United States District Court, D. New Jersey
August 9, 2005.
In re: LISANTI FOODS, INC., et al. Debtors. JOSEPH M. LISANTI, JR., et al., Appellants,
JAY LUBETKIN, Chapter 11 Trustee of Lisanti Foods, Inc., et al., and THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF LISANTI FOODS, INC., et al. Appellees.
The opinion of the court was delivered by: JOHN LIFLAND, Senior District Judge
MEMORANDUM AND ORDER
Appellants Joseph M. Lisanti, Jr., Rosemarie Lisanti, Lisanti
Realty of Arizona, Inc., Lisanti Realty Corp., Lisanti
Enterprises, LLC, Texas Trucking Corp., JL Trucking, LLC, New
Jersey Trucking Corp., and Arizona Freight Haulers, Inc.
(collectively, the "Non-Debtor Entities") appeal from the May 17,
2004 Order Confirming Second Amended Joint Plan of Liquidation
(the "Plan") entered by the Honorable Novalyn Winfield, U.S.B.J. This appeal
disputes certain evidentiary determinations of the bankruptcy
judge as well as the legal sufficiency of the Plan under the
applicable provisions of the Bankruptcy Code ("Code"). For the
reasons set forth below, the Order of the Bankruptcy Court will
A. Procedural History and General Facts
This appeal arises in connection with the Debtors' Chapter 11
liquidation proceeding pending in the Bankruptcy Court. Debtors
filed voluntary petitions for relief under Chapter 11 of the Code
on November 20, 2002. These cases were subsequently consolidated
for joint administration. On November 29, 2002, the United States
Trustee for the District of New Jersey ("Trustee") appointed an
Official Committee of Unsecured Creditors pursuant to §§ 1102(a)
and (b) of the Bankruptcy Code.
The Debtors were wholesale distributors of Italian specialty
foods and food-related products to, among others, food retailers
and restaurants. The Non-Debtor Entities operated the
distribution centers and delivered the specialty foods and
related products to the Debtors' customers.
Joseph M. Lisanti, Jr. is the former President of Lisanti
Foods, Inc. Mr. Lisanti and his sister, Rosemarie Lisanti
("Lisantis"), are the sole officers, shareholders, and/or members of each of the Non-Debtor Entities.
Lisanti Realty of Arizona, Inc., Lisanti Realty Corp., and
Lisanti Enterprises, LLC, own or had owned certain warehouse
facilities and offices located in Arizona, Texas, and Totowa, New
By Order dated January 21, 2003, the Bankruptcy Court, inter
alia, (1) approved the sale of substantially all of the assets
of Lisanti Foods, Inc. to Ferraro Foods, Inc. and further
approved the auction sale of any remaining assets of Lisanti
Foods, Inc. in Totowa, and (2) approved the sale at auction of
all of the remaining assets of Lisanti Foods of Arizona, Inc. and
Lisanti Foods of Texas, Inc. to the highest bidder. On January
30, 2003, upon the Trustee's motion, Jay L. Lubetkin was
appointed as Chapter 11 Trustee with regard to the liquidation
and distribution of the Debtors' consolidated estate.
B. Second Amended Joint Plan of Liquidation
The Official Committee of Unsecured Creditors and the
Chapter 11 Trustee filed the Plan and related Disclosure Statement in the
Bankruptcy Court on October 14, 2003. On December 17 and 18,
2003, Judge Winfield heard argument on whether the proposed Plan
satisfied the requirements of the Code. On April 13, 2004, the
Bankruptcy Court conducted further hearings on confirmation of
the Plan, during which it detailed reasons for finding that the
Plan should be confirmed. This decision was memorialized in the May 17, 2004
Order appealed from in the present matter.
Bankruptcy Court Order Confirming the Plan
This Court has reviewed Judge Winfield's April 13, 2004 oral
decision confirming the Plan. It is evident from the transcript
that the bankruptcy court considered Appellants' objections to
confirmation. The Bankruptcy Court acknowledged that the burden
is on the plan proponents to prove that all the applicable
provisions of 11 U.S.C. § 1129 have been satisfied. (Appendix to
Brief of Appellees, Exh. 1, at 4 ll. 5-10) (citing In re Greate
Bay Hotel & Casino, Inc., 251 B.R. 213 (D.N.J. 2000)). In
reaching her decision, Judge Winfield relied on the testimony of
the Chapter 11 Trustee, accountant Bernard Katz (who testified as
to how consolidation of the estates would inure to the economic
benefit of creditors), and the documentary evidence. (Appellees'
Appx, Exh. 1, at 4 ll. 111-5).
STANDARD OF REVIEW
The standard of review to be applied by a district court
reviewing a ruling of a Bankruptcy Judge is determined by the
nature of the issues presented on appeal. Legal conclusions of
the Bankruptcy Court are subject to de novo or plenary review.
Donaldson v. Bernstein, 104 F.3d 547, 551 (3d Cir. 1997);
Chemetron Corp. v. Jones, 72 F.3d 341, 345 (3d Cir. 1995); In re
Carretta, 220 B.R. 203, 210 (D.N.J. 1998). However, the factual
determinations of the bankruptcy court are not to be set aside
unless "clearly erroneous." Fed.R.Bankr.P. 8013 (stating
that "[f]indings of fact, whether based on oral or documentary
evidence, shall not be set aside unless clearly erroneous");
Chemetron Corp., 72 F.3d at 345; In re Indian Plans Assocs.,
Ltd., 61 F.3d 197, 203 (3d Cir. 1995). This standard requires
the district court to "give due regard to the opportunity of that
court to judge, first-hand, the credibility of the witnesses."
Fellheimer, Eichen, & Braverman, P.C. v. Charter Techs., Inc.,
57 F.3d 1215, 1223 (3d Cir. 1995); Fed.R.Bankr.P. 8013.
Where a matter presents mixed questions of law and fact, the
reviewing court will apply the relevant standard to each
component of the issue. Chemetron, 72 F.3d at 345.
The Bankruptcy Court's exercise of discretion is reviewed "for
abuse thereof." In re Prof'l Ins. Mgmt., 285 F.3d 268, 283-84
(3d Cir. 2002); In re Trans World Airlines, Inc., 145 F.3d 124,
132 (3d Cir. 1998).
Appellants present the following issues in this appeal:
1. Whether the Bankruptcy Court erred in admitting into
evidence documents and testimony of Appellees' expert witness in
connection with the proposed confirmation of Appellees' Second
Amended Joint Plan of Liquidation. 2. Whether confirmation of the Plan was in error because of
defects in the solicitation of ballots for acceptance or
rejection of the Plan and further defects in the computation and
certification of the ballots received.
3. Whether Plan confirmation was in error because the Plan did
not meet the prerequisites for substantive consolidation of the
Debtors. Alternatively, whether the Plan provides adequate means
for its implementation through substantive consolidation.
