UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
IN RE: : CHAPTER 7
INTERNATIONAL BIOCHEMICAL : CASE NO. 04-92814-JB
INDUSTRIES, INC.,
Debtor. : JUDGE BIHARY
HERBERT C. BROADFOOT II,
Chapter 7 Trustee for
International Biochemical
Industries, Inc.,
Plaintiff, : ADVERSARY PROCEEDING
v.
: NO. 06-06035-JB
NOVA BIOGENETICS, INC.,
Defendant.
MEMORANDUM OF LAW IN SUPPORT OF
TRUSTEE’S MOTION FOR SUMMARY JUDGMENT
Plaintiff Herbert C. Broadfoot II, Chapter 7 Trustee
(“Trustee”) of the estate of International BioChemical Industries,
Inc., formerly known as BioShield Technologies, Inc.
(“International BioChemical”)1, respectfully moves this Court to of it will be delivered to the Clerk of the Bankruptcy Court for the Northern District of Georgia, and thereafter may be reviewed during normal business hours at Room 1340, 75 Spring Street, S.W., Atlanta, Georgia 30303.
1. The company changed its name on September 24, 2002.
BioShield Technologies, Inc. Annual Report on Form 10-KSB for
the fiscal year ended dated June 30, 2002, filed with the SEC on or about October 16, 2002 (“International BioChemical Annual Report”), cover page. It is Exhibit A to the Plaintiff’s Second Set of Requests for Admissions, Third Set of Interrogatories and Third Set of Requests for Production of Documents, served on May 31, 2006. Nova admitted the authenticity of this Exhibit by not serving a response to the requests for admissions within thirty days of service. Fed. R. Civ. P. 36(a) (made applicable to this adversary proceeding by Bankruptcy Rule 7036). This discovery request is voluminous and was not filed electronically. A copy
2 The Federal Insecticide, Fungicide, and Rodenticide Act
(“FIFRA”), 7 U.S.C. §§ 136, et seq., “governs the sale,
distribution, and use of pesticides. In general, FIFRA requires that a pesticide be registered with EPA before it can be sold and distributed. FIFRA § 3(a), 7 U.S.C. § 136(a)(a).” Syngenta Crop Protection, Inc. v. United States Environmental Protection Agency, 222 F.R.D. 271 (M.D.N.C. 2004).
3 On February 17, 2006, Mr. Moses was convicted of securities
fraud and perjury. United States v. Moses, No. 1:04-cr-00508-CAP (N.D. Ga.).
2 enter summary judgment against defendant Nova BioGenetics, Inc. (“Nova”) and avoid the transfer to Nova of International
BioChemical’s intellectual property, including its patents and
patent applications, and its EPA registrations.2 Facts
International BioChemical Industries, Inc., formerly BioShield
Technologies, Inc., is a Georgia corporation, which was organized in 1995. International BioChemical Annual Report, p. F-8. Timothy C. Moses was the founder, a member of the board of directors, the Chairman of the Board, President, Chief Executive Officer, Secretary and Treasurer of International BioChemical.3 International BioChemical Annual Report, p. 24. In its annual report, International BioChemical described its business as follows:
[International BioChemical] is committed to
the discovery, development, marketing and sale
4 The Healthcare March 19, 2003 Report is Exhibit A to the
Plaintiff’s Third Set of Requests for Admissions, Fourth Set of
Interrogatories and Fourth Set of Requests for Production of
Documents, served on May 31, 2006. Nova admitted the
authenticity of this Exhibit by not serving a response to the
requests for admissions within thirty days of service. Fed. R.
Civ. P. 36(a) (made applicable to this adversary proceeding by
Bankruptcy Rule 7036). This discovery request is voluminous and
was not filed electronically. A copy of it will be delivered to
the Clerk of the Bankruptcy Court for the Northern District of
Georgia, and thereafter may be reviewed during normal business
hours at Room 1340, 75 Spring Street, S.W., Atlanta, Georgia
3
of leading-edge antimicrobial and biostatic
products. The Company’s antimicrobial
technology is a revolutionary alternative to
conventional sanitizers, disinfectants,
bleaches, biocides and preservatives.
[International BioChemical’s] proprietary
antimicrobial products are much more durable,
effective, and safe, and can make claims no
other product can.
* * *
Unlike most other biocides, [International
BioChemical’s] antimicrobial is effective
against single-celled organisms. Since it
does not dissipate, it minimizes or eliminates
the potential for microorganisms to adapt,
build up tolerance, or become resistant. It
acts by rupturing the cell membrane, not by
poisoning the cell. By contrast, most other
antimicrobials, sanitizers and disinfectants
are designed to diffuse and be absorbed. Once
absorbed, they act by poisoning the
microorganisms or causing fatal mutations.
However, as they diffuse, they lose strength,
and adaptation can and usually does occur.
International BioChemical Annual Report, p. 1.
In February, 2002, Nova was formed under the laws of the State
of Delaware. Healthcare Network Solutions, Inc., Current Report on
Form 8-K dated March 19, 2003 (“Healthcare March 19, 2003 Report”),
p. 2.4 Timothy C. Moses was the Chairman of the Board of Nova from
30303.
5 Dr. Kevin Smith was the Fed. R. Civ. P. 30(b)(6) witness
for Nova in this adversary proceeding, and the brother of G.
Michael Smith, counsel for Nova in this adversary proceeding.
Nova Deposition, p. 6.
6 This deposition transcript is voluminous and was not filed
electronically. A copy of it will be delivered to the Clerk of
the Bankruptcy Court for the Northern District of Georgia, and
thereafter may be reviewed during normal business hours at Room
1340, 75 Spring Street, S.W., Atlanta, Georgia 30303.
7 The Nova Annual Report is Exhibit G to the Plaintiff’s
Second Set of Requests for Admissions, Third Set of
Interrogatories and Third Set of Requests for Production of
Documents, served on May 31, 2006. Nova admitted the
authenticity of this Exhibit by not serving a response to the
requests for admissions within thirty days of service. Fed. R.
