immediately developable?

A. I’m not sure it’s the only property. It’s certainly the

only large piece of property that would be immediately

developable.

Q. So there would be no cash that could come from the

development process, then, absent the West End until all

of the environmental remediation work has been done on

all the other properties; is that a correct statement?

A. No, that is not correct. Our feeling is that we can

clean up portions of the mill site and develop it using the

cash flow from the sale of that property to clean up the

next portion. And it’s not anticipated that we will clean

the entire property up before development starts.

Q. I see. But all of the cash flow, then, is going to go to

the next phase remediation process; is that correct?

A. It depends how expensive that is and, of course, we

don’t know that right now, but that is entirely possible,

right, that will happen.

Q. Absent return of the West End properties, sir, is there

even a remote chance that there would be any surplus

cash flow from a Lusk joint venture that would be avail-

able to go to any of the shareholders of the reorganized

Kaiser?

A. It’s unlikely.

Q. It would be all incurred in this ongoing environmental

remediation process; is that correct?

A. That would be the most likely event, yes.

Q. So it would be very desireable for Kaiser holdings to

recover the West End property?

30a

A. Yes, it would.

Q. And, indeed, if Kaiser does not deliver the West End

property by a certain time, Lusk has the option to ter-

minate his participation in the joint venture, does he not?

A. My—understanding of the agreement is that he can

terminate the agreement, but it would be based on his

assessment of the amount of money it would take to clean

the site up rather than whether we get the West End

property back.

But he basically has a discretionary—

He does.

—right to terminate; is that correct?

POP &

He does. He does, yes.

Q. Would it be fair to say that the economics of that

development are insignificantly impacted by whether or

not Kaiser can deliver the West End property?

A. Yes, that would be correct.

THE DEPONENT: May I take about a one-minute break

here?

MR. HULTIN: Why don’t we take five minutes.

(A recess was taken.)

Q. (BY MR. HULTIN) Mr. Hendry, it’s my understanding

that there’s one other business venture—significant busi-

ness venture that’s involved in the Kaiser holdings which

is the reorganized entity, and that’s the Eagle Mount solid

waste disposal project with MRC; is that correct?

A. Yes, that’s correct

(Brief interruption.)

(The last question and answer were read.)

Q. (BY MR. HULTIN) So we've got the lawsuits, the Lusk

joint venture and the Eagle Mount joint venture. There's

Kaiser’s business holdings as well.

3la

A. There are other things as well, but those are the main

things.

Q. When does Kaiser project to receive cash flow from

the Eagle Mountain/MRC joint venture?

A. I believe the agreement calls for payments starting in

"91 or ’92.

Q. That assumes that the project is successful?

A. I believe the payments have to start irregardless, but

it would be a credit against future revenues, but, ulti-

mately, of course, the project has to be successful.

Q. Now, that project involves significant environmental

approvals, does it not?

A. Yes, it does.

@. Have those been obtained as of this date?

A. No.

Q. Does Kaiser holdings have any expectation of any cash

flow other than from these lawsuits over the next two or

three yeas?

A. Over the next two or three years I doubt that it will

have any cash from—any significant cash flow from our

businesses.

Q. Other than from these lawsuits?

A. Well, we do have existing cash flow from smaller

sources that will—

Q. Is that going to do anying other than keep the door

open?

A. No, it will not. "

Will it be sufficient to keep the doors open?

I believe it will, yes.

What are those businesses?

> Ore

We sell slag to two buyers. There’s significant scrap

sale which had and will continue to be made.

32a

Q. Scrap metal

A. Well, scrap. Mostly metal, but there are small engines

and other things that were the residual of the old steel

mill site that we continue to sell off as essentially scrap.

There are other materials which are called revert materials

which are sold to yet another purchaser.

Q. Revert?

A. It’s something with a high iron ore content that is

mixed with some other product. I’m not sure what it is,

but it gives us a cash flow.

We have rentals both at Eagle Mountain and we were

renting some 30 or 40 houses to the state of California

with plans to rent additional houses to them or others.