4. Whether confirmation of the Plan was in error because the
Disclosure Statement contained inadequate information.
5. Whether confirmation of the Plan was in error because
Appellees failed to comply with the required elements for plan
confirmation found in 11 U.S.C. § 1129(a).
6. Whether confirmation of the Plan was in error because the
Plan failed to provide for payment of all administrative claims
on the Effective Date.
7. Whether confirmation of the Plan was in error because the
Plan vested the liquidating trustee and the oversight committee
with broad powers not subject to the supervision of the
I. Overview of 11 U.S.C. § 1129
According to a leading bankruptcy treatise:
Confirmation of a plan of reorganization is the
statutory goal of every chapter 11 case. Section 1129
of the Bankruptcy Code provides the requirements for
such confirmation, containing Congress's minimum
requirements for allowing an entity to discharge its
unpaid debts and continue its operations. [Section
1129(a)] contains thirteen paragraphs, each of which
contains a separate requirement that must be met in
order to confirm the plan.
COLLIER ON BANKRUPTCY ¶ 1129.01. Therefore, the Code's statutory framework governs the
Bankruptcy Court's decision to confirm a plan. In some places, §
1129 provides its own substantive requirements while in other
places § 1129 more generally requires plan compliance "with the
applicable provisions of [title 11]." Consequently, review of a
proposed plan for compliance requires consideration of both §
1129 and other relevant sections of the Code. The following
review of the Bankruptcy Court's Order distinguishes between
Appellants' objections based on purported non-compliance with §
1129 and objections based on non-compliance with other applicable
title 11 provisions.
A. Substantive Consolidation: Background and Prerequisites
Substantive consolidation results in the pooling of the assets
of, and claims against, two or more entities, thereby satisfying
liabilities from the resultant common fund, eliminating duplicate
claims, and combining the creditors of the two entities for
purposes of voting on reorganization plans. In re Morfesis,
270 B.R. 28, 31 (D.N.J. 2001). The power to order substantive
consolidation of bankruptcy estates is within the Bankruptcy
Court's equitable powers under § 105 of the Code. See Fed.
Deposit Ins. Corp. v. Colonial Realty Co., 966 F.2d 57, 59 (2d
Cir. 1992); see also In re Stone & Webster, Inc.,
286 B.R. 532, 539 (D. Del. 2002); 2 COLLIER ON BANKRUPTCY ¶ 105.09
("the authority of a bankruptcy court to order substantive consolidation derives from its general
discretionary equitable powers."). "As an equitable remedy,
substantive consolidation is to be used to afford creditors
equitable treatment and thus may be ordered when the benefits to
creditors exceed the harm suffered." In re Worldcom Inc., No.
021-3533, 2003 WL 23861928, at *35 (Bankr. S.D.N.Y. Oct. 31,
2003) (citing In re Augie/Restivo Baking Co., Ltd.,
860 F.2d 515, 518-19 (2d Cir. 1988)).
The party requesting substantive consolidation must show: (1) a
substantial identity between the entities to be consolidated; (2)
that consolidation is necessary to avoid harm or to achieve some
benefit; and (3) in the event that the creditor shows harm, that
the benefits of consolidation "heavily" outweigh the harm. In re
Morfesis, 270 B.R. at 31 (citing In re Auto-Train Corp.,
810 F.2d 270, 276 (D.C. Cir. 1987)).
With respect to whether the Bankruptcy Court properly
considered these factors, there is ample evidence in the record
to uphold the Bankruptcy Court.
Judge Winfield found that the proponents had proved a
substantial identity between the parties to be consolidated,
based on the testimony of the Trustee and Mr. Katz. As the court
summarized the Trustee's testimony:
Mr. Lubetkin testified that without contradiction
that all three debtors have the same officers, same
directors and shareholders. They conducted the same general business operations under
very similar names. His review of inter-company
transactions revealed that inter-company dealings
were done without the usual corporate formalities . . .
no promissory notes were prepared, and no corporate
resolutions reflected either the borrowing or the
(Id., at 15 ll. 8-17.).
In further support of the identity of interest among the three
debtors, Mr. Katz testified, for example, that the debtors did
not charge each other for services rendered and all accounts
receivable were billed from the New Jersey debtor's facility.
(Id., ll. 18-21.). After reviewing further testimony from the
Trustee and Mr. Katz, the court found that "members of the
Creditors' Committee and other vendors . . . viewed the debtors
as a single entity when extending credit terms." (Id., at
16-17.). The Bankruptcy Court therefore concluded that the
proponents had established that the debtors all shared a
substantial identity of interest.*fn1
Next, the court determined that the testimony of the Trustee
and Mr. Katz demonstrated that consolidation benefits creditors.
Appellants contend that the "only potential benefit" advanced by
Appellees was the elimination of determining professional fees on a case-by-case basis. (Appellants' Br., at
21.). While Judge Winfield only quoted from the Trustee's
testimony as it related to allocation of professional fees, it is
clear that the proponents presented other persuasive testimony as
well. For example, the Bankruptcy Court detailed the difficulties
attendant upon administering the three estates separately:
Lubetkin and Katz testified that the consolidation
benefits rather than harms the creditors. In large
measure their testimony centered on the cost to
administer three separate estates and on the
difficulty and expense in separating the financial
affairs of the three entities . . . Lubetkin
testified that the allocation of liabilities and
expenses would have to be done on both a
post-petition and a pre-petition basis, and some of
the determinations of how to allocate would be
difficult . . . [i]t seems to me it would be
appropriate to allocate the general accounting,
accounts payable, accounts receivable, cash
management operations of the debtor that was located
in New Jersey but performed services for all three
debtors among all three debtors, and then with regard
to the adversary proceeding there are certainly
claims and causes of action in that proceeding,
recoveries upon which would be very, very difficult
(Appellees' Appx, Exh. 1, at 17 ll. 4-25.).
Additionally, the Trustee's affidavit listed as benefits of
substantive consolidation the elimination of inter-company debts,
allowing creditors to share pro rata in the assets of the
consolidated debtors once claims are pooled against a single
entity, and the appointment of only one Liquidating Trustee
administering the consolidated estate. With respect to the pro rata share in the consolidated estate,
Appellants maintain their objection that under consolidation the
creditors of Lisanti Foods, Inc. will receive a diluted recovery.
Because all the assets of the debtor entities are pooled, the
assets of one debtor may be used to pay the creditors of another
debtor. In this regard Appellants argue that consolidation
clearly harms, not benefits, them because they are creditors of a
solvent debtor. The Bankruptcy Court acknowledged the theoretical
merit of Appellants' position, but found that practically it does
not prevent consolidation in this case. The court found that
Lisanti Foods, Inc.'s (the debtor entity of which Appellants are
creditors) market value was significantly less than the total
assets listed on its schedules, a fact suggesting that
Appellants' anticipated recovery on a consolidated basis would
not necessarily be less than on a separate estate-by-estate
basis. Therefore, the Court rejected a factual underpinning to
Appellants' assertions that they would be harmed by the
consolidation. That rejection was not clearly erroneous.
