2000 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

9-18-2000

In Re: PWS Holding

Precedential or Non-Precedential:

Docket 00-5042

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Recommended Citation

"In Re: PWS Holding" (2000). 2000 Decisions. Paper 199.

http://digitalcommons.law.villanova.edu/thirdcircuit_2000/199
Filed September 18, 2000 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

Nos. 00-5042 and 00-5074 

In re: PWS HOLDING CORPORATION 

BRUNO'S, INC; FOOD MAX OF MISSISSIPPI, INC; 

A.F. STORES, INC; BR AIR, INC.; 

FOOD MAX OF GEORGIA, INC; 

FOOD MAX OF TENNESSEE, INC; 

FOODMAX, INC; LAKESHORE FOODS, INC; 

BRUNO'S FOOD STORES, INC; GEORGIA SALES 

COMPANY; SSS ENTERPRISE, INC 

W.R. Huff Asset Management Co., L.L.C., 

Appellant in 00-5042 

HSBC BANK USA, as Indenture Trustee for 

the 10.5% Senior Subordinated Notes, 

Appellant in 00-5074 

On Appeal From the United States District Court 

for the District of Delaware 

(D.C. Civ. No. 98-cv-00212) 

District Judge: Honorable Sue L. Robinson 

Argued: March 10, 2000 

Before: BECKER, Chief Judge, SCIRICA and 

NYGAARD Circuit Judges. 

(Filed: September 18, 2000) 
 EDWARD S. WEISFELNER, 

 ESQUIRE (ARGUED) 

 ANDREW DASH, ESQUIRE 

 JOHN P. BIEDERMANN, ESQUIRE 

 Berlack, Israels & Liberman 

 120 West 45th Street 

 New York, NY 10036 

 STEVEN K. KORTANEK, ESQUIRE 

 JOANNE B. WILLS, ESQUIRE 

 Klehr, Harrison, Harvey, Branzburg 

 & Ellers, LLP 

 919 Market Street, Suite 1000 

 Wilmington, DE 19801 

 Counsel for Appellant 

 W.R. Huff Asset Management Co. 

 PETER D. WOLFSON, ESQUIRE 

 (ARGUED) 

 CAROL NEVILLE, ESQUIRE 

 Pryor, Cashman, Sherman & Flynn, 

 LLP 

 410 Park Avenue 

 New York, NY 10022-4441 

 JEFFREY C. WISLER, ESQUIRE 

 Connolly, Bove, Lodge & Hutz 

 1220 Market Building 

 P.O. Box 2207 

 Wilmington, DE 19899 

 Counsel for Appellant 

 HSBC Bank USA, Indenture Trustee 

 HARVEY R. MILLER, ESQUIRE 

 (ARGUED) 

 LORI R. FIFE, ESQUIRE 

 MARC D. PUNTUS, ESQUIRE 

 Weil, Gotshal & Manges, LLP 

 767 Fifth Avenue 

 New York, NY 10153 

 2 
 THOMAS L. AMBRO, ESQUIRE 

 DANIEL J. DeFRANCESCHI, 

 ESQUIRE 

 One Rodney Square 

 P.O. Box 551 

 Wilmington, DE 19899 

 Counsel for Appellees PWS Holding 

 Corp.; Bruno's, Inc.; Food Max of MI, 

 Inc.; AF Stores, Inc.; BR Air, Inc.; 

 Food Max of GA, Inc.; Food Max of 

 TN, Inc.; Foodmax Inc.; Lakeshore 

 Foods, Inc.; Brunos Food Stores; 

 Georgia Sales Co.; SSS Entr, Inc. 

 HAROLD S. NOVIKOFF, ESQUIRE 

 (ARGUED) 

 AMY R. WOLF, ESQUIRE 

 Wachtell, Lipton, Rosen & Katz 

 51 West 52nd Street 

 New York, NY 10019 

 EDWARD G. BIESTER, III, ESQUIRE 

 Duane, Morris & Heckscher 

 4200 One Liberty Place 

 Philadelphia, PA 19103-7396 

 TERESA K.D. CURRIER, ESQUIRE 

 Duane, Morris & Heckscher 

 1201 Market Street, Suite 1500 

 P.O. Box 195 

 Wilmington, DE 19899 

 Counsel for Appellee 

 Chase Manhattan Bank 

 DENNIS S. KAYES, ESQUIRE 

 (ARGUED) 

 STUART E. HERTZBERG, ESQUIRE 

 I. WILLIAM COHEN, ESQUIRE 

 Pepper, Hamilton, LLP 

 100 Renaissance Center, 36th Floor 

 Detroit, MI 48243 

 3 
 DAVID M. FOURNIER, ESQUIRE 

 MONICA LEIGH LOFTIN, ESQUIRE 

 Pepper, Hamilton, LLP 

 1201 Market Street, Suite 1600 

 Wilmington, DE 19801 

 Counsel for Appellee Official 

 Committee of Unsecured Creditors 

OPINION OF THE COURT 

BECKER, Chief Judge. 

W.R. Huff Asset Management Co., L.L.C. ("Huff "), and 

HSBC Bank USA ("HSBC") appeal from the order of the

District Court confirming a reorganization plan for Bruno's, 

Inc., (Bruno's), and several affiliates.1 Bruno's is based in 

Alabama and operates a chain of supermarkets in the

southeastern United States. Huff was the holder of $290 

million in Bruno's subordinated notes; HSBC was the

indenture trustee for the subordinated notes (we refer to 

them together as Huff). They argue that the District Court 

should not have confirmed the plan for a host of reasons, 

most notably because it contains releases that violate the 

absolute priority rule of 11 U.S.C. S 1129(b)(2)(B)(ii) and are 

thus impermissible under the Bankruptcy Code. 

Three separate interests have appeared to defend the 

plan: the debtors and debtors-in-possession (referred to 

throughout as the Debtors); the Chase Manhattan Bank, 

representing the group of banks (the Banks) that were the 

senior lenders to Bruno's before the reorganization; and the 

Official Unsecured Creditors' Committee. Together they 

contend that the plan does not violate the absolute priority 

rule because the releases were not granted "on account of " 

the interests of the released parties, but rather the claims 

released had little or no value. 

_________________________________________________________________ 

1. The affiliates are PWS Holding Corp., Food Max of Mississippi, Inc, 

A.F. Stores, Inc., BR Air, Inc., Food Max of Georgia, Inc., Food Max of 

Tennessee, Inc., FoodMax, Inc., Lakeshore Foods, Inc., Bruno's 

Foodstores, Inc., Georgia Sales Co., and SSS Enterprises, Inc. 

 4 
The absolute priority rule, found in 11 U.S.C. 

S 1129(b)(2)(B)(ii), provides that "the holder of any claim or 

interest that is junior to the claims of [a class of unsecured 

claims] will not receive or retain under the plan on account 

of such junior claim or interest any property." In Bank of 

America National Trust and Savings Association v. 203 

North LaSalle Street Partnership, 526 U.S. 434 (1999), the 

Supreme Court interpreted the "on account of " language in 

S (b)(2)(ii). The Court rejected arguments that "on account 

of " means "in satisfaction of " the interest or "in exchange 

for" the interest and concluded that it means"because of " 

the interest. Id. at 450-51. Accordingly, a causal connection 

between holding the prior claim or interest, and receiving or 

retaining property, will trigger the absolute priority rule. 

Huff submits that this plan, by releasing claims held by the 

bankrupt entity that arose out of the leveraged 

recapitalization, essentially transferred property to holders 

of junior equity in violation of the absolute priority rule. 

Huff argues that the release was a transfer to junior equity 

because the potential claims included claims against junior 

equity--affiliates of Kohlberg, Kravis, Roberts & Co., L.L.C. 

(KKR), and other participants in the recapitalization. Huff 

contends that the transfer violated the absolute priority 

rule because senior creditors (including Huff) had not been 

paid in full. 

We conclude that the District Court did not err in the 

challenged respects.2 The Examiner appointed by the

District Court under 11 U.S.C. SS 1104(c) and 105(a) at the 

behest of Huff found in a comprehensive report that the 

claims released had little potential merit. We find no error 

in the District Court's decision to accept the Examiner's 

findings and legal conclusions regarding the viability of the 

claims, and we reject Huff 's contention that the releases 

were granted "on account of " old equity's interest. We also 

reject the Debtors' contention that the challenge to 

confirmation is equitably moot under In re Continental 

Airlines, 91 F.3d 553, 559 (3d Cir. 1996) (en banc). 

_________________________________________________________________ 

2. Because the order of reference to the Bankruptcy Court was 

withdrawn in the District of Delaware, this case was heard initially in 

the 

District Court. 

 5 
Huff 's other challenges to confirmation include that the 

plan should not have been confirmed because the District 

Court erred in determining that it was proposed in good 

faith as required by 11 U.S.C. S1129(a)(3). Huff has not 

offered anything but innuendo to support its contention 

that the Debtors violated this portion of the Code, and we 

find no error in the District Court's conclusion that the 

plan was proposed in good faith. 

Additionally, Huff contends that the plan should not have 

been confirmed because it violates the following sections of 

the Bankruptcy Code: 11 U.S.C. S 510(a), which provides 

that a "subordination agreement is enforceable in a case 

under this title to the same extent that such agreement is 

enforceable under applicable nonbankruptcy law;" 11

U.S.C. S 524(e), which provides that "[e]xcept as provided in 

subsection (a)(3) of this section, discharge of a debt of the 

debtor does not affect the liability of any other entity on, or 

the property of any other entity for, such debt;" 11 U.S.C. 

S 363, which governs the sale of assets outside of the 

reorganization plan; 11 U.S.C. S 1129(a)(2), which provides 

that a court shall confirm a plan only if "[t]he proponent of 

the plan complies with the applicable provisions of this 

Title;" and 11 U.S.C. S 1129(a)(7), which provides that a 

court shall confirm a plan only if the debtor demonstrated 

at the Confirmation Hearing that creditors rejecting the 

plan would not receive a greater recovery in a Chapter 7 

liquidation. 

