In Re: Submicron Sys

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit

1-6-2006

In Re: Submicron Sys
Precedential or Non-Precedential: Precedential

Docket No. 03-2102

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 03-2102

In Re: SUBMICRON SYSTEMS CORPORATION, et al,
Debtors

HOWARD S. COHEN, as Plan Administrator
for the Estates of
SubMicron Systems Corporation, SubMicron Systems Inc.,
SubMicron Wet Process Stations Inc. and SubMicron Systems
Holdings I Inc.,

Appellants

v.

KB MEZZANINE FUND II, LP;
EQUINOX INVESTMENT PARTNERS, LLC; and
CELERITY SILICON, LLC

On Appeal from the United States District Court
for the District of Delaware
(D.C. Civil Action No. 02-cv-00752)
District Judge: Honorable Sue L. Robinson
 Argued September 14, 2004

Before: SCIRICA, Chief Judge, ALITO
and AMBRO, Circuit Judges

(Filed January 6, 2006 )

Rona J. Rosen, Esquire
Klehr, Harrison, Harvey
Branzburg & Ellers
260 South Broad Street
Suite 400
Philadelphia, PA 19102

Joanne B. Wills, Esquire (Argued)
Klehr, Harrison, Harvey,
Branzburg & Ellers
919 North Market Street
Suite 1000
Wilmington, DE 19083

Attorneys for Appellant

Laura D. Jones, Esquire
Pachulski, Stang, Ziehl, Young,
Jones & Weintraub
919 North Market Street
P.O. Box 8705, 16th Floor
Wilmington, DE 19801

2
Peter J. Korneffel, Jr., Esquire
Brownstein, Hyatt & Farber
410 Seventeenth Street
22nd Floor
Denver, CO 80202

Robert A. Klyman, Esquire (Argued)
David D. Johnson, Esquire
Latham & Watkins LLP
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071-2007

Attorneys for Appellees

OPINION OF THE COURT

AMBRO, Circuit Judge

Appellant Howard S. Cohen (“Cohen”), as Plan
Administrator for the bankruptcy estates of SubMicron Systems
Corporation, SubMicron Systems, Inc., SubMicron Wet Process
Stations, Inc. and SubMicron Systems Holdings I, Inc. (jointly
and severally, “SubMicron”), challenges the sale to an entity
created by Sunrise Capital Partners, LP (“Sunrise”) of
SubMicron’s assets under 11 U.S.C. § 363(b), which authorizes
court-approved sales of assets “other than in the ordinary course
of business.” Sunrise negotiated directly with several—but not

3
all—of SubMicron’s creditors before presenting its bid to the
District Court. These creditors—The KB Mezzanine Fund II,
LP (“KB”), Equinox Investment Partners, LLC (“Equinox”),1
and Celerity Silicon, LLC (“Celerity”) (collectively, the
“Lenders”)—agreed to contribute toward the purchase of
SubMicron’s assets new capital along with all of their claims in
bankruptcy against SubMicron in exchange for equity in the
entity formed by Sunrise to acquire the assets—Akrion LLC
(“Akrion”). Akrion in turn “credit bid” the full value of the
Lenders’ secured claims contributed to it as part of its bid for
SubMicron’s assets pursuant to 11 U.S.C.§ 363(k).2 The

1
Equinox was formed in 1996 to manage KB after it was
acquired by Dresdner Bank. For the sake of simplicity, we shall
refer to both entities simply as “KB/Equinox.”
2
This provision reads:
At a sale under subsection (b) of
this section of property that is
subject to a lien that secures an
allowed claim, unless the court for
cause orders otherwise the holder
of such claim may bid at such sale,
and, if the holder of such claim
purchases such property, such
holder may offset such claim
against the purchase price of such
property.
11 U.S.C. § 363(k).

4
District Court approved the sale.3 In re SubMicron Sys. Corp.,
291 B.R. 314 (D. Del. 2003).

Cohen, seeking as Plan Administrator of the SubMicron
estates to aid unsecured creditors “cut out of the deal” by the
Lenders and Sunrise, attacks the sale on several fronts. First, he
argues that the purportedly secured debt investments made by
the Lenders and contributed to Akrion should have been
recharacterized by the District Court as equity investments. In
the alternative, if the District Court did not err in declining to
recharacterize the investments as equity, Cohen contends that it
erred by failing to conclude that the debt was unsecured. Even
if the District Court properly considered the debt secured, Cohen
challenges the propriety of the District Court’s allowance of the
credit bid portion of Akrion’s offer. As a last option, Cohen
asserts that the District Court erred by declining to equitably
subordinate the Lenders’ secured claims to those of creditors
with inferior claims. For the reasons discussed below, we reject
these arguments and affirm the judgment of the District Court.

I. Facts and Procedural Posture

A. SubMicron’s Financing

3
This bankruptcy case is before the District Court because it
withdrew, pursuant to 28 U.S.C. § 157(d), the reference of the
case to the Bankruptcy Court for the District of Delaware.

5
 Before its sale in bankruptcy, SubMicron designed,
manufactured and marketed “wet benches” 4 for use in the
semiconductor industry. By 1997, it was experiencing
significant financial and operational difficulties. To sustain its
operations in the late 1990s, SubMicron secured financing from
several financial and/or investment institutions. On November
25, 1997, it entered into a $15 million working capital facility
with Greyrock Business Credit (“Greyrock”), granting Greyrock
first priority liens on all of its inventory, equipment, receivables
and general intangibles. The next day, SubMicron raised
another $20 million through the issuance of senior subordinated
12% notes (the “1997 Notes”) to KB/Equinox (for $16 million)
and Celerity (for $4 million) secured by liens behind Greyrock
on substantially all of SubMicron’s assets. Submicron
subsequently issued a third set of notes in 1997 (the “Junior
1997 Notes”) for $13.7 million, comprising $8.7 million of 8%
notes and a $5 million note to The BOC Group, Inc. The Junior
1997 Notes were secured but junior to the security for the 1997
Notes. Despite this capital influx, SubMicron incurred a net loss
of $47.6 million for the 1997 fiscal year.

