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Xyience Dismissal of UCC

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					Case: 08-01094-mkn

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Entered on Docket October 17, 2008
__________________________________ Hon. Mike K. Nakagawa United States Bankruptcy Judge

5 ___________________________________________________________ 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 2008. The appearances of counsel and the parties were noted on the record. The matter was 24 taken under submission after presentation of oral arguments. 25 26 27 28
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UNITED STATES BANKRUPTCY COURT DISTRICT OF NEVADA ****** In re: ) ) XYIENCE INCORPORATED, a Nevada ) corporation, ) Debtor. ) ____________________________________ ) ) THE OFFICIAL COMMITTEE OF ) UNSECURED CREDITORS OF ) XYIENCE, INCORPORATED, ) ) Plaintiff, ) v. ) ) ZYEN, LLC, a Nevada limited liability ) company, ) ) Defendant. ) ____________________________________ ) BK-S-08-10474-MKN Chapter 11

Adversary No. 08-1094 Date: June 11, 2008 Time: 9:30 a.m.

MEMORANDUM DECISION ON MOTION OF ZYEN, LLC, TO DISMISS ADVERSARY PROCEEDING Defendant Zyen, LLC’s Motion to Dismiss Adversary Proceeding was heard on June 11,

BACKGROUND1 In the text and footnotes of this Memorandum Decision, all references to “Section” shall be to the provisions of the Bankruptcy Code appearing in Title 11 of the United States Code, unless otherwise indicated. All references to “FRCP” shall be to the Federal Rules of 1

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On January 3, 2008, an involuntary Chapter 11 proceeding was commenced against Xyience Incorporated, a Nevada corporation (“Xyience”). Thereafter, Xyience commenced a voluntary Chapter 11 proceeding on January 18, 2008. On January 31, 2008, the involuntary proceeding, denominated Case No. BK-S-08-10049, was dismissed by stipulation, and the voluntary Chapter 11 proceeding went forward with Xyience as the debtor-in-possession. On February 19, 2008, an Official Committee of Unsecured Creditors (“Committee”) was appointed in the Chapter 11 proceeding pursuant to Section 1102. On March 3, 2008, a stipulation for use of cash collateral between Xyience and Zyen (“Cash Collateral Stipulation”) was approved on a final basis. On March 31, 2008, the Committee commenced the above-captioned adversary proceeding against Zyen, LLC, a limited liability company (“Zyen”) formed under Nevada law. The adversary complaint (“Complaint”) is framed as three separate claims for relief: (1) equitable subordination pursuant to Section 510(c) and/or re-characterization of debt as equity, (2) lender liability, and (3) breach of fiduciary duty. On April 7, 2008, an order was entered in the Chapter 11 proceeding granting Xyience’s motion to sell its business operations free and clear of liens (“Asset Sale”) pursuant to Sections 363, 105 and 549. Included in the order was the assumption and assignment of certain agreements pursuant to Section 365. The Asset Sale did not include any claims and choses of action belonging to the Xyience bankruptcy estate. On May 2, 2008, Zyen filed a motion to dismiss (“Dismissal Motion”) the proceeding under FRCP 12(b)(1) and FRCP 12(b)(6). A written objection was filed by the Committee (“Opposition”) and Zyen filed a written reply (“Reply”).2 On the same date the Committee filed its Opposition, a proposed Plan of Reorganization (“Proposed Plan”) was filed by Xyience in the

Civil Procedure. All references to “Rule” shall be to the Federal Rules of Bankruptcy Procedure, unless otherwise indicated. In this Memorandum Decision, the legal memoranda submitted by the parties will be cited by page and line numbers, separated by a colon. For example, “Document at 4:9-12", would mean page 4, lines 9 through 12 of the memorandum identified. 2
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Chapter 11 proceeding. APPLICABLE LEGAL STANDARDS Under FRCP 12(b)(1), a proceeding may be dismissed for lack of subject matter jurisdiction if the plaintiff lacks standing to sue. The court lacks subject matters jurisdiction if the plaintiff is not a person aggrieved to have constitutional standing under Article III to seek relief. If the plaintiff is a person aggrieved to meet the threshold of constitutional standing, then dismissal for lack of standing under a particular statute is properly addressed under FRCP 12(b)(6). See Canyon County v. Syngenta Seeds, Inc., 519 F.3d 969, 975 n.7 (9th Cir. 2008). Under FRCP 12(b)(6), incorporated by reference under Rule 7012, an action may be dismissed if it “fails to state a claim for which relief may be granted.” The allegations of the