We reject Huff 's argument under S 510(a) because the 

subordinated noteholders' rights under the agreement do 

not arise until the senior indebtedness is paid in full, which 

has not happened under the plan. We reject the S 524(e) 

argument because we conclude that the limited release in 

Paragraph 58 of the plan does not come within the meaning 

of S 524(e) and is consistent with the standard of liability 

under the Code. We reject Huff 's S 363 argument because 

we do not agree with the contention that the Plan triggered 

a duty to fully market the company. We conclude that Huff 

does not have standing to raise the challenge under

S 1129(a)(2) because third-party standing is limited on 

appeal in bankruptcy cases and Huff cannot show that it 

was personally aggrieved by any alleged failure of 

 6 
disclosure. Finally, because we are satisfied that the 

Debtors met the S 1129(a)(7) burden of demonstrating that 

the creditors would not receive a greater recovery under 

Chapter 7, we reject the challenge under this section as 

well. We will therefore affirm the order of the District Court 

confirming the plan. 

I. Factual & Procedural Background 

As of the commencement date of the Chapter 11 cases, 

Bruno's was a chain of about 200 supermarkets operating 

in the southeastern United States (principally in Alabama). 

In 1995, affiliates of KKR acquired an 83.33% interest in 

Bruno's in a leveraged recapitalization. As part of this 

transaction, then existing shareholders of Bruno's were 

bought out for approximately $880 million. The leveraged 

recapitalization was financed by a revolving credit and term 

loan facility provided by the Banks, an equity contribution 

of $250 million by KKR through Crimson Associates LLP, 

and the issuance by Bruno's of $400 million in notes due 

in 2005 pursuant to an indenture. Section 9 of the 

indenture contains a subordination clause that provides 

that the noteholders' claims are fully subordinated to the 

payment in full (including interest) of the claims of the 

senior lenders (the Banks). 

For at least two years following the leveraged 

recapitalization, Bruno's paid all of its debts as they 

matured (including $97.5 million in interest payments on 

the subordinated notes). In the summer of 1997, the

Debtors were able to refinance the Bank debt relating to the 

recapitalization at a lower interest rate and on terms more 

favorable than the original terms. But by the second half of 

1997, as a result of either mismanagement by the directors 

selected by KKR and a controversial change in pricing 

policy (according to Huff), or as a result of a greatly 

increased level of competition in the market (according to 

the Debtors), Bruno's began to falter. Bruno's had difficulty 

in meeting payment obligations from the recapitalization 

and in paying its suppliers and other creditors. On

February 2, 1998, it filed a voluntary petition for relief 

under Chapter 11 of the Bankruptcy Code. Since thefiling 

date, the Debtors have remained in possession. 

 7 
As of the filing date, Bruno's owed approximately $462 

million to the Banks, $135 million to trade vendors, 

suppliers, and other unsecured creditors, and $421 million 

on the subordinated notes. In the 90 days prior tofiling for 

relief, it made payments to a variety of creditors and 

suppliers amounting to more than $600 million, including 

to firms that provided professional services to the Debtors.3 

However, the only preference action the Debtors pursued 

was an action against the Banks seeking to avoid liens 

granted to the prepetition lenders in December 1997. 

In February 1998, the Bankruptcy Trustee appointed a 

nine member "Official Unsecured Creditor's Committee" (the 

Committee). Huff, holder of $290 million in subordinated 

notes, was the largest creditor of the estate and was elected 

co-chair of the Committee. The other members of the

Committee included four representatives of the Banks, 

three representatives from the trade, and one representative 

of the other subordinated noteholders. A representative 

from the United Food and Commercial Workers Union, 

which represented supermarket employees of Bruno's, was 

appointed to serve on the Committee from March 1998 to 

April 1999. 

In October 1998, the Debtors presented a business plan 

to the Committee. The Committee rejected this plan and 

then appointed a subcommittee, the "Strategic Alternatives 

Committee," to work with the Debtors to develop a new 

plan. This Subcommittee conducted a test marketing of the 

enterprise and sent out a summary information package to 

two different sets of potential buyers (neither of which 

included financial buyers). The Subcommittee did not 

believe that there would be interest in purchasing the 

enterprise, and indeed none of the companies contacted 

expressed an interest. By January 1999, the Debtors

concluded that no potential buyers had an interest in the 

acquisition. 

_________________________________________________________________ 

3. For example, payments to suppliers included approximately $19 

million to Kraft Foods, $4.1 million to Frito-Lay, and $750,000 to 

Pillsbury. Payments to providers of professional services included 

$225,551.69 to Cravath, Swaine & Moore, $1.2 million to KKR, and 

$232,838.71 to Wasserstein Perella & Co. 

 8 
Throughout the spring of 1999, the Committee and 

subgroups of the Committee convened several times to 

develop a reorganization plan. Huff asserts that it was 

excluded from these meetings and that many of the 

conferees pursued some interest other than maximizing the 

size of the bankruptcy estate. In March 1999, the Debtors' 

law firm determined that legal claims arising out of the 

leveraged recapitalization (primarily fraudulent transfer 

claims) were not worth pursuing because they believed that 

the claims were unlikely to succeed and that litigation 

would be expensive, time consuming, complicated, 

protracted and vigorously defended, and likely would delay 

the confirmation of the reorganization plan. In April 1999, 

the Committee voted to deny funds to pursue the claims, 

while preserving the claims for further consideration. In 

response, Huff successfully moved for the appointment of 

an independent examiner to evaluate the claims. The

Debtors presented the first version of the new plan in May 

1999. It was revised several times between May and 

December 1999. 

As a part of the negotiations regarding reorganization, 

three independent entities (Wasserstein Perella & Co. (for 

the Debtors), PricewaterhouseCoopers (for the Committee), 

and Chilimark Partners (for the Banks)) conducted 

assessments of the Debtors and reported current value 

estimations ranging between $260 and $315 million. Huff 's 

expert argued for a valuation at $580 million, but this 

valuation was rejected by the District Court, and Huff 

appears to have abandoned any argument for it on appeal. 

HSBC still appears to contend that the reorganized 

enterprise was "significantly undervalued by the Debtors 

and the Bank Group." HSBC does not, however, argue that 

the District Court committed clear error in determining that 

the reorganization value of the Debtors was "substantially 

below the amount necessary to allow for the satisfaction in 

full of the Bank claims" and thus that Huff and the other 

holders of subordinated notes were substantially out of the 

money (by about $300 million). The interests of the holders 

of the subordinated notes, including Huff and HSBC, were 

thus wiped out and, by operation of the Code, 11 U.S.C. 

S 1126(g), the holders are deemed to have rejected the plan. 

 9 
Huff and HSBC challenge three separate releases of legal 

claims included in the plan. We describe the different 

releases in the three following subsections, sections I.A-C. 

A. 

The first releases pertain to the estate's claims arising 

out of the leveraged recapitalization. These releases include 

"avoidance claims" that, if successful, could have allowed 

the Debtors to avoid certain aspects of the 1995 leveraged 

recapitalization. In late 1998, the Debtors, with the consent 

of the Committee, undertook a review of the leveraged 

recapitalization to determine if any viable fraudulent 

transfer claims existed and should be pursued. In March 

1999, the Debtors' counsel Weil, Gotshal & Manges 

completed a 100 page report analyzing the claims, 

concluding that the transaction was not a fraudulent 

transfer and that there were no viable claims against any of 

its participants. In April 1999, the Committee nevertheless 

voted to preserve these causes of action in the plan. One 

month later, however, the Committee reversed its position 

and, with the support of the trade representatives and the 

Banks, voted to support the plan releasing the claims. 

Huff and HSBC objected to these releases and, as noted, 

successfully moved the District Court for the appointment 

of an Examiner to evaluate the claims. The District Court 

appointed Harrison J. Goldin as Examiner. The Examiner's 

Final Report, prepared with the aid of eminent counsel, 

made extensive findings of fact regarding the leveraged 

recapitalization.4 The Examiner adopted a model for

assessing the viability of the claims that broke the 

probability of success into five categories. Under the model, 

the Examiner concluded that a claim was "highly likely" to 

succeed if he believed that it had an 80% or greater chance 

of success; "likely" if the Examiner believed that it had a 

60% to 80% chance of success; "reasonable" if the 

Examiner believed that the likelihood of success was 

between 40% and 60%; "unlikely" if the Examiner believed 

its chance of success was only between 20% and 40%; and 

_________________________________________________________________ 

4. The Examiner interviewed 19 people and reviewed approximately 

75,000 pages of documents relating to the transaction. 

 10 
"remote" if the Examiner concluded that there was less 

than a 20% chance of success. 

As the report details, in August 1995, certain affiliates of 

KKR, including an Alabama corporation formed for the 

transaction, Crimson Associates LLP (of which KKR is the 

general partner), acquired 83.33% of the stock of Bruno's. 

To pay for this transaction, Bruno's and its affiliated 

Debtors obtained cash and credit through the issuance of 

$400 million in notes, a $475 million term loan facility from 

Chemical Bank, and a $125 million revolving credit facility 

from Chemical Bank (from which approximately $10 million 

was drawn to fund the 1995 transaction). KKR and its 

affiliates contributed $250 million, and Bruno's applied $20 

million of its existing cash to the transaction. 

The net cash proceeds were allocated to the following 

principal uses: (1) payment of $880.1 million of cash 

merger consideration to the pre-closing shareholders (the 

purchase of Bruno's pre-transaction outstanding common 

stock at $12.00 per share); (2) repayment of $200 million 

plus accrued interest in pre-transaction indebtedness; and 

(3) payment of approximately $40 million in fees and 

expenses related to the merger.5 The Examiner hired Goldin 

Associates, L.L.C., to perform a detailed financial analysis 

of the recapitalization. The analysis covered two principal 

issues regarding Bruno's at the time of the recapitalization: 

the solvency of Bruno's, and the adequacy of Bruno's' 

capital resources to meet its future needs, including its 

ability to pay its debts and satisfy its liabilities as due. 

