Bittner v. Borne Chem. Co. - 691 F.2d 134 (3d Cir. 1982)

Rule:

Congress has given the bankruptcy courts broad discretion to estimate a claim pursuant to 11 U.S.C.S. § 502(c)(1). As classic economic regulation, the federal bankruptcy laws need only be supportable on a rational basis to survive substantive due process challenges. A bankruptcy court's discretion to treat a contingent, unliquidated claim is undoubtedly rationally related to the legitimate governmental interests expressed in Chapter XI.

Facts:

Prior to filing its voluntary petition under Chapter XI of the Code, Borne Chemical Company, Inc. (Borne) commenced a state court action against Rolfite Company for the alleged pirating of trade secrets and proprietary information from Borne. The Rolfite Company filed a counterclaim, alleging, inter alia, that Borne had tortiously interfered with a proposed merger between Rolfite and the Quaker Chemical Corporation (Quaker) by unilaterally terminating a contract to manufacture Rolfite products and by bringing its suit. Sometime after Borne filed its Chapter XI petition, the Rolfite stockholders sought relief from the automatic stay so that the state court proceedings might be continued. The district court directed the bankruptcy court to hold an estimation hearing. After weighing the evidence, the bankruptcy court assigned a zero value to the Rolfite claims and reinstated its earlier order to disallow temporarily the claims until such time as they might be liquidated in the state court, in effect requiring a waiver of discharge of the Rolfite claims from Borne. Upon appeal, the district court affirmed. Rolfite stockholders appealed.

Issue:

Did the bankruptcy court err in assigning a zero value to the Rolfite claims against Borne, justifying the intervention of the appellate court?

Answer:

No.

Conclusion:

The court held that even if the bankruptcy court did estimate Rolfite’s claims on their ultimate merits rather than the present value of the probability of success in state court, such a valuation method was not an abuse of discretion. By temporarily disallowing them until final resolution of the state action, the possibility of a protracted and inequitable reorganization proceeding was avoided while ensuring a dividend on the claims in the event that the state court decided in appellant's favor. Only when the trial court's factual findings were clearly erroneous should an appellate court intervene. The subsidiary findings of the court plainly indicated that Rolfite’s counterclaim in the state action lacked legal merit. Faced with only the remote possibility that the state court would find otherwise, the bankruptcy court correctly valued the claims at zero.