In re N2N Commerce, Inc.

• Decision Date: 01 May 2009
• Docket Number: No. 09-10246-JNF.,09-10246-JNF.
• Citation: 405 B.R. 34
• Parties: In re N2N COMMERCE, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

Page 34

405 B.R. 34

In re N2N COMMERCE, INC., Debtor.

No. 09-10246-JNF.

United States Bankruptcy Court, D. Massachusetts.

May 1, 2009.

John G. Loughnane, Eckert Seamans, Boston, MA, for Debtor.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.

I. INTRODUCTION

The matter before the Court is the Motion to Dismiss, Abstain, or, in the Alternative, for Relief from Stay (the "Motion") filed by Lawrence Bohn ("Bohn"), Joel Cutler ("Cutler"), Sharen Turney ("Turney"), Martyn Redgrave ("Redgrave"), Ruben Pinchanski ("Pinchanski"), Stephen Asbaty ("Asbaty"), Wendy LaHaye ("LaHaye"), and Mark Delcher ("Delcher")(collectively, "Movants").¹ Among the arguments they make in their Motion, Movants contend that the bankruptcy case commenced "by and through Joseph F. Finn, Jr., in his capacity as Assignee for the Benefit of Creditors of N2N Commerce, Inc." should be dismissed because Joseph F. Finn, Jr., the Assignee for the Benefit of the Creditors of N2N (the "Assignee"), was not authorized to file a bankruptcy petition on behalf of N2N Commerce, Inc. ("N2N").

Finn, on behalf of the Chapter 7 Debtor, creditors, NaviSite, Inc. and Optaros, Inc. (collectively, the "Creditors"), and the Chapter 7 Trustee filed oppositions to the Motion in which they contend that the bankruptcy case is needed to protect, preserve and maximize the assets of N2N. The Assignee represented that he filed the bankruptcy petition after consultation with the largest creditors of N2N, while the Creditors contend that the Motion is "a thinly veiled attempt by the Former Officers and Directors to avoid liability for their improper conduct as directors and officers of the Debtor." Finally, the parties opposing the Motion assert that Movants lack standing to contest the petition.

The Court heard the Motion and Oppositions on February 26, 2009.² Upon consideration of the Motion, Oppositions, memoranda, and exhibits attached to the pleadings, as well as the existing record, the Court shall treat the Motion as a motion for summary judgment. See Fed. R. Bankr.P. 7056. The Court now makes the following findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.

II. FACTS

A. Background

N2N, "by and through Joseph F. Finn, Jr., in his capacity as Assignee for the Benefit of Creditors of N2N Commerce, Inc." filed a voluntary petition under Chapter 7 of the Bankruptcy Code on January 14, 2009. On January 30, 2009, the Assignee filed schedules of assets and liabilities, and a Statement of Financial Affairs on behalf of N2N. On Schedule B-Personal Property, Finn disclosed cash in the sum of $208,061.46 in his operating account and causes of action against certain former officers, directors and stockholders, as well as causes of action for fraudulent conveyances against former insiders, all with unknown values. The Assignee disclosed no other assets.

On Schedule F-Creditors Holding Unsecured Nonpriority Claims, the Assignee listed approximately 80 creditors with claims totaling $13,388,573.52. He disclosed no other creditors.

On February 4, 2009, Movants filed the Motion that is now before the Court, together with a Memorandum to which they attached 1) the Assignment for the Benefit of Creditors, dated January 4, 2008, pursuant to which Finn agreed to accept an assignment of the assets of N2N; 2) the By-Laws of N2N, which was initially known as Everest Commerce, Inc.; and 3) a Verified Complaint for Declaratory Judgment filed by Pinchanski, Turney, Redgrave, Cutler, Bohn, Asbaty and LaHaye against the Assignee and N2N, as a nominal defendant, in the Delaware Chancery Court.

The following facts can be gleaned from the Motion and Oppositions. N2N was a start-up company incorporated in Delaware. It was founded in June of 2006 and conducted business from premises located in Cambridge, Massachusetts. Its purpose was to develop and market a software platform to facilitate internet-based retail sales. Its initial investors were General Catalyst Group IV, L.P. and General Catalyst Entrepreneurs Fund IV, L.P. (collectively, "General Catalyst") and L.B.I. Holdings, Inc. ("LBI"), a subsidiary of Limited Brands, Inc.³ Turney and Redgrave were LBI's designees on the Board of Directors of N2N, while Bohn and Cutler were General Catalyst's designees. Pinchanski was the fifth director and, according to the Assignee, was a co-founder and Chief Executive Officer of N2N. Asbaty and LaHaye were officers of N2N and Delcher was an employee.⁴

N2N worked to develop the software platform until December of 2007 when its financing was depleted, and it was forced to close its doors. Movants contend that N2N's Board considered all options available to the company for winding up its affairs and liquidating and distributing its assets, including the possibility of filing a voluntary Chapter 7 petition. Again, according to Movants, on January 3, 2008, N2N's Board of Directors unanimously voted to enter into an Assignment for the Benefit of Creditors. The next day, N2N entered into an Assignment with Finn. Movants represent, and Schedule B reflects, that the Assignee has liquidated all of N2N's assets, except certain intangible assets with unknown values.

