Free Reply Brief - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWAR
ARIN M. ADAMS, Chapter 11 Trustee of the Post-Confrmation Bankruptcy Estates of
CORAM HEALTHCARE CORP. and CORAM,
)

)
) )

INC.,

) Civ. Action No. 04-cv-1565(SLR)
Plaintiff,
v.
) ) )

DANL D. CROWLEY, et aI.,
Defendants.

) ) ) )

REPLY BRIEF IN SUPPORT OF THE TRUSTEE'S MOTION FOR SUMMARY JUDGMENT ON LIABILITY OR, IN THE ALTERNATIVE, FOR THE COURT TO DEEM CERTAIN FACTS ESTABLISHED
Dated: May 15, 2007
Richard A. Barkasy (#4683) Michael J. Bare (#4684)

SCHNADER HARSON SEGAL & LEWIS LLP 824 N. Market Street, Suite 1001 Wilmington, DE 19801 (302) 888-4554 (telephone) (302) 888-1696 (facsimile)
OF COUNSEL:
Barry E. Bressler (admitted pro hac vice)
Nancy Winkelman (admitted

Wilbur L. Kipnes (admitted pro hac vice) pro hac vice)

SCHNADER HARSON SEGAL & LEWIS LLP 1600 Market Street, Suite 3600
Philadelphia, P A 19103 (215) 751-2400 (telephone) (215) 751-2205 (facsimile)
Counsel to Plaintif

Arlin M Adams, Chapter 11 Trustee of the Post-

Confrmation Bankrptcy Estates of CORA
HEALTHCARE CORP. and CORAM, mc.

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TABLE OF CONTENTS
Page

i. INTRODUCTION............................................................. ..................................................... 1

II. CROWLEY WAS BOTH A PARTY TO THE BANUPTCY PROCEEDINGS AN IN PRNITY WITH CORA. ........................................................ 1
A. Crowley Was A Party To The Banptcy Proceedings. ................................................... 1
B. Crowley Was In Privity With Coram...................... ............................................................ 5

III. THE HEARSAY RULE DOES NOT APPLY TO JUICIAL OPINIONS
SOUGHT TO BE USED FOR ISSUE PRECLUSION. ........................................................ 7
IV. THE ACTUAL LITIGATION OF CROWLEY'S CONFLICT IN THE

BANUPTCY COURT WARTS SUMY JUGMENT IN
FAVOR OF THE TRUSTEE. ............................................................................................. 10

V. CROWLEY'S ARGUMENT THAT THE FACTS AR "HOTLY DISPUTED" IS FATAL TO HIS OWN SUMARY JUGMENT MOTION. ............................................................................................................................ 16

VI. EVEN IF SUMMARY JUGMENT IS NOT WARTED, RULE 56(d)
ENTITLES THE TRUSTEE TO HAVE CERTAIN FACTS DEEMED ADMITTED......................................................................................................................... 17

VII. CONCLUSION.................................................................................................................... 18

1

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TABLE OF AUTHORITIES
CASES

In re Am. Appliance, 272 B.R. 587 (Ban. D.NJ. 2002) ...............................................................3
In re Amatex Corp., 755 F.2d 1034 (3d Cir. 1985)..........................................................................3
Amtrak v. Pa. Publ. Uti!. Comm., 288 F.3d 519 (3d Cir. 2002) ....................................................10

In re Barnes, 275 B.R. 889 (Ban. E.D. Cal. 2002) .......................................................................3
Burke v. Timothy's Rest., Civ. A. 03-1070,2005 U.S. Dist LEXIS 15533
(D. DeL. July 29, 2005)..................................................................................................................9

In re Camden Ordinance Mfg. Co. of Ark., Inc., 245 B.R. 794 (E.D. Pa. 2000).............................3
Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (DeL. 1993).........................................................13

In re Combustion Eng'g, Inc., 391 F.3d 190 (3d Cir. 2004) ............................................................3
Connell v. Liberty Mut. Ins. Co., 841 F. Supp. 578 (D. DeL. 1994)...............................................10

In re Convertible Rowing Exerciser Patent Litig., 814 F. Supp. 1197
(D. DeL. 1993)..............................................................................................................................1 0

Copeland v. Merril Lynch & Co., 47 F.3d 1415 (5th Cir. 1995)..................................................14
In re Evans, 344 B.R. 440 (Bank. W .D. Va. 2004) ....................... .................................................3
In re Exide Techs., 303 B.R. 48 (Bank. D. DeL. 2003) ................................................................. 15

Fernicola v. Specifc Real Prop. in Possession, Custody & Control of Healthcare
Underwriters Mutual Ins. Co., Civ. A. No. 00-5173,2001 U.S. Dist.

