Opinion
Case No. 10-08505-PB7
04-27-2012
In re MICHAEL J. CONRAD, Debtor.
WRITTEN DECISION - NOT FOR PUBLICATION
ORDER ON MOTION FOR ORDER
APPROVING SALE OF ESTATE
ASSETS AND SETTLEMENT
The Trustee in this case seeks approval of a sale of estate assets to, and settlement with L-3 Services, Inc., and related parties (L-3). This sale/settlement is in connection with the sale of the assets of the Aries Associates, Inc., bankruptcy estate (Case No. 10-04338-PB7). Dr. Conrad and parties related to him (Conrad Parties) oppose the motion on several grounds, but primarily on the ground that the Aries bankruptcy estate does not own the assets to be sold and that, if it does, they are subject to a security interest in favor of Dr. Conrad and his wife, Dr. Cole (collectively the Conrads). As in the Aries case, the Court finds that the position now taken by the Conrad Parties is not supported by competent and admissible evidence. The Court also holds that the sales price, which was tested by extensive notice and the opportunity of overbid, is reasonable. Finally, the Court holds that the sale is proposed in good faith under § 363(m). Accordingly, and for the reasons discussed below, the Court grants the Trustee's motion and approves the proposed sale and settlement.
MOTION
The Trustee proposes to sell the bankruptcy estate's rights, title and interest in and to certain assets particularly described in the Asset Purchase Agreement between L-3 and the Trustee (the APA) and in the Motion. The assets to be sold were categorized as Subject Assets and Purchased Documents. Included in the Subject Assets is the estate's right, title and interest in and to certain intellectual property which is the subject of the ongoing litigation between L-3 and Aries ("Intellectual Property"). The proposed sales price is $15,000 and was subject to overbid. The proposed sale is free and clear of liens.
The Conrad Parties object primarily on the ground that the Intellectual Property was not owned by Aries, and hence are not assets of the Aries bankruptcy estate. Rather, argue the Conrad Parties, Aries holds a conditional, non-exclusive right to use the Assets and its ownership is conditional on repayment to Conrad and Cole of $1.8 million, which has not occurred. Alternatively, to the extent Aries owns the Intellectual Property, it is subject to a first priority security interest in favor of the Conrads.
BACKGROUND
Dr. Conrad is the President of Aries. Dr. Conrad and Dr. Cole are the sole owners of Aries. Since January of 2009 Aries and L-3 have been engaged in litigation in district court over ownership of certain decontamination technology (the "CDCA Litigation"). Generally speaking, Aries contends that its principal, Dr. Conrad, created the decontamination technology for chemical and biological weapons which he eventually called "AeROS," and that at least as of the date of the complaint, that technology was owned by Aries:
ARIES is the owner of certain patents, trademarks, and trade secrets protecting ideas and technology used in chemical and biological decontamination systems ... ARIES is the owner of certain patents, trademarks, and trade secrets protecting its AeROS... technologies used in chemical and biological decontamination systems.Corrected First Amended Complaint, L-3's Request for Judicial Notice (RJN) Ex. 3 at 2:13-20. In the CDCA Litigation, Aries, through Dr. Conrad, contended that development of what would become the AeROS technology began with Dr. Conrad's work at Chromagen, Inc., and that in March, 2005, he and Dr. Cole formed Aries and assigned to it all rights in the Chromagen technology. See L-3's RJN Ex. 4. In the March 2, 2009, Declaration of Michael J. Conrad, PH.D., in Support of Aries Associates, Inc.'s Motion for Preliminary Injunction, he reiterated under oath:
Pursuant to a secured credit agreement dated March 29, 2005, Chromagen assigned certain intellectual property rights, including patents, trademarks and trade secrets, to my wife Dr. Cole, and me. We, in turn, as-signed these rights to ARIES. To acquire Chromagen'sSee L-3's RJN Ex. 2 at 6:26-7:3.
intellectual property, ARIES agreed to assume responsibility for certain Chromagen debts of approximately $2.7 million.
L-3, on the other hand, has contended that the technology was created while Dr. Conrad was working for L-3 under "Work for Hire Contracts" and thus belongs to L-3. This battle was being waged in the CDCA Litigation when this bankruptcy case was filed.
