Free Opening Brief in Support - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWAR
ARLIN M. ADAMS, Chapter J J Trustee of the Post-Confirmation Bankruptcy Estates
of CORAM HEALTHCARE CORP. and CORAM, INC,
) ) )

)

) Civ. Action No. 04-cv-1565(SLR)
Plaintiff,
v.
) ) )

DANIEL D. CROWLEY, et aI.,
Defendants.

)

)
) )

BRIEF OF CHAPTER 11 TRUSTEE IN SUPPORT OF MOTION IN LIMINE TO ADMIT FINDINGS MADE IN THE PRIOR BANKRUPTCY COURT PROCEEDINGS FOR A LIMITED, NON-HEARSAY PURPOSE
Richard A. Barkasy (#4683)
Michael J. Barre (#4684)

Dated: August 20, 2007

SCHNADER HARSON SEGAL & LEWIS LLP 824 N. Market Street, Suite 1001 Wilmington, DE 19801 (302) 888-4554 (telephone) (302) 888-1696 (facsimile)
OF COUNSEL:

Barr E. Bressler (admitted pro hac vice) Wilbur L. Kipnes (admitted pro hac vice)
Nancy Winkelman (admitted pro hac vice)

SCHNADER HARSON SEGAL & LEWIS LLP 1600 Market Street, Suite 3600
Philadelphia, P A 19103 (215) 751-2400 (telephone) (215) 751-2205 (facsimile)
Counsel to Plaintif

Arlin M. Adams, Chapter 11 Trustee of the PostConfirmation Bankruptcy Estates of CORAM HEALTHCARE CORP. and CORAM, INC.

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T ABLE OF CONTENTS

Page

i. NATUR AND STAGE OF PROCEEDINGS ......................................................................1
II. SUMMARY OF ARGUMENT.............................................................................................. 2

III. FACTUAL BACKGROUN ................................................................................................. 3
iv. ARGUMENT.......................................................................................................................... 5
A. The Trustee Is Permitted To Use The Bankruptcy Court's Findings For A Non-Hearsay

Purpose. ............................................................................................................................ 7
B. Crowley Wil Not Be Prejudiced If A Limited,

The Bankruptcy Court's Findings Are Admitted For

Non-Hearsay Purpose. .................................................................................. 11

V. CONCLUSION. ...... .......... .............. ..... ..... ........ ........ ......................... ............. ...................... 15

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TABLE OF AUTHORITIES

FEDERA CASES
Cloverland-Green Spring Dairies, Inc. v. Pa. Milk Mktg. Bd., 298 F.3d 201 (3d Cir.

2002) ...,............................................................................................................................ ..........7

In re Coram Healthcare'Corp., 271 B.R. 228 (Bank. D. DeL. 2001) .............................................3

In re Coram Healthcare Corp., 315 B.R. 321 (Bank. D. DeL. 2004) .............................................5
Greycas, Inc. v. Proud, 826 F.2d 1560 (7th Cir. 1987) ...................................................................9 Herrick v. Garvey, 298 F.3d 1184 (lOth Cir. 2002) ........................................................................7

Liberty Mutual Insurance Company v. Rotches Pork Packers, Inc., 969 F.2d 1384 (2d Cir. 1992)................................................................................................................................... 7
Marks v. Marina Dist. Dev. Co., App. A. No. 05-3619,2007 U.S. App. LEXIS 479 (3d

Cir. Jan. 10, 2007) ..................................................................................................................... 7

Nipper v. Snipes, 7 F.3d 415 (4th Cir. 1993) ...................................................................................7
Orthotec v. Reo Spineline, LLC, 438 F. Supp. 2d 1122 (C.D. Cal. 2006) .......................................8

Thompson v. Glenmede Trust Co., Civ. A. No. 92-5233, 1996 U.S. Dist. LEXIS 13672
(E.D. Pa. Sept. 16, 1996) ...... ..................... ........................................ ........................................ 7

United States v. Boulware, 384 F.3d 794 (9th Cir. 2004)................................................................8

United States v. Perry, 857 F.2d 1346 (9th Cir. 1988) ..................................................................10
United States v. Sine, 483 F.3d 990 (9th Cir. 2007) ........................................................................7
United States v. Syme, 276 F.3d 131 (3d Cir. 2002) ......................................................................13

FEDERA RULES
Fed. R. Evid. 403 .......................................................................................................................... .13
Fed. R. Evid. 80 1 (c) .............................. ............ ........... ........ ............. ........... ................ ....... ............ 7

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i. NATURE AND STAGE OF PROCEEDINGS
Arlin M. Adams, the Chapter 11 Trustee of

the Post-Confirmation Bankptcy

Estates of

Coram Healthcare Corp. and Coram, Inc. (collectively, "Coram"), filed this action on

December 29,2004, alleging that defendant Daniel D. Crowley, Coram's former CEO and

President, breached his fiduciary duties to Coram.

