Free Appendix - District Court of Delaware - Delaware

Case 1:04-cv-01565-SLR

Document 125-11

Filed 04/17/2007

Page 1 of 30

Under Section6.3 ofbisCerberus
reasonable instructions

ontracI

Crowleys.failure

toIoIlowibe..-.
Portfolio

of

Cerberus Fenberg or the board and
forfeiture

of directors of

Company

was grounds

for-termination

of his .Cerberus compensation

.On

November-12
sent

199

while his .contTact and confidential
to

negotiations
letter

with CoEam.wemeigoing
additional

Crowley

personal from

to

Feinberg seeking atCorain

compensation

Cerberus tied

his.perfonnance

It

is

also

undisputed that Crowley

and Feinberg did

not disclose

either the

existence

or the

terms of the Cerberus contract

to

the dfrectors

or.sbareholders

of

Coram
in the

either

orally

or in writing prior to discovery

in.the

bankruptcy case

The 1999

Form 10-K

section

titled

Certain Relationships

and

Related Transactions

states

only that Cerberus owns

an interest in Winterland

the privately

held

affinity

merchandise

company of which

Mr
of the

Crowley

is

the

Chairman

of the Board

of Directors

10-K
Party

at

45 Thee

is

no inention

Cerberus contract

there or in the section

titled

Related

Transactions

Id

at

72-73 The

Management
Winterland
to state that

section

of the Disclosure

Statement describes

Crowley

as

Chairman of
Cerberus goes on

but

does not expi

am

the

relathnship between

Win

terland

and

It

Crowley also serves

as

consultant

to

Cerberus

with respect to

its

investments

in

various

healthcare

companies

other

than the Debtors and that

lie

generally

receives

fee

from

Cerberus for such services

It is silent

as to the nature

and amount

of that

fee

or the

nature

of the contractual

relationship

between

Crowley

and

Cerberus

Disclosure

Statement

at

There

isno question

that

these

facts

were material that they were not timely

disclosed

and

that

Crowleys and Feinbergs V.A.2 below

failure to disclose

them

was

serious

breach

of-

duty

As

discussed

in

Point

the non-disclosure

of these

facts

gives

rise

to

potentially

significant

claims

against

Crowley

and

Feinberg for breach

of fiduciary

duty

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This does not end the analysis

however

Forwhile

the non-disclosure

of the

basic

facts

is

undisputed

the parties hotly dispute

two issues

iwhetherFeinberg and Crowley
and

.cteiwithJpiproper

motives whentheyentered

into

Crowleys Cerberus

contract

iiwhether.theirnon-disclosure

of thatcontractXo

Corams

other

directors

and

officers

was

.j..

intentional

or inaciveitent

The

resolution

of.These

disputed

issues

has significant

bearing

bnthe

nature

and magnitude

of the penalty

that

may be imposed

on Crowley

or

Feinberg

We

address.

