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IN RE SUPREMA SPECIALTIES

August 25, 2005.

IN RE: SUPREMA SPECIALTIES, INC., et al., Debtors. SPECIAL SITUATIONS FUND III, L.P., and SPECIAL SITUATIONS CAYMAN FUND, LLP, Appellants,
v.
KENNETH P. SILVERMAN, ESQ., The Chapter 7 Trustee of the Estate of Suprema Specialties, Inc., et al., Appellee.



The opinion of the court was delivered by: THOMAS GRIESA, Senior District Judge

OPINION

Appellants Special Situations Fund III, L.P., and Special Situations Cayman Fund, LLP, appeal from a December 1, 2004 Order by Judge Blackshear of the Bankruptcy Court approving a settlement between the Trustee and two insurers. Appellee Kenneth Silverman, the Chapter 7 Trustee of Suprema Specialties, Inc., et al., moves to dismiss the appeal.

The motion is denied.

  BACKGROUND

  Suprema Specialties, Inc., et al., ("Suprema") was a manufacturer of all-natural, gourmet Italian cheeses. Suprema's stock was publicly-traded. Suprema filed for bankruptcy in early 2002 following the discovery of a massive accounting fraud.

  This accounting fraud occurred during the years 1996 to 2002. Members of Suprema's management team and three principals of Suprema's largest customers arranged sham transactions between Suprema and those companies. The sham transactions were so numerous that around $700 million, or approximately 87%, of Suprema's sales over that time period were either fictitious or inflated. At least one member of Suprema's management team, along with three others, later pled guilty to criminal charges of securities fraud and bank fraud.

  Suprema filed for bankruptcy under Chapter 11 on February 24, 2002. On March 20, 2002 the Bankruptcy Court converted the case to liquidation proceedings pursuant to Chapter 7, and appointed Silverman as the Trustee.

  Appellants

  Appellants are institutional investors who purchased millions of dollars of now-worthless Suprema stock. However, Appellants have not filed a Notice of Interest with the Bankruptcy Court. They are not creditors of Suprema, and have not filed a Proof of Claim with the Bankruptcy Court. Appellants are pursuing federal statutory and state common law claims against certain of Suprema's directors, officers, and employees. Appellants seek to hold these persons liable for the false and misleading statements contained in Suprema's public filings. Appellants seek more than $25 million in damages. Appellants' claims are currently being asserted in an action in the United States District Court for the District of New Jersey captioned Special Situations Fund III, L.P., et al. v. Mark Cocchiola, et al., No. 2:02 Civ. 3099. Although those claims were dismissed by the District Court, Special Situations' appeal is currently pending before the Third Circuit.

  There is also a class action pending against certain of Suprema's directors, officers, and employees in the United States District Court for the District of New Jersey captioned In re Suprema Specialties, Inc., Securities Litigation, No. 02-168. That action apparently raises similar claims as the above-mentioned action, but it is not clear if Appellants are members of the putative class. Like the action brought solely by Appellants, the class action was dismissed by the District Court, and an appeal is currently pending before the Third Circuit.

  The Insurance Policies

  Suprema maintained three directors and officers liability insurance policies (the "D&O Policies"). The D&O Policies covered Suprema as the "Named Entity" as well as certain "Insured Persons", who were officers and directors of Suprema. The first policy was an Executive and Organization Liability Insurance Policy with National Union Fire Insurance Co. in the amount of $7.5 million (the "Primary Policy"). The second was an Excess Directors and Officers Liability Insurance Policy with Royal Indemnity Company (the "First Excess Policy") in the amount of $7.5 million in excess of the amount covered by the Primary Policy. The third was an Excess Insurance Policy with National Union Fire Insurance Co. in the amount of $10 million in excess of the amount covered by the Primary Policy and the First Excess Policy.

  On January 21, 2004 the Trustee commenced ten insider adversary proceedings in the Bankruptcy Court against insiders and officers and directors of Suprema. Those proceedings seek to recover damages for, among other things, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, waste, mismanagement, and fraudulent conveyances.

  In a letter dated April 8, 2004, National Union advised those directors and officers that it was entitled to rescind the D&O Policies because they were issued in reliance on materially false and misleading representations by the insureds. National Union specifically alleged that, in deciding to issue the policies, it had relied on the 10Ks, 10Qs, and 8Ks filed by Suprema with the SEC. National Union concluded that ...


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