The Bankruptcy Court did not abuse its discretion when it found
that the proponents demonstrated the prerequisites for
substantive consolidation. II. Objections Under § 1129
1. "Best Interests"
Appellants argue that the Bankruptcy Court erred in finding
that the Plan satisfied the "best interests" test of §
1129(a)(7). Appellants note that substantive consolidation would
not be possible in a Chapter 7 liquidation, and thus "all of the
value of Lisanti Foods, Inc. estate would inure to the benefit of
holders of Allowed Claims against that entity." (Appellants' Br.,
at 15-16.). As dissenting claimants, Appellants contend that they
were entitled to proof that they would not receive less under the
Plan on the Effective Date than they would in a Chapter 7
liquidation. Furthermore, Appellants argue that the lack of a
definite effective date in the Plan made it impossible for the
Bankruptcy Court to determine what value claim holders would
Appellees respond that the best interests analysis must take
into account the costs of a Chapter 7 liquidation. Appellees
refer to the testimony of the Chapter 11 Trustee concerning the
increased value for claim holders under Chapter 11 because of
less delay and administrative expenses. The Bankruptcy Court
agreed and observed that the Plan called for liquidation on the
model of Chapter 7, but without the cost and delay. Under 11 U.S.C. § 1129(a)(7), the court shall confirm a plan
With respect to each impaired class of claims or
interests (A) each holder of a claim or interest of
such class (i) has accepted the plan; or (ii) will
receive or retain under the plan on account of such
claim or interest property of a value, as of the
effective date of the plan, that is not less than the
amount that such holder would so receive or retain if
the debtor were liquidated under chapter 7 of this
title on such date.
"The `best interests' test applies to individual creditors
holding impaired claims, even if the class as a whole votes to
accept the plan." Bank of America Nat. Trust & Sav. Ass'n v. 203
North LaSalle St. Partnership, 526 U.S. 434
, 442 n. 13 (1999).
It is the plan proponent's burden to prove that the plan complies
with section 1129(a)(7). In re MCorp Financial,
Inc.,137 B.R. 219, 228 (S.D. Tex. 1992). That burden is met by showing that
creditors will receive at least as much under the Plan as they
would receive in a liquidation of the Debtors' assets under
chapter 7. In re Resorts Int'l, Inc., 145 B.R. 412, 477-78
(D.N.J. 1990). In making such a showing, the liquidation value of
the debtor's assets is controlling. See id. Moreover, the
costs of a chapter 7 case must also be taken into account. In re
American Family Enterprises, 256 B.R. 377, 403 (D.N.J. 2000)
(citing In re Montgomery Court Apartments,141 B.R. 324 (Bankr.
S.D. Ohio 1992)).
The application of the best interests test involves a
hypothetical application of chapter 7 to a chapter 11 plan. In re Stone & Webster, Inc.,
286 B.R. 532, 544 (D. Del. 2002). "A liquidation and distribution
analysis is performed to see whether each holder of a claim or
interest in each impaired class, as such classes are defined in
the subject plan, receive not less than the holders would receive
in a `hypothetical Chapter 7 distribution' to those classes."
Id. at 544-45 (citing 7 COLLIER ON BANKRUPTCY ¶ 1129.03[b]).
Here, the Bankruptcy Court found the Plan to be substantively
indistinguishable from a Chapter 7 liquidation in terms of
distribution. Judge Winfield explained:
[T]his is a liquidating plan which provides for
payment of claims in accordance with the distributive
provisions of Chapter 7 in essence. In this Court's
view this liquidating plan is in effect a Chapter 7
liquidation without the attendant costs and delay of
conversion. Accordingly, I find 1129(a)(7) is met.
(Appellees' Appx., Exh. 1, at 25.).
There is clear support for this conclusion in both the
testimony presented and the Disclosure Statement. The Bankruptcy
Court accepted the Trustee's testimony that "general unsecured
creditors will receive substantially more and those sums
substantially more quickly than they will if the cases are
converted to a Chapter 7 proceeding." (Id., Exh. 2, at 62.).
The Trustee further opined: [T]here's a very significant benefit to the creditors
of the bankruptcy estates from substantive
consolidation and among the significant benefits are
avoiding what would be extremely high professional
fee costs and extremely long delays associated with
trying to administer the estates on a separate basis.
It requires allocating assets among the three
separate estates, allocating liabilities among the
three separate estates and that process needs to be
done not only on a post-petition basis, but on a
pre-petition basis. And for some assets and some
liabilities it's relatively easy to allocate, but for
others it's virtually impossible without making
subjective determinations and to me the consequences
of those subjective determinations to creditors are
necessarily unfair. By way of example . . . [i]t
seems to me it would be appropriate to allocate the
general accounting, accounts payable, accounts
receivable, cash management operations of the Debtor
that was located in New Jersey but performed services
for all three Debtors amongst all three Debtors, and
then with regard to the adversary proceeding, there
are certainly claims and causes of action in that
proceeding, recoveries upon which would be very, very
difficult to allocate.
(Id. at 69-70.).
While this does not explicitly speak to whether general
unsecured creditors will receive at least as much as they would
have under Chapter 7, it does document the administrative
expenses that would undoubtedly negatively impact what they would
receive under Chapter 7.
Section VII.A of the Second Amended Disclosure Statement
considered the alternative of chapter 7 liquidation and its
potential effect on claim holders: "The Proponents believe that a
chapter 7 liquidation would result in substantially the same amount of assets liquidated for distribution due to the fact
that the Bankruptcy Court previously found that the purchase
price paid pursuant to the Asset Sales was the highest and
otherwise best offer for the Debtors' inventory assets."
