In Re Marchfirst Inc.

• Decision Date: 23 June 2010
• Docket Number: Adversary No. 09 A 104.,Bankruptcy No. 01 B 24742.
• Citation: 431 B.R. 436
• Parties: In re MARCHFIRST, INC., et al., Debtors.Andrew J. Maxwell, trustee, Plaintiff,v.Novell, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

431 B.R. 436

In re MARCHFIRST, INC., et al., Debtors.Andrew J. Maxwell, trustee, Plaintiff,v.Novell, Inc., Defendant.

Bankruptcy No. 01 B 24742.

Adversary No. 09 A 104.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

June 23, 2010.

Kathleen M. McGuire, Jaclyn H. Smith, Vikram R. Barad, Maxwell Law Group, LLC, Chicago, IL, Richard J. Mason, Patricia K. Smoots, Paul J. Catanese, McGuireWoods LLP, Chicago, IL, Attorneys for plaintiff Andrew J. Maxwell, Trustee.

David E. Leta, Michael A. Gehret, Snell & Wilmer, L.L.P., Salt Lake City, UT, Attorneys for defendant Novell, Inc.

Howard L. Adelman, Adam P. Silverman, Adelman & Gettleman, Ltd., Chicago, IL, Attorneys for intervenor JPMorgan Chase Bank, N.A.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

This matter is before the court for ruling on the motion of plaintiff Andrew J. Maxwell, chapter 7 trustee, for judgment on the pleadings on Count I of his adversary complaint against defendant Novell, Inc. In that count, Maxwell alleges that Novell's Claim No. 4524 is a claim for damages arising from the purchase or sale of a security of debtor marchFirst, Inc. and therefore must be subordinated to all senior or equal claims pursuant to section 510(b) of the Bankruptcy Code, 11 U.S.C. § 510(b). For the reasons that follow, Maxwell's motion will be granted.

1. Jurisdiction

The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(b) and the district court's Internal Operating Procedure 15(a). This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (B).

2. Background

a. Rule 12(c) Standards

Rule 12(c) of the Federal Rules of Civil Procedure permits a party to “move for judgment on the pleadings” once the pleadings are closed. Fed.R.Civ.P. 12(c) (made applicable by Fed. R. Bankr.P. 7012(b)). The standard for judgment on the pleadings is often said to be the dismissal standard under Rule 12(b)(6). See, e.g., Buchanan-Moore v. County of Milwaukee, 570 F.3d 824, 827 (7th Cir.2009). Alexander v. City of Chicago, 994 F.2d 333 (7th Cir.1993), however, explains that the Rule 12(b) standard applies only when a defendant uses Rule 12(c) to raise Rule 12(b) defenses. Id. at 336. When a party invokes Rule 12(c) to dispose of a case on “the underlying substantive merits,” the summary judgment standard applies. Id. Thus, judgment on the pleadings may be granted if there are no genuine issues of material fact, and the movant is entitled to judgment as a matter of law. Id.; see, e.g., Robert W. Karr & Assocs., Ltd. v. Novoselsky, No. 08 C 1197, 2008 WL 4865573, at *2 (N.D.Ill. July 14, 2008).

In determining the presence of factual issues on a Rule 12(c) motion, the court “may consider only the contents of the pleadings.” Alexander, 994 F.2d at 336. The “pleadings” means “the complaint, the answer, and any written instruments attached as exhibits” under Rule 10(c). Northern Ind. Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 452 (7th Cir.1998). A “written instrument” for purposes of Rule 10(c) includes “documents such as affidavits and letters, as well as contracts and loan documentation.” Id. at 453 (internal citations omitted). Also fair game are matters of public record of which the court can take judicial notice. United States v. Wood, 925 F.2d 1580, 1582 (7th Cir.1991).

b. Facts

The following facts are drawn from the pleadings and are not contested, either because they are admitted in Novell's answer or because they are subject to judicial notice.¹

i. The Purchase Agreement and the Alliance Agreement

Whittman-Hart, Inc. (“WH”) was a provider of consulting services in information technology. (Compl. Ex. 1, Supp. Doc. B ¶ 2). Novell is a major provider of software used to manage computer networks. ( Id. ¶ 3). One of its products was “Novell Directory Services” (“NDS”), a form of network software designed for businesses. ( Id.). In 1999, WH and Novell negotiated a business alliance under which they would cross-market their services and develop, market, and implement technology solutions and consulting services based on the strategic use of NDS and related technologies. (Compl. ¶ 18; Answer ¶ 18).

To implement their alliance, WH and Novell entered into two agreements on September 29, 1999. (Compl. ¶ 19; Answer ¶ 19). Under the first, the Common Stock and Warrant Purchase Agreement (the “Purchase Agreement”), WH agreed to issue and sell to Novell more than three million shares of WH common stock in exchange for $100 million. (Compl. ¶ 27; Answer ¶ 27). WH also agreed to issue to Novell at closing warrants to purchase up to 400,000 additional shares. ( Id.). The Purchase Agreement required WH to use the proceeds of the stock sale to fund the development, promotion, and implementation of an “NDS Solutions Practice,” a term defined in the second agreement between WH and Novell. (Compl. ¶ 28; Answer ¶ 28).

