Cohen v. KB Mezzanine Fund II, LP (In re SubMicron Systems Corp.)

SubMicron Systems Corp. (SubMicron) (debtor) experienced financial difficulties. In 1997, SubMicron issued $20 million in notes to KB Mezzanine Fund II, LP; Equinox Investment Partners, LLC; and Celerity Silicon, LLC (collectively, the lenders) (defendants). The notes were secured by liens on SubMicron inventory, equipment, and other assets. SubMicron continued to struggle. In 1998 and 1999, SubMicron issued additional notes to the lenders. Also in 1999, as SubMicron continued to lose money, the lenders advanced additional funding to SubMicron. No notes were issued for this funding, though SubMicron recorded it as secured debt in a filing with the U.S. Securities and Exchange Commission (SEC). By June 1999, each of the lenders had representatives on the SubMicron board of directors. SubMicron filed for bankruptcy. Sunrise Capital Partners, LP (Sunrise) negotiated directly with the lenders—but not other SubMicron creditors—to purchase SubMicron’s assets. The plan administrator, Howard Cohen (plaintiff), challenged the Sunrise sale in federal district court, arguing in part that the 1999 funding should be characterized as equity rather than debt. The court approved the sale, finding that the absence of notes from the 1999 financing and the lenders’ representation on the SubMicron board did not necessarily support an equity characterization. Cohen appealed. The United States Court of Appeals for the Third Circuit granted certiorari.