(Appellees' Appx., Exh. 5, VII.A). By contrast, a chapter 7
liquidation "would result in substantial diminution in the value
to be realized by Holders of Allowed Claims because of the
additional administrative expenses. . . ." (Id.). Therefore,
based on the liquidation value of the Debtors' assets, the
proponents contended that chapter 11 liquidation would not
diminish the claim holders' recovery. Rather, it would maintain
the recovery amounts while limiting the related costs. The Court
finds that this satisfied the proponents' burden under
11 U.S.C. § 1129(a)(7).
As to the lack of a definite Effective Date, the Bankruptcy
Court correctly noted (and Appellants acknowledged in their
objections to confirmation) that the Code does not define
"effective date." See COLLIER ON BANKRUPTCY ¶ 1129.06[e], at
1129-171 (The Code does not define "effective date." Rather, the
terms of each confirmed plan will set the effective date. Most
often, the effective date of the plan will be tied to . . . the
satisfaction of conditions contained in the plan. In the absence
of any contrary indications . . . the date the confirmation order
is entered should be the effective date."). The Plan set the effective date as "the first business day that is ten days after
the Confirmation Date." Judge Winfield recognized that "the
effective date of the plan is several months down the road,
because it is not possible at this particular time to know the
timing of the recoveries on the matters that remain to be
liquidated." (Appellees' Appx., Exh. 1, at 28.). However, the
Bankruptcy Court also noted that under the facts of this case,
waiting for recovery on matters not yet liquidated before
confirming the plan would cause the parties to lose the benefits
of substantive consolidation. The Court sees no error in this
2. Payment of Administrative Claims
Appellants argue that the Bankruptcy Court erroneously
confirmed the Plan even though it was aware the administrative
claims would not be paid on the Effective Date, a violation of
11 U.S.C. § 1129(a)(9)(A). Appellees contend first that Appellants
do not have standing under this section to object because they do
not hold an allowed administrative claim under the Plan. Assuming
Appellants have standing, Appellees also argue that the Plan
provides for timely distributions to claim holders.
Unless the holder of a particular claim agrees otherwise,
11 U.S.C. § 1129(a)(9)(A) requires that the holder of an
administrative claim receive payment on the effective date of the plan. As provided in the Plan, the
"effective date" in this case is "the first business day that is
ten (10) days after the Confirmation Date."
In pertinent part, the Plan defines "administrative claim" as
"all Allowed Claims that are entitled to be treated as
Administrative Claims pursuant to a Final Order of the Bankruptcy
Court under § 546(c)(2)(A) of the Bankruptcy Code." The Plan
further defines an "allowed" claim as "any Claim against the
Debtors . . . against which filed Claim no objection to the
allowance thereof has been or will be interposed, or as to any
such objection there has been a Final Order entered or (3) any
Claim which has been allowed by a Final Order of the Bankruptcy
Court." With respect to administrative claims, the Plan provides
that such claims will be paid "on, or as soon as reasonably
practicable after, the latest of: (i) the Initial Distribution
Date (defined as on or before 90 days following the Effective
Date); the date such Administrative Claim becomes an Allowed
Administrative Claim; or (iii) the date such Administrative Claim
becomes payable pursuant to any agreement between the Liquidating
Trustee and the Holder of such Administrative Claim." (Appellees'
Appx., Exh. 4, at 13.). Therefore, Appellants argue, the terms of
the Plan do not provide for payment of administrative claims on
the Effective Date, as required by § 1129(a)(9)(A). Judge Winfield expressly noted that the provisions of the Plan
dealing with payment of administrative claims were "imprecise,"
but nevertheless found compliance with § 1129(a)(9)(A):
I will concede that the date by which administration
claims will be paid is imprecise, but I also point
out that nothing in the Code establishes a particular
or precise time line, and accordingly, that date can
and does often times vary with the facts of a
particular case . . . The reality is, as apparent
from Mr. Lubetkin's testimony, that payment to
administration creditors and indeed the effective
date of the plan is several months down the road,
because it is not possible to at this particular time
know the timing of the recoveries on the matters that
remain to be liquidated . . . [I]f I confirm now, we
get the benefits of the substantive consolidation,
and we continue the oversight of the unsecured
creditors, a constituency that has a great interest
in having the initial distribution date occur sooner
rather than later, so I think there's a safeguard
there. Therefore, I find that the period within which
administrative creditors and indeed even unsecured
creditors will receive payment as sufficiently
(Id., Exh. 1, at 28-29.).
The Court finds no error in Judge Winfield's determination that
the Plan complied with § 1129(a)(9)(A). First, objections to
Appellants' claims are currently pending in the Bankruptcy Court.
Because these claims are not "allowed" as defined by the Plan,
Appellants do not yet have any entitlement to payment of their
administrative claims unless and until the Bankruptcy Court so
orders. Second, as Judge Winfield correctly noted, the timing of
payment on administrative claims may vary with the facts of a given case.
See, e.g., In re PWS Holding Corp., No. 98-212, 1999 WL
33510165, at *6 (Bankr. D. Del. Dec. 30, 1999) (confirmation of
plan providing that "on the later of the Effective Date and the
date such Administrative Expense Claim becomes an Allowed
Administrative Expense Claim, or as soon thereafter as is
practicable, the holder of such Claim will receive on account of
such Claim Cash in an amount equal to the Allowed amount of such
3. Post-Confirmation Expenses
Appellants argue that the Plan fails under
11 U.S.C. § 1129(a)(4) because it did not require Bankruptcy Court approval
for fees and expenses of the Trustee and other necessary
professionals. Relying on a decision from the Northern District
of Texas, Appellees respond that § 1129(a)(4) is applicable only
to pre-confirmation services. The new entity created by
reorganization is therefore not subject to the jurisdiction of
the Bankruptcy Court.
Pursuant to § 1129(a)(4), a Plan should not be confirmed unless
fees and expenses related to the Plan have been approved, or are
subject to the approval, of the Bankruptcy Court. Paragraph 5.13
of the Plan provides that the Liquidating Trust may employ
necessary professionals and compensate them monthly "without further notice, hearing, or approval of the bankruptcy court."
The bankruptcy judge found that the Plan complied with §
1129(a)(4) "since the plan provides for payment of only allowed
administrative expenses, and all fees and expenses of
professionals are subject to review by me." (Appellees' Appx.,
Exh. 1, at 24.). The Plan provides that "the Bankruptcy Court
shall retain exclusive jurisdiction over all matters arising out
of, and related to, the Chapter 11 Cases and the Plan to the
fullest extent permitted by law, including, among other things,
Hear and determine all applications for compensation
and reimbursement of expenses of Professionals under
the Plan or under section? . . . 1129(a)(4) of the
Bankruptcy Code; provided, however, that from and
after the Effective Date, the payment of the fees and
expenses of the Liquidating Trust shall be made in
the ordinary course of business and shall not be
subject to approval of the Bankruptcy Court.
(Appellees' Appx., Exh. 4, Art. 11, ¶ (b).) (emphasis in
11 U.S.C. § 1129(a)(4) requires approval of fees for
pre-confirmation services. See, e.g., In re Stations Holding
Co., Inc., No. 02-10882, 2002 WL 31947022, at *3 (Bankr. D. Del.
Sept. 30, 2002) (confirming under § 1129(a)(4) plan requiring
bankruptcy court approval for fees "to the extent of services
provided before the Confirmation Date"); see also In re
Briscoe Enter. Ltd., 138 B.R. 795, 809 (N.D. Tex. 1992) ("[T]he reorganized debtor is a
new entity not subject to the jurisdiction of the bankruptcy
court, except as provided in the plan. Therefore, approval of
fees for post-confirmation services is not required.