These issues are important to analyzing the claims arising 

out of the recapitalization because the viability of the 

claims depends on whether the recapitalization left Bruno's 

insolvent or with an unreasonably small amount of assets 

in relation to the business or the transaction. If the value 

of the assets acquired in the recapitalization does not 

exceed the debt incurred, or if the business was left with 

unreasonably small capital, the transaction may be a 

_________________________________________________________________ 

5. These fees and expenses included $15 million in fees to KKR, more 

than $14 million to Chase, and more than $10 million to BT Securities 

for underwriting fees and intrabank funding costs. 

 11 
"fraudulent transfer." Transactions in violation of the 

prohibition on fraudulent transfers can be avoided. 6 

The test of solvency is whether, at the time of the

recapitalization, the company's assets exceeded its

liabilities. There are two basic approaches to this

evaluation: asset by asset evaluation, which ascribes value 

to each asset and determines solvency by comparing the 

sum of those assets to total liabilities, and enterprise 

valuation, which values the business as a going concern 

and includes intangibles such as relationships with

customers and suppliers, and the name, profile, and

reputation of the business.7 The Examiner concluded that 

it was likely (i.e., that there was a 60-80% chance) that a 

court would apply the business enterprise analysis. The 

Examiner believed that the business enterprise evaluation 

was the appropriate measure of solvency because KKR

acquired Bruno's as a going concern. 

Under the business enterprise evaluation, the Examiner 

performed three separate analyses: a comparable public 

company analysis, a comparable acquisitions analysis, and 

a discounted cash flow analysis. The Examiner found that 

in all but one of the relevant formulations, Bruno's was 

solvent at the time of the recapitalization. The approach 

favored by the Examiner, comparing enterprise value

derived from a discounted cash flow analysis to long-term 

debt, reflected that the enterprise value of Bruno's exceeded 

its long-term debt by approximately $270 million to $690 

million. The valuation is a range because the Examiner 

used three earnings amounts: sales, EBITDA (earnings 

_________________________________________________________________ 

6. Fraudulent transfer actions may be brought by a debtor-in-possession 

under S 548 of the Code, see 11 U.S.C.S 548, and, pursuant to S 544(b) 

of the Code, under applicable state fraudulent transfer statutes, see 11 

U.S.C. S 544(b). Because the recapitalization occurred approximately two 

and one-half years before the commencement of the Chapter 11 cases, 

S 548 is inapplicable, and hence any fraudulent transfer claims would 

have to be brought under state law through S 544(b) of the Code. 

7. In assessing liabilities, the Examiner considered the bank loans, 

subordinated notes, capital lease obligations, deferred tax liability, and 

contingent and other off-balance sheet liabilities. The Examiner 

concluded that no material adjustments to the balance sheet liabilities 

were required for purposes of the solvency analysis. 

 12 
before interest, taxes, depreciation, and amortization), and 

EBIT (earnings before interest and taxes). The trading 

market enterprise value is divided by these earning

amounts to derive multiples, which are applied to Bruno's' 

earnings totals to derive valuation. 

The other methods of analyzing solvency also resulted in 

a range because the Examiner considered multiple earnings 

amounts. The "assets to liabilities" construct, comparing 

total adjusted enterprise value derived from a discounted 

cash flow analysis to total liabilities, showed that Bruno's 

was solvent by approximately $215 to $635 million. The 

acquisition multiples test, which gives greater weight to an 

acquisition premium, also indicated that Bruno's was 

solvent, with assets of approximately $188 million to $250 

million, using multiples of EBITDA and EBIT, respectively 

(and higher if the multiple of sales is applied). 8 The market 

multiples solvency test, which does not include a control 

premium, produced lower margins of solvency ranging from 

approximately $27 to $104 million. The only test which 

indicated insolvency applied a southeast sales multiple. 

Under this test, the Examiner considered the sales earnings 

amount for comparable enterprises operating in the 

southeastern United States only. 

The Examiner concluded that the southeast sales test 

was an inappropriate means of measuring the solvency of 

Bruno's and, in any event, should be given less weight than 

the other valuations standards. The Examiner also noted 

that the purchase price itself was probative of Bruno's' 

value (and thus solvency). The purchase price indicated an 

enterprise value of $1.2 billion, which exceeded long-term 

debt by approximately $245 million. Adding current 

liabilities of $156.4 million, the sum exceeded total 

liabilities by about $90 million.9 Although he deemed it 

unlikely that a court would apply the asset-by-asset test, 

_________________________________________________________________ 

8. The Examiner considered the sales multiple to be a less appropriate 

measure of solvency than EBITDA and EBIT. 

9. The Examiner's Report appears to contain an arithmetical or 

typographical error in that it concludes from the above numbers that the 

sum exceeded total liabilities by over $190 million, rather than $90 

million. Nothing in this case turns on this point, however. 

 13 
the Examiner also conducted an analysis under the assetby-asset methodology. The sum of Bruno's assets, valued 

piecemeal, was $1,024.8 million. The assets did not exceed 

the total of liabilities, which were $1,114.1 million. 

Additionally, the Examiner analyzed whether the 

recapitalization left Bruno's with unreasonably small 

capital. The critical question is whether the parties' 

projections were reasonable at the time of the transaction. 

The analysis looked at historical data, such as cashflow, 

net sales, gross profit margins, and net profits and losses, 

and whether the parties considered difficulties that might 

arise, such as interest rates fluctuations and market 

downturns, to gauge the reasonableness of the projections 

in light of working capital needs in the industry and actual 

cash available to service needs. Actual performance of the 

debtor following the transaction is evidence of whether the 

parties' projections were reasonable. 

The Examiner opined that Bruno's was not 

undercapitalized. He concluded that at the time of the 

recapitalization Bruno's was a viable enterprise capable of 

substantial improvement, and that the parties' projections, 

although aggressive in some areas, were conservative in 

others. The enterprise failed, in his opinion, not because of 

inadequate capital, but because a series of unfortunate 

decisions, including a change in pricing strategy and a 

decision to close one distribution center, caused substantial 

erosion in the company's customer base. Declining demand 

for Bruno's' services resulted in declining revenue, which 

led to the bankruptcy. 

In part because of these conclusions, the Examiner 

opined that any claims arising out of the recapitalization 

were unlikely to succeed (i.e., that they had only a 20-40% 

chance of success). He reasoned that "the Recapitalization 

differed fundamentally from prior-leveraged transactions 

that have been found to be unlawful; among other things, 

the risks of the transaction were borne by the acquirer 

(KKR) and the lenders (who were unsecured), rather than 

shifted onto pre-transaction creditors." The Examiner also 

concluded that the claims were "not promising," were 

"limited and speculative," that "significant defenses" were 

available to each of the principal participants, the former 

 14 
shareholders, the Banks, the subordinated noteholders, 

and KKR in the recapitalization, and that 

 [i]n light of the multiple legal and factual obstacles to 

 any substantial fraudulent transfer or illegal 

 distribution recovery by the Debtors [relating to the 

 recapitalization], the examiner believes that the 

 prosecution of such claims is extremely difficult to 

 justify . . . . As a legal matter, the laws of the governing 

 jurisdiction (Alabama, and, if suit is filed in Delaware, 

 the Third Circuit) present formidable obstacles to 

 recovery from the principal defendants. 

The releases of these claims do not cover any direct, 

personal, non-derivative claims held by creditors against 

non-debtor third parties. The releases do extinguish many 

if not all of the claims arising out of the recapitalization 

that could have been pursued by the Debtors or on their 

behalf. The parties do not dispute the findings of fact 

included in the Examiner's Final Report. Huff and HSBC 

argue, however, that the Examiner's (and the District 

Court's) conclusion that there was little value to be had 

from the claims was flawed because it depended on the 

Examiner's conclusion that Bruno's was left solvent after 

the recapitalization. Huff argues that the Examiner erred in 

adopting the enterprise valuation approach. 

B. 

The second issue regarding the releases has to do with 

Paragraph 58 of the Confirmation order, which releases 

Committee members and professionals who provided 

services after the petition date from certain liability for their 

work in the reorganization. The release in Paragraph 58 is 

limited to claims brought in connection with work on the 

bankruptcy reorganization plan, and it does not eliminate 

liability but rather limits it to willful misconduct or gross 

negligence. Huff and HSBC nevertheless argue that this 

release violates S 524(e) of the Bankruptcy Code because it 

affects the liability of another entity for the debt of the 

Debtors. The Debtors respond that the releases do not 

come within the meaning of S 524(e) and were consistent 

with the standard of liability under the Code. 

 15 
C. 

The third set of claims concern the waiver of preferences, 

i.e., preference claims to recover from trade creditors and 

suppliers for payments made in the 90 days prior tofiling 

for bankruptcy. As noted above, the Debtors paid out 

substantial sums of money during this period. Under

bankruptcy law, such payments can be recovered by the 

estate; S 547 of the Bankruptcy Code vests exclusive 

discretion to prosecute or not prosecute preference claims 

with the trustee or debtor-in-possession. Afterfiling, the 

Debtors pursued a preference action against the Banks, 

seeking to avoid certain liens granted to the Banks within 

90 days of the filing. The action settled; the Banks agreed 

to release the liens granted just prior to the bankruptcy 

filing against property and assets of the Debtors and, in 

exchange, the Debtors agreed to pay the fees and expenses 

of the Banks' attorneys throughout the Chapter 11 case. 

The Debtors waived many other preference actions. The 

Debtors represent that they decided to waive these claims 

as a part of the reorganization plan in order to facilitate 

and rehabilitate post-reorganization relationships with key 

suppliers. 

D. 

The District Court confirmed the Debtors' reorganization 

plan after a three day hearing. The confirmation order was 

issued by the District Court pursuant to 28 U.S.C.S 1334, 

which grants jurisdiction to the district courts over 

bankruptcy matters. Because this is an appeal from a 

district court exercising original jurisdiction in bankruptcy, 

our jurisdiction stems from 28 U.S.C. S 1291 rather than 

28 U.S.C. S 158(d). See In re Marvel Entertainment Group, 

Inc., 140 F.3d 463, 470 (3d Cir. 1998). The confirmation 

order was a final appealable order. See id. at 469. We 

review the District Court's legal determinations de novo, its 

factual findings for clear error, and its exercise of discretion 

for abuse thereof. See In re Environmental Energy, Inc., 188 

F.3d 116, 122 (3d Cir. 1999). 

