In re AHT Corp.
| Citation | 265 BR 379 |
| Decision Date | 13 June 2001 |
| Docket Number | Bankruptcy No. 00 B 14446(ASH). Adversary No. 00-2935A. |
| Parties | In re AHT CORPORATION, et al., Debtors. AHT Corporation, Plaintiff, v. Bioshield Technologies, Inc., AHT Acquisition Corp., Timothy C. Moses, Jacques Elfersy, Scott Parliament, and Geoffrey Faux, Defendants. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
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Klestadt & Winters, LLP, by Tracy L. Klestadt New York City, Gravel and Shea, by Andrew D. Manitsky, Robert F. O'Neill, Burlington, VT, for AHT Corporation.
Roosevelt, Benowich & Lewis, LLP, by Leonard A. Benowich, Kenneth M. Lewis, White Plains, NY, Sims, Moss, Kline & Davis, LLP, Atlanta, GA, for Defendants.
DECISION DENYING MOTION TO ABSTAIN
Before me is a motion to abstain from hearing this adversary proceeding brought by debtor/plaintiff AHT Corporation ("AHT" or "debtor") against defendants Bioshield Technologies, Inc. ("Bioshield"), AHT Acquisition Corp., a wholly-owned subsidiary of Bioshield ("AHT Acquisition") and three individual defendants alleged to have been directors and controlling persons of Bioshield.
The adversary proceeding was filed on or about November 24, 2000. Defendants did not initially answer, but filed a motion to dismiss the complaint. The motion to dismiss was denied by Judge Connelly, to whom the case was initially assigned, at the conclusion of oral argument at a hearing on January 23, 2001. Upon Judge Connelly's retirement, the case was transferred to me.
Defendants filed answers with affirmative defenses and counterclaims. Plaintiff has filed a reply and defenses to the counterclaims. On February 6, 2001 counsel for the parties completed and the Court thereafter signed a Scheduling Order setting June 15, 2001 as the deadline to complete discovery, June 27, 2001 as the deadline to file a joint pretrial order and trial briefs and July 3, 2001 as the date for a final pretrial conference. On May 29 I granted the parties' request to modify the Scheduling Order to provide for a discovery deadline of September 14 with Joint Pretrial Order to be filed October 1, 2001.
The Court has jurisdiction over the subject matter of this controversy under 28 U.S.C. §§ 1334(a) and 157(a) and the standing order of reference signed by Acting Chief District Judge Ward on July 10, 1984. The instant motion is a core proceeding under 28 U.S.C. § 157(b)(2).
As in any motion to abstain, the factual predicate must be drawn from the allegations of the pleadings, mainly the complaint, and so it is here. The following brief recitation of facts and events, which is necessary for purposes of background, is based on the complaint and submissions of counsel. My statements here obviously do not constitute findings of fact, nor are any conclusions expressed here intended to constitute law of the case except to the extent strictly necessary to decide this motion to abstain. Nothing I say in this ruling can be construed as expressing or even intimating any view on my part as to any of the merits of the claims, counterclaims, defenses, objections or positions of the parties that may come before me in this proceeding. The parties would make a great mistake to think, or to argue, to the contrary. Assuming that I try this case (and I make no such assumption at this time), I shall have no view as to the merits or the outcome of any issue until I have heard and read the evidence, read the briefs and heard the arguments of counsel.
I express these caveats, perhaps in an excess of caution, because of references in the parties' memoranda to comments by this Court at earlier stages of the proceedings. For example, defendants' Memorandum at page 7 quoted a comment by Judge Connelly at the January 23 hearing, and defendants asserted that "this Court has recognized that it will be unable to conduct the jury trial in this Adversary Proceeding" (id. at 17), presumably referring to some comment I made in the course of oral argument on March 1 at a time when I was engaging in dialogue with counsel to thresh out the issues. Similarly, plaintiff quoted certain comments by Judge Connelly at a hearing in November on an unrelated issue (Memorandum 5). I do not intend anything I say in this ruling to be misinterpreted by counsel or their clients, or misquoted or quoted out of context before any other bankruptcy judge or any reviewing court.
On June 30, 2000 AHT, Bioshield and AHT Acquisition entered into a Merger Agreement pursuant to which AHT was to become a wholly-owned subsidiary of Bioshield, and AHT shareholders were to receive Bioshield common stock in accordance with a formula. Plaintiff alleges that the defendants committed a variety of acts of serious wrongdoing in connection with the Merger Agreement and that the corporate defendants breached the Merger Agreement.
On September 7, 2000 AHT gave notice to Bioshield that due to Bioshield's material breaches AHT was terminating the Merger Agreement, and the same day AHT commenced an action against the same defendants as those named in this adversary proceeding in the Georgia State Court (the "State Court Action"). The defendants filed counterclaims in the State Court Action. Settlement negotiations ensued, resulting in a negotiated, contingent settlement with three interrelated aspects, namely, (i) a new so-called Asset Purchase Agreement dated September 22, 2000 under which Bioshield would acquire the assets and business of AHT at a lower price than that contemplated under the June 30 Merger Agreement, (ii) settlement of the claims and counterclaims in the State Court Action and (iii) the simultaneous filing on September 22, 2000 by AHT of a voluntary petition under Chapter 11 in this Court.
The parties did in fact execute the Asset Purchase Agreement, and AHT did in fact file its Chapter 11 petition in this Court, both on September 22. But Bioshield did not purchase the assets and business of the debtor. Because it was operating post-petition at a deficit, the debtor eventually was forced to terminate operations and relinquish its assets to its secured creditor. This left the debtor with a fund of cash and this adversary proceeding as its only assets of any substance.
There is no dispute as to the law that determines the outcome of this motion. The governing statute is 28 U.S.C. § 1334(c). Section 1334(c) has two subsections. Subsection (1) concerns permissive abstention and states:
(1) Nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.
Subsection (2) provides for so-called mandatory abstention and states:
(2) Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.
Whether to abstain or not under subsection (1) is a matter for the sound discretion of the bankruptcy court. See, In re Masterwear Corp., 241 B.R. 511, 520 (Bankr.S.D.N.Y.1999); In re Consulting Actuarial Partners, LP, 72 B.R. 821, 829 (Bankr.S.D.N.Y.1987). For the reasons set forth in my decision in In re Texaco, Inc., 182 B.R. 937, 946-947 (Bankr. S.D.N.Y.1995) and the authorities there cited, and because of the particular circumstances present in this case as amplified in point III, below, I decline to abstain under subsection (1).
There are six statutory prerequisites for abstention under subsection (2). It is clear from the statute itself that all six must be found for abstention to be mandatory. The six requirements are as follows:
See, e.g., S.G. Phillips Constructors, Inc. v. City of Burlington, Vermont (In re S.G. Phillips Constructors, Inc.), 45 F.3d 702, 708 (2d Cir.1995); In re Thomson McKinnon Securities Inc., 161 B.R. 98, 100 (Bankr.S.D.N.Y.1993); In re Consulting Actuarial Partners, LP, 72 B.R. at 827.
Although abstention under subsection (2) is mandatory in the sense that, if all six factors are found to be present, the Court "shall abstain from hearing such proceeding" (emphasis supplied), Congress necessarily vested in the bankruptcy court the discretion to determine factors (1) and (6). These factors, concerning timeliness, require the bankruptcy court to give appropriate consideration to the circumstances in the litigation before the court and the requirements of the Bankruptcy Code, Bankruptcy Rules and the special exigencies applicable in bankruptcy proceedings which are not present in litigation pending in other ...
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