LEXIS 21724 (S.D.N.Y. Dec. 20, 2001) .......................................................................................5
First Options of

Chicago, Inc. v. Kaplan, 913 F. Supp. 377 (E.D. Pa. 1996) .................................5

Gulf Island-IV v. Blue Streak-Gulf Is Ops., 24 F .3d 743 (1994) ......... ......... ...................................4

Guth v. Loft, Inc., 5 A.2d 503 (DeL. 1939).....................................................................................14

In re Hechinger Inv. Co., 327 B.R. 537 (D. DeL. 2005)...................................................................2
Herrick v. Garvey, 298 F 3d 1184 (10th Cir. 2002) ................................ ................................ ....8, 9

11

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Higgins v. Walls, 901 A.2d 122 (DeL. Super. 2005) ........................................................................5

Huber v. Taylor, Civ. A. No. 02-304, 2007 U.S. Dist LEXIS 31131 (W.D. Pa. Apr. 27, 2007) ...............................................................................................................5

In the Matter of Embrace Sys. Corp., 178 B.R. 112 (Ban. W.D. Mich. 1995) ............................3
In re Lernout & Hauspie Speech Products, 301 B.R. 651 (Bank. D. DeL. 2003).........................15

Liberty Mut. Ins. Co. v. Rotches Pork Packers, 969 F.2d 1384 (2d Cir. 1992)...............................8
Mars, Inc. v. Nippon Conlux Kabushiki-Kaisha, 855 F. Supp. 673 (D. DeL. 1994) ......................10
McDowell v. DeL. State Police, Civ. A. No. 95-129, 1999 U.S. Dist. LEXIS 3105 (D. DeL. Mar. 15, 1999)..................................................................................................................9

Meade v. Simon Prop. Group (Delaware) Inc., Civ. A. No. 00-101, 2001 U.S. Dist. LEXIS 25563 (D. DeL. Sept. 28, 2001) ................................................................9

Melwani v. John, Civ. A. No. 02-12242004 U.S. Dist. LEXIS 16867
(S.D .N. Y. Aug. 23, 2004) ..............................................................................................................5

NL Indus. v. GHR Energy Corp., 940 F.2d 957 (5th Cir. 1991)......................................................2
Nipper v. Snipes, 7 F .3d 415 (4th Cir. 1993).............. ............................................... ......................8

In re Pro Set, Inc., 193 B.R. 812 (Bank. N.D. Tex. 1996) .............................................................2
Robertson v. Bartels, 148 F. Supp. 2d 443 (D. N. J. 2001) .............................................................5

Scooper Dooper, Inc. v. Kraftco Corp., 494 F.2d 840 (3d Cir. 1974).............................................9

In re Si!ver Falls Petroleum Corp., 55 B.R. 495 (Ban. S.D. Ohio 1985) ....................................2
Thompson v. Glenmede Trust Co., Civ. A. No. 92-5233, 1996 WL 529693 (E.D. Pa. Sept. 17, 1996) ...........................................................................................................7,8
Unoffcial Comm. of

Zero Coupon Noteholders, 179 B.R. 56 (D. DeL. 1995) ................................3

Wellborn v. Mountain Accessories Corp., 23 F. Supp. 2d 1321 (D. Wyo. 1998) ...........................5

Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100 (1969)............................................4

II

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FEDERA STATUTES AND RULES
11 U.S.C. § 11 09 ..........................................................................................................................2, 3
FED. R. BANKR. P. 3003( c )(2) ........................................................... ...............................................1

FED. R. BANKR. P. 7052 .................................................................................................................11

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I. INTRODUCTION
On April 17,2007, the Trustee filed a Motion for Sumary Judgment on Liability
or, in the Alternative, for the Cour to Deem Certain Facts Established.! The Trustee argued that
the Banptcy Court's findings regarding Crowley's actual conflct of

interest are entitled to

preclusive effect. Those findings entitle the Trustee to summary judgment on liability. In the

alternative, even ifthose findings do not entitle the Trustee to sumary judgment on liability,

this Cour should deem the facts underlying the Banptcy Cour's decisions established for
puroses of

this litigation. On May 4,2007, Crowley filed his answering brief and the Trustee

now files this reply.

II. CROWLEY WAS BOTH A PARTY TO THE BANKRUPTCY PROCEEDINGS AND IN PRIVITY WITH CORA.
A. Crowley Was A Party To The Bankruptcy Proceedings.

Crowley's brief

misstates fudamental tenets of

bankptcy law. Crowley

asserts

that he was not a "pary in interest" in Coram's bankptcy because he was not listed on the
schedule of creditors filed by Coram. Since Crowley filed proofs of claim, he is wrong. And
even had Crowley not filed proofs of claim, he stil was a "party in interest" under the

Banptcy Code, and, as such, a party in the banptcy proceedings for collateral estoppel

puroses.
In a Chapter 11 case, a creditor whose claim is not scheduled may file a proof of
claim; FED. R. BANKR. P. 3003( c )(2). This is precisely what Crowley chose to do. On

! On that same day, Crowley filed his own motion for sumar judgment, or in the alternative,

parial summary judgment (D.I. 122, 123), to which the Trustee has responded. (D.I. 137.)

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September 27,2000, long before the confirmation hearing began, Crowley filed proofs of claim
against the Debtors' banptcy estates. (C45-C47 (Proofs of

Claim).)

Crowley's filing of proofs of claim had legal consequences. The filing "triggered
the process of allowance and disallowance of (his) claim(s), thereby subjecting (Crowley) to the
banptcy court's equitable power." In re Hechinger Inv. Co., 327 B.R. 537, 545 (D. DeL.
2005). It also made him a pary in interest under 11 U.S.c. § 1109, affording him the right to be
heard with regard to Coram's plans of

reorganization. See In re Si!ver Falls Petroleum Corp., 55

B.R. 495, 497 (Ban. S.D. Ohio 1985) ("We hold that by fiing his proof of claim, (the creditor)
has established his standing to object to confirmation of

the plan.").