A steep downturn in the semiconductor industry made
1998 a similarly difficult year for SubMicron. By August of that

4
Wet benches are automatic process tools used for cleaning
and etching operations in semiconductor processing. See
http://www.semiconductorglossary.com/default.asp?searchter
m=wet+bench (last visited Dec. 27, 2005).

6
year, it was paying substantially all of the interest due on the
1997 Notes as paid-in-kind senior subordinated notes. On
December 2, 1998, SubMicron and Greyrock agreed to renew
the Greyrock line of credit, reducing the maximum funds
available from $15 to $10 million and including a $2 million
overadvance conditioned on SubMicron’s securing an additional
$4 million in financing. To satisfy this condition, on December
3, SubMicron issued Series B 12% notes (the “1998 Notes”) to
KB/Equinox (for $3.2 million) and Celerity (for $800,000). The
1998 Notes ranked pari passu with the 1997 Notes and the
interest was deferred until October 1, 1999. SubMicron
incurred a net loss of $21.9 million for the 1998 fiscal year, and
at year’s end its liabilities exceeded its assets by $4.2 million.

SubMicron’s financial health did not improve in 1999.
By March of that year, its management determined that
additional financing would be required to meet the company’s
immediate critical working capital needs. To this end, between
March 10, 1999 and June 6, 1999, SubMicron issued a total of
eighteen Series 1999 12% notes (the “1999 Tranche One
Notes”) for a total of $7,035,154 (comprising nine notes to
KB/Equinox totaling $5,888,123 and nine notes to Celerity
totaling $1,147,031). The 1999 Tranche One Notes proved
insufficient to keep SubMicron afloat. As a result, between July
8, 1999 and August 31, 1999, KB/Equinox and Celerity made
periodic payments to SubMicron (the “1999 Tranche Two
Funding”) totaling $3,982,031 and $147,969, respectively. No
notes were issued in exchange for the 1999 Tranche Two

7
Funding. Between the 1999 Tranche One Notes and the 1999
Tranche Two Funding (collectively, the “1999 Fundings”),
KB/Equinox and Celerity advanced SubMicron a total of
$9,870,154 and $1,295,000, respectively. (The 1999 Fundings
were recorded as secured debt on SubMicron’s 10-Q filing with
the Securities and Exchange Commission.) Despite the cash
infusions, during the first half of 1999 SubMicron incurred a net
loss of $9.9 million. On June 30, 1999, SubMicron’s liabilities
exceeded its assets by $3.1 million.

By January 1999, KB/Equinox had appointed three
members to SubMicron’s Board of Directors. All appointees
were either principals or employees of KB/Equinox. By June
1999, following resignations of various SubMicron Board
members, KB/Equinox employees Bonaparte Liu and Robert
Wickey, and Celerity employee Mark Benham, represented
three-quarters of the Board, with SubMicron CEO David Ferran
the lone Board member not employed by KB/Equinox or
Celerity.

B. The Acquisition

SubMicron began acquisition discussions with Sunrise in
July of 1999. By all accounts, it was generally understood that
if SubMicron failed to reach a deal with Sunrise, it would be
forced to liquidate, leaving secured creditors—with the
exception of Greyrock—with pennies on the dollar and
unsecured creditors and shareholders with nothing.

8
KB/Equinox, not SubMicron’s management, conducted
negotiations with Sunrise, developing and agreeing on the terms
and financial structure of an acquisition to occur in the context
of a prepackaged bankruptcy.

On August 31, 1999, SubMicron entered into an asset
purchase agreement with Akrion, the entity created by Sunrise
to function as the acquisition vehicle. The following day,
SubMicron filed a Chapter 11 bankruptcy petition and an
associated motion seeking approval of the sale of its assets to
Sunrise outside the ordinary course of business pursuant to
§ 363(b) of the Bankruptcy Code.

The asset purchase agreement reiterated, inter alia, that
KB/Equinox and Celerity would contribute their secured claims
(i.e., the 1997 Notes, the 1998 Notes and the 1999 Fundings) in
order for Akrion to credit bid these claims under § 363 of the
Bankruptcy Code—but only contingent on the closing of the
sale. The agreement also required SubMicron, at the closing of
the sale, to pay $5,500,000 immediately to the holders of the
1999 Fundings. In return, KB/Equinox and Celerity would
receive a 31.475% interest in Akrion (KB/Equinox received a
30% interest and Celerity received a 1.475% interest). The
Court and Official Committee of Unsecured Creditors (the
“Creditors’ Commitee”) were apprised of the terms of this
agreement prior to the sale.

At the sale hearing Akrion submitted a bid of

9
$55,507,587 for SubMicron. The cash component of the bid
totaled $10,202,000 and included $5,500,000 in cash from
Akrion, $3,382,000 to pay pre- and post-petition Greyrock
secured debt, and $850,000 to cover administrative claims.5 The
credit portion of the bid consisted of the $38,721,637
outstanding for the 1997 Notes, the 1998 Notes, and the 1999
Fundings (all of which KB/Equinox and Celerity had
contributed to Akrion), plus $1,324,138 in individual secured
claims, for a total of $40,045,775. Finally, the bid included
SubMicron’s liabilities that would be assumed by
Akrion—$681,346 in lease obligations and $4,578,466 in other
assumed liabilities for a total of $5,259,812. No other bid for
SubMicron’s assets was made, SubMicron’s Board and the
Court both approved Akrion’s bid over the objection of the
Creditors’ Committee, and on October 15, 1999, the asset sale
closed.