Civ. P. 36(a) (made applicable to this adversary proceeding by
Bankruptcy Rule 7036). This discovery request is voluminous and
was not filed electronically. A copy of it will be delivered to
the Clerk of the Bankruptcy Court for the Northern District of
Georgia, and thereafter may be reviewed during normal business
hours at Room 1340, 75 Spring Street, S.W., Atlanta, Georgia
30303.
4
its inception in February 2002. Healthcare March 19, 2003 Report,
p. 7. Dr. Kevin Smith was an officer.5 Transcript of the Fed. R.
Civ. P. 30(b)(6) deposition of Nova BioGenetics, Inc., taken July
3, 2006 (“Nova Deposition”), p. 17.6 Mr. Moses’ children were
Nova’s principal owners. Nova Biogenetics, Inc. Annual Report on
Form 10-KSB for the fiscal year ended June 30, 2003 (“Nova Annual
Report”), p. F-12.7 On July 8, 2002, it had no assets and no
liabilities; it existed only on paper. Declaration of Deirdre S.
Baker dated July 21, 2006 (“Baker Declaration”), paragraph 3, which
is attached to this memorandum of law as Exhibit A. Accord, Nova
8 Curiously, International BioChemical made no mention of
the assignment and transfer of the patents and EPA registrations
in its quarterly report for the fiscal quarter in which the
transaction allegedly occurred, i.e., the one ended September 30,
2002. Nova Deposition, pp. 57-58 and Exhibit 18. The BioShield
Technologies, Inc. Quarterly Report on Form 10-QSB for the fiscal
quarter ended September 30, 2002, filed with the SEC on or about
November 14, 2002 (“International BioChemical September 30, 2002
Quarterly Report”) is Exhibit B to the Plaintiff’s Second Set of
Requests for Admissions, Third Set of Interrogatories and Third
Set of Requests for Production of Documents, served on May 31,
2006. Nova admitted the authenticity of this Exhibit by not
serving a response to the requests for admissions within thirty
days of service. Fed. R. Civ. P. 36(a) (made applicable to this
adversary proceeding by Bankruptcy Rule 7036). This discovery
request is voluminous and was not filed electronically. A copy
of it will be delivered to the Clerk of the Bankruptcy Court for
the Northern District of Georgia, and thereafter may be reviewed
during normal business hours at Room 1340, 75 Spring Street,
S.W., Atlanta, Georgia 30303.
5
Deposition, p. 18. Its stock had no market and no value. Id. It
was not until December 2002 that Nova had the money to open a bank
account. Baker Declaration, paragraph 4. Before its reverse
merger with Healthcare on March 19, 2003, Nova was reported to be
a development stage company with four employees. Healthcare March
19, 2003 Report, p. 2. It was just getting off the ground. Nova
Deposition, p. 45.
In its quarterly report filed with the SEC for the fiscal
quarter ended December 31, 20028, International BioChemical
reported:
On July 5, 2002, the Company entered into a
joint venture agreement with Nova Biogenetics,
Inc. (“Nova”) a company in part owned by a
trust fund for the benefit of the children of
[International BioChemical]’s President. ...
6
The joint venture calls for the joint
assignment of all[] patent ownership, EPA
registration rights and ownership from the
Company to Nova (see subsequent events
concerning patents). For consideration of
these assets, the Company received 500,000
shares of Nova’s common stock (5,700,000
shares outstanding), and an amount equal to
$500,000 in cash, if Nova secures additional
capital of $2,000,000 or 25% of all monies
raised until the $500,000 is met and 20% of
all the difference raised between $3,000,000
and $5,000,000. This amount is secured by a
$500,000 promissory note bearing interest at
6% per annum due June 30, 2003. Additionally,
the Company will receive 5% of all gross sales
of products sold by Nova using technology
jointly owned by the two companies (see
subsequent events). The Company also received
an exclusive license agreement under which the
Company has exclusive authority throughout the
world to manufacture and sell the former
assigned products of the Company. The license
may be terminated at anytime [by] giving sixty
(60) days notice to the Company.
* * *
On December 23, 2002, the Company entered into
a Master Distribution Agreement with Nova,
granting Nova the rights of resale of all of
the Company’s licensed products. Nova may
appoint sub-distributors and agents to
facilitate the marketing and sales efforts of
the Company’s licensed products.
* * *
On January 27, 2003 Nova Biogenetics, Inc.
(hereinafter “Nova”) sold and assigned to
International Biochemical Industries, Inc.
(hereinafter “IBCL”) and Nova as joint
assignees, Nova’s entire right, title and
interest to certain identifiable intellectual
property as well as to applications therefrom
and all patents and extensions thereof.
International BioChemical Quarterly Report on Form 10-QSB for the
9 The International BioChemical December 31, 2002 Quarterly
Report is Exhibit C to the Plaintiff’s Second Set of Requests for
Admissions, Third Set of Interrogatories and Third Set of
Requests for Production of Documents, served on May 31, 2006.
Nova admitted the authenticity of this Exhibit by not serving a
response to the requests for admissions within thirty days of
service. Fed. R. Civ. P. 36(a) (made applicable to this
adversary proceeding by Bankruptcy Rule 7036). This discovery
request is voluminous and was not filed electronically. A copy
of it will be delivered to the Clerk of the Bankruptcy Court for
the Northern District of Georgia, and thereafter may be reviewed
during normal business hours at Room 1340, 75 Spring Street,
S.W., Atlanta, Georgia 30303.
10 International BioChemical reported in its quarterly report
for the fiscal quarter ended September 30, 2002, that it owned
approximately 28.7% of all the then issued and outstanding shares
of Healthcare and that its shareholders owned an additional
24.6%. International BioChemical September 30, 2002 Quarterly
Report, p. 6.
