In re Submicron Systems Corp., C.A. No. 02-752-SLR.
| Citation | 291 B.R. 314 |
| Decision Date | 10 March 2003 |
| Docket Number | Bankruptcy No. 99-2959(SLR).,Adversary No. A-00-484.,Bankruptcy No. 99-2962(SLR).,C.A. No. 02-752-SLR.,Bankruptcy No. 99-2961(SLR).,Bankruptcy No. 99-2960(SLR). |
| Parties | In re SUBMICRON SYSTEMS CORPORATION, et al., Debtors. Howard Cohen, Plan Administrator for the Estates of Submicron Systems Corporation, Submicron Systems, Inc., Submicron Wet Process Stations, Inc., Submicron Systems Holdings, Inc., Plaintiff, v. The KB Mezzanine Fund II, L.P., Equinox Investment Partners, LLC and Celerity Silicon, LLC, Defendants. |
| Court | U.S. District Court — District of Delaware |
Joanne B. Wills, of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP, Wilmington, DE, Counsel for Plaintiff. Of Counsel: Rona J. Rosen, and Carol Ann Slocum, of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP, Philadelphia, Pennsylvania.
Laura Davis Jones, of Pachulski, Stang, Ziehl, Young & Jones, P.C., Wilmington, DE, Counsel for Equinox Investment Partners, LLC, and The KB Mezzanine Fund II, L.P. Of Counsel: Robert A. Klyman, and John Steele, of Latham & Watkins, Los Angeles, California.
Ian Connor Bifferato, of Bifferato, Bifferato & Gentilotti, Wilmington, DE, Counsel for Celerity Silicon, LLC. Of Counsel: Peter J. Korneffel, Jr., of Brownstein, Hyatt & Farber, P.C., Denver, Colorado.
On September 1, 1999, debtors SubMicron Systems Corporation ("SubMicron"), SubMicron Systems, Inc. ("SSI"), SubMicron Wet Process Stations, Inc. ("SWPS"), and SubMicron Systems Holdings, Inc. ("SSH") filed separate voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 101. On October 15, 1999, the debtors consummated a sale of substantially all of their assets to Akrion, LLC ("Akrion") pursuant to 11 U.S.C. § 363.
On April 18, 2000, the Official Committee of Unsecured Creditors (the "Committee") filed this action as an adversary proceeding against the debtors, KB Mezzanine Fund II, L.P. ("KB"), Equinox Investment Partners LLC ("Equinox"), Celerity Silicon, LLC ("Celerity"), David Ferran and Akrion, LLC ("Akrion"), alleging claims of equitable subordination, recharacterization of debt, breach of fiduciary duty and unjust enrichment. (D.I. 1)
On April 23, 2001, pursuant to the Plan of Liquidation, Howard Cohen, the Plan Administrator, was substituted for the Committee as plaintiff. (D.I. 112) Claims of wrongful transfer of proceeds and aiding and abetting were abandoned by plaintiff, and the only remaining defendants are KB, Equinox and Celerity. (D.I. 18, 114) Defendants moved for summary judgment and on June 27, 2001, this court denied defendants' motion. (D.I. 39, 79, 82, 146) Between July 30 and August 2, 2001, the court held a bench trial on the issues. The following are the court's findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a).
1. SubMicron Systems Corporation ("SubMicron") was a Delaware corporation having its principal place of business in Allentown, Pennsylvania. SubMicron was involved in the design, manufacture and marketing of wet benches used in the semiconductor industry. (PX 95; TT 54)1
2. The KB Mezzanine Fund II, L.P. ("KB") is an investment fund formed in 1995 by Kleinwort Benson. The purpose of the fund is to invest in debt and equities securities in order to achieve the goal of obtaining a return on investment. (TT 207-08)
3. Equinox Investment Partners, LLC ("Equinox") is a company formed in 1996 to manage the KB Mezzanine Fund II after Kleinwort Benson was acquired by Dresdner Bank. (TT 209-10) Hereinafter, KB and Equinox may be collectively referred to as "KB/Equinox."
