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

Case 1:04-cv-01565-SLR

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
ARIN M. ADAMS, Chapter 11 Trustee of the Post-Confirmation Bankruptcy Estates
of CORAM HEALTHCARE CORP. and CORAM, INC.,
) ) ) )

) Civ. Action No. 04-cv-1S6S(SLR)
Plaintiff,
v.
) )
)

DANIEL D. CROWLEY, et a!.,
Defendants.

)

) ) )

BRIEF OF CHAPTER 11 TRUSTEE IN SUPPORT OF MOTION TO EXCLUDE IRRLEVANT EVIDENCE REGARDING CORAM INTEREST HOLDERS AND DISTRIBUTION OF DAMAGES
Richard A. Barkasy (#4683)
Michael J. Barre (#4684)

Dated: August 20, 2007

SCHNADER HARRISON 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 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 PostConfrmation Bankruptcy Estates of CORAM HEALTHCARE CORP. and CORAM, INC.

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TABLE OF CONTENTS
Page

i. NATUR AN STAGE OF PROCEEDINGS ...................................................................... 1
II. SUMMARY OF ARGUMENT.............................................................................................. 1

III. FACTUAL BACKGROUN................................................................................................. 3
N. ARGUMENT.......................................................................................................................... 4
A. This Court Should Exclude Evidence That The Shareholders As A Group And Coram's
Trade Creditors Benefited From The Denial Of

Coram 's Proposed Plans Of

Reorganization. .............................................................................................................. 4
B. This Court Should Exclude Evidence That Individual Shareholders Benefited From

Coram's Bankruptcy. ..................................................................................................... 6
C. This Court Should Exclude Evidence That The Net Proceeds Of This Litigation Wil

Be Distributed To Trade Creditors And Former Shareholders. .................................... 9

V. CONCLUSION..................................................................................................................... 10

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TABLE OF AUTHORITIES

FEDERA CASES
Carter v. Hewitt, 617 F.2d 961 (3d Cir. 1980) ................................................................................8
In re Coram Healthcare Corp. and Coram, Inc., 271 B.R. 228 (Bank. D. DeL. 2001)..................4

In re: Coram Healthcare Corp. and Coram, Inc., 315 B.R. 321 (Ban. D. DeL. 2004).................4

In re Granite Partners, 194 B.R. 318 (Bank. S.D.N.Y. 1996).......................................................5
In re Norstan Apparel Shops, Inc., 367 B.R. 68 (Bank. E.D.N.Y. 2007).......................................5
Parsons v. Jefferson-Pilot Corp., 141 F.R.D. 408 (M.D. N.C. 1992) .............................................9
Rhone-Poulenc Rorer Inc. v. The Home Indem. Co., Civ. A. No. 88-9752, 1991 U.S. Dist. LEXIS 12959 (E.D. Pa. Sept. 16, 1991) ...........................................................................9
In re Scott Acquisition Corp., 344 B.R. 282 (Bankr. D. DeL. 2006) ................................................5

Silbergleit v. First Interstate Bank, NA., 37 F.3d 394 (8th Cir. 1994)............................................8
Tessendorfv. First Colony Life Ins. Co., Civ. A. No. 91-7293, 1992 U.S. Dist. LEXIS 17681 (N.D. IlL. Nov. 13, 1 992).................................................................................................8

STATE CASES
Prod. Res. Group, 1.1. C v. NCT Group, Inc., 863 A.2d 772 (DeL. Ch. Ct. 2004)..........................5

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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"), fied this action on
December 29,2004, alleging that defendant Daniel D. Crowley, Coram's former CEO and

President, breached his fiduciary duties to Coram. On April 17, 2007, the Trustee filed a motion

for summary judgment on the ground that the Bankptcy Court's findings following two
contested confirmation hearings precluded Crowley from re-litigating whether he had breached

his fiduciary duties, or in the alternative, required that certain facts be deemed established under
Federal Rule of Civil Procedure 56( d). Crowley

also filed a motion for summary judgment. The

summary judgment motions have been fully briefed, with oral argument requested. (D.I. 122,
123, 128, 129, 133, 137, 143, 148, 150, 151.) Crowley also filed a motion to strike from the
Trustee's summary judgment papers evidence of, and references to, the previous findings and
conclusions of the Bankuptcy Court. That motion also is fully briefed and oral arguent has
been requested. (D.I. 146, 147, 152, 153, 154.)

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 exclude certain
irrelevant evidence regarding Coram interest holders and distribution of damages.

II. SUMMARY OF ARGUMENT
1. The Trustee anticipates that Crow ley wil argue that Coram did not suffer

damages by having remained in bankptcy for as long as it did and will seek to introduce
evidence that: (a) Coram's common shareholders and its trade creditors fared better under the
Trustee's plan than they would have under either of Coram's proposed plans; (b) certain

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individual members of

the Equity Committee profited on their investments in Coram; and (c) the

beneficiaries of any net proceeds of this lawsuit will be the same trade creditors and former
common shareholders.