7
fiscal quarter ended December 31, 2002, filed with the SEC on or
about February 28, 2003 (“International BioChemical December 31,
2002 Quarterly Report”), pp. 7-8.9
On March 19, 2003, Healthcare Network Solutions, Inc.10
(“Healthcare”) closed on an Agreement and Plan of Reorganization
and Stock Purchase Agreement with Nova, Mr. Moses, and the Nova
shareholders. Healthcare March 19, 2003 Report, p. 1. The
transaction was a reverse merger. Baker Declaration, paragraph 5.
The two entities merged into a single corporation under the name
Nova BioGenetics, Inc. Nova Annual Report, p. F-7.
Healthcare was a Delaware corporation, which was formed by
International BioChemical on April 23, 2001, and of which,
initially, International BioChemical was the sole shareholder.
11 The Healthcare December 31, 2002 Quarterly Report is
Exhibit E to the Plaintiff’s Second Set of Requests for
Admissions, Third Set of Interrogatories and Third Set of
Requests for Production of Documents, served on May 31, 2006.
Nova admitted the authenticity of this Exhibit by not serving a
response to the requests for admissions within thirty days of
service. Fed. R. Civ. P. 36(a) (made applicable to this
adversary proceeding by Bankruptcy Rule 7036). This discovery
request is voluminous and was not filed electronically. A copy
of it will be delivered to the Clerk of the Bankruptcy Court for
the Northern District of Georgia, and thereafter may be reviewed
during normal business hours at Room 1340, 75 Spring Street,
S.W., Atlanta, Georgia 30303.
8
International BioChemical Annual Report, p. F-7; Healthcare Network
Solutions, Inc. Quarterly Report on Form 10-QSB for the fiscal
quarter ended December 31, 2002, filed with the SEC on or about
February 14, 2003 (“Healthcare December 31, 2002 Quarterly
Report”), p. 6.11 Through November 2001, Healthcare was a 52% owned
subsidiary of International BioChemical. Healthcare December 31,
2002 Quarterly Report, p. 6. During December 2001 approximately
24% of the shares owned by International BioChemical were spun off
to its shareholders. Id. Until November 1, 2002, Mr. Moses was a
director of Healthcare. Healthcare December 31, 2002 Quarterly
Report, p. 12.
Healthcare reported on Form 8-K, dated March 19, 2003, filed
with the SEC on or about March 21, 2003, and signed by Dr. Kevin
Smith,
On July 5, 2002, Nova Biogenetics entered
into a Joint Venture Agreement with
[International BioChemical]. Mr. Tim Moses is
the president and a member of the board of
directors of both Nova Biogenetics and
9
[International BioChemical]. Under the terms
of this agreement, [International BioChemical]
assigned and transferred all of its rights,
title and interest in all patent ownership,
EPA registration rights and ownership to Nova.
Thereafter on February 27, 2003, Nova assigned
jointly to itself and [International
BioChemical] such patents and related
interests. A primary purpose of the joint
venture is for the parties to share the costs
of applicable facilities and research and
development. As consideration for the
assignment of these assets, Nova
issued [International BioChemical]
500,000 shares of its common stock which
was subsequently exchanged for 4,410,000
common shares of [Healthcare].
agreed to pay [International
BioChemical] an amount equal to $500,000,
up to a maximum of $1,000,000 depending
on the proceeds Nova receives in a
private offering. The minimum payment is
due on June 30, 2003.
agreed to pay [International
BioChemical] 5% of all gross sales of
products sold by Nova using technology
jointly owned by Nova and [International
BioChemical].
The joint venture is to be managed by
both companies, with [International
BioChemical] having been granted the right to
appoint one member to Nova’s board of
directors. [International BioChemical] and
Nova are affiliates, and [International
BioChemical] is an affiliate of [Healthcare].
At the closing of the Joint Venture Agreement,
[International BioChemical] delivered the
documents necessary to transfer the ownership
of all the patents, patent applications and
EPA registrations to Nova, as described above.
Contemporaneously with the Joint Venture
Agreement, Nova and [International
BioChemical] also entered into an Exclusive
12 The Healthcare March 27, 2003 Report is Exhibit B to the
Plaintiff’s Third Set of Requests for Admissions, Fourth Set of
Interrogatories and Fourth Set of Requests for Production of
Documents, served on May 31, 2006. Nova admitted the
authenticity of this Exhibit by not serving a response to the
requests for admissions within thirty days of service. Fed. R.
Civ. P. 36(a) (made applicable to this adversary proceeding by
Bankruptcy Rule 7036). This discovery request is voluminous and
was not filed electronically. A copy of it will be delivered to
the Clerk of the Bankruptcy Court for the Northern District of
Georgia, and thereafter may be reviewed during normal business
hours at Room 1340, 75 Spring Street, S.W., Atlanta, Georgia
30303.
10
License Agreement wherein [International
BioChemical] was granted an exclusive license
throughout the world to manufacture and sell
the products assigned to Nova. This Exclusive
License Agreement can be terminated with 60
days notice.
On January 27, 2003 Nova sold and
assigned to [International BioChemical] and
Nova as joint assignees, Nova’s right, title
and interest to the above patents, as well as
to applications therefrom and related rights.
Healthcare March 19, 2003 Report, p. 2.
Healthcare reported on its Form 8-K, dated March 27, 2003,
filed with the SEC on or about April 27, 2003 (“Healthcare March
27, 2003 Report”)12,
Nova acquired from International BioChemical
Industries (OTC: PINK; IBCL), a related party,
one-half of [International BioChemical]’s
patent rights and all of [its] EPA
registration rights for a note obligation of
$500,000 to [International BioChemical] and
500,000 shares of Nova issued to
[International Biochemical] at $3.125 per
share totaling $1,562,500, in Nova stock
value. The total [value] of the assets
acquired from [International BioChemical] was
$2,062,500 ... .
