Palltronics, Inc. v. PALIoT Solutions, Inc. (In re Lightning Techs., Inc.)

• Citation: 647 B.R. 76
• Decision Date: 21 November 2022
• Docket Number: Case No. 21-41019,Adv. Pro. No. 22-4114
• Parties: IN RE: LIGHTNING TECHNOLOGIES, INC., Debtor. Palltronics, Inc., Plaintiff, v. PALIoT Solutions, Inc., etc., Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

647 B.R. 76

IN RE: LIGHTNING TECHNOLOGIES, INC., Debtor.Palltronics, Inc., Plaintiff,

v.PALIoT Solutions, Inc., etc., Defendant.

Case No. 21-41019

Adv. Pro. No. 22-4114

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed November 21, 2022

Marc N. Swanson, Steven A. Roach, Miller, Canfield, Paddock and Stone, P.L.C., Detroit, Michigan, Attorneys for Plaintiff.

Paul R. Hage, R. Christopher Cataldo, Johnathan Sriro, Jaffe Raitt Heuer & Weiss, P.C., Southfield, Michigan, Attorneys for Defendant.

Jacob L. Carlton, Miller Johnson, Grand Rapids, Michigan, Attorney for Defendant.

OPINION REGARDING DEFENDANT'S MOTION TO DISMISS FOR LACK OF JURISDICTION, OR IN THE ALTERNATIVE, FOR ABSTENTION

Thomas J. Tucker, United States Bankruptcy Judge

I. Introduction

This opinion concerns issues of subject matter jurisdiction and permissive abstention. This adversary proceeding is before the Court on the motion by the Defendant PALIoT Solutions, Inc. ("PALIoT"), entitled "Motion to Dismiss for Lack of Jurisdiction, or in the Alternative, For Abstention" (Docket # 11, the "Motion"). The Motion seeks dismissal of all six counts of the complaint filed by Plaintiff Palltronics, Inc. ("Palltronics"), for lack of subject matter jurisdiction. Alternatively, the Motion requests that the Court "abstain from hearing this dispute pursuant to 28 U.S.C. § 1334(c)," if the Court finds that it has subject matter jurisdiction over any of the counts in the complaint.¹

Palltronics filed an objection to the Motion (Docket # 15, the "Objection"), arguing that the Court has subject matter jurisdiction over all of the counts in its complaint. Palltronics argues further that the Court should not abstain from deciding any of the counts in its complaint.

The Court held a hearing, and took the Motion under advisement. For the reasons stated in this Opinion, the Court determines that it has subject matter jurisdiction over all six counts of the complaint. But the Court will abstain from deciding any of the counts, on permissive abstention grounds under 28 U.S.C. § 1334(c)(1), and therefore will dismiss all counts on abstention grounds.

II. Facts

A. Background

The following background facts are alleged by Palltronics's complaint. Pre-petition, the Chapter 7 Debtor, Lightning Technologies, Inc., (the "Debtor") operated a business that had "spent tens of millions of dollars" and more than five years researching and developing a revolutionary multi-component, extended-use shipping pallet, which had sections "made of an engineered wood core structure [held together with proprietary adhesive, rather than fasteners and] coated with a proprietary polymer [called Exobond] to give it strength and rigidity."² Embedded in the pallets was a proprietary tracking device that uses a snorkel device which allows the tracker to be sprayed after its insertion into the pallet, and that "could monitor the physical location of the [p]allet, the temperature and humidity, and shock or vibration."³ The Debtor also developed methods of assembling and then spraying the pallets, after embedding the tracking device in the pallets, and recovering the excess of the material sprayed. The assembly process required the Debtor to develop proprietary equipment, including a spray booth, a wood milling machine, and robots, which required coding.⁴ The Debtor also developed a business plan which included sources for the necessary materials for the pallets; sets of customers who would use the pallets; and methods "to track the movement of the pallets through the supply chain and earn an accumulation of carbon credits."⁵

B. The Lightning Technologies, Inc. bankruptcy case

On February 5, 2021, an involuntary bankruptcy petition under Chapter 7 was filed against Lightning Technologies, Inc. by three petitioning creditors, commencing Case No. 21-41019. On February 8, 2021, the Debtor stipulated to the entry of an order for relief under Chapter 7, the Court entered such an order,⁶ and a trustee was appointed.

