In re Traxcell Technologies, LLC
- Reporters:
- ,
- Before:
- Michael M. Parker
OPINION ON MOTION TO DISMISS CASE
I. INTRODUCTION
Before the Court is the Motion by Judgment Creditors Verizon and T-Mobile to Dismiss Debtor‘s Chapter 11 Case Pursuant to
II. JURISDICTION AND VENUE
The Court has jurisdiction over this matter under
III. FACTUAL BACKGROUND
This case is the latest skirmish in a series of legal battles between Verizon Wireless, Sprint Spectrum LLC, and T-Mobile USA Inc. (collectively, ”Judgment Creditors“) and Traxcell Technologies, LLC (”Traxcell“), which began in 2017 and traversed two federal district courts, a federal circuit court, and two levels of Texas state court review before finally arriving here. The parties’ extensive history, described below, informs this Court‘s ruling.
a. TRAXCELL‘S BUSINESS
Traxcell is a “non-practicing entity” or, pejoratively, a “patent troll.” Like other non-practicing entities, Traxcell has no employees, no non-intellectual property assets, and no manufacturing or service capabilities. Traxcell has not sought (i) debtor-in-possession financing or permission to use cash collateral; (ii) permission to pay prepetition employee debt or create
Traxcell held eleven patents on cell phone-related technology, all of which except one have now expired. Traxcell values its patent infringement lawsuits at $700 million on its schedules. Traxcell‘s receiver now appears to own those patents following the imposition of a receivership by a Texas state court.
Since its inception in 2015, Traxcell has only generated revenue through patent infringement litigation and licensing fees. Traxcell receives services and funding for these lawsuits from AiPi and Ramey, who has represented Traxcell since 2015. In return, Ramey and AiPi receive the vast majority of any litigation proceeds and licensing fees obtained by Traxcell (50% to AiPi, 45% to Ramey, and the remaining 5% to Traxcell).2 According to Ramey, Traxcell has generated about $3 million in litigation proceeds and another $500,000 in licensing fees since its formation. If true, this suggests that after AiPi and Ramey were paid, Traxcell‘s total net income over the last eight or so years was $175,000 (5% of $3.5 million), or just $21,875 per year on average.
In late 2017, Traxcell filed a series of lawsuits in the United States District Court for the Eastern District of Texas, alleging patent infringement against several cell phone companies, including the Judgment Creditors. By April 2020, Traxcell‘s cases against each Judgment Creditor had been dismissed with prejudice. Subsequently, Judgment Creditors Verizon and Sprint each filed Motions for Attorney‘s Fees and were awarded $512,661.09 and $805,889.86, respectively (collectively, the ”Fee Awards“). The Eastern District Judge, adopting the Magistrate Judge‘s Memorandum Order, found that the Fee Awards were warranted because Traxcell “continued to pursue theories that it knew, or should have known, to be baseless.” Order at 3, Traxcell Technologies, LLC v. AT&T Corp. & AT&T Mobility LLC, No. 2:17-cv-00718-RWS-RSP (E.D. Tex. Dec. 22, 2022), ECF No. 545. Traxcell appealed the Fee Awards to the Federal Circuit, which upheld them in July 2023. Traxcell then filed a Petition for Writ of Certiorari to the United States Supreme Court, again challenging the Fee Awards.3
While the Federal Circuit appeal was pending, the Judgment Creditors domesticated the Fee Awards in a Texas state court. Soon after, Verizon filed a Motion for Turnover and Appointment of a Receiver (”Turnover Motion“) in Texas state court. The court granted the Turnover Motion on March 7, 2023, appointed a receiver, and ordered that Traxcell transfer to the receiver, among other things, its patents (”Receivership Order“). Traxcell‘s filing of this bankruptcy case stayed Traxcell‘s appeal of the Receivership Order.
c. TRAXCELL‘S BANKRUPTCY CASE
On its schedules, Traxcell‘s largest creditor is Ramey, with a $1.9 million contingent fee claim, which depends on the successful resolution of the Western District Litigation. Traxcell also lists a debt to AiPi for an unknown amount. Substantially all of Traxcell‘s debts consist of (i) contingent legal fees owed to Ramey, (ii) litigation funding fees owed to AiPi,4 and (iii) amounts owed to the Judgment Creditors and judgment creditor Nokia.5
In the three months from the petition date until the hearing date on the Motion to Dismiss, Traxcell had not filed a single operative motion other than applications to employ Ramey and Charles Chesnutt.6 After the Motion to Dismiss had been filed but before it was heard, Traxcell filed a skeletal “placeholder” plan of reorganization without a disclosure statement. ECF No. 69.
