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IN RE SUPREMA SPECIALTIES

August 25, 2005.

IN RE: SUPREMA SPECIALTIES, INC., et al., Debtors. HARLEYSVILLE WORCESTER MUTUAL INSURANCE COMPANY and LUMBERMENS MUTUAL CASUALTY INSURANCE COMPANY, 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 Harleysville Worcester and Lumbermens appeal from a December 1, 2004 Order by Judge Blackshear of the Bankruptcy Court approving a settlement between the Trustee and two insurance companies. 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 from 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 creditors of Suprema, and have claims totalling $3,882,571.19. They filed their proofs of claim in the Bankruptcy Court on August 2, 2002. Appellants provided Suprema with a Bond in the amount of $5.1 million to secure prompt payment to New York milk dealers, as is required under New York's Agriculture and Markets Law § 258-b. Suprema purchased milk in order to manufacture various cheese products. In early February 2002, Appellants learned of the fraud, or at least of the investigation of such fraud. Appellants wrote to Suprema asserting that under the contracts governing the Bond, Suprema was obligated to release them from any liability under the Bond. Appellants demanded such a release by February 12, 2002. Suprema never complied, and continued to purchase milk during the weeks proceeding the bankruptcy filing. Suprema failed to pay roughly $3.8 million to New York milk dealers, for which Appellants were ultimately liable under the Bond. It is that amount which they now seek from Suprema.

  Appellants have also pursued state common law claims against certain of Suprema's former directors. Appellants sought to recover the roughly $3.8 million, as well as legal fees, from the former directors as a result of their negligence in failing to detect and prevent the misappropriation or conversion of corporate assets. That lawsuit was brought in the New Jersey Superior Court, Bergen County, captioned Harleysville Worcester Insurance Company and Lumbermens Mutual Casualty Company v. Mark Cocchiola, et al., docket no. BER-L-6229-02, but was voluntarily dismissed without prejudice pursuant to an agreement between Appellants and Suprema. The agreement resulted from the Government's seizure of Suprema's books and records, which apparently made discovery almost impossible. The parties also agreed to toll the statute of limitations until those records become available. At that time, Appellants apparently intend to pursue their claims against the former directors.

  Other Pending Actions

  There is also a class action brought by Suprema shareholders 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. 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 ...


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