these

two issues-in tuni below

The

evidence

on the

first

issue

-whether

Feinberg and Crowley

intended

or

expected

Crowley

to

advanceCerberus

interests

to the detriment-of

Coram and

its

shareholders

is not
other

conclUsive

Crowleys

Cerberus

contract

the non-disclosure

of

its

terms to

Corams
to

directors

and officers and

his

November 12 1999

letter

could be deemed

sufficient

support

an

inference

of malevolent intent

Feinberg and Crowley on the other hand both

vociferously

deny having had any such intent

They claim

it

was

their

understanding and intent

that

Crowley would

run Coram

for

Corain

as-

Crowley

put ft acting

at

all

times

in

the best

interests

of Coram and

its

shareholders

While.an inference

to

the contrary

cannot

be precludeddefinitively

3oldin finds

credible

Feinbergs and

Crowleys

assertions

that

they

never intended

or

expected

Crowley

to

breach

his

fiduciary

duties

at

Corain

number

of factors

support

this

conclusion

Most

significant

is

that

at

the

time Crowley

became

CEO

of

Coram

the

Noteholders

interest

in

how Coram was managed
of financial

was

closely

aligned

with that of Corams

shareholders

Corarn was

in

State

crisis

and

it

was

already

apparent

that

the

company was worth

substantially

less

than

the

amount of

its

debt

Cerberus for example had

-941CLZIO813.1

A842

Case 1:04-cv-01565-SLR

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written

di%yii

its

Coram

debt

at

this

time to less than

50%

of

its

face amonnt

The immediate

iniperative

from

th.e

standpoint

of the Noteholderand

the

shareholderE was to try and

stabilize

.Corains opr.atioiis and to improve

its

financial

pØtformance

Given thL1aciof

aiy confiict

between

the

shareholders

and

the

Notebolders

basic

intefests

Feinberg

bldseem
the

tphave

had

little

inceiti.ve

at

the outset

to conspire

with

CEowley

in the egregious

fashion

Complaint

alleges

As

for

Crowley

his

compensation

arrangements

at

Comm

gave

him

strong

incentives

to

maximize

shareholder

value

.Croweys.base

salary-

at

Coram was oily $650000
and

substantil

sum

but far below

the

amount

to

which

an executive

of

-his -caliber

experience

might be entitled

On

top

of his base salary

his

November

1999

employment

agreement

gave

hith

options

to

purchase

one million shares

of Corarns

stock

at.the

then

market-price-pius

perfonnance

bonus

of upto

nearly

$2 million contingent

on

his

ability

to

increase

Corams

-3

EB1TDA
The
April

plus

an acquisition

bonus

of

almost $2 million in the event

of

sale

of the company

2000

amendment

to his

employment

agreement

increased

his incentives

to

maximize

--

shareholder

value

it

substantiallyincreased

the

amount

of his EBITDA-based

performance

bonus

and

also

gave

him the right

to

$1.9

million

success

fee payable upon
to

the

consummation

of

refinanciOg

As

result

the potential

benefits

Crowley

from generating

value

for

Corams

shareholders

far

outweighed

the relatively

small

benefits

to

which

he

was

entitled

under

his

Cerbems agreement
Winterland

that

is his salary

of $960000

per year plus

expenses

and

his

30%

stake

in

which was worth next

to

nothing

While

the terms

of Crowleys employment agreement

with Cerberus are

susceptible

of adverse

inferences

they

are not inconsistent

with an expecthtion

that

he would

honor

his fiduciary

duties

at-Coram

For example Crowleys

agreement

with

Cerbenis requires

KU.2ID13.J

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Crowleyto

ushis best

efforts

to

promote

the success

of the Employers busineis-or the

business

of

Company...
cause
for termination

Agreement

2.3

emphasis

added Similarly
the

agreement

defines

to include

Crowleys

Tallure

tofollow

reasnabte

instructions

of the Employer

orthe Board

of Directors

of any Portfolio

Company
suggest that

Id
when
the

6.3 emphasis

added

The

less strained

reading

of the agreement

would

sccess

of Cerberus appears

to conflict

with that of

prlicularPortf9io Company

in

this

case

Corani Crwley

is

to pat his fiduciaiy

duties

to the Portfolio

Company

ahead

of his

contractual

duties

to

Cerberus

Similarly

it

is

sensible

to read

Section

6.3s reference

to

reasonable

instructions

of the Employer

to

suggest

that

an instruction requiring crowley

to

breach his fiduciary

duties

to

Poiifolio

Company

would

be unreasonable

As noted
the

separate

issue

is

whether

Crowleys and Feinbergs
officers

failure to disclose

Cerberus contract

to

Comms

other

directors

and

was

deliberate

or inadvertent

Both

Feinberg and

Crowley characterize

their

failure

to disclose

the

full

extent

of the

Crowley/Cerberus relationship as an oversight

which

they

greatly regret

While

the

evidence

on

this

issue too

is

inconclusive

we

believe

the

weight of the evidence

points

to different

conclusions

for

Feinberg and

for

Crowley

We
deceit Central
to

find credible

Feinbergs

assertion

that

his non-disclosure

was

not

calculated

this

conclusion

is

the lack

of any apparent

motivation

for

Feinberg

to

conceal

Crowleys

Cerberus

relationship

Given

that

the

Noteholders

interests

at

the

time were

consistent

with

those

of

Comm

and

its

shareholders and

given

the urgent

need

felt

by

Comms
have

directors to hire

CEO
in

of Crowleys caliber without

delay

it

appears

that the

board would

had

little

hesitation

hiring

Crowley even

following

full

disclosure

of

his

Cerberus ties

In

these

circumstances

query why

Feinberg would

have

deliberately

concealed

Crowleys Cerberus

-9610.22103813.1

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Case 1:04-cv-01565-SLR

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ties

themby

risking

both

liability

and

taint

to

Cerberus Teputation..More

plaUsible

isthat

Feinberg

for

.vhom

Comm

isinerel3k

one

of many

diverse

investments under

management was

giiIty

of an inadvertence

-L

Crowleyby

contrast

did

have

an inºentive

to

conceal

the existence

of his

Cetberus contract

As noted

Crowley consistently

sought strongly

to

maximize

his

compensation

at

both Coram and Cerberus.

He

negotiated

and

renegotiated

his

compensation

with an unrelenting

zeal on which

Ainaral Feinberg and

others

have

commented

Crowley

may

have

feared

that disclosure

of his $960000

salary

and

other

compensation

from Cerberus might

have

caused

Comm

to seek

to renegotiate

his

compensation

arrangements

or

at

least resist

demands

for increases

of the kind Crowley

negotiated

in April

2000

Moreover

as the

Bankmptcy Court has found Crowleys November 12 1999
from Winterland
tied to

letter

to

FeinbergVrequesting

additional

compensation

Corains

peiformance

evidences

that

Crowley was not above

concealing his conpensation

arrangements

think

that

EC-20

November 12 1999
relationship
in

letter

did

show an
and
in
-to

intent to hide his request for his for additional here

Cerberus Winterland

hide

compensation
at

exchange

efl9orts

Coram
at

..

Fr of Dec
the existence

21

2000

confirmation

hearing

89 Arguably

Crowley

did

not

mean

to conceal

of his VCerberus

contract

but

simply his request

for additional

compensation

from

Cerberus

tied

to

Corams performance
told

type

of compensation

that

Amaral

as

chairman

of

Corarus board had

Crowley

he would

not

permit but

it

is at

least equally

plausible

that

Crowley meant to conceal

the existence

of his Cerberus contract

as

well

-97ci2o873.7

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--

..

.- .The-Mismanagement

Allegations

Despite the conflict posed by Crowleys undisclosed

dual

employment Goldins
of Feinbergand

invesdgatioii.hs

4isclosed

no

evidence

that

he deib.erate1yfayQd

the interests

Cerberus.to

the-

detriment

of Coramandits shareholders

No

evidence

suggests

that

Cerhers

or

the other

Noteholders

iflstructed

Crowley

to.act

in

manner

that

was

contrary

to the best

interests

of the company

Nor does

the

evIdence

suggest that-Crowiey

did

so of his own

accord

with the possible

exception

of his $6.3

million

cash interest payment

to the

Noteholders

which

turned

out not to

cause Coram any bairn

Consequently

Coram and
breaches

its

shareholders

have

suffered

no damage

by

virtue

of Crowleys and

Feinbergs

of.fiduciary

duty
Courts

other

than

the

delays professional

fees

and business

losses

resulting

from the Bankruptcy

refusal

to

confinn the Debtors

Plan

The
According
the

alleged

scheme
Rick

to

oust Smith

to

Complaint

Smiths

plans

to

grow

the

company were
and steal

incompatible

with Feinbergs and Crowleys alleged

plan

to

drive

it

into

Chapter 11

the

equity

for the

Noteholders

The Complaint Smiths

alleges

that

Feinberg and

Crowley

developed

andimplemented

scheme

to

provoke

resignation

as

Comms CEOand
was
to

his

eventual

replacement by Crowley

The

first

step in the alleged

scheme

hire

Crowley

as

consultant

with the intention

that

Smith would

resign

shortly

thereafter

as

in

fact

he did

Compi
Rick

25

Once

Crowley became

CEO
and
set

the

Complaint

alleges

he discarded

the efforts

of

Smith to grow the business

out

instead

to

enhance

the value

of the Notes

held

by Cerberus

and

to

give

Cerberus and the other Noteholders

claim to the equity

of

Coraim

Compi 132

-98KL2IOU73.7

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No

evidence

supports

thes

aliegation

Rather

thai1ncrea
inCOrams
financial

ia1ue of the

Company Compi
In

22

Smithpresided

overascvergdecine

condition

1999

Corain suffered

net loss

of $115

Eiillio $93 million more

thart

in the piior

year

By

the

end

of 1999

Coraifl

had negligible

EBITDA

only $307000

number

of factors

.contributed

to

Corarns

declining

perlbrmance in 1999

in

additiLn

to the loss

of the

Aetna.