On April 18, 2000, the Creditors’ Committee brought
against the Lenders, among others, an adversary proceeding in
which it made the claims before us on appeal. (Cohen was
subsequently substituted for the Creditors’ Committee.) After
a bench trial before Judge Sue Robinson in late July/early
August 2001, she ruled against Cohen, setting out her reasoning
in a comprehensive opinion. Cohen appeals.

5
These enumerated components of the cash portion of the bid
total $9,732,000, not $10,202,000. The District Court’s opinion
leaves unclear what accounted for the missing $470,000.

10
 II. Jurisdiction and Standard of Review

Because the typical reference of bankruptcy cases to
bankruptcy courts was withdrawn here by the District Court, our
appellate jurisdiction stems from 28 U.S.C. § 1291, not 28
U.S.C. § 158(d). In re PWS Holding Corp., 228 F.3d 224, 235
(3d Cir. 2000); In re Marvel Entm’t Group, Inc., 140 F.3d 463,
470 (3d Cir. 1998). “We review the District Court’s legal
determinations de novo, its factual findings for clear error, and
its exercise of discretion for abuse thereof.” In re PWS Holding
Corp., 228 F.3d at 235 (citing In re O’Brien Envtl. Energy, Inc.,
188 F.3d 116, 122 (3d Cir. 1999)).

III. Recharacterization as Equity

Cohen argues that the District Court erred by failing to
recharacterize the infusion of the 1999 Fundings as an equity
investment. To succeed with this argument, he must
demonstrate that the District Court abused its discretionary
authority or premised its determination on clearly erroneous
findings of fact. Because he has failed to do so, we affirm the
District Court’s recharacterization holding.

A. Recharacterization / Equitable Subordination

At the outset, it is important to distinguish
recharacterization from equitable subordination. Both remedies

11
are grounded in bankruptcy courts’ equitable authority6 to ensure
“that substance will not give way to form, that technical
considerations will not prevent substantial justice from being
done.” Pepper v. Litton, 308 U.S. 295, 305 (1939). Yet
recharacterization and equitable subordination address distinct
concerns. Equitable subordination is apt when equity demands
that the payment priority of claims of an otherwise legitimate
creditor be changed to fall behind those of other claimants. See,
e.g., Citicorp Venture Capital, Ltd. v. Comm. of Creditors
Holding Unsecured Claims, 160 F.3d 982, 986–87 (3d Cir.
1998); Bayer Corp. v. MascoTech, Inc. (In re Autostyle Plastics,
Inc.), 269 F.3d 726, 749 (6th Cir. 2001). In contrast, the focus
of the recharacterization inquiry is whether “a debt actually
exists,” In re Autostyle Plastics, 269 F.3d at 748 (internal

6
Bankruptcy courts’ general powers of equity are codified at
11 U.S.C. § 105(a), which states that a “court may issue any
order, process, or judgment that is necessary or appropriate to
carry out the provisions of [the Bankruptcy Code].” The power
of equitable subordination is specifically codified at 11 U.S.C.
§ 510(c), which states that,
after notice and a hearing, the court may (1) under
principles of equitable subordination, subordinate
for purposes of distribution all or part of an
allowed claim to all or part of another allowed
claim or all or part of an allowed interest to all or
part of another allowed interest; or (2) order that
any lien securing such a subordinated claim be
transferred to the estate.

12
quotation marks omitted) or, put another way, we ask what is the
proper characterization in the first instance of an investment.7
For these reasons, we agree with those courts that have
determined that “the issues of recharacterization of debt as
equity capital and equitable subordination should be treated
separately.” Blasbalg v. Tarro (In re Hyperion Enters., Inc.),
158 B.R. 555, 560 (D.R.I. 1993); see, e.g., In re Autostyle
Plastics, 269 F.3d at 749 (explaining that “[b]ecause both
recharacterization and equitable subordination are supported by
the Bankruptcy Code and serve different purposes, we join those
courts that have concluded that a bankruptcy court has the power
to recharacterize a claim from debt to equity” and collecting
cases); Aquino v. Black (In re AtlanticRancher, Inc.), 279 B.R.
411, 433 (Bankr. D. Mass. 2002) (stating that “while once
considered solely in conjunction with the doctrine of equitable
s u b o r d i n a ti o n , b a n k r u p t c y c o u r t s n o w c o n s i d e r

7
In this context, the label “recharacterization” is misleading.
See Citicorp Real Estate, Inc. v. PWA, Inc. (In re Georgetown
Bldg. Assocs. Ltd. P’ship), 240 B.R. 124, 137 (Bankr. D.D.C.
1999) (“The debt-versus-equity inquiry is not an exercise in
recharacterizing a claim, but of characterizing the advance’s
true character.” (emphases in original)); In re Cold Harbor
Assocs., L.P., 204 B.R. 904, 915 (Bankr. E.D. Va. 1997)
(“Rather than recharacterizing the exchange from debt to equity,
or subordinating the claim for some reason, the question before
this Court is whether the transaction created a debt or equity
relationship from the outset.”).

13
recharacterization a separate cause of action”).

Cohen advances both arguments. He argues that the
infusion of the 1999 Fundings is most accurately characterized
as an equity investment—a recharacterization argument—and,
in the alternative, that if the infusion is deemed a debt
investment, the Lenders’ claims should be equitably
subordinated. We turn first to the recharacterization argument,
as “[d]etermining [an] equitable subordination issue prior to
determining whether [an] advance is a loan or [an equity
investment] is similar to taking the cart before the horse.”
Diasonics, Inc. v. Ingalls, 121 B.R. 626, 630 (Bankr. N.D. Fla.,
1990). If a “particular advance is a capital contribution, . . .
. then equitable subordination never comes into play.” In re
Georgetown Bldg. Assocs., 240 B.R. at 137.

