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PROTOCOMM CORP. v. NOVELL

June 25, 1999

PROTOCOMM CORP., PLAINTIFF,
v.
NOVELL, INC. ET AL., DEFENDANTS.



The opinion of the court was delivered by: Lowell A. Reed, Jr., Senior District Judge.

  MEMORANDUM

Before the Court is the motion to dismiss of defendants David L. Nelson, Cornelius A. Ferris, Premkumar Uppaluru, Aeneas Venture Corporation, Edelson Technology Partners II, L.P., Olivetti Holding, N.V., Technologies for Information & Publishing, L.P., ASCII Corporation, Cirrus Logic, Inc. and Intel Corporation (collectively referred to as the "Former Fluent Shareholders").*fn1 Based on the following, the motion will be denied.

I. BACKGROUND

This case is the third generation lawsuit springing from a breach of contract dispute between plaintiff ProtoComm Corporation ("ProtoComm") and Fluent, Inc., now Novell Advanced Services ("Fluent"). In January of 1993, ProtoComm filed a lawsuit against Fluent alleging a breach of an agreement to develop a video server software. ("ProtoComm I"). On July 24, 1996, a jury returned a verdict in ProtoComm I in favor of ProtoComm and against Fluent for $12.5 million. The verdict was affirmed by the Court of Appeals for the Third Circuit on October 29, 1997.

The details of ProtoComm I and the lawsuit that followed, ProtoComm II, have been extensively reported by this Court and will not be repeated here. The following facts are pertinent to the resolution of the pending motions and are gleaned from the allegations of the complaint in this litigation, ProtoComm III.

ProtoComm alleges that while litigation in ProtoComm I was pending, Novell, Inc. ("Novell") and Fluent made plans for Novell's acquisition of Fluent. In letters of intent dated in the spring of 1993, Novell and Fluent indicated that Novell would acquire all the assets and obligations of Fluent through a merger. (Complaint ¶¶ 21-23). According to an agreement approved by Fluent's board of directors on June 4, 1993, Fluent would be the surviving corporation of the merger as a wholly owned subsidiary of Novell. (Complaint ¶ 24). The agreement also provided that as a condition precedent to the merger, ProtoComm I must have been resolved. (Complaint ¶ 25). The shareholders of Fluent were informed of this condition precedent in a proxy statement around June 4, 1993. (Complaint ¶ 26).

ProtoComm alleges that despite this condition precedent, the merger was consummated on July 7, 1993. (Complaint ¶ 28). However, the merger was restructured as a stock acquisition/merger, whereby Novell purchased all of Fluent's stock for approximately $17.5 million which was paid directly to the shareholders, not to Fluent's treasury. (Complaint ¶ 29). ProtoComm alleges that Novell took complete control over Fluent's assets and made all key decision with respect to Fluent's business after the stock acquisition. (Complaint ¶ 57).

ProtoComm alleges that Novell's acquisition of Fluent was deliberately structured to leave Fluent with no assets to meet the potential judgment against it in ProtoComm I. (Complaint ¶ 31). As a result of the merger, Fluent was left as "a shell corporation, wholly controlled by Novell, with no assets, no employees, no meaningful business activities of its own, no board of directors, and no observance of corporate formalities." (Complaint ¶ 35).

Count I and Count V allege claims against the Former Fluent Shareholders and are the only counts at issue in the pending motion. Count I is a claim for fraudulent transfer. ProtoComm alleges that the actions of Novell, Fluent, and the Former Fluent Shareholders were done with "the actual intent to hinder, delay or defraud ProtoComm in the collection of its $12.5 million judgment against Fluent." (Complaint ¶ 38). Further, ProtoComm alleges that the defendants knew that restructuring the merger into a stock acquisition would leave Fluent with "no or unreasonably small assets and capital and with no ability to pay its obligation to ProtoComm." (Complaint ¶ 40).

Count V is a claim for wrongful dividends. ProtoComm alleges that although the transaction was characterized as a stock acquisition, in reality, Novell acquired all of the assets of Fluent without paying money into Fluent's treasury. (Complaint ¶ 70). Because Novell paid the money to the shareholders of Fluent, ProtoComm alleges that the payment amounted to a payment of dividends that were not paid out of Fluent's surplus or net profits and which left Fluent with no assets, with unreasonably small capital, and unable to meet its obligation to ProtoComm. (Complaint ¶¶ 72-74).

II. PRINCIPAL ARGUMENTS OF THE PARTIES

First, the Former Fluent Shareholders argue that the claims against them should be dismissed as barred by the statute of limitations. In addition, the Former Fluent Shareholders argue that the allegations against them for fraudulent conveyance do not state a claim upon which relief may be granted because ProtoComm did not allege a transfer of assets that involved the Former Fluent Shareholders, only a sale of stock. Similarly, the Former Fluent Shareholders argue that the claim for wrongful dividend should be dismissed for failure to state a claim because ProtoComm did not allege that Fluent paid a dividend or distribution to them in connection with the stock transaction.

ProtoComm contends that its claims are not barred by the statute of limitation because the applicable two year limitation period began to run when it obtained a judgment against Fluent and not from the date of the alleged fraudulent conveyance. As for the claims for fraudulent conveyance and wrongful dividend, ProtoComm argues that while the transaction between Novell and the Former Fluent Shareholders was a sale of stock only, the court should collapse all of the transactions among Fluent, the Former Fluent Shareholders, and Novell into one integrated transaction to determine whether its allegations are sufficient to state a claim.

III. STANDARD FOR A MOTION TO DISMISS*fn2

Rule 12(b) of the Federal Rules of Civil Procedure provides that "the following defenses may at the option of the pleader be made by motion: (6) failure to state a claim upon which relief can be granted." In deciding a motion to dismiss under Rule 12(b)(6), a court must take all well pleaded facts in the complaint as true and view them in the light most favorable to the plaintiff. See Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969). A complaint should be dismissed if "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984).

IV. ANALYSIS*fn3

A. Pennsylvania Uniform Fraudulent Conveyances Act*fn4

Section 359 of PAUFCA,*fn5 entitled "Rights of creditors whose claims have matured," provides in pertinent part:

  (1) Where a conveyance or obligation is fraudulent as
  to a creditor, such creditor, when his claim has
  matured, may, as against any person except a
  purchaser for fair consideration without knowledge of
  the fraud at the time of the purchase, or one who ...

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