contiact

and

the attendant

bminess

losses

indluding the bankruptcy of the R-Net-subidiaries

Corain faced

Increased

competition

from hospitals

and physicians

offering

infusion

and

other

home

healthcare

services

pricing

pressure

caused by an unfavorable

shift

in

payor mix from

private

insurance

to

managed

care

plans

and

an increase

in the costs

associated

with providing

infusion

therapy

services

At

the

same time Coranfs
had declined

accounts

receivable

had.grown

substantially

and

the

rate

of collections

To be sure Smiths doorstep

not

all

of Corams

declining

performance

in

1999

can

fairly

be

laid

at

Nonetheless

Smith seems

to

have

done

little

to

counter the negative

trends

facing

Coram and may
the

well

have

contributed

tothem

Smith concedes

that

the

Aetna

litigation

consumed

bulk of

his

time and

attention

throughout

large

part

of his tenure

as

CEO

preventing

him from

devoting

his energies

to other

areas Perhaps

because

of his inability to

extricate

himself from the Aitna dispute Smith failed

to

act decisively

to

stem the.companys

declining

revenues

slower

collections

and

increased

costs

When
as

Smith became

CEO

in

April

1999

he was relatively

young

and

had no prior

experience

CEO
that

Within

few

months

the

board

concluded

unanimously

and npt without

justification

he

was

in

over his head

Even Amaral who had
Smith was

trained

Smith and urged

his

elevation

to

CEO
at

soon came

to believe

that

not

up

to

the

job and

needed

to

be

replaced

or

least

coached

by

healthcare

executive

with more experience

Hence

in the

-99
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Summer.oN999

after

tvo quarters

of precipitous

declines

in the fortunes

of the company

--

the.board

decided

to bring

ma

more seasoned

CEO
it

to serve

as

consultant nientor or

coach

to

Smith From

the

boards

standpoint

was not unreasonable to think

that

Crowley

with his strong track

record

in

tumipg around

troubled

healthcare

companies

could give Smith

the

guidance

be appeared

to

need

Unfortuimtely the Crowley/Smith

relationship

got off to

poor

start

and never

recovered

result

for

which

both men appear

to

bear responsibility

Srnith.adinits

that

for

at

least the

first

month

after

CEowey

was hired he

refused

to

cooperate with

him
did

Although

Smith

eventually

became somewhat

more cooperative

he concedea

that

he often

not return

Crowleys phon
considered

calls

and did not

treat

Crowleys

requests

for

lilforniation

as

priority

Re

Crowley an

overbearing

manager who sometimes made
decisions

criticized

Smith in front of other

board members

and

at

other times

behind his back

By

October

1999 when

Smith resigned

and rejected

the

bpards request

that

he stay on as

co-CEO

with Crowley

it

had

become

clear

that

Crowley

and Smith could

not function

effectively

together

In

any event

there

is little

if

any

basis for the

Equity Committees allegation

that

Crowley discarded

Smiths

efforts

to

grow

the

business

Neither

Smith nor his

CFO Wendy
by Smith

Simpson

identified

any significant

growth plans

that

were originated

or

implemented

but subsequently

abandoned

by Crowley

CPS was

the

major growth area

during

Smiths tenure

But CPS was

still

in

an early stage

of development

it

was

consuming

large

amounts

of scarce

cash

and was

not expected

to generate

positive

cash

flow for years

Given

CoramS

liquidity

problems

at

the

time CPS

was an obvious candidate

for the auction

block

Accordingly

with

the

boards

approval Smith retained

DBAB

to

explorea

sale or other

disposition

of

CPS

decision

that

in

retrospect

Smith continues

to

believe

was sound

Smiths

other

growth plans

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were much

smaller in scope ahd magnitude

and by and largethey

were continued

not

abandoned by Crowley

ii

The aileed

failure

to

plore options ther

than

Chapter 11
Corani

The Equity Co

tteeasserts

that

Peiiberg caused Crowley

to

manage

so as to

avoid

all

reasonable

efforts to explore

options

other

than

Chapter

11

The Complaint

alleges

for

example

that

Corannever

retained

an investment banker

to

explore the manner in

which

the

value of

Comm

could

be increased

and

tht.itnver.had.a

ftmctibning

special

committee of independent

directpx

toexplore strategic options

to

grow

the

company
opportunities

By
that

failing

to explore

such potential options

Coram-4missed

attractive business

would

have

ehhanced

its

value

by
and

increasing

its

reventtes

margins

.and

allowed

refinancing

of

its

indebtedness

avoided.destructive

bankruptcy proceeding

Compi

42

The

inferences

and allegations

are

wide

of the

mark

even

were one

to

assume

that

Crowley was acting

at

the behest

of the Noteholders

On
tenure

stand-alone

basis Coram was

worth

substantially

less than

its

debt

throughout

Crowleys

as

CEO

Consequently

any sale or

merger that benefited

Comms
the

shareholders

for consideration

in excess

of

Comms
have

debt

would

have

benefited

Noteholders

as

well

Similarly the Noteholders

wOuld

benefited

directly

and

substantially

from any equity

investment or other financing

tmansaÆtion

that

benefited

shareholders

It

is

apparent

that

the prospects

for

any sale or financing

transaction

beneficial

to

the shareholders

were remote

at

best

Nor does the-Complaint

identify

any specific

opportunity-that

was

supposedly

left

unexplored

.loI KL22HW

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Merger At
time Crowley..bpcalBe

orS1eOpponifl
Coram was concluding
disastrous

the

CEO

year and

Was

.in

flo-cQndition

lobe

sold

advantageous1y

Corams.net

losses

had

increased

ior

tWQ

consecutive

years

it

had over $300

million in

debt

and

it

had

shareholder

equity

of

minus
million suit

$21

The

prospects

for

2000

were no better

Coram was defending

$100

brought by

its

largest

customer

Aetna

It

was suffering

decline

in

revenue

due

to

the resulting

bankruptcy of

its

RNet

subsidiaries

The

infusion

business

was

less profitable

than

ever

because

of the

difficulties

associated

with managed

care

and

other

reguintory

and reimbursement issues

And

it

was

highly

likely that

absent

substantial

capital

infusion

Corani would

not satisfy

Stark

11

at

year-end

In addition

to

Comms

severeproblems

the

home

healthcare

industry

as

whole

was

experiencing

hard

times

On
Aniaral

number of occsions

in

1999

and 2000.various board

members

including

and

Crowley spoke
for either

with

executives

and

bankers

in the healthcare

field to assess

the

opportUnities

business

combination or

financing

The response
as interim

was uniform

no

such opportunities

existed

In the Fall of

1999 while

serving

CEO

Arnaral

met with-

investment bankers

from Bear Steams Chase

Capital Bain and

Fox Payne

Based

on

those

discussions

he concluded

that

ihere was

no appetite

out there

for

deal
told

In

the

Spring of 2000

Crowley called

number

of banks

to

try

and raise capital

Citibank

him

that

would

lend

at

most $25

million and only

if

the loan

was

secured

by inventory

Everyone

else turned

him

down

Under

these

circumstances

retaining

an

investment banker

to explore

strategic

options

for the

company Would

have

been

an

unwarranted

and

likely pointless

expense

In

fact

in

June or July 2000

Crowley asked Christina Morrison

of

DBAB

whether

it

made

sense

for

-102Kt2210U73.7

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Coram

to retain

DBAB

to

tTy

and efltheoinjany

Mpriisns

response

wasthat given

the size

of Corains

market capitalization

less than

$20

miliknÆt the-time

it

didnOt.thake

sense for

Corarn to pay the minimum

fee

of $1 million to $1

imthon that

DBAB

charges

for

such an

engagement

Capitd-Raising

Oprortunities

Given

the

state

of.Coranfs balance

sheet

and

the inflexible

requirements of Stark

II scant

reason exists

to

believe

that

Coram could have

raised

sufficient

capital to

avoid having

to

file

for

bankruptcy protection

At the end of 1999

Craxn

ha4

barely

met

the

$7

million threshold

required

to

satisfy

the public

company

exception

of Stark

Moreover

it

was

able to

do so only by

computing

shareholder

Lquity.based

on the preceding-three-years

average

and

that

approach

would

not

be available

the following

year

Because

shareholder

equity

in

1999

was

negative

$22

million Corain would

have

had

to increase

shareholder

equity

by more than

$95

million before

the

end

of 2000

to

satisfy

Stark

II

With

negligible

EB1TDA

it

was

virtually

impossible for

Coram

to achieve

that

result

on

its

own

Thus

as the

companys
infusion

regulatory

counsel told the

board

at

its

meeting on December 17 1999

an
order

equity

of some type would probably be

required

before

the

end of the year 2000

in

for the

Company

to

be able to use the public

company

exception

beyond

December 31

2000

Several

factors

made

it

difficult

or

impossible for Corarn to raise any equity

capital

let

alone

the

massive

dollar

amount

it

would have

needed

to satisfy Stark

II

and

avoid

bankruptcy

First

and foremost

Corams

reorganization

value

was substantially

lessth

its

existing

debt

That alone

posed

formidable hurdle

to

Corams

ability

to raise capital

without

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restructuringof

its

balance

sheet The pendency

of Aetnas $100

millionclaim against

Coram

posed an additiotial veiy substantial

barrier to

potential

investment

further

problem

according

to

ChristinaMortisonofDBAB

was

that the

availability

of capital for non-rnternet

service

companies

and

for

healthcare.companidsln

particular

was

relatively

starce

in the

first

half

of 2000

Yet andtherproblem

was

that

Corams

stock

ws held

primarily

by

individual

shareholders

few

if

any

institutional

invstorsowned

significant

blocks

ofCoram stock

The absence of

substantial.ins.titutional

ownership

was

an-

impediment

to raising

capital

through

either

rights offering

or

public

offeiing

In

the

cbcuinstances the boards

decision

not to incur

the

expense

of retaining

financial

advisor

to

pursue potential financings

was reasonable
advice from

Nonetheless

prior

to

authorizing

the

bankruptcy

filing

Corain obtained

DBAB

gratis that there was no

way

to raise sufficient

capital

to

satisfy

Stark

II

and

that

accordingly

bankruptcy was

unavoidable.

