Opinion ID: 3010612
Heading Depth: 3
Heading Rank: 1

Heading: The Legal Sufficiency of the Findings of the

Text: Bankruptcy Court CVC acknowledges that it and its representative, Muqaddam, owed a fiduciary duty to Papercraft and its creditors at all times relevant here. It asserts, however, that neither breached a fiduciary duty. It insists that it is not improper per se for a fiduciary to purchase claims against the debtor in a bankruptcy at a discount and it stresses that the bankruptcy court made no finding that the prices paid for the Papercraft notes were unfair or inequitable at the time of the purchases. We accept, arguendo, that the purchase of notes at a discount by a fiduciary of a debtor in bankruptcy is not improper under all circumstances,3 and we acknowledge the absence of a finding on the fairness of the purchase price. The bankruptcy court found, however, that the Papercraft notes (1) were purchased for the dual purpose of making a profit for CVC on the notes and of being able to influence the reorganization in its own self-interest, (2) were purchased with the benefit of non-public information acquired as a fiduciary, and (3) were acquired without disclosure of its purchasing plans to the bankruptcy court, the Papercraft board, the Committee, or the selling note holders. The bankruptcy court further pointed out that under Brown v. Presbyterian Ministers, 484 F.2d 998, 1005 (3d Cir. 1973), the opportunity to purchase the notes was a corporate opportunity of which CVC could not avail itself, consistent with its fiduciary duty, without giving the corporation and its creditors notice and an opportunity to participate. _________________________________________________________________ 3. There is authority arguably to the contrary, but, in light of the findings of the bankruptcy court, we need not, and do not, resolve the issue here. In Manufacturers Trust Co. v. Becker, 338 U.S. 304, 313-14 (1949) the court observed, . . . [I]f it is clear [as it is] that a fiduciary may ordinarily purchase debt claims in fair transactions during the solvency of the corporation, the lower federal courts seem agreed that he cannot purchase after judicial proceedings for the relief of a debtor are expected or have begun. (citing cases). 10 CVC primarily protests that the bankruptcy court's findings of fact concerning inequitable conduct on its part are clearly erroneous. We will address that contention in the following section. We hold here, however, that the above noted findings reflect ample inequitable conduct to support a subordination remedy. Indeed, those findings make this a paradigm case of inequitable conduct by a fiduciary as that concept has been developed in the case law, and we believe further elaboration is not required. Before turning to an analysis of the record support for these findings, we will only comment briefly on two of CVC's justifications for its conduct. CVC insists that the opportunity to purchase the notes was not a corporate opportunity, and that notice to Papercraft's Board and the Committee was not required because Papercraft could not have purchased the notes at discount and the members of the Committee had no interest in doing so. We agree with the Committee, however, that CVC's argument is fundamentally at odds with our decision in Brown. In Brown, we held that the availability of claims for purchase at a discount constitutes a corporate opportunity. After noting that a director of a solvent corporation may take advantage of a corporate opportunity only if he discloses the opportunity to the corporation, we further held that a director of a corporation in bankruptcy owes a fiduciary duty to creditors and cannot seize a corporate opportunity without disclosure to the creditors or their representative. Even though the director in Brown had purchased a note at discount with the consent of the corporation and its stockholders, we concluded that a breach of fiduciary duty had occurred: The opportunity should have been disclosed to the receiver as representative of the creditors. Id. at 1005. CVC contends that Brown is distinguishable because Papercraft was not in a financial or legal position to purchase the notes and because the members of the Committee must have been well aware that a market existed in Papercraft debt. It necessarily follows, according to CVC, that neither could have been injured by its purchases. We believe this argument more relevant to the 11 remedy issue than to whether a breach of fiduciary duty occurred. That duty required that it share everything that it knew with Papercraft's board and the Committee before commencing its purchases. Its failure to do so would alone support a subordination depriving it of its profit from the note transactions. The absence of a disclosure in circumstances of this kind makes it extremely difficult to say with confidence what would have happened had no breach of duty occurred4 and that, in itself, is a compelling reason for insisting on disclosure. CVC also argues that its failure to disclose its identity to note sellers was not inequitable because its identity was not material to the purchases. It stresses that no note sellers have thus far complained. We agree with the bankruptcy court, however, that CVC's identity and purchasing plans were clearly material to the purchase transaction. The fact that CVC, a party with access to inside information, was seeking to purchase over $10 million in Papercraft debt and to steer the reorganization towards a sale to it of Papercraft's assets would certainly have been of interest to a creditor considering a CVC offer to purchase in the summer of 1991. In short, we agree with the bankruptcy court, the district court, and the Committee that CVC violated its fiduciary duty in a number of significant respects. 2. Record Support for the Bankruptcy Court's Findings CVC's most fundamental challenge to the factual findings of the bankruptcy court relates to the disclosure issue. It asserts that the court clearly erred in concluding that CVC anonymously purchased the Papercraft notes. While CVC makes no claim that it acted affirmatively to notify anyone _________________________________________________________________ 4. If the attention of the Papercraft board and the Committee had been focused on the potential CVC perceived in its note purchases, it is not at all clear that Papercraft or its creditors would have been unable to tap additional resources, just as CVC did. Either or both might have been able to seize or participate in the opportunity through borrowing, court approved purchases or amendment to the plan of reorganization to include a cash-out option. See, e.g., In re Cumberland Farms, Inc., 181