Free Appendix - District Court of Delaware - Delaware

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 1 of 30

liability

case for the breach

of duty claims

against

Feinberg

and

Cerberus both he and

Shestack

recognized

that

Coram

faced

significant

obstacles

in

proving

causation

and

damages

The Trustee

concluded

that

$56 million and

the

waiver

of their remaining

$9

million

claim was the

maximum

amount

to

reasonably

expect

the

Noteholders

to

pay

in

settlement

TA 124
of $9

He

faced

this

decision

reject

certain

recovery

of $56 million plus the forgiveness

million of

indebtedness

from

fewer than

all

defendants

or

pursue

larger

recovery

against

all

defendants

including

RICO

claims

in

what everyone

agrees would be

expensive

lengthy

complex and

contentious

litigation

that

had no guarantee of success

The

Trustee knows

that

litigation

is

inherently

uncertain

and

that

it

was very

possible

that

the

net

proceeds

of the litigation

could

be

less

than the settlement amount

perhaps

substantially

less

TA13O-31

The Trustee believed

that

it

was reasonable

to

settle

with the Noteholders

on these terms

The

EC

did not introduce

direct

evidence

that

the

settlement

is

unreasonable

To

the

contrary

Mr

Liebentritt

testified that

he would have

settled

for

$50-$55

million although

he did

not so inform the Trustee

TA257 TA260

Judge

McKelvie

criticized

Shestacks

methodology

in

limited

way

but did not opine that the

settlement was

unreasonable

Even

if

Shestacks

testimony

were discounted

entirely

the Trustee

would

still

propose

the settlement

As

Judge

McKelvie

testified

he

would

absolutely agree

that

in this

context

the

Trustee

and

especially

Judge

Adams

would be

in

better

position

than

would be

to

make

decisions

relating

to

settlement

TA241

THE CHAPTER
BUSINESS
To propose

11

TRUSTEE

JUDGMENT AFTER
the
Trustee and

PROPOSES THIS SETTLEMENT FULL INVESTIGATION
his

IN HIS

settlement

counsel

need

not be

so familiar with the case

as

to

be prepared to go

to

trial

In

re

Lee

Way

Holding

Comp 120

B.R 881

897

Bankr

S.D Ohio

1990

rejecting

argument

that

Jenner

Block

as

counsel to the trustee

failed

to

suffiLiently

investigate

lawsuit

before

trustee

proposed

settlement

cited

In

re

Healthco

Inter

Inc

136

19

Al 051

Case 1:04-cv-01565-SLR

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Page 2 of 30

F.3d

45 511st Cir

1998

In

addition to his

own
his

investigation

the

Chapter

11

Trustee

proposes

this

settlement after thorough

investigations

by

counsel

Shestack

Harrison

Goldin

the

EC

and

its

counsel

See In re Martin

91

F.3d

389
to the

395

3d

Cir 1996 stating

that

normal

circumstances

the

court

would

defer

Trustees

judgment so long

as there

is

legitimate

business justification see also

In

re

Genesis

Health

Ventures Inc 266 B.R

591

620

Bankr

Del 2001

Tn re

Marvel

234 B.R 21 71

Del 1999
work
of the

The Trustee had

the benefit

of the aggressive

EC
the

which spent

millions

of

dollars

in professional

fees

conducting

discovery

and

investigating

facts

surrounding

the

Crowley

conflict

of interest

TA264
all

There

can

be

no question

that

the

EC
an

obtained

all

the

important documents

and deposed

of the key witnesses

The

EC

retained

experienced

and

well-regarded

damages expert

In

their effort to

persuade

the

Trustee to seek

Court permission

to

file

the derivative

lawsuit

the

EC

tried to put our best foot

forward

TA265
to ascertain

As

Shestack

testified

think the equity holders

did

very

thorough

job in trying

facts

that

would

sustain

their

theory

and

if

they failed

it

was because

the

theory

failed

not their due

diligence

TA119
judgment

The

Trustee carefully

considered

the

results

of the

ECs

efforts

in

reaching

his

own

THE PROPOSED

SETTLEMENT

IS

WELL ABOVE THE LOWEST RANGE OF

REASONABLENESS
In
can be approving settlement the Court
is

not to determine

that

the

settlement

is

the

best

that

achieved

by

the

debtor

but rather

to

canvass

the

issues

and

see whether

the

settlement

fall
Inc

below

the

lowest

point in the range

of reasonableness

In

re Intergrated

Health

Services

2001

Bankr LEXIS 100

at

67

Del

Bankr Jan

2001
In

Bankruptcy

Court

should

consider

four

criteria

See In re Martin 91

F.3d

at

393

re Intergrated

Health

Services

Inc

2001

Bankr LEXIS

100

at

20

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the probability

of success
in

in litigation

the likely difficulties the complexity inconvenience
the

collection involved and
the it

of the litigation and

expense
and

delay necessarily

attending

paramount

interests

of the creditors

Factors

through

require

little

discussion

the

defendants

have

appropriate

resources

the litigation

would be complex

long and

expensive5

and

the

creditors

will

be paid in full

The

question

is

simply this

Should

the

Trusteepursue

the

factually

and

legally

complex RICO

claims

against

Cerberus

and

Feinberg

with their possibility

of treble

damages and

the

state

law claims

against

Feinberg

and

the

Noteholders

and

forego

certain

$56 million The

answer

is

clear

no

The Claims
Survive

Against

Goldman Sachs and

Foothill

Would Probably Not

Summary Judgment
and Judge

Judge

Adams
Sachs

Shestack

McKelvie

all

testified that

the

proposed

state

law claims

against

Goldman

and

Foothill

are

weak

Goldman

Sachs

and

Foothill

are

not defendants

in

the

RICO claims

The Trustee

testified that

he scoured

the

record

in this

case many of

the

statements under

oath and

have

nothing

that

implicates

Goldman

Sachs

in

any

way TA134
and
Foothill

Shestack

reviewed

the

discovery

in great

detail

and

concluded

that

Goldman

Sachs

would have

very good
in

strong arguments

against

liability

because

there

are

no

facts

to

support

their participation

an

alleged

conspiracy

and

they never

occupied

fiduciary

positions

TA96

The

argument

that

Feinberg

became

their

agent

because

he was

the

Noteholders

representative

on

the

board

of directors

is

factually

weak

even

assuming

the

legal

theory

could

The

ECs Disclosure
at

Statement

states

that to

the

lawsuit in civil

might take two-years and case
in

cost

an
is

additional

$6

million

dollars

Tr
and

Ex
law

33-34

The median
this lawsuit are

time

trial

Delaware

District

Court

21

months
all

TA236
sides

As
issue

Shestack

testified firms that

would be very contentious because
and
lawsuit clients clearly that

you have

very good

lawyers on

of

the

very experienced with
the trying the

can

pay

their

fees
the

TA95
partial

The long delay high costs and
In

complexity
against fact

associated

supports accepting

settlement focus on
the

contrast

lawsuit

Crowley
the conflict

and

outside

directors

would not have RICO claims and would
after

essentially

undisputed

of

and

would take place

Coram

is

out of bankruptcy

and

financially

secure

21