Christina

Morrison of

DBAB

iddressLd the board

on July

31

2000

on

variety

of

capital-raising

alternatives

including

follow-on

offering

rights offering

strategic

investment

by

third

party

and

leveraged

buyout

She

concluded

that

none

of these

options

was

viable

means

of-raising the substantial

capital

that

Coram needed

to

avoid bankruptcy

As

Morrison

explained

her conclusion

on

this

point

was

not

close

call

iii

The

allegedly

improper

CPS
to
sell

sale

The

Complaint alleges

that

by deciding

CFS
was

for

$41.3

million

Crowley

favored

the short-term

interests

of

the

Noteholders

the price

allegedly

far below

the value

estimated

by Corams

investment

banker

Deutsche

Banc Alex

Brown

It

maintains

that

he

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compounded

the error

by

using

thelsale

proceeds

to.pay

down

the outstanding

balance

of the

senior

revolver

and

portion

of the Series

ANotes

CompL

34

The

allegation

is

hnfounded

Fora

starterit

is

misleading

at

best

to suggest.that

DBAB
for
that

bad

estimated

CPS
to

value to be far greater

than

the eventualsale

price

The

sole basis

assertion

appears

be

an informal

discussion

between

Coram and

DBAB

in

the

Summer

of 1999 before

DBAB

was

formally

retained.before

it

had been.given any meaningful

financial information

about

CPS

other than

its

gross

revenues

andbefore

it

had

done

any financial analysis

In that

preliminary

meeting

DBAB

said

CPS might

yield as

much

as

$100

nililion

were

it

valued on the basis of

niultiple

of gross revenues

valuation

based solely on

gross

revenues

generally

has limited

utility

as

measure

of actual value

it

appears

to

have

been

mentioned

by

DBAB

at

the

time only

because

at

that early

stage

it

had no other financial

information

about

the

company
valuation

DBABs
of.CPS

preliminary

observations

therefore

have

little

or

no bearing on the ultimate

When
to

judged from the dual perspective

of process

and price the

CPS

sale

appears

have

been

entirely

proper

The

sale

was

the result

of

lengthy

and competitive

bidding

process

in

which

DBAB

contacted

45 prospects

24 were sent confidentiality

agreements

16 returned

those

agreenients

and were sent the Offering

Memorandum

eight

submitted non-

binding bids

and were given

the opportunity

to

undertake due

diligence four

actually

did

so and

two provided written offers

At the conclusion

of

that

process

GTCR
offered

emerged

as the highest

bidder

by

substantial

margin

The

next highest

bidder

CVS

only $345

million 10%

of which

was subject

to

holdbak

Crowley

rejected

that offer

and instmcted

DAB.to
--

hold out

for

at

least

$40

million

in

cash

There

is

no reason to believe

that the sale

process

which

was

conducted

by

DBAI3

respected

and

independent

investment bank

with the assistance

of the

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law firm Reed

Smith Shaw

McClay

was.conductedin

anythingother

than

professional

thorouh

and.armslength fashion

Theboard

approved

the sale

unanimously

In

doing so

it

relied

among
In

other

things on

tBABs

opinion

that the

ae

was

fair

from

financial

perspective

rendering

its

fairness

opinion

DBAB
analysis

used the three standard

methods

of valuation

comparable

public

company market
cash flow analysis

ii comparable
first

company

transaction

analysis

and

lii discounted

The

method

yielded

valuations

that

ranged from

$9.7 million

to

i45
the

million the second yielded

valuations

that

ranged

from i3.4

million to

$61.7 miilion and

third

yielded.vaiuations

that

ranged from $24.6 million to $53.6

million The price

that

Comm

obtained

ultimately

$41.3

million

in

cash

was

within

this

range of values

iv

The challenged July 2000-payments
alleges that to further the

to

the

Noteholders

The

Committee

Noteholders

interests

CrowlLy

made
flow and

strategic decisions

designed

to

provide

cash to reduce debt

at

the

expense

of future-cash

without

regard

to

the injury thereby

caused

to

Corain

Compi
it

32

In that

regard

it

refers to

several

debt

payrnents-Crowley

made

in July

2000

First

questions

Crowleys

decision

to

make

$6.3

million cash

interest

payment

to

the

Noteholders

claiming that Coram was

seriously short of cash and should

have exercised

its

right

to

make

the

payment

in kind

It

also

questions

Crowleys

decision

to use the entire

$38

million

in

proceeds

from the sale of

CPS

to

pay down the balance

of the revolver

$28.5

million and part of the principal

on

the Series

-Notes
--

$9.5 million claiming

that

as

matter

of

prudent

business

practice Coram should have

attempt

to

negotiate

the

amount

of

this

payment Id

fi 33-34

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Cmwley
in

dscision

tomake

the

$63

million interest

payment

in

cash

rather

than

kind on

the

eve

of Corams.bankiuptcy

filing

raises troubling

questions.-

By contrast
in
full

Corarn

had

no alternative

but to use the

CPS

sale

proceeds

to

pay down

the revolver

and

to

partially

pay

down

the Series

Notes

Given

Crowleys

financial

ties

to

Cerberus

queiy

whose

benefit

the

cash

interest

payment was

intended

to

promote

Moreover

the payiiient

reduced

Corams

cash to

dangerously low level

at

time when the compancould

not

count

on

additional

cash coining

in.

