In re PWS Holding Corp. Bruno's Inc.

• Citation: 228 F.3d 224
• Decision Date: 10 March 2000
• Docket Number: Nos. 00-5042 and 00-5074,s. 00-5042 and 00-5074
• Parties: (3rd Cir. 2000) In re: PWS HOLDING CORPORATION BRUNO'S, INC; FOOD MAX OF MISSISSIPPI, INC; A.F. STORES, INC; BR AIR, INC.; FOOD MAX OF GEORGIA, INC; FOOD MAX OF TENNESSEE, INC; FOODMAX, INC; LAKESHORE FOODS, INC; BRUNO'S FOOD STORES, INC; GEORGIA SALES COMPANY; SSS ENTERPRISE, INC W.R. Huff Asset Management Co., L.L.C., Appellant in 00-5042 HSBC BANK USA, as Indenture Trustee for the 10.5% Senior Subordinated Notes, Appellant in 00-5074 Argued:
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 224

228 F.3d 224 (3rd Cir. 2000)

In re: PWS HOLDING CORPORATION BRUNO'S, INC; FOOD MAX OF MISSISSIPPI, INC; A.F. STORES, INC; BR AIR, INC.; FOOD MAX OF GEORGIA, INC; FOOD MAX OF TENNESSEE, INC; FOODMAX, INC; LAKESHORE FOODS, INC; BRUNO'S FOOD STORES, INC; GEORGIA SALES COMPANY; SSS ENTERPRISE, INC

W.R. Huff Asset Management Co., L.L.C., Appellant in 00-5042

HSBC BANK USA, as Indenture Trustee for the 10.5% Senior Subordinated Notes, Appellant in 00-5074

Nos. 00-5042 and 00-5074

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued: March 10, 2000

Filed September 18, 2000

On Appeal From the United States District Court for the District of Delaware, D.C. Civ. No. 98-cv-00212, District Judge: Honorable Sue L. Robinson

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Counsel for Appellant W.R. Huff Asset Management Co.: EDWARD S. WEISFELNER, ESQUIRE (ARGUED) ANDREW DASH, ESQUIRE JOHN P. BIEDERMANN, ESQUIRE Berlack, Israels & Liberman 120 West 45th Street New York, NY 10036, STEVEN K. KORTANEK, ESQUIRE JOANNE B. WILLS, ESQUIRE Klehr, Harrison, Harvey, Branzburg & Ellers, LLP 919 Market Street, Suite 1000 Wilmington, DE 19801

Counsel for Appellant HSBC Bank USA, Indenture Trustee: PETER D. WOLFSON, ESQUIRE (ARGUED) CAROL NEVILLE, ESQUIRE Pryor, Cashman, Sherman & Flynn, LLP 410 Park Avenue New York, NY 10022-4441, JEFFREY C. WISLER, ESQUIRE Connolly, Bove, Lodge & Hutz 1220 Market Building P.O. Box 2207 Wilmington, DE 19899

Counsel for Appellees PWS Holding Corp.; Bruno's, Inc.; Food Max of MI, Inc.; AF Stores, Inc.; BR Air, Inc.; Food Max of GA, Inc.; Food Max of TN, Inc.; Foodmax Inc.; Lakeshore Foods, Inc.; Brunos Food Stores; Georgia Sales Co.; SSS Entr, Inc.: HARVEY R. MILLER, ESQUIRE (ARGUED) LORI R. FIFE, ESQUIRE MARC D. PUNTUS, ESQUIRE Weil, Gotshal & Manges, LLP 767 Fifth Avenue New York, NY 10153, THOMAS L. AMBRO, ESQUIRE DANIEL J. DeFRANCESCHI, ESQUIRE One Rodney Square P.O. Box 551 Wilmington, DE 19899

Counsel for Appellee Chase Manhattan Bank: HAROLD S. NOVIKOFF, ESQUIRE (ARGUED) AMY R. WOLF, ESQUIRE Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019, EDWARD G. BIESTER, III, ESQUIRE Duane, Morris & Heckscher 4200 One Liberty Place Philadelphia, PA 19103-7396, TERESA K.D. CURRIER, ESQUIRE Duane, Morris & Heckscher 1201 Market Street, Suite 1500 P.O. Box 195 Wilmington, DE 19899

Counsel for Appellee Official Committee of Unsecured Creditors: DENNIS S. KAYES, ESQUIRE (ARGUED) STUART E. HERTZBERG, ESQUIRE I. WILLIAM COHEN, ESQUIRE Pepper, Hamilton, LLP 100 Renaissance Center, 36th Floor Detroit, MI 48243, DAVID M. FOURNIER, ESQUIRE MONICA LEIGH LOFTIN, ESQUIRE Pepper, Hamilton, LLP 1201 Market Street, Suite 1600 Wilmington, DE 19801

Before: BECKER, Chief Judge, SCIRICA and NYGAARD Circuit Judges.

OPINION OF THE COURT

BECKER, Chief Judge.