Under the second agreement, the Global Alliance Agreement (the “Alliance Agreement”), WH and Novell spelled out their obligations to develop “a leading worldwide NDS consulting organization that offers a comprehensive set of NDS-based products, services and solutions” and to develop, market, and implement an “NDS Solutions Practice.” ² (Compl. ¶ 20; Answer ¶ 20). As the Purchase Agreement did, the Alliance Agreement made clear that the proceeds from the sale of WH stock to Novell would fund, among other things, the costs WH incurred in fulfilling its obligations under the Alliance Agreement. (Compl. ¶¶ 20, 21; Answer ¶¶ 20, 21). The Alliance Agreement also contained a limitation of liability clause that excluded the recovery of indirect, special, reliance, and consequential damages, “whether in a contract, tort or other action,” to the maximum extent allowed by law. (Compl. ¶ 22; Answer ¶ 22).

Some time between mid-November and mid-December 1999, the Purchase Agreement closed.³ Novell paid $100 million to WH. ( See Compl. Ex. 1 at 3). WH, in turn, issued its common stock to Novell.⁴

Shortly after the closing, WH announced its intent to merge with USWeb/CKS (“USWeb”) an internet consulting business. ( See Compl. Ex. 1 at 3). Novell was not told of the pending merger either before or at the closing. ( Id.). At the time, Novell considered Microsoft a major competitor (Compl. ¶ 46; Answer ¶ 46), and USWeb was, in Novell's words, a “very pro-Microsoft and anti-Novell consulting business” (Compl. Ex. 1 at 3). Although Novell made public statements after the merger suggesting that its partnership with WH-by then called “marchFirst, Inc.”-was nonetheless a strong one with immense potential (Compl. ¶¶ 50, 51, 57; Answer ¶¶ 50, 51, 57), Novell was plainly displeased (Compl. Ex. 1 at 3). Had Novell known of the pending merger, it would not have purchased $100 million in WH stock. ( Id.). Moreover, marchFirst made little or no effort to meet its obligations under the Alliance Agreement despite Novell's investment of $100 million. ( Id.).

ii. marchFirst's Bankruptcy and Novell's Claims

In April 2001, marchFirst and its subsidiaries filed petitions for relief under chapter 11 of the Bankruptcy Code. (Compl. ¶ 1; Answer ¶ 1). The cases were converted to cases under chapter 7, and Maxwell was appointed trustee. (Compl. ¶¶ 2, 4; Answer ¶¶ 2, 4). In June 2001, the court entered an order setting October 11, 2001, as the deadline for creditors to file claims against the estates. (Compl. ¶ 5; Answer ¶ 5).

On October 11, 2001, the bar date, Novell filed a proof of claim (“Claim No. 4524”) for $100 million. (Compl. ¶¶ 6, 7; Answer ¶¶ 6, 7; see Compl. Ex. 1). Attached to Claim No. 4524 was a typed page with a section entitled “Basis of Claim.” In that section, Novell described how it came to enter into the Purchase and Alliance Agreements and pay $100 million to WH. (Compl. Ex. 1 at 3). Novell then described the WH merger with USWeb, said that it had not known of the pending merger, and added that if had it had known of the merger, it would not have paid the $100 million. ( Id.). “As a direct and proximate result of marchFirst's fraud,” Novell contended it had “been injured and suffered damages in the amount of $100,000,000.00, plus interest and fees as allowed by law.” ( Id.). Also attached to Claim No. 4524 as supporting documents were copies of the Purchase and Alliance Agreements. (Compl.Ex.1, Supp.Docs.A, B).

Novell also filed a second proof of claim on the bar date, this one for $1.19 million (“Claim No. 4525”). Attached to Claim No. 4525 was a typed page with a section entitled “Basis of Claim.” ⁵ In that section, Novell recounted its entry into the Alliance Agreement with WH and stated that marchFirst had “breached its obligations under the Alliance Agreement.” As “a direct and proximate result” of the breach, Novell said, it had suffered damages of “at least $1,190,000.00,” and Novell itemized the known damages.⁶ Also attached to Claim No. 4525 as a supporting document was a copy of the Alliance Agreement.

iii. Maxwell's Adversary Proceeding and Motion

In February 2009, Maxwell filed a two-count adversary complaint against Novell. In Count I, Maxwell alleged that Claim No. 4524 was a claim for damages arising from the purchase or sale of a security of the debtor under section 510(b) of the Bankruptcy Code. Maxwell therefore requested a judgment subordinating Claim No. 4524 to all senior or equal claims. In Count II, Maxwell alleged “on information and belief” that Novell had described Claim No. 4524 as a claim based on marchFirst's misuse of the $100 million paid under the Purchase Agreement, that such a claim would “in essence” be one for breach of the Alliance Agreement, and that the Alliance Agreement's limitation of liability provision barred any recovery of damages. Maxwell accordingly sought a judgment disallowing the claim.

Novell answered the complaint, and Maxwell immediately moved for judgment on the pleadings on Count I. In its response to the motion, Novell conceded that it had purchased shares of the...