B. Recharacterization Framework

In defining the recharacterization inquiry, courts have
adopted a variety of multi-factor tests borrowed from non-
bankruptcy caselaw.8 While these tests undoubtedly

8
In Roth Steel Tube Co. v. Comm’r, 800 F.2d 625 (6th Cir.
1986), the Court of Appeals for the Sixth Circuit laid out eleven
factors to determine whether an investment was debt or equity
in the context of assessing income tax liability. Id. at 630. In re
Autostyle Plastics extended the use of those factors to the
recharacterization context. 269 F.3d at 749–50. They are:

14
 (1) the names given to the instruments, if any,
evidencing the indebtedness; (2) the presence or
absence of a fixed maturity date and schedule of
payments; (3) the presence or absence of a fixed
rate of interest and interest payments; (4) the
source of repayments; (5) the adequacy or
inadequacy of capitalization; (6) the identity of
interest between the creditor and the stockholder;
(7) the security, if any, for the advances; (8) the
corporation’s ability to obtain financing from
outside lending institutions; (9) the extent to
which the advances were subordinated to the
claims of outside creditors; (10) the extent to
which the advances were used to acquire capital
assets; and (11) the presence or absence of a
sinking fund to provide repayments.
Roth Steel Tube Co., 800 F.2d at 630.
The Courts of Appeal for the Eleventh and Fifth Circuits
also employ a multi-factor test in the tax context. They have
identified the following thirteen factors:
(1) the names given to the certificates evidencing
the indebtedness; (2) the presence or absence of a
fixed maturity date; (3) the source of payments;
(4) the right to enforce payment of principal and
interest; (5) participation in management flowing
as a result; (6) the status of the contribution in
relation to regular corporate creditors; (7) the
intent of the parties; (8) “thin” or adequate
capitalization; (9) identity of interest between

15
 creditor and stockholder; (10) source of interest
payments; (11) the ability of the corporation to
obtain loans from outside lending institutions;
(12) the extent to which the advance was used to
acquire capital assets; and (13) the failure of the
debtor to repay on the due date or to seek a
postponement.
Stinnett’s Pontiac Serv., Inc. v. Comm’r, 730 F.2d 634, 638
(11th Cir. 1984) (citing Estate of Mixon v. United States, 464
F.2d 394, 402 (5th Cir. 1972)).
In re Cold Harbor Assocs., L.P., 204 B.R. at 915,
discussed both of the above tests in the recharacterization
context and applied the factors relevant to that case, and In re
Georgetown Bldg. Assocs., 240 B.R. at 137, cited with approval
Cold Harbor’s use of these factors in the recharacterization
context (but found it unnecessary to adopt formally a specific set
of factors).
In this case, the District Court applied a seven-factor test
used in an unpublished District of Delaware case that was
bankruptcy related, Official Comm. of Unsecured Creditors of
Color Tile, Inc. v. Blackstone Family Inv. P’ship (In re Color
Tile, Inc.), No. Civ. A. 98-358-SLR, 2000 WL 152129 (D. Del.
Feb. 9, 2000) (Robinson, J.). Those factors are
(1) the name given to the instrument; (2) the
intent of the parties; (3) the presence or absence
of a fixed maturity date; (4) the right to enforce
payment of principal and interest; (5) the presence
or absence of voting rights; (6) the status of the
contribution in relation to regular corporate

16
include pertinent factors, they devolve to an overarching
inquiry: the characterization as debt or equity is a court’s
attempt to discern whether the parties called an instrument one
thing when in fact they intended it as something else. That
intent may be inferred from what the parties say in their
contracts, from what they do through their actions, and from the
economic reality of the surrounding circumstances. Answers lie
in facts that confer context case-by-case.

No mechanistic scorecard suffices. And none should, for
Kabuki outcomes elude difficult fact patterns. While some
cases are easy (e.g., a document titled a “Note” calling for
payments of sums certain at fixed intervals with market-rate
interest and these obligations are secured and are partly
performed, versus a document issued as a certificate indicating
a proportional interest in the enterprise to which the certificate
relates), others are hard (such as a “Note” with conventional
repayment terms yet reflecting an amount proportional to prior
equity interests and whose payment terms are ignored). Which
course a court discerns is typically a commonsense conclusion
that the party infusing funds does so as a banker (the party
expects to be repaid with interest no matter the borrower’s

contributors; and (7) certainty of payment in the
event of the corporation’s insolvency or
liquidation.
In re SubMicron Sys., 291 B.R. at 323 (citing In re Color Tile,
2000 WL 152129, at *4).

17
fortunes; therefore, the funds are debt) or as an investor (the
funds infused are repaid based on the borrower’s fortunes;
hence, they are equity). Form is no doubt a factor, but in the end
it is no more than an indicator of what the parties actually
intended and acted on.

C. Review of the D istrict Court’s
Recharacterization Holding

i) Standard of Review

We must first determine whether the District Court’s
recharacterization conclusion is a finding of fact we review for
clear error or a conclusion of law over which we exercise
plenary review. Direct precedent on this issue is lacking,9 but
several courts have considered this issue in the tax context.

In tax cases addressing whether for tax purposes a

9
Research has uncovered only one bankruptcy case
discussing whether the capital contribution versus loan
determination question is primarily one of law or fact. There the
Court concluded that “[t]he issue of classification of an advance
presents a question of law subject to de novo review.” Celotex
Corp. v. Hillsborough Holdings Corp. (In re Hillsborough
Holdings Corp.), 176 B.R. 223, 248 (M.D. Fla. 1994) (citing
Lane v. United States (In re Lane), 742 F.2d 1311 (11th Cir.
1984), a tax refund case).