In their Oppositions, the Creditors and the Assignee represented that N2N purchased one or more directors and officers liability insurance policies from Federal Insurance Company at the time of the Assignment. Further, they represented that General Catalyst, LBI and the insurance carrier negotiated a multi-million dollar settlement that included payments from the carrier on account of the insurance policies that were property of N2N without notifying the Assignee. According to the Assignee, he did not discover the settlement until the fall of 2008.

On December 17, 2008, following the liquidation of the assets of N2N, Finn commenced an action in Massachusetts Superior Court Department of the Trial Court against Pinchanski, Asbaty, LaHaye, and Delcher. Pursuant to his four-count complaint, Finn sought the avoidance of allegedly fraudulent transfers under the Massachusetts version of the Fraudulent Transfer Act, see Mass. Gen. Laws ch. 109A, §§ 5 and 6, with respect to bonuses, severance payments, and other expenditures made to, or authorized by them, in August of 2007 and December 2007 while N2N was undercapitalized and insolvent. See Finn v. Asbaty, Civ. Action No. 08-5575-BLS.

On January 5, 2009, approximately one week before the commencement of the bankruptcy case, Movants commenced a three-count declaratory judgment action in the Court of Chancery for the State of Delaware, see Pinchanski v. Finn, Civil Action No. 4266-CC, seeking declarations that, as officers and directors of N2N, they did not breach their fiduciary duties under Delaware law, that they did not commit waste of corporate assets, and that they are not liable for any fraud.

B. The Assignment for the Benefit of Creditors

The Assignment for the Benefit of Creditors, which was executed by Finn and the Chief Executive Officer of N2N, identified N2N as the "Debtor," duly organized and existing under the laws of Delaware. It contained four recitals and six separately numbered sections, most with multiple subsections. The Debtor acknowledged that it had been forced by its financial circumstances to wind up its business and to liquidate and distribute its assets, that it was unable to pay its creditors as its obligations became due, that it wished to provide a mechanism for the payment of creditors, and that it "determined that the most efficient and economical mechanism to accomplish this purpose is to make an assignment for the benefit of creditors." The Assignee acknowledged that he agreed to accept the assignment "under the terms and conditions hereof."

The first section of the Agreement contained a number of definitions. Notably, priority Creditors were defined with reference to 31 U.S.C. § 3713 and "Section 507(a) of the United States Bankruptcy Code in effect on the date hereof, as modified in section 5.10 below."

Section 2 contained language whereby the Debtor conveyed and assigned to the Assignee all of its real and personal property, wherever located and without limitation, including the following: inventory, accounts receivable, equipment, notes, bills, drafts and similar instruments, cash and deposit accounts, securities, real property and leasehold interests, contracts and insurance policies, intellectual property, all products and proceeds of its assets, books and records, and "any and all other legal or equitable interests in property of any kind." The Debtor also assigned to the Assignee "claims of every nature, contingent or non-contingent, including without limitation those arising from tort, contract, breach of duty, rights to tax refunds and rights to seek damages, specific performance or to exercise set-off, subject to applicable contracts."

Section 3 provided that the assets would be subject to valid security interests, mortgages or liens and would be enforceable against the Assignee.

Section 4 of the Assignment specified the powers and duties of the Assignee. The parties set forth nineteen powers and duties, including the duty to hold the assets in trust for the benefit of the assenting priority and secured creditors; to incur and pay the actual and necessary costs of managing, operating, preserving, liquidating and distributing the Assets, including paying reasonable wages, salaries, commissions, professional fees, rents, insurance premiums, maintenance charges, supplies, utilities, taxes and reasonable compensation for his services as Assignee "but in no event to exceed the greater of (a) $400 per hour or (b) maximum amount of compensation which would be permitted to a trustee in bankruptcy administering the same assets as the Assignee pursuant to 11 U.S.C. A. § 326(a)."

Pursuant to section 4.4, the Assignee had to the power "[t]o institute or defend suits, legal or equitable proceedings incident to collection,...