II. Equitable Mootness 

Under the doctrine of equitable mootness, an appeal

should be dismissed, even if the court has jurisdiction and 

 16 
could fashion relief, if the implementation of that relief 

would be inequitable. See In re Continental Airlines, 91 F.3d 

553, 559 (3d Cir. 1996) (Continental I). As we noted in 

Continental I, "[t]he use of the word`mootness' as a 

shortcut for a court's decision that the fait accompli of a 

plan confirmation should preclude further judicial 

proceedings has led to unfortunate confusion" between 

equitable mootness and constitutional mootness. Id.

Constitutional mootness implicates the Article III case or 

controversy requirement; an appeal is moot in the 

constitutional sense only if events have taken place that 

make it "impossible for the court to grant `any effectual 

relief whatever.' " Church of Scientology of Calif. v. United 

States, 506 U.S. 9, 12 (1992) (citation omitted). Equitable 

mootness is a broader concept that has developed in

bankruptcy law. It provides that that "[a]n appeal should 

. . . be dismissed as moot when, even though effective relief 

could conceivably be fashioned, implementation of that 

relief would be inequitable." Continental I , 91 F.3d at 558 

(citing In re Chateaugay Corp., 988 F.2d 322, 325 (2d Cir. 

1993)). 

In Continental I, we dismissed the appeal after finding it 

equitably moot because the appeal had an "integral nexus" 

with the feasibility of the Continental Debtors' plan of 

reorganization. Id. at 564. The Court identified prudential 

factors with which to evaluate equitable mootness, 

including whether the plan has been substantially 

consummated or stayed, whether the requested relief would 

affect the rights of other parties, whether the requested 

relief would affect the success of the plan, and whether it 

would further the public policy of affording finality to 

bankruptcy judgments. See id. at 560. These factors are 

given varying weight, depending on the particular 

circumstances, but the foremost consideration is whether 

the reorganization plan has been substantially 

consummated. See id. "This is especially so where the 

reorganization involves intricate transactions . . . or where 

outside investors have relied on the confirmation of the 

plan." Id. at 560-61 (citations omitted). We have also noted, 

however, that the doctrine is "limited in scope and [should 

be] cautiously applied," id. at 559, and that it involves "a 

 17 
discretionary balancing of equitable and prudential factors," 

id. at 560. 

The Debtors here argue that, since the stay was denied 

and the reorganization has gone forward, this appeal is 

equitably moot. They argue that the appeal, if successful, 

would necessitate the reversal or unraveling of the entire 

plan of reorganization. We disagree. There are intermediate 

options. The releases (or some of the releases) could be 

stricken from the plan without undoing other portions of it. 

We draw instruction in this regard from In re Chateaugay 

Corp., 167 B.R. 776, 780 (S.D.N.Y. 1994), in which the 

court stated that 

 [i]t is difficult to conceive how a potential liability of, at 

 most, several million dollars could unravel the Debtors' 

 reorganization, which involved the transfer of billions of 

 dollars, and which has resulted in the revival of 

 Debtors into a multibillion dollar operation with $200 

 million in working capital . . . appellees have made no 

 showing that it would "knock the props out from under 

 the authorization for every transaction that has taken 

 place and create an unmanageable, uncontrollable 

 situation for the Bankruptcy Court." 

(quoting In re Chateaugay Corp., 10 F.3d 944, 952 (2d Cir. 

1993)). 

In balancing the policy favoring finality of bankruptcy 

court judgments--particularly reorganization plans-- 

against other considerations, we conclude that the equities 

here do not require dismissal. Huff has clearly been an 

active participant in the reorganization and was heard at 

length in the confirmation hearing, and in that sense has 

had its day in court. It seeks to invalidate releases that 

affect the rights and liabilities of third parties. The plan has 

been substantially consummated, but, as noted above, the 

plan could go forward even if the releases were struck, and 

Huff 's reply brief suggests that it now seeks only

alterations to the plan rather than an unraveling of the 

reorganization. Cf. In re Continental Airlines , 203 F.3d 203, 

210 (3d Cir. 2000) (Continental II) (rejecting equitable 

mootness argument as inadequately pled, but noting also 

that the argument was unlikely to succeed because"[n]o 

 18 
evidence or arguments have been presented that Plaintiffs' 

appeal, if successful, would necessitate the reversal or 

unraveling of the entire plan of reorganization"). We 

therefore hold that this appeal should not be dismissed for 

equitable mootness. 

III. The Absolute Priority Rule 

Section 1129(b)(2) of the Bankruptcy Code requires that 

creditors be paid in full before holders of equity receive any 

distribution. It reads in pertinent part: 

 (2) For the purpose of this subsection, the condition 

 that a plan be fair and equitable with respect to a class 

 includes the following requirements: 

 . . . 

 (b) With respect to a class of unsecured claims-- 

 . . . 

 (ii) the holder of any claim or interest that is junior to 

 the claims of such class will not receive or retain under 

 the plan on account of such junior claim or interest 

 any property. 

11 U.S.C. S 1129(b)(2). This provision is the"absolute 

priority rule." Huff contends that the District Court erred in 

confirming the plan because, by releasing the claims arising 

out of the recapitalization, the plan awarded an interest to 

old equity (KKR and the other participants in the 

reorganization) "on account of " their interest in the estate 

in violation of the absolute priority rule. Huff 's theory has 

several components. First, it makes the legal argument that 

under Bank of America National Trust and Savings 

Association v. 203 North LaSalle Street Partnership , 526 

U.S. 434 (1999), the Supreme Court's most recent case 

construing S 1129(b)(2), no junior class of creditors or 

interest holders may receive or retain any property under a 

plan in which a rejecting class of creditors is not being paid 

in full. Second, Huff submits that the District Court erred 

in concluding that the claims were eliminated because they 

were unlikely to succeed and potentially costly to the 

debtors to pursue. The success of this contention depends 

 19 
on Huff 's ability to establish that the Examiner and the 

District Court erred in concluding that the claims were 

unlikely to succeed. We begin by discussing 203 North 

LaSalle. 

A. 

In 203 North LaSalle, 526 U.S. 434 (1999), the Supreme 

Court held that, even if it is assumed that there is a new 

value corollary to the absolute priority rule (which would 

allow old equity to contribute new value and receive interest 

in the reorganized entity in exchange), allowing junior 

interest holders to have an exclusive opportunity to obtain 

an interest in a reorganized entity by providing new value, 

free from competition and without market valuation,

violates S 1129(b)(2)(B)(ii). See id. at 458.10 This is because 

the exclusive opportunity to invest in the reorganized entity 

(and receive equity in it thereby) must be considered 

property received "on account of " the junior claim (the 

equity interest). Id. Huff argues that the plan, by releasing 

the claims arising out of the leveraged recapitalization held 

by the bankrupt entity against holders of junior equity 

(such as KKR) even though senior creditors were not paid 

in full, essentially transferred property to those holders of 

junior equity in violation of the absolute priority rule. 

There can be little doubt that a legal claim is property 

within the meaning of the Bankruptcy Code. See Northview 

Motors, Inc. v. Chrysler Motors Corp., 186 F.3d 346, 350 (3d 

Cir. 1999) (treating estate's legal claims as estate property 

within the meaning of the Code). Similarly, a release of 

liability has value cognizable under the Code. Accordingly, 

when the Debtors extinguished the claims arising out of the 

_________________________________________________________________ 

10. For some time, there has been a split of authority regarding whether 

there is a "new value" exception or corollary to the absolute priority 

rule. 

Such a corollary would mean that, when old equity provides new value 

under the reorganization plan, any property it receives under the plan 

would not be considered to be received "on account of " the old equity 

interest and therefore would not violate the absolute priority rule. The 

Supreme Court declined to decide whether there is a new value corollary 

in 203 North LaSalle, 526 U.S. at 454 (1999), and that issue is not 

presented in this case. 

 20 
recapitalization, KKR received something of value even 

though some creditors senior to the equity holder had not 

been paid in full. KKR is a key potential object of the 

avoidance claims because it was a moving force in the 

reorganization, and a holder of equity in the Debtors. Thus, 

if KKR benefitted from the releases "on account of " its 

interest in the Debtors, then the plan violated the absolute 

priority rule. 

In 203 North LaSalle, the Supreme Court interpreted the 

"on account of " language in S 1129(B)(2)(b)(ii). The Court 

rejected arguments that "on account of " means "in 

satisfaction of " the interest or "in exchange for" the interest 

and concluded that it means "because of " the interest. 526 

U.S. at 450-51. Accordingly, a causal connection between 

holding the prior claim or interest, and receiving or 

retaining property, will trigger the absolute priority rule. 

The degree of causation required is not defined specifically 

in 203 North LaSalle, because the Court concluded that on 

either of several views the creditor's objection in that case 

would require rejection of the plan at issue. See id. at 454. 

Nevertheless, the Court provided a few points of reference 

for defining prohibited "on account of " transactions. 

First, the Court rejected the amicus curiae position of the 

United States, which had contended that, under a 

reorganization plan, old equity should not be allowed to 

take any property of the debtor if creditors are not paid in 

full. See id. at 451. The Court said that this "starchy" 

position could not be correct because, under this view of 

the absolute priority rule, Congress would have omitted 

entirely the phrase "on account of." Id. at 451-52. This 

confirms that there are some cases in which property can 

transfer to junior interests not "on account of " those 

interests but for other reasons. 

Second, in considering the necessary level of causation, 

the Court looked to the two basic goals of Chapter 11: 

those of "preserving going concerns and maximizing 

property available to satisfy creditors." Id. at 453. While 

emphasizing that it was not providing "an exhaustive list of 

the requirements," id., the Court explained: 

 Causation between the old equity's holdings and 

 subsequent property substantial enough to disqualify a 

 21 
 plan would presumably occur on this view of things 

 whenever old equity's later property would come at a 

 price that failed to provide the greatest possible 

 addition to the bankruptcy estate, and it would always 

 come at a price too low when the equity holders 

 obtained or preserved an ownership interest for less 

 than someone else would have paid. 

Id. at 453 (citations omitted). 

B. 