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Case 1:04-cv-01565-SLR

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survive

There

is

nothing

in this

extensive

record to

support the proposition

that

Cerberus side-

deal

with

Crowley was within

the

scope

of Feinbergs

agency

as the

Noteholders

representative

Significantly Judge

McKelvie

agreed

that

it

was more

likely

than not that the claims

against

Goldman

Sachs

and

Foothill

would not survive

summary judgment even

though

summary

judgment

is

not favored

in

our

Court

TA227
no and opinion
Foothill

Is

it

correct

that

you have
Sachs

you

are

offering

no opinion
for

that

the

claims

against

Goldman

would survive

motion

summary judgment

Thats correct

And

if

you thought
for

it

was more judgment

likely

than not that

those claims

would survive

motion

summary

you would have

said

so

Iwouldhave

TA235

If

Goldman

Sachs

and

Foothill

are

dismissed

the

RICO

claim under

1962c

fails

as

well

because

even

though

they are not defendants

their participation

is

necessary to establish

the

required association

in

fact

element

Tr Ex
the

30

at

154

Compl.
burden

Without

Goldman

Sachs

and

Foothill

in the

case

Coram would have

extremely

difficult

of explaining to

jury

why

Goldman

Sachs

and

Foothill

who

together

held

62%

of the Notes would have

allowed

Cerberus to

jeopardize their investments

by causing Coram

to

underperform

There

Is

Serious

Chance that the

RICO

Claims Would Not Survive

Summary Judgment
The proposed
complaint attempts
to

transform fairly straightforward breach

of fiduciary

duty claims

against

Crowley and

Feinberg

into

complicated

RICO scheme

There

are

numerous

decisions

in

which

courts

have

rejected

efforts

to

expand

state

law claims

into

RICO

violations

court

might

well view the proposed

RICO

claims

skeptically

Moreover

RICO

is

complex

and

confused

field

of

law

TA99

As

the

eminent

Chairman of Jenner

Block has explained

Not

only

is

RICO

law constantly changing

but there

is

disagreement

among

circuits

and

even

within

22

Al 054

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circuits

about

how

to

apply

RICO
1-4

Jerold

Solovy

Douglas

Rees CIVIL RICO

Guide

to

Federal

Civil

RICO

Litigation

Jenner

Block 2003

Jenner RICO Treatise

TA319

RICO

claims

are

particularly

difficult

because

they require

proof of more than duty breach

causation

and damages

RICOs

requirements

of

culpable

person

who

conducts

the

affairs

of

distinct

enterprise

through

pattern

of racketeering

in

way
at

that

proximately

causes

injury

can

make

RICO complex
was

and

mystifying

Jenner

RICO

Treatise

1-1

TA3 18

Shestack

testified

that

there

considerable

risk

that

the

RICO

claims

would not survive

TA1O3
the

Judge

McKelvie

agreed

that

there

are difficult

factual

issues

with

RICO

claims

proposed

by the

BC

complaint

under

1962b

and

TA229

He

also

agreed

that

the

1962c RICO

claim would probably

not survive

summary judgment

TA233.-34

TA235
Treatise
at

The Jenner

Treatise

states

that

successful

1962b
conspiracy

claims

are

rare

Jenner

RICO

6-1

TA321

The remaining

1962d

claim

is

built

on

the

1962b

and

violations

Defendants Would and Illogical

Attack

the Proposed

Scheme As Unnecessary

An

actionable

scheme must have

plausible

objective

The proposed

RICO

claims

assert

that

Crowley

Feinberg

and

the

Noteholders

devised

scheme

to

put Coram into bankruptcy

so the

Noteholders

could

steal

the

equity

Shestack

testified

that

defendants

best

liability

argument

is

that

the

alleged

scheme simply makes no sense

Why

should there

have

been

scheme

to

throw

this

company

into

bankruptcy

when

it

was

essentially

in

zone of insolvency

at

the

time the scheme

started
court

TA 103

Without

scheme

much

of the lawsuit falls by the

wayside why
the

TA97

The

on

pretrial

motion

or the

jury after

trial

may

be

equally skeptical

asking

Noteholders

would have

conspired

to

put Coram

into

bankruptcy

when

they could

have

done so

legally

Moreover

if

the

defendants

can

show

that

the

BC

was out of

the

money

before

Corams

23

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bankruptcy

there

was nothing

to

steal

Professor

Fischel acknowledged

that

Corams

debt

more

than $250 million exceeded

its

value

$199

million

before Crowley became

CEO TA218
to

There

is

substantial

evidence

that

Coram

bankruptcy

was unrelated

Crowley

conflict

Coram had

significant

economic

problems

before

Crowley became

CEO

Coram

assumed

significant

debt to finance

its

growth

in the

mid-1990s

which caused

Coram financial

difficulties

through

much

of the late

1990s

TA330-31
ever

When

he

became

CEO

in

1996 Donald

Amaral

described

Coram

as

the

worst train wreck

saw TA3 14
was negotiated

Corams

debt problems

were

exacerbated

by the unfortunate

Aetna

contract

that

by Rick Smith Corams

CFO

who became

CEO
in

when

Amaral resigned and was

later

replaced

by Crowley

and

which caused

$46 million loss

1999

Tr Ex
will

at

53

EC

Disc

Statement

The Noteholders

argue

that

the

facts

alleged in the Complaint do not support the

supposed

scheme

TA97-98
The

The

Complaint

asserts

that

the

first

step

was

the

1998

Securities

Exchange Agreement

BC

sees

as

nefarious the provisions of the Agreement

that

permitted the

Noteholders

to declare

default

if

Amaral stepped

down

as

CEO
the

and

to

appoint

board

member

Tr Ex
allegiance

30

at

19-32

Compl.

The

Complaint

alleges

that

Noteholders

bought

Amarals

by paying him

bonus of $1 million

The Noteholders

will

counter

all

of these

assertions

Coram

initiated

the

negotiations

with the Noteholders

to

restructure

its

debt

TA 108 2Corams
debt and

Board not

the

Noteholders

gave

Amaral

the

bonus

for restructuring

the

DLJ Corams
that

prior

debt holder

had

seat

on the board

In

fact

the

Noteholders

would present testimony

their

conduct

was designed

to

assist

Coram

in

an effort to help

it

stave

off bankruptcy

TA 113-14
did

The Noteholders

extended

the

maturity date

on

the

debt

lowered

the

interest

rate

and

not declare

default

when

Amaral resigned

There

is

no

allegation

that

the

Noteholders

could possibly have

known

that

one

of Amarals

family members would become

very

ill

and

eventually cause

his

resignation

Marshall

Stearns

Senior Vice

President

at

Foothill

24

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testified that

was no scheme

to

steal the

company
to steal this

and

that

the

Noteholders

had

numerous

opportunities

should

we

have

wanted

company
When

TA1

13-14
he

The next

step

in the

alleged

scheme concerned

Rick Smith

Amaral resigned

recommended

to the

Board

that

it

elevate

Smith to

CEO
to

According

to

the

Complaint

the

Noteholders

used

Smiths

promotion

as the

vehicle

place Crowley

at

the

helm

Tr Ex

30

at

33-3

Compi.

