Cellceutix Corp. v. Nickless (In re Formatech, Inc.)
| Decision Date | 09 July 2013 |
| Docket Number | Adversary No. 12–4041.,Bankruptcy No. 11–43424–MSH. |
| Citation | 496 B.R. 26 |
| Parties | In re FORMATECH, INC., Debtor. Cellceutix Corporation, Plaintiff v. David M. Nickless, Chapter 7 Trustee, Defendant and Sovereign Bank, N.A., Intervenor/Defendant. Sovereign Bank, N.A., Intervenor/Crossclaimant v. David M. Nickless, Chapter 7 Trustee, Defendant. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
OPINION TEXT STARTS HERE
Joseph P. Evans, Esq., Curley & Curley, P.C., Boston, MA, for the plaintiff, Cellceutix Corporation.
David M. Nickless, Esq., Nickless, Phillips and O'Connor, Fitchburg, MA, for defendant, David M. Nickless, Chapter 7 trustee of the estate of Formatech, Inc.
Bertin C. Emmons, Esq., Salem, NH, for the intervenor, Sovereign Bank, N.A.
This adversary proceeding arises from a dispute between Cellceutix Corporation and David M. Nickless, the chapter 7 trustee of the estate of Formatech, Inc., over Cellceutix's claim of a right to rescind an agreement by which it transferred shares of its stock to Formatech. The chapter 7 trustee seeks dismissal of Cellceutix's three-count complaint or, alternately, summary judgment in his favor. Sovereign Bank, N.A., which has been allowed to intervene as a party defendant, asserts a security interest in the stock and seeks summary judgment declaring that regardless of whether the Formatech–Cellceutix agreement is rescinded its rights in the stock are superior to those of Cellceutix. Although the trustee and Sovereign Bank disagree as to which of them has superior rights in the stock, that issue is not now before me.
The facts are taken from the affidavits and exhibits thereto filed in support of and in opposition to the motions for summary judgment and from the affidavit of William Jay Reese, III, vice president of Sovereign Bank, and exhibits thereto submitted in support of Sovereign Bank's motion to intervene. 1 Except as otherwise noted the material facts are not in dispute.
On March 17, 2010, Formatech and Cellceutix entered into a Clinical Materials Contract Aseptic Fill Manufacturing Agreement (the “Manufacturing Agreement”) 2 pursuant to which Formatech was to provide various services, including manufacturing a drug developed by Cellceutix called Kevetrin for use in clinical trials. Formatech was to produce the drug in accordance with the Food and Drug Administration's (“FDA”) “Current Good Manufacturing Practices” (“CGMP”) 3 and the instructions contained in a Project Agreement and Letter of Authorization dated March 17, 2010 (the “Project Agreement”) between Formatech and Cellceutix.4 The Manufacturing Agreement stated that it is governed by Massachusetts law.
The Manufacturing Agreement exculpated Formatech from damages caused by Formatech's delay or default in performing its obligations under the Manufacturing Agreement if the delay or default was “caused by conditions beyond Formatech's control ... [which] shall include, but are not limited to, ... regulation or law or other action of government or any agency thereof....” Formatech was to promptly notify Cellceutix of any such events and make all “reasonable efforts toward prompt resumption of its performance when possible....” 5
Between August and November 2010, the FDA conducted an inspection of Formatech'smanufacturing facility and generated on a form referred to as an “FDA 483” its findings from its inspection.6 The FDA found violations of CGMP which required remediation by Formatech. In fact, even before the FDA inspection had been completed and although not yet mandated to do so by the FDA, Formatech ceased operations in its manufacturing area to begin remediation.7 Consequently, Formatech's manufacturing operations ceased for a month or two in the fall of 2010.8 The temporary cessation of manufacturing and the stigma associated with the FDA's inspection and the FDA 483 caused Formatech's revenues to decline in 2010.9
Formatech also retained consultants, who were expert in the drug industry, to review the results of the FDA's inspection and assist Formatech in planning the remediation and its formal response to the FDA 483.10 During this period Formatech's chief executive officer called the FDA almost weekly attempting to arrange a meeting to discuss Formatech's remediation. 11 The FDA rebuffed all of Formatech's requests for a meeting during this period.12 Mr. Bernard testified that he did not know personally but believed that Cellceutix had been informed of the FDA's inspection and the ensuing cessation of manufacturing. He testified that since such notification was handled by Formatech's quality assurance group, he was not personally aware of when or which clients received notice.13 He testified that he believed that Cellceutix was informed of the remediation because “that was our standard practice.” 14
