On Appeal from the United States District Court for the District of Delaware (D.C. Civil Action No. 02-cv-00752) District Judge: Honorable Sue L. Robinson.
The opinion of the court was delivered by: Ambro, Circuit Judge
Argued September 14, 2004
Before: SCIRICA, Chief Judge, ALITO and AMBRO, Circuit Judges.
Appellant Howard S. Cohen ("Cohen"), as Plan Administrator for the bankruptcy estates of SubMicron Systems Corporation, SubMicron Systems, Inc., SubMicron Wet Process Stations, Inc. and SubMicron Systems Holdings I, Inc. (jointly and severally, "SubMicron"), challenges the sale to an entity created by Sunrise Capital Partners, LP ("Sunrise") of SubMicron's assets under 11 U.S.C. § 363(b), which authorizes court-approved sales of assets "other than in the ordinary course of business." Sunrise negotiated directly with several-but not all-of SubMicron's creditors before presenting its bid to the District Court. These creditors-The KB Mezzanine Fund II, LP ("KB"), Equinox Investment Partners, LLC ("Equinox"),*fn1 and Celerity Silicon, LLC ("Celerity") (collectively, the "Lenders")-agreed to contribute toward the purchase of SubMicron's assets new capital along with all of their claims in bankruptcy against SubMicron in exchange for equity in the entity formed by Sunrise to acquire the assets-Akrion LLC ("Akrion"). Akrion in turn "credit bid" the full value of the Lenders' secured claims contributed to it as part of its bid for SubMicron's assets pursuant to 11 U.S.C.§ 363(k).*fn2
The District Court approved the sale.*fn3 In re SubMicron Sys. Corp., 291 B.R. 314 (D. Del. 2003).
Cohen, seeking as Plan Administrator of the SubMicron estates to aid unsecured creditors "cut out of the deal" by the Lenders and Sunrise, attacks the sale on several fronts. First, he argues that the purportedly secured debt investments made by the Lenders and contributed to Akrion should have been recharacterized by the District Court as equity investments. In the alternative, if the District Court did not err in declining to recharacterize the investments as equity, Cohen contends that it erred by failing to conclude that the debt was unsecured. Even if the District Court properly considered the debt secured, Cohen challenges the propriety of the District Court's allowance of the credit bid portion of Akrion's offer. As a last option, Cohen asserts that the District Court erred by declining to equitably subordinate the Lenders' secured claims to those of creditors with inferior claims. For the reasons discussed below, we reject these arguments and affirm the judgment of the District Court.
I. Facts and Procedural Posture
Before its sale in bankruptcy, SubMicron designed, manufactured and marketed "wet benches"*fn4 for use in the semiconductor industry. By 1997, it was experiencing significant financial and operational difficulties. To sustain its operations in the late 1990s, SubMicron secured financing from several financial and/or investment institutions. On November 25, 1997, it entered into a $15 million working capital facility with Greyrock Business Credit ("Greyrock"), granting Greyrock first priority liens on all of its inventory, equipment, receivables and general intangibles. The next day, SubMicron raised another $20 million through the issuance of senior subordinated 12% notes (the "1997 Notes") to KB/Equinox (for $16 million) and Celerity (for $4 million) secured by liens behind Greyrock on substantially all of SubMicron's assets. Submicron subsequently issued a third set of notes in 1997 (the "Junior 1997 Notes") for $13.7 million, comprising $8.7 million of 8% notes and a $5 million note to The BOC Group, Inc. The Junior 1997 Notes were secured but junior to the security for the 1997 Notes. Despite this capital influx, SubMicron incurred a net loss of $47.6 million for the 1997 fiscal year.
A steep downturn in the semiconductor industry made 1998 a similarly difficult year for SubMicron. By August of that year, it was paying substantially all of the interest due on the 1997 Notes as paid-in-kind senior subordinated notes. On December 2, 1998, SubMicron and Greyrock agreed to renew the Greyrock line of credit, reducing the maximum funds available from $15 to $10 million and including a $2 million overadvance conditioned on SubMicron's securing an additional $4 million in financing. To satisfy this condition, on December 3, SubMicron issued Series B 12% notes (the "1998 Notes") to KB/Equinox (for $3.2 million) and Celerity (for $800,000). The 1998 Notes ranked pari passu with the 1997 Notes and the interest was deferred until October 1, 1999. SubMicron incurred a net loss of $21.9 million for the 1998 fiscal year, and at year's end its liabilities exceeded its assets by $4.2 million.