complaint (or counterclaim) must be construed in the light most favorable to the plaintiff and all well-pleaded factual allegations are accepted as true. See Cahill v. Liberty Mutual Insurance Co., 80 F.3d 336. 337-38 (9th Cir. 1996). General or vague allegations are not enough to withstand a motion to dismiss. See Funderburk v. McDaniel, 2007 WL 4191963 at *2 (D. Nev. November 21, 2007). In Bell Atlantic Corporation v. Twombly, ___ U.S. ___, 127 S.Ct. 1955 (2007), the Court recently observed as follows: “While a complaint...does not need detailed factual allegations, a plaintiff’s obligation to provide the ‘grounds for his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of elements of a cause of action will not do...Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” 127 S.Ct. at 1965. To avoid being dismissed for failure to state a claim, the complaint must set forth “...enough facts to state a claim for relief that is plausible on its face...” 127 S.Ct. at 1974. See, e.g., In re Friedman’s Inc., 385 B.R. 381, 410 (S.D.Ga. 2008). Dismissal without leave to amend is proper if it is clear that the complaint could not be saved by an amendment. See Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1051 (9th Cir. 2008), citing Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003).

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DISCUSSION Causes of action against third parties are property of the debtor’s bankruptcy estate. See 11 U.S.C. § 541(a)(1). See also Sierra Switchboard Co. v. Westinghouse Electric Corp., 789 F.2d 705, 707 (9th Cir. 1986). A claim involving a generalized harm to all creditors constitutes property of the bankruptcy estate, while a claim that involves an individualized harm to a specific creditor is not property of the bankruptcy estate. See Schnelling v. Thomas (In re Agribiotech, Inc.), 319 B.R. 216, 220-21 (Bkrtcy.D.Nev. 2004). A Chapter 11 debtor-inpossession has the rights of a trustee in bankruptcy. See 11 U.S.C. § 1107(a). A bankruptcy trustee has capacity to sue on behalf of the bankruptcy estate, see 11 U.S.C. section 323(a), and has the exclusive right to sue on claims belonging to the estate. See Estate of Spirtos v. San Bernardino County Superior Court (In re Spirtos), 443 F.3d 1172, 1175 (9th Cir. 2006). Other parties may be authorized by the bankruptcy court to sue on claims belonging to the bankruptcy estate, but only after obtaining express permission to do so on cause shown. See In re Permatex, Inc., 199 F.3d 1029, 1031 (9th Cir. 1999), citing In re Curry and Sorensen, Inc., 57 B.R. 824, 828 (B.A.P. 9th Cir. 1986)3. Here, the Complaint includes claims for relief allege generalized harms to all creditors and therefore constitute property of the Xyience bankruptcy estate. None of the claims were sold in the Asset Sale and all remain with the debtor-in-possession. The Committee has never sought nor obtained approval of the Court to pursue the claims.4 Because of the Committee’s failure to seek authority to pursue the estate’s causes of action, Zyen argues that the Committee lacks