Both paries have fied summary judgment and/or partial summary judgment

motions. Those motions are fully briefed, with oral argument requested. (D.I. 122, 123, 128,
129, 133, 137, 143, 145, 148, 150, 151.) The Trustee sought summary judgment on liability
only. The basis of

the Trustee's motion was that certain findings that the Bankuptcy Court

made following two contested confirmation hearings should be given collateral estoppel effect so as to either preclude Crowley from re-litigating them, or in the alternative, be deemed established
under Federal Rule of

Civil Procedure 56(d). (D.I. 128.)

In the course of

the summary judgment briefing, Crowley fied a motion to strike

from the summary judgment record all of

the Trustee's references to the Bankptcy Court's

"statements from the bench, all orders or opinions in In re Coram Healthcare, and all references
to the Banptcy Court's factual findings and legal conclusions." (D.I. 147 at 1.) This motion,
too, is fully briefed with oral argument requested. (D.I. 147,152,153,154.) One of

the

arguments that the Trustee made in opposition to Crowley's motion to strike was that the motion
was premature because the issue of

whether the Banptcy Cour findings are to be given

preclusive effect is a legal issue, distinct from the issue of

whether those findings are admissible.

The latter, of course, can and should be raised in the context of a motion in limine, not in the

context of summar judgment proceedings.

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A final pre-trial conference is scheduled for September 5,2007 and trial is set to

commence on September 17,2007. This is the Trustee's motion in limine to have prior findings
of

the Bankptcy Court admitted at trial for a limited, non-hearsay purpose. i

II. SUMMARY OF ARGUMENT
1. The Bankuptcy Court's findings that the Trustee seeks to use are not

hearsay because they will not be offered to prove the truth of the matter asserted. The Trustee
seeks to have admitted only certain findings of

the Bankruptcy Court for a non-hearsay purpose

- namely, that the Court denied Coram's first and second plans of

reorganization in 2000 and
its largest

2001 due to its finding that Crowley's dual employment with Coram and one of

noteholders created an actual conflict of interest. The significance of these Bankptcy Court
findings is that they exist, not whether or not they were correct. The Trustee will not seek to
introduce the findings to prove that Crowley had a conflict or that he breached his fiduciary

duties, but rather to show that Coram remained in bankptcy longer than it would have had
Crowley had no conflict of interest.

2. The Bankptcy Court's findings are relevant and admitting them for this
limited purpose will not unduly prejudice Crowley. To the contrary, the Trustee will be greatly
prejudiced if the opinions are not admitted. A significant focus of

the Trustee's liability case is
reorganization due to

that, when the Bankuptcy Court denied Coram's first proposed plan of

Crowley's dual employment relationship, Crowley should have conformed his conduct in the
context of

that fact. Moreover, the Trustee's damages theory is based on the expenses that
the Bankptcy Court's findings during the Trustee's

1 This motion addresses only the use of

affrmative case. The Trustee reserves the right to use the opinions as necessary to defend against the evidence put forth by Crowley in his case.

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Coram incurred and the business losses that it sustained as a result of its continued stay in
bankptcy. If

the jury does not know why the Bankptcy Court twice denied confirmation, the

Trustee wil have no way to connect Crowley's conduct with Coram's damages and the
wrongdoer will be rewarded. In addition, the Court can guard against any possible prejudice to
Crowley by providing an appropriate instruction to make clear the limited purpose for which the

jury can consider the findings.

III. FACTUAL BACKGROUND2
In November 1999, Crowley signed a three-year employment agreement with

Coram to serve as Coram's CEO and President. At the time, Crowley had an employment
relationship with Cerberus Partners, L.P., one of

Coram's three Noteholders. (When Coram filed

its bankptcy petition, the three Noteholders held approximately $250 million in unsecured

notes, of

which Cerberus owned approximately 36%.) In fact, the day after he executed his

employment agreement with Coram, Crowley entered into a written agreement with Cerberus

under which he was to receive a base salary of $80,000 a month, plus performance-based

bonuses, in exchange, inter alia, for devoting "his entire business time, attention, skil and
energy exclusively to (Cerberus J" and for using "his best efforts to promote the success of
(Cerberus)." In re Coram Healthcare Corp., 271 B.R. 228, 231 (Ban. D. DeL. 2001).