The day after the hearing, Traxcell filed its Motion to Omit Disclosure Statement, which argues that there is “little reason for a disclosure statement in this case” because Traxcell has no employees, “very little” current income from its only source (patent litigation), and “few assets other than the patents.” ECF No. 78. The next day, Traxcell moved to withdraw its Motion to Omit Disclosure Statement, ECF No. 79, and a few days later filed a disclosure statement inconsistent with the Plan.7 ECF No. 83.
The Judgment Creditors argue that Traxcell‘s case should be dismissed “for cause” (i) under
a. DISMISSAL FOR BAD FAITH UNDER § 1112(B)
Section 1112(b) provides that a court shall “dismiss a case under this chapter … for cause.”
The Fifth Circuit treats a debtor‘s bad faith in filing a case as cause for dismissal under
- The debtor has no employees, except for the principal(s);
- The debtor has little or no cash flow;
- The debtor has no available sources of income to sustain a plan of reorganization or make adequate protection payments;
- There are only a few unsecured creditors with relatively small claims compared to the secured claims in the case;
- The case is a two-party dispute between the debtor and a single creditor (or consolidated group of creditors);
The debtor‘s primary asset is about to be sold or transferred, and the debtor has failed to prevent the sale or transfer in state court.
Little Creek Dev. Co., 779 F.2d at 1073; see also In re McMahan, 481 B.R. 901, 916 (Bankr. S.D. Tex. 2012) (adding the existence of a two-party dispute as a Little Creek factor). These factors are not exclusive, but the Court finds them instructive in its analysis of the totality of the Debtor‘s circumstances.
The Judgment Creditors allege that Traxcell filed this case in bad faith, not to reorganize its business, but simply to stay the effects of the Receivership Order. In other words, the Judgment Creditors argue that Traxcell‘s case serves effectively as a costless appeal bond—its purpose is only to stall a potentially unfavorable ruling in state court (a receiver taking control of Traxcell‘s patents) while awaiting a decision on its Petition for Writ of Certiorari to the United States Supreme Court (seeking reversal of the Judgment Creditors’ Fee Awards).8 By filing the case, Traxcell avoids the cost of an appeal bond and circumvents the reason such bonds are required: to shift some risk of an adverse ruling to the appellant (here, Traxcell).
Although Traxcell‘s Response was incoherent,9 for the sake of argument the Court interprets it to allege a legitimate reorganizational purpose: removing the receivership so Traxcell
Applying the Little Creek factors to these facts, the Court finds that cause exists under
i. TRAXCELL HAS NO EMPLOYEES BESIDES ITS PRINCIPALS
The first factor asks whether the debtor has non-principal employees. As Reed testified, Traxcell has no employees, and its only managing members are Reed and his wife. A lack of any employees suggests that there is no business to reorganize and thus no good faith reason for being in chapter 11. While there may well be non-employee businesses with a good faith reason to be in bankruptcy, here, this factor favors a finding of bad faith.
ii. TRAXCELL HAS NO CASH FLOW
The second factor concerns the debtor‘s cashflow. Traxcell currently has none and has not had any in the last few years. As Reed and Ramey both testified, Traxcell has historically had only two sources of income: proceeds of patent infringement lawsuits and licensing fees. Traxcell, however, has earned no revenue from either source since at least 2021 and will continue to earn nothing pending the Receivership Order appeal. Its only potential source of income, the Western District Litigation, has been stayed, and most, if not all, of its revenue from licensing agreements has dried up now that its patents have expired. This factor favors a finding of bad faith.
