Datawave Int'l, LLC v. Bluesource, Inc. (In re Procedo, Inc.)
| Decision Date | 01 April 2016 |
| Docket Number | ADV 13-3158,BKY 10-38679 |
| Parties | In re: PROCEDO, INC., Debtor. DATAWAVE INTERNATIONAL, LLC and MICHAEL J. IANNACONE, as Trustee for Procedo, Inc. Plaintiffs, v. BLUESOURCE, INC., AKAIBU, INC., TRUSTED DATA SOLUTIONS, LLC, CHRISTOPHER M. CLARK, MATTHEW EDWARDS, BRIAN JANC, and JOSEPH R. KVIDERA, Defendants. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota |
At St. Paul, Minnesota
April 1, 2016.
Procedo, Inc. was a Mahtomedi, Minnesota-based company that was engaged in software development and marketing. On order of the Minnesota state courts, it was placed into receivership on March 29, 2010. The receiver negotiated a sale of Procedo's software-related assets to DataWave International, LLC ("DataWave").
Before the sale closed, Procedo went into bankruptcy under Chapter 7, through a voluntary petition filed on December 6, 2010.1 Defendant Joseph Kvidera signed the petition andassociated documents in the stated capacity of sole owner and operator. Co-Plaintiff Michael J. Iannacone was appointed as the trustee of the Debtor's bankruptcy estate.2
Shortly after the bankruptcy filing (January, 2011), the Trustee conducted a sale of the Debtor's software-related assets pursuant to 11 U.S.C. § 363. DataWave purchased the assets from the Trustee. The terms of the Trustee's Asset Purchase Agreement ("the APA") were essentially the same as those for the receiver's proposed sale to DataWave.
More than two years after the bankruptcy filing and the closing of the Trustee's sale, this adversary proceeding was commenced--on July 31, 2013. DataWave sued on the accusation that the Defendants had pirated the most significant of the assets sold to DataWave--the program, source code, and licensing keys for software known as PAMM--and have been using them unlawfully to their own enrichment.3 The APA gave the estate a share of a stream of future payments from income generated from the assets; the Plaintiffs call that "the Pipeline." Asserting that the estate's right to receive that was destroyed by the Defendants' actions, the Trustee has joined DataWave as a plaintiff.
The various defendants are said to have participated in the alleged expropriation in different ways. Defendants Joseph R. Kvidera and Brian Janc are classified on their close pre-sale association with the Debtor (Kvidera as founder, sole stockholder, and former Chief Executive Officer; Janc as employee and the principal developer of PAMM). Kvidera and Janc are accused of taking digital-format copies of the assets from the Debtor's control and then misappropriating them in their new personal affiliations with the corporate defendants. Defendants Bluesource, Inc. ("Bluesource"), Akaibu, Inc. ("Akaibu"), and Trusted Data Solutions, LLC ("TDS") are sued on the accusation that they exploited the assets after Kvidera and Janc extracted them from the Debtor. Defendants Christopher Clark and Matthew Edwards are classified on their associations with the corporate defendants (Clark identified as the President of TDS; Edwards as an officer of Bluesourceand a shareholder in Akaibu), and the accusation that they and their companies personally participated in the misappropriations by Janc and Kvidera, or aided and abetted them.
The initiation of suit by this adversary proceeding followed motions in the main bankruptcy case, in which suspicions of the now-accused conduct were first raised. The Plaintiffs tried to use discovery-related measures under the Federal Rules of Bankruptcy Procedure to investigate whether the Defendants had pirated PAMM. The defendants strenuously resisted. They had many objections over the intrusiveness and disruptive potential of the discovery measures the Trustee was demanding. There was also much dissimulation from the defendants over the nature and causes of what the Trustee and DataWave were describing in their disquiet. All of that ended up being inconclusive.
The filing of the Plaintiffs' original complaint was the next action within the Debtor's case. After that, an Amended Complaint [Dkt. No. 18] was filed.
On a recitation of historical fact, the Plaintiffs pleaded 14 different counts in the Amended Complaint. Under them, claims for monetary relief were framed under widely-varying legal theories. Only half of the counts sounded under substantive law within the specialized expertise of a bankruptcy judge. Some of the counts named sub-aggregations of defendants as liable under their theories; others just named "Defendants" collectively, as the liable parties.