Crowley contends that even though he filed proofs of claim, he was not a

"creditor" within the meaning of Section 1109 because his claims for bonus compensation did

not arse until after Coram filed its Chapter 11 petition. This argument fails for two reasons.
First, the proofs of claim do not assert claims for post-petition bonus compensation; rather, they
are claims for "indemnification, reimbursement or contribution." (C47 (Proofs of

Claim).)

Indeed, an application for payment of a post-petition administrative expense would not have

been properly asserted in a proof of claim. NL Indus. v. GHR Energy Corp., 940 F.2d 957,966

(5th Cir. 1991); In re Pro Set, Inc., 193 B.R. 812,815-16 (Bank. N.D. Tex. 1996) (quoting

Official Banptcy Proof of Claim Form (Form B 1 0) ("This form should not be used to make a
claim for an administrative expense arising after commencement of the case. A request for
payment may be fied pursuant to 11 U.S.C. § 503.")).

Second, even if Crowley's proofs of claim had asserted a post-petition claim, creditors whose claims arise post-petition are considered parties in interest under Section 1109:

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"'

interest for purposes of

(T)he Code contemplates that a creditor is a pary in raising issues and objections in a

bankptcy case. The Code does not distinguish between creditors existing at the time of a banptcy case filing and

those that attain creditor status post-petition.

In the Matter of

Em

brace Sys. Corp., 178 B.R. 112, 120 (Ban. W.D. Mich. 1995); see also In

re Evans, 344 B.R. 440, 455 (Bank. W.D. Va. 2004) (same); In re Barnes, 275 B.R. 889,893
(Ban. E.D. Cal. 2002) (same).

Moreover, even in the absence of filing proofs of claim, Crowley was a party in
interest in the bankptcy proceeding. The Banptcy Code defines "pary in interest" to

include "the debtor, the trustee, a creditors' committee, an equity security holders' committee, a

creditor, an equity security holder or indentue trustee." 11 U.S.C. § 1109(b). However, "(t)his
list is not exhaustive." In re Combustion Eng'g, Inc., 391 F.3d 190, 214 (3d Cir. 2004). The
scope of the definition of

"pary" is "flexible and broad." In re Camden Ordinance Mfg. Co. of

Ark., Inc., 245 B.R. 794, 807 (E.D. Pa. 2000). The test "does not tur upon whether the pary

maintains a claim against the debtor." In re Am. Appliance, 272 B.R. 587, 595 (Ban. D.NJ.
2002). Rather, a "pary in interest" includes anyone who has a "stake in the proceedings." In re
Amatex Corp., 755 F.2d 1034, 1042 (3d Cir. 1985). Even a "practical stake in the outcome" wil
suffice. Unoffcial Comm. of

Zero Coupon Noteholders, 179 B.R. 56, 59 (D. DeL. 1995).

Crowley's direct economic interest in the confirmation of

both the first and

second plans was more than adequate to confer party in interest status. If the first plan had been

confrmed, Crowley would have earned an additional $1.8 milion "Success Bonus" under the
Third Amendment to his Coram Employment Agreement. (CL (Third Amendment to

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':

Employment Agreement) § 1.) If

the second plan had been confirmed, Crowley would have

been paid a $5.9 milion bonus. 271 B.R. at 233.2

Crowley also had a less direct, but equally significant, stake in the confirmation of

the plans that rendered him a pary in interest. The Equity Committee objected to the plans
based upon Crowley's relationship with Cerberus. Crowley had a critical interest in how that

issue was adjudicated; were the Banptcy Cour to find that he had an actual conflict of
interest, he could face prosecution of claims against him in the future.3 On the other hand, if
either the first or second plan had been confirmed, Crowley would have received a release from

any claims related to his Cerberus contract. (C38-C40 (Debtors' Joint Plan), Aricle XIII; C182C185 (Debtors' Second Joint Plan) Aricle XII.)
Crowley argues, without supporting authority,4 that a party in interest under the

Banptcy Code is not the equivalent of a "pary" for collateral estoppel puroses. This
argument should be rej ected because the rights of a pary in interest under Section 11 09(b) of the

bonus compensation for the years 2000, 2001, and 2002, which he withdrew with prejudice shortly Daniel Crowley for Payment of before the scheduled hearing on the claim. (C247 (Request of Daniel Crowley for Request of Administrative Expense), iiii 5-7; C259 (Stipulated Withdrawal of Payment of Administrative Expense ClaimJ).)
2 Crowley later filed a Request for Payment of Administrative Claim seeking payment of

3 In February 2001, the Equity Committee filed a motion for leave to file an action against
Crowley for breach of fiduciary duty, which was denied without prejudice. (C77 -C81 (Equity

Committee Motion for Leave to File Adversary Proceeding).)
4 The cases Crowley cites on this point, Gulf Island-IV v. Blue Streak-Gulf Is Ops., 24 F .3d 743
(5th Cir. 1994), and Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100 (1969), are inapplicable because they were not bankptcy matters and did not address pary status in the context of a Chapter 11 banptcy case.

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Banptcy Code to "appear and be heard on any issue" in the case are the same as the rights
held by any pary to a lawsuit.

For all of

these reasons, Crowley was a pary to the Coram banptcy and, as

such, is a "pary" for purposes of collateral estoppel.