If

Amaral was aligned with the Noteholders

why would

he

suggest that the

independent

Smith be

made

CEO
factual

There

is

substantial

support for the proposition that

Smith lacked the experience

to

lead

company

as

troubled as

Coram when

TA296-97

TA307
Don

There

is

certainly

nothing

wrong with
of

replacing senior

management

appropriate

Liebentritt

testified that

Samstock

one

Zells

companies

and

member

of the

EC

effectuates

management

change

when

the

situations

warrant

TA208 How
problem

the

Noteholders

knew

Smith would resign

is

not explained

but the more

fundamental

with the

RICO

claims

is

that

the

Complaint

concocts

an

elaborate

scheme

when none was

necessary

According

to

the

ECs

theory

the

next step in the conspiracy

to

drive

Coram

into

bankruptcy

to

steal the

equity

was

the

Noteholders

failure to

help Coram with

its

Stark

II

issues

Tr Ex

30

at

1-61

Compl.
lesser position

The Noteholders

had no duty

to

renegotiate

their-debt

and

voluntarily

assume

if

Coram

as

appeared

highly likely

had

to

file

for

bankruptcy

protection

The

risk to

the

plaintiff

is

that

the

RICO

claims

would be dismissed

in their entirety

because

of factual

i.e

logical deficiencies

and

it

is

very serious

risk

Coram Might Not
Even
if

Establish

the

Riuired RICO Pattern Coram would
have
to establish

the

alleged

scheme survived

summary judgment

RICO

pattern

RICO

claims

are

often

successfully

challenged

on

this

basis

The

EC

contends

that

25

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continuity

will

be established

because

is

open-ended

continuity

as

reflected

by

the

three

other cases

alleging

similar

conduct

against

Cerberus and

closed-ended

continuity

the scheme

persisted

for

well over two years

before

trustee

was appointed

Tr Ex

at

42

EC

Disc

Statement
the three other

Relying

upon

cases identified

by

the

EC

to

establish

so-called

open-ended

continuity

is

risky

The

court

trying

the

RICO

case must admit the evidence

Shestack

testified

that

Its

very likely that

they would ask for pretty

considerable

offers

of proof and

summary

judgment

or

motions

in

limine would be

likely

TA100-O1

Judge

McKelvie

testified

that

its

difficult

management

issue

for

judge

because

you dont want people

to

retry

all

of the issues

in

case

TA235
--

The

evidence

must

also

support

the

current

claim

Shestack

testified that

these

cases

in

one

of which the plan of reorganization has been

confirmed

and

another was

completely

unrelated

--

are

not really very good cases to prove

that

point

TA1O1

The WSNet

case

may

have

similar

allegations

because

it

apparently

involves

claim that

Cerberus

attempted

to

gain

control

of

bankrupt

company
is

But

the

case has not progressed

and

the

Trustee

has to decide

now

whether

to

settle

It

neither

realistic

nor prudent

for the

Trustee

to turn

down $56

million and

await the outcome

of the

WSNet

litigation

which could be years from
of facts

now
to

Moreover

it

is

certainty

that

Cerberus would challenge

the

introduction

relating

WSNet

which would

open up

that

case for discovery

in

Corams

case

thereby

very substantially

increasing the

complexity

and

expense

of the proposed

RICO case
to establish

There

are

also

risks

in

Corams

ability

period

of

at

least

one

year required by

the

Third Circuit

to

establish

close-ended

continuity

court or jury might

easily

conclude

that

the

pattern

began

with

Crowleys

appointment

as

CEO

and

ended with Corams

bankruptcy

filing

period of less than nine months

If the

court

or

jury rejected

the

argument

that

Amaral was

involved

or rejected

the argument

that

the

Securities

Exchange Agreement

was

part

of the scheme

26

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given

the

lack of evidence

supporting

claims

against

Goldman

Sachs

and

Foothill

Corams

attempt to prove

pattern

could

fail

More basically

the

court or jury might

wonder

why

the

Noteholders

did

not simply declare

Coram

in default

when

Amaral resigned

or

why Amaral
as the

recommended

Smith to replace him

if

Smith was

not part

of the scheme

and

why

Complaint

alleges Amaral would be

loyal

to the

Noteholders

In

short there

are

more than

sufficient

RICO

burdens

here to raise serious

doubts about

the ultimate viability

of the proposed

RICO

claims

There Are

Difficult

Issues

Of Causation And Damages
Calculation
Is

The
In

ECs

Damages
part

Subject

to

Challenge

Shestacks

opinion

the

weakest

of the case was

causation

and

damages

TA121
create

Complex

cases

sometimes

call

for

complex damages

theories

and

complex damages

theories

significant

litigation

risks

There

could

be no

clearer

proof of the accuracy

of this proposition than

the

difficulties

encountered

by Professor Fischel

We
expert

recount

those difficulties

here not to

attack

Professor

Fischel

an

eminent

damages

but to underscore

why

the

proposed

settlement makes so

much

sense

Professor

Fischels

estimates

of damages decreased

from $320

million

the

ECs
at

Disclosure

Statement

to

$275 million

expert

report

to

$265

million trial testimony

Tr Ex

49-50

EC

Disc

Statement

TA21O

TA211

On

the

eve

of his testimony

Professor

Fischel acknowledged

he made

two $100 million

changes which counsel euphemistically described

as

computational corrections

TA215
and

In

his

report

Professor

Fischel had

not accounted

for

all

of

Corams payments
which had

of principal

interest

in

the period

under

examination

TA214

The

other

change

the

false illusion

of

symmetry was

to

include

repayments

of principal

by

the

index

companies

in the

calculation

of

return

on debt

Dr

Tabak agreed

that

the

first

correction

was proper

but testified that

the

second

was

indisputably

wrong
by

TA283

As

result

Professor

Fischel overstated

by $127 million the

damages

calculated

his

methodology of comparing

Corams

growth

to the

average

growth

of the

27

Al 059

Case 1:04-cv-01565-SLR

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four

index

companies

TA289 Dr Tabak
credited the

explained

that

Professor

Fischels

complex

methodology

incorrectly

peer companies

with growth

when

they simply borrowed and

repaid principal.6

TA272-83
the

The

EC

did not challenge

Dr

Tabaks

conclusion

TA289-90
million

As

recalculated

by

Dr Tabak
Professor

damages based

on Professor Fischels

index

are

$137.8

TA289
precision

But

Fischel properly acknowledged

that

the

court

should not ascribe

false

to this

figure

TA220
legal theories create significant litigation

As noted complex
errors

risk

Had

Professor

Fischels

come

to

light

at

Daubert

hearing

it

is

quite

possible that

his

testimony

would have

been

precluded

leaving

Coram without

damages case

See

Augustine

Medical

Inc

Mallinckrodt

Inc 2003 U.S
Daubert motion

Dist

LEXIS 6079

at

28..29

Del

April

2003 Chief
to

Judge

Robinson

granted

because

expert failed

to

gather facts

and

data sufficient

form

reliable

opinion
motion

Judge

McKelvie

expressed his view that

the

damage

analysis

would survive

Daubert

but that

was before

Dr

Tabak

identified

additional

changes

to

the

damages model

that

Professor

Fischel had

not mentioned

during

his

testimony

TA287-88
defendants
will assert

Even

assuming

the

validity

of the damages theory

numerous

arguments

that

the

number

is

too high

For example

Professor

Fischel

used

discounted

cash

flow

analysis

to

determine

Corams

pre-Crowley

value

of $199.6

million but used the

EB/SSG

weighted

average

of three

methodologies

to

determine

Corams

end

value

Had

he used

discounted

cash

flow

6Dr Tabak
deposition produced growth
the rate

used

simple example

to

demonstrate

the that

methodology did nothing

that other

had

been

confirmed

at

Mr

Gokhales
interest the altered

TA276-83
positive rate

TA280-81
of return

company

than borrow
that the error

and repay
inflated the other that

money without
performance change while
these

TA280-83
exaggerated
the

Dr Tabak
Corams
of debt

explained

of

of

the

peer index and
also similar

underperformance

TA283
they were

The

which

value

of

Coram

involved because
the

repayment

However

Dr Tabak

explained
in fact

changes because

were

superficially Fischel

they both

involved
in

repayments very For
the

of debt

very

different