11
The annual report Nova filed with the SEC for the fiscal year
ended June 30, 2003 reflected Nova’s acquisition of International
BioChemical’s intellectual property:
Nova Biogenetics is a biopharmaceuticals
company headquartered in Atlanta, Georgia that
is engaged in the discovery, development, and
commercialization of new therapeutic agents
that treat life-threatening infectious
diseases. Nova Biogenetics’ pipeline is based
on proprietary patented technology used as a
broad base for application with existing
antibiotic compounds. ...
* * *
Nova’s broad line of specialized antibiotic
products act by disrupting the cell wall of
bacteria and/or fungi. This action kills the
targeted organisms. Presently, many generic
antibiotic formulations act by diffusing into
the targeted organism/cells and providing an
environment for slowing cellular activity
providing a state of stasis (cells not
actually killed). Nova’s compounds have
significantly enhancing existing generic
antibiotic medications. In addition, Nova
possess[es] the competitive advantage of
providing a product platform that can create
logevity in the drugs that it produces by
delivering antibiotics that are less
susceptible to adaptation or mutation.
Nova Annual Report, p. 4. It described the transaction whereby it
acquired International BioChemical’s intellectual property as
follows:
On January 27, 2003, Nova Biogenetics, Inc.
(“Nova”) purchased and received assignment
from International BioChemical Industries,
Inc. (“IBCL”), IBCL’s entire rights, title and
interest to certain identifiable intellectual
property as well as to applications therefrom
and all patents and extensions thereof.
12
The purchase price was 500,000 shares of
Nova’s stock and $500,000. This amount is
secured [sic] by a $500,000 promissory note
bearing interest at 6% per annum due June 30,
2003. Additionally, Nova will pay 5% of all
gross sales of the product sold by using the
intellectual property. The balance of this
note as of June 30, 2003 is $490,904 and is
past maturity.
Nova Annual Report, p. F-12.
On January 13, 2006, the Trustee filed his Complaint to Avoid
Fraudulent Transfer and Recover Property Transferred (“Complaint”),
instituting this adversary proceeding. Nova admitted in its
answer, that
According to the Joint Venture Agreement
entered into July 5, 2002, by and between Nova
and International Biochemical’s predecessor,
Bioshield Technologies, Inc. [(“International
BioChemical”), International BioChemical]
transferred to Nova all of [International
BioChemical’s] right, title, and interest in
all intellectual property, including certain
listed patents and patent applications, and
certain EPA registrations. Nova tendered to
[International BioChemical] 500,000 shares of
Nova common stock, “an amount equal to
$500,000, in the event Nova raises a minimum
of $2,000,000 and/or 25% of all monies raised
until the $500,000 is met and 20% of the
difference raised between $3,000,000 and
$5,000,000, secured by a promissory note to be
executed by December 31, 2002 in the amount of
$500,000 with 6% interest due not later than
June 30th 2003, in the event the full amount of
the consideration has not been paid by said
aforementioned date”, 5% of all gross sales of
products sold by Nova using the technology
formerly owned by [International BioChemical].
Additionally, Nova licensed to [International
BioChemical] certain rights in the
intellectual property.
According to Amendment A September 20,
2002, Joint Venture Agreement/Clarifications
13
and Amendment to Original Agreement, by and
between Nova and [International BioChemical],
[International BioChemical] transferred to
Nova all of [International BioChemical’s]
right, title, and interest in all intellectual
property, including certain listed patents and
patent applications, and certain EPA
registrations not later than December 30,
2002. [International BioChemical] was required
to maintain all cost associated with said
intellectual patents until joint transfer of
ownership, and any failure to do so was cause
for default. Nova tendered to [International
BioChemical] 500,000 shares of Nova common
stock, “an amount equal to $500,000, secured
by a promissory note to be executed by
December 31, 2002 in the amount of $500,000
with 6% interest due not later than June 30th
2003, in the event the full amount of the
consideration has not been paid by said
aforementioned date, and Nova has become a
public company by June 30, or is close to
becoming a public company, then [International
BioChemical] shall receive shares in Nova once
it has been effectuated as a public entity in
an amount equivalent to the then outstanding
amount owed to [International BioChemical],
but not later than December 30, 2003”, 5% of
all gross sales of products in the field of
pharmaceutical products by Nova using the
technology formerly owned by [International
BioChemical]. Additionally, Nova licensed to
[International BioChemical] certain rights in
the intellectual property.
According to the Joint Venture Agreement
entered into September 20, 2002, by and
between Nova and [International BioChemical],
[International BioChemical] transferred to
Nova all of [International BioChemical’s]
right, title, and interest in all intellectual
property, including certain listed patents and
patent applications, and certain EPA
registrations. Nova tendered to
[International BioChemical] 500,000 shares of
Nova common stock, “an amount equal to
$500,000, payable at the Closing, in the event
Nova raises a minimum of $3,000,000, and 20%
of the difference raised between $3,000,000
and $5,000,000 if raised”, 5% of all gross
sales of products sold by Nova using the
14
technology formerly owned by [International
BioChemical]. Additionally, Nova licensed to
[International BioChemical] certain rights in
the intellectual property.
According to the Exhibit to Default
Notice dated July 5, 2003, Occurance [sic]
Date January 8, 2003, [International
BioChemical] acknowledged that Nova had no
further obligations (monetary or otherwise,
including promissory notes and old
investments) due and owing from Nova to
[International BioChemical] under the Joint
Venture Agreement of July 5, 2002,
[International BioChemical] acknowledged that
it was in default of its obligations in the
Joint Venture Agreement, and Nova “at this
time will allow the patents to remain jointly
owned.”
According to a Memorandum dated July 14,
2003, from Kevin F. Smith of International
Biochemical to Cecil Smith, CEO, Nova,
International Biochemical acknowledged that it
was in default of its obligation under the
Joint Venture Agreement dated July 5, 2002,
and “due to this default, that the ‘transfer
of rights, title and interest in the patents,
trademarks, EPA registrations and proprietary
information ... shall no longer be the
property of [International BioChemical] and
Nova, but rather the intellectual property on
[sic] Nova only.’”