The CPS

sale

had

not yet

closed

and

indeed

was

not

even

assured

of

taking

place

Immediately

following

the interest

payment

Coram had $7472429
had

in

cash

barely

enough

to

cover

its

weekly

cash needs

One week
below

later

cash

dwindled to only

$5481008
bills

Allowing

cash

to decline

to

level

what

the company might need

to.pay

its

by making

cash payment

that

could have

been

avoided

is difficult

to justify

However

Coram

suffered

no damages

as

result

of the interest payment

The

CPS

sale closed

shortly

after

the

payment was made bringing
to

sizeable

amount

Of cash into the

company and
from

eliminating

the

need

spend cash

on inventory for

CPS

Moreover

when

-viewed

bankruptcy perspective

the July

2000

debt

payments

all

of which

were

made by Corani
expense of any

Inc
other

not

Coram

JJealthcare

did

not

unwarrantedly

benefit

the

Noteholders

at

the

constituencies

The

Plan

of Reorganization

proposed

to

pay

general

unsecured

creditors

of

Coram

Inc

in

full

Consequently

these

payments

did

not have

the effect

of improving

the

Noteholders

position

vis--vis

other

creditors

As

for the

shareholders

they

would

have

been

treated

no

differently

in

bankruptcy had these

payments

not

been

made

or

had they been

made in kind

rather

than

in

cash

In either

case

thenet result would

have

been

to

increase

Corams

outstanding

debt

leaving

its

margin of insolvency

unchanged

The payments

thus had

no meaningful

impact on

-107-

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Corams
any WOISC

solvency frornthe

standpoint

of

its

balance

sheet

and

did

not place

the.shareholders

in

position

Arguably Coram might have gained
Noteholdershad

leverage

in

Its

tiegotiations

with the

itvithheld

the

$63 miuioncash

interest

payment
these

Had Coramwithhekl.that

cash payment

the Noteliolders

would

have

faed

the risk that

monies

might be dissipated

during

the

course of the bankruptcy proceeding

risk

they might have

been

willing to

avoid

by

making

concessions

for the benefit

of the shareholders

Debtors often employ

such tactics

particularly

whena

priority

of

debtors

management
that

is

to defend.shareholder

asdisflnct

frori

creditor

interests

The argument
interests

therefore

is

Crowleys

ties

to

Cerberus caused him

to

prioritize the creditors

ahead

of those

of the shareholders

and

to avoid

unduly

pessuring

the

Noteholders during

pre-filing negotiations

On
Chanins
valuation

the other

hand Crowley had

justification

for the alternative

ho chose

and Goldins

independent

analysis

both confirm

that

Corani was insolvent

by

substantial

margin

Accordingly

the shareholders

had

no

entitlement

to

any distribution

under

plan

of reorganization

any bargaining

leverage

Coram might have
of an outcome

obtained

by withholding

the

interest

payment

would

have

been

in furtherance

not

legally or financially

warranted.

Crowley

cannot

be held

liable

for

any

damages
employ

Corarns

shareholders

might

arguably

have

suffered

as

result

of his

failure

to

bargaining

tactics

of

this

sort

The The Committee

allegation

that

Coram
and

delayed filing as long as possible

alleges

that

Crowley

Fcinberg

with the assistance

of

Corains

bankruptcy counsel

decided

to

delay

any bankruptcy

filing

as

long as possible

in the year

-108.
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2000

inorder to create an

artificial

Stark

II

emergency
The

so Coramwouldhave

to

emerge

from

Chapter 11

as a.piivate

company

before

year-end

allegation

appears

to lack

suppOrt

Had Crowleys and Feinbergsobjective
have-been

beento

contriveto

wipe

out the

equity

that goal

would

best served

by

filing

sooner rather

than

later

in

1999

Coram had-

EBITDA

of only $3074000

and

suffered

$i.14823000

netiss

Clearly any valuation

that

rests

principally

on

Comms

1999

rather

than

2000 performance

-yields

value much

further

below

the

amount

of Coraiflsdebt

COnsequentIy

deliberatedelays

in

filing

for

bk
in-

ptcy

would have

increased

the

chances thatimproed

performance

in .2000

would

result

higher

valuation possibly

one

that

would

yield

value

for the

equity

In

any event

no evidence

has emerged

that

Crowley

or

anyone

else deliberately

delayed the bankruptcy

filing

in

an attempt

to prejudice

Corams

shareholders

Rather

the

timing

of the decision -was

driven

by

number of

objective

factors.30

30

Had Corarn been
Stark
11
it

able

to

raise sufficient able
to

equity

to

satisfy

the public

company exception
that prospect

to

might have

been

avoid spring
litigation

bankruptcy of 2000

filing

Although

became
was
still

increasingly

remote in th
the

few

avenues remained

open

CPS
in

on the market
against

Aetna

was

still

pending
out

and Coram was involved
acquisition for

litigation

PricewaterhouseCoopers
resolutions sufficient lawsuits accepted

arising

of the Caremark and high price
It

Had
it

Coram

achieved

favorable obtained both

of these
equity

lawsuits

CPS

could

conceivably

have

to satisfy

the

exception

was
than

not until the

end

of April
for

when

were settled on

teims less favorable

had been were

hoped

and Coram had off

GTCRs

bid

for

CPS

that

all

three

avenues

finally closed

in April prior to

Coram
filing

hired

.Chanin

to prepare
that

valuation

of the company
that

necessary in
filing

step

the petition attributable

From
to the

point

on

it

appears
did

any

delay
its

the
July retained that

petition was

fact

that to

Chanin

not complete
to the fact

valuation

until

31

Chanins

delay
not close to

in

turn appears

be attributable

that

when

it

was

Coram was
Chanin

to
its

having finalized

business plan

much

less the projections

needed

do

work

-109-

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Even could

the

Committee

prove that Crowley improperly delayed Corams

bnkrntcy

filingCoram

does not appear to have

suffered

damage

as a.result

Thereisno

reason to believe

that

the deterioration

in the

companys performance

beginning in mid-2000

was

in

any way attributable to Corains

failure to

file

earlier in the year

Arguably

an earlier

filing

would

have

precipitated

an

earlier

decline

in

performance

The Asserted Causes of Action
Based on the foregoiæ allegations
the

Complaint

asserts

claims against

Crowley

and Feinberg for breath of fiduciary

duty

and fraudulent

misrepresentation

Counts

and

IV

The Complaint
for the alleged

also

asserts three claims

against

Cerberus alleging

that

it

is liable as principal

misconduct

of Crowley

its

agent

ii

it

aided

and

abetted

Crowley5s alleged

breaches

of fiduciary

dutyby

knowingly

inducing

those

breaches

and iii

it

owed and breached

flduciary

duties

of

its

own by

virtue of

its

supposed

defacto

control

over Corams

affairs

Counts

11111

and

We

address

these

in turn

below

Crowley

and Feinberg
that

Goldin believes

Crowley and

Feinbergs

actions

amounted

to

breach

of

fiduciary

duty but the scope of and remedies for the breach are

far

more Imuted

than

the

Equity

Committee

asserts

Crowley and

Feinberg breached

their fiduciary

duties

to

Coram by
directors

failing to

disclose

the

full

extent

of

the

Crwley/Cerberus

relationship

to

Corams

other

and

officers

As

the

Bankruptcy

Court has found Crowleys employment

agreement

with

Cerberus

constituted

an actual

conflict

of interest

and the non-disclosure

of that agreement

tainted the

debtors

restructuring

of

its

debt the debtors

negotiations

towards the plan

even

the

debtors

restructuring

of

its

operations

Tr

of

Dec 21.2000
Coram

hearing

at.88-89

Nonetheless

as

noted

Crowley does

not

appear

to

have

mismanaged

for the benefit

of the Noteholders
--

KL22IOU3.7

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Consequently

the undisclosed

conflict

tausºd.Corin

no

actual

harm other
to

than the relatively

limited

damages

resuliing

from the Bankri ptcyCourts

inability

conflm the..Dbtors Plan of

Reorganization

.-

..-

The Bquity Committee

has suggested

that

under

Delaware

law which governs
for

its

claims

punitive

damages

are potentially

available

as

remedy

Motion

Leave

to

Fil

Adversary Proceeding

dated

Feb

2001

at

Qur.resarch

has disclosedno

support

for this

proposition

To omkiiowl1ge or

no reported

decisiOn

applying

Delawªreiaw

has dyer awarded

punitive

damages-

evºn-uggested

that

such damagesmay

be appropriate

for

1eaches

of duty

in the corporate

coiitext.3

To be sure
remedies available

as the

Committee

notes Delaware

courts

frequently

characterize

the

for breaches

of the duty of loyalty

as

expansive

Cede

Co
imposition

Technicolor

542 A.2d

1182 1187

Del 1988

and

as involving

strict

of

penalties.