Professor

included
enterprise

repayment
at

of debt

two

different

methodologies he

For

Coram
rate

he

was measuring
growth rate

Corams

actual

value

two

distinct

points

index

was determining

of

return

TA284-86

28

Al 060

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to

determine

the

end

value the damages would be reduced

by $11

million

TA216-17

In

fact

the damages would be

reduced

for

every dollar

Corams

value

exceeds

$219 million

TA217

Professor

Fischels

Theory Would

be Challenged

as Improperly

Assuming The

Causation

ECs

proposed

damages

are

not based

on

specific

events

i.e decisions

Crowley made

or did

not

make

that

allegedly

caused

Coram harm Rather than following

causal link between

decisions

and

damages

the

EC

resorted

to

theory based

on

the

creation

of an

index

of peer

companies

the

calculation

of the

growth

of an

investment

in that

index and

the

application

of that

growth

rate

to

Coram

Under

the

EC

theory

the

entire

shortfall

of

Coram

actual

growth

when

compared

to the

growth

in the

index companies

is

attributable

to

Crowleys

conflict

ECs
not possible

theory

is

that

conflict

such

as

Crowleys

is all

pervasive

and
not be

therefore

it

is

simply

to

attribute

damages

to

specific

events and

Coram

should

required to do

so in

order to recover

damages

But

court

or

jury might

well ask

why not
of fact

It

is

reasonable

to

think

that

before awarding

hundreds

of millions

of dollars the

trier

would

require

some

specific

evidence

to

support the notion

that

Crowley caused

Coram

to

underperform

particularly

in

the

face

of evidence

that

Crowley

greatly

improved Corams

financial

position

The

EC
to

witnesses

had

to

concede

that

reasons other than Crowleys

conflict

might

have

caused

Coram

underperform

the

index Professor Fischel agreed

that

any
agreed

one

of

number of factors

could

have

caused

the

difference

TA3O1-02

TA221

and

that

Coram underperformed

his

index

before

Crowley

became

CEO TA222
between

Based on

his real

world

experience

Zell

agreed

that

differential

performance

companies

does not mean

that

the

management

of the

lesser

performing

company

is

corrupt

TA312
to the

The

ECs
to

response

challenge

that

pervasive

conflict

is

not

proxy

for

proof of

causation

is

argue

that

the

burden

shifts to

defendants

to

show

that

the

conflict

did

not cause

29

Al 061

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injury

It

is

possible that

Coram could prevail

but there

is

very significant

risk

it

would not

No

court has addressed

burden

shifting

in

case

like

this

The Trustee cannot

turn

down

such

substantial

settlement on the hope that

he will succeed

in

difficult

case

of

first

impression

As

Shestack

testified

there

is

significant

question

whether

the entire

fairness

doctrine

would be

applied

when

the

interested

transactions

are

not identified

TA 117
or

Entire fairness

is

used

in

cases involving

single

defined

event

involving

an officer

director

such

as

merger

or

corporate

opportunity

Franklin Balotti

Jesse

Finkelstein

Del

Corp
none

Bus Org
in

4-124

2004 TA323

The

BC

has not cited

any

case and

the

Trustee

has found

which

the plaintiff

sought to rely upon the entire fairness

doctrine

without

identifing

specific

transaction

Furthermore entire fairness

is

Delaware

state

law doctrine

To

the

Trustees

knowledge

no published

case permits

its

use to establish

causation

in

RICO

action

There

is

also

risk that

Professor

Fischels

theory

would be

rejected

for legal

insufficiency

As Shestack

pointed

out Professor

Fischel

did not account

for

any variables

between

Coram and

the

companies

in the

index

Professor

Fischel asserts

that

the

very use of the index

makes

it

unnecessary

to

do so

Perhaps

but perhaps

not

Courts

have

rejected

similar

damage

methodologies

In

Blue Cross

Blue

Shield United

Marshfield

Clinic

152

F.3d

588

593-94

7th Cir

1998
to

the

court stated-that

studies

that

fail

to

correct

for salient

factors not

attributable

the

defendants

misconduct

that

may

have

caused

the

harm of which

the

plaintiff

is

complaining

do

not provide

rational

basis

for

judgment
Medical

Chief Judge

Robinson

granted

summary judgment

to

defendants

in

Augustine

Inc 2003 U.S

Dist

LEXIS 6079
no

at

28.

29

because

the experts

analysis

stacks assumption

upon assumption

and

made

effort to

segregate the effects

of legitimate

activities

from

the

effects

of the alleged

anticompetitive

conduct

Similarly in First National

Bank

Gelt Funding

Corp
show

27

F.3d 763

2d

Cir

1994 the

Second

Circuit

reaffirmed the need

for

RICO

plaintiff

to

both

transactionaP

but for and

30

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loss proximate

causation

with particularity

and

affirmed

the

dismissal of

lenders

RTCO

complaint

because

the

lender could

not plead that

the

plaintiffs

misrepresentations

rather

than

intervening market

forces

caused

losses

to

the

lenders

loan portfolio

Jenner

RICO

Treatise

at

4-

22

TA320
The
There
is

ECs

Causation Theory

Is

Susceptible

to

Factual

Challenge

significant

risk that

ajury

would not award damages

in the

amount

the

BC
that

suggests

jury would be

presented with testimony

from

both fact

and

expert witnesses

Coram

improved under

Crowley

An EC
were

advisor

from Equity Group Investments

one

of Zells

companies

wrote

draft

letter

that

they

quite

impressed

with the current

state

of

Corams

operations

under

Crowley

Counsel

chastised

the

EGI

financial

analyst

for this

admission As

because

he
noted

correctly

predicted

that

it

would

haunt

EC
who

in

many
said

ways TA207
that

Shestack

Every
the

one

of the independent

directors

testified

he

worked

very hard that

company

improved considerably

and

that

he

did

very good

job

TA 115

TA296 TA298-99
After the
first

TA307 TA309
confirmation

Coram employees

have

also

praised

Crowley

TA304-05

hearing

this

Court

stated

that

there

is

evidence

that

Mr

Crowley did do

good job

operationally

in

helping

the

debtor turn

around

TA326
It Is

Even

if

the

ECs

Unrealistic

Damages Theory Went To The Jury To Assume An Award of $137 Million
entire difference

Professor

Fischels

theory

is

that

the

between

the

performance

of Coram

and

its

peers after Crowleys

appointment

is

attributable

to

Crowleys

conflict

and

is

the

appropriate

measure of damages caused

by

the

conflict

As

previously noted defendants

will

point out that

Coram underperformed

the

index

before

CrOwley became

CEO
the

TA222
four

and

that

the

theory

failed

to

adjust

for other

material

differences

between Corarn and

companies

in the

index

Professor

Fischel testified that

averaging

four

companies

resolves

any

differences

between Coram

31

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and

the

average company
to like the

TA2217

but defendants

will

contend

that

there

is

no reason

to

expect

Coram

perform

hypothetical average

company

Professor

Fischel conceded

that

you
Don

never

expect any

individual

firm to perform

exactly the

way

an index

performs .TA2
would survive

19

Liebentritt

agreed

TA256

So

even

if

Professor

Fischels

analysis

Daubert

challenge

there

is

every reason to think that

jury would award far less than

EC

suggests

The jury might choose

to

reject the

entire

damages theory

if

it

concluded

that

some of

Crowley

acts

were not

liability

causing events

found

that

factors

other than Crowley

conflict

contributed

to

Corams underperformance
to

or concluded

that

Professor

Fischel should have

adjusted his average

company

more

closely

resemble

Coram

at

the

point Crowley became

CEO
fall-

Since

Professor

Fischels

theory

does not allocate

damages

to

any

particular

act there

is

no

back

position

Juries

compromise

Even

if the

jury accepted

Professor

Fischels

theory

it

could

award

far less

than $56 million

Finally the Trustee

can

and

should conclude

that

this

is

not

punitive

damages case

Shestack

testified that

he thought

punitive damages were highly unlikely

TA1 19

Judge

McKelvie

offered

no opinion

on

punitive

damages

The The
If court

Possibility

Noteholders

Of PursuingAn Events Based Lawsuit Against Does Not Justify Rejecting The Settlement
on the

