In re BIOLITEC, INC. BIOLITEC AG, et al., Appellants,
MELANIE L. CYGANOWSKI, Chapter 11 Trustee, Appellee.
OPINION & ORDER
FAITH S. HOCHBERG, District Judge.
This matter comes before the Court upon Appellants Biolitec AG, Biomed Technology Holdings, LTD, Ceramoptec Industries, Inc., Dr. Wolfgang Neuberger, Biolitec Holdings US, Inc., and Biolitec FZ LLC's appeal from the United States Bankruptcy Court for the District of New Jersey's Order Expunging Proof of Claim of Biolitec FZ LLC (Dkt. Nos. 1-3). The Court decides the appeal without an oral hearing, pursuant to Federal Rule of Bankruptcy Procedure 8012 and Federal Rule of Civil Procedure 78(b), because the facts and legal arguments are adequately presented in the briefs and record and oral argument would not significantly aid the decisional process. For the following reasons, the Court affirms the ruling of the Bankruptcy Court.
Biolitec, Inc. ("Debtor") was a member of the Biolitec group of companies. These companies manufacture and distribute fiber optic devices such as medical lasers. In January 2008, AngioDynamics, Inc. ("ADI") filed a breach of contract action against Debtor in United States District Court for the Northern District of New York ("the New York action") alleging that Debtor was obligated to defend and indemnify ADI in two underlying patent infringement lawsuits that had been filed against ADI. (B.R. Dkt. The Debtor counterclaimed and sought the recovery of $1.6 million in defense costs expended in one of the underlying patent litigations. (B.R. Dkt. No. 2, ¶ 13.) On November 8, 2012, the New York court entered judgment in the approximate amount of $23 million in favor of ADI against Debtor. (B.R. Dkt. No. 2, ¶ 9.) The Debtor appealed the New York judgment to the Second Circuit on January 18, 2013. (B.R. Dkt. No. 2, ¶ 16.)
Meanwhile, in October 2009, ADI commenced an action in the United States District Court for the District of Massachusetts against Debtor, Biolitec AG, Biomed Technology Holdings Ltd., and Wolfgang Neuberger seeking to disregard Debtor's corporate structure and impose liability on the Massachusetts defendants based on veil piercing and fraudulent transfer claims alleging the defendants sought to leave Debtor judgment proof. (B.R. Dkt. No. 2, ¶ 50.) In August 2012, ADI obtained a preliminary injunction freezing the Debtor's and other Biolitec entities' assets subject to an ordinary course of business exception. (B.R. Dkt. No. 2, ¶ 53.) The injunction was subsequently affirmed by the First Circuit. AngioDynamics, Inc. v. Biolitec AG , 711 F.3d 248, 252 (1st Cir. 2013); (B.R. Dkt. No. 210-1, ¶ 17).
On January 22, 2013, the Debtor initiated its Chapter 11 bankruptcy. (B.R. Dkt. dated 1/22/13.) Prior to the appointment of the trustee in this matter,  Biolitec AG merged with its Austrian subsidiary in violation of the injunction issued by the Massachusetts District Court. (B.R. Dkt. No. 210-1, ¶¶ 18-19.) As a result, the Massachusetts Court held the Biolitec defendants in contempt of court. (Id.) After Dr. Neuberger failed to appear personally and explain his actions before the Massachusetts Court, the Court issued a warrant for his arrest and issued a series of fines against the Biolitec companies. (Id.
On May 28, 2013, during Debtor's bankruptcy, appellant Biolitec FZ LLC filed a proof of claim related to its alleged interest in Debtor's counterclaims asserted in the New York action alleged to be worth approximately $1.6 million should Debtor's appeal to the Second Circuit succeed. (B.R. Dkt. No. 249-3, ¶ 1; B.R. Dkt. No. 2, ¶ 13.) Appellants argue that this interest was assigned on January 21, 2013-one day prior to the filing of Debtor's bankruptcy. On July 26, 2013, the Trustee objected to Biolitec FZ LLC's proof of claim on a number of grounds, including 11 U.S.C. § 502(b)(1). (B.R. Dkt. No. 210.)