SubMicron's financial health did not improve in 1999. By March of that year, its management determined that additional financing would be required to meet the company's immediate critical working capital needs. To this end, between March 10, 1999 and June 6, 1999, SubMicron issued a total of eighteen Series 1999 12% notes (the "1999 Tranche One Notes") for a total of $7,035,154 (comprising nine notes to KB/Equinox totaling $5,888,123 and nine notes to Celerity totaling $1,147,031). The 1999 Tranche One Notes proved insufficient to keep SubMicron afloat. As a result, between July 8, 1999 and August 31, 1999, KB/Equinox and Celerity made periodic payments to SubMicron (the "1999 Tranche Two Funding") totaling $3,982,031 and $147,969, respectively. No notes were issued in exchange for the 1999 Tranche Two Funding. Between the 1999 Tranche One Notes and the 1999 Tranche Two Funding (collectively, the "1999 Fundings"), KB/Equinox and Celerity advanced SubMicron a total of $9,870,154 and $1,295,000, respectively. (The 1999 Fundings were recorded as secured debt on SubMicron's 10-Q filing with the Securities and Exchange Commission.) Despite the cash infusions, during the first half of 1999 SubMicron incurred a net loss of $9.9 million. On June 30, 1999, SubMicron's liabilities exceeded its assets by $3.1 million.
By January 1999, KB/Equinox had appointed three members to SubMicron's Board of Directors. All appointees were either principals or employees of KB/Equinox. By June 1999, following resignations of various SubMicron Board members, KB/Equinox employees Bonaparte Liu and Robert Wickey, and Celerity employee Mark Benham, represented three-quarters of the Board, with SubMicron CEO David Ferran the lone Board member not employed by KB/Equinox or Celerity.
SubMicron began acquisition discussions with Sunrise in July of 1999. By all accounts, it was generally understood that if SubMicron failed to reach a deal with Sunrise, it would be forced to liquidate, leaving secured creditors-with the exception of Greyrock-with pennies on the dollar and unsecured creditors and shareholders with nothing. KB/Equinox, not SubMicron's management, conducted negotiations with Sunrise, developing and agreeing on the terms and financial structure of an acquisition to occur in the context of a prepackaged bankruptcy.
On August 31, 1999, SubMicron entered into an asset purchase agreement with Akrion, the entity created by Sunrise to function as the acquisition vehicle. The following day, SubMicron filed a Chapter 11 bankruptcy petition and an associated motion seeking approval of the sale of its assets to Sunrise outside the ordinary course of business pursuant to § 363(b) of the Bankruptcy Code.
The asset purchase agreement reiterated, inter alia, that KB/Equinox and Celerity would contribute their secured claims (i.e., the 1997 Notes, the 1998 Notes and the 1999 Fundings) in order for Akrion to credit bid these claims under § 363 of the Bankruptcy Code-but only contingent on the closing of the sale. The agreement also required SubMicron, at the closing of the sale, to pay $5,500,000 immediately to the holders of the 1999 Fundings. In return, KB/Equinox and Celerity would receive a 31.475% interest in Akrion (KB/Equinox received a 30% interest and Celerity received a 1.475% interest). The Court and Official Committee of Unsecured Creditors (the "Creditors' Commitee") were apprised of the terms of this agreement prior to the sale.
At the sale hearing Akrion submitted a bid of $55,507,587 for SubMicron. The cash component of the bid totaled $10,202,000 and included $5,500,000 in cash from Akrion, $3,382,000 to pay pre- and post-petition Greyrock secured debt, and $850,000 to cover administrative claims.*fn5 The credit portion of the bid consisted of the $38,721,637 outstanding for the 1997 Notes, the 1998 Notes, and the 1999 Fundings (all of which KB/Equinox and Celerity had contributed to Akrion), plus $1,324,138 in individual secured claims, for a total of $40,045,775. Finally, the bid included SubMicron's liabilities that would be assumed by Akrion-$681,346 in lease obligations and $4,578,466 in other assumed liabilities for a total of $5,259,812. No other bid for SubMicron's assets was made, SubMicron's Board and the Court both approved Akrion's bid over the objection of the Creditors' Committee, and on October 15, 1999, the asset sale closed.
On April 18, 2000, the Creditors' Committee brought against the Lenders, among others, an adversary proceeding in which it made the claims before us on appeal. (Cohen was subsequently substituted for the Creditors' Committee.) After a bench trial before Judge Sue Robinson in late July/early August 2001, she ruled ...