designed

to

discourage

disloyalty Boniarko

Intl Telecharge

Inc

1999

WI

1022083

at

21Del Cb Nov
of
this

16 1999

However

as the

Delaware

Supreme

Court recently

observed

statements

sort

31

jury in Indiana fiduciary Riblet duty

did

in

one

case

award

punitive

damages
of

for perceived

breaches

of See Nagy had

committed by majority Products Corp 79 F3d 572
the jury

shareholders

Delaware

corporation
the
district at

7th Cir 1996
law on

However
all

court

charged

under

Indiana
held

not the

Delaware
breach

issues

See Id

576

On
law

appeal the Seventh and
certified

Circuit

of duty claim was governed
the question arose

by Delaware

to the

Delaware

Supreme Court
given that the

whether

defendants

fiduciary

duties

were evenimplicated 577-78

suit

under

an employment
question

agreement hithe case

Id

at

The Delaware

Supreme Court answered
is

the certified

negative holding.that governed by an employment
Jn
light

not

case

of breach

of fiduciary

contract

Rible-

Products

Corp

duty Nagy
did

but rather 683 A.2d

3740

Del

1996

of

its

ruling the Delaware

Supreme Court
at

not address-the

availability-vel

non

of punitive

damages

Id

40

n.6

111
Ki2W8fl.7

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stand for nothing damages
defendants should

more

than

the proposition

that

the imposition

of

.-

eliminate

the possibility

of profit flowing to
relationship.

from the breach

of the fiduciary

Intl Telecharge

Inc

Bomzrko Inc 766 A.2d 437441

Dci 2000
to

While

many

Delaware

cases

recognize the propriety of disgorgement as an alternative

compensatory

damages e.g
lack

Thorpe

CERBCO Inc

676 A.2d

436445

JeI

1996 ordering disgorgethent

despite

of harm to the corporation

on the ground

that

fiduciary

not profit personally

from his

conduct
iii

not one

of those

cases

suggests

the availability

of

monetary

remedy

that

is

punitive

nature

i.e

that

is

that

goes beyond

the twin

goals

of disgorgernent

and

compensation

of loss

recent.Chancery

Court decision

Cantor Fitzgerald

LP

.v

Cantor 2001WL
award

536911

at

eL

Ch May

.11

2001

iUusates

the

Delaware

courts

unwiffingness

to

punitive

damages even
breaches

for serious

breaches

of duty.

There

the court

repeatedly

characterized

the

defendants

of

their

duty

of loyalty as egregious

kL

at

13

In

addition

with the

defendants

conduct

having harmed

plaintiff

in

several

identifiable

but inherently

unmeasurable

ways

the court

found

that

even

an

award-of compensatory

damages-will

not

make

the

plaintiff

completely

whole

Id

at

Nonetheless

the court

declined

to

award

damages

beyond

the

amount

of plaintiffs

attorneys

fees

and

expenses

observing that any

greater

award

could

fairly

bn deemed

tantamount

to

awarding

punitive

damages

Jd

see also

Id noting

the

peril

of.over-harshly

punishing

the

defendants

Under

Delaware

law

therefore

only two kinds of remedies are potentially

available

in

suit

against

Crowley

and Feinberg

court

might order disgorgement

of an

appropriate

portion

of

Crowleys

compensation

or more

precisely

reduction

of the

approximately

$13.4

million

owed under

his

employment

agreement

In

addition Crowley

and

Feinberg might be held

liable

for

Coranis

actual

damages which

appear

to

be limited

to

the

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losses

related

to the

Debtorsiæabllity

toobtain conThinationofthPIan

ofRbraiiization

These

losses

fall

into

two categoriei

The

non-disclosure

of Crowleys conflict

of interest has caused or will

cause Corm

to

have

to

pay

approximately

$5 million to $6 millioi nore in fees and

expenses

to

bankruptcy professional than

it

otherwise

would

have

paid The bulk of
have been

these

additional

fees

and

expenses

about.$4

million

to

$5 million

are

those

that

incurred

since

the

December 21 2000

conclusion

of the confirmation hearing

by

the various

counseF and financial

advisors

to the

Debtors and

the

two

official

omniittee

as well

as

by Goldin and

its

counsel as

result

of the inability

to

conclude

thebankruptcy

In

addition the non-disclosure

of Crowleys

conflict

of interest

caused the December 2000 confu-mation

hearing

and related

discovery

to

be

significantly

more

protracted

and

costly

than would

otherwise

have

been

the

case and will cause

Coram

to.have

to

bear the expense

of

second

confirmation

hearing

later

this

year

While

any

estimate

of the

magnitude

of thes additional

expenses

the

incremental

cost

of the December

2000

hearing

and

the

total

cost

of the

futi

re confirmation

hearing

is

necessarily

imprecise

tioldin

estimates

them to be

at

least

$1 million

independent

of the professional

fees the ppmximate1y ten-month delay

in

concluding

this

bankruptcy will cause Coram business

losses

with an estimated

present

value

of between

$7 million and $9

million Assuming that an earlier emergence

from chapter

11

would

have

resulted

in

an earlier realization

ofi

higher revenues

and

ii correspondingly
of Coranfs
plan

higher

EI31TDA

Goldin estimates

that the

ten-month delay

in confirmation

of

reorganization

will

cause

the

companys

EB1TDA

in

the years

2001

through 2004

to

be

approximately $4 million to $5 million lower

in

the

aggregate

than

it

would

have

been

had the

Plan beencontirmed

last

December

Using

the discounted

cash flow assumptions discussed

in

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Section

1Vabove including an

18.1.%

discount

rate

and

7.01

exit

multiplier the effect

is

to

reduce

Comms

entexpiise

valie

by approximately $8
of the estimated

million.-

Changes

in the

assumptions ueci

oiild of course change

the

amount

lQss.