4. Celerity Silicon, LLC ("Celerity") is a California-based investment fund. (D.I. 146 at 3)
5. Howard Cohen is a principal with the accounting and consulting firm of Parente Randolph and was retained as the plan administrator of the SubMicron bankruptcy cases in September 1999. (TT 689-90)
6. SubMicron through 1997. By early 1997, SubMicron was experiencing financial and operational difficulties. (TT 57-58, 569) In May 1997, David Ferran was hired by SubMicron as CEO to turn the company around. (TT 427)
7. On November 25, 1997, SubMicron entered into a formula-based $15 million working capital facility with Greyrock Business Credit ("Greyrock") that was secured by first priority liens on all inventory, equipment, receivables and other property of SubMicron. (PX 15-16; TT 60)
8. On November 26, 1997, SubMicron issued $16 million of senior subordinated 12% notes to KB/Equinox and $4 million of senior subordinated 12% notes to Celerity (collectively "the 1997 notes"), both due February 1, 2002. The 1997 notes were secured by second priority liens, second to Greyrock, on substantially all of SubMicron's assets. (DX 142 at 7720; TT 175-78)
9. In connection with the 1997 notes, both KB/Equinox and Celerity received a seat on the Board of Directors of SubMicron. Michael Khougaz, a principal at KB/Equinox, and Mark Benham, a principal at Celerity, were each initially given a seat on the Board. (PX 23; TT 67-68)
10. For the 1997 fiscal year SubMicron incurred a net loss of $47.6 million. (PX 95, DX 30 at 36) The 1997 notes were recorded as secured debt on SubMicron's 10K SEC filing and UCC-1 financing statements. (DX 19, 29; TT 132-33)
11. SubMicron in 1998. During 1998, the operational aspect of SubMicron improved, however, due to a downturn in the semiconductor industry, the company continued to struggle financially. (PX 95; TT 430-31)
12. Until February 1, 1998, SubMicron was paying cash interest on the 1997 notes. However, after February 1, 1998, SubMicron began paying half the interest in cash and half in paid in kind ("PIK") senior subordinated notes. By August 1, 1998, SubMicron was paying substantially all of the interest on the 1997 notes as PIK. (PX 38; TT 227)
13. At the end of 1998, the Greyrock financing was up for renewal and on December 2, 1998, Greyrock reduced the maximum funds available to SubMicron from $15 million to $10 million but included a $2 million overadvance in additional funding. This overadvance, however, was conditioned on SubMicron securing an additional $4 million in equity and/or subordinated debt and obtaining interest payment deferrals from KB/Equinox, Celerity and SubMicron's other noteholders. (PX 45; TT 74-75)
14. In order to secure the additional equity and/or subordinated debt, SubMicron issued a Series B 12% note in the amount of $3.2 million to KB/Equinox and a Series B 12% note in the amount of $800,000 to Celerity on December 3, 1998 (collectively "the 1998 notes"). The 1998 notes ranked pari passu with the 1997 notes and the interest was deferred until October 1, 1999. (PX 47; TT 75-76)
15. For the 1998 fiscal year, SubMicron incurred a net loss of $21.9 million and the liabilities of SubMicron exceeded its assets by $4.2 million. (PX 95, DX 30 at 36; TT 84) The 1998 notes were recorded as secured debt on SubMicron's 10K SEC filing and UCC-1 financing statements. (PX 95, DX 30, 286)
16. SubMicron in 1999. On January 19, 1999, Kevin Lynch, Bonaparte Liu and Robert Wickey, all of KB/Equinox, were elected to the Board of Directors of SubMicron. (PX 51; TT 87) The Board was comprised of David Ferran of SubMicron, the three KB/Equinox members, one Celerity member, and three other independent members. (PX 51)
17. On February 26, 1999, Robert Wickey, a member of SubMicron's Board of Directors and a managing member of the KB/Equinox fund primarily responsible for the SubMicron investment, proposed a debt for equity exchange at a meeting of the Board to "bring the Company's balance sheet into line" in order to be able to obtain additional funding or enter into a strategic partnership. (PX 59, 61; TT 237-39, 312-13) Mr. Wickey then presented his debt for equity exchange proposal to other investors/noteholders. (PX 81, 87, 100) Ultimately, however, no debt for equity exchange occurred since the demands for ownership in the post-exchange total by the noteholders exceeded 100% ownership in SubMicron. (PX 100; TT 252-253)
18. Between late February and early March 1999, the management of SubMicron determined that in order to fund its immediate and critical working capital needs, SubMicron would need to issue up to $6,480,000 in Series 1999 12% notes due February 1, 2002. (PX 61, 62) A Special Finance Committee of KB/Equinox subsequently approved the additional funds to SubMicron. (PX 74)
19. In response to this decision, SubMicron issued a number of Series 1999 12% notes between March 10, 1999 and June 6, 1999. (PX 194) In this time period, SubMicron issued nine notes to KB/Equinox totaling $5,888,123, and nine notes to Celerity totaling $1,147,031 for a sum total of $7,035,154 of Series 1999 12% notes (collectively "the 1999 notes"). (PX 78, 79, 85, 86, 98, 99, 104, 105, 106, 107, 110, 111, 112, 113, 117, 118, 127; TT 105-112) Had KB/Equinox and Celerity not made these loans to SubMicron, SubMicron would not have been able to make payroll and would have been forced to cease operations. (TT 340-41, 850)
20. When issuing notes, a member of SubMicron's accounting department would enter the date and amount funded into a computer and the computer would automatically generate a note. (TT 112-13) In issuing notes, members of SubMicron's accounting department occasionally made mistakes in data entry resulting in incorrect notes. For example, on November 26, 1997, SubMicron issued notes for $17 million to KB/Equinox and $3 million to Celerity. However, the amounts financed were actually $16 million by KB/Equinox and $4 million by Celerity as disclosed in SubMicron's bankruptcy schedules. (PX 18, 18(a), DX 142 at 7720, DX 144 at 7506, DX 146 at 7854; TT 176-78, 928) Additionally, on December 3, 1998, SubMicron issued a note to Celerity in the amount of $8 million when the amount funded was actually $800,000. (PX 47;...
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