IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
________________________________________
) In re: XTEND MEDICAL CORP., )
) Case No. 11-10428-CSS Debtor. )
) Chapter 7
________________________________________ )
DEBTOR’S RESPONSE TO MOTION OF U&I BIO-TECH, INC. AND SANG M. LEE A/K/A SAM LEE FOR RELIEF FROM THE AUTOMATIC STAY PURSUANT TO 11 U.S.C. §362(d) Debtor XTend Medical Corporation (“XTend”) hereby responds to the Motion of U&I Bio-Tech, Inc. and Sang M. Lee a/k/a Sam Lee ("Movants") for Relief from the Automatic Stay
Pursuant to Dismiss Case Pursuant to 11 U.S.C. §362(d) (the “Motion”) as follows:
1. Unsecured creditors such as Movants are rarely entitled to relief from the automatic stay, and then only in extraordinary circumstances. In re Eagle Enterprises, Inc., 265
B.R. 671, 680 (E.D. Pa. 2001); In re U.S. Physicians, Inc., 236 B.R. 593, 601 (Bankr. E.D. Pa.
1999).
2. Movants have not demonstrated extraordinary circumstances. First, movants only seek permission to litigate a claim to rescind a settlement agreement. A resolution of that issue
will not result in any right to the patents. Instead, it will only restore the underlying litigation,
which remains subject to the automatic stay. No discovery has been taken on the underlying litigation, nor have Movants demonstrated any possibility of success in that underlying
litigation.1 Finally, Movants have not established that their claims cannot be resolved through proceedings in this Court.
1 Principles of proper notice should preclude Movants from seeking relief from the automatic stay as to the underlying litigation at this time, as it is relief different from what they
request in their current motion.
FACTUAL BANKGROUND
3. XTend, a corporation publically-traded on the pink sheets since August 2007, had been engaged in the placement of home patient-monitoring devices.
4. On December 8, 2009, XTend entered into an Asset Purchase Agreement (the
“APA”) with Sang M. Lee and U&I Bio-Tech, Inc. (referred to herein collectively as “Mr. Lee”).
The APA, drafted by Mr. Lee’s attorney, provided that XTend would receive all rights in Mr.
Lee’s patented invention, the BioHarp, in exchange for 541,853,832 shares of common stock in XTend.
5. Mr. Lee did not perform all of the obligations required under the APA, including a complete transfer of all BioHarp assets to XTend. As a result of this dispute, XTend was required to retain legal counsel to assist in resolving this dispute. XTend retained Knobbe, Martens, Olsen & Bear, LLP (“KMOB”), a noted intellectual property firm. Because of XTend’s limited financial resources, the retention agreement required XTend to grant KMOB a security
interest in the patents XTend received under the APA (Ex. A), which interest was subsequently perfected by filing a UCC-1 statement with the Delaware Secretary of State. (Ex. B).
6. Mr. Lee decided that he no longer wanted to be bound by the APA, and by letter dated April 27, 2010, he purported to terminate the APA. As a consequence, XTend was required to initiate legal proceedings to require Mr. Lee to perform. XTend originally filed suit in California. However, Mr. Lee objected, pointing to the choice of venue provision in the APA, and so XTend dismissed the California action and filed suit in Delaware, retaining Morris Nichols Arsht & Tunnell, LLP, with KMOB serving as “of counsel.” (Ex. C). Mr. Lee filed a counterclaim seeking to rescind the APA and retain the patents. (Ex. D).
7. The parties agreed to mediate the dispute, and as a result the parties entered in an Enforceable Settlement Agreement (“ESA”) which provided that Mr. Lee would perform under the APA.
8. Shortly after the mediation, and before Mr. Lee had appointed any new directors as authorized under the ESA, Messrs. Lisenby and Friedman as sole directors passed a resolution amending XTend’s certificate of incorporation to increase the authorized number of shares of common stock so as to be able to meet the demands of any existing holders of preferred stock who wanted to convert their shares to common stock, and to make the capital structure more attractive for outside investors. Although the APA did not contain a non-dilution clause, and did not guarantee him control of XTend, he considered this a breach of the ESA.