B. Crowley Was In Privity With Coram.

Crowley argues that he is not in privity with Coram because privity requires a

finding of an "alter ego type relationship," which he did not have with Coram. (D.I. 133 at 10.).

The concept of privity is not so rigid. "(T)he privity inquiry should be flexible enough to
acknowledge the realities of paries' relationships." First Options of

Chicago, Inc. v. Kaplan,

913 F. Supp. 377, 384 (E.D. Pa. 1996). Privity exists when the one party adequately represents

the other entity's interests in the prior proceeding. Id.; see also Huber v. Taylor, Civ. A. No. 02304,2007 U.S. Dist LEXIS 31131, at *66 (W.D. Pa. Apr.27, 2007); Higgins v. Walls, 901 A.2d
122, 138 (DeL. Super. 2005). '" (O)ne pary 'adequately represents' the interests of another when

the interests of the two paries are very closely aligned and the first party had a strong incentive
to protect the interests of

the second party.''' Robertson v. Bartels, 148 F. Supp. 2d 443,450

(D.N.J. 2001) (quoting Tyus v. Shoemehl, 93 F.3d 449,455-56 (8th Cir. 1996)).

Furthermore, the identity of interest between a corporate officer and the entity

s/he leads is suffcient to establish privity. See Fernicola v. Specifc Real Prop. in Possession,
Custody & Control of Health

care Underwriters Mutual Ins. Co., Civ. A. No. 00-5173,2001 U.S.

Dist. LEXIS 21724, at *14 (S.D.N.Y. Dec. 20,2001); see also Melwani v. John, Civ. A. No. 0212242004 U.S. Dist. LEXIS 16867, at *7 n.3 & *8-*9 (S.D.N.Y. Aug. 23, 2004); Wellborn v.

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Mountain Accessories Corp., 23 F. Supp. 2d 1321, 1324 (D. Wyo. 1998) (when director is sued

in his official capacity, the close relationship "wil generally establish privity").

Contrar to Crowley's argument, Crowley's and Coram's interests were squarely

aligned in the bankptcy proceedings. Crowley and Coram shared the same goal -- to defeat the
Equity Committee's objections (which were based upon Crowley's relationship with Cerberus).

Crowley was not only Coram's CEO, President, and Chairman, but he also had a direct personal
interest in the proceedings. If either of

Coram's proposed plans had been confirmed, Crowley

would have received millions of dollars in bonus compensation and would have been released
from all derivative claims.

Not only were Crowley's and Coram's interests squarely aligned, but also
Crowley's interests were adequately represented by Coram, which put up a vigorous defense to
the Equity Committee's objections during the confirmation hearngs. Crowley testified at length

regarding his relationship with Cerberus in both hearings and had a full and fair opportunity to

explain his position regarding his conflicted relationships to the Banptcy Court. Crowley's
assertions in this case are the same as the assertions that Coram made at the confirmation
hearngs -- all of

which the Bankptcy Cour flatly rejected. For example:
Coram's Closing Arguments at the

Crowley's Assertions In This Case

Confirmation Hearings that were Rejected by the Bankruptcy Court
"Crowley never took any action while at Coram that favored Cerberus to the detriment of Coram." (D.I. 133 at 23.)
"I don't think that anything was introduced that rebuts (Crowley's) basic statement which he stated: 'I am my own man. I'm no sycophant for Cerberus or anybody. I don't have any allegiance to Cerberus, Steve Feinberg, or anybody. My position at Coram is to do the best that I know for all of the stakeholders of

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Coram. Your Honor, that is what I have tried to do.'" (C68 (Dec. 21, 2000 Hrg. Tr.) at 25).
"Crowley was not paid for any work related to Coram after he became CEO." (D.I. 133
at 23.)

"Cerberus does not pay Mr. Crowley for any work which Mr. Crowley does (for) Coram." (C68 (Dec. 21, 2000 Hrg. Tr.)
at 26).

"Crowley dramatically improved Coram's financial performance." (D.I. 133 at 23.)

"Mr. Crowley came in and the company
was saved." (C69 (Dec. 21, 2000 Hrg.

Tr.) at 48).

"Immediately following the rejection of Coram's First Plan, Crowley again disclosed to the board of directors and Friedman his relationship with Cerberus." (D.I. 133 at 24.)
"Crowley's continuing relationship with Cerberus was also fully disclosed in

"Mr. Crowley fully disclosed his relationship with Cerberus to his own board of directors after this Cour's ruling as he testified last Thursday." (C244 (Dec. 17,2001 Hrg. Tr.) at 704).

"Mr. Crowley's relationship with Cerberus was fully disclosed on Coram's 2000 SEC Form 1O-K." (D.I. 133 at numerous occasions since this Cour's decision. It was disclosed in the 10- K." 24.) (C243 (Dec. 17,2001 Hrg.Tr.) at 703).

Crowley is not entitled to a third trial on these very same issues.

III. THE HEARSAY RULE DOES NOT APPLY TO JUDICIAL OPINIONS SOUGHT TO BE USED FOR ISSUE PRECLUSION.
Crowley argues that the Trustee is not entitled to sumar judgment based on

collateral estoppel because the Banptcy Cour's statements are inadmissible hearsay. If
Crowley were correct, there could never be res judicata or issue preclusion at the summar

judgment stage because the moving party never would be permitted to tell the court in the

subsequent action what the earlier cour had found.