On August 8, 2013, the Bankruptcy Court issued an oral decision expunging Biolitec FZ LLC's claim on the basis that Biolitec FZ LLC failed to carry its burden that there was a valid assignment of an interest in Debtor's counterclaims. (August 8, 2013 Hr'g Tr.) The Bankruptcy Court specifically found that: (1) the purported assignment was not notarized, authenticated, or witnessed; (2) the purported assignment was dated one day prior to the filing of Debtor's bankruptcy and was signed by Dr. Neuberger on behalf of both parties; (3) the assignment indicated that Biolitec FZ LLC would prosecute the Second Circuit appeal diligently and at its sole cost; (4) in exchange, Biolitec FZ LLC would receive 75% of any counterclaim recovery and Debtor would receive 25%; (5) the purported assignment did not give any indication of what consideration was paid for the interest in the counterclaims; (6) there is no credible evidence that a $215, 000 payment to Debtor on January 18, 2013 from Biolitec Holdings was consideration for the alleged interest; (7) Dr. Neuberger did not attend the hearing and was not subject to cross examination; (8) the schedules and statements of financial affairs filed in the bankruptcy proceeding did not disclose the alleged assignment to Biolitec FZ LLC, but they did list the counterclaims as an asset of the Debtor; (9) the assignment appeared to violate the Massachusetts' Court's injunction; and (10) the contemporaneous documents indicate that the $215, 000 transferred to Debtor from another Biolitec entity was a capital contribution and not consideration for the alleged assignment from Biolitec FZ LLC. (August 8, 2013 Hr'g Tr. at 22-25.) On August 9, 2013, the Bankruptcy Court entered an Order expunging Biolitec FZ LLC's proof of claim. (B.R. Dkt. No. 260.) This appeal followed.
II. JURISDICTION & STANDARD OF REVIEW
The bankruptcy court had subject matter jurisdiction pursuant to 28 U.S.C. § 1334. This Court has appellate jurisdiction over the final order of the bankruptcy court pursuant to 28 U.S.C. § 158(a). In re Am. Classic Voyages Co., 405 F.3d 127, 130 (3d Cir. 2005); see also Walsh Trucking Co., Inc. v. Ins. Co. of N. Am., 838 F.2d 698, 701 (3d Cir. 1988) ("[A]n order expunging a creditor's claim in an ongoing bankruptcy proceeding is a final order immediately appealable to the district court under section 158(a).")
This court "review[s] the bankruptcy court's legal determinations de novo, its factual findings for clear error, and its exercise of discretion for abuse thereof." Am. Classic Voyages Co., 405 F.3d at 130. The Court "must break down mixed questions of law and fact, applying the appropriate standard to each component." In re Allegheny Int'l, Inc., 954 F.2d 167, 172 (3d Cir. 1992).
Appellants seek reversal of the Bankruptcy Court's order expunging Biolitec FZ LLC's proof of claim. Under 11 U.S.C. § 502, a party in interest is authorized to object to claims. "The burden of proof for claims brought in the bankruptcy court under 11 U.S.C.A. § 502(a) rests on different parties at different times." Allegheny, 954 F.2d at 173. First, the claimant must allege facts sufficient to support his claim. Id. If the allegations in the filed claim meet this standard, "it is prima facie ' valid." Id. "In other words, a claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant's initial obligation." Id. In a bankruptcy proceeding, a properly filed proof of claim is considered "prima facie evidence of the validity and the amount of the claim." Fed.R.Bankr.P. 3001(f). The burden then shifts to the objector "to produce evidence sufficient to negate the prima facie validity of the filed claim." Allegheny, 954 F.2d at 173. "In practice, the objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency." Id. at 173-74. If the objector meets this burden, "the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence.... The burden of persuasion is always on the claimant." Id. Section 502(b)(1) "is most naturally understood to provide that, with limited exceptions, any defense to a claim that is available outside of the bankruptcy context is also available in bankruptcy." Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 450 (2007).
Appellants argue that the Bankruptcy Court made five errors when rendering its decision: (1) it improperly inquired in to the adequacy of consideration; (2) it gave improper weight to the absence of notarization and lack of reference to consideration; (3) it gave improper weight to the absence of the transaction in the statements of financial affairs; (4) it improperly concluded the Massachusetts injunction was violated; and (5) the Bankruptcy Court erred when it failed to initiate an adversary proceeding in accordance with Federal Rule of Bankruptcy Procedure 7001. The Chapter 11 Trustee disputes these allegations. The Court ...