2. The plaintiff in this case is the Trustee of Coram's Post-Confirmation

Bankptcy Estates. The former shareholders and the trade creditors are not plaintiffs. It is not

appropriate to examine the impact of the banptcy on a particular constituency of the plaintiffentity. That the shareholders collectively received more money under the Trustee's plan than
they would have received under Coram's proposed plans does not mean that Coram was not
damaged. If a corporation brings a lawsuit, the question of "what part of the corporation was

hared" is never asked because it is never relevant. This case is no different simply because the
plaintiff

happens to be the Trustee of a bankptcy estate. Moreover, even if such evidence were

relevant, its prejudicial effect substantially outweighs whatever probative value it may have and
so it should be excluded under Rule 403.

3. Coram was a publiciy-traded company, with its shareholders changing

every day. Some purchased stock both before and after the bankptcy and made money. Others
lost money. Members of the Equity Committee were in both categories. Evidence of how any

particular shareholders made out has no possible relevance to any issue in this case. Moreover,
such evidence serves no purpose other than to confuse and prejudice the jury and should be
excluded under Rule 403 even if it were otherwise relevant.

4. The Trustee will distribute any recovery in this case in accordance with

the confirmed plan of reorganization. What a plaintiff intends to do with a recovery is irrelevant.
This case is no different simply because this plaintiff is the Trustee of a bankptcy estate.

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III. FACTUAL BACKGROUND
This litigation concerns the Trustee's claim that defendant Crowley breached his fiduciary duties to Coram by maintaining an employment relationship with Cerberus Partners,
L.P. while serving as CEO and President of

Coram. (D.I. 1.) That dual relationship caused the
interest and so to reject Coram's

Bankptcy Court to find that Crowley had a conflict of

proposed plans of reorganization on two occasions. The Trustee asserts that Coram incurred

direct and indirect costs as a result of remaining in bankptcy for an extended period of time.

The Trustee is the only plaintiff in this case. Yet Crowley apparently intends to
show that the shareholders collectively and trade creditors fared better under the confirmed plan
of reorganization than they would

have under the two rejected proposed plans. Furthermore,

Crowley appears to intend to introduce evidence related to individual shareholders and members
of the Equity Committee, some of

whom saw substantial returns on their investment in Coram

stock. Finally, Crowley may attempt to inform the jury that any verdict the Trustee obtains will

be distributed first to pay interest to the trade creditors and then to the shareholders. All of these
arguments would serve only to confuse the jury as to the identity of

the plaintiff, invite the jury

to veer off into irrelevant tangents, and prejudice the Trustee.

Because the facts relevant to each of

these three points differ slightly, the Trustee

sets forth the specific facts relevant to each individual point below.

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iv. ARGUMENT
A. This Court Should Exclude Evidence That The Shareholders As A Group And

Coram's Trade Creditors Benefited From The Denial Of Coram's Proposed
Plans Of Reorganization.
Coram's first proposed plan of

reorganization (which the Banptcy Court

denied) would have cancelled all shareholder interests, paid $2 million to the trade creditors, and
issued all of

the stock in the reorganized private company to the noteholders. In re Coram

Healthcare Corp. and Coram, Inc., 271 B.R. 228,232 (Bank. D. DeL. 2001). Coram's second
proposed plan of

reorganization (which the Bankptcy Court also denied) would have given the

shareholders $ 1 0 million provided their class voted in favor of the plan, paid the trade creditors

$3 million, and again given all the stock to the noteholders. Id. at 233. Under the Trustee's

confirmed plan, the shareholders received approximately $40 million, the trade creditors
received 100% of their allowed pre-petition claims, and the noteholders relinquished all of

their

claims and interests and contributed $56 milion in cash and guarantees to Coram's estate in
return for ownership of the company and a release of any claims that Coram may have against

them. in re: Coram Healthcare Corp. and Coram, Inc., 315 B.R. 321, 328 (Bankr. D. Dei.
2004).

The fact that the Coram shareholders and trade creditors collectively received
more money under the Trustee's confirmed plan of

reorganization than they would have under

the rejected plans is irrelevant. This is not a direct case by shareholders claiming that they were

hared in their capacity as shareholders. It is a case brought by the entity.

The Trustee represents Coram, which was harmed by having remained in

bankptcy. The Trustee stands in the shoes of Coram and may bring any lawsuit that Coram

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could have brought. See In re Norstan Apparel Shops, Inc., 367 B.R. 68, 82 (Bank. E.D.N.Y.
2007) (noting that breach of

fiduciary duty claims belong to corporation); In re Granite Partners,

194 B.R. 318, 323 (Ban. S.D.N.Y. 1996) ("(The trustee) may bring any suit that the debtor
could have brought before bankuptcy.").