We do not believe that these releases were made"on 

account of " KKR's junior interest as that phrase is 

construed in 203 North LaSalle. What doomed the plan in 

203 North LaSalle was not that old equity received property 

under the plan, but the "exclusivity" that old equity 

enjoyed, which suggested that old equity might have

obtained the interest for less than someone else might have 

paid.11 Under the 203 North LaSalle plan, old equity set the 

price for the interest it obtained under the plan, and the 

right to set this price amounted to a property right in itself: 

 Hence it is that the exclusiveness of the opportunity 

 with its protection against the market's scrutiny of the 

 purchase price by means of competing bids or even 

 competing plan proposals, renders the partners' right a 

 property interest extended "on account of " the old 

 equity position and therefore subject to an unpaid 

 senior creditor class's objection. 

Id. at 456. 

In this case, to the extent that KKR and the other entities 

that benefitted from the releases had an exclusive 

_________________________________________________________________ 

11. Huff argues that 203 North LaSalle's prohibition on exclusive 

opportunities was violated here because the Debtors had the exclusive 

opportunity to dispose of the Debtors' property. However, to read 203 

North LaSalle so broadly would be to undermine the express statutory 

provision for exclusivity in S 1121(b), which provides "[e]xcept as 

otherwise provided in this section, only the debtor may file a plan until 

after 120 days after the date of the order for relief under this chapter." 

See In re Zenith Electronics, 241 B.R. 92, 106 (Bankr. D. Del. 1999) 

(making this point). This we decline to do. 

 22 
opportunity to gain the release in the reorganization, it was 

only because they were on the radar screen as potentially 

liable parties. Huff has adduced no evidence that they 

sought out the releases or set a price for them; indeed, Huff 

itself made several offers for the claims, which were 

considered and rejected, demonstrating that KKR enjoyed 

no exclusivity of opportunity.12 

The District Court held that the decision to extinguish 

the claims arising out of the recapitalization was made 

because the claims were adjudged to have a negative value 

to the estate and not because the junior creditors 

persuaded the Debtors to release them "on account of " 

their interest in the Debtors and in violation of the absolute 

priority rule. It concluded that the claims were extinguished 

for three reasons. First, it was persuaded by the Examiner's 

conclusion that there was a low likelihood of recovery on 

the claims. At the stay hearing, the Court noted that 

 I have to say I was sitting at the end of the 

 confirmation hearing, still waiting to hear the facts that 

 would convince me that there . . . was value to be had 

 . . . and I never heard that. And I remain convinced 

 that there was every opportunity to make that record, 

 and that record was not made. 

The Examiner concluded that the prospects for successfully 

prosecuting the claims were "not promising." He noted that, 

as a factual matter, the recapitalization transaction differed 

markedly from prior highly leveraged transactions that had 

been found to be unlawful insofar as the risks of the 

transaction were born by the acquirer (KKR) and other 

unsecured creditors and not by pre-transaction creditors. 

Second, the Court concluded that the potential cost to the 

_________________________________________________________________ 

12. Huff has argued that its own willingness to buy the claims from the 

bankruptcy estate shows that the claims did have value (and thus, by 

implication, that they were extinguished not because they lacked value 

but because they had value that the junior creditors saw and managed 

to capture in violation of the absolute priority rule). But Huff offered 

only 

$100,000 plus some portion of any future recovery. We do not think that 

relatively meager and arguably strategic offer demonstrates that the 

claims would have had more value to the estate if they had been 

preserved or sold to Huff than they did under the reorganization plan. 

 23 
estate of prosecuting the action and defending and paying 

indemnification claims, cross claims, and counterclaims 

arising out of the prosecution was high. Third, the Court 

believed that there was some likelihood that the Banks and 

the subordinated noteholders, as participants in the 

leveraged recapitalization, would be estopped from 

recovering on the claims. 

Huff and HSBC do not challenge the Examiner's (and the 

District Court's) factual findings, which, at all events, are 

well supported, but contend that the Examiner's analysis of 

the value of the claims was flawed because he made a legal 

error in determining that a court would evaluate the claims 

on an enterprise evaluation basis, and thus he incorrectly 

concluded that the claims were unlikely to succeed. It is on 

this basis that they challenge the finding made by the 

Examiner and accepted by the District Court that the 

claims were of little value to the estate. Their theory is that 

the claims did have substantial value and thus that the 

District Court erred in concluding that the claims were 

released because they were adjudged to be unlikely to 

succeed. 

C. 

The Examiner analyzed the viability of any claims arising 

out of the recapitalization primarily under Alabama law.13 

Two types of fraudulent transfers, actual and constructive, 

are within the scope of the Alabama Fraudulent Transfer 

Act, ALA. CODE 1975, S 8-9A-1 et seq. See McPherson Oil Co., 

Inc. v. Massey, 643 So.2d 595, 596 (Ala. 1994). An actual 

fraudulent transfer is one made by a debtor who transfers 

assets "with actual intent to hinder, delay, or defraud any 

creditor of the debtor." ALA. CODE 1975, S 8-9A-4(a). The 

trial court considers several factors in determining whether 

the debtor possessed the requisite intent, including to 

_________________________________________________________________ 

13. Huff does not challenge the decision to analyze claims arising out of 

the recapitalization under Alabama law. The Examiner canvassed choice 

of law rules and determined that Alabama law would apply to the claims 

whether suit was filed within the Third Circuit or in Alabama because 

Alabama's contacts with Bruno's generally, and with the recapitalization 

specifically, exceeded all others in quantity, substance, and 

significance. 

 24 
whom the transfer was made, the amount of assets 

transferred, and the financial condition of the debtor before 

and after the transfer. See id., S8-9A-4(b); McPherson Oil, 

643 So.2d at 596. A constructive fraudulent transfer occurs 

when a debtor transfers assets to another without 

consideration, and the debtor was, or became, insolvent at 

the time of the transfer. See ALA. CODE 1975, S 8-9A-5(a); 

McPherson Oil, 643 So.2d at 596; Champion v. Locklear, 

523 So.2d 336, 338 (Ala. 1988). 

The parties have focused on potential constructive 

fraudulent transfer claims.14 To succeed on a claim of 

constructive fraudulent transfer arising out of the

recapitalization, a claimant would have to show that 

Bruno's was insolvent or left with unreasonably small 

capital at the time of the recapitalization.15 Based on the 

conclusion that the leveraged recapitalization did not 

render Bruno's insolvent or leave it with unreasonably 

small capital, the Examiner concluded that the claims had 

little value.16 He noted as well that, because KKR bore most 

of the risk of the transaction, the chance that KKR would 

be held liable for constructive fraudulent transfer was 

remote. 

Huff would have us reject the Examiner's conclusions 

that Bruno's was solvent after the recapitalization on the 

basis that the Examiner used an incorrect method to

evaluate solvency. Huff argues that the Examiner erred by 

evaluating solvency on a "business enterprise" method 

rather than a "piecemeal or asset-by-asset" valuation 

method (which does not take goodwill into account except 

_________________________________________________________________ 

14. The Examiner concluded that the chances that a claim for actual 

fraudulent transfer would succeed were remote. 

15. The Examiner concluded that the fraudulent transfer claims would 

not be barred under the applicable statutes of limitations, and no one 

has challenged that conclusion. 

16. The Examiner also concluded that there was a reasonable possibility 

that the subordinated noteholders and the Banks would be estopped 

from sharing in any fraudulent transfer recoveries. In this regard, it is 

significant that 87% of the debtors' creditors (i.e. the senior lenders 

and 

the subordinated noteholders) participated in the recapitalization. 

 25 
insofar as the entity includes separately saleable 

intangibles).17 

The Examiner used the business enterprise method, as 

opposed to the asset-by-asset method, after extensive 

analysis of the case law. He concluded that it was unlikely 

that a court would analyze fraudulent conveyance claims 

under the asset-by-asset test and that the business

enterprise method was consistent with generally accepted 

accounting principles (GAAP) and appropriate under the 

circumstances. We conclude that the District Court's 

decision to credit the Examiner's Report, which concluded 

that the business enterprise approach was the appropriate 

measure of solvency, was not error. The Alabama 

Fraudulent Transfer Act does not appear to require an 

asset-by-asset approach.18 The statute limits the definition 

of assets without excluding assets, such as goodwill, that 

are typically included in the business enterprise analysis 

_________________________________________________________________ 

17. The Examiner actually used an "adjusted business enterprise" 

method, in which he considered short-term liabilities, which are often 

left out of a business enterprise analysis. He did so because he 

concluded that a court analyzing fraudulent transfer would include short 

term liabilities in an assessment of liabilities. The Examiner also 

considered contingent and off-balance sheet liabilities for the same 

reason. 

18. The statute provides that 

 (a) A debtor is insolvent if the sum of the debtor's debts is 

greater 

 than all of the debtor's assets at a fair valuation. 

 (b) A debtor who is generally not paying his debts as they become 

 due is presumed to be insolvent. 

 *** 

 (d) Assets under this section do not include property that has been 

 transferred, concealed, or removed with intent to hinder, delay, or 

 defraud creditors or that has been transferred in a manner making 

 the transfer voidable under this chapter. 

 (e) Debts under this section do not include an obligation to the 

 extent it is secured by a valid lien on property of the debtor not 

 included as an asset. 

ALA. CODE 1975 S 8-9A-2. No evaluation method is specified by the 

statute, which does not define "fair valuation." 

 26 
but not in an asset-by-asset evaluation. See ALA. CODE 1975 

S 8-9A-2. 

Moreover, however value is analyzed, it is clear that 

Bruno's functioned soundly for several years after the 

recapitalization, paying its debts (including all interest 

payments) and successfully renegotiating the interest rates 

on some of its loans. Huff has given us no reason to 

conclude that the Examiner incorrectly determined that 

Bruno's was solvent at the time of the recapitalization. Huff 

itself initially invested in Bruno's in December 1995 (four 

months after the recapitalization). It made additional 

investments in 1996 and early 1997, and in October 1997 

Huff 's analysts were still recommending Bruno's as a 

"buy." Importantly, and as the District Court noted, at the 

time of the recapitalization Huff 's own experts agreed that 

Bruno's was solvent: 

 The credit analysis prepared by Huff 's financial 

 analyst, Allen Gurevich, in August 1995 (Debtor's 

 Exhibit 18) and the testimony of Huff 's portfolio 

 manager (tr. pp 122-123) and Huff 's inside attorney 

 Bryan Bloom (tr. 166-0167) that the fair market value 

 of Bruno's at the time of the Leveraged Recapitalization 

 in August 1995 approximated 1.1 billion. 

