In re Cybergenics Corp. v. Chinery
| Decision Date | 02 October 2000 |
| Docket Number | No. 99-5592,99-5592 |
| Citation | 226 F.3d 237 |
| Parties | (3rd Cir. 2000) IN RE: CYBERGENICS CORPORATION, DEBTOR THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF CYBERGENICS CORPORATION, ON BEHALF OF CYBERGENICS CORPORATION, DEBTOR IN POSSESSION, APPELLANT V. SCOTT CHINERY; L&S RESEARCH CORPORATION; FIRST UNION NATIONAL BANK OF NORTH CAROLINA; BANQUE INDOSUEZ; SUNAMERICA LIFE INSURANCE COMPANY; LINCOLNSHIRE MANAGEMENT INC; LINCOLNSHIRE EQUITY FUND, L.P |
| Court | U.S. Court of Appeals — Third Circuit |
On Appeal From the United States District Court For the District of New Jersey, D.C. No. 98-cv-03109, District Judge: Honorable Garrett E. Brown, Jr. [Copyrighted Material Omitted]
Counsel for Appellant: Gary D. Sesser [argued] James Gadsden Carter, Ledyard & Milburn 2 Wall Street New York, NY 10005
Counsel for Appellee Scott Chinery: Brian J. Molloy [argued] Wilentz, Goldman & Spitzer 90 Woodbridge Center Drive Woodbridge, NJ 07095
Counsel for Appellees First Union National Bank of North Carolina; Banque Indosuez; Sunamerica Life Ins.: Dennis F. Dunne [argued] Milbank, Tweed, Hadley & McCloy One Chase Manhattan Plaza New York, NY 10005
Counsel for Appellees First Union National Bank of North Carolina; Banque Indosuez; Sunamerica Life Ins.: Michael A. Zindler Teich, Groh, Frost & Zindler 691 State Highway 33 Trenton, NJ 08619
Counsel for Appellees Lincolnshire Mgt. Inc.; Lincolnshire Equity: Scott A. Eggers [argued] Proskauer Rose 1585 Broadway New York, NY 10036
Before: Becker, Chief Judge, Rendell, and Aldisert, Circuit Judges
OPINION FOR THE COURT
In this appeal, we consider whether certain fraudulent transfer claims arising from transfers made by Cybergenics Corporation were included in a sale of all assets of Cybergenics so as to foreclose its creditors from thereafter pursuing those claims on behalf of its bankruptcy estate. For the reasons explained below, we conclude that the sale of all of Cybergenics' assets did not encompass these claims and we therefore will reverse the District Court's dismissal of the creditors' complaint.
We have jurisdiction under 28 U.S.C. S 1291. We exercise plenary review over the District Court's dismissal of this action under Rule 12(b)(1) of the Federal Rules of Civil Procedure. See United States Securities and Exchange Comm'n v. Infinity Group Co., 212 F.3d 180, 186 n. 6 (3d Cir. 2000).
Cybergenics, originally known as L&S Research Corporation, was a successful marketer of body-building and weight loss products under the Cybergenics name. In 1994, L&S was sold in a leveraged buyout, and the newly formed Cybergenics Corporation became burdened with more than $60 million of debt that was secured by substantially all of Cybergenics' assets.1 In August 1996, Cybergenics filed a petition for relief under chapter 11 of the Bankruptcy Code, operating as a debtor in possession. See 11 U.S.C. SS 1101(1), 1108.
Shortly after filing for bankruptcy, Cybergenics entered into an agreement to sell nearly all of its assets to a third party for $2.5 million. At the ensuing auction sale, held under the auspices of the Bankruptcy Court in October 1996, another party who bid $2.65 million was the successful purchaser of all Cybergenics' assets.
The sale agreement and the sale order approving the 1996 asset sale made clear that the purchaser bought "all of the rights, title, and interest of Cybergenics in and to all of the assets and business as a going concern of Cybergenics." App. 77. The sale order provided that the acquired assets included, without limitation, a variety of categories of business-related property such as trade accounts receivable, inventory, and various types of intellectual property. The sale order was not appealed and the sale was consummated.