The third factor, related to the second, is whether the debtor has income sufficient to fund a plan or make adequate protection payments. Traxcell‘s only projected source of income for its reorganization is the Western District Litigation, which has been stayed by the Receivership Order appeal and this case. Traxcell does not have the income to pay an appeal bond, much less the ongoing expenses of the estate. Although Traxcell asserts in its schedules that its claims against the Judgment Creditors and other defendants are worth $700 million, the Court finds Traxcell‘s valuation highly speculative and not supported by credible or admissible valuation testimony. The only witness who testified on the value of the Western District Litigation was Ramey, who is not, and was not at the hearing, qualified as a valuation expert. As proposed contingent fee counsel for Traxcell in the Western District Litigation, Ramey has a vested interest in continuing that litigation at all costs and regardless of the risks to other creditors. The Court therefore finds the $700 million valuation unsupported by credible or admissible evidence.
Even if Ramey‘s $700 million valuation were credible, that valuation depends on two highly uncertain contingencies, neither of which was addressed by Ramey in his testimony. Traxcell must (i) overturn the Receivership Order on appeal, and (ii) then prevail on its claims in the Western District Litigation, all without funding. In terms of actual liquidity, Traxcell‘s schedules reveal just $3,414.68 in cash and accounts—hardly enough to pay the $1.3 million it owes to the Judgment Creditors. Moreover, to be successful, Traxcell would have to confirm a plan that at least two-thirds of its non-insider, unsecured creditor class appear to oppose. This factor favors a finding of bad faith.
The fourth factor concerns the proportion, in both number and value, of the debtor‘s unsecured debts. In Little Creek, the Fifth Circuit illustrated this factor with the example of a debtor filing chapter 11 to protect a single, encumbered tract of real property. Little Creek Dev. Co., 779 F.2d at 1072. A relatively low proportion of unsecured debts tends to indicate bad faith because it suggests the debtor filed in contemplation of a single, large, secured debt. See, e.g., In re Triumph Christian Ctr., Inc., 493 B.R. 479, 494 (Bankr. S.D. Tex. 2013) (finding that this factor favored a finding of bad faith where only 3% of debts were unsecured, with the remaining 97% owed to one secured creditor).
According to Traxcell‘s schedules, its debts are all unsecured, including those to Ramey and litigation funder AiPi. No evidence was presented about the secured or unsecured nature of the claims of Ramey or AiPi. The Court believes it unusual for such claims to be unsecured. The claims of litigation funders like AiPi are often secured with an interest in the borrower‘s litigation proceeds. Ali M.M. Mojdehi et al., Litigation Finance and the Issues It Creates in Bankruptcy, 37 AM. BANKR. INST. J. 40, 40 (2018). Although Ramey testified that he and AiPi have a combined 95% interest in the proceeds of Traxcell‘s patent litigation, no documentary evidence of a security interest was presented and it is unclear whether either creditor holds a security interest. The Plan also suggests that the IRS has a secured claim, but no evidence of such claim was submitted. Because neither of Traxcell‘s funding agreements with Ramey or AiPi are in evidence and the Court has no evidence to the contrary, it will assume the claims of Ramey and AiPi are unsecured and that no IRS secured claim exists. Despite the conflicting information presented to the Court, without evidence of any secured debts, this factor favors a measured finding of good faith.
The fifth Little Creek factor asks whether the case is a two-party dispute. Although this factor was not originally stated in Little Creek, bankruptcy courts in the Fifth Circuit have since adopted the existence of a two-party dispute as a Little Creek factor.10 E.g., In re Triumph Christian Ctr., Inc., 493 B.R. at 494; In re McMahan, 481 B.R. at 916. Courts routinely dismiss two-party disputes in chapter 11, characterizing them as having been filed in bad faith. Triumph Christian Ctr., 493 B.R. at 495. When considered as a Little Creek factor, the characterization of a case as a two-party dispute is given greater weight relative to the other factors. Id. The existence of a two-party dispute can be independent grounds for dismissing a case. In re Turner, 2022 WL 3363687, at *4 (Bankr. W.D. Tex. 2022); see also In re Marino, 2010 WL 519772, at *3 (Bankr. S.D. Tex. 2010) (“This court has generally found cause to dismiss cases in which it appeared that the debtor was attempting to use the provisions of the Bankruptcy Code to gain an unfair advantage in a two-party dispute.“).