And as the Examiner noted, "in connection with the 

transaction, other sophisticated financial inst[itutions] 

relied on KKR's projections. From interviews with 

representatives of all of these institutions and a review of 

thousands of documents, the Examiner is aware of no

instance in which these institutions contemporaneously 

challenged the reasonableness of KKR's projections for 

Bruno's." Huff 's challenge to the Examiner's and the 

District Court's finding that the leveraged recapitalization 

did not render Bruno's insolvent is unavailing. 

As noted above, Huff does not challenge the Examiner's 

factual findings, and we find no error in District Court's 

decision to accept the Examiner's decision to evaluate the 

claims using the business enterprise method. Huff 's 

remaining argument that the release of the claims was on 

account of the interest amounts to an argument from res 

ipsa loquitur: KKR had an equity interest in the corporation, 

 27 
and therefore the Debtors must have made the releases for 

that reason. If we were to accept this position, without 

some evidence of a causal relationship, any time that old 

equity received anything of value under a reorganization 

plan we would have to conclude that it was received"on 

account of " the interest--the position rejected by the 

Supreme Court in 203 North LaSalle. See 526 U.S. at 451- 

52. In this regard, it is significant that claims against all 

participants in the recapitalization, and not just KKR, were 

extinguished, including all claims against the noteholders 

(including Huff) and all claims against the shareholders 

who were bought out in the recapitalization (who were the 

managers of the company when it made the deal for the 

reorganization). 

The evidence compels the conclusion that the claims

were extinguished because, in the judgment of the plan 

proponents, extinguishment was the approach most likely 

to provide the greatest possible addition to the bankruptcy 

estate. To be sure, the releases were not subjected to a 

formal "market test," as 203 North LaSalle suggests may be 

required. However, in these circumstances, the Examiner's 

finding that the claims had little to no value, which was 

accepted by the District Court, was an appropriate 

surrogate for a market test and an acceptable safeguard. 

We thus conclude that the District Court did not err in 

concluding that the potential cost of defending and paying 

indemnification claims, cross claims, and counterclaims 

arising out of the prosecution of the claims was high, and 

that the claims were extinguished not on account of KKR's 

interest in the Debtors, but because the Debtors 

determined that they were unlikely to have any value. The 

Examiner's and the District Court's conclusions that the 

claims were unlikely to succeed and were potentially costly 

to pursue are legally and factually supported. Huff has 

failed to demonstrate the requisite causal relationship 

between the transfer of value and KKR's interest in the 

Debtors. Therefore, we conclude that the plan did not 

violate the absolute priority rule. 

This is not to say that a reorganization plan can transfer 

assets whenever the Trustee or the Debtor-in-Possession 

judges that to do so would be in the best interest of the 

 28 
reorganized entity. Rather, we announce a narrow rule that, 

without direct evidence of causation, releasing potential 

claims against junior equity does not violate the absolute 

priority rule in the particular circumstance in which the 

estate's claims are of only marginal viability and could be 

costly for the reorganized entity to pursue. 

IV. Good Faith 

Huff contends that the plan should not have been 

confirmed because the District Court erred in determining 

that it was proposed in good faith. Section 1129(a)(3) 

provides that the court shall confirm a plan only if "[t]he 

plan has been proposed in good faith and not by any means 

forbidden by law." 11 U.S.C. S 1129(a)(3)."[F]or purposes of 

determining good faith under section 1129(a)(3) . . . the 

important point of inquiry is the plan itself and whether 

such a plan will fairly achieve a result consistent with the 

objectives and purposes of the Bankruptcy Code." In re 

Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 150 n.5 

(3d Cir. 1986) (quoting In re Madison Hotel Assocs., 749 

F.2d 410, 425 (7th Cir. 1984)) (alteration in original). The 

District Court's determinations of fact pertaining to good 

faith are reviewed for clear error. Cf. Abbotts Dairies, 788 

F.2d at 147 (holding that the standard of review for good 

faith under S 363(m) of the Code is mixed:"we exercise 

plenary review of the legal standard applied by the district 

and bankruptcy courts, but review the latter court's 

findings of fact on a clearly erroneous standard") (citations 

omitted). 

Huff contends that the plan was not proposed in good 

faith because the releases from any claims arising out of 

the recapitalization were made in a collusive quid pro quo 

for the waiver of preferences. Huff 's theory of bad faith is 

that KKR orchestrated the reorganization and controlled the 

Debtors throughout the reorganization in order to avoid 

potential liability arising out of the leveraged 

recapitalization, and that it persuaded the other creditors to 

agree to the reorganization plan by including the waiver of 

preferences. 

As the District Court found, however, the timing of the 

releases belies this argument; there is scant evidence tying 

 29 
the release of the claims arising out of the recapitalization 

to the waiver of preferences. The Debtors decided not to 

pursue the preferences on March 17, 1999. One month

later, the Committee passed a resolution preserving the 

claims arising out of the recapitalization until further 

information could be gathered about them. This shows that 

a month after the Debtors decided not to pursue the

preferences, the Committee had not decided whether to 

release the claims arising out of the recapitalization plans. 

At the confirmation hearing, Ms. Schirmang, co-chair of 

the Committee, testified that the Debtors did not release 

the claims arising out of the leveraged recapitalization in a 

quid pro quo deal for the preference claims. She testified 

that, when the Committee decided to release the claims in 

May 1999, it did so "in the interest of getting the plan into 

the hands of creditors and hopefully getting a distribution 

as soon as possible and getting the Debtor out of 

bankruptcy." Ms. Schirmang also testified that the 

preference waivers were intended to maintain and 

rehabilitate post-petition relationships within the trade, and 

that there was nothing unusual about the waiver of 

preferences: "to be honest with you, I have never seen a 

reorganized debtor pursuing preference actions." The trade 

creditors who benefitted from the waivers included key 

suppliers to the business. See note 3, supra. Huff has not 

presented anything but innuendo in support of its 

argument that the Debtors failed to act in good faith. Given 

the record evidence, we conclude that the District Court's 

finding that the plan was proposed in good faith was not in 

error. 

V. Conformity to Applicable Provision of 

 Title II of the Code 

Section 1129(a)(1) provides that the court shall confirm a 

plan if it "complies with the applicable provisions of this 

title." 11 U.S.C. S 1129(a)(1). This requires that the plan 

conform to the applicable provisions of Title II. See 

Lawrence P. King, Collier on BankruptcyP 1129.03[1], 1129- 

25 (15th ed. rev. 1996). Huff argues that the plan should 

not have been confirmed because it violates several

provisions of Title II. 

 30 
A. Section 510(a) 

Section 510(a) provides that a "subordination agreement 

is enforceable in a case under this title to the same extent 

that such agreement is enforceable under applicable

nonbankruptcy law." Huff argues that it had subrogation 

rights under the indenture which are violated by the terms 

of the plan. The relevant provision of the indenture provides 

that 

 [a]fter all senior indebtedness has been paid in full 

 . . . . Holders shall be subrogated . . . to the rights of 

 holder of Senior Indebtedness to receive distributions 

 [from the debtors] applicable to Senior Indebtedness to 

 the extent that distributions otherwise payable to the 

 Holders have been applied to the payment of Senior 

 Indebtedness. No payments or distributions to the 

 holders of Senior Indebtedness to which the Holders of 

 the Securities or the Trustee would be entitled except 

 for the provisions of this Article . . . shall, as between 

 the Company, its creditors other than holders of the 

 Senior Indebtedness and the Holders of the Securities, 

 be deemed to be a payment by the Company to or on 

 account of Senior Indebtedness. 

The subordination agreement is an intercreditor 

arrangement between the Banks (the senior indebtedness) 

and the subordinated noteholders. It does not relieve the 

Debtors of their payment obligations on the subordinated 

notes. But the subordinated noteholders' subrogation rights 

under the indenture described in these provisions never 

arose because the Banks' claims were not paid in full under 

the plan. There is no question that the Banks were not paid 

in full under the reorganization plan, because the 

reorganized entity was worth at most $340 million, whereas 

the Banks had claims of $421 million. 

Huff argues that the subordinated noteholders had a

right under this provision to subrogation. More specifically, 

Huff argues that it should be awarded warrants to 

purchase common stock if and when the reorganized 

company reaches a value of $421 million. But the 

bankruptcy estate is evaluated and distributions made at 

the time of the effective date of the reorganization plan. See 

 31 
11 U.S.C. S 1129(b)(2)(B)(i) (referring to"value, as of the 

effective date of the plan"). After that date, there are no 

remaining claims under which Huff could assert 

subrogation rights. This contention therefore fails. 

Huff also argues that under an additional clause, the socalled X clause, the subordinated noteholders should get 

securities in the new entity subordinated to the Banks' 

interests to the same extent that they had an interest in the 

old entity.19 The clause states that 

 [u]ntil all Obligations with respect to Senior 

 Indebtedness (as provided in Subsection above) are 

 paid in full in cash or cash equivalent, any distribution 

 to which holders would be entitled but for this article 

 shall be made to holders of Senior Indebtedness (except 

 that Holder may receive (i) securities that are 

 subordinated to at least the same extent as the 

 Securities to (a) Senior Indebtedness and (b) any 

 securities issue in exchange for Senior Indebtedness), 

 as their interests may appear. 

This clause does not apply to the current situation. The 

clause requires that, if the Debtors distribute securities to 

the subordinated noteholders, the general obligation to turn 

over distributions to Senior Indebtedness is waived so long 

as the new securities are subordinated "to the same extent 

as" the existing subordinated debt. 