rejected

causation

or

damages based

ECs

theory

court would almost

certainly

permit Coram

to

seek damages based

on

specific

events

such

as the

$6.3

million paid to

the

Noteholders

prior to

bankruptcy

the

administrative

costs

associated

with the bankruptcy

7Putting experts

aside

the

question of whether use peer companies of value
that

the to

use of peer companies valuation calculations
the

to point

calculate the

damages

is

acceptable dispute

because
financial the

financial advisors

routinely their

determine

defendants

would

do

not base valuation

opinions

on he

mathematical not use

For of

example Daniel Lynn of Deloitte
mathematical Rather exercise
Deloitte to

BCs
the the

expert

testified

did other to

simply
for

product

determine

relationship

between and

Coram

and

companies
take into

purposes
for the

of valuation
differences did in

considered and
other

comparable

companies between
Fischel the for

adjusted

multiples

account

size product what

mixes

variables

comparable not doing

companies

and

Coram

TA247

Deloitte

precisely

Shestack

criticized

Professor

32

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proceedings

and

the

sale

of

CPS

Given

the recent

sale

of what was

CPS when owned

by Coram

there

is

probably

starting

point from

which damages can be calculated

We

make

three

points

regarding

the

sale

of

CPS

First

Corams

bankruptcy

should

not be prolonged

in

order for the

Trustee to investigate

rescission-type

damages

Second

those damages can

be pursued

against

Crowley and

the

outside

directors

who

are the

logical

defendants

on

the

claim that

CPS

should not

have

been

sold

Third Crowley and

the

outside directors

will

of course defend

their

decision

contending

that

the

board

decided

to

sell

CPS

while

Smith was

CEO

that

the

sale

was necessary

given

Corams

need

for

cash

that

the

sale

was made

at

fair

price

established

by

substantial

bidding

process and

that

Deutsche

Bank

Alex Brown

provided

fairness

opinion

TA118
was highly

Crowleys

decision

to

make

the

$6.3 million payment

before bankruptcy

questionable

and

perhaps

even

improper but

it

is

difficult

to

see

how

that

harmed Coram which

owed

the

money

to the

Noteholders

The administrative

costs

associated with the

first

confirmation

hearing

may

not be

recoverable

unless

it

can

be established

that

Coram should not have

been

in

bankruptcy.8

The

Outside

Directors are the appropriate

defendants

for the

costs

of the

second

and

third

confirmation

hearings

because

they proposed

the second

plan which

this

Court

criticized

for

its

ostrich-like

approach

See

In

re

Coram

271

B.R

at

1314

24..25

TA338-40
Is

TA347

There

Is

No Evidence
the

That The Settlement

Unreasonable

Judge

McKelvie

did

not testify that

settlement was

unreasonable

TA225

opting

to

defer

to

others

including the Trustee

who

have

much

better

understanding

of the facts

and

circumstances

than

do TA226
Shestack

In

contrast

to

who

performed

full

litigation

risk analysis

after

reviewing

the

extensive

record

Judge

McKelvie

did

not evaluate

all

of the facts

surrounding

the

various

causes

of

The
have

administrative

costs

of
for

the

second

and

third

confirmation

hearings can
to the

only be
first

recovered second

if the plans

first

plan

would

been

confirmed

but

Crowleys

conflict

But

the

BC

objected

and

on

additional

grounds

33

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action

or the

anticipated

defenses

Rather he simply looked

at the

core

facts

essentially

the

conflict

TA226
when

As

result

Judge

McKelvie

did not truly purport to assess

the

RICO

claims

For example

asked

whether

he considered

the

fact

that

when

the Security Exchange

Notes

were renegotiated

the

interest

rate

was lowered Judge

MeKelvie

testified that

he

did

not rely on

them

for the

purpose

of reaching

the

opinions

Ive given

TA238-39

He

provided

the

same

answer

when

asked

about

the

Noteholders

decision

to

extend the maturity date

on

the

notes

TA239
Judge

MeKelvies

principal

testimony

was

to

rebut Shestack

He

said

that

Shestack

made

two mistakes

that

the

settlement was not worth

$56 million because

it

was

loan

TA229
damages

and

that

Shestack

failed

to

consider the

likelihood

that

the defendants

would present

theory

and

the

jury would then compromise by granting

Coram

recovery

somewhere

between

Corams number

and

the

defendants

number TA230-3

The Trustee disagrees with Judge

McKelvies

first

point

but

it

is

now moot

because

the

Trustee

has amended

his

Plan to reflect

that

the

Noteholders

have

agreed

to

pay

cash

and

assume

Corams IRS

liability

There

can

now

be no dispute

that

the

settlement

value

is

in

excess

of $56

million

The

second

error does-not

establish

that

the

settlement

is

unreasonable

for

number

of

reasons

First

Coram would

still

have

to

survive

motion

practice

including motions

for

summary

judgment and

motions

in lirnine

before

the

Noteholders

would be

called

upon

to

present

damages

theory

to

jury

Second

there

is

no guarantee

that

the

Noteholders

would present

damages case and

no

guarantee that

it

would be

close

to

$56 million

Judge

McKelvie

agreed

that

he does

not

know what

number

the

defendants

would present

TA237

He did

not analyze

or

do

any

independent

research

into

the

items identified

by Cerberus

trial

counsel

in his

examination

of Shestack

34

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TA237

But

as

discussed above

recovery

based

on

the

$6.3

million payment

and the

administrative

costs

associated with the confirmation

hearings

is

far

from

certain

Third

the possibility

of

compromise

verdict

between $137.8

million and

some number

below $56 million does not support

rejecting

certain

payment

of $56 million

now

In

addition

if

Judge

McKelvie

is

correct

Crowley and

the

outside directors

will

present

damages

figure

to

the

jury spurred

by

$100 million insurance policy

and

if

the

award

is

more than $56 million the

Trustee

will

collect

the

difference

for the

benefit

of the equity

holders

If the

award

is

less nothing

more

will

be

collected

but the estate

and

its

stakeholders

will

have

had

the

benefit

of $56 million

Finally the testimony

of Donald

Liebentritt

the

ECs

most

active

member

also

supports the

reasonableness

of the settlement

At

the

confirmation

hearing

Mr Liebentritt
50
to

informed

the

Trustee

for the

first

time that

were looking

to

accept

an offer

in the

55

range

prior to the

Trustees

appointment

TA257
didnt have
50
to authority

had not number
willing

from
if

the

other

members
is

of the

EC

to

accept have been think

in the to

55

range but
as

your

question and

at that

time would
to other

go along with that
trying to

member

recommend so

member

thats

what we were
mediation

achieve
the

but did not do of any

At

the

you didnt

tell

Trustee

of his representative
willing to

that

your
six

$118 million demand months earlier

was more than twice what youd been

accept

No

one

asked

that

question

We

did

not

we didnt

say that

no

TA260
The
only point of Judge

McKelvies

testimony

was

that

the

Trustee

should not have

relied

on Shestack

Even

if

that

were so

the

Trustee

had

ample

basis

on

which

to

conclude

that

his

fiduciary

responsibilities

demanded

that

he accept

such

substantial

settlement and

there

is

simply

no question

that

the

Trustee

is

singularly

qualified

to

make

that

assessment

35

Al 067

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 18 of 30

THE COURT SHOULD APPROVE
The Court should
also

TITlE

R-NET

SETTLEMENT
with R-Net the

approve

the

Trustees

proposed

settlement agreement

R-Net Settlement
more than $41

which

among

other

things

reduces

R-Nets

claim against

the