Complaint, paragraphs 9-11, 15-16; Defendant’s Answer to
Plaintiff’s Complaint and Defendant’s Counterclaim (“Answer”), pp.
4-5, paragraphs 9-11, 15-16 (Docket No. 7).
In its quarterly report for the fiscal quarter ended March 31,
2006, filed with the SEC on or about May 22, 2006, Nova described
this adversary proceeding as follows:
This suit was filed by the Trustee to
determine if sufficient consideration was
13 The Nova March 31, 2006 Quarterly Report is Exhibit H to
the Plaintiff’s Second Set of Requests for Admissions, Third Set
of Interrogatories and Third Set of Requests for Production of
Documents, served on May 31, 2006. Nova admitted the
authenticity of this Exhibit by not serving a response to the
requests for admissions within thirty days of service. Fed. R.
Civ. P. 36(a) (made applicable to this adversary proceeding by
Bankruptcy Rule 7036). This discovery request is voluminous and
was not filed electronically. A copy of it will be delivered to
the Clerk of the Bankruptcy Court for the Northern District of
Georgia, and thereafter may be reviewed during normal business
hours at Room 1340, 75 Spring Street, S.W., Atlanta, Georgia
30303.
15
provided by Nova to [International
BioChemical] for the transfer and exchange of
one half of the rights in the various patents
owned by the debtor and sold to Nova. ... It
is Nova’s position that more than sufficient
consideration was provided to [International
BioChemical] including but not limited to the
payment of maintenance fees and the transfer
of Nova stock to [International BioChemical],
all of which occurred approximately two years
before [International BioChemical] filed for
bankruptcy protection.
Nova Biogenetics, Inc. Quarterly Report on Form 10-QSB for the
fiscal quarter ended March 31, 2006, filed with the SEC on or about
May 22, 2006 (“Nova March 31, 2006 Quarterly Report”), p. 9.13 Nova
makes no mention of its obligations to pay $500,000 or its
commitment to pay 5% of all gross sales of products sold by Nova
using the technology formerly owned by International BioChemical.
At the Rule 30(b)(6) deposition of Nova, its CEO, Dr. Kevin
Smith was asked, “[w]hat is your understanding of the transaction
... in the sense of what did International Biochemical give Nova
and what did Nova provide in return.” Nova Deposition, p. 56. Mr.
16
Smith answered:
My understanding as of today in terms of
what we have gone through is transferring
shares and money to International for rights
to the patents and EPA [registrations] ...
[o]r the intellectual property.
Q. What money was transferred from Nova
to International Biochemical, if any?
A. Only what I read in here. There was
a promissory note.
Q. Do you know of any other moneys that
were paid?
A. There was a balance of $490,000.
There must have been some money
related to that.
Q. Do you know of any other moneys?
A. No, I don’t.
Nova Deposition, pp. 56-57.
At the time of the transfer of its intellectual property to
Nova, International Biochemical was insolvent and had at least one
unsecured creditor. Dr. Kevin Smith, who was an officer and
director of International BioChemical, admitted that International
BioChemical was insolvent. Nova Deposition, pp. 11, 12, 13-14. He
testified that there was never a time when the total amount of its
assets exceeded its liabilities. Nova Deposition, p. 13. He
further testified that on a regular basis International BioChemical
was behind in paying its bills from 2000 until the filing of
bankruptcy. Nova Deposition, pp. 13-14.
The financial statements in the annual report that
International BioChemical filed with the SEC for the fiscal year
14 The First Requests for Admissions is voluminous and was
not filed electronically. A copy of it will be delivered to the
Clerk of the Bankruptcy Court for the Northern District of
Georgia, and thereafter may be reviewed during normal business
hours at Room 1340, 75 Spring Street, S.W., Atlanta, Georgia
30303.
17
ended June 30, 2002, and the quarterly reports that it filed with
the SEC for the fiscal quarters ended September 30, 2002 and
December 31, 2002, show that the sum of its debts was greater than
all of its assets, at a fair valuation. On June 30, 2002, the
total amount of current liabilities was $4,649,548; total assets
were only $574,609. International BioChemical Annual Report, p. F-
3. Furthermore, International BioChemical was in default on a
$1,000,016 line of credit. International BioChemical Annual
Report, p. F-12, Note 5. On September 30, 2002, International
BioChemical’s current liabilities had increased to $4,793,887;
total assets had fallen to $386,798. International BioChemical
September 30, 2002 Quarterly Report, p. 3. On December 31, 2002,
International BioChemical’s current liabilities had further
increased to $6,593,906; total assets had further declined to
$275,339. International BioChemical December 31, 2002 Quarterly
Report, p. 3.
Nova admitted in its response to Plaintiff’s First Set of
Requests for Admissions, First Set of Interrogatories and First Set
of Requests for Production of Documents, served March 31, 2006
(“First Requests for Admissions”)14 that International BioChemical
18
had at least one unsecured creditor at the time of the transfers at
issue. Defendant’s Answer to Plaintiff’s Second Set of
Interrogatories, and Request for Production of Documents, filed May
26, 2006 (Docket No. 16), p. 2.
Nova also admitted this element of the Trustee’s case and
International BioChemical’s insolvency on the date of the transfer
by not serving a timely response to the Trustee’s First Requests
for Admissions. In his First Requests for Admissions, the Trustee
asked Nova to admit that International Biochemical was insolvent on
the date(s) of the transfers described in the Complaint and that
International Biochemical had at least one unsecured creditor at
the time(s) of the transfers described in the Complaint. Nova did
not respond within 30 days after service, and the requests for
admissions were deemed admitted.
19
Argument and Citation of Authority
The Trustee brings this adversary proceeding pursuant to 11
U.S.C. § 544 and O.C.G.A. § 18-2-70 et seq., the Uniform Fraudulent
Transfers Act. “Under 11 U.S.C. § 544(b), a trustee in bankruptcy
may ‘step into the shoes’ of an unsecured creditor and void a
transfer of an interest in the debtor’s property that the unsecured
creditor would have the power to void under federal or state law.”