W.R. Huff Asset Management Co., L.L.C. ("Huff "), and HSBC Bank USA ("HSBC") appeal from the order of the District Court confirming a reorganization plan for Bruno's, Inc., (Bruno's), and several affiliates.¹ Bruno's is based in Alabama and operates a chain of supermarkets in the southeastern United States. Huff was the holder of $290 million in Bruno's subordinated notes; HSBC was the indenture trustee for the subordinated notes (we refer to them together as Huff). They argue that the District Court should not have confirmed the plan for a host of reasons, most notably because it contains releases that violate the absolute priority rule of 11 U.S.C. S 1129(b)(2)(B)(ii) and are thus impermissible under the Bankruptcy Code.

Three separate interests have appeared to defend the plan: the debtors and debtors-in-possession (referred to throughout as the Debtors); the Chase Manhattan Bank, representing the group of banks (the Banks) that were the senior lenders to Bruno's before the reorganization; and the Official Unsecured Creditors' Committee. Together they contend that the plan does not violate the absolute priority rule because the releases were not granted "on account of " the interests of the released parties, but rather the claims released had little or no value.

The absolute priority rule, found in 11 U.S.C. S 1129(b)(2)(B)(ii), provides that "the holder of any claim or interest that is junior to the claims of [a class of unsecured claims] will not receive or retain under the plan on account of such junior claim or interest any property." In Bank of America National Trust and Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), the Supreme Court interpreted the "on account of " language in S (b)(2)(ii). The Court rejected arguments that "on account of " means "in satisfaction of " the interest or "in exchange for" the interest and concluded that it means "because of " the interest. Id. at 450-51. Accordingly, a causal connection between holding the prior claim or interest, and receiving or retaining property, will trigger the absolute priority rule. Huff submits that this plan, by releasing claims held by the bankrupt entity that arose out of the leveraged recapitalization, essentially transferred property to holders of junior equity in violation of the absolute priority rule. Huff argues that the release was a transfer to junior equity because the potential claims included claims against junior equity--affiliates of Kohlberg, Kravis, Roberts & Co., L.L.C. (KKR), and other participants in the recapitalization. Huff contends that the transfer violated the absolute priority rule because senior creditors (including Huff) had not been paid in full.

We conclude that the District Court did not err in the challenged respects.² The Examiner appointed by the District Court under 11 U.S.C. SS 1104(c) and 105(a) at the behest of Huff found in a comprehensive report that the claims released had little potential merit. We find no error in the District Court's decision to accept the Examiner's findings and legal conclusions regarding the viability of the claims, and we reject Huff 's contention that the releases were granted "on account of " old equity's interest. We also reject the Debtors' contention that the challenge to confirmation is equitably moot under In re Continental Airlines, 91 F.3d 553, 559 (3d Cir. 1996) (en banc).

Huff's other challenges to confirmation include that the plan should not have been confirmed because the District Court erred in determining that it was proposed in good faith as required by 11 U.S.C. S1129(a)(3). Huff has not offered anything but innuendo to support its contention that the Debtors violated this portion of the Code, and we find no error in the District Court's conclusion that the plan was proposed in good faith.

Additionally, Huff contends that the plan should not have been confirmed because it violates the following sections of the Bankruptcy Code: 11 U.S.C. S 510(a), which provides that a "subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law;" 11 U.S.C. S 524(e), which provides that "[e]xcept as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt;" 11 U.S.C. S 363, which governs the sale of assets outside of the reorganization plan; 11 U.S.C. S 1129(a)(2), which provides that a court shall confirm a plan only if "[t]he proponent of the plan complies with the applicable provisions of this Title;" and 11 U.S.C. S 1129(a)(7), which provides that a court shall confirm a plan only if the debtor demonstrated at the Confirmation Hearing that creditors rejecting the plan would not receive a greater recovery in a Chapter 7 liquidation.

We reject Huff 's argument under S 510(a) because the subordinated noteholders' rights under the agreement do not arise until the senior indebtedness is paid in full, which has not happened under the plan. We reject the S 524(e) argument because we conclude that the limited release in Paragraph 58 of the plan does not come within the meaning of S 524(e) and is consistent with the standard of liability under the Code. We reject Huff's S 363 argument because we do not agree with the contention that the Plan triggered a duty to fully market the company. We conclude that Huff does not have standing to raise the challenge under S 1129(a)(2) because third-party standing is limited on appeal in bankruptcy cases and Huff cannot show that it was personally aggrieved by any alleged failure of disclosure. Finally, because we are satisfied that the Debtors met the S 1129(a)(7) burden of demonstrating that the creditors would not receive a greater recovery under Chapter 7, we reject the challenge under this section as well. We will therefore affirm the order of the District Court confirming the plan.

I. Factual & Procedural Background

As of the commencement date of the Chapter 11 cases, Bruno's was a chain of about 200 supermarkets operating in the southeastern United States (principally in Alabama). In 1995, affiliates of KKR acquired an 83.33% interest in Bruno's in a leveraged recapitalization. As part of this transaction, then existing shareholders of Bruno's were bought out for approximately $880 million. The leveraged recapitalization was financed by a revolving credit and term loan facility provided by the Banks, an equity contribution of $250 million by KKR through Crimson Associates LLP, and the issuance by Bruno's of $400 million in notes due in 2005 pursuant to an indenture. Section 9 of the indenture contains a subordination clause that provides that the noteholders' claims are fully subordinated to the payment in full (including interest) of the claims of the senior lenders (the Banks).

For at least two years following the leveraged recapitalization, Bruno's paid all of its debts as they matured (including $97.5 million in interest payments on the subordinated...