11 U.S.C. § 1129(a)(4) calls for approval of fees for pre-confirmation
services ?.") Therefore, in this case the Plan was not required
to mandate bankruptcy court approval for fees and expenses
related to post-confirmation administration of the estate.
III. Objections Under Other Applicable Provisions of Title
Pursuant to 11 U.S.C. § 1129(a)(1) and (2), in addition to
complying with the substantive requirements of § 1129, a proposed
plan must also comply with the applicable provisions of title 11.
Appellants argue that the Plan fails to comply with five
provisions of title 11.
1. Defects in Balloting for Acceptance or Rejection of the
Appellants devote a significant portion of their argument to
the allegedly defective process by which the Appellees solicited
creditors' ballots and subsequently certified the number of
creditors voting for and against the Plan. Specifically,
Appellants contend that the proponents' Certifications do not
"correctly reflect the proper `number' of ballots voting in favor
or opposition to the Plan nor the proper dollar amounts of the creditors' votes in
favor and/or in opposition to the Plan." (Appellants' Br., at
Appellants' argument focuses first on discrepancies between the
dollar amounts reflected on the ballots themselves and the
amounts reflected in the Initial and Supplemental Certifications.
(Id. at 36.). Because class acceptance of a plan is achieved
when the creditors accepting the plan hold at least two-thirds in
amount and more than one-half in number of allowed claims, the
obvious effect of such distortions is that they potentially
convey imprecise voting results.
Second, Appellants argue that the Initial Certification
improperly aggregated certain ballots. (Id. at 36-40.). In
other words, even though the three separate Debtors' cases had
not yet been substantively consolidated, the Certification
combined a given creditor's separate ballots into one dollar
amount. Therefore, Appellants argue generally that the ballot
certification process was result-oriented and arbitrary.
(Appellants' Br., at 36, 42).
Pursuant to 11 U.S.C. § 1126(c):
A class of claims has accepted a plan if such plan
has been accepted by creditors . . . that hold at
least two-thirds in amount and more than one-half in
number of the allowed claims of such class held by
creditors . . . that have accepted or rejected such
The Trustee noted in the Supplemental Certification of Balloting
that "since the Plan provides for substantive consolidation of the Debtors'
bankruptcy estates, ballots should be analyzed on a substantively
consolidated basis." (Appellees' Appx., Exh. 8, ¶ 5.). Per Judge
Winfield's request, the Trustee provided an analysis of balloting
on both a separate-estate basis and a substantively consolidated
The Court has reviewed the Trustee's explanation of the
balloting methodology and the accompanying spreadsheet analyzing
the creditors' voting. In analyzing votes by dollar amount, the
Trustee counted votes according to each creditor's allowed claim.
The dollar amount accorded each allowed claim corresponds to the
amount in each creditor's filed proof of claim. (Id. ¶ 11.).
Where no proof of claim was filed, the Trustee used the amount
appearing on the Debtors' Schedules and Statement of Financial
Affairs. (Id.). This was correct.
Significantly, the Trustee also performed an alternative
analysis of the votes that took a conservative approach to the
claim amounts of each creditor. Essentially, this approach
minimized the amounts of the claims of the voters who accepted
the Plan but maximized the alleged claims of the Appellants who
rejected the Plan. (Id. ¶ 14.).*fn2 Using this approach,
and under both a separate estate-by-estate analysis and a consolidated basis analysis, the Plan was
Judge Winfield approved the Trustees' counting of the ballots
in the following terms:
The Court finds appropriate the proponents'
methodology of counting both the dollar amount in
number of claims, and the Court specifically rejects
the objector's contention that the claim should be
counted by the dollar amount listed on the ballot as
opposed to the allowed amount of the claims as shown
by the proof of claim or on the schedules. I find
their proposal simply too imprecise. I find, in fact,
that the proponents' approach to counting ballots was
a conservative, gave a more than fair reading of the
ballots, and accordingly, I find no problem there.
(Id., Exh. 1, at 25-26.).
Appellants' objections to the dollar amounts used in the
Trustee's analysis are resolved by reference to the Bankruptcy
Code's provisions on allowed claims. The value of an "allowed
claim" is based on the filed proof of claim. See In re
DiDaniele, No. 01-55091, 2002 WL 535320, at *3 (Bankr. D.N.J.
Feb. 28, 2002) ("A proof of claim executed and filed as provided
in the Bankruptcy Rules is prima facie evidence of the amount and
validity of the claim."). Therefore, it was appropriate for the
Trustee to tabulate votes and dollar amounts according to each creditor's allowed claim as opposed to the amount on the ballot.
The Trustee's spreadsheet clearly indicates that based on dollar
amounts alone, the Plan was accepted as to each of the three
debtor entities individually as well as on a combined basis.
Therefore the Court sees no error in the analysis of votes by
With respect to improper aggregation of ballots, Judge Winfield
noted that "until the cases are consolidated you have to count
[the ballots] separately." (Appellees' Appx., Exh. 1, at 30.).
While the Bankruptcy Court disagreed with the proponents'
position that ballots should be analyzed on a substantively
consolidated basis, it saw no need to comment further "because on
requesting the recount . . . from the plan proponents here on an
estate-by-estate basis, it's obvious that there were sufficient
votes." (Id. at 31.). This Court agrees that the
estate-by-estate analysis indicates that the Plan was accepted,
thus rendering unnecessary a discussion of the aggregated
2. "Adequate Means" for Plan Implementation
Appellants first argue that the Plan does not provide "adequate
means" for its implementation as required under
11 U.S.C. § 1123(a)(5). They argue essentially that the Plan erroneously
presupposed substantive consolidation without the proponents first satisfying their burden of proving
that consolidation was even appropriate in this case. See
Heartland Fed. Sav. & Loan Ass'n v. Briscoe Enter., Ltd.,
994 F.2d 1160, 1165 (5th Cir. 1993) (proponent of plan must show by a
preponderance of the evidence that plan satisfies the
requirements of § 1129). Appellants assert that controlling law
requires the proponents to prove that the benefits of
consolidation outweigh the harms "on a non-consolidated, debtor
by debtor basis that consolidation may be better for the
consolidated entity as a whole is of no moment." (Appellants'
Br., at 22-23.).
In § 1123(a)(5), the Code provides a non-exclusive list of the
types of "adequate means" for plan implementation. COLLIER ON
BANKRUPTCY ¶ 1123.01 ("The types of means listed in section
1123(a)(5) are clearly illustrative and not exclusive."). Among
the means listed are: retention by the debtor of estate property;
transfer of estate property to one or more entities; merger or
consolidation of the debtor with other persons; sale of estate
property; and satisfaction of liens.