Westgate Vacation Villas, Ltd. v. Tabas (In re International
Pharmacy & Discount II, Inc.), 443 F.3d 767, 770 (11th Cir. 2005).
O.C.G.A. § 18-2-77 provides that a creditor may avoid a fraudulent
transfer, subject to certain statutory limitations, to the extent
necessary to satisfy the creditor’s claim.
A transfer made ... by a debtor is fraudulent
as to a creditor whose claim arose before the
transfer was made ... if the debtor made the
transfer ... without receiving a reasonably
equivalent value in exchange for the transfer
... and the debtor was insolvent at that time
or the debtor became insolvent as a result of
the transfer ... .
O.C.G.A. § 18-2-75(a). “A debtor is insolvent if the sum of the
debtor’s debts is greater than all of the debtor’s assets, at a
fair valuation.” O.C.G.A. § 18-2-72(a). “A debtor who is
generally not paying his or her debts as they become due is
presumed to be insolvent.” O.C.G.A. § 18-2-72(b).
Nova has admitted that International Biochemical had at least
one unsecured creditor at the time of the transfers at issue.
Furthermore, there can be no question about International
15 These elements of the Trustee’s case were also admitted by
Nova when it did not serve a timely response to the Trustee’s
First Requests for Admissions. Fed. R. Civ. P. 36(a), made
applicable to this adversary proceeding by Bankruptcy Rule 7036.
20
BioChemical’s insolvency at the time of the transfer of its
intellectual property to Nova. Dr. Kevin Smith, who was an officer
and director of International BioChemical, admitted that
International BioChemical was insolvent. Nova Deposition, pp. 11,
12, 13-14. He testified that there was never a time when the total
amount of its assets exceeded its liabilities. Nova Deposition, p.
13. He further testified that on a regular basis International
BioChemical was behind in paying its bills from 2000 until the
filing of bankruptcy. Nova Deposition, pp. 13-14.
On June 30, 2002, the total amount of current liabilities was
$4,649,548; total assets were only $574,609. International
BioChemical Annual Report, p. F-3. Furthermore, International
BioChemical was in default on a $1,000,016 line of credit.
International BioChemical Annual Report, p. F-12, Note 5. On
September 30, 2002, International BioChemical’s current liabilities
had increased to $4,793,887; total assets had fallen to $386,798.
International BioChemical September 30, 2002 Quarterly Report, p.
3. On December 31, 2002, International BioChemical’s current
liabilities had further increased to $6,593,906; total assets had
further declined to $275,339. International BioChemical December
31, 2002 Quarterly Report, p. 3.15
21
The final element the Trustee must prove to avoid the
fraudulent transfer is that International BioChemical did not
receive “reasonably equivalent value” for the transfer of its
intellectual property to Nova.
Where the facts and circumstances of the
transaction indicate a collusive sale, as they
do here, a lack of reasonably equivalent value
is established by even a minuscule disparity
between the value given up and the value
received. See Ames Department Stores, Inc. v.
Wertheim Schroder & Co. (In re Ames Department
Stores, Inc.), 161 B.R. 87, 90 (Bankr.
S.D.N.Y. 1993) (denying the transferee’s
motion for summary judgment where the value
received by the debtor was worth 97.875% of
the value given up).
Breeden v. L.I. Bridge Fund, LLC (In re The Bennett Funding Group,
Inc.), 232 B.R. 565, 572 (Bankr. N.D.N.Y. 1999). Here, the same
person, Timothy C. Moses, was the founder, a member of the board of
directors, the Chairman of the Board, President, Chief Executive
Officer, Secretary and Treasurer of the transferor, International
BioChemical, and the Chairman of the Board of the transferee, Nova,
from its inception through the date of transfer. His children were
the principal owners of the transferee, Nova.
The transfer was not publicly disclosed for months after the
transfer. Although the agreement to transfer the patent rights and
EPA registrations was purportedly signed on July 5, 2002, it was
not disclosed in the SEC filings for International Biochemical and
Nova’s predecessor, Healthcare Network Solutions, until the
quarterly reports for the fiscal quarter ended December 31, 2002
22
were filed in early 2003. International BioChemical December 31,
2002 Quarterly Report, pp. 7-8; Healthcare December 31, 2002
Quarterly Report, p. 13 and Exhibit 2.1, p. 4, section 2.8.
In its Answer Nova admitted that the date of the agreement to
transfer the patent rights and EPA registrations was July 5, 2002,
which is consistent with International BioChemical’s quarterly
report filed with the SEC for the fiscal quarter ended December 31,
2002, and Healthcare’s current report on Form 8-K, dated March 19,
2003, filed with the SEC on or about March 21, 2003. Answer,
paragraph 9; International BioChemical December 31, 2002 Quarterly
Report, p. 7; Healthcare March 19, 2003 Report, p. 2.
In its Answer, Nova also admitted that it signed Amendment A
September 20, 2002, Joint Venture Agreement/Clarifications and
Amendment to Original Agreement, by which International BioChemical
purportedly transferred to Nova all of International BioChemical’s
right, title, and interest in all intellectual property, including
certain listed patents and patent applications, and certain EPA
registrations not later than December 30, 2002, and it signed the
Joint Venture Agreement entered into September 20, 2002, by which
International BioChemical purportedly transferred to Nova all of
International BioChemical’s right, title, and interest in all
intellectual property, including certain listed patents and patent
applications, and certain EPA registrations. Answer, paragraphs
10-11.
23
At the Fed. R. Civ. P. 30(b)(6) deposition of Nova
Biogenetics, its designated representative, Dr. Kevin Smith was
asked “[d]o you know whether there was any transfer of intellectual
property from International Biochemical to Nova after January 17,
2000", he responded “[n]o, I don’t.” Nova Deposition, p. 19.