1. The sale of substantially all of the Debtor's assets to Palltronics

On May 13, 2021, on a motion by the Chapter 7 Trustee, the Court entered an order (the "Sale Order"), authorizing and approving the sale of substantially all of the Debtor's "Assets" to Palltronics, under 11 U.S.C. §§ 105, 363 and 365.⁷ The Sale Order provided that the Debtor's " ‘Assets’ shall be sold free and clear of all Interests" and it defined "Interests" broadly.⁸ The Sale Order provided that the sale of the Debtor's "Assets," is governed by (1) the terms of an amended asset purchase agreement between the Chapter 7 Trustee and Palltronics "entered into on March 16, 2021, but effective as of March 4, 2020" (the "Final APA"),⁹ which the Court authorized and approved in the Sale Order, and (2) the terms of Sale Order.¹⁰

Paragraph 2 of the Final APA broadly defined the "Assets" that were being sold under that agreement and the Sale Order, and stated, in pertinent part:

2. Purchase and Sale of Assets.

2.1.Assets. Upon the terms and subject to the conditions set forth in [the Final APA] and the Sale Order, and pursuant to Sections 105, 363 and 365 of the Bankruptcy Code, at the Closing and effective on the Closing Date, [the Trustee] shall sell, convey, transfer, assign and deliver to [Palltronics], and [Palltronics] shall purchase, receive and accept from [the Trustee], free and clear of all liens, claims, encumbrances and other interests, all of the Assets. "Assets" shall mean all of the Debtor's and its bankruptcy estate's right, title, and interest in and to the assets, properties, and other rights used, useful or capable of being used in connection with the Business (exclusive only of the Excluded Assets (as defined in Section 2.4 below)). The Assets shall include, but shall not be limited to, all of the Debtor's and its bankruptcy estate's right, title and interest in and to the Assets described in the following clauses of this Section 2.1 (but shall specifically exclude the Excluded Assets only):

...

2.1.4. the Intellectual Property (as defined and identified on Schedule 2.1.4 hereto) ;

...

2.1.8. any other property or assets of the Debtor or its bankruptcy estate in existence at the time of the Closing that are not Excluded Assets (as defined in Section 2.4 below);

...¹¹

Schedule 2.1.4 of the Final APA described the "Intellectual Property" that was being sold to Palltronics, and it included "[a]ll of the Debtor's and bankruptcy estate's entire right, title and interest in, to and under" a list of property, which included, among other property:

(b) Any and all trade secrets or similar protection for confidential information (including proprietary business processes, knowledge, ideas, research and development, knowhow, data or any other information or technique relating to the Business, any and all formula, pattern, device, schematics, technology, technical data, designs, drawings, flowcharts, block diagrams, specifications, whether or not patentable, or compilation of information that is used, usable or capable of being used in the Business; including information relating to the formulation of chemical compounds and their application methods or processes, material handling, coating and spray technology and techniques, pooling, and pallet manufacturing and design (including the track and trace and RFID technology embedded therein and related software)), including without limitation the "Exobond" secret formula and the "Exobond" secret process; and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held.

(c) Any and all design rights which may be available now or hereafter existing, created, acquired or held.

....

(f) Any website, domain name, and customer portal.¹²

The Sale Order provided that at closing, all Assets would vest in Palltronics free and clear of all Interests, and that anyone in possession of any such Assets must turn them over to Palltronics:

6. Upon Closing, the Assets shall vest [Palltronics] with all right, title and interest of the Debtor and its bankruptcy estate to the Assets, free and clear of and from any and all Interests (other than any assumed liabilities under the Final APA in connection with Assumed Contracts and then only to the extent of liabilities that arise, accrue or otherwise are exclusively for periods after Closing). The transfer of the Assets to [Palltronics] pursuant to the Final APA and any and all documents executed in connection therewith does not require any consents other than specifically provided for in the Final APA or as provided for in this Sale Order.

....

9. Except for the Trustee and his professionals to the extent provided in paragraph 34 of this Sale Order, all persons or entities which, as of or after the Closing Date, are in possession of some or all of the Assets are hereby ordered and directed to surrender possession of the Assets to [Palltronics] on the Closing Date or at such time thereafter as [Palltronics] may request and, immediately after delivery of such Assets, to permanently erase or destroy all digital or other electronically stored copies. This directive includes, but is not limited to, the possession of the Assets, including any Intellectual Property and Electronically Stored Property stored or kept electronically or digitally and all copies of Intellectual Property and Electronically Stored Property. Any such person or entity, with notice of this Sale Order, shall be required to certify in writing to the Trustee and [Palltronics] that such party has delivered all Assets and copies to [Palltronics], and has permanently erased or destroyed all digital or other electronically stored copies. In the event that the Back-Up Buyer [(PALIoT)] becomes the Buyer, the immediately preceding sentence is inapplicable.¹³

The Sale Order also contained a retention of jurisdiction provision:

36. This Court shall retain exclusive jurisdiction to enforce the provisions of this Sale

...