We have virtually a town up there that’s vacant.

Q. Lake Tamarisk?

A. Lake Tamarisk and we have another town that we own

which has additional lots, so there is a cash flow coming

into the company that will keep the doors open essentially.

Q. But would it be fair to say that the retirees are the

largest creditors of the Kaiser Estate, both in terms of

dollars and in terms of numbers?

A. Yes.

Q. And would it be fair to say that they get nothing if

Kaiser is not successful in the lawsuits?

A. That is true if you put a time period on it. Let’s say

the next two to three years. Beyond that, of course, we

hope to have Kaiser Steel Resources, which is the new

official name of the company—

Q. Kaiser Holdings, Inc. is now Kaiser Steel Resources,

Inc.?

A. That’s correct. Over the next two or three years, these

projects I’ve discussed will start producing some cash flow,

enna

33a

but certainly over the next two or three years what the

retirees can expect is from the successful conclusion of

these lawsuits.

Q. And they have immediate critical need for cash, do

they not?

A. They have a need for cash. They have been funded for

the next two years already. So, yes, after the next two

years, they will have to get some additional cash or have

to cut back on benefits.

x * *

Q. Let me digress. Just before the break, Mr. Hendry, I

asked you some questions about some current administra-

tive expenses in the amount of 3 to $4 million that you

said were unpaid.

What do those consist of? Are those unpaid attorney’s

fees?

A. Essentially, yes.

Q. And the law firms have given notes of taken notes

from Kaiser for those?

A. Yes.

Q. And interest is accruing at, what 12 percent on those

notes?

A. I don’t recall. I think 10 or 12 is the figure that I

recall.

Q. Okay. Do you know whether New York Life has been

paid in full?

A. I do not.

MR. GLENNON: I have 3204, by the say.

MR. HULTIN: You do have it?

MR. GLENNON: Yes.

Q. (BY MR. HULTIN) New York Life had an adminis-

trative claim in the amount of about $3.1 million, a con-

firmation that they took a note rather than cash?

A. Yes.

eee eteiereeee

34a

Q. But for that note, the plan would not have been con-

firmable; is that correct?

A. I believe that’s correct, right.

Q And you don’t know whether that’s been paid or not?

A.-I don’t believe I’ve—I don’t know whether that’s been

paid.

x~ * *

(The deposition recessed at 5:45 p.m., December 14,

1988.)

35a

APPENDIX F

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Period November 16, 1988

to December 31, 1988

FORM 10-K

Commission File Number 1-7651

94-0594733

(I.R.S. Employer Identification No.)

KAISER STEEL RESOURCES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

(State or other jurisdiction of incorporation or jurisdiction)

8300 Utica Avenue

Suite 301

Rancho Cucamonga, CA 91730

(Address of principal executive offices and zip code)

PART I

Item 1. BUSINESS

‘Kaiser’ or ‘‘the Company”’ when used in this Form 10-

K refers to Kaiser Resources, Inc., including, where ap-

plicable, its consolidated subsidiaries.

36a

Emergence from Bankruptcy

On September 23, 1988, Kaiser Steel Resources, Inc.,

a Delaware corporation (the ‘‘Company’’), emerged from

bankruptcy proceedings as the recognized successor to Kai-

ser Steel Corporation pursuant to confirmation of the Sec-

ond Amended Joint Plan of Reorganization, As Modified

(the “Plan of Reorganization’’), upon order of the United

States Bankruptcy Court for the District of Colorado (the

‘Bankruptcy Court’’). The Plan of Reorganization was im-

plemented effective November 15, 1988.

x * *

The former creditors of Kaiser Steel Corporation (but

not former or current Management, or Employees) re-

ceived, in addition to shares of common stock of the Com-

pany, the mght to proceeds from the sale of excess

properties (less certain administrative and priority pay-

ments) not retained by the Company and the net distrib-

utable proceeds received from prosecution of the litigation

initiated during the Bankruptcy. The net distributable pro-

ceeds will not be retained by the Company but will be

distributed directly to the Company’s former creditors. The

allocations for such distributions are set forth below:

1. Retiree Medical

Benefits Trust 52.5%

_ Pension Benefit

i)

Guaranty Corporation 28.0%

3. Retiree Pension Trust 4.0%

4. General Unsecured Claimants 15.5%

100.0%

Pursuant to the Plan of Reorganization, certain liabilities

of the Company for the administrative costs of the bank-

ruptcy, prior tax claims, mining reclamation claims, prior-

——=_a_aaaaaaae

37a

ity and administrative claims, litigation expenses, and

claims administration costs can be paid from proceeds from

successful litigation or asset sales prior to any distribution

of proceeds to creditors.

Il. Adversary Litigation

Through the bankruptcy reorganization process, Kaiser

Steel Corporation, as debtor-in-possession, commenced law-

suits seeking to recover damages, money and property

transferred from the Company over the last several years,

principally relating to the 1984 Leveraged Buyout Trans-

action (““LBO’’), the 1985 Exchange, the TIPs Program,

and actions of directors and professionals in approving the

1984 LBO and subsequent transactions. These lawsuits are

collectively referred to as the ‘‘Adversary Litigation.’’ The

net cash proceeds recovered in these suits will become

‘Distributable Proceeds” payable to creditors in accord-

ance with the Plan of Reorganization. The principal actions

now pending are described beiow. Recoveries in the Ad-

versary Litigation are expected to be the principal source

of cash distributions to unsecured creditors and an alter-

native source of payment of certain priority and admin-

istrative expenses. If the Adversary Litigation cases are

minimally or not successful, there may be only nominal or

no cash distributions to unsecured creditors and the Com-

pany will be obligated for the liquidation costs and the

unpaid priority and administrative expenses.

The costs and expenses associated with pursuing the ‘

Adversary Litigation are significant. To fund these ex-

penses, the PBGC and the Company entered into a loan

agreement providing for the PBGC to extend a $4 million

line of credit. The loan proceeds are to be used solely to

fund the litigation costs. The line of credit is a 30-month

loan, at a fixed 10% interest rate, secured by the following

assets of the Company:

————————

38a

1. The West Slag Pile and underlying real estate (lo-

cated on a portion of the former steel mill site);

2. The Chino Basin water rights appurtenant to the

Fontana steel will site property; and

3. Certain property at Lake Tamarisk, a small devel-

opment located near the Company’s Eagle Mountain

mine complex.

Funding of the costs and expenses of the Adversary

Litigation will also be defrayed with proceeds from the

settlement agreements described below.

x* * *

B. 1985 Exchange Litigation (the “1985 Exchange Case’’).

In February, 1987, the Company filed a lawsuit in the

Bankruptcy Court challenging three groups of transac-

tions: The “April 1985 Exchange,”’ the ““West End Prop-

erty Transactions,’ and the ‘Cottonwood Transaction.’’ As

noted below, settlement agreements have been entered into

with certain of the defendants.

C. TIPs Litigation (the ‘“‘TIPs Case’’). In June, 1987,

Kaiser Steel Corporation and Kaiser Coal Corporation filed

a Complaint in the Bankruptcy Court captioned Kavzser

Steel Corporation v. Monty H. Rial, et al. (the “TIPs

Case’). In this lawsuit, the Company seeks to set aside

and recover various payments and transfers made to mem-

bers or affiliates of the Frates Group and the Rial-Perma

Group during the period from March, 1984, through Jan-

uary, 1987.

The Company has entered into settlement agreements

with a number of the defendants in the 1985 Exchange

Case and the TIPs Case, including Donaldson, Lufkin &

Jenrette Securities Corporation (““‘DLJ’’), Dean Witter Rey-

nolds, Inc., Southern California Edison, Clifford Brokaw,

9

39a

Dr. Eustice H. Winn and the directors and officers who

were not members of the Rial-Perma or Frates Groups.

The settlement agreements have been approved by the

Bankruptcy Court.

