In Re Robotic Vision Systems, Inc.
MEMORANDUM OPINION
I. INTRODUCTION
On Mаrch 1, 2005, the Court held a hearing on the Motion For Determination of Bona Fide Dispute (Doc. No. 629) (the “Motion”), filed by RVSI Investors, L.L.C. (the “Lender”), requesting this Court to determine that a bona fide dispute exists over the interests in property of the bankruptcy estate within the meaning of 11 U.S.C. § 363(f), which would allow the Court to authorize the sale of an operating division (the “SEG Division”) of Robotic Vision Systems, Inc. (the “Debtor”) free and clear of the claims and interests of GSI Lumonics, Inc. (“GSIL”). ■ The Official Committee of Unsecured Creditors (the “Committee”) supported the Motion and filed a motion to join the Motion (Doc. No. 721) (the “Joinder Motion”), which was
This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the “Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire,” dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).
II. FACTS
The Debtor and GSIL have been involvеd in a long-standing dispute regarding the use of and rights in and ownership of certain patented technology and other intellectual property described in a 1998 Settlement Agreement dated June 12,1998 (hereinafter “the 1998 Settlement Agreement”), by and between the parties (hereinafter “the Disputed Technology”). On Nоvember 11, 2004, the date of the filing of the Debtor’s chapter 11 bankruptcy petition (the “Petition Date”), the dispute between the Debtor and GSIL was the subject of a proceeding pending in the United States District Court for the Eastern District of New York (the “District Court Action”). Prior to the Petition Date, a preliminary injunction was issued in the District Court Action prohibiting the Debt- or from disclosing, selling or transferring any Disputed Technology. 2
At the beginning of this bankruptcy proceeding, the Debtor was experiencing substantial cash-flow difficulties and required the use of the Lender’s cash collateral in order to operate its business. In order to obtаin the Lender’s agreement to use cash collateral, the Debtor agreed to sell its SEG Division on an expedited basis. The Debtor had been marketing the SEG Division for several years prior to the Petition Date without success. Pursuant to an auction procedure approved by the Court, the Debtor marketed the SEG Division and conducted an auction among qualified bidders on February 28, 2005. The following day the Court held a hearing on the Debt- or’s Motion to Sell the SEG Division free and clear of all interests pursuant to 11 U.S.C. § 363 (Doc. No. 557) (the “Sale Motion”).
GSIL filed an objection to the Sale Motion contending that a portion of the assets the Debtor proposed to sell with the SEG Division included the Disputed Technology that was the subject of the preliminary injunction in the District Court Action. At the hearing on the Sale Motion, the Debtor amended its motion to request authorization to sell the SEG Division with a specific exclusion for any Disputed Technology and added a condition precedent to the buyer’s obligation to close on the purchase. The condition precedent was that the buyer receive either a release of any claim by GSIL or satisfaction that the SEG Division sale did not involve the Disputed Technology. After the amendment to the Sale Motion, GSIL withdrew its objection to the sale of the SEG Division and the Court approved the sale. Following approval of the amended Sale Motion, the Court heard arguments on the Motion and took the matter under advisement.
For the reasons set forth in this opinion, the Court shall deny the Motion.
A. Standard for Determination of a Bona Fide Dispute
A bona fide dispute exists when there is an objective basis for either factual or legal dispute as to the validity of an interest in property.
In re Octagon Roofing,
The reported cases reveal a wide range of evidentiary requirements that must be met before a court may make a determination that a bona fide dispute exists.
Union Planters Bank v. Burns (In re Gaylord Grain L.L.C.),
B. Arguments of the Parties
• The Lender asserts a bona fide dispute exists as to the ownership of the Disputed Technology. In a complaint filed with the Court, 3 the Lender alleges the 1998 Settlement Agreement between the Debtor and GSIL was not a license but, in fact, an assignment and security agreement between the parties; and that GSIL retained rights in the Disputed Technology to secure the repayment of the Note and, as such, the Debtor is the true owner of the Disputed Technology. The Lender contends the filing of its complaint disputing thе actual ownership of the technology is sufficient to raise the issue of a bona fide dispute as defined by Section 363(f)(4). The Committee adopts the Lender’s theory of the nature of the 1998 Settlement Agreement and contends the Debtor or the Committee has grounds to recover the Disputed Technolоgy from GSIL under one or more of the avoidance actions available under the Bankruptcy Code.
GSIL did not directly object to the Motion. However, in its objection to the Sale Motion, GSIL asserted that characterization of the 1998 Settlement Agreement is not relevant because the 1998 Settlement Agreement, be it a license or assignment,
C. Basis for Factual or Legal Disputes
1. Characterization of the 1998 Settlement Agreement
In its complaint, the Lender asserts that the 1998 Settlement Agreement between the parties is a “disguised security agreement” and not a license. Upon review оf the terms of the agreement, the Court finds the economic realities of the terms between the parties could be construed as an assignment rather than a license.