That Crowley's position is nonsensical is made clear by Thompson v. Glenmede

Trust Co., Civ. A. No. 92-5233, 1996 WL 529693 (E.D. Pa. Sept. 17, 1996), the primary case
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upon which Crowley relies for this point. In Thompson, while the cour rejected plaintiffs effort
to have a prior judicial decision admitted under the public records exception to the hearsay rule,

it expressly based its decision on the undisputed fact that the plaintiff was "not offering the
opinion for res judicata puroses." Id. at *9. Here, of course, the Trustee seeks to use the

Bankptcy Cour's findings precisely for their preclusive effect. Thus, Thompson does not
support Crowley's position.

Nor do any of

the other cases that Crowley cites support his argument. In Nipper

v. Snipes, 7 F.3d 415 (4th Cir. 1993), the trial court admitted an order from another case

involving the same parties (but different facts). It did so as evidence of a civil conspiracy -- not
for puroses of collateral estoppel. The Fourth Circuit reversed on hearsay grounds. In Liberty

Mutual Insurance Co. v. Rotches Pork Packers, 969 F.2d 1384 (2d Cir. 1992), the cour reversed

a decision to take judicial notice of a banptcy court order, but explicitly noted without further
o

explanation, "the doctrine of collateral estoppel cannot be invoked (because the defendant) was
not a pary to the bankptcy proceeding." Therefore, the cour in Liberty Mutual was not faced

with the issue here, the preclusive effect of a banptcy opinion in a subsequent case that
involves the same paries. Similarly, in Herrick v. Garvey, 298 F.3d 1184 (10th Cir. 2002), the

cour held that the public records exception to the hearsay rule did not apply to judicial findings

of fact in a prior, unrelated case. Id. at 1192 (emphasis added). Herrick thus has nothing to do

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with the situation in this case involving the collateral estoppel effect of a prior decision in a case
from which the subsequent case actually arose.5

The obvious reason why Crowley can find no support for his argument is because
it makes no sense. The Trustee's motion does not require a ruling on the admissibility of

the the

Banptcy Cour's opinions at this time, nor does his argument depend on the truth of

statements in the opinions. Rather, the Trustee's argument is based only on the fact that the
statements were made.

Moreover, taken to its logical conclusion, Crowley's argument would mean that a

prior decision can never be used as a basis for summar judgment on preclusion grounds. Yet
we know that is not the law. As the Third Circuit has explained, "(T)he use ofthe sumary

judgment device by a pary asserting collateral estoppel is not uncommon. Provided that there is
no genuine factual dispute as to the identity of the paries, the nature of

the prior judgment, or the

similarty of the issues, sumary judgment is available to establish the collateral estoppel
defense." Scooper Dooper, Inc. v. Kraftco Corp., 494 F.2d 840,847 (3d Cir. 1974). It is for this
reason that courts in this District have not hesitated to grant summary judgment on the basis of

collateral estoppel. See, e.g., Burke v. Timothy's Rest., Civ. A. 03-1070,2005 U.S. Dist LEXIS
15533 (D. DeL. July 29,2005); Meade v. Simon Prop. Group (Delaware) Inc., Civ. A. No. 00101,2001 U.S. Dist. LEXIS 25563 (D. DeL. Sept. 28, 2001); McDowell v. Del. State Police, Civ.

5 The plaintiff in Herrick sought to show that the defendant did not own a set of documents by

relying on a finding of fact that had been made more than a decade before in an unelated case. Id. at 1191. Furthermore, the finding of fact the plaintiff claimed had been previously
determined did not even address the issue of the ownership of

the documents.

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A. No. 95-129, 1999 U.S. Dist. LEXIS 3105 (D. DeL. Mar. 15, 1999); Connell v. Liberty Mut.

Ins. Co., 841 F. Supp. 578 (D. DeL. 1994); Mars, Inc. v. Nippon Conlux Kabushiki-Kaisha, 855

F. Supp. 673 (D. DeL. 1994); In re Convertible Rowing Exerciser Patent Litig. 814 F. Supp. 1197
(D. DeL. 1993).

The chart that Crowley includes at pages 23-25 of

his answering brief actually

ilustrates the Trustee's very point. Crowley argues that summar judgment is inappropriate
because the Banptcy Cour's findings "are either legal conclusions (rather than facts), or hotly
disputed." (D.I. 133 at 22.) Yet collateral estoppel applies regardless of

how the Banptcy

Cour's conclusions are defined. See Amtrak v. Pa. Publ. Uti!. Comm., 288 F.3d 519,525 (3d
Cir. 2002) ("When an issue of fact or law is actually litigated and determined by a valid and
final judgment, and the determination is essential to the judgment, the determination is

conclusive in a subsequent action between the paries, whether on the same or a different

claim.") Further, Crowley's "dispute" with the Bankptcy Court's findings begs the question.
It is the Banptcy Cour's very decision that precludes Crowley

as a matter oflaw from now

asserting that those findings are disputed. That is the purpose of collateral estoppel -- to prevent
a party (in this case, Crowley) from re-litigating an issue that already has been decided.

