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