Debtors

from

million to $7.95

million

Tr Ex 26
cases

The R-Net Settlement

has already been

approved

by the Court

in the

R-Net bankruptcy

TA9O
it

The Court should approve

the

R-Net Settlement because

substantially

reduces

the

amount

of the R-Net claim permitting

the

payment of 100

cents

on

the

dollar

to

unsecured

creditors

of

Coram under

the

Plan

The

EC

does

not quarrel

with the settlement amount

indeed

it

adopted

it

for

Equitys Plan

In

fact

Liebentritt

seemed

to

suggest that

R-Net

is

entitled

to

bonus

of

2%

of the

net

proceeds

of the litigation

claims

promised

to

it

by

the

EC

under

the

Equity

Plan because

the

Trustee

persuaded

R-Net

to

settle for

too low

figure

TA266-67
because the Debtors claim against

The

Court should

also

approve

the

R-Net Settlement

Net

is

uncollectible

As

Hobart

Truesdell

Truesdell
on
the

R-Nets

Chief Liquidating

Officer

confirmed

if

the

Trustee

litigated the

claims

merits and

prevailed

R-Nets bankruptcy

estates

would be

left

administratively

insolvent

rendering

any

favorable

verdict

illusory

TA89
uncertain

Finally

by settling

the Trustee

will

avoid protracted

expensive

inconvenient

and

litigation

There

are

twenty-five

captioned

parties

who

have

retained

eleven

law firms

If litigated

the

case would cost

millions of dollars

The

EC

has argued

that

the

settlement

is

not in the best interests

of the Debtors

estates

because

the

Noteholders

are

being released by R-Net

This assertion

is

both

red herring and

without

merit

None

of R-Nets

creditors

who

are the

only parties affected

by the release

objected

to

the

settlement

Rather Truesdell and

the

R-Net Creditors

Committee agreed

to

it

And

the

Court already approved

the

settlement in the bankruptcy

case of the releasing

R-Net parties

36

Al 068

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 19 of 30

Additionally

the

Noteholders

would not have

agreed

to

fund the Plan without

global resolution

which included

the

R-Net

litigation

For these

reasons and

those expressed

in the

testimony

of the Trustee

and

Truesdell

the

Court should

approve

the

R-Net Settlement

THE THIRD PARTY RELEASES UNDER THE PLAN ARE APPROPRIATE
The Debtors
is

Release

of Their Litigation

Claims Against

the Noteholders

Proper
releases

The Third Party

under

the

Trustees

plan are appropriate

The

releases

at issue

here

are

being given

as part

of the

settlement of litigation

claims

held by the Debtors

estates

for tangible

economic

benefits not merely

as part

of

plan of reorganization.9

The

settlement as

whole

should

be judged

under

the

standard for approval

of compromises pursuant to

Fed

Bankr 9019

Even

if

the

Court determines

these releases

are part

of

plan

as

opposed

to

being part

of

litigation

settlement the releases

are

nevertheless

appropriate

In

In

re

Zenith

Electronics Corporation

241

B.R 92
whether

110

Bankr

Del 1999
releases are

the

Court

identified

five

factors

to

consider

when
the

determining

third party

appropriate

an identity

of interest between

debtor and

the

third

party

such

that

suit against

the

non-

debtor will deplete

assets

of the estate

ii

substantial

contribution

by

the

non-debtor

of assets to

the

reorganization

iii the

essential

nature of the injunction

to

the

reorganization to the extent

that

without

the

injunction

there

is little

likelihood

of success

iv
if

an agreement

by

substantial

majority of creditors

to

support the injunction

specifically

the

impacted

class

or classes

vote to

accept

the

plan and

provision in the plan for payment

of

all

or

substantially

all

of the claims

of

The Trustee
Irrespective

is

seeking

approval
claim is

of

the

settlement as part

as

part

of

his

plan
to

as

permitted

by

11

U.S.C
the

1123b3A
Bankruptcy court

of whether
to separate In

settled

of plan pursuant Rule

section

123b3A of
by
the

code
for

or

pursuant
are the

motion

under

Bankruptcy

9019

the

standardsapplied

Bankruptcy

approval Inre

same

re International

Wireless 794

communs

Holdings

Inc

1999

Bankr

LEXIS

1853

at

13

quoting

Best Products

co

Inc

177

B.R 791

Bankr S.D.N.Y

1995

37

Al 069

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 20 of 30

the

class

or classes

affected

by

the

injunction

In

Zenith

the debtor

proposed

plan of

reorganization based

on

pre-petition

agreement

with

its

largest

creditor

and

shareholder

214 B.R

at

97

Under

this

agreement

the

creditor

agreed

to

fund the plan in exchange

for

release

Id

at

110

The

Court

approved

the

releases

after

considering

the

above

five

factors

Id

All of the Zenith

factors

are

met

in

this

case

First an

identity

of interest

exists

between

the

Debtors

and

the

Noteholders

because

the

Noteholders

are preferred

shareholders

and

are

providing

significant

funding

for the

Plan

Just

like in

Zenith

the

Noteholders

as

funder

of the

Plan

and

who were
Debtors
in

instrumental in formulating

the

Plan

similarly

share

an

identity

of interest

with

seeing that the Plan succeeds

and

the

company

reorganize

Id

Second

the

Noteholders

will

make

substantial

contribution

to the

reorganization

In

addition

to

funding

the

Plan with

$56 million

the

Noteholders

are

also

exchanging

their

debt and

preferred

stock in excess

of $350 million

for

100%

ownership

of

reorganized

company

with

fair

market

value

of between

$195

to

$225

million and

waiving

the balance

due

on

their

Notes

Thus
the

similar to

the

creditor

in

Zenith

the

Noteholders

will

also

make

substantial

contributions

to

Plan by funding

the

Plan and

agreeing to the compromise of

its

claim Id

at

111

Third

the

release

is

essential

to

the

reorganization

because

without

it

the

Plan would not

have adequate

funding

The

releases

are

an
by

integral

part

of the Plan Funding

Agreement
there

and

will

ensure that

the

Debtors

are

not distracted

litigation

by

the

estate

Moreover

are

no

reasonable

alternatives

to the

Plan

the

Equity

Plan

is

riddled

with defects

preventing

its

confirmation

Fourth

all

classes

of claims

and

interests

have

overwhelmingly

voted

to

accept

the

Plan

As

of April

2004 88%
owning

of

all

unsecured

creditors

the

Noteholders

unanimously

and

68%

of individuals

or entities

shares voted

to

accept

the

Plan

38

Al 070

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 21 of 30

Finally the Plan will provide

payment

of

all

or substantially

all

of the claims of the class

or

classes

affected

by

the

injunction

In

addition

to

100%

plus interest

distribution

to

all

unsecured

creditors the Trustee

estimates

in

excess

of

$40 millionpro rata

distribution

to

the

CHC common

shareholders

despite

their

being

out

of the

money
of Claims Against the Noteholders

The Third Party
The
third party releases

Releases

Are Proper

of claims

against

the

Noteholders

as

contemplated

by

the

Plan

are

also

permitted by the Bankruptcy

Code

and

appropriate

here.hi

This

Court has approved

releases

of non-debtor

third parties

over the objection of other

parties

in interest

In

re

Vencour

Inc 284 B.R 79
non-debtor
third

85

Bankr

Del 2002
$40

In

Vencour

the

Court

confirmed

plan in which

party

contributed

million and

other

consideration

in

exchange

for the

release

of certain

tort

claims

held by those debtors

creditors

284

B.R

at

81

Subsequent

to

plan confirmation

some of these

creditors

moved

the

Court for

modification

of the plans release

provisions claiming that

the Court

lacked jurisdiction

to

grant

such

relief

Ich

at

82

Rejecting

this

contention

the

Court

held that

it

had jurisdiction

to

consider

and

grant

the

releases

contained

in the

Id

at

86

This Courts holding

in

Vencour

is

further

supported

by recent

decisions

of the Third Circuit

which explain

the

