Bittner v. Borne Chemical Co., Inc.

• Decision Date: 30 November 1979
• Citation: 691 F.2d 134
• Parties: 7 Collier Bankr.Cas.2d 376, 9 Bankr.Ct.Dec. 1065 John W. BITTNER, Isa R. Coble, William T. Galey, Walter B. Levering, Jr., Walter F. Martin, Andrew T. Rolfe, Robert H. Smellie, Jr., Mary G. Wilson, and C. Merritt Winsby, and the class of all persons who were stockholders of the Rolfite Company on
• Court: U.S. Court of Appeals — Third Circuit

Page 134

691 F.2d 134

7 Collier Bankr.Cas.2d 376, 9 Bankr.Ct.Dec. 1065

John W. BITTNER, Isa R. Coble, William T. Galey, Walter B Levering, Jr., Walter F. Martin, Andrew T. Rolfe, Robert H Smellie, Jr., Mary G. Wilson, and C. Merritt Winsby, and the class of all persons who were stockholders of the Rolfite Company on November 30, 1979, Appellants, v. BORNE CHEMICAL COMPANY, INC., a corporation of the State of New Jersey.

No. 82-5148.

United States Court of Appeals Third Circuit.

Argued Sept. 13, 1982.

Decided Oct. 8, 1982.

Roger C. Ward (argued), Sean R. Kelly, Tamzin McMinn, Pitney, Hardin, Kipp & Szuch, Morristown, N. J., for appellants.

Frank J. Vecchione (argued), Karen A. Giannelli, Crummy, Del Deo, Dolan & Purcell, Newark, N. J., for appellee.

Before GIBBONS, WEIS and SLOVITER, Circuit Judges.

OPINION OF THE COURT

GIBBONS, Circuit Judge.

Stockholders of The Rolfite Company appeal from the judgment of the district court, affirming the decision of the bankruptcy court to assign a zero value to their claims in the reorganization proceedings of Borne Chemical Company, Inc. (Borne) under Chapter 11 of the Bankruptcy Code (Code), 11 U.S.C. §§ 1-151326 (Supp. IV 1981). Since the bankruptcy court neither abused its discretionary authority to estimate the value of the claims pursuant to 11 U.S.C. § 502(c)(1) nor relied on clearly erroneous findings of fact, we affirm.

I.

Prior to filing its voluntary petition under Chapter 11 of the Code, Borne commenced a state court action against Rolfite for the alleged pirating of trade secrets and proprietary information from Borne. The Rolfite Company filed a counterclaim, alleging, inter alia, that Borne had tortiously interfered with a proposed merger between Rolfite and the Quaker Chemical Corporation (Quaker) by unilaterally terminating a contract to manufacture Rolfite products and by bringing its suit. Sometime after Borne filed its Chapter 11 petition, the Rolfite stockholders sought relief from the automatic stay so that the state court proceedings might be continued. ¹ Borne then filed a motion to disallow temporarily the Rolfite claims until they were finally liquidated in the state court. The bankruptcy court lifted the automatic stay but also granted Borne's motion to disallow temporarily the claims, extending the time within which such claims could be filed and allowed if they should be eventually liquidated.

Upon denial of their motion to stay the hearing on confirmation of Borne's reorganization plan, the Rolfite stockholders appealed to the district court, which vacated the temporary disallowance order and directed the bankruptcy court to hold an estimation hearing. The parties agreed to establish guidelines for the submission of evidence at the hearing, and, in accordance with this agreement, the bankruptcy court relied on the parties' choice of relevant pleadings and other documents related to the state court litigation, and on briefs and oral argument. After weighing the evidence, the court assigned a zero value to the Rolfite claims and reinstated its earlier order to disallow temporarily the claims until such time as they might be liquidated in the state court, in effect requiring a waiver of discharge of the Rolfite claims from Borne. Upon appeal, the district court affirmed.

II.

Section 502(c) of the Code provides:

There shall be estimated for purposes of allowance under this section-

(1) any contingent or unliquidated claim, fixing or liquidation of which, as the case may be, would unduly delay the closing of the case....