The Defendants filed separate motions for dismissal in lieu of filing answers--a total of three motions, each one nominally by a different group of movants. In total, they raised a welter of issues as to the adequacy of the Plaintiffs' fact-pleading and the viability of their theories of recovery under the pleaded facts and the invoked substantive law. The Plaintiffs responded in kind.4
As filed and argued, the motions presented quite a morass. Some of the counts were pleaded under theories commonly seen in bankruptcy litigation--the ones for avoidance ofallegedly-fraudulent transfers and for the turnover of assets alleged to be property of the bankruptcy estate. But, they were imprecisely framed under the pleaded facts; they proved difficult to fit to the context of the cited law. The remaining counts were pleaded under the law of intellectual property and business tort. They generated technical arguments from both sides--especially the defense. Some of these arguments were presented with a conclusory self-assuredness that was disquieting and facially suspect.
These motions were another big preemptive move by the defense in a lawsuit that had been commenced by complex pleading. As such, they ended up being another imposition on a hapless trial judge--part of the continuing fallout of the Supreme Court's adoption of a new tack on Rule 12(b)(6) under the much-cited opinions of Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 547 (2007) and Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). This order disposes of the defense's motions for dismissal, addressing the challenges to the Plaintiffs' pleading head-on.
The circumstances do not merit a decision organized in complex fashion by the sequence of the litigation. Nor is a painstaking recapitulation of the pleading necessary, or a separate detailing of the governing authorities on procedure and law. Rather, each count will be treated as to the adequacy of its fact-pleading and the viability of its asserted legal theory. The motions will be disposed of by collective rulings as to each count.
Nonetheless, the analysis should be opened by setting out the general approach to the adequacy of pleading under the Supreme Court's recent jurisprudence and its local application. "[A] complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face,'" if it is to pass muster in the face of a motion for dismissal. Ashcroft v. Iqbal, 556 U.S. at 678 (quoting Bell Atlantic Corp.v. Twombly, 550 U.S. at 547) (emphasis added). To meet this standard, the facts pled must show more than just a "sheer possibility" of proving the claim on its legal merits. Iqbal, 556 U.S. at 663. To be plausible, fact-pleading must be enough to support a "reasonable inference that the defendant is liable for the [conduct] alleged." Id. Thepleaded facts must "affirmatively and plausibly suggest that [the plaintiff] has the right [it] claims"; the pleading of "facts that are merely consistent with such a right" will not suffice, if they do not meet all the elements under law. Stalley v. Catholic Health Initiatives, 509 F.3d 517, 521 (8th Cir. 2007) (citing Twombly, 550 U.S. at 554-557). A "formulaic recitation of the elements of a cause of action," in conclusory legal terminology alone, will not suffice. Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009).
Five separate counts (termed "Claims") of the Amended Complaint are framed under federal and state fraudulent-transfer statutes. In the prefatory paragraph to each count, it is pleaded that "Plaintiffs incorporate" all of their previous, general fact-pleading into the particular count. But then the closing paragraph of Claims One through Four identifies the Trustee as the "party entitled to judgment" against the Defendants under the cited fraudulent-transfer laws. Claim Seven asserts that "Defendants are liable to Plaintiffs" and "Plaintiffs are entitled to judgment . . . ." Amended Complaint, ¶ 84 (emphasis added). This inconsistency created some confusion as to which Plaintiffs assert the standing to obtain this type of relief, giving rise to a certain amount of dithering by the defense.5
However, as a matter of law, only the Trustee has standing to sue on these counts, in the Debtor's bankruptcy case. When a claim for avoidance under fraudulent-transfer law is brought in a bankruptcy case, it is an attribute of the bankruptcy estate and a trustee is the only statutorily-named party vested with the power to avoid the subject transfer. The text of the Bankruptcy Code and Supreme Court precedent dictate that. 11 U.S.C. §§ 544(a) - (b) (); 11 U.S.C. § 548(a)(1) (ditto); Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000) (). One exception, derivative standing, has been judicially created; but it has not been set up in the Debtor's case. Under the factual posture of the Amended Complaint's pleading, it could not be set up.6
For substantive authority, all five of the counts...
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