Crowley's curent disagreement with the Banptcy Cour's findings is wholly irrelevant.

iv. THE ACTUAL LITIGATION OF CROWLEY'S CONFLICT IN THE

BANKRUPTCY COURT WARTS SUMMARY JUDGMENT IN FAVOR OF THE TRUSTEE.
Crowley argues that collateral estoppel is inappropriate because the issues
presented in the Banptcy Cour proceedings are substantially different from the issues

presented here. His first argument in that regard is that, "(t)he closest that the Trustee comes to

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~

establishing a link between the confirmation hearngs and this litigation is the notion that
Crowley's alleged conflict of interest was one of

the issues discussed durng the banptcy."

(D.I. 133 at 12-13.) (emphasis added). That is quite an understatement.

The Banptcy Cour's determination that Crowley had an actual conflict of
interest, not merely an "alleged conflct," was its central finding -- on two occasions. That
finding was the very reason that the Banptcy Cour twice denied confirmation of

Coram's

proposed plan. After holding extensive hearings and making express findings of fact and
conclusions oflaw in accordance with Federal Rule of

Bankptcy Procedure 7052,6 the

Bankptcy Cour rejected the first proposed plan "because the process was tainted by the
relationship between Crowley and Cerberus." (A38 (Dec. 21, 2000 Hrg. Tr.) at 88,/ The

Bankptcy Court rejected the second proposed plan because Crowley's actual conflct continued
and because "a continuous conflct of interest by the CEO of

the Debtor precludes the Debtors

from proposing a plan in good faith under 1129(a)(3)." 271 B.R. at 240.

While the ultimate issue presented to the Bankptcy Court was whether the plan
was submitted in good faith under Section 1129(a)(3) of

the Bankptcy Code, in making that

determination, the Court focused solely on Crowley's conflict. Crowley emphasizes a quote
from the second opinion denying confirmation: "(W)e must once again deny confirmation of

the

Civil Procedure 52, relating to findings of fact and conclusions oflaw, applicable to adversary proceedings. Federal Rule of Banptcy Procedure 9014 makes Rule 7052 applicable to "contested matters."
6 Federal Rule of Banptcy Procedure 7052 makes Federal Rule of 7 To avoid repetition, this reply brief

briefin support of

wil cite to the Appendix fied with the Trustee's opening his motion for summary judgment to reference documents already fied with

the Cour.

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Debtors' Plan because we are unable to determine under all of the circumstance that the Debtors'

Second Plan has been proposed in good faith under section 1129(a)(3)." (D.I. 133 at 14 (quoting
271 B.R. at 237).) But Crowley conveniently neglects to set forth the entire quote, which makes
clear that the very reason the Court found that the second plan was not proposed in good faith
(just as the Court had found with respect to the first plan) was because of Crowley's conflict:
As we noted in the first confirmation hearng, given the actual

conflict of interest which the Debtors' CEO has, we are unable to conclude that any action taken by the Debtors which may impact on the rights of Cerberus were taken without any undue
consideration of the interests of

Cerberus. Consequently, we must

the Debtors' Plan because we are once again deny confirmation of unable to determine under all of the circumstances that the Debtors' Second Plan has been proposed in good faith under
section 1129(a)(3).

271 B.R. at 237 (emphases added).

Thus, not only was Crowley's conflct of interest actually litigated in the
Banptcy Court proceedings, it was the raison d'etre for that Court's denial of Coram's first

two plans of reorganization.

Crowley next argues that the Trustee improperly conflates the concepts of conflct
of interest and breach of

fiduciary duty. Crowley is wrong. The Banptcy Court addressed
interest is a violation of

that very question and expressly held that "Crowley's conflct of

his

fiduciary duty to the Debtors and the estate." 271 B.R. at 240. But even had the Banptcy
Cour not expressly so determined, the Cour's findings that Crowley had an actual conflict that

he failed adequately to disclose justify sumary judgment. Crowley argues that not every
conflict of interest in and of itself necessarly constitutes a breach of fiduciary duty because

conflcts can be "cured by proper disclosure and/or approval by an independent Board of
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Directors." (D.I. 133 at 13.). Yet, the Bankptcy Cour expressly found not only that Crowley
had an "actual conflct," 271 B.R. at 235, but also that he failed adequately to disclose that actual
conflict:

. "(TJhe actionsofMr. Crowley to hide the relationship (with Cerberus J . . . did at least evidence that he, himself, believed that this relationship should not be disclosed and, therefore, did, in fact, taint his ability to serve as Coram's CEO" (A39 (Dec. 21. Hrg. Tr.
at 89J);

. "(AJlthough Crowley testified that he told the Board of Directors that he continued to receive compensation from Cerberus, we do not credit that testimony" 271 B.R. at 234 n.7; and
. "(NJeither Cerberus nor Crowley voluntarily disclosed the

agreement to the Debtors or to the Court. . . (fJurther, even disclosure of the conflict may not be sufficient to permit approval of a transaction involving an actual conflict of interest." !d. at 239.

Finally, the Banptcy Cour found that Crowley's undisclosed actual conflct
hared Coram. As the Cour explained, Crowley's conflct "has (J tainted the debtors'
restructuring of

its debt, the debtors' negotiations towards a plan, even the debtors' restructuring

of

its operations." (A38 (Dec. 21, 2000 Hrg. Tr.J at 88.) Additionally, the Court held that

Crowley had an "obligation to avoid any direct actual confict of

interest." 271 B.R. at 236. It

also found that Crowley's actions regarding the $6.3 milion interest payment to the Noteholders
showed how harful Crowley's actual conflct was to Coram. Id.