Thereafter, Cybergenics moved to dismiss its bankruptcy case, averring that dismissal would be in the best interest of the bankruptcy estate because it "has no employees, no ongoing business operations, has liquidated its assets and disbursed the Sale Proceeds, has no ability to reorganize and has no estate to administer." App. 202. The chair of the Committee of Unsecured Creditors ("Committee") objected to the dismissal, contending that the transactions comprising the 1994 leveraged buyout should be investigated and could give rise to causes of action to avoid the transactions that Cybergenics could bring on behalf of the bankruptcy estate in its capacity as debtor in possession. Although Cybergenics agreed to adjourn its motion to dismiss to permit the Committee chair's counsel to investigate potential fraudulent transfer claims arising from the 1994 leveraged buyout, Cybergenics decided not to exercise its power as debtor in possession to pursue such an action itself, explaining that it doubted that such actions would benefit the bankruptcy estate.2
Based on its investigation, and Cybergenics' refusal to pursue these claims, the Committee sought leave from the Bankruptcy Court to bring a state law fraudulent transfer action on behalf of the bankruptcy estate in Cybergenics' stead.3 In opposition, those who would be named defendants in the Committee's suit took the position that the Committee could not bring the action because the claims asserted therein had been sold in the 1996 asset sale. The Bankruptcy Court authorized the Committee to pursue the fraudulent transfer action without deciding whether the underlying claims had been transferred in the 1996 asset sale; it equivocated on this point, noting that "[c]ontrary to the Banks' assertion, the sale of the business assets of the Debtor did not necessarily include the sale of avoidance rights of the debtor-in-possession." App. 369. In March of 1998, the Committee filed its complaint alleging that Cybergenics made transfers and incurred obligations in connection with the 1994 leveraged buyout that were constructively fraudulent under New Jersey law. The defendants filed motions to dismiss the complaint, reiterating their argument that the fraudulent transfer claims asserted by the Committee had been sold in the 1996 asset sale.
The District Court4 granted the defendants' motions and dismissed the Committee's complaint for lack of subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure. Opining that the fraudulent transfer claims were "property of the estate" under 11 U.S.C. S 541, the District Court concluded that Cybergenics had sold them to the purchaser in the 1996 asset sale. The District Court reasoned that the concept of "property of the estate" under section 541(a) includes causes of action existing at the time a petition for bankruptcy relief is filed. The District Court decided as well that fraudulent transfer claims were in the nature of contract claims, as opposed to tort claims, and therefore were assignable. Thus, the District Court concluded that the Committee's complaint must be dismissed because the claims asserted therein had been sold to the successful purchaser in the 1996 asset sale.
To resolve this appeal, we must determine whether the fraudulent transfer claims asserted in the action dismissed by the District Court were, in fact, transferred in the 1996 asset sale, and, accordingly, must construe the sale order in accordance with its terms. The Bankruptcy Court's order authorized and directed Cybergenics to "sell and transfer the assets under the Agreement" to the purchaser, and set forth a nonexhaustive list of examples, which included business-related assets such as trade accounts receivable, inventory, fixed assets, and various types of intellectual property. It noted further that "any references in the Agreement or in the Schedules attached thereto to any assets to be excluded from the sale are hereby deleted as it is acknowledged that all of the assets of the Debtor [defined to include Cybergenics as debtor and debtor in possession] are being conveyed to the Purchaser." App. 187. Like the sale order, the underlying sale agreement referred to the sale of all assets of Cybergenics as debtor and debtor in possession.
Our reading of these documents, which clearly authorized the sale of all assets of Cybergenics, directs our focus to one inquiry: were fraudulent transfer claims, which arose from transfers made and obligations incurred by Cybergenics in the 1994 leveraged buyout, assets of Cybergenics? If not, the 1996 asset sale is not an impediment to the Committee's lawsuit.5
Determining the "ownership" of a claim or cause of action would seem to be a relatively straightforward inquiry requiring that we evaluate the nature of the cause of action at issue. However, the overlay of bankruptcy complicates our analysis. Thus, we will explore the nature of the fraudulent transfer claim, but we also will review fundamental bankruptcy principles regarding the status and powers of the debtor in possession in relationship to such a claim, including the legal fiction -- the avoidance power provided in 11 U.S.C. S 544(b) -- that enables a debtor in possession to bring certain causes of action that actually belong to its creditors.
The Committee's complaint challenges transfers that Cybergenics made to the defendants, and obligations that Cybergenics incurred for the defendants' benefit, in connection with the 1994 leveraged buyout. The complaint accordingly seeks recovery from the defendants based on New Jersey fraudulent transfer law. If state law provided that this cause of action actually belonged to, and inured to the benefit of, the transferor, Cybergenics, we might readily conclude that it was Cybergenics' asset and was sold in the 1996 asset sale. However, that is not the case. As we explain below, fraudulent transfer claims have long belonged to a transferor's creditors, whose efforts to collect their debts have essentially been...
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