In fact, if the cause of action belongs to the estate, only the Trustee may assert it.

See In re Scott Acquisition Corp., 344 B.R. 282, 290-91 (Ban. D. DeL. 2006) ("trustee may

assert only the claims that belong to the bankptcy estate. . . a trustee does not have standing to
pursue the individual claims of creditors or even of creditors as a class."); Prod. Res. Group,
1.1.C v. NCT Group, Inc., 863 A.2d 772, 793 n.65 (DeL. Ch. Ct. 2004) ("The Trustee can bring

any suit (the insolvent company) could have brought, including suits against directors and
controlling shareholders for breach of

fiduciary duty.").

The issue is whether Coram was damaged by having to spend $36 million in

reorganization expenses between the time that the first plan was denied and the time that the
Trustee's plan was confirmed, as well as having to incur additional indirect costs attributable to

remaining in bankptcy for that extended period of time. That the trade creditors and the
common shareholders may have fared better under the Trustee's plan than they would have
under Coram's plan is not at all probative of

the question whether Coram was damaged. That

Coram's bankuptcy estate spent $36 million canot be disputed and the plaintiff

is the Trustee

of Coram's bankptcy estate.

Even if evidence regarding how the shareholders collectively and the trade

creditors fared under the various plans was probative, it should nevertheless be excluded under

Rule 403. Evidence about the shareholders would confuse the jury into thinking that they are the
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plaintiffs. The Trustee would then have to present testimony explaining the difference between a

corporation and its shareholders in order to explain what could be a confusing and diffcult
economic concept that a corporation is owned not just by its shareholders, but by its debtholders

as well. Evidence and argument about "which part of Coram" was damaged serves no purpose,
is likely to create confusion about "who is the plaintiff," may well mislead the jury, and certainly

wil take up trial time unnecessarily.

Therefore, evidence relating to the treatment of the trade creditors and the
shareholders collectively under the various proposed plans of

reorganization should be excluded.

B. This Court Should Exclude Evidence That Individual Shareholders Benefited

From Coram's Bankruptcy.

After Coram fied for bankptcy, the United States Trustee appointed an Equity
Committee to represent the interests of Coram Healthcare Corporation common stock. The
Equity Committee was comprised of

Donald Liebentritt, VP of Samstock, L.L.c., Mark Slezak,

CEO and VP of

the Ann & Robert Lmie Family Foundation, and Richard Haydon ofRLH
the Equity Committee are wealthy

Management. There is no dispute that the members of

1 investors.

Throughout discovery and his papers in this case, Crowley makes repeated

references to the "wealthy investors" who purchased Coram shares, both before and after Coram

filed for bankruptcy. For example, in Crowley's summary judgment papers, he states that,
1 Samstock is the personal investment vehicle for Sam Zell, a Chicago-based real estate

entrepreneur who recently purchased the Tribune Company. The Lurie Foundation was formed by Mr. Zell's late partner, Robert Lurie, and principally makes its very substantial grants in the health care field. Richard Haydon is a New York based investor. Wil Weinstein is Sam Zell's broker.

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"(o)nce the possibility of a restructuring was disclosed in Coram's SEC public fiing, a group of

highly sophisticated Coram shareholders sought a way to profit from Coram's banptcy" and
"(o)n the day following Coram's bankuptcy fiing, Zell bought 450,000 shares of

Coram

common stock at six cents per share through his personal investment vehicle, Samstock, L.L.C."

(D.I. 123 at 10); see also (D.I. 123 at 11) ("The investment would be worthless unless Levy (the
lawyer for the Equity Committee) could defeat Coram's Plan for Reorganization."); (id.) ("Other
members of Levy's ( ) group, including Weinstein and several of his clients, also increased their

positions in Coram, buying large numbers of shares (more than 3.6 milion) at rock-bottom
prices.").

Crowley's expert, Joseph A. Dworetzky, picked up the theme, noting that some

investors purchased shares "for as little as $.06 per share." (Ex. A (Dworetzky Expert Report) at

10.) Additionally, Dworetzky opined that the Equity Committee's "aggressive litigation. . .
ultimately achieved a better bargain than originally proposed. (S)hareholders who purchased
rf'r.:m'".."tf'f'lr .:t 4".vv .l""i. .....1\,.."""".:t thP timp f'fh.:nlrnll"tf'U h.:uP rpf'pi,lPrl 11 timp" thP;r ..V.l~...I.. "'''VY.L'l'''' q: 0'; l"pr d,.:rp ".1.1_ "...1...."" v.. ..-i...Ilo"".l'''') .1.1_,,"" .1""..""..,..-. .1-' ...I.I.I.I""u "'.1.......1

investment." (Id.)