Accordingly - and contrary to Crowley's assertion - the Bankptcy Cour

determined that Crowley had an actual conflict of interest that he failed adequately to disclose
and that Coram had been hared as a result. If

those findings are accepted, Crowley has

breached his fiduciary duties to Coram under Delaware law. See, e.g., Cede & Co. v.

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Technicolor, Inc., 634 A.2d 345, 361 (DeL. 1993) (duty ofloyalty demands that corporate officer

place best interests of corporation and shareholders over officer's own interests); Guth v. Loft,

Inc., 5 A.2d 503,510 (DeL. 1939) (duty ofloyalty "requires an undivided and unselfish loyalty to
the corporation (and) demands that there shall be no conflict between duty and self-interest.").

Crowley's reliance on Copeland v. Merril Lynch & Co., 47 F.3d 1415 (5th Cir.
1995), is misplaced. Copeland, the founder of Pop

eye's Famous Fried Chicken, acquired a

competitor, Church's Fried Chicken. The emerging company, Al Copeland Enterprises, Inc.

("ACE"), was soon forced into banptcy. Copeland sued Merrll Lynch and the Canadian
Imperial Bank of Commerce, Inc. ("CIBC") in federal distrct court, alleging that defendants had
breached their agreement with him to submit a joint plan of reorganzation on behalf of ACE.
CIBC had submitted its own proposed plan of

reorganization, to which the plaintiff objected.

CIBC and Merrll Lynch denied that any such agreement existed. Copeland had earlier fied an
adversary action in the bankptcy court based on defendants' breach of

the alleged agreement to

submit a joint plan. The bankptcy court stated that the plaintiff "may have had a claim" for

breach of contract, but that it was in the estate's best interests to confirm CIBC's plan. In the
district court action, Copeland moved for sumary judgment, arguing that the banptcy

cour's statement should be accorded collateral estoppel effect. The district court denied the
motion.

The Fifth Circuit affrmed, holding that the banuptcy cour's statement was not
entitled to preclusive effect because the banptcy court had not addressed the merits of

Copeland's breach of contract claim. Rather, the banptcy court had considered the valuation
of the company and ACE's proposed settlement of

its claims against Merrll Lynch and CIBC,

and stated only that Copeland "may have had" causes of action in his own right. Copeland's
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causes of action were not a "critical and necessary par" of

the banptcy cour's decision. Id.

at 1423; see also id. at 1422 ("Copeland's individual claim did not impact the banptcy cour's
consideration of

the CIBC plan.").

This case stands in sharp contrast to Copeland. Here, the very reason that the

Bankptcy Cour determined that the plans were not submitted in good faith was Crowley's
actual conflict. Hence, the actual conflict was a "critical and necessary" par of the Banptcy

Court's decisions.

Finally, Crowley's assertion that the burden has shifted from Crowley to the
Trustee misconstrues the banptcy court proceedings. The Equity Committee filed objections
to each of Coram's proposed plans, asserting that Crowley had an actionable conflct of

interest

that precluded confirmation. (C48-C63; C203-C224 (Equity Committee Objections).) The
burden was on the Equity Committee to produce evidence in support of

its objections. See In re

Exide Techs., 303 B.R. 48, 58 (Banr. D. DeL. 2003) ("(T)he objecting parties bear the burden of

producing evidence to support their objections"); see also In re Lernout & Hauspie Speech
Products, 301 B.R. 651, 656 (Bank. D. DeL. 2003) ("Creditors objecting to the proposed plan

bear the burden of producing evidence to support their objections"). The Equity Committee

satisfied its burden, and the Bankptcy Cour twice concluded that Crowley had an
impermissible conflict of interest that caused har to Coram. It was because the Equity

Committee proved its objection that the Bankptcy Court denied confirmation. This is the same
burden that the Trustee has here -- to prove the existence of Crowley's conflct. It is sophistry to
argue as Crowley does that he had the burden of proving the absence of a conflct.

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v. CROWLEY'S ARGUMENT THAT THE FACTS ARE "HOTLY DISPUTED" IS FATAL TO HIS OWN SUMMAY JUDGMENT MOTION.
Crowley's chart (D.I. 133 at 23-25) of

"hotly disputed" facts demonstrates why

his own motion for sumar judgment must faiL. If Crowley is correct that the issues really are
"hotly disputed," then his position that there are no genuine issues of

material fact cannot be
material fact exist for purposes of

correct. Crowley claims that no genuine issues of

his

sumar judgment motion, but then simultaneously asserts in opposition to the Trustee's motion

that the Bankptcy Cour's findings are not entitled to preclusive effect because they are
disputed.

Although the facts to which Crowley points in his chart were at one time subject
to dispute, the Banptcy Court explicitly decided all of

them against Crowley. The Trustee's

motion asserts that these facts are entitled to preclusive effect against Crowley. Should this

Cour disagree with that conclusion, the Cour wil deny the Trustee's summary judgment
motion, and will return the paries to their previous position -- disputing the facts. Put another

way, the Trustee's sumary judgment motion is entirely based on the premise that the issues
have already been litigated by the paries. Therefore, should the Court determine that collateral
estoppel is inapplicable here, that decision would simply leave the paries to litigate before a jury

the issues decided by the Bankptcy Cour.