Cerberus

Goldin believes

that the three claims

the

Equity Committee

asserts

against

Cer1ems

are unlikely

toprevaiL

As

discussed

in

Section

V.A.1 above

thevidence.suggests

that

Feinberg didnot

intend

for or expect

Crowley to disregard

his

fiduciry

duties

to

Comm
is

Because

of the

apparentJack

of wrongful intent on Feinbprgs

part the quity Committee

unlikely

to

be able to prove that Crowley was acting

at

Coram

as

Cerberus

agent Count

Ii or

that

Cerberus knowingly induced

Crowley

to

breach

his fiduciary

duties

Count

Dl

or that

Cerberus exercised

defacto

control

over Corams

affairs

Count V.32

The Equity The

Committees Obtections
Committee

to

Confirmation

Equity

objected

to confirmation

of the Debtors

Plan

Reorganization

or three principal grounds

the

Plan did not satisfy the fair and

equitable

requirement

of Bankruptcy

Code

1129b

because the value of the distributions

to

be made to

the Noteholders

supposedly cxceeded.the

amount

of

their

claims

ii the
and

Plan did not

satisfy

the

requirement

of Code

1129a3

that

it

be proposed

in

good

faith

not

by means forbidden

It is

possible

that

Cerbemus might be held

liable

for

Feinbergs
has

breaches

of fiduciary

duty

on an

alternative
is liable

ground which
as principal his capacity

the

Equity Committee

not yet asserted
its

i.e that. on

Cerbenis Coranis

for the breaches as agent as for

of Feinberg which

agent

Feinberg sserved
the

board

in

Cerberus

along

with

two ptherT

Noteholders Nonetheless would
apply

designated the limits to claims

him

board

representative

pursuant to the loan documents Delaware

on recoverable
against

damages

under

law

discussed

above

Cerberus as much

as to those

against

Feinberg

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by

law

and

iii Cerberus claim which

the

Plan presumed

iobe valid

shotiid.be

recharacterized

as

equity

We

address

these

objections

in turn

below

The Fair and Euliable Rewiirement
As
discussed in Section

IV above we

believe

the

EquityCominittees

first

objection

to the

Plan was unfounded

at

the

ti.me.of

the confrnnation

hewing and
value

is

still

unfounded

Goldins

valuation

indicates

that

far

from having an enterprise

in

excess

of

its

approximately

$290.million

of debt

at the time of the coninatioxr

hearing Corarns enterprise
$240.million

value was

approximately$198

million

in.tecember20O

andis

approximately

today

The

Good

Faith Requirement
before
it

Given

the record

at

the confim3atlon

heanng

the

Bankruptcy

Court was

unable to find that the Debtors had

proposed

the PJan.in

good

faith.as required

by Bankruptcy

Code
between

1129a3 Dec

21

2000

Tr

at

87 The
to an

Court found

that the contractual

relationship

Cerberus and Crowley gave

rise

actual

conflict

of interest1 on Crowleys part

which

tainted the debtors restructuring

of

its

debt the debtors

negotiations

towards

plan

even

the

debtors restructuring

of

its

operations

14
be

at

88-89

As

result

the

Court

concluded

it

was

impossible

to

know

whether

we

would

in

the

same

boat

today

or

whether

The

Equity Committee

also

objected

to the

Plans releases

of direct shareholder

claims
as the

against matter

Crowley Feinberg and others contending that these releases are improper of law The objection is well-founded Under the standards articulated by
in

Third Circuit
releases

In

reContinentalAirlines
claims

203

F.3d 203

3d

Cir 2000 nn-consensual
.of

of

direct

shareholder the

are clearly

impermissible in the circumstances
estates are

thiscase
permissible

By

contrast

Plans releases of claims held by the Debtors amendments

provided

thePlan

recommended

in Section

above

are

implemented

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differentplan

wonidhave

beenproposed

by

the

debtor

had

mwley

not sufferedfroman

undisclosed

conflict

of interest

Id

at

The

central

focus

ofGoldins

investigation

has been

to address

the question

raised

by

the

Couit

whether

absent

Crowleys

undisclosed

conflict

of interest

Corain would be

In

the

same

boat

today or instead would be

in

financial

position

strong

enough

to

entitle

its

equity

holders

to share

in distributions

under

its

Plan of Reorganization.