The fortunes of individual shareholders and investment success of any particular
shareholder investment is not probative of any issue in this case and, again, will only serve to

create jury confusion regarding "who is the plaintiff." Coram was at all relevant times a
publicly-traded company, with shareholders changing daily. As with all publicly-traded
companies, some Coram shareholders made money and others lost money. It is irrelevant to this
litigation to focus on any particular shareholder because none of them is a plaintiff

in this action.

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As discussed above, only the Trustee is the plaintiff and he has brought this lawsuit on behalf of

the bankptcy estate.

Even if evidence of Sam Zells earnings on Coram stock was relevant (which is it
not), it should be excluded under Rule 403 because it is unduly prejudiciaL. Evidence of a

plaintiff s wealth is generally inadmissible, except in some unique circumstances where it is

probative of some particular fact at issue. See, e.g., Silbergleit v. First Interstate Bank, NA., 37
F.3d 394, 397-98 (8th Cir. 1994); Tessendorfv. First Colony Life Ins. Co., Civ. A. No. 91-7293,

1992 U.S. Dist. LEXIS 17681, at *22 (N.D. IlL. Nov. 13, 1992). Here, such evidence has no

probative value and, if admitted, would be just a blatant appeal for the jury to reject the Trustee's
claim for damages on the ground that some of

Coram's shareholders happen to be wealthy and

made substantial returns on their Coram investments. As such, the evidence could inflame the
jury and invite it to assess damages not on the basis of

the evidence presented, but on its own

prejudices. See Carter v. Hewitt, 617 F.2d 961,972 (3d Cir. 1980) (evidence that appeals to
jury's sympathies or may cause jury to base decision on something other than established
propositions in case is unduly prejudicial). Moreover, if

this irrelevant and prejudicial evidence
his own about

were admitted, the Trustee would be forced to defend by presenting evidence of

how other shareholders (including Coram employees) lost money on their investments. This
would lead to a distracting, confusing, and misleading side show.

In short, evidence of the wealth of individual Coram shareholders and the returns
earned by any individual shareholder should be excluded.

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C. This Court Should Exclude Evidence That The Net Proceeds Of

This Litigation Wil Be Distributed To Trade Creditors And Former Shareholders.

Under the Trustee's confirmed plan, the net proceeds from this case are to be

distributed first to pay interest to the trade creditors and then to the former shareholders. The
Trustee seeks to exclude any evidence about the distribution of the net proceeds because such
evidence is not relevant.

How the proceeds will be distributed does not tend to make any material fact in

issue more or less likely. Plaintiffs are not asked "what do you intend to do with the money if

you win?" because the information is irrelevant. This case is no different. This is similar to the

rule that a plaintiffs motivation in bringing a lawsuit is irrelevant. See Rhone-Poulenc Rorer
Inc. v. The Home Indem. Co., Civ. A. No. 88-9752, 1991 U.S. Dist. LEXIS 12959, at *7 (E.D.

Pa. Sept. i 6, i 99 I) ("the motive behind the institution of an action has been deemed not relevant

to the subject matter involved pursuant to Fed. R. Civ. P. 26(b)."); see also Parsons v. Jefferson-

Pilot Corp., 141 F.R.D. 408, 414 (M.D. N.C. 1992) ("It is well-established that in ordinary

litigation, not involving the clean hands defense, the plaintiffs motive in bringing suit is not
relevant to the subject matter of

the litigation and is not a matter of discovery.").

The Trustee is charged with protecting the post-confirmation Coram estate. What constituencies stand to gain from a verdict in favor ofthe Trustee does not shed any light on
whether Crowley breached his fiduciary duties or whether Coram suffered damages. Therefore,
such evidence should be excluded.

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V. CONCLUSION
For these reasons, the Trustee respectfully requests that the Cour exclude
evidence that would inform the

jury: (1) that Coram's former shareholders collectively and its
reorganization than

trade creditors received more money under the Trustee's confirmed plan of

they would have received under Coram's proposed plans that were not confirmed; (2) relating to

the identity of individual shareholders and whether they eared a profit on their investments in
Coram common stock; and (3) relating to how any damages awarded in this case will be
distributed.

Respectfully submitted,

Dated: August 20, 2007

Isl Michael 1. Barre

mbarre~schnader.com
OF COUNSEL:

Richard A. Barkasy (#4683) Michael 1. Barre (#4684) SCHNADER HARRISON SEGAL & LEWIS LLP 824 Market Street Mall, Suite 1001 Wilmington, DE 19801 (302) 888-4554 (telephone) (302) 888-1696 (telecopier)

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

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