Certain settlement payments have been made. The bulk

of the remaining settlements will be paid to the Company

upon final resolution of any appeals to the Bankruptcy

Court Orders approving the settlements. Resolution of any

appeals could delay receipt of the founds for an indeter-

minate period; however, the funds are to be held in an

interest-bearing escrow account pending distribution. Pur-

suant to the Plan of Reorganization, the litigation pro-

ceeds, after recovery of the litigation expenses and creation

of appropriate reserves for future Adversary Litigation

expenses, wil be used to pay administrative and priority

expenses incurred through the bankruptcy reorganization

process, with the balance available for distribution to Kai-

ser Steel Corporation’s general unsecured creditors.

~*~ * *

Note 2 REORGANIZATION PROCEEDINGS

The amounts included as liabilities subject to Chapter

11 proceedings at December 31, 1988, consist of:

Accrued professional fees, including

SUVCE RE CE GL vaiscnccssssccsstenixidacsaves $5,024,186

Resolved administrative claim, including

IT aE Te kasxiitownsnicientccthaaecsiniene 3,236,882

Disputed secured claim, including disputed

interest of $148,755, discussed below ...... 425,939

PEGROTEY CANE DOIIID nscensscccscssscrsncsescens 345,337

$9,032,344

The Plan of Reorganization provides that the liabilities

noted above may be repaid from the proceeds generated

from the sale of designated assets (which is substantially

40a

complete) and the recoveries, if any, from various law-

suits which the Company, as debtor-in-possession, had

filed or would file against its former owners, directors,

officers and advisors (Note 16). The proceeds generated,

if any, from these two sources become “distributable

proceeds.”’ As such, the Plan calls for the distribution

of these proceeds to the Company’s former creditors,

net of the following:

1) A reasonable reserve for the operations of the re-

organized company;

2) All actual and anticipated costs of litigation; and

3) All costs associated with the bankruptcy claims res-

olution process.

Il. Adversary Litigation

Through the bankruptcy reorganization process, Kaiser

commenced lawsuits seeking to recover damages for

money and property transferred from the Company over

the last several years, principally relating to the 1984

Leveraged Buyout, certain property exchanges, certain

payments to officers and directors, and actions of di-

rectors and professionals in approving the subsequent

transactions. These lawsuits are collectively referred to

as the ‘‘Adversary Litigation.’”” Any net cash proceeds

recovered in these suits will become ‘Distributable Pro-

ceeds’’ payable to creditors in accordance with the Plan

of Reorganization (Notes 2 and 16).

a x *

Note 16 SUBSEQUENT EVENTS

x x *

Litigation Settlement

The Company has reached settlements with certain

defendants in two of the Adversary Litigation proceedings.

dla

On November 18, 1988, the Company received $200,000

in a partial settlement agreement with a defendant in one

of the proceedings. In March, 1989, the Company reached

partial settlements with certain defendants in both of the

cases. All settlement agreements have been approved by

the Bankruptcy Court. A portion of the March, 1989, set-

tlement is subject to appeal, however, the Company, in

consultations with legal counsel, is of the belief it will be

successful in defending this appeal. The Company has re-

corded a litigation receivable of $21,100,000 at November

15, 1988, as a result of the settlements noted above.

The settlement proceeds of $21,100,000 will be utilized to

repay the following liabilities as recorded at December 31,

1988:

Accrued professional and other fees,

including interest of $180,555 «0.0.0... $5,024,186

Administrative claims, including interest of

I OIEI INET cen: +danuianinndiasdenesiaensssiiiadehaaneesanacaanaies 3,236,882

UCIT TONN BN oicncneicictcessa rete reteccnsccecnens 345,337

Attorney fees, per contingency agreement ... 2,637,500

Note payable to the Pension Benefit

rg ys + 2,600,006

Reimbursement to the Company of actual

costs of litigation and bankruptcy claims .. 2,800,754

Distribution per the Plan of Reorganization

to tne former creditors of Kaiser

BOOGE CRON OEIOR, a iccscssccnsscsccascesccsscosageans 5,055,341

$21,100,000