As the Seventh Circuit has explained, these clauses are 

quite common, and are intended to avoid a procedure of 

requiring junior creditors to turn over securities and then 

receive them back once senior creditors are paid in full: 

 [s]uch clauses are common in bond debentures, 

 although there is no standard wording. Without the 

 clause, the subordination agreement that it qualifies 

 would require the junior creditors to turn over to the 

 senior creditors any securities that they had received 

 as a distribution in the reorganization, unless the 

 senior creditors had been paid in full. Then, 

_________________________________________________________________ 

19. The Debtors argue that this issue was not raised in the District 

Court, but we are satisfied that it was raised in HSBC's objections to the 

plan, and in Huff 's argument to the District Court. 

 32 
 presumably, if the senior creditors obtained full 

 payment by liquidating some of the securities that had 

 been turned over, the remaining securities would be 

 turned back over to the junior creditors. The X Clause 

 shortcuts this cumbersome procedure and enhances 

 the marketability of the securities received by the 

 junior creditors, since their right to possess (as distinct 

 from pocket the proceeds of) the securities is 

 uninterrupted. 

In the Matter of Envirodyne Indus., Inc., 29 F.3d 301, 306 

(7th Cir. 1994). We agree. The clause is not a requirement 

that the Debtors distribute to the subordinated noteholders 

subordinated securities, or warrants to purchase securities, 

if the reorganized entity does well in the future so that the 

Banks (the Senior Indebtedness) make back their losses, in 

proportion to any securities distributed to Senior 

Indebtedness. 

Huff makes one final argument under this section--that 

the provision of the indenture that states that"nothing in 

the indenture shall impair, as between the Company and 

the holders, the obligation of the Company, which is 

absolute and unconditional, to pay principal of and interest 

on the Securities in accordance with their terms," requires 

the Debtors to preserve a recovery for the noteholders with 

the issuance of securities junior to the common stock. This 

is a misreading of the provision, which simply provides that 

the subordination agreement is an intercreditor 

arrangement, i.e., an arrangement between the Banks (the 

senior indebtedness) and the subordinated noteholders, 

and does not relieve the Debtors of their payment 

obligations on the subordinated notes. 

B. Section 524(e) 

Section 524(e) provides that "[e]xcept as provided in 

subsection (a)(3) of this section,[20 ] discharge of a debt of 

_________________________________________________________________ 

20. Subsection (a)(3) provides that a discharge of a case under Title II 

 operates as an injunction against the commencement or 

 continuation of an action, the employment of process, or an act, to 

 33 
the debtor does not affect the liability of any other entity 

on, or the property of any other entity for, such debt." 11 

U.S.C. S 524(e). Huff argues that the release in Paragraph 

58 of the confirmation order violates S 524(e), because it 

affects the liability of the members of the Committee and 

professionals who provided services to the Debtors to third 

parties. However, we believe that Paragraph 58, which is 

apparently a commonplace provision in Chapter 11 plans, 

does not affect the liability of these parties, but rather 

states the standard of liability under the Code, and thus 

does not come within the meaning of 524(e).21 

Section 524(e) "makes clear that the bankruptcy 

discharge of the debtor, by itself, does not operate to relieve 

non-debtors of their liabilities." In re Continental Airlines, 

203 F.3d 203, 211 (3d Cir. 2000) (Continental II ) (citations 

omitted). Section 524(e), by its terms, only provides that a 

discharge of the debtor does not affect the liability of nondebtors on claims by third parties against them for the debt 

discharged in bankruptcy. Thus, for example, S 524(e) 

makes clear that a discharge in bankruptcy does not

_________________________________________________________________ 

 collect or recover from, or offset against, property of the debtor 

of 

 the kind specified in section 541(a)(2) of this title that is 

acquired 

 after the commencement of the case, on account of any allowable 

 community claim, except a community claim that is excepted from 

 discharge under section 523, 1228(a)(1), or 1328(c)(1) of this 

title, or 

 that would be so excepted, determined in accordance with the 

 provisions of sections 523(c) and 523(d) of this title, in a case 

 concerning the debtor's spouse commenced on the date of the filing 

 of the petition in the case concerning the debtor, whether or not 

 discharge of the debt based on such community claim is waived. 

11 U.S.C. 524(a)(3). 

21. HSBC argues more generally that "[t]he most obvious defect of the 

Plan is that it incorporates releases and provides for extinction of 

causes 

of action against non debtor third parties for no consideration." It 

argues 

that under In re Continental Airlines, 203 F.3d 203, 211 (3d Cir. 2000), 

a plan with releases is unconfirmable as a matter of law. HSBC reads 

S 524(e) and Continental II too broadly. Section 524(e) provides that the 

bankruptcy discharge of the debtor does not operate to relieve nondebtors of their liabilities, but by its terms it does not govern 

provisions 

in a plan by which a debtor releases its own claims against third parties. 
 34 
extinguish claims by third parties against guarantors or 

directors and officers of the debtor for the debt discharged 

in bankruptcy. Indeed, Continental II held that a plan that 

enjoined plaintiffs' actions against the debtor's directors 

and officers who "ha[d] not formally availed themselves of 

the benefits and burdens of the bankruptcy process," id. at 

211, violated S 524(e), id. at 214. The injunction in that 

plan protected directors and officers from actions taken 

prior to bankruptcy that allegedly violated the securities 

laws and thus abrogated the liability of third parties. 

Paragraph 58 does not similarly affect the liability of 

third parties. Paragraph 58 provides that 

 [n]one of the Debtors, the Reorganized Debtors, New 

 Bruno's, the Creditor Representative, the Committee or 

 any of their respective members, officers, directors, 

 employees, advisors, professionals or agents shall have 

 or incur any liability to any holder of a Claim or Equity 

 Interest for any act or omission in connection with, 

 related to, or arising out of, the Chapter 11 Cases, the 

 pursuit of confirmation of the Plan, the consummation 

 of the Plan or the Administration of the Plan or the 

 property to be distributed under the Plan, except for 

 willful misconduct or gross negligence, and, in all 

 respects, the Debtors, the Reorganized Debtors, New 

 Bruno's, the Creditor Representative, the Committee 

 and each of their respective members, officers, 

 directors, employees, advisors, professionals and 

 agents shall be entitled to rely upon the advice of 

 counsel with respect to their duties and responsibilities 

 under the plan. 

Under Paragraph 58, members of the Committee and 

professionals who provided services to the Debtors remain 

liable for willful misconduct or gross negligence. Because 

we conclude that this standard of liability is the standard 

that already applies in this situation, we believe that 

Paragraph 58 affects no change in liability. 

Section 1103(c) of the Bankruptcy Code, which grants to 

the Committee broad authority to formulate a plan and 

perform "such other services as are in the interest of those 

represented," 11 U.S.C. S 1103(c), has been interpreted to 

 35 
imply both a fiduciary duty to committee constituents and 

a limited grant of immunity to committee members, see In 

re L.F. Rothschild Holdings, Inc., 163 B.R. 45, 49 (S.D.N.Y. 

1994); In re Drexel Burnham Lambert Group, Inc. , 138 B.R. 

717, 722 (Bankr. S.D.N.Y. 1992), aff 'd, 140 B.R. 347 

(S.D.N.Y. 1992); In re Tucker Freight Lines, Inc., 62 B.R. 

213, 216, 218 (Bankr. W.D. Mich. 1986); Lawrence P. King, 

Collier on Bankruptcy P 1103.05[4], 1103-32-33 (15th ed. 

rev. 1996) ("[A]ctions against committee members in their 

capacity as such should be discouraged. If members of the 

committee can be sued by persons unhappy with the 

committee's performance during the case or unhappy with 

the outcome of the case, it will be extremely difficult to find 

members to serve on an official committee."). 

This immunity covers committee members for actions 

within the scope of their duties. The committee members 

and the debtor are entitled to retain professional services to 

assist in the reorganization. In Pan Am Corp. v. Delta 

Airlines, Inc., 175 B.R. 438, 514 (S.D.N.Y. 1994), it was held 

that committee members and those professionals who 

provide services to the debtor with respect to 

reorganization, or to the committee members in their 

capacity as committee members, however, do remain liable 

for willful misconduct or ultra vires acts. 

We agree with this interpretation of S 1103(c) and hold 

that it limits liability of a committee to willful misconduct 

or ultra vires acts. The release in Paragraph 58 sets forth 

the appropriate standard for liability that would apply to 

actions against the committee members and the entities 

that provided services to the Committee in the event that 

they were sued for their participation in the reorganization.22 

_________________________________________________________________ 

22. Huff also argues that the failure of the Debtors to enforce the 

subordinated noteholders' subrogation rights violates S 524(e) and calls 

this a provision "extinguish[ing] the Noteholders' rights to seek 

recoveries 

directly against the Banks," which constitutes an impermissible nonconsensual third-party release. However, this argument is specious for 

the same reason that Huff 's main argument about the surbordination 

agreement is specious: the subordinated noteholders' subrogation rights 

only arise when the senior lenders are paid in full. As noted above, the 

senior creditors in this case were not paid in full under the plan. 

 36 
It does not affect the liability of another entity on a debt of 

the debtor within the meaning of S 524(e). 

Nothing in our recent opinion in Continental II is to the 

contrary. In that case, we held that a plan that enjoined 

plaintiffs' actions against Continental's directors and 

officers violated S 524(e). Id. at 214. The release in question 

here differs from that in Continental II in a fundamental 

way: it sets forth the applicable standard of liability under 

S 1103(c) rather than eliminating it altogether. In

Continental II, we concluded that it was clear under any 

rule that the court might adopt that the releases at issue 

were impermissible because "the hallmarks of permissible 

non-consensual releases--fairness, necessity to the

reorganization, and specific factual findings to support 

these conclusions--are all absent here." Id. at 214. We did 

not treat S 524(e) as a per se rule barring any provision in 

a reorganization plan limiting the liability of third parties. 

See id. Because of the differences between the releases in 

the two cases, Continental II does not compel the 

conclusion that this release is impermissible. Indeed, 

because this release does not affect the liability of third 

parties, but rather sets forth the appropriate standard of 

liability, we believe that this release is outside the scope of 

S 524(e). 