In August 2000, Coram fied a petition under Chapter 11 of the Bankptcy Code

together with a proposed plan of reorganization (the "First Plan"). The First Plan provided for
Coram to become a private company owned by the Noteholders, for Coram's general unsecured the factual background is set forth in the Trustee's briefing on his and Crowley's sumary judgment motions. (D.I. 123, 129.) We provide here only an overview of the facts relevant to this motion.
2 A fuller explanation of

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creditors to receive approximately 30 cents on the dollar, and for Coram's shareholders to
receive nothing. In the course of discovery, the Equity Committee discovered Crowley's

employment relationship with Cerberus and opposed the First Plan.

In December 2000, the Bankptcy Court conducted a confirmation hearing over

five days. Crowley testified at length over a two-day period. His relationship with Cerberus was
a central focus of

the hearing. The Bankuptcy Court rejected Coram's proposed First Plan,

holding that Coram had not submitted the plan in good faith as required by the Bankptcy Code.
This was because, in the Court's view, Crowley's dual employment with Coram and Cerberus
created "an actual conflict of

interest." (Ex. A (Dec. 21, 2000 Hrg. Tr.J at 89.)

Following the denial of

the First Plan, a special committee of

Coram's four

outside directors retained Goldin Associates as an independent restructuring advisor. 271 B.R. at

232. Goldin concluded that: (l) the full extent of Crowley's relationship with Cerberus should
have been disclosed to Coram's Board of

Directors; (2) Crowley's failure to do so constituted a
Cerberus at

breach of

his fiduciary duty to Coram; (3) Crowley advanced the interests of

Coram's expense by making a $6.3 milion cash payment to the Noteholders at a time when

Coram was considering banptcy and should have been conserving cash resources; and
(4) Coram suffered damages as a result of Crowley's conflct. Id. at 233. Coram incorporated
Goldin's recommendations into Coram's second proposed plan of

reorganization ("the Second

Plan"), which the Equity Committee again opposed. Under the Second Plan, the Noteholders
again would receive all of Coram's stock, the general unsecured creditors would receive approximately 40 cents on the dollar, and the shareholders would receive a $10 million cash
distribution provided their class voted in favor ofthe Second Plan. Id. at 234.

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In late 2001, the Banptcy Court conducted hearings on the Second Plan over a
seven-day period. Once again, Crowley's dual employment and continuing conflict of

interest

was a critical issue. Once again, Crowley testified at length about that relationship. Once again,
the Bankruptcy Court denied the proposed plan. As the Court explained:
Nothing, in fact, has changed since the first confirmation hearing. Crowley continues to receive almost $ 1 milion a year from one of the Debtors' largest creditors (Cerberus), while serving as the Debtors' CEO and President. Under this agreement with Cerberus, he is required to obey its instructions or risk having the agreement terminated and losing his $1 million. This is an actual conflict of interest, as we concluded at the first confirmation hearing.
his fiduciary

Id. at 235. The Cour continued: "Crowley's conflct of

interest is a violation of

duty to the Debtors and estate." Id. at 240. The Court fuher determined that Crowley's conflct
caused harm to Coram, including, but not limited to the harm caused by continuing to remain in

bankptcy. Id. at 237.

The Bankptcy Court subsequently appointed Arlin M. Adams as Chapter 11
Trustee to oversee Coram's operations and assist it through the reorganization process. See In re
Coram Healthcare Corp., 315 B.R. 321, 328 (Bankr. D. DeL. 2004). Both the Equity Committee

and the Trustee filed plans of reorganization. !d. In October 2004, the Bankptcy Court
confirmed the Trustee's plan. !d. at 327. The Trustee's plan included a preservation of

his rights

to file claims on behalf of Coram's estate against Crowley. This litigation ensued.

iv. ARGUMENT
Prior to turning to our argument, we address a few preliminary issues for clarity's

sake. First, this Court need not reach the admissibility issue presented in this motion should it

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grant the Trustee's summary judgment motion on liability and rule either that the Trustee is
entitled to summary judgment on the basis of the preclusive effect of

the prior Bankruptcy Court
those

findings or, in the alternative, that certain facts should be deemed established as a result of

findings.