Later in the deposition Dr. Smith responded, “I don’t know the
exact terms of the agreement between [International BioChemical]
and Nova.” Nova Deposition, p. 46. At the end of the deposition,
Dr. Kevin Smith was asked, “[w]hat is your understanding of the
transaction ... in the sense of what did International Biochemical
give Nova and what did Nova provide in return.” Nova Deposition,
p. 56. Mr. Smith answered:
My understanding as of today in terms of
what we have gone through is transferring
shares and money to International for rights
to the patents and EPA [registrations] ...
[o]r the intellectual property.
Q. What money was transferred from Nova
to International Biochemical, if any?
A. Only what I read in here. There was
a promissory note.
Q. Do you know of any other moneys that
were paid?
A. There was a balance of $490,000.
There must have been some money
related to that.
Q. Do you know of any other moneys?
A. No, I don’t.
Nova Deposition, pp. 56-57. Dr. Smith’s evasive answers strongly
suggest that Nova has something to hide.
24
When asked why he signed two agreements as the president of
Nova to transfer the patents and EPA registrations, one of which
was dated July 5, 2002, and the other was dated September 20, 2002,
Dr. Smith’s answer was he did not know why one of the agreements
was dated July 5, 2002, and the other was dated September 20, 2002.
Nova Deposition, pp. 20-21. The September 20, 2002 date does not
appear in any of the SEC filings of International BioChemical,
Healthcare or Nova.
In Nova’s annual report for the fiscal year ended June 30,
2003, Nova states that the date was January 27, 2003, when it
purchased and received assignment from International BioChemical of
its entire rights, title and interest to certain identifiable
intellectual property as well as to applications therefrom and all
patents and extensions thereof. Nova Annual Report, p. F-12.
Besides these discrepancies in the reporting of the date of
the agreement to transfer the patent rights and EPA registrations,
there are also discrepancies in the reporting of the terms of the
transaction, particularly what, besides Nova stock, Nova was to
transfer to International BioChemical in return for its patent
rights and EPA registrations. In the International BioChemical
quarterly report for the fiscal quarter ended December 31, 2002,
International BioChemical reported that it received 500,000 shares
of Nova’s common stock (5,700,000 shares outstanding), and an
amount equal to $500,000 in cash, if Nova secures additional
25
capital of $2,000,000 or 25% of all monies raised until the
$500,000 is met and 20% of all the difference raised between
$3,000,000 and $5,000,000, secured by a $500,000 promissory note
bearing interest at 6% per annum due June 30, 2003. International
BioChemical December 31, 2002 Quarterly Report, p. 7.
Additionally, International BioChemical reported that it would
receive 5% of all gross sales of products sold by Nova using
technology jointly owned by the two companies and an exclusive
license agreement under which it was to have exclusive authority
throughout the world to manufacture and sell the former assigned
products of the company. Id.
In the Healthcare current report on Form 8-K, dated March 19,
2003, filed with the SEC on or about March 21, 2003, International
BioChemical was reported to have received, 500,000 shares of Nova’s
common stock, an agreement to pay International BioChemical an
amount equal to $500,000, up to a maximum of $1,000,000 depending
on the proceeds Nova receives in a private offering with the
minimum payment due on June 30, 2003, an agreement to pay
International BioChemical 5% of all gross sales of products sold by
Nova using technology jointly owned by Nova and International
BioChemical and an exclusive license agreement wherein
International BioChemical was granted an exclusive license
throughout the world to manufacture and sell the products assigned
to Nova. Healthcare March 19, 2003 Report, p. 2.
26
Healthcare reported on its Form 8-K, dated March 27, 2003,
filed with the SEC on or about April 27, 2003, that International
BioChemical only received a note obligation of $500,000 and 500,000
shares of Nova stock.
Nova reported in its annual report for the fiscal year ended
June 30, 2003 that International BioChemical received 500,000
shares of Nova’s stock and $500,000, “secured [sic] by a $500,000
promissory note bearing interest at 6% per annum due June 30,
2003.” Nova Annual Report, p. F-12. Additionally, Nova was to pay
5% of all gross sales of the product sold by using the intellectual
property. Id.
In its quarterly report for the fiscal quarter ended March 31,
2006, Nova reported that International BioChemical received the
payment of maintenance fees and the transfer of Nova stock. Nova
March 31, 2006 Quarterly Report, p. 9.
The SEC filings of International BioChemical, Healthcare, and
Nova are inconsistent as to what value, if any, International
BioChemical received for its patent rights and EPA registrations,
which Nova reported in its Form 8-K, dated March 27, 2003, filed
with the SEC on or about April 27, 2003, had a total value of
$2,062,500.
Although his testimony was not entirely clear or consistent,
Nova’s Rule 30(b)(6) witness, Dr. Kevin Smith, seemed to adopt as
accurate the report of the transaction contained in the Healthcare
27
current report on Form 8-K, dated March 19, 2003, filed with the
SEC on or about March 21, 2003, which he signed. Nova Deposition,
pp. 43-44, 45, 46. According to that report, International
BioChemical received 500,000 shares of Nova stock and two promises,
neither of which Nova kept: (1) to pay International BioChemical an
amount equal to $500,000, up to a maximum of $1,000,000 depending
on the proceeds Nova receives in a private offering, and (2) to pay
International BioChemical 5% of all gross sales of products sold by
Nova using technology jointly owned by Nova and International
BioChemical. Healthcare March 19, 2003 Report, p. 2; Nova
Deposition, pp. 56-57; Baker Declaration, paragraph 6.
To determine whether International BioChemical received
reasonably equivalent value for its $2,062,500 in assets, the value
it received in return must be examined at the time of the transfer.
Koch v. Rogers (In re Broumas), Nos. 97-1182 and 97-1183, 1998 U.S.
App. LEXIS 3070 (4th Cir. Feb. 24, 1998). At the time Nova had just
been incorporated and was not yet registered to transact business
in Georgia. Healthcare March 19, 2003 Report, p. 2; Nova
Deposition, Exhibit 2. It was just getting off the ground. Nova
Deposition, p. 45. At the time Nova had no assets and no
liabilities; it existed only on paper. Baker Declaration,
paragraph 3. Accord, Nova Deposition, p. 18. It did not have a
bank account until December, 2002. Baker Declaration, paragraph 4.