the

Court observed

that question

is

inherently

speculative

and can

never be answered

with certthrty

Nonetheless

3oldins

investigation

which

has included

extensive.review

ofCoramsflnancil

records

and

other

documents

interviews

of more than

35 present

arid

former representatives

of Coram and

its

creditors

and comprehensive

financial

analysis

has

unearthed no evidence

that.Corams

financial

position

would

be materially

stronger

today had

the

Crowley

conflict

been

disclosed

at

the outset

No
more
effective

evidence

suggests

that

timely

disclosure

of the conflict

Would

have

resulted

in

management of Corams operations
alone

in

improved

financial

performance

or in the

identification

let

consummation

of

possible

merger
there

sale

or financing

transaction

that

might have

enabled

Corairi toiivoid

bankruptcy

Nor

is

any evidence

that

Corams

financial

records or

its

accounting

or financial

management systems have Been
that

malevolently

manipulated

in

any

way much
and has

less

in

way

that

might

alter

the conclusion

the enterprise

value

of

Coram

is

now

at

all

pertinent

times

been

substantially

below

the

amount

of

its

debt

Goldin believes

that

at

confirmation

hearing

on.an

amended Plan of

Reorganization

particularly

one

that

incorporates

settlement

along

the

lines

discussed

in

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Section

II

above thCourt At

will

be

in

position

to find that

the

amendePlan

hasbeen

proposed

in

good

faith

the

initial

confirmation

hearing

the record

on good

faith

was

deficient

impart

because evidence

of Crowleys cohflict of interest badsurfaced

only weeks before

leaving

the

partis and

the

Court with only

limited

ability

to investigate

and

determine what

effect

if

any

the conflict

bad

had

on Corains

management

l3ased

on

its

extensive

investigation

Goldin

believes

that

the

Court can

have

confidence that the possibility of mismanagement

has

been

probed

adequately

InGoldins

view

Therefore

the

Courtcau

fairly

conclude

that the

lebtors

amended

Plan

satisfies

the

gOod faith requirement of Code

11

29a3

Given

the

Debtors

undeniable need

to restructure

their debts

in order

to

satisfy

the

requirements of Stark

1Vf

there

is

little

question

that

the Plan

will

fairly

achieve

result consistent

with the objectives

and

purposes

of the Bankruptcy

Code

In

reMadison Hotel Associates 749

P.2d

410

425

7th Cir 1999

1984

see

also e.g In re Zenith

Electronics

Corp

241

B.R 92
it

108

Bankr

DeL

Wairath

plan

satisfied

the

good

faith

requirement where

was

proposed with

the

legitimate

purpose

of restructuring

debtors

finances

to

permit itto reorganize

successfully

The

Validity

of Cerberus

Claim

The Plan

is

predicated

on the assumption that the claims of Cerberus and

the other

Noteholders are valid

Compare Plan

2.13

defining Allowed

Comm

Note

Claims

to

mean

the Coram Note Claims Claim mean

with

Plan

2.11

defining Allowed

Corani General Unsecured

to

Coram General Unsecured

Claim

to the extent

it

is

or

has become

an

Allowed

Claim

Consequently

were Cerberus

claim disallowed

or

subordinated

in

whole

or

in

part and

were the Plan not amended

to

modify

Cerberus

treatment

accordingly

the

lair and

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equitableruireineæt

of Code

1.129h
129.04

would

not bb

satisfied.-

See generally

liwrence

King

-Collier

on Bankruptcy

fair and equitable
allowed amountotits

standard

requires

that

no

creditor

be paid

premiuin ever

the

claim 1-th

.ed

rev 1997

The Bqnity Committee
claim should

contends

that

Cerberus

is

uilty ofinequitable

conduct

and

that

its

therefore

be recharacterized

as

equity

Objections

to-Confirmation

dated November

21 2000
is

at

37

quoting

Zenith

Elecfi

onics 241

B.R
debt

at

107

This assertion

is

unfounded

There

no legal basis for recharacterizing

Cerberus

as equity.34

Noi does

ny

basis

exist for

equitable disallowance

of Cerberus claim the doctrine

the

Equitr Committee

appears

to intend

to

invoke

Even were Cerberus

to

be held responsible

for

Feinbergs

breach

of

duty

and

it

Is

uncertain

whether

such aresult would

be warranted

the

maximum
necessary

appropriate

remedy

would

be

reduction

of the amount

of

Cerberus

claim to the extent

to

compensate

creditors for the

damages

caused by the non-disclosure

ofCrowleys

conflict

of

interest

Prior to

the

enactment

of the Bankruptcy

Code

the

wet of bankruptcy
would

courts

to

equitably disallow

claim in appropriate

circumstances

when

subordination

not

be

The
here

doctrine

of-rechhracterization

of debt

as equity

rests

not

on facts

of the

sort

alleged

misconduct

by

creditor--

but instead on facts
than to

indicating

that loan

the debt

ab

initio

was and

more akin to an equity
character

contributior contribution

debt

Where

has the substance as equity

of an equity

the court

may

recharacterize

the debt

regardless

of whether

the requirements

of equitable

subordination

have
111

been

satisfied

In re Kids Creek Partners primary
factor
this

LP
is

200

BR

996

1019

Bankr
or In Joan re

ND
is

1996
by
the transaction

Court
result

to consider

when

evaluating

whether

funds advanced

shareholder

are the

of an equity

contribution

whether

bearthe

earmarks

of an arms length

negotiation
citing
in fact

Cold HarborAssocs

LP

204

13.R 904 915
has not alleged
that

Bankr E.D Va 1997
that

Pepper an equity

Litton

The Equity Committee
ab initlo or even of the debt

.Cerberus
in

debt

was

contribution
in

Cerbenis

engaged

collusive

or inequitable

behavior

the acquisition

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sufficient

equitable

mmedy
the

was

well

established

See Pepper

Luion 308

US

295

1939
claim ofa

Douglas

J. affirming who
bad

barilcruptey-

courts

powr

to subordinate

or disallow

the

fiducidry

conimitted

gross

misconduct

in connection-with.The

acquisidon of the claim

The language

of Bankruptcy

Code

510c
is silent

which

expressly codifies

ihe Banlciptcy

Courts

equitable

subordination

power but

as to

disallowance

could be read

to

suggest that

Couress

intended

tonuJIif

the

courts

equitable

disallowance

power

However

the legislative

Instory

makes

clear

that

Congress

intended

no such

result

This-section

iS.intØnded

to

cddfy.case1aw such
and
is

as

Pepper

Litton 308 courts
court

U.S
in

295

1939
Nor does

not

intended to limit the
court will

power

anyway
from

The bankruptcy
this

remain

of equity

subsection disallowing.a

precludea claim in

bankruptcy court
appropriate

completely

circumstances

See Pepper 359

Litton supra

Rep

No

95-59595th

Cong

1st

Sess

1977

Since The Codes enactment

few
not

if

any

courts

have

had

occasion

to

apply the

doctrine

of equitable

disallowance

perhaps

surprisingly

given

that

complete

subordination

of

claim has the same effect

as

disallowance

except in cases

where

the debtor

is

solvent

Nonetheless

the courts

that

have

addressed

the issue

in dicta

have

overwhelmingly

recognized

the continuing

viability

of the equitable

disallowance

doctrine

See e.g

HBE

Leasing

Frank

48 F.3d 623 634

2d

Cir

1995 Koch

Refining

Farmers Union

Cent Exch
176

831

F.2d 1339

1350-51

7th Cir 1987 Murgilo
Outdoor

CaL

State

Sd

of Equalization

BR

524
Ohio

531

9th

Cir.

BAP 1995
In re

In

re

Sports

Headquariers

168

B.R 382

177

Bankr S.D
13

1994

but see

Foundation for

New

Era Philanthropy

201

BR

Bankr E.D Pa 1996
of

questioning

the availability

of equitable

disallowance

after

enactment

Code

510o

The

Third Circuit

has

noted

but not decided

this

issue See

Citicorp

Venture Capital Lid

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Committe of creditors

160

R3d 982 991n7 3dcir 1998
law
bankruptcy court

The

rationªleofPepperwould

suggest

that

under pre-Code

was

authorized

to disallw

portion

of

th

fiduciarys

claim-when

that

iould prbduce

an equitable

result

We

find

it

itnneessary

here to...

resolv

the issue

as to

whether

equitable

disallowance

remains an available

remedy

Because

equitable

disallowance

rests

on the same principles

as equitable

subordination

see

Pepper

Litwn 308 U.s

at

30642

the

two

doctrines

are subject

to the

same

equitable

limitations

The Third

Circuit

recently

delineated

those

limitations

in Citicorp

Venture

Capital

There

the

bankruptcy court

equitably

subordinted

debt

claims that

CVC

fiduciary

of the debtor

had secretly

purchased

at

discount

in

an

attempt

to gain

control

of the debtor

The

Court.of

Appeals

held

that

it

was

appropriate

to equitably

subordinate

CVCs

claims

to the

extent

of depriving

CVC of

any profit on

its

purch

ses but that subordination

beyond

that extent

would

only be

appropriate

if

the

relief

was

proportional

to the injuries suffered

by

those

who

would

benefit

WJe

do not suggest

that

bankruptcy court

can

never impose

subordination putting benefit

remedy
price

beyond
tag

disgorgement of profit without by those

specific

on the loss suffered Such
that
is

who
not

will

from the subordination

quantification the

may

always be feasible

and where

case

it

should not

redoundto the benefit should harm
it

of the wrongdoer
to

bankruptcy court and
will extent of the

however
intends
to

attempt

identify
in

the nature
that

judgment

compensate tobe made regarding
that

manner

permit of the remedy

the pioportionality

to the injury

has been

suffered

by

those

who

will benefit

from

the subordination

160F.3dat991

In the present

case Cerberus has reaped

no improper

gains

by virtue of Feinbergs

alleged

misconduct

Disgorgement

therefore

is

not

proper remedy

At most equitable

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subordination

farrantdwhichis

questiOnable35-.wbuldbe

appropriate

toaliniited

extent

proportional

to thelosses

Coram has

suffered

as

result

of the nondisclosure

of Crowleys

conflict

9finteresl lJnder

the controlling

CiticorpYentureCapital

decision

no greater.remedy be permitted

and certainly not the drasticremedy

of disallowing

Cerbtus

claim

would

It

is

uncertain

whether purposes
it

Cerberus will be found
It

to

be an insider for equitable
that lender will not

subordination insider unless 161
rights at

is

widely recognized complete
coEtrol

be treated

as

an

exerts

B.R 107
under
its

118

ED

virtually

over the borrower lenders
to

See In re Paolella of contractual See Id

Pa 1993
is

collecting not

cases
sufficient

exercise

loan

documents

by

itself

confer insider status
court

120

Our attention
the claims while

has not been of

called

to

any case

wherein
to the

has equitably
loan

subordinated

non-insider

who adhered

terms of

agreement.
insider

Moreover
Bankruptcy
status

Feinberg himself was an insider by virtue of his board

seat see
confer

Code

1013lBi
as well as

that

fact

alone

maybe

insufficient

to

on Cerberus given that over
record

90%
in

of the financial

interests in.Cerberus

Partners
in

L.P the
the

owner
is

the other unaffihiated

Cerberus funds that hold participations with Feinberg

Coram debt

held

by

investors

Were Cerberus
warranted tantamount

not

deemed
it

to

be an insider
to

equitable in

subordination or

of

its

claim would

be

only were
to

found

have

eiigaged

gross
In rº

egregious misconduct
at

fraud overreaching or spoliation here

Paolela 161 B.R

122

conduct

clearly not present

-121KL22lUm.7

A869

Case 1:04-cv-01565-SLR

Document 125-11

Filed 04/17/2007

Page 30 of 30

...

The above

constitutes

the

Updated

Report of the Thdependentiestructuring

Advisor

The

attached

Exhibits

are incorjiorated

herein

and.sliould

be treated

as part

of

the

Updated

Report.

Dated

New York New
September

York

2001

.IsI
Harrison Goldin

GOLDIN ASSOCIATES
767
Fifth

L.L.C

Avenue
10153

New York New York
c212 593-2255

Of counsel

KRA1ERLEV1N
/5/

NAFIALIS

FRANKEL LLP

By

Kenneth

Eckstein

Philip Bentley

Marjorie Sheldon 919 Third Avenue 10022

New York New York
212715-9100

-122122IDU731

A870