## Facts

- Borne Chemical Company, Inc. (debtor) had a manufacturing relationship with The Rolfite Company (Rolfite).
- Before the bankruptcy filing, Borne sued Rolfite in state court for alleged misappropriation of trade secrets and proprietary information.
- Rolfite asserted counterclaims, including that Borne tortiously interfered with a proposed merger between Rolfite and Quaker Chemical Corporation by terminating the manufacturing contract and filing suit.
- After Borne filed a voluntary Chapter 11 petition, Rolfite’s stockholders (as successors to Rolfite) sought relief from the automatic stay to continue the state-court litigation.
- The bankruptcy court lifted the stay to permit the state litigation to proceed but temporarily disallowed the Rolfite-related claims in the Chapter 11 case pending state-court liquidation, while extending deadlines to preserve later allowance if liquidated.
- The district court vacated the temporary disallowance order and directed the bankruptcy court to conduct an estimation hearing.
- The parties agreed the bankruptcy court would estimate the claims based on selected pleadings and other state-court documents, with briefs and oral argument.
- On remand, the bankruptcy court estimated the claims at zero and reinstated temporary disallowance pending liquidation, structured so the plan could proceed without reserving value for the claims while preserving the possibility of later pursuit after liquidation.
- The district court affirmed, and the stockholders appealed to the Third Circuit.

## Issues

1. Whether the bankruptcy court abused its discretion under 11 U.S.C. § 502(c)(1) or made clearly erroneous factual findings in estimating the stockholders’ contingent and unliquidated claims at zero.
2. Whether § 502(c)(1) required an “expected value” approach (discounting by likelihood of success in state court) rather than a merits-based evaluation that could yield a zero estimate.

## Decision

- The Third Circuit affirmed the district court’s judgment.
- The court held the bankruptcy court did not abuse its discretion in estimating the claims at zero under § 502(c)(1).
- The court held the bankruptcy court’s fact-finding supporting the zero valuation was not clearly erroneous.
- The court rejected the argument that § 502(c)(1) mandates an expected-value methodology and approved the flexible estimation approach used.
- The court upheld temporary disallowance pending state-court liquidation as a permissible mechanism to avoid delaying Chapter 11 administration while preserving the potential for later recovery if the claims were liquidated.

## Legal Principles

- Under 11 U.S.C. § 502(c)(1), bankruptcy courts may estimate contingent or unliquidated claims when liquidation would unduly delay administration of the estate.
- Claim estimation under § 502(c)(1) grants bankruptcy courts broad discretion as to procedure and valuation method, so long as the approach is reasonable and supported by the record.
- A bankruptcy court may estimate a claim at zero when the materials considered support a conclusion that the claim lacks sufficient merit to warrant a positive value in the reorganization case.
- Appellate review of estimation decisions is deferential: estimation is upheld absent abuse of discretion or clearly erroneous findings of fact.
- Temporary disallowance pending liquidation may be used to permit plan progress without reserving value for unresolved litigation claims, while preserving the claimant’s ability to seek recovery later if the claim is liquidated.

## Conclusion

The Third Circuit upheld a bankruptcy court’s § 502(c)(1) estimation assigning zero value to contingent state-law claims and its temporary disallowance mechanism, concluding the estimation method was within the court’s discretion, supported by non-erroneous findings, and consistent with efficient Chapter 11 administration despite ongoing state-court litigation.


Bittner v. Borne Chem. Co., 691 F.2d 134 (3d Cir. 1982)