One fuher point in this regard bears emphasis. Examining a record similar to
that presented to this Cour,

the Banptcy Cour explicitly found the above facts -- against

Crowley. Crowley's summar judgment depends on this Cour determining that a reasonable
factfinder (Chief Judge Walrath) -- who has already rejected Crowley's position, not

just once,

but on two separate occasions - was wrong. In other words, Crowley would be entitled to
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sumary judgment only if this Court were to conclude that no reasonable factfinder possible

could find precisely what the Bankptcy Court already has found -- two times. To state the
proposition is to rebut it.8

VI. EVEN IF SUMMARY JUDGMENT is NOT WARTED, RULE 56(d)
ENTITLES THE TRUSTEE TO HAVE CERTAIN FACTS DEEMED ADMITTED.
Crowley asserts that the Trustee is not entitled to partial summary judgment under

Rule 56(d) because the Bankptcy Court's opinions are hearsay and collateral estoppel does not
apply to any of its findings.

But, as set forth in Section III ofthis brief, the Banptcy Court's opinions are
being used for their preclusive effect and therefore hearsay is not an issue here. Furthermore,
even if

the Court concludes that the Banptcy Court did not actually decide the ultimate issue

of Crowley's breach of fiduciary duty, the Trustee respectfully requests that this Cour give

preclusive effect to the Banptcy Cour's underlying factual findings (as set forth at pages 16,
26-27 of

the Trustee's opening brief).

8 Crowley also argues that it would be inequitable to apply collateral estoppel because, "(i)t is liability based on the ruling of not clear at the time that he faced any risk whatsoever of personal the Banptcy Cour, other than possibly losing the right to receive some bonus money." (D.I. his 133 at 20.) Crowley's contention is disingenuous. As he notes in the very next sentence of brief, "In fact, at the time, Coram was arguing that the Equity Committee's proposed derivative suit against Crowley would be fritless. . ." (!d.) Clearly, at that time, Crowley was aware that Coram's argument could fail and that the Equity Committee, even then, might be permitted to bring its proposed derivative suit against Crowley personally. As CEO and President of a publicly-traded corporation, Crowley had every incentive to litigate whether or not his conflct of

interest was a bar to Coram confirming a banptcy plan and his right to receive milions of
dollars in bonuses upon confirmation of a plan.

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VII. CONCLUSION
For the above cited reasons, as well as those set forth in the Trustee's opening
brief, the Trustee respectfully requests that sumary judgment be entered in his favor and

against Crowley on the issue ofliability. In the alternative, the Trustee respectfully requests that

the specific facts found by the Banptcy Court, and set forth in the Trustee's opening brief at
pages 16,26-27, be deemed established for purposes of

this litigation.

Dated: May 15, 2007

Respectfully submitted,

Isl Michael J. Barre Richard A. Barkasy (#4683) Michael J. Bare (#4684)

SCHNADER HARSON SEGAL & LEWIS LLP 824 N. Market Street, Suite 1001 Wilmington, DE 19801 (302) 888-4554 (telephone) (302) 888-1696 (facsimile)
OF COUNSEL:
Barry E. Bressler (admitted pro hac vice)

Wilbur L. Kipnes (admitted pro hac vice)
Nancy Winkelman (admitted pro hac vice)

SCHNADER HARSON SEGAL & LEWIS LLP 1600 Market Street, Suite 3600 Philadelphia, P A 19103 (215) 751-2400 (telephone) (215) 751-2205 (facsimile)
Counsel to Plaintif

Arlin M Adams, Chapter 11 Trustee of the PostConfirmation Bankrptcy Estates of CORAM HEALTHCARE CORP. and CORAM, mc

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWAR
ARIN M. ADAMS, Chapter 11 Trustee of
the Post-Confirmation Bankrptcy Estates of CORA HEALTHCARE CORP. and CORAM,
)

INC,
Plaintiff,
v.

) ) ) )
) Case No. 04-1565 (SLR)

DANELD. CROWLEY, etal.,
Defendants.

) ) ) ) )

CERTIFICATE OF SERVICE
I, Michael J. Bare, hereby certify that I am at least eighteen years of age and that
on May 15,2007, I caused a true and correct copy ofthe Reply Brief in Support of

the Motion

for Summary Judgment on Liability, or in the Alternative, for the Cour to Deem Certain Facts
Established, as well as the Appendix of

Documents in Support, to be served upon the following:

Jeffrey C. Wisler, Esquire
Chrstina M. Thompson, Esquire

Connolly Bove Lodge & Hutz LLP 1007 N. Orange St., P.O. Box 2207 Wilmington, DE 19899 (via CM/ECF and hand delivery)

Elliot R. Peters, Esquire Laurie Car Mims, Esquire Keker & VanNest, LLP 710 Sansome Street San Francisco, CA 94111 (via CM/ECF, emai! and overnight mail)

Dated: May 15, 2007

SCHNADER HARSON SEGAL & LEWIS LLP

By: Isl Michael J. Barre
Richard A. Barkasy (#4683) Michael J. Bare (#4684) 824 N. Market Street, Suite 1001 Wilmington, DE 19801
Telephone: (302) 888-4554
Facsimile: (302) 888-1696