general considerations

governing

third

party non-consensual

releases

See

Inre

10

The payment
the

is

anticipated will

to

be

in

excess

of

the

full

market
they

capitalization

as their

of

the

date for

of

the

confirmation

hearing

i.e

shareholders

receive

more than 100%

of what

could

sell

shares

in the

market

The
re

clear

weight

of

authority

holds

that

bankruptcy

courts

may confirm plans containing
bankruptcy F.3d
court

third-party

releases

Dow

Corning

Corp
against enter

280

F.3d

648

658
In

6th Cir 2002
re

the
97

may

enjoin

non-consenting bankruptcy
court

creditors claims
jurisdiction to

non-debtor

Munford

Inc

449

454

11th Cir 1996
In re

had

an order barring

claims

that

might be
court

asserted

against

non-debtor

Monarch

Life

Insurance

65
against enjoin

F.3d

973

984-85 entity from

1st Cir 1995
In re

bankruptcy

entered

an order enjoining

post-confirmation

lawsuits court

non-debtor
creditor In re

Drexel

Burnham
provided F.2d

Lambert
the

Groun Inc 960 F.2d 285 293 2d Cir 1992
plays

may

suing

third

party 880

injunction

an

important bankruptcy plan of

part

in the

debtors
grant if

reorganization permanent

plan

A.H

Robbins
to

Co
to

Inc

694

700-02 and not

4th Cir 1989
of

court

can

injunctive

relief

essential contribute

enable

the

formulation
the

confirmation
settle their

reorganization protection

non-debtors from

who post

would otherwise
confirmation

funding form
the

plan

will

mutual
the

claims absent
11

potential

lawsuits

arising

prepetition

relationship

with

Chapter

debtor

39

Al 071

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 22 of 30

United

Artists

Theatre

Company
In re

315

F.3d 217

3d

Cir

2003

In

re

PWS

Holding Corporation

228

F.3d 224

3d

Cir

2000

Continental

Airlines

203

F.3d 203

3d

Cir

2000

12

In

these cases

the

Third Circuit

set forth

the

hallmarks of permissible non-consensual

releases

which include

fairness necessity

to

the

reorganization

that

the

releases

were given

in

exchange

for

fair

consideration

and

specific

factual

findings

to

support these conclusions

United

Artists 315

F.3d at

227 quoting Continental

Airlines 203

F.3d at

214-215
the Court might

PWS

Holding Corporation

228

F.3d at 247 concluding

that

under

any rule that

adopt the hallmarks

of

permissible non-consensual

releases

are

fairness necessity

to

the

reorganization

and

specific

factual

findings

to

support these conclusions

The

releases

provided

to

the

Noteholders

are

fair

to

both the Noteholders

and

other

parties

in

interest

The Noteholders

are

contributing

$56 million in cash

to

fund the Plan that

will result

in

an

immediate

100%

distribution

to

creditors

and

an estimated

distribution

of at least $40 million to

CHCs

shareholders

Having

made

substantial

contribution

to the

Debtors reorganization

including

waiving

their

remaining

$9

million in Notes

and

the

balance

of their preferred

stock

liquidation

preference

over the value of the

Company

they are entitled

to

freedom

from

any

further

causes

of action

related

to

the

Debtors

which might be conjured

up by

third party.3

As

Marshall

Stearns of Wells

Fargo

Foothill

testified

the

Noteholders

would not have

agreed

to

fund the Plan without

protection

from potential

post-confirmation

lawsuits

TA 111
Transit

Accordingly

the third

party

releases

are

required for

successful

reorganization

12

Courts of Appeals
party

in the

First

Second

Fourth

Sixth

and Eleventh

Circuits

have

supported

the

appropriateness of

third

releases

fn

supra

atp 40

13

Courts have

routinely

confirmed
Transit

plans containing non-consensual

third party

party

releases

for

similar and sometimes
in exit

less and Inre

consideration subordinated American Investment
its

See

Group
to other

Inc
377

286

B.R

811

released 284

extended released
contributed

$22
party

million

financing million

unsecured

debt

creditors

Vencour

B.R

79

contributed million of $7

$40

Family Enterprises

256

B.R

D.N.J 2000
1994

released

party

$70
total

Master

Mortgage

Fund

Inc

160

B.R

930

W.D Mo

released

parties

contributed

million

40

Al 072

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 23 of 30

Group Inc 286 B.R
where lender refused

at

818

finding

non-consensual

third party

release

essential

to

reorganization

to

fund the debtors

plan through

an

exit

financing

if

not granted

American

Family

Enterprises

256 B.R

377 permanent

injunction

is

essential

because without

it the

parties

proposed

to

be released would contribute

nothing

towards

the

reorganization

Since

the

releases

are

fair

and

necessary to the reorganization

they are proper

IV

THE EQUITY

COMMITTEES PLAN MAY NOT BE CONFIRMED
VOTES

THE EC PLAN DTD NOT RECEIVE THE REOUISITE
No Impaired CI
In

Class Voted to Accept

The Equity Plan
class

order to have

confirmable

plan

at least

one

impaired

of creditors

must vote

to

accept

the

plan

11

U.S.C

129a1O
voting

Although

based

upon

the

outcome of the

ECs
the

motion

to

temporarily

allow claims

for

purposes

CHC
to

class

of creditors

voted

to

accept

Equity

Plan no CI impaired

class

of creditors

voted

accept

the

Equity

Plan

Therefore

the

Equity

Plan

cannot

be

confirmed

as to

Debtor

Coram Inc Which Are

The

EC Plan

Misdesignated

Classes as Impaired

Uiiimpaired

The Equity Plan

states

that

the

classes

of general unsecured

claims

C3

and

CHC3
will

are

impaired

However
on
the

the

Equity

Plan provides

that

the

claims

of unsecured

creditors

be paid in

full

in

cash

effective

datØ

In

response

to the

Trustees

motion

to

designate votes

the

EC
on

clarified

that

the

unsecured

creditors

will

also

receive payment

of post-petition

interest

in

cash

the

effective

date

Since

they are to be paid in full with post-petition

interest

in

cash

at

closing

the

members of Classes C3 and

CHC3

are

not impaired

and

were misdesignated

in violation

of 11

U.S.C

1123a2
The only
class

and

of creditors

to

vote to accept

the

Equity

Plan was

CHC3

Since

CHC3

is

not

impaired

no

impaired

class

of claims

voted

to

accept

the

EC

Plan and therefore

it

may

not be

confirmed
41

Al 073

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 24 of 30

The Equity Plan Impermissibly
Noteholders Unsecured Claims

Classified

The R-Net Claim and

the

The Equity Plan provides

that

R-Net

will

have

an allowed

unsecured

claim in the amount

of

$7.95

million

and

that

the

Noteholders

have

unsecured

claims

of $9

million based

upon

their

remaining

unconverted

notes

However
of

instead

of including R-Nets

and

the

Noteholders

unsecured

claims within

the

classes

CHCs

and

Cls

unsecured

creditors the Equity

Plan

separately

classified

them.4

As

the

Third Circuit

explained

in

John

Hancock

Mutual

Life

Insurance

Co

Route 37

Business

Park

Associates

987 F.2d 154

159

3d

Cir

1993 the
claims
in

Code

was not meant

to

allow

debtor

complete

freedom

to

place substantially

similar

separate

classes

In

classifying

claims

the

proper

focus of classification

is

the

legal

character

of the claims

as

they related

to

the

assets

of the debtor

In

re

Midway

Investment

Ltd

187

B.R 382 Pa 1993

392

Banks

S.D Fla 1995
claims will

In

re

Thornwood

Assocs

161

B.R 367
one

371

Bankr

M.D

Unsecured

generally speaking

comprise

class whether

trade tort

publicly

held debt or

deficiency of

secured

creditor

because

they are claimants

of equal rank entitled

to

share

pro rata

in

values

remaining

after

payment

of secured

and

priority

claims

FGH

Realty

Credit

Corp

News Inc
are

Airport/Hotel

Ltd Partnership

155

B.R 93

99

D.N.J

1993

see

also

In re

Cavalier Indus

2003 Banks

LEXIS

150

at

14

Bankr
to

E.D Pa 2003

As

general rule unsecured

creditors

claimants

of equal rank entitled

share pro rata in whatever

remains

after

payment of secured

and

priority

claims.