9. On December 7, 2010, Mr. Lee filed a new action in the Court of Chancery. He did not seek specific enforcement of the ESA. Instead, he repudiated the ESA and sought rescission. (Ex. E).
10. XTend offered to give Mr. Lee additional shares to place him in the same ownership position he would have been in prior to the stock issuance or, alternatively, to rescind the stock issuance. He rejected those overtures. THE BALANCE OF EQUITIES SUPPORTS DENYING RELIEF
11. Movants ask that the stay be lifted to allow them to seek rescission of the ESA. However, such action will not divest XTend of the patents, or result in a judicial determination of
the value of Movants' claim in this Court. As such, it will neither resolve Movants' issues nor aid in the resolution of this bankruptcy proceeding. All it will do is potentially delay the bankruptcy proceeding and put Debtor to additional expense.
12. The issue of the underlying litigation, i.e., Mr. Lee's claim seeking to rescind the APA and take property of the Debtor, is a core proceeding. In re Domestic Fuel Corp., 79 B.R.
184, 197 (Bank. S.D.N.Y. 1987). As such, it is more appropriate and efficient to have this Court resolve the issue.
13. Considerations of judicial economy and efficient administration of the bankruptcy estate counsel in favor of the bankruptcy court deciding Movants' claims. Although Movants
suggest that discovery is completed in the Chancery litigation, this is misleading. Although discovery may be concluded as to the claim to rescind the ESA, discovery has not yet
commenced on the underlying litigation to determine the respective parties' rights to the patents (as it was avoided through settlement). Because the issue involves estate asserts and matters
closely related to the administration of the bankruptcy estate, it makes more sense to have those claims determined by this Court. Unnecessary delay in the administration of the bankruptcy
estate is therefore more likely if the claims proceed outside of this Court.
14. Having the matter determined by this Court will result in the most economical use of debtor and creditor resources. It is important to note that one creditor, KMOB, has a perfected
security interest in the patents at issue. KMOB is not a party to the action in the Court of Chancery, but has entered an appearance in this action as a creditor. Further, it is possible that
KMOB's security interest may exhaust XTend's equity, rendering any claim by Movants for rescission moot. Further, Movants will not be prejudiced simply by having to press their claims
in this Court as opposed to the Court of Chancery
15. Finally, Movants have not offered any evidence to suggest that they have even a slight probability of prevailing in the underlying litigation.
CONCLUSION
WHEREFORE, for the foregoing reasons, Debtor XTend Medical Corp. respectfully requests that the Court deny Movants Motion for Relief from the Automatic Stay.
Dated: August 24, 2011
Respectfully submitted,
/s/ David L. Finger___________________
David L. Finger (DE Bar ID #2556)
Finger & Slanina, LLC
One Commerce Center
1201 N. Orange St., 7th floor
Wilmington, DE 19801-1186
(302) 573-2525
Attorney for Debtor XTend Medical Corporation
CERTIFICATE OF SERVICE
I, David L. Finger, hereby certify that on this 24th day of August, 2011 the foregoing document was served via e-filing upon the below-listed parties and counsel:
Jeoffrey L. Burtch, Trustee
Cooch and Taylor, P.A.
P.O. Box 1680
Wilmington, DE 19899-1680
Mary Caloway, Esq.
Buchanan Ingersoll & Rooney PC
1105 North Market Street Suite 1900
Wilmington, DE 19801-1228
Kevin F. Brady, Esq.
Jeffrey C. Wisler, Esq.
Jeremy D. Anderson, Esq.
Connolly Bove Lodge & Hutz LLP
P.O. Box 2207
Wilmington, DE 19899-2207
/s/ David L. Finger___________________
David L. Finger (DE Bar ID #2556)
Finger & Slanina, LLC
One Commerce Center
1201 N. Orange St., 7th floor
Wilmington, DE 19801-1186
(302) 573-2525
AI