In its schedules, Traxcell alleges that it owes $3,616,000 to various creditors, the largest single claim being a $1.9 million contingent debt owed to Ramey. Ramey‘s contingent fee claim, however, will not be paid unless Traxcell prevails in the Western District Litigation. Disregarding Ramey‘s contingent fee claim along with the remaining contingent, unliquidated, or disputed claims, Traxcell is left with $1,481,000.00 in debts. Of that amount, $1,391,000.00 is owed to the Judgment Creditors, meaning that 94% of all non-contingent claims belong to the Judgment
vi. THIS CASE WAS FILED TO PREVENT THE SALE OF TRAXCELL‘S PATENTS
The sixth factor asks whether the debtor filed bankruptcy to prevent the transfer of its valuable asset(s) (via sale or foreclosure) and had been unsuccessful at preventing such transfer at the state court level. Traxcell seeks to prevent the transfer to a receiver of Traxcell‘s only valuable assets, its patent infringement lawsuits. Under the Receivership Order, Traxcell‘s patents are to be sold to pay Traxcell‘s creditors. Traxcell‘s attempts to reverse the Receivership Order at the state level have failed. Accordingly, Traxcell appears to have filed this proceeding to obtain the stay of the Receivership Order it could not obtain in state court. It is classic bad faith when a debtor attempts to use a bankruptcy filing to impede and relitigate a matter involving a significant debtor asset, or collective set of significant assets, unfavorably decided at the state court level. See, e.g., In re SB Properties, Inc., 185 B.R. 206 (Bankr. E.D. Pa. 1995) (dismissing a chapter 11 case under
b. DISMISSAL UNDER § 1112(B)(4)(A)
Alternatively, the Judgment Creditors argue that Traxcell‘s case should be dismissed under
i. THE ESTATE WILL SUFFER SUBSTANTIAL LOSS IN BANKRUPTCY
To satisfy the first prong of
The Judgment Creditors argue that allowing the case to continue would result in loss to the estate because Traxcell would accrue an unknown amount in attorney‘s fees and costs from the
The Court agrees. While Traxcell, as a non-practicing entity, does not have overhead, wages, or other expenses, it is accruing attorney‘s fees and costs in the bankruptcy. Traxcell is effectively insolvent, with no current cashflow. All but $3,416.83 of its scheduled assets come from the projected value of its patent infringement lawsuits in the Western District Litigation. Under these circumstances, Traxcell‘s attorney‘s fees and costs “effectively [come] straight from the pockets of creditors” and establish substantial loss or diminution of the estate under
ii. THERE IS NO REASONABLE LIKELIHOOD OF REHABILITATION
“The issue of rehabilitation for purposes of Section 1112(b)(4)(A) is not the technical one of whether the debtor can confirm a plan, but, rather, whether the debtor‘s business prospects justify continuance of the reorganization effort.” In re TMT Procurement Corp., 534 B.R. 912, 920 (Bankr. S.D. Tex. 2015) (quoting In re LG Motors, Inc., 422 B.R. 110, 116 (Bankr. N.D. Ill. 2009)). In other words, the second prong of
More importantly, the Court does not believe that Traxcell has a business to rehabilitate in the first place. Even if Traxcell could undo the Receivership Order, Reed testified that all but one of the patents Traxcell formerly held have expired. This means that Traxcell‘s business of filing patent infringement litigation is winding down.13 It could not enter into licensing agreements on the expired patents post-rehabilitation either, and any such current licensing agreements it has may be unenforceable. Accordingly, the Court finds that the second prong of
c. DISMISSAL UNDER § 305(A)
Finally, the Judgment Creditors argue that Traxcell‘s case should be dismissed under
Dismissal under
(i) the economy and efficiency of administration; (ii) whether another forum is available to protect the interests of both parties or there is already a pending proceeding in state court; (iii) whether federal proceedings are necessary to reach a just and equitable solution; (iv) whether there is an alternative means of achieving an equitable distribution of assets; (v) whether the debtor and the creditors are able to work out a less expensive out-of-court arrangement which better serves all interests in the case; (vi) whether a non-federal insolvency has proceeded so far in those proceedings that it would be costly and time consuming to start afresh with the federal bankruptcy process; and (vii) the purpose for which bankruptcy jurisdiction has been sought. Id.