C. Sections 363 and 1123 

Section 363 governs the sale of assets outside of the 

reorganization plan. It permits the trustee (or the debtor-inpossession), after notice and a hearing, to use, sell, or lease 

property of the estate outside of the ordinary course of 

business. See 11 U.S.C. S 363(b)(1); In re Rickel Home 

Centers, 209 F.3d 291, 297 (3d Cir. 2000). Section 

1123(b)(4) provides that a plan may "provide for the sale of 

all or substantially all of the property of the estate, and the 

distribution of the proceeds of such sale among holders of 

claims or interests." 11 U.S.C. S 1123(b)(4). Huff 

characterizes the reorganization plan as involving a sale of 

assets and tries to transform these two sections of the 

Bankruptcy Code into a general duty to fully market the 

company, similar to the duty recognized by the Delaware 

Supreme Court in the context of corporate change in

 37 
control transactions. See Paramount Communications v. 

QVC Network, 637 A.2d 34, 43 (Del. 1994); Revlon, Inc. v. 

MacAndrews & Forbes Holdings, 506 A.2d 173, 182 (Del. 

1986). 

This argument fails because these provisions of the Code, 

even if they do impose a duty to fully market assets in 

some circumstances (a question we do not address), are 

simply inapplicable to this situation. The plan wiped out 

old equity and issued new stock to the creditors. For tax 

purposes, this transaction was accomplished by 

transferring substantially all of the assets of the Debtors to 

a creditors' representative and immediately thereafter to the 

newly created Bruno's Supermarkets, a corporation whose 

equity is owned by the senior lenders. But just because a 

transaction is a sale or exchange for tax purposes does not 

mean that it is a sale within the meaning of the Code. See 

In re PCH Assocs., 804 F.2d 193, 201 (2d Cir. 1986)

(looking to the economic substance of the transaction to 

determine whether it was a sale or a lease within the 

meaning of the Code). In a similar case, Major's Furniture 

Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 546 (3d Cir. 

1979), we stated that 

 [i]t is apparent to us that on this record none of the 

 risks present in a true sale is present here. Nor has the 

 custom of the parties or their relationship, as found by 

 the district court, given rise to more than a 

 debtor/creditor relationship in which Major's' debt was 

 secured by a transfer of Major's' customer accounts to 

 Castle . . . . Accordingly, we hold that on this record 

 the district court did not err in determining that the 

 true nature of the transaction between Major's and 

 Castle was a secured loan, not a sale. 

That the assets passed though the hands of a creditors' 

representative before being returned to the reorganized 

Debtors does not transform this plan from a stand-alone, 

internally generated plan of reorganization to a sale of 

assets to a third party. To hold otherwise would be to read 

S 1129 of the Code as characterizing the many 

reorganizations involving the transfer of control from a 

corporation's old equity to its creditors as involving a sale, 

a position without support in our jurisprudence. 

 38 
D. Section 1129(a)(2) 

Section 1129(a)(2) provides that the court shall confirm a 

plan only if "[t]he proponent of the plan complies with the 

applicable provisions of this Title." 11 U.S.C.S 1129(a)(2). 

We agree with the District Court's conclusion that 

S 1129(a)(2) requires that the plan proponent comply with 

the adequate disclosure requirements of S 1125.23 Title 11 

U.S.C. S 1125(b) mandates the filing of a disclosure 

statement containing "adequate information." Huff argues 

that the plan proponents failed to comply with the 

disclosure requirements by failing to provide adequate 

information regarding the release of the preferences. The 

Debtors respond that Huff does not have standing to raise 

this argument. 

Appellate standing in bankruptcy cases is more limited 

than standing under Article III or the prudential 

requirements associated therewith. "Generally, litigants in 

federal court are barred from asserting the constitutional 

rights of others." Kane v. Johns-Manville Corp., 843 F.2d 

636, 643 (2d Cir. 1988) (citing Warth v. Seldin , 422 U.S. 

490, 499, 509 (1975)). The court in Kane explained why 

limits on third-party standing are particularly relevant to 

appellate standing in bankruptcy proceedings: 

 Bankruptcy proceedings regularly involve numerous 

 parties, each of whom might find it personally 

 expedient to assert the rights of another party even 

 though that other party is present in the proceedings 

 and is capable of representing himself. Third-party 

 standing is of special concern in the bankruptcy 

 context where, as here, one constituency before the 

_________________________________________________________________ 

23. Other courts also have found S 1125 to be one of the applicable 

provisions of the Code referenced to in S 1129. See, e.g., Tenn-Fla 

Partners v. First Union Nat'l Bank of Fla., 229 B.R. 720, 732 (W.D. Tenn. 

1999); In re Trans World Airlines, Inc., 185 B.R. 302, 313 (Bankr. 

E.D.Mo. 1995) ("The principal purpose of section 1129(a)(2) of the 

Bankruptcy Code is to assure that the plan proponents have complied 

with the disclosure requirements of section 1125 of the Bankruptcy Code 

in connection with the solicitation of acceptances of the plan."); see 

also 

Lawrence P. King, Collier on BankruptcyP 1129.03[2] at 1126-26.1 & 

n.14 (15th ed. rev. 1996). 

 39 
 court seeks to disturb a plan of reorganization based 

 on the rights of third parties who apparently favor the 

 plan. In this context, the courts have been 

 understandably skeptical of the litigant's motives and 

 have often denied standing as to any claim that asserts 

 only third-party rights. 

Id. at 644; see also Travelers Ins. Co. v. H.K. Porter Co., 

Inc., 45 F.3d 737, 741 (3d Cir. 1995) (adopting the

reasoning of Kane). 

Title 11 U.S.C. S 1109(b)--which provides that "[a] party 

in interest, including the debtor, the trustee, a creditors' 

committee, an equity security holders' committee, a

creditor, an equity security holder, or any indenture 

trustee, may raise and may appear and be heard on any 

issue in a case under this chapter"--confers broad standing 

at the trial level. However, courts do not extend that 

provision to appellate standing: 

 This rule of appellate standing is derived from former 

 section 39(c) of the Bankruptcy Act of 1898, which 

 permitted only a "person aggrieved" to appeal an order 

 of the bankruptcy court. 11 U.S.C. S 67(c) (1976) 

 (repealed 1978). Although the present Bankruptcy 

 Code does not contain any express restrictions on 

 appellate standing, courts have uniformly held that the 

 "person aggrieved" standard is applicable to cases 

 under the Code. 

Kane, 843 F.2d at 641-42. 

This court has emphasized that appellate standing in 

bankruptcy cases is limited to "person[s] aggrieved." 

Travelers Ins. Co., 45 F.3d at 741. We consider a person to 

be aggrieved only if the bankruptcy court's order 

"diminishes their property, increases their burdens, or 

impairs their rights." In re Dykes, 10 F.3d 184, 187 (3d Cir. 

1993) (citation omitted). Thus, only those "whose rights or 

interests are directly and adversely affected pecuniarily" by 

an order of the bankruptcy court may bring an appeal. Id. 

(internal quotation marks and citation omitted). The 

"person aggrieved" standard is more stringent than the 

constitutional test for standing. In re O'Brien Envtl. Energy, 

Inc., 181 F.3d 527, 530 (3d Cir. 1999). 

 40 
Huff contends that Bruno's failed to disclose that it had 

not done a thorough analysis of preference claims before 

deciding not to pursue them. But Huff itself was aware of 

this alleged failing at the time and pointed it out to the 

other creditors when it opposed the plan. Huff clearly would 

not have acted any differently if the disclosure had been 

made as it now argues it should have been. Similarly, 

because Huff pointed out the alleged failure to disclose in 

its statements protesting the plan, it cannot show that it 

was personally aggrieved because other creditors might 

have voted differently if they had had the information 

allegedly missing from the disclosure. Since Huff cannot 

show that it was personally aggrieved by any failure to 

disclose, we conclude that Huff does not have standing to 

raise this claim. See In re Middle Plantation of Williamsburg, 

Inc., 47 B.R. 884, 891 (E.D. Va. 1984) ("Holders of impaired 

claims who have been induced to vote in favor of a plan are 

the only ones who may raise the issue of the adequacy of 

the Disclosure Statement."), aff 'd, 755 F.2d 928 (4th Cir. 

1985). 

We do not foreclose the possibility that, in another case, 

a creditor objecting to a plan for lack of disclosure that 

actually had the information it complains is missing from 

the disclosure might nevertheless have standing if it could 

show that there is a possibility that other creditors would 

have acted differently (thus benefitting the protesting 

creditor) if they had had the same information. See In re 

Perez, 30 F.3d 1209, 1217 (9th Cir. 1994) (concluding that 

a creditor had standing on this theory). But in this case, 

because Huff itself made the information available to the 

other creditors, it has not made such a showing. The 

chance that the other creditors would have acted differently 

is simply too speculative to be a basis for third party 

standing here. 

E. Section 1129(a)(7) 

Section 1129(a)(7) provides that a court shall confirm a 

plan only if 

 With respect to each impaired class of claims or 

 interests-- 

 41 
 (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; or 

 (B) if section 1111(b)(2) of this title applies to the 

 claims of such class, each holder of a claim of such 

 class will receive or retain under the plan on account 

 of such claim property of a value, as of the effective 

 date of the plan, that is not less than the value of such 

 holder's interest in the estate's interest in the property 

 that secures such claims. 

11 U.S.C. S 1129(a)(7). The District Court found that the 

Debtors have demonstrated at the Confirmation Hearing 

that creditors rejecting the plan would not receive a greater 

recovery in a Chapter 7 liquidation. We review this factual 

finding for clear error. 

Huff failed to challenge the Debtors' liquidation analysis. 

Huff also did not introduce evidence to demonstrate that 

the recapitalization claims have significant value or that it 

was in the best interests of the estate to pursue the 

preference claims. And as noted above, the Examiner's 

District Court findings to the contrary are well supported. 

Accordingly, the District Court did not commit clear error in 

holding that the Debtors met their burden under 

S 1129(a)(7). 

VI. Conclusion 

For the foregoing reasons, the Order of the District Court 

confirming the Debtor's Second Amended Joint Plan of 

Reorganization under Chapter 11 of the Bankruptcy Code 

will be affirmed. 

 42 
A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 43