Nova did not have the ability to deliver on its unperformed
28
promises. Nova Deposition, p. 43. These promises cannot
constitute reasonably equivalent value.
[T]he debtor must have “received” the value in
question “in exchange” for the transfer or
obligation at stake. An unperformed promise
to pay ..., after the debtor has completed the
transfer or incurred the obligation, cannot
satisfy the concept of a fair exchange. The
requirement that the debtor must have
“received” the value in question expresses a
temporal condition demanding an element of
contemporaneity in the determination of
whether something close to the reasonable
equivalence has been exchanged. Full
performance on the debtor’s part in return for
an executory promise to perform on the other
party falls short of the requisite standard of
equivalent worth at the time of the
transaction.
Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.), 263 B.R.
406, 466-67 (S.D.N.Y. 2001)(construing 11 U.S.C. § 548).
“[R]easonably equivalent value” will not lie
when the debtor receives only an illusory
promise in return for her tender. In Mellon
Bank, N.A. v. Official Comm. Of Unsecured
Creditors of R.M.L. (In re R.M.L.), 92 F.3d
139 (3d Cir. 1996), for example, the Third
Circuit recognized that while a future return
on an investment could constitute “reasonably
equivalent value” for the initial purpose,
there must be some legitimate and reasonable”
chance of return. R.M.L., 92 F.3d at 152.
Frank v. Kiesel (In re Denison), 292 B.R. 150, 154 (E.D. Mich.
2003).
According to the Nova’s annual report for the fiscal year
ended June 30, 2003, Nova had promised to pay $500,000 and 5% of
all gross sales of the product sold by using the intellectual
29
property. Nova Annual Report, p. F-12. The $500,000 payment was
secured by a $500,000 promissory note bearing interest at 6% per
annum due June 30, 2003. Id. The balance of this note as of June
30, 2003 was $490,904 and it was past maturity. Id. This
reduction in principal of approximately $10,000 was all that Nova
ever paid to International BioChemical pursuant to its promises.
Nova Deposition, pp. 56-57.
The only other conceivable value International BioChemical
received for its transfer of $2,062,500 in assets was the value of
the 500,000 shares of Nova stock. This stock had no market and no
value. Baker Declaration, paragraph 3.
In general, stock as an asset has value
because of its capacity to generate cash flows
in the future. Shareholders may expect to
receive future cash flows from the stock in
three ways: (1) as dividends when corporate
profits are periodically distributed to the
company’s shareholders; (2) as capital
appreciation (or decline) when the stock is
sold at some point in the future for a profit
(or loss); and/or (3) as liquidation
distributions when, upon dissolution of the
company, the shareholders receive the residual
value of the company’s assets after all
creditor claims have been satisfied. In
financial terms, the value of the stock on any
given day (its present value”) is how much
money an investor would be willing to pay on
that given day in order to obtain the right to
receive the stock’s cash flows in the future.
See also Beerly v. Dept. of Treasury, 768 F.2d
942, 946 (7th Cir. 1985), cert. denied, 475
U.S. 1010, 89 L. Ed. 2d 301, 106 S. Ct. 1184
(1986).
In re Prince, 85 F.3d 314, 319 (7th Cir. 1996) (footnote omitted).
30
Stock in an insolvent company is worthless. Chapman v. Baldi (In
re Gropman, Inc.), No. 02 C 4058, 01 A 479 & 98 B 19860, 2002 U.S.
Dist. LEXIS 15654 (N.D. Ill. Aug. 23, 2002).
At the time of the transfer of International BioChemical’s
patents and EPA registrations, Nova had just been incorporated and
was not yet registered to transact business in Georgia. Healthcare
March 19, 2003 Report, p. 2; Nova Deposition, Exhibit 2. On July
8, 2002, it had no assets and no liabilities; it existed only on
paper. Baker Declaration, paragraph 3. Accord, Nova Deposition,
p. 18. Its stock had no market and no value. Id. It was not
until December 2002 that Nova had the money to open a bank account.
Baker Declaration, paragraph 4. Before its reverse merger with
Healthcare on March 19, 2003, Nova was reported to be a development
stage company with four employees. Healthcare March 19, 2003
Report, p. 2. The 500,000 shares of Nova stock International
BioChemical received was not reasonably equivalent in value to the
$2,062,500 in assets it gave up. Therefore, this Court should
avoid the transaction.
31
Conclusion
International BioChemical Industries, Inc. did not receive
reasonably equivalent value for the transfer of its patent rights
and EPA registrations to Nova BioGenetics, Inc. It gave up assets
worth $2,062,500 and in return received 500,000 shares of stock in
a company that only existed on paper with no assets, liabilities,
or even a bank account, and two empty promises to pay $500,000 and
5% of the gross proceeds from the sale of products using its
assets. At the time International BioChemical was insolvent and
had at least one unsecured creditor. Pursuant to 11 U.S.C. § 544
and O.C.G.A. § 18-2-70 et seq., the Uniform Fraudulent Transfers
Act, this Court should avoid the transfer and order Nova
BioGenetics to transfer the patent rights and EPA registrations
back to International BioChemical.
Respectfully submitted,
/s/
James R. Schulz
Georgia Bar No. 630274
Attorney for Trustee
Ragsdale, Beals, Hooper &
Seigler, LLP
2400 International Tower
Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303-1629
(404) 588-0500
CERTIFICATE OF SERVICE
I certify that I have this day served the Memorandum of Law in
Support of Trustee’s Motion for Summary Judgment by mailing a copy
to:
G. Michael Smith
Dean, Smith & Therrall, P.A.
2340 Perimeter Park Drive, Suite 201
Atlanta, Georgia 30341
This 21st day of July, 2006.
/s/
JAMES R. SCHULZ
Attorney for Trustee
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