In concluding that various creditors lacked standing to bring a fraudulent transfer action in a Chapter 11 proceeding, the appellate panel in Curry and Sorensen observed “that even creditors’ committees organized under 11 U.S.C. § 1102 must also secure prior court approval before instituting such suits.” 57 B.R. at 828 n.3. At the hearing, counsel for the Committee suggested that the Court could grant permission to the Committee to commence the adversary proceeding on a nunc pro tunc basis. While such authority may be available, the Committee has not demonstrated a sufficient basis for the authority to be exercised. 4
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standing to pursue the claims for relief set forth in the Complaint5. In its written objection, the Committee makes three arguments: (1) that under the Cash Collateral Stipulation, the Committee is an “interested third party” that has the right to challenge the validity of Zyen’s lien against the assets of the estate, see Opposition at 10:4 to 11:2, (2) that creditors committees may be excused from seeking prior court permission where a demand upon the debtor to pursue an action would be futile, see Opposition at 11:3 to 12:15, and (3) that retroactive standing should be granted since Xyience’s interest in pursuing claims against Zyen were minimized as a result of the Asset Sale. See Opposition at 12:16-24. All of these arguments fail. For the purpose of challenging the validity of Zyen’s prepetition lien against the Debtor’s assets, it does not appear that the Liquidating Trust would be any less an “interested third party” than the Committee under the Cash Collateral Stipulation. Both the Committee and the Liquidating Trust are postpetition entities that would be asserting no greater claims than those that could be asserted by Xyience. More important, none of the substantive arguments raised by Zyen, see Dismissal Motion at 7:6 to 13:8 and Reply at 3:2 to 5:27, are based on any admissions or waivers by Xyience allegedly contained in the Cash Collateral Stipulation. Thus, if Xyience had commenced the instant adversary proceeding rather than the Committee, Zyen could be asserting the same defenses and raising the same arguments on the merits of the asserted claims as it is in the current proceeding. Contrary to the Committee’s suggestion, there is no apparent “futility” in making demand upon Xyience to pursue claims against Zyen since the claims set forth in the Complaint are being assigned for prosecution, if at all, to a liquidating trust under the Proposed Plan. Under Article 1, Section 1.1.6, “Assets” administered under the Proposed Plan include all “Litigation Claims”

Zyen makes no argument that the Committee fails to meet the minimal constitutional threshhold for Article III standing. To the extent the Committee is alleging that Zyen’s purported conduct has caused damage to its unsecured creditor constituents, the lesser burden of constitutional standing arguably has been met. This “preliminary conclusion” is not final, but permits the Court to address whether the Committee possesses statutory standing to pursue the claims asserted in the Complaint. See Canyon County v. Syngenta Seeds, Inc., supra. 5

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and other property of the estate. Section 1.1.46, defines “Litigation Claims” to include the instant adversary proceeding and others. Under Article 5, Section 5.1.5, all Assets of the bankruptcy estate, including all rights to prosecute the Litigation Claims, are to be assigned to a Liquidating Trust. Article 7, Section 7.1, provides for the Liquidating Trust to be the representative of the bankruptcy estate to retain and enforce the Assets of the estate, including Litigation Claims. Under Section 7.2(i), the Liquidating Trustee is allowed to continue or institute any actions which were or otherwise could have been brought by the bankruptcy estate and the Liquidating Trustee is allowed to settle such actions only with bankruptcy court approval on noticed hearing.6 Nothing in the proposed Plan prohibits the Committee from seeking removal of the Liquidating Trustee in the event the Liquidating Trustee improperly fails to pursue the Litigation Claims, or from seeking court authorization to pursue the claims upon the Liquidating Trustee’s improper failure to do so. Under these circumstances, the Committee lacks standing to pursue the claims alleged in the Complaint. The Committee’s failure to seek prior approval from Xyience before commencing the adversary proceeding is not excusable as an exercise in futility, nor is a grant of “retroactive standing” to the Committee appropriate. If the Committee demonstrates in the future that neither Xyience or a liquidating trustee will pursue meritorious claims against Zyen to the detriment of creditors, it may timely seek prior permission to do so. CONCLUSION For the reasons set forth above, the Motion to Dismiss Adversary Proceeding will be granted for lack of standing pursuant to FRCP 12(b)(6). A separate order has been entered concurrently herewith.

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Under this provision, the Liquidating Trustee does not need court approval to settle claims involving an original amount of less than $25,000. Because the Complaint involves a claim of Zyen in an amount in excess of $25,000, court approval would be required. 6

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Copies noticed through ECF to: MATTHEW E. MCCLINTOCK mmcclintock@bellboyd.com, sthoma@bellboyd.com MATTHEW C. ZIRZOW bankruptcynotices@gordonsilver.com, bknotices@gordonsilver.com LAUREL E. DAVIS ldavis@fclaw.com, mhurtado@fclaw.com;lgolonka@fclaw.com

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