See Microsoft Corp. v. DAK Indus., Inc.,
2. Status of 1998 Settlement Agreement on the Petition Date
The next step in the Court’s analysis is to determine the status of the Debt- or’s interests pursuant to the 1998 Settlement Agreement on the Petition Date. Notwithstanding any characterization of the relationship between the parties created by the agreement, it is undisputed that the 1998 Settlement Agreement was terminated prior to the Petition Date. Magistrate Judge Steven Gold for the Eastern District of New York found that, according to the terms of the 1998 Settlement Agreement, GSIL was entitled to terminate that agreement due to the Debtor’s material default under is terms.
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Further, in its argument in the District Court Action, the Debtor represented to the court that as of March 28, 2003, it voluntarily terminated its rights under the agreement with GSIL and returned all formerly licensed technology acquired from GSIL under the 1998
Based upon the Debtor’s admissions in the District Court Action, this Court finds that the Debtor terminated the 1998 Settlement Agreement, and the Debtor voluntarily surrendered its rights and interests in the Disputed Technology no earlier than March 28, 2003, and no later than the date of the Report & Recommendation, October 17, 2003. Either way, any rights the Debt- or may have had in the Disputed Technology, be they pursuant to a license or an assignment, were terminated prior to the Petition Date. Therefore, on the Petition Date, thе Debtor had no interest in the Disputed Technology.
Notwithstanding Movant’s argument to the contrary, the Court finds termination of the 1998 Settlement Agreement is relevant to the analysis. The threshold determination as to the existence of a bona fide dispute necessarily requires a finding that the disputed property is or could become property of the bankruptcy estate.
In re Rodeo Canon Dev. Corp.,
3. Did a Transfer Occur?
Under Chapter 5 of the Bankruptcy Code, certain transfers of interests in property may be avoided and recovered for the benefit of the bankruptcy estate. The Bankruptcy Code defines thе term “transfer” broadly. Under the Bankruptcy Code, a transfer means, “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption.” 11 U.S.C. § 101(54). Congress intended the term transfer to be as broad as possible.
Lloyd McKee Motors, Inc. v. Chrysler Corp. (In re Lloyd McKee Motors),
There are three prоvisions of the Bankruptcy Code under which the transfer of the Disputed Technology may be recovered for the benefit of the estate. 11 U.S.C. §§ 544, 547, 548. To recovery property of the estate under sections 547 and 548, the transfer must occur within one year of the Petition Date. In this case, the latest the transfer сould have occurred would have been October 17, 2003, more than one year before the Petition Date. Accordingly, the Debtor’s interests in the Disputed Technology cannot be recovered as a fraudulent transfer under 11 U.S.C. § 548 or as a preferential transfer under 11 U.S.C. § 547. However, the Debtor’s interests could' be recovered under 11 U.S.C. § 544 as a fraudulent transfer under applicable state fraudulent transfer laws. 7
In order to obtain relief under state fraudulent transfer law, the Movant must allege and establish either actual
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or constructive fraud.
9
Cf. Dahar v. Jackson, (In re Jackson),
IV. CONCLUSION
For the reasons set forth in this opinion, the Court finds that the Movant has failed to establish аn objective basis for a factual or legal argument establishing the Debt- or’s rights to the Disputed Technology. This opinion constitutes the Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue a separate order denying the Motion.
Notes
. The Committee and the Lender shall be collectively referred to as the "Movant” and the Motion and the Joinder Motion shall be collectively referred to as the "Motion.”
. GSI Lumonics, Inc. v. Robotic Vision Sys., Inc., No. 03-CV-4474 (D.N.Y. January 27, 2004)(Order adopting Report and Recommendation of the Magistrate Judge issued on October 17, 2003).
. See RVSI Investors, L.L.C. v. GSI Lumonics, Inc. Adv. Pro. No. 05-1023-JMD.
. The Court notes that, in the Motion, the Lender has requested this Court to enter an order allowing the Debtor to sell assets free and clear of any claim of GSIL subject to appropriate modification of the injunction order issued by the District Court Action.
. "It is undisputed that defendant RVSI defaulted on the terms of its promissory note, and that [GSIL] provided RVSI with notice of termination. It therefore seems clear that [GSIL] is entitled to revoke its license pursuant to the agreement's explicit terms.” Report and Recommendation of Mag. dated October 17, 2003, p. 3-4
. See GSI Lumonics, Inc. v. Robotic Vision Sys., Inc., No. 03-CV-4474 (D.N.Y. January 27, 2004).
.The choice of law provision of the 1998 Settlement Agreement states that disputes shall be determined pursuant to New York state law. New York state has adopted the Uniform Fraudulent Conveyance Act. N.Y. Debt. & Cred. § 270 et. seq.
. N.Y. Debt. & Cred. § 276.
. N.Y. Debt. & Cred. §§ 273-75.