18
contribution should be treated as debt or equity, courts of appeal
are split. The United States Courts of Appeals for the Sixth and
Ninth Circuits have concluded the issue is one of fact to be
reviewed for clear error. Roth Steel Tube, 800 F.2d at 629
(citing Smith v. Comm’r, 370 F.2d 178, 180 (6th Cir. 1966));
Bauer v. Comm’r, 748 F.2d 1365, 1367 (9th Cir. 1985) (citing
A.R. Lantz Co. v. United States, 424 F.2d 1330, 1334 (9th Cir.
1970)). The Fifth and Eleventh Circuit Courts of Appeals, on
the other hand, have held the issue to be primarily one of law
subject to de novo review. Lane v. United States (In re Lane),
742 F.2d 1311, 1315 (11th Cir. 1984); Estate of Mixon v. United
States, 464 F.2d 394, 402–03 & n.13 (5th Cir. 1972).10 In our
Court, we were called upon to review a debt versus equity
determination in the tax context in Geftman v. Comm’r, 154
F.3d 61 (3d Cir. 1998), but we eschewed entering the thicket of
deciding whether we were reviewing a finding of fact or a
conclusion of law. See id. at 68 n.9.

As discussed above, the determinative inquiry in

10
Of course, it could be argued that the Eleventh Circuit did
not reach this conclusion of its own accord. When the former
Fifth Circuit was split into the Fifth and Eleventh Circuits on
October 1, 1981, the Eleventh Circuit adopted as precedent the
decisions of the Fifth Circuit handed down as of September 30,
1981. Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th
Cir. 1981). Thus, Mixon was binding precedent for the Lane
Court.

19
classifying advances as debt or equity is the intent of the parties
as it existed at the time of the transaction. So framed, we agree
with our Sixth and Ninth Circuit colleagues that this is a
question of fact that, “once resolved by a district court, cannot
be overturned unless clearly erroneous.” A.R. Lantz Co., 424
F.2d at 1334.

ii) The District Court’s Determination Was
Not Clearly Erroneous

The District Court’s opinion includes ample findings of
fact to support its recharacterization determination. Because
these findings are not clearly erroneous and overwhelmingly
support the Court’s decision to characterize the 1999 Fundings
as debt (under any framework or test), we affirm its factual
determination.

The District Court set out numerous facts to support a
debt characterization. Looking to the lending documents, it
found “beyond dispute in the record that . . . the name given to
the 1999 fundings was debt . . . and . . . the 1999 fundings had
a fixed maturity date and interest rate.” In re SubMicron Sys.,
291 B.R. at 325. The Court also found evidence of the parties’
intent to create a debt investment outside the lending documents.
For example, it noted that “[t]he 1999 notes were recorded as
secured debt on SubMicron’s 10Q SEC filing and UCC-1
financing statements.” Id. at 319.

20
 The District Court could not find, on the other hand,
convincing evidence to support an equity investment
characterization of the 1999 Fundings. It rejected Cohen’s
argument that the dire financial circumstances surrounding the
infusion of the 1999 Fundings supported an equity
characterization. Instead, it concluded, with reference to the
conflicting testimony and relative credibility of witnesses
presented by both parties, that Cohen “failed to prove that[,]
under SubMicron’s dire circumstances, [the Lenders’]
transactions were improper or unusual [as debt investments].”
Id. at 325. Recognizing that “‘[w]hen a corporation is
undercapitalized, a court is more skeptical of purported loans
made to it because they may in reality be infusions of capital,’”
id. (quoting In re Autostyle Plastics, 269 F.3d at 746–47), the
District Court also noted that “when existing lenders make loans
to a distressed company, they are trying to protect their existing
loans and traditional factors that lenders consider (such as
capitalization, solvency, collateral, ability to pay cash interest
and debt capacity ratios) do not apply as they would when
lending to a financially healthy company,” id. Weighing these
competing considerations, it did not find SubMicron’s
undercapitalization greatly supported an equity characterization.
Id.

Similarly, the Court found the Lenders’ participation on
the SubMicron Board did not, in and of itself, provide support
for an equity characterization. Again relying on expert
testimony, it emphasized that it is “not unusual for lenders to

21
have designees on a company’s board, particularly when the
company [is] a distressed one.” Id. at 325–26. After reviewing
conflicting evidence on the issue, the Court concluded that
Cohen “[did] not prove[] that [Lenders] or their designees
controlled or dominated SubMicron’s Board in any way.” Id. at
326. Based on these factual determinations, the conclusion was
inevitable that the Lenders’ representation on SubMicron’s
Board did not necessarily support an equity characterization.

Lastly, the Court found unpersuasive Cohen’s argument
that SubMicron’s failure to issue notes for the 1999 Tranche
Two Funding should be understood as evidence of the parties’
understanding that the 1999 Fundings were, in effect, equity
investments. It noted that “[t]he record is clear that
SubMicron’s accounting department made numerous mistakes
and errors when generating notes,” concluding that “[t]he fact
that notes were generated for some fundings and not others is
not sufficient, in and of itself, to recharacterize the 1999
fundings as equity.” Id. at 326.

In short, the District Court found ample evidence to
support a debt characterization and little evidence to support a
characterization of equity infusion. On the basis of these
findings, which comport with the record, it was hardly clear
error for the Court to conclude that “[Cohen] ha[d] not proven
by a preponderance of the evidence that the 1999 [F]undings
should be recharacterized as equity.” Id. at 325.

22
 IV. The 1999 Fundings Were Secured Debt

Having established that the District Court properly
concluded the 1999 Fundings were debt, we turn to Cohen’s
assertion that the Lenders did not present a valid secured claim.
In determining whether claims asserted by creditors in
bankruptcy are secured, state law applies. See In re Bollinger
Corp., 614 F.2d 924, 925 n.1 (3d Cir. 1980). Cohen concedes
that, whether one applies Delaware, Pennsylvania, California or
New York law, the requirements to obtain a security interest are
the same. Thus each state’s codification of Uniform
Commercial Code (“U.C.C.”) §§ 9-203 and 9-302 existing in
1999 11 requires a written security agreement in favor of the
lender describing the collateral and, for the collateral in question
(inventory, equipment, receivables and general intangibles), the
filing of a properly executed financing statement (unless the
inventory and equipment are possessed by the lender or its
representative, something normally, and here highly,
impractical).