11 U.S.C. § 1123(a)(5)(A)-(J).
As the Bankruptcy Judge noted, Article 5 of the Plan provided
for the creation of the liquidating trust (and the appointment of
a liquidating trustee), substantive consolidation of the debtors'
estates, transfer of estate property to the liquidating trust,
and the creation of an oversight committee. As Judge Winfield stated:
I find that Article 5 of the plan provides an
adequate means for implementation of the plan. First
by substantive consolidation of the debtor estates . . .
[s]econdly, by transfer of all of the bankruptcy
estate assets including causes of action to a
liquidating trust together with appointment of a
liquidating trustee and oversight committee . . . I
find in this case in general in effect these types of
cases and these types of trusts permit conclusion of
the Chapter 11 in much the same way as would occur in
a Chapter 7 liquidation, but and I think this is an
important point with the greater participation
creditor participation that's afforded by means of
the Oversight Committee.
(Appellees' Appx, Exh. 1, at 6 ll. 5-21.)
These constitute "means" for the Plan's implementation under
section 1123(a)(5). In response to the Appellants' objection that
the amount of recovery from the causes of action transferred to
the liquidating trust was speculative, the Bankruptcy Court
I do not find in that regard that to demonstrate
adequate means of plan implementation that the
proponents had to provide an exhaustive valuation of
each piece of the litigation. The showing by the
proponents that the recovery could range from 4 to
40% was I think sufficient. Certainly on its face,
such a wide variation in recovery speaks volumes, and
the estimation in this Court's view provided each
creditor with information that the prospect for a
nominal dividend was, in fact, real. I don't think
anymore was needed in the context of a liquidating
(Id., at 11 ll. 9-18.). The Court is satisfied that the proponents proved adequate
means for implementation of the Plan and finds no error in the
Bankruptcy Court's ruling.
3. Adequacy of Disclosure Statement
Appellants object that the Disclosure Statement submitted in
connection with the Plan was deficient because it did not
adequately disclose: (a) that substantive consolidation would
result in the unequal treatment between and among the Class 3
(general unsecured) creditors of each individual debtor; (b) that
substantive consolidation would result in a diminished recovery
and/or the potential loss of a defense (i.e., insolvency) to any
avoidance action (i.e., preference and/or fraudulent conveyance
actions) commenced against them; (c) any legitimate basis for
consolidation; and (d) the distinct assets and liabilities, and
the amount of claims asserted against each of the separate debtor
entities. (Appellants' Br., at 27-28.). Appellants also contend
that the lack of substantive information in the Disclosure
Statement left creditors "to guess as to what substantive
consolidation was, not to mention whether it was appropriate in
these cases or what the potential ramifications were." (Id. at
28.). In sum, Appellants argue that the Bankruptcy Court
erroneously held that the limited analysis of substantive
consolidation in the Statement provided creditors with sufficient
information on the consolidation proposal. Section 1125(a)(1) of the Bankruptcy Code requires that a
Disclosure Statement provide "adequate information" to claim
holders to enable an informed judgment about the proposed plan.
"Adequate information" is "information of a kind, and in
sufficient detail, as far as is reasonably practicable in light
of the nature and history of the debtor and the condition of the
debtor's books and records, that would enable a hypothetical
reasonable investor typical of holders of claims or interests of
the relevant class to make an informed judgment about the
plan. . . ." 11 U.S.C. § 1125(a)(1); see also
Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. General Motors
Corp., 337 F.3d 314, 322 (3d Cir. 2003) ("The importance of full
disclosure is underlaid by the reliance placed upon the disclosure
statement by the creditors and the court. Given this reliance, we
cannot overemphasize the . . . obligation to provide sufficient
data to satisfy the Code standard of adequate information.").
Section 1125 affords the Bankruptcy Court substantial discretion
in considering the adequacy of a disclosure statement. In re River
Village Assoc., 181 B.R. 795, 804 (E.D. Pa. 1995).
The legislative notes to § 1125 provide that "[b]oth the kind
and form of information are left essentially to the judicial
discretion of the court, guided by the specification . . . that
it be of a kind and in sufficient detail that a reasonable and
typical investor can make an informed judgment about the plan.
The information required will necessarily be governed by the circumstances of the
case." 11 U.S.C. § 1125 Notes of Committee on the Judiciary, S.R.
"Disclosure is the pivotal concept in reorganization practice
under the code." COLLIER ON BANKRUPTCY ¶ 1125.02. Its aim is to
provide creditors with relevant information on the likelihood and
amount of eventual distributions. See id. ¶ 1125.02
(noting with approval one district court's statement that "the
disclosure statement must clearly and succinctly inform the
average unsecured creditor what it is going to get, when it is
going to get it, and what contingencies there are to getting its
distribution."). However, "adequate information" within the
meaning of § 1125(a)(1) is not a static concept:
Precisely what constitutes adequate information in
any particular instance will develop on a
case-by-case basis. Courts will take a practical
approach as to what is necessary under the
circumstances of each case. . . . There will be a
balancing of interests in each case. In
reorganization cases, there is frequently great
uncertainty. Therefore the need for flexibility is
Id. (quoting H.R. Rep. No. 95-595, at 409 (1977)).
Judge Winfield held:
The standard for adequacy of disclosure in 1125(a) is
whether the information is sufficient to allow a
hypothetical reasonable investor typical of holders
of claims or interests of the relevant class to make
an informed judgment about the plan. Case law points
out that this is an intentionally flexible standard
as adequacy is determined on a case-by-case basis . . . the Court does not have to
presume that the hypothetical reasonable
investor/creditor is a blank slate, or that it has
the knowledge or business sophistication of a fifth
(Appellees' Appx, Exh. 1, at 12.).
In addition, the Bankruptcy Court was satisfied that the
Disclosure Statement adequately described the effect of
substantive consolidation on creditors' recoveries as well as the
assets and liabilities of the estates consolidated into a single
Section 1.30 of the plan describes estate assets as
collectively, all of legal and equitable right in and
to all assets, property, interests, and so on held at
any time by the estates . . . Section 2, part (c)
which contains the chart which projects the estimated
minimum/maximum recoveries, plainly reflects the
consolidation of the estates, and the assets and
liabilities of the estates are reflected as those of
a single entity.
(Id. at 13.).
Applying the reasonable investor/creditor standard to this
case, Judge Winfield initially noted that many of the creditors
that approved the Plan had claims against all three debtors, and
several of these creditors were co-proponents of the Plan.
(Id.). As the Bankruptcy Court observed, Part II.C of the
Second Amended Disclosure Statement estimated the recovery by
general unsecured creditors. The accompanying chart detailed both
the potential minimum and maximum recovery to the general unsecured creditors after
subtraction of those amounts owed to priority claimants.