Formatech believed it had remediated the conditions identified in the FDA 483 and by letter dated November 8, 2010, Michael Healey, Formatech's director of quality assurance, provided Cellceutix with a copy of Formatech's redacted response to the FDA 483.15 On or about November 19, 2010, Mr. Healey informed Cellceutix by email that Formatech had completed its remediation and would re-start operations the next day.16
On or about February 10, 2011, the FDA sent Formatech a warning letter notifying Formatech that the FDA had identified deficiencies in Formatech's manufacturing facility and breaches of the FDA's CGMP.17 After receiving the warning letter, Formatech went back to its consultants in an attempt to understand what concerns the FDA still had since Formatech believed that it had responded satisfactorilyto the FDA 483.18 At this point the FDA granted Formatech's request for a meeting which occurred in approximately March 2011 and during which the FDA informed Formatech that its responses to the FDA 483 had been “too specific” and that the FDA was looking for a more “global response.” 19
After its receipt of the FDA's warning letter, Formatech hired former FDA inspectors as consultants to review and “tighten up” Formatech's corrective actions. After the review, the consultants informed Formatech that they believed the company was “in very good shape” and in compliance with CGMP. 20
There is some disagreement as to whether and when Formatech may have told Cellceutix about the FDA's warning letter. Mr. Bernard testified:
We would have notified any client that had previously manufactured in-within [sic] a reasonable time frame—probably going back to the date of the first inspection, but I'm not sure—and anyone who was on the calendar to manufacture, moving forward, to notify them that a warning letter had been received. And we invited all of those clients to have the opportunity to review our 43[sic] responses, our Warning Letter responses, our planned responses, and also invite them to come in to do their own quality assurance audit to ensure that they were comfortable with our systems, procedures, et cetera, before moving forward.21
He also noted that the FDA's warning letter was a public document and was posted on the FDA website.22
On March 1, 2011, Formatech and Cellceutix entered into an Alternative Payment Structure Agreement (the “APS Agreement”) 23 pursuant to which Formatech received cash and 184,375 shares of unregistered Cellceutix stock, evidenced by a stock certificate dated May 27, 2011, in payment for certain of the services Formatech rendered or was to render to Cellceutix under the Manufacturing and Project Agreements.24 The APS Agreement provides that it is governed by Massachusetts law.
Krishna Menon, Cellceutix's president, testified in her affidavit that Cellceutix had no notice of the warning letter until sometime after the APS Agreement was executed.25 Ms. Menon testified that had she known about the warning letter Cellceutix would not have entered into the APS Agreement but would have terminated its agreements with Formatech.26
In March 2011, Formatech finally began manufacturing Kevetrin although Formatech did not ship the finished product to Cellceutix's designee until August 2011.27By this time circumstances had changed for the worse at Formatech.
On August 12, 2011, Formatech filed a voluntary petition under chapter 11 of the Bankruptcy Code (11 U.S.C. § 101 et seq.). On August 14, 2011, by email to Sylvia Holden at Cellceutix, with a copy to Ms. Menon, Mr. Bernard informed Cellceutix of the status of the FDA investigation and of Formatech's filing for bankruptcy protection.28 In part the email stated:
As you know, the FDA has been at our facility performing re-inspection for the last 3 weeks. We learned on Thursday that they plan to continue the inspection into next week and that observations will be issued on a Form 483. The inspectors, as of Friday afternoon, had not yet completed their review of our Warning Letter responses. The effect of the yet to be closed Warning Letter combined with the threat of FDA actions that could affect our client's ability to continue or file for new trials wit [sic] drug product manufactured at our facility, has forced many of our clients to find alternative CMO's to address their near-term requirements for clinical supplies pending resolution of the inspections.
On Friday, August 12 at 3:00 pm, our owners called a company meeting to announce that we do not have the resources to ride out another round of 483 responses, corrective actions, etc. A rather painful decision was made—Formatech filed for bankruptcy and we are discontinuing all operations....
This weekend, I performed a review of our inventory and the urgent requirement of this e-mail is to provide you with a list of your materials that (I believe) are currently onsite. Our goal is to either return or destroy all...
To continue reading
Request your trial