Cohen contends that the Lenders did not comply with
state U.C.C. law (and thus the requirements for assertion of a
secured claim). The main source of contention is that financing
statements filed by the Lenders only list “Equinox Investment

11
Since then, a revised Article 9 has been adopted in each
state.

23
Partners, LLC, as Collateral Agent,” as the secured party.12
Cohen asserts that the listing of Equinox solely (and not also KB
and Celerity) rendered the financing statement ineffective under
the then-extant U.C.C. § 9-402(1), which stated that a
“financing statement is sufficient if it gives the names of the
debtor and the secured party, is signed by the debtor, gives an
address of the secured party from which information concerning
the security interest may be obtained, gives a mailing address of
the debtor and contains a statement indicating the types, or
describing the items, of collateral.” Official Comment 2 to then-
U.C.C. § 9-402 indicated that Article 9 employed a “notice
filing” system whereby financing statements needed only to
indicate that a secured party “may have a security interest in the
collateral described. Further inquiry from the parties concerned
. . . [may] be necessary to disclose the complete state of affairs.”
(Emphasis added.) In this context, “[t]he Uniform Commercial
Code does not require that the secured party as listed in [a
financing] statement be a principal creditor and not an agent.”
Indus. Packaging Prods. Co. v. Fort Pitt Packaging Int’l, Inc.,
161 A.2d 19, 21 (Pa. 1960). Because the financing statements
name both SubMicron as debtor and Equinox as secured party,
provide mailing addresses for both entities, and describe the

12
No claim is made that a security interest in the collateral
was not created (the security agreements for the 1997 Notes and
the 1998 Notes state that the collateral secures “the payment of
all present and future indebtedness”), only that it was not
properly perfected.

24
collateral that is subject to the security agreement, we conclude
that any interested party would be on notice to communicate
with Equinox regarding the status of its (and its principals’)
interest in SubMicron’s assets. This is sufficient for Article 9
perfection purposes. Id.

We also conclude that, on the record before us, there can
be no doubt that KB and Celerity were intended secured parties
served by their agent, Equinox. Indeed, in the schedule of
liabilities filed with the District Court, SubMicron lists KB and
Celerity as secured noteholders. The District Court found on the
basis of overwhelming evidence that KB and Celerity were
intended secured parties with respect to the 1999 Fundings and
we discern no basis to believe this determination was erroneous.
In sum, we conclude that the Lenders presented valid secured
claims for the 1999 Fundings.

V. Propriety of § 363 Credit Bid

Having determined that the 1999 Fundings represented
an extension of secured debt, we turn to Cohen’s argument that
the § 363(k) credit bid was improper because the Lenders did
not (and could not) demonstrate that some portion of their
claims remained secured by collateral as defined in Bankruptcy
Code § 506(a).13 The District Court determined that “there was

13
This provision reads in pertinent part:
An allowed claim of a creditor secured by a lien on

25
no collateral available to actually secure the 1999 fundings.” In
re SubMicron Sys., 291 B.R. at 327. As a result, Cohen argues
that, because the secured debt had no actual (or economic)
value, it could not be credit bid under § 363(k). Because that
section empowers creditors to bid the total face value of their
claims—it does not limit bids to claims’ economic value—we
disagree and hold that the District Court did not err in allowing
the Lenders to credit bid their claims.

It is well settled among district and bankruptcy courts
that creditors can bid the full face value of their secured claims
under § 363(k). See, e.g., In re Suncruz Casinos, LLC, 298 B.R.
833, 839 (Bankr. S.D. Fla. 2003) (“[T]he plain language of
[section 363(k)] makes clear that the secured creditor may credit
bid its entire claim, including any unsecured deficiency portion
thereof.” (emphasis in original)); In re Morgan House Gen.
P’ship, Nos. 96-MC-184 & 96-MC-185, 1997 WL 50419, at *1
(E.D. Pa. Feb. 7, 1997) (holding that secured creditors may bid
“to the extent of [their] claim” under § 363(k)); In re Midway
Invs., Ltd., 187 B.R. 382, 391 n.12 (Bankr. S.D. Fla. 1995) (“[A]
secured creditor may bid in the full amount of the creditor’s

property in which the estate has an interest . . . is a secured claim
to the extent of the value of such creditor’s interest in the
estate’s interest in such property . . . and is an unsecured claim
to the extent that the value of such creditor’s interest . . . is less
than the amount of such allowed claim.
11 U.S.C. § 506(a).

26
allowed claim, including the secured portion and any unsecured
portion thereof” (citing legislative history) (alteration in
original) (internal quotation marks omitted)); In re Realty Invs.,
Ltd. V, 72 B.R. 143, 146 (Bankr. C.D. Cal. 1987) (same); see
also Criimi Mae Servs. Ltd. P’ship v. WDH Howell, LLC (In re
WDH Howell, LLC), 298 B.R. 527, 532 n.8 (D.N.J. 2003).

In fact, logic demands that § 363(k) be interpreted in this
way; interpreting it to cap credit bids at the economic value of
the underlying collateral is theoretically nonsensical.

A hypothetical is illustrative.

Assume that Debtor has a single asset: a truck, T.
Lender is a secured creditor that has loaned
Debtor $15, taking a security interest in T.
Debtor is in Chapter 11 bankruptcy and has filed
a § 363 motion to sell T to Bidder for $10.
Debtor argues that Lender can only credit bid $10
for T and must bid any excess in cash if it wishes
to outbid B.