Dismissal under this analysis is much less clear-cut than dismissal under
i. THE ECONOMY AND EFFICIENCY OF ADMINISTRATION
The first factor, the economy and efficiency of administration, considers whether administration of a case in bankruptcy court is needlessly costly or disruptive to the business. Abstention and dismissal may be appropriate where “an ably-functioning, going-concern business is being foisted in disruptive fashion into a bankruptcy.” Id. at 146. By the time Traxcell filed
ii. THE EXISTENCE OF AN ALTERNATIVE FORUM
The second factor asks whether another forum is available to protect the interests of the debtor and creditors, or if there is a preexisting pending state court proceeding. Here, there is both a non-bankruptcy forum that would protect the interests of the Judgment Creditors (the receivership) and a preexisting pending state court proceeding (the Receivership Order appeal). But that is not the end of the inquiry. The Court must also consider whether liquidation and distribution of the patents under the alternative forum is comparatively advantageous to all creditors and the Debtor.
The Court finds that the receivership would better serve the Judgment Creditors’ interests because (i) Traxcell‘s articulated dire financial situation and limited resources make its short term survival unlikely, (ii) Traxcell‘s Plan, which the Judgment Creditors oppose, has a narrow chance of achieving confirmation, and (iii) Traxcell‘s chances of successfully reversing the Receivership Order and then successfully prosecuting the Western District Litigation appear equally limited and speculative. Under these circumstances, the odds of achieving an equitable distribution to the
Arguably, the interests of the remaining, non-insider, non-contingent creditors, who collectively hold the relatively minor amount of $90,000 in unsecured claims (”Non-Judgment Creditors“)15 may be better protected by the receivership. Unlike some receivership orders, which exclusively favor judgment creditors, the Receivership Order here only directs the turnover of the patents to the receiver without directing the return of the sale proceeds to only the Judgment Creditors. This leads the Court to believe that the Non-Judgment Creditors might also be able to seek payment from a portion of any sale proceeds. If the patent litigation claims are as valuable as Traxcell suggests, their sale would net ample funds with which to pay the Non-Judgment Creditors. Traxcell‘s Plan, by comparison, seeks to pay the Non-Judgment Creditors’ claims through litigation, which, in its current posture, is highly uncertain to net any recovery. Even if Traxcell were to succeed in the Western District Litigation, its Plan requires revenue in excess of amounts due to AiPi and Ramey to pay the Non-Judgment Creditors’ claims, which the Plan proposes to pay “when due according to their terms.” ECF No. 69. No such revenue currently exists, nor is it
Finally, dismissal under
The second factor favors dismissal.
iii. THE RELATIVE DESIRABILITY OF BANKRUPTCY COURT AS A FORUM
The third, fourth, fifth, and sixth factors all generally concern whether bankruptcy court is comparatively the appropriate, desirable, or efficient forum for distribution to creditors. In re Paper I Partners, L.P., 283 B.R. 661, 679 (Bankr. S.D.N.Y. 2002). As discussed, the receivership is a more appropriate forum for distribution to all creditors, including the Non-Judgment Creditors. Additionally, it would be efficient to allow the receivership, which existed before the bankruptcy, to handle distribution. These factors collectively favor dismissal.
iv. THE PURPOSE OF THE DEBTOR‘S BANKRUPTCY
The seventh factor concerns the purpose for which the debtor sought bankruptcy protection and is essentially a test of the debtor‘s good faith. “A significant factor in favor of dismissing a case pursuant to
V. CONCLUSION
Traxcell brings before this Court a two-party dispute with the Judgment Creditors with no realistic prospects of rehabilitation or even a business to reorganize. The Court finds cause to dismiss this case as a bad faith filing under
The Court also finds that cause exists to dismiss this case under
Finally, the Court finds that dismissal under
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