This Court has independently considered Part II of the
Disclosure Statement. There the proponents described the
liquidation of estate assets and the transfer of the assets to
the liquidating trust; the liquidating trustee's authority to
distribute trust assets to creditors in accordance with the Plan;
and the trustee's right to litigate claims against the estate. It
was also disclosed that the estates received proceeds from asset
sales in the amount of $558,782; the priority claim of the
secured lender in the amount of $5,998,316 was satisfied; and $1
million remained to satisfy claims against the estate. As noted
above, the Disclosure Statement then estimated a minimum recovery
to unsecured creditors of $1,123,947 and a maximum recovery of
Reviewing the discretionary determination of the bankruptcy
judge that the disclosure statement was adequate, this Court
finds no error. The relevant assets and liabilities were
disclosed, as well as the range of potential recovery to
creditors. The Disclosure Statement acknowledged the uncertainty
of recovery amounts based on several contingencies, including:
the estimated amount of allowed general unsecured claims;
anticipated recovery from preference litigation; recovery from
litigation against insider Lisantis; anticipated amounts from accounts receivable; anticipated fees and costs; and the success
of the proponents' objections to claims of the Lisanti insiders.
However, such uncertainties are common and do not suggest in this
case that the disclosure statement was inadequate.
4. Powers of the Liquidating Trustee
Appellants argue that the Plan improperly granted unlimited
power to the Liquidating Trustee. Specifically, Appellants
contend that the Plan permitted the Trustee to employ
professionals, sell assets in the Trust Estate, and take legal
action on behalf of the Trust Estate without the approval of the
Bankruptcy Court. Appellants argue that these unlimited powers
contravene the Code.
Appellees respond essentially that the Liquidating Trustee's
power is not without limit; rather, he is subject to applicable
law, the Oversight Committee, and the continuing jurisdiction of
the Bankruptcy Court.
A liquidating trustee is properly authorized to administer the
post-confirmation estate and implement the Plan. Section 1123 of
the Code allows a plan to provide for "the retention and
enforcement by the debtor, by the trustee, or by a representative
of the estate appointed for such purpose, [of any claim or
interest belonging to the debtor or to the estate]."
11 U.S.C. § 1123(b)(3)(B); see In re Ampace Corp., 279 B.R. 145, 147 (D.
Del. 2002) (noting that plan provided liquidating trustee with "sole discretion" to pursue avoidance
actions for the benefit of holders of Allowed Unsecured Claims).
Appellees aptly cite In re USN Communications, Inc.,
280 B.R. 573, 579-80 (D. Del. 2002) in which the court described the
discretionary function of the liquidating trustee in the subject
The Liquidating Trust shall succeed to all the rights
of the Debtors necessary to protect, conserve, and
liquidate all Liquidating Trust Assets as quickly as
reasonably practicable. In that capacity, the
Liquidating Trust shall have the exclusive power, on
behalf and in the name of the debtors, to prosecute,
defend, compromise, settle, and otherwise deal with
all such Liquidating Trust Assets subject to the
restrictions of the Liquidating Trust Agreement, this
Plan, and the Confirmation Order. . . .
Here, the Plan vests the Liquidating Trustee with discretionary
control over the affairs and assets of the Liquidating Trust, in
accordance with the Liquidating Trust Agreement, subject to the
review and direction of the Oversight Committee. (Appellees'
Appx., Exh. 4, ¶ 5.8) (emphasis added). The Plan also details the
supervisory authority of the Oversight Committee, including the
power to supervise the Trustee's management of the Trust, the
power to remove the Trustee, and the right to approve the
settlement of certain disputed claims. (Id. ¶ 5.9.). Finally,
Article 11 of the plan provides for the Bankruptcy Court's
retention of jurisdiction. Of particular relevance in Article 11
is ¶ 11(g), which ensures that the Bankruptcy Court resolves "disputes arising in connection
with the interpretation, implementation, consummation, or
enforcement of the Plan, including disputes arising under
agreements, documents, or instruments executed in connection with
the Plan." Thus, the Bankruptcy Court found that Plan provisions
related to the Oversight Committee appropriately circumscribed
the Trustee's authority. (Id., Exh. 1, at 23 ll. 15-18.).
The Court is not persuaded that the protections afforded by the
Liquidating Trust Agreement and the Oversight Committee, together
with the requirements of the Code as enforced by the Bankruptcy
Court, are somehow insufficient to warrant Plan confirmation.
5. Classification of Claims
Appellants argue that under the Plan Class 3 improperly
consolidated the following creditors: (i) claims of creditors who
dealt solely with Lisanti Foods, Inc.; (ii) claims of creditors
who dealt solely with Lisanti Foods of Texas, Inc.; and (iii)
claims of creditors who dealt solely with Lisanti Foods of
Arizona, Inc. (Appellants' Br., at 24.). Appellants argue that as
creditors of Lisanti Foods, Inc. (a debtor with a lower debt to
asset ratio than the other debtors), their claims should be
separately classified, thus entitling them to a greater
Title 11 U.S.C. § 1122 governs the classification of claims or interests:
(a) Except as provided in subsection (b) of this
section, a plan may place a claim or an interest in a
particular class only if such claim or interest is
substantially similar to the other claims or
interests of such class.
(b) A plan may designate a separate class of claims
consisting only of every unsecured claim that is less
than or reduced to an amount that the court approves
as reasonable and necessary for administrative
Thus, similar claims are generally placed into the same class.
"Substantially similar claims" are "those which share common
priority status and other legal rights against the debtor's
assets. In re Fairfield Executive Assoc., 161 B.R. 595, 600
(D.N.J. 1993) (citing In re Greystone Joint Venture,
995 F.2d 1274
, 1278 (5th Cir. 1991)). As a result, "unsecured claims will,
generally speaking, comprise one class . . . because they are
claimants of equal legal rank entitled to share pro rata in
values remaining after payment of secured and priority claims."
Id. (internal quotations omitted). Separate classifications for
unsecured creditors are only justified "where the legal
character of their claims is such as to accord them a status
different from the other unsecured creditors." Granada Wines,
Inc. v. New England Teamsters & Trucking Indus. Pension Fund,
748 F.2d 42
, 46 (1st Cir. 1984) (emphasis added).
It is therefore legally appropriate to group all unsecured
creditors into the same class. Appellants rely on Granada Wines for the
proposition that creditors with claims against different property
should be separately classified. That case considered the effect
of Chapter 11 reorganization on an employer's obligations under
the Employee Retirement Income Security Act. Specifically, the
First Circuit addressed whether an employer undergoing Chapter 11
reorganization could reduce its financial liability to a pension
fund creditor under certain provisions of the Multiemployer
Pension Plan Amendments Act. The court decided that the employer
was not entitled to a limitation of its liability to the pension
The only conceivable relevance of Granada Wines to the claim
classification issue here lies in the First Circuit's treatment
of the argument that the amount of the disputed claim rendered it
dissimilar from other unsecured claims and therefore susceptible
to separate classification. The court found that the amount of
the pension fund's claim does not implicate the legal character
of the claim, and therefore separate classification was not
warranted under the Code.