This hypothetical reveals the logical problem with an actual
value bid cap. If Lender bids $12 for T, by definition $12
becomes the value of Lender’s security interest in T. In this
way, until Lender is paid in full, Lender can always overbid
Bidder. (Naturally, Lender will not outbid Bidder unless Lender
believes it could generate a greater return on T than the return

27
for Lender represented by Bidder’s offer.) As Lender holds a
security interest in T, any amount bid for it up to the value of
Lender’s full claim becomes the secured portion of Lender’s
claim by definition.14 Given the weight of reason’s demand that
“it must be so,” we see no reason to catalog the myriad other
arguments that have been advanced to support this

14
Precisely this logical argument was presented in In re
Realty Invs., Ltd V:
An argument might be made that the
“allowed claim” referred to in the Congressional
Record is only the secured portion of [the
creditor]’s claim. But this is an argument of form
and not of substance.
Until [the nonrecourse undersecured
lender] is paid in full, any bid received is subject
to overbid by [the lender]. If [the bidder]’s bid
were valued [below the full value of the lender’s
claim], [the lender] could overbid it, and [the
lender]’s bid would then become, by definition,
the “allowed” claim. . . . [I]t is practical that [the
lender] will bid in its entire obligation and
therefore that is its “allowed” claim. Because no
one could buy the property without [the lender]’s
consent, unless [the lender] is paid in full, the
“allowed claim” of [the lender] must (for
purposes of credit bidding) be its total claim
without reference to the “value” of the property.
72 B.R. at 146.

28
“interpretation.” 15

15
We pause nonetheless to note one such argument, in the
mode of statutory interpretation, that is based on the exception
for § 363 sales contained in § 1111(b)(1)(A)’s statutory
protection for nonrecourse creditors (that is, in the event of the
borrower’s default, the creditor may not look to the borrower for
repayment, and thus is limited to its security, if any). The latter
was “enacted by Congress to cure the harsh result of Great
National Life Ins. Co. v. Pine Gate Associates, Ltd., 2 B.C.D.
1478 (Bankr. N.D. Ga. 1976).” Tampa Bay Assocs., Ltd. v.
DRW Worthington, Ltd. (In re Tampa Bay Assocs., Ltd.), 864
F.2d 47, 49 (5th Cir. 1989). In Pine Gate, a secured creditor
holding a nonrecourse lien against real property unsuccessfully
objected to the bankruptcy sale of the property at a dramatically
depressed price. The case made clear that “under the former
Bankruptcy Act a debtor could file bankruptcy proceedings
during a period when real property values were depressed,
propose to repay secured [nonrecourse] lenders only to the
extent of the then-appraised value of the property, and ‘cram
down’ the secured lender class, preserving any future
appreciation of the property for the debtor.” Id. at 50. Congress
attempted to remedy this problem by enacting § 1111(b)(1)(A),
which “provid[es] such creditors with an opportunity to elect to
have their liens treated as recourse claims if their debtors intend
to retain the property secured . . . .” Id. The provision explicitly
excepts sales of property under § 363, however. 11 U.S.C.
§ 1111(b)(1)(A)(ii).
The rationale for this exception presupposes that § 363(k)
credit bidders can bid the full value of their secured claims.

29
 Cohen is not out of plausible arguments, however, as he
claims that because the Lenders were not partially undersecured
but completely undersecured—that is, because the collateral was
found to have no economic value—this case is different. Yet
nothing about the logic of allowing credit bids up to the full face
value of the collateral changes if the collateral has no actual
value. Because the Lenders had a valid security interest in

“Congress intended to protect the nonrecourse undersecured
creditor only if such a creditor is not permitted to purchase the
collateral at a sale or if the debtor intends to retain the collateral
after bankruptcy and not repay the debt in full.” In re Tampa
Bay Assocs., 864 F.2d at 50. Congress deemed the undersecured
nonrecourse creditor’s ability to credit bid the full value of his
claim adequate protection in the § 363 context, rendering
§ 1111(b)(1)(A) unnecessary:
The legislative history verifies this congressional
intent in limiting the applicability of the statutory
recourse status: “Sale of property under [§] 363 or
under the plan is excluded from treatment under
[§] 1111(b) because of the secured party’s right to
bid in the full amount of his allowed claim at any
sale of collateral under section 363(k) . . . .”
Id. (quoting 124 Cong. Rec. H11,103-04 (1978)) (omission in
original) (emphasis added). Because an undersecured
nonrecourse creditor is protected to the full extent of its claim by
virtue of its ability to bid up to the full value of that claim under
§ 363(k), Congress concluded that § 1111(b)(1)(A) need not
apply to § 363 sales.

30
essentially all the assets sold, by definition they were entitled to
the satisfaction of their claims from available proceeds of any
sale of those underlying assets. Their credit bid did nothing
more than preserve their right to the proceeds, as credit bids do
under § 363(k).

Unable squarely to rest this argument on a theoretically
sound construction of the Bankruptcy Code’s credit bidding
provisions, Cohen enlists the aid of 11 U.S.C. § 506(a), which
provides for the splitting of partially secured claims into their
secured claim and unsecured claim components. Yet § 506(a)
is inapplicable. As one member of the Supreme Court has
explained, “[w]hen . . . the Bankruptcy Code means to refer to
a secured party’s entire allowed claim, i.e., to both the ‘secured’
and ‘unsecured’ portions under § 506(a), it uses the term
‘allowed claim’—as in 11 U.S.C. § 363(k) . . . .” Dewsnup v.
Timm, 502 U.S. 410, 422 (1992) (Scalia, J., dissenting) (first
emphasis in original). That is, § 363(k) speaks to the full face
value of a secured creditor’s claim, not to the portion of that
claim that is actually collateralized as described in § 506.

Moreover, as a practical matter, no § 506 valuation is
required before a § 363 sale of the underlying collateral can be
approved. Section 363 attempts to avoid the complexities and
inefficiencies of valuing collateral altogether by substituting the
theoretically preferable mechanism of a free market sale to set
the price. The provision is premised on the notion that the
market’s reaction to a sale best reflects the economic realities of

31
assets’ worth. Naturally, then, courts are not required first to
determine the assets’ worth before approving such a market sale.
This would contravene the basis for the provision’s very
existence.