Second, the briefing in the context of Crowley's motion to strike (D.I. 147, 152,
153) somewhat narrowed the parties' dispute about which of

the Bankptcy Court's findings

should and should not be admissible. For his par, the Trustee made clear that he does not (and would not) seek to use the findings for their truth. (D.I. 152 at 5-6.) More specifically, the
Trustee stated previously, and reiterates here, that (other than in the collateral estoppel context
that formed the basis for his summary judgment motion), he does not seek to have the

Bankuptcy Court's findings that Crowley had an actual conflict admitted in order to establish
here that Crowley had an actual conflict of interest or that he breached his fiduciary duty. These
are matters that the Trustee is prepared to prove in this case under the relevant Delaware law.
For his pa.ii, Crowley stated in his briefing on the motion to strike that he is willing to stipulate to
the fact that the Bankruptcy Court denied Coram's First and Second Plans of

reorganization and

that Arlin M. Adams was subsequently appointed Trustee. (D.I. 153 at 1.)

The point of dispute, then, is now a fairly narrow but important one: whether the

Bankuptcy Court's two findings as to why it denied the First and Second Plans - i.e., because
Crowley's dual employment relationship with Coram and Cerberus created an actual conflict of
interest - are admissible. For the reasons set forth below, because the Trustee is not seeking to

use those findings to prove their truth, the findings are not hearsay. Further, the relevance of

the

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findings and the prejudice to the Trustee if

they are not admitted greatly outweigh any possible

prejudice to Crowley if

they are admitted.

A. The Trustee Is Permitted To Use The Bankruptcy Court's Findings For

A Non-Hearsay Purpose.
There is no per se rule holding that judicial opinions always are inadmissible as

hearsay. See United States v. Sine, 483 F.3d 990, 1003, 1005 n.13 (9th Cir. 2007). Rather, the
line is the usual hearsay line: is the party seeking to use the out-of-court statements to prove the

truth of the matter asserted? It is not surprising, then, that in the cases upon which Crowley
relied in his motion to strike, the court disallowed the opinion because the party was seeking to
use it to prove the truth of

the matter asserted. See, e.g., Sine, 483 F.3d at 1004; Herrick v.

Garvey, 298 F.3d 1184, 1191 (lOth Cir. 2002); Nipper v. Snipes, 7 F.3d 415,417 (4th Cir. 1993);
Liberty Mutual Insurance Company v. Rotches Pork Packers, Inc., 969 F.2d 1384, 1388 (2d Cir.
1992); Thompson v. Glenmede Trust Co., Civ. A. No. 92-5233, 1996 U.S. Dist. LEXIS 13672, at
*9 (E.D. Pa. Sept. 16, 1996).

On the other hand, as the Advisory Committee notes to Rule 801 (c) make clear,

"(iJfthe significance of an offered statement lies solely in the fact that it was made, no issue is
raised as to the truth of anything asserted, and the statement is not hearsay." FED. R. EVID.

801(c) Advisory Committee note. Accordingly, "verbal acts and verbal parts of acts, in which
the statement itself affects the legal rights of the parties or is a circumstance bearing on conduct

affecting their rights," are not hearsay. !d. Statements offered to show the effects on the listener
and statements that have relevance simply because they are made are not hearsay. See
Cloverland-Green Spring Dairies, Inc. v. Pa. Milk Mktg. Bd., 298 F.3d 201, 218 n.20 (3d Cir.

2002) (noting that "verbal act" is not hearsay because "the statement itself has legal effect"); see

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also Marks v. Marina Dist. Dev. Co., App. A. No. 05-3619,2007 U.S. App. LEXIS 479, at *10*11 (3d Cir. Jan. 10,2007); Orthotec v. Reo Spineline, LLC, 438 F. Supp. 2d 1122, 1129 n.9
(C.D. Cal. 2006).

The Banptcy Court's findings that it could not confirm either the First or

Second Plans due to Crowley's conflict are just the sort of "legally operative" statements that are
not hearsay and so are admissible.