To the extent that Appellants' argument for separate
classification here is based on the greater amount they believe
they will be entitled to as creditors of Lisanti Foods, Inc., as
compared to the other unsecured creditors, Granada is to the
contrary. Appellants also argue for separate classification because their
claims and the claims of the other unsecured creditors are
against different debtors. However, based on the foregoing
discussion of when separate classifications are legally
appropriate, the Court is not persuaded that separate
classification on that basis is proper.
IV. Testimony of Appellees' Expert Accountant
Appellants contend that they were prejudiced by the Bankruptcy
Court's allowing Appellees' accountant to testify despite
untimely submission of his expert report. (Appellants' Br., at
46-47.). Citing to Third Circuit precedent addressing the
circumstances under which exclusion of testimony is appropriate,
Appellants argue that (1) they were unable to effectively
cross-examine Mr. Katz; (2) they were prejudiced by Appellees'
unwillingness to alter the schedule of the Confirmation Hearing;
(3) the untimely submission of the expert report amounted to bad
faith; and (4) they were unable to prepare an effective rebuttal
to Mr. Katz's testimony. (Id.). Furthermore, Appellants
maintain that the Bankruptcy Court compounded the harm by
precluding the testimony of their own accountant.
Appellees counter that this issue was not included in
Appellants' Statement of Issues on Appeal and therefore may not be considered
in this appeal. Nevertheless, Appellees respond that, when
reviewed under the abuse of discretion standard applicable to
evidentiary rulings, the Bankruptcy Court's decision to allow Mr.
Katz's testimony was proper. (Appellees' Br., at 38-39.). The
Court reviews the Bankruptcy Court's evidentiary determination
for abuse of discretion. "An abuse of discretion exists where the
[bankruptcy] court's decision rests upon a clearly erroneous
finding of fact, an errant conclusion of law, or an improper
application of law to fact." In re Integrated Telecom Express,
Inc., 384 F.3d 108, 118 (3d Cir. 2004). "`An abuse of discretion
can occur when no reasonable person would adopt the . . . [lower]
court's view.'" In re PPI Enter. (U.S.), Inc., 324 F.3d 197,
211 (3d Cir. 2003) (quoting Rode v. Dellarciprete,
892 F.2d 1177, 1182 (3d Cir. 1990)).
Over the objections of Appellants' counsel, the Bankruptcy
Court allowed Mr. Katz's testimony on the following grounds:
I'm not going to disallow Mr. Katz's testimony. I
will hear his testimony. I will repeat again, the
parties have ample opportunity to work out the timing
of various submissions or reports and documentary
evidence requested. I have myself seen though, not
reviewed in any depth, Mr. Katz's report . . . Having
received it prior to the deposition, there was ample
opportunity to examine Mr. Katz on the information
contained therein. I have . . . ample statements that
support that they, by that I mean the Trustee and his
counsel, turned over all the documents requested of
them, and I see no reason not to have Mr. Katz's
testimony on the record.
(Appellants' Appx., Exh. 11, at 101.).
The Bankruptcy Court found that on the facts before it, and the
representations of counsel, Appellants had an adequate
opportunity to review the substance of Mr. Katz's report and
prepare for his deposition. These are critical factual
determinations which the Court sees no reason to disturb.
Accordingly, the Court finds that it was not an abuse of
discretion for the Bankruptcy Court to hear Mr. Katz's testimony.
In a related matter, Appellants contend that they were
prejudiced by the Bankruptcy Court's exclusion of the testimony
of their own expert accountant, Michael Gould. The record
indicates that, despite Judge Winfield's ruling that Mr. Katz
could be present at Mr. Gould's deposition, Appellants refused to
produce Mr. Gould for his deposition. (Appellees' Appx, Exh. 12)
("[W]e're maintaining our position that Mr. Katz is not a party
and it is not appropriate for him to be present during the course
of the deposition. . . ."). No authority is cited by Appellants
for this position.
Federal Rule of Evidence 615 provides that "[a]t the request of
a party the court shall order witnesses excluded so that they
cannot hear the testimony of other witnesses. . . . This rule does not authorize exclusion of
. . . (3) a person whose presence is shown by a party to be
essential to the presentation of the party's cause." As Appellees
note, the Advisory Committee Notes explain that category (3)
"contemplates such persons as . . . an expert needed to advise
counsel in the management of the litigation."
Federal Rule of Evidence 615 applies to deposition testimony.
See, e.g., Skidmore v. Northwest Eng'g Co., 90 F.R.D. 75,
75-76 (S.D. Fla. 1981); Williams v. Elec. Control Sys., Inc.,
68 F.R.D. 703 (E.D. Tenn. 1975) ("[Rule 615] gives a litigant the
right to have witnesses excluded from the courtroom, except for
three categories who are excepted from its operation. The same
rule applies to the taking of depositions."). "The party seeking
to exclude persons from depositions must show good cause, and the
protection is limited to circumstances where justice requires
such exclusion to protect a party from annoyance, embarrassment,
oppression or undue burden or expense." Skidmore,
90 F.R.D. at 76. However, "the long-accepted policy reasons for the
sequestration rule preventing one witness from conforming his
testimony to that of another are not applicable when an expert is
involved" because the expert testifies not to disputed facts but
matters of opinion. Id.; see also Veress v. Alcoa Mill
Prod., Inc., No. 01-2430, 2002 WL 1022455, at *1 (E.D. Pa. May 20, 2002).
The Bankruptcy Court held that Federal Rule of Evidence 615 did
not apply to bar Mr. Katz from the Gould deposition:
With respect to Rule 615, that's a rule that deals
with testimony at trial, and I would agree it
certainly ought to, in general, apply to excluding
witnesses at deposition testimony. But I read that
rule to be geared toward fact witnesses. It is not
uncommon . . . to have I'll call them professional
advisors, since there are any number of professionals
that assist attorneys in various types of litigation
anymore, present at deposition to listen to the
deposition testimony of other professional expert
(Id., Exh. 2, at 31.).
The Court also notes that Rule 615's Advisory Committee Notes
specifically forbid the exclusion of experts needed to advise
counsel, as here. Appellants' "position," quoted above,
disregarded or was unaware of the Advisory Committee's
interpretation (which this Court adopts).
The Court agrees with the bankruptcy judge that Rule 615 is
primarily directed at the exclusion of witnesses at trial, but
also applies to depositions. The Court sees no reason to bar one
party's expert witness from the deposition of the other party's
expert. It is common for experts to assist attorneys in
connection with deposition testimony of opposing experts.
Therefore, it was entirely appropriate for Judge Winfield to
exclude the testimony of Mr. Gould, based on Appellants' unwarranted refusal to produce him for his
Accordingly, IT IS on this 9th day of August 2005,
ORDERED that the May 17, 2004 Order Confirming Second Amended
Joint Plan of Liquidation is affirmed.