The Code, the Rules of Bankruptcy Procedure, 11 U.S.C. app. (1977), and the Suggested Interim Bankruptcy Rules, 11 U.S.C.A. (1982), are silent as to the manner in which contingent or unliquidated claims are to be estimated. Despite the lack of express direction on the matter, we are persuaded that Congress intended the procedure to be undertaken initially by the bankruptcy judges, using whatever method is best suited to the particular contingencies at issue. The principal consideration must be an accommodation to the underlying purposes of the Code. It is conceivable that in rare and unusual cases arbitration or even a jury trial on all or some of the issues may be necessary to obtain a reasonably accurate evaluation of the claims. See 3 Collier on Bankruptcy P 502.03 (15th ed. 1981). Such methods, however, usually will run counter to the efficient administration of the bankrupt's estate and where there is sufficient evidence on which to base a reasonable estimate of the claim, the bankruptcy judge should determine the value. In so doing, the court is bound by the legal rules which may govern the ultimate value of the claim. For example, when the claim is based on an alleged breach of contract, the court must estimate its worth in accordance with accepted contract law. See, e.g., 3 Collier on Bankruptcy P 57.15(3.2) (14th ed. 1977). However, there are no other limitations on the court's authority to evaluate the claim save those general principles which should inform all decisions made pursuant to the Code.

In reviewing the method ² by which a bankruptcy court has ascertained the value of a claim under section 502(c)(1), an appellate court may only reverse if the bankruptcy court has abused its discretion. ³ That standard of review is narrow. The appellate court must defer to the congressional intent to accord wide latitude to the decisions of the tribunal in question. Section 502(c)(1) of the Code embodies Congress' determination that the bankruptcy courts are better equipped to evaluate the evidence supporting a particular claim within the context of a particular bankruptcy proceeding. Thus, an appellate court can impose its own judgment only when "the factors considered (by the bankruptcy court) do not accord with those required by the policy underlying the substantive right or if the weight given to those factors is not consistent with that necessary to effectuate that policy...." Gurmankin v. Costanzo, 626 F.2d 1115, 1119-20 (3d Cir. 1980).

According to the Rolfite stockholders, the estimate which section 502(c)(1) requires is the present value of the probability that appellants will be successful in their state court action. Thus, if the bankruptcy court should determine as of this date that the Rolfite stockholders' case is not supported by a preponderance or 51% of the evidence but merely by 40%, they apparently would be entitled to have 40% of their claims allowed during the reorganization proceedings, subject to modification if and when the claims are liquidated in state court. The Rolfite stockholders contend that instead of estimating their claims in this manner, the bankruptcy court assessed the ultimate merits and, believing that they could not establish their case by a preponderance of the evidence, valued the claims at zero.

We note first that the bankruptcy court did not explicitly draw the distinction that the Rolfite stockholders make. Assuming however that the bankruptcy court did estimate their claims according to their ultimate merits rather than the present value of the probability that they would succeed in their state court action, ⁴ we cannot find that such a valuation method is an abuse of the discretion conferred by section 502(c)(1).

The validity of this estimation must be determined in light of the policy underlying reorganization proceedings. In Chapter 11 of the Code, Congress addressed the complex issues which are raised when a corporation faces mounting financial problems.

The modern corporation is a complex and multi-faceted entity. Most corporations do not have a significant market share of the lines of business in which they compete. The success, and even the survival, of a corporation in contemporary markets depends on three elements: First, the ability to attract and hold skilled management; second, the ability to obtain credit; and third, the corporation's ability to project to the public an image of vitality....

One cannot overemphasize the advantages of speed and simplicity to both creditors and debtors. Chapter XI allows a debtor to negotiate a plan outside of court and, having reached a settlement with a majority in number and amount of each class of creditors, permits the debtor to bind all unsecured creditors to the terms of the arrangement. From the perspective of creditors, early confirmation of a plan of arrangement: first, generally reduces administrative expenses which have priority over the claims of unsecured creditors; second, permits creditors to receive prompt distributions on their claims with respect to which interest does not accrue after the filing date; and third, increases the ultimate recovery on creditor claims by minimizing the adverse effect on the business which often accompanies efforts to operate an enterprise under the protection of the Bankruptcy Act.

124 Cong.Rec. H 11101-H 11102 (daily ed. Sept. 28, 1978) (statement of Rep. D. Edwards of California, floor manager for bankruptcy legislation in the House of Representatives). Thus, in order to realize the goals of Chapter 11, a reorganization must be accomplished quickly and efficiently.

If the bankruptcy court estimated the value of the Rolfite stockholders' claims according to the ultimate merits of their state court action, such a valuation method is not inconsistent with the principles which imbue Chapter 11. Those claims are contingent ⁵ and unliquidated. According to the bankruptcy court's findings of fact, the Rolfite stockholders' chances of ultimately succeeding in the state court action are uncertain at best. Yet, if the court had valued the Rolfite stockholders' claims according to the present probability of success, the Rolfite stockholders might well have acquired a significant, if not controlling, voice in the reorganization proceedings. The interests of those creditors with liquidated claims would have been subject to the Rolfite interests, despite the fact that the ...