The Equity Plan provides

for

bonus
the unfairly

of two

percent

of

the to

net

proceeds
to other

of

the

proposed

derivative

claims
the

for

Net

sum which
result

could
the

far

exceed

post-petition

interest in

be

paid

unsecured of

creditors 11

under

Equity

Plan As

Equity Plan

discriminates

favor

of R-Net

in violation

U.S.C

129b1

42

Al 074

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 25 of 30

R-Nets

and

the

Noteholders

unsecured

claims

are

of equal rank to claims

of other

unsecured

creditors

in the

context

of these Chapter

11

proceedings

and

thus should not have

been

separately

classified

R-Net and

the

Noteholders

rejected

the

Equity

Plan

If

R-Nets

and

the

Noteholders

claims

had

been

properly classified

and

either

or

both of their votes against

the

BC

Plan were

included

in

Class

CHC3

the

CHC3
to

Class would have

voted

to

reject

the

Equity

Plan and

no

class

of creditors

would have

voted

accept

the

Equity

Plan for either

CHC

or

CI
of the R-Nets

Since

there

was no

justification

for the

ECs separate
be

classification

and

the

Noteholders

unsecured

claims

the

Equity

Plan cannot

confirmed

THE EOUITY PLAN
In

IS

NOT FEASIBLE
confirmed
the

order for the Equity

Plan to be

EC
is

must

establish

by

clear and

convincing

test that

the

confirmation

of the Equity

Plan

not likely followed

by

the

liquidation or

need

for further

reorganization

of the Debtors

In

re

National

Award

Mfg

Inc

35

B.R 691
of

693

Bankr
success

S.D Ohio 1983
In re

To

satisfy

this test

the

plan

must

present reasonable

assurance

Made

in

Detroit

Inc 299 B.R
has failed
to

170 176

Bankr
burden

E.D Mich 2003

review

of the

record

clearly

shows

that

the

EC

meet

this

The

EC
in

proposes

to

satisfy

the

Noteholders

claims

by issuing

$50

million

in

new

notes and

$212

million

new

preferred stock

Despite

the dismissal of

its

equitable

subordination

lawsuit

against

the

Noteholders

the

EC

assumes

that

it

will

be

successful

in

its

argument

that

the

Noteholders

should

be denied post-petition

interest

of more than $100 million

as

result

of their

alleged

inequitable

conduct

If the

EC

does

not prevail

on

this

argument

the

company

would be

forced to issue

in

excess

of $100 million

more

in

new

notes and/or

stock

Corarn will have

substantial

difficulty

in

making

the

required payments

to

the

Noteholders

if

the

Equity

Plan

is

confirmed

Victor

analyzed

Corams

ability

to

pay

its

debts under

the

Equity

43

Al 075

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 26 of 30

Plan

He

explained

that

investment

bankers

lenders

and

analysts

in the

marketplace

require

fixed-

charge

coverage

ratio

of 1.5

TA14-15
only 1.06

His

analysis

showed

that

Corams

fixed-charge

coverage

ratio

under

the

Equity

Plan was

TA14

razor thin

margin

See

In re

Revco

D.S Inc
ranging

1990

Bankr LEXIS 2966

at

27

Bankr N.D Ohio 1990 fixed margin.
with

charge

coverage

ratios

from

1.05

to

1.18

constitute

very narrow

Lane

testified that

plan would be feasible

fixed-charge

coverage

ratio

of as low as

1.10

TA171
prepared

However Lane

the

fixed-charge

coverage

ratio for

the

first

year in the feasibility

analysis

by

contained

in the

ECs

Disclosure

Statement

was only 1.04 below

Lanes own minimum threshold

TA171
analysis Lane increased the ratio to 1.37

In

his

revised feasibility

TA17O

However

his

analysis

contained

number of flaws

Lane ignored

the

$2.9 million in deferred

tax payments

due

to

the

IRS each

year

TA171-72
are

He

also

assumed

that

the

EC

would be

successful

in

arguing

that

the

Noteholders

not entitled

to

post-petition

interest

at

the contract

rate

and

that

their

claims

will

be

reduced

from

more than $370

million

to

$262 million

TA186-88
Equity

Further

he

did not

include

any

interest

payments on

the

line

of credit

included

in the

Plan

TA 172
to

Finally

Lane used Deloittes

growth

rate

projections

instead

of the projections

deemed

be

appropriate

by

Corams management
suffer net loss

TA172during the

Nevertheless

even

under

Lanes

new
Lanes

analysis Coram would

of cash

first

year

TA187

Moreover

feasibility

analysis

showed

that

the

entire

remaining

principal

balance

of the

new

notes and

the

liquidation

preference

of the

new

preferred

stock would remain

due

in

2008

TA1 88

44

Al 076

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 27 of 30

Victor warned

that

if

the

EC

Plan

is

confirmed

there

is

serious

risk that

the

Debtors

will

not be

able

tO

pay

their

debts as they become

due.5

Danitz

agreed

that

if

the

Equity

Plan was

confirmed

it

was

likely

that

the

company would have

to

endure

subsequent

bankruptcy

TA 122
be

Given Lanes

testimony

substantial

questions

arise

regarding

whether

there

will

enough

cash

available

to

make

the payments

required under

the

EC

Plan

In his

feasibility

analysis

Lane

assumed

that

only $2

million of the $6

million to be contributed

to

the

litigation

trust

would be

funded

on

the

effective

date

even

though

he

admitted

that

the Equity

Plan requires

it

to

be funded

on

the

effective

date

TA163-65

used

an estimate

of unsecured

claims

of $6.8 million $1.2

million

less

than the Trustees

estimate

TA163
creditors

and

did

not include

any

amounts

for post-

petition

interest

to

be paid to unsecured

TA166-67
fully

Lane

testified

that

if

the

litigation

trust

was

funded

the

Trustees

more conservative

estimate of unsecured

claims

were used and

post-petition

interest

was

factored

in Coram would be

left

with

only $3.4 million in cash

working

capital

on

the

effective

date

of the Equity

Plan

TA 167-

69

$6.6 million

less

than the

minimum that

the company

believes

is

required

TA45

Lanes

explanation

was

that

the company

could

draw on

the

line

of credit

provided

for in the

Equity

Plan to

make

up

the

difference

TA 169-70

However

as

Lane admitted

the

EC

has not obtained

firm

commitment

for

any financing

TA169

Absent

firm commitment for the required line of credit

the

Equity

Plan

may
re

not be

confirmed

In

re

Tyler

P.E P.S Inc
Minn.1984

156

B.R 995

997

Ohio

1993

In

Stoffel 41

B.R 390

393

Bankr

Would

reorganized

Coram

under

the

Equity plan

therefore

be

able

to

pay

its

debts

as

they

mature

It

would be almost
in the

wont
several

say almost impossible and going
into

but

any

any kind of hiccup

in the like

company
there

going

forward

next

months
half the

04

if there increase

was another
in

drug

issue

was with
debt

bankomycin
service to

year and be
defaulted

ago

if there

was an

bad

debt
ratio

anything
is

would cause
too

under

Equity

Committees

plan

because

that

just

way way

tight

TA15
45

Al 077

Case 1:04-cv-01565-SLR

Document 126-3

Filed 04/17/2007

Page 28 of 30

The

EC

has not met

its

burden

of proving

that

the

Equity

Plan

is

feasible

Accordingly the

Equity

Plan

may

not be

confirmed

THERE ARE SEVERAL OTHER LEGAL IMPEDIMENTS CONFIRMATION OF THE EQUITY PLAN
The
Equity Plan
fails

TO THE

to

meet

the

requirements

of

1129

of the Bankruptcy

Code

for the

following

additional

reasons

which

are

set forth

in detail

in the

Chapter

11

Trustees

Objection

to

the

ECs

Second Amended

Plan of Reorganization

which

is

incorporated

herein

by reference

in

its

entirety

and

included

in the

Trustees

Appendix

TA361-380
the

the

EC

Plan was not proposed

in

good

faith

as

required by 11

U.S.C

129a3
EC
Plan unfairly

EC

Plan unfairly

discriminates against

general unsecured

creditors

the

discriminates against

the

Noteholders

the

EC

Plan

may

not be confirmed

because

it

discriminates in favor of and promises

to

pay to R-Net

more than 100% of

its

agreed

allowed

claim

t