On March 19, 2010 Conrad filed its chapter 7 petition. A day earlier, Dr. Conrad filed a chapter 7 petition on behalf of Aries. In the Aries case, the debtor scheduled the Intellectual Property as an asset of the estate. The Aries Trustee was able to negotiate a sale of the assets of the Aries bankruptcy estate, including the AeROS technology and the claims against L-3 asserted in the CDCA Litigation, to L-3, approval of which the Trustee sought in a concurrent motion. The Trustee in this case negotiated a sale of any interest the Conrad estate held in the same or similar assets, which L-3 desires for complete relief.
In response to the Motion the Conrad Parties now argue that Aries does not own the Intellectual Property or any of the assets. Rather, contend the Conrad Parties, Aries has a mere "conditional assignment" of the technology which is contingent upon payment to Conrad and Cole of the obligations assumed from Chromagen. They also argue that to the extent Aries owns the property, it is subject to a first-priority security interest in favor of the Conrads and that the Conrads were given a right of first refusal.
DISCUSSION
Before allowing a Trustee to sell assets of the estate, the Court must find that the estate owns the property to be sold. In re Popp, 323 B.R. 260 (9th Cir.BAP 2005); In re Rodeo Canyon, 362 F.3d 603 (9th Cir. 2004) .
Aries' Schedules, attested to under penalty of perjury by Dr. Conrad, state that Aries owns all of the assets to be sold in that case.
In Schedule B in this case, Dr. Conrad included under "Accounts receivable," "Money owing by Aries Associates, Inc. for patent licenses. Face amount approx. $1,800,000." The entry was amended to "Money owing by ARIES Associates, Inc. for patent and patent application assignments. Face amount approx. $1,800,000." However, in neither version is there an indication the claim is secured or that Dr. Conrad asserted a beneficial interest in the underlying Intellectual Property. Conrad's Schedule B also provided "Mr. Conrad may have rights intellectual property formerly owned by Chromagen, Inc. as a result of the corporate dissolution of that company," but the specific Intellectual Property, including AeROS, was not scheduled. Dr. Conrad scheduled no executory contracts. Nor was any putative asset in the form of a security interest, as required to be disclosed by a debtor. The Trustee is entitled to rely on a debtor's schedules. Hebbring v. U.S. Trustee. 463 F.3d 902, 908-09 (9th Cir. 2006).
A party asserting a competing interest in property to be sold under § 363 has the burden of proof on the issue of the validity, priority, or extent of such interest. 11 U.S.C. § 363(p)(2). The sole evidence upon which the Conrad Parties base their assertion that Aries does not own the beneficial interest in the Intellectual Property, or that the Conrads have a security interest therein, is a document entitled "Secured Debt Agreement" dated July 5, 2006 (SDA) and the declarations of Drs. Conrad and Cole based thereon.
As discussed in the "ORDER ON MOTION FOR ORDER APPROVING SALE OF ESTATE ASSETS AND SETTLEMENT," entered concurrently herewith in the Aries case (Aries Order), the Conrad Parties' position is based solely upon the a document entitled "Secured Debt Agreement" dated July 5, 2006 (SDA) and the declarations of Drs. Conrad and Cole based thereon. In the Aries Order the Court explained that the duplicate copy of the SDA proffered by the Conrad Parties was not admissible under Federal Rules of Evidence 1002 & 1003. For the same reasons as set forth in the Aries Order, the duplicate copy of the SDA is similarly not admissible in this case. Since the SDA will not be admitted, the Conrad Parties have not met their burden under 11 U.S.C. § 363(p)(2).
The Conrad Parties also argue that the sales price is insufficient. However, the sale was widely publicized and noticed and was subject to overbid, and neither the objecting parties nor anyone else submitted a qualifying bid. A public auction subject to overbid is an acceptable and common method of determining the market value of assets. In re Abbotts Dairies of Penn., Inc., 788 F.2d 143, 149 (3d. Cir. 1986). Notice of the sale was published and the parties most likely to be interested in the assets, including the Conrads, received notice of the proposed sale and an