For these reasons, we conclude that the District Court
properly allowed the Lenders to contribute their credit bids
under the §363 sale.

VI. Equitable Subordination

Cohen also argues that the Lenders’ claims related to the
1999 Fundings should be equitably subordinated to the claims
of the general unsecured creditors. In Citicorp Venture Capital,
Ltd. v. Comm. of Creditors Holding Unsecured Claims, we
explained that

[b]efore ordering equitable subordination, most
courts have required a showing involving three
elements: (1) the claimant must have engaged in
some type of inequitable conduct, (2) the
misconduct must have resulted in injury to the
creditors or conferred an unfair advantage on the
claimant, and (3) equitable subordination of the
claim must not be inconsistent with the provisions
of the [B]ankruptcy [C]ode.

160 F.3d 982, 986–87 (3d Cir. 1998) (citing United States v.

32
Noland, 517 U.S. 535 (1996)). We declined, however, to adopt
the first generally recognized element as a formal requirement
for equitable subordination, noting instead that because the
Bankruptcy Court in Citicorp Venture Capital properly found
inequitable conduct, there was no “need . . . [to] resolve the
issue of whether misconduct is always a prerequisite to equitable
subordination . . . .” 16 160 F.3d at 987 n.2. In a similar vein,
because the District Court found in our case, through a proper
exercise of its discretion, that no injury resulted to SubMicron’s
unsecured creditors as a result of the Lenders’ dealings with
Akrion, we need not reach the issue of inequitable conduct in
order to affirm the District Court’s equitable subordination
holding.

As the District Court explained, the doctrine of equitable
subordination “is remedial, not penal, and should be applied
only to the extent necessary to offset specific harm that creditors
have suffered on account of the inequitable conduct.” 291 B.R.
at 327 (citing Trone v. Smith (In re Westgate-California Corp.),
642 F.2d 1174, 1178 (9th Cir.1981)); see also Citicorp Venture

16
Our hesitancy to adopt an inequitable conduct requirement
in Citicorp Venture Capital stemmed from our prior holding in
In re Burden v. United States, 917 F.2d 115, 120 (3d Cir. 1990),
that “creditor misconduct is not [always] a prerequisite for
equitable subordination.” As we explained, “Burden involved
subordination of a tax penalty in the absence of government
misconduct.” 160 F.3d at 987 n.2.

33
Capital, 160 F.3d at 991 (“A bankruptcy court should . . .
attempt to identify the nature and extent of the harm it intends
to compensate in a manner that will permit a judgment to be
made regarding the proportionality of the remedy to the injury
that has been suffered by those who will benefit from the
subordination.”); Stoumbos v. Kilimnik, 988 F.2d 949, 960 (9th
Cir. 1993) (“A claim will be subordinated only to the claims of
creditors whom the inequitable conduct has disadvantaged.”);
Estes v. N & D Props., Inc. (In re N & D Props., Inc., 799 F.2d
726, 733 (11th Cir. 1986) (stating that “equitable subordination
operates only to redress the amount of actual harm done”).

Considering Cohen’s equitable subordination claim, the
District Court held:

[P]laintiff has failed to show that . . . the
unsecured creditors suffered any harm as the
result of defendants’ actions.

The trial testimony is uncontradicted that
had defendants not made the 1999 [F]undings to
SubMicron, the company would have been forced
to close down and liquidate, leaving the
unsecured creditors with nothing.

Furthermore, the record shows that there
were no other parties interested in acquiring
SubMicron at the time of the bid. Plaintiff has

34
 failed to show that any other party was willing to
bid on SubMicron at any price. In fact, the
testimony shows that Sunrise/Akrion was the deal
of last resort for SubMicron and the company
aggressively sought other suitors prior to the
Sunrise/Akrion deal. Given these facts, plaintiff
has not proven that any harm resulted from any
improper double bidding or inflated bid price.

In re SubMicron Sys., 291 B.R. at 329.

The record supports the Court’s findings, and Cohen
barely argues otherwise.17 Further, Cohen points to no evidence

17
While the last major heading in Cohen’s Opening Brief is
that “The Record Contains Overwhelming Evidence That The
Appellees Breached Their Fiduciary Duties and Their Claims
Should be Equitably Subordinated,” Cohen Op. Br. at 51, little
argument even implies the District Court’s findings were
entered in error.
As an aside, we note that Cohen recites the generalization
that Delaware courts have held that directors’ fiduciary duties
extend to creditors as well as shareholders once a debtor is in the
“vicinity of insolvency.” Id. at 52 (citing Geyer v. Ingersoll
Publ’ns Co., 621 A.2d 784, 789 (Del. Ch. 1992); Credit
Lyonnais Bank Nederland, N.V. v. Pathe Commc’ns Corp., Civ.
A. No. 12150, 1991 WL 277613, at *34 & n.55 (Del. Ch. Dec.
30, 1991)). The recent Delaware Chancery Court opinion of
Vice Chancellor Strine in Production Resources Group, L.L.C.

35
showing that unsecured creditors were in any way disadvantaged
or harmed by the sale of assets.18 In this context, equitable
subordination would serve no purpose and the Court thus
properly denied Cohen’s claim.

*****

We affirm the District Court’s approval of the § 363 sale
of SubMicron’s assets.

v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004), addresses
the extent of director duties when a corporation is insolvent. Id.
at 787–93. In so doing, the Vice Chancellor clarifies inaccurate
generalizations of Credit Lyonnais that have gained traction
from uncritical repetition.
18
Indeed, it appears the 1999 Fundings benefitted unsecured
creditors by enabling SubMicron to pay operating expenses and
to avoid a Chapter 7 liquidation.

36