The Ninth Circuit's opinion in United States v. Boulware, 384 F.3d 794,805-06

(9th Cir. 2004), is instructive. Boulware owned all ofthe shares in a vending machine company.
The governent claimed that he had diverted funds from his company to support his extravagant

lifestyle and charged him with tax fraud, tax evasion, and conspiracy. During trial, the district
court excluded evidence of a state court civil judgment that had determined that Boulware's

company, as opposed to Boulware personally, owned some of the funds at issue. Boulware was
convicted.

The Ninth Circuit reversed the convictions, holding that the district court erred in

excluding the state court civil judgment. This was because, inter alia, Boulware had offered the
state court judgment not to prove whether he (personally) or his company actually owned the
funds, but rather simply for the legal effect of

the state cour's judgment. As the Court

explained, "(aJ prior judgment is not hearsay. . . to the extent that it is offered as legally
operative verbal conduct that determined the rights and duties of

the paries." Id. at 805-06.

Applying that principle to the facts before it, the Cour concluded that, "(Boulware J was offering the judgment not for the truth of the matters asserted in the judgment, but rather to establish the

judgment's legal effect. ... this is a nonhearsay purpose." Id. at 807.
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To similar effect is the Seventh Circuit's opinion in Greycas, Inc. v. Proud, 826

F.2d 1560 (7th Cir. 1987). Proud was a lawyer. His brother-in-law, Crawford, owned a failing
farm. Crawford applied for a loan from Graycas. Graycas agreed to extend the loan subject to
Crawford providing a letter that there were no prior liens on the farm machinery that was being
used to secure the loan. Proud sent Greycas such a letter, stating that he had conducted an

independent search and concluded that there were no liens. As it turned out, that was doubly

false - Proud had not conducted any independent investigation and, in fact, Crawford already
had pledged most of the machinery to other lenders. Greycas made the loan. Crawford
defaulted. The machinery was sold at auction. A state court ruled that Greycas' loan was
, subordinate to the prior liens.

Greycas sued Proud for negligent misrepresentation. The district court allowed
Greycas to offer into evidence the state court findings regarding the priority of the various liens.
Based on the state court findings, the district court concluded that if

Proud's representation had

been accurate (i.e., ifthere had been no prior liens); Greycas would have recovered $833,760 on
its collateral, which was significantly more than it was able to recover at the auction of

the

machinery. The court entered judgment in favor of Greycas in that amount.

The Seventh Circuit affirmed, holding that the district court did not err in relying

on the state court findings as to the priority of the liens. The Court advanced several different
reasons for its conclusion. Of

particular relevance here was the Court's view that the state cour

judgment was not hearsay at all because "it should make no difference to Greycas' rights against
Proud whether the state cour

judgment is erroneous." Id. at 1567. Proud could have put on
the liens,

whatever evidence he wished to challenge the state court's findings as to the priority of

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yet still the state cour judgment was admissible "as evidence of the status of Greycas' s liens."

!d. See also United States v. Perry, 857 F.2d 1346, 1351-52 (9th Cir. 1988) (not error to admit

during defendant's mail and wire fraud trial prior bankptcy court finding that certain property
transfers to defendant's relative were fraudulent conveyances because finding not offered as
substantive proof but only to show that defendant was true owner of

property).

It is for these same reasons that the Bankptcy Court's findings that the plans
could not be confirmed due to Crowley's conflict are not hearsay. The Trustee can prove liability, and he can prove damages, just as Greycas could prove liability and damages. But just
as Greycas could not prove - without evidence of the state court's finding on the priority of

the

competing liens - that Proud's misconduct was the reason it recovered so little, so the Trustee
canot prove - without evidence of

the Bankptcy Court's finding that it was denying the

plans due to Crowley's conflict - that it was Crowley's conflct that caused Coram to remain in
bankptcy for the protracted period that it did.

In short, the Trustee does not seek to use the Banptcy Court's findings to
prove their truth, i.e., that Crowley actually had a conflict. In fact, just as in Boulware and

Greycas, whether the Bankptcy Court was right or wrong is irrelevant: it is only the existence
of

the Court's findings that matters. The Trustee will use the findings to demonstrate why the

Bankuptcy Court refused to confirm Coram's first two proposed plans for reorganization.
Crowley will be free to argue that he did not have a conflict; that ifhe had a conflict, he
adequately disclosed it; that he did not breach his fiduciary duties; and that his conduct did not

har Coram. (And, as discussed below, the Cour can also fashion an appropriate instruction to
ensure against any possible confusion.) But what Crowley should not be allowed to dispute is

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the legally operative fact that the Banptcy Court twice denied confirmation because of the
conflict of interest that his ongoing relationship with Cerberus created.

B. Crowley Wil Not Be Prejudiced If The Bankruptcy Court's Findings Are

Admitted For A Limited, Non-Hearsay Purpose.
Crowley argued in the briefing on his motion to strike that, even if

the Bankptcy

Court's findings are not hearsay (which they are not), they still should not be admitted because

they are unduly prejudiciaL. (D.I. 147 at 5-6.) This argument is a nonstarter for a number of
reasons.

First, Crowley's Rule 403 argument relies largely on the incorrect premise that

the Trustee will offer the findings for their truth. As set forth above, that is not so.

Second, the courts have made clear that simply because facts within a judicial

opinion will sometimes unfairly prejudice a party "does not mean that admission of such facts
will always fail the balancing test of

Rule 403. Such a holding would be inconsistent with

courts' increasing reluctance to reject in toto the validity of

the law's factfinding processes

outside the confines of

res judicata and collateral estoppel." Sine, 483 F.3d at 1003 (internal

quotation and citation omitted). Accordingly, the relevance of

the findings and the prejudice to

the Trustee if

they are not admitted must be considered alongside any possible prejudice to
they are admitted.

Crowley if

The findings are highly relevant to both liability and damages. As to liability,
without being able to use the Bankptcy Court's findings that the plans could not be confirmed

due to Crowley's conflict, it wil be virtually impossible for the Trustee to demonstrate why

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Crowley's conduct following the Banptcy Court's denial of confirmation of Coram's first

proposed plan constituted a breach of the several fiduciary duties he owed to Coram. The

evidence of Coram's decisions regarding the preparation of its Second Plan - the formation of
the Special Committee, the retention of Goldin as restructuring advisor, the adoption of Goldin's
recommendations - would be meaningless if not presented in the context of Crowley's decision

to maintain his dual employment relationship not withstanding the Banptcy Court's findings.

As to causation, the Bankruptcy Court's findings are integral- indeed, essential

- to the Trustee's case. The Trustee asserts that Coram was damaged because it was forced to
remain in banptcy for longer than it otherwise would have due to the Bankptcy Court's

denial of Coram's two plans. The reason why the Bankptcy Court denied both plans was
because of

Crowley's conflict. There is no way for the Trustee to prove why Coram faced an

extended stay in bankruptcy other than by showing what the Bankptcy Court did and why it
did it. Moreover, the Trustee would suffer undue prejudice if

this Court does not admit the

findings for the limited purpose that the Triistee seeks to use them. Without ¥JlowIng why the

Bankptcy Court rejected the first two plans, the jury will be left to speculate why Coram was
forced to remain in bankuptcy for so long. The Trustee can show that Crowley had a conflict of

interest, that Coram remained in bankptcy, and that Coram was damaged by its extended stay

in bankptcy, but will be handcuffed in connecting these points. In fact, the jury may be led to
believe that Coram was to blame for remaining in bankptcy, which is factually incorrect,
highly misleading, and prejudicial to the Trustee. There is no reason to leave the jury befuddled
and wondering why the plans were not confirmed and why the Trustee commenced this litigation
in the first place.

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Last, Crowley wholly ignores the curative instructions the Court could give, and

provides no reason why a curative instruction would not cure any potential prejudice to him,
given the limited use for which the Trustee seeks to use the findings. See FED. R. EVID. 403,

advisory committee notes ("In reaching a decision whether to exclude on grounds of unfair
prejudice, consideration should be given to the probable effectiveness of a limiting instruction.");

see also Boulware. 384 F.3d at 808 ("Any danger that the jur would have given undue weight to
the state court

judgment could have been dealt with by a cautionary instruction."). And, of
jury will follow its instructions. United States v. Syme, 276 F.3d

course, a court presumes that a

131, 155 (3d Cir. 2002).

A final note bears mention. If there were any doubt that the reasons why the

Bankptcy Court denied both plans is a relevant fact, both interwoven with and inseparable

from this litigation, expert discovery has highlighted the essential nature of the Bankptcy
Court's findings to this case. For example, one of Crowley's experts, Joseph A. Dworetzky,
YY.,lr"" r",.".,t"r! r"f"r",.""" ...I.. .L..iu 'i...l''.... tn t"h" R",nlrriint"v rniirt nnininn" "t",tina ......_... J.J..i".1..v~ .i"'YVl.'-V\, .IV.lV.L"".L.LVV~i,. "hi" r",.nrt .... ...1.1.. ~_.L..Jr-.t..vJ ..__.... _.t.L.L.&.L_.L.I~, ~"'_".L.L.&bt"h",t.

the Bankptcy Court denied confirmation of the First Plan on the

basis that the debtor, as the plan proponent, had not met its burden proving that the plan had been proposed in good faith. of Important to the Bankuptcy Court's conclusion was its determination that Crowley, the Chairman of the Board and CEO of Coram, had an employment contract with (CerberusJ, the largest ofthe three Noteholders that were to be restructured under the First Plan, which had not been adequately disclosed in the Disclosure Statement.

(Ex. B (Dworetzky Expert Report) at 2.) See also (Ex. C (Dworetzky Dep.J at 186:20-23) ("I
think that Crowley's relationship with Cerberus definitely was one of

the factors that made this a

tough bankuptcy."); (Ex. B at 13) ("(iJn rejecting the Second Plan, the Cour took the view that.

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. . the contractual relationship between Cerberus and Crowley created such a continuing conflict
that the plan could not be confirmed.").

Dworetzky opines that the Trustee's causation theory is unreasonable, yet, for the
réasons set forth above, the Trustee will be unable to rebut that point unless the jury knows the

reason behind the Bankruptcy Cour's decisions. Finally, although his opinion as a whole is that,
"(aJs a general matter, business bankuptcies under Chapter 11 do not come with any guarantee
of success" and are "highly uncertain" and so it is unfair to blame Crowley alone, Dworetzky's
opinion cannot be understood except in the context of

what the Bankptcy Court actually did

and the reasons why it did so. (Ex. B at 4.)

By way of

further example, one of

the Trustee's experts, Scott Victor, also

focused on the Banuptcy Court's opinions, stating that only two material issues existed during

the confirmation hearings for the first plan: Crowley's conflict and valuation. (Ex. D (Victor
Expert ReportJ at 2.) But, as Victor notes, "(tJhe ultimate valuation that was accepted by the
Court when the Trustee's plan was confirmed was consistent with the Debtor's original valuation
put forth at the time of the First Plan. Therefore, the competing valuation testimony would not

have prevented confirmation of the First Plan since the very same valuation dispute did not
prevent confirmation of

the Trustee's plan." (Id.) He therefore concludes that without the taint

of

the conflict, Coram would have emerged from banptcy three earlier than it did. (Id.)

Victor further opines that Crowley's conflct, which was the reason Coram remained in
bankptcy, presented an additional obstacle. (!d. at 3.) If the jury cannot be told of

the reason the puzzle

behind the denial of

the plans, Victor wil be unable to testify as to the key piece of

behind Coram's damages.

14

Case 1:04-cv-01565-SLR

Document 176

Filed 08/20/2007

Page 18 of 18

v. CONCLUSION
For all of

these reasons, the Trustee respectfully requests that the Court admit the

prior findings of

the Bankrptcy Court that the reason it rejected Coram's first two plans of

reorganization was because Crowley's dual employment relationships with Coram and Cerberus

created a conflct of interest.

Respectfully submitted,

Dated: August 20, 2007

/s/ Michael 1. Barre

Richard A. Barkasy (#4683) Michael 1. Barre (#4684) SCHNADER HARRSON SEGAL & LEWIS LLP 824 Market Street Mall, Suite 1001 Wilmington, DE 19801 (302) 888-4554 (telephone)
(302) 888- 1 696 (telecopier)

mbarre~schnader.com
OF COUNSEL:

Barr E. Bressler (admitted pro hac vice) Wilbur L. Kipnes (admitted pro hac vice)
1IT~_~.. UT;_l,~l_~_ (~"'_;++~'" _..~ 7.~~ ..;~~\ 1 ~c111'" Y VV 1111\Çl1l1c111 \. c1Ul1l1LLÇU 1// u nui- vil-t:)

SCHNADER HARRSON SEGAL & LEWIS LLP 1600 Market Street, Suite 3600 Philadelphia, P A 19103
(215) 751 - 2400 (telephone)

(215) 751-2205 (facsimile)
Counsel to Plaintif

Arlin M Adams, Chapter 11 Trustee of the PostConfirmation Bankruptcy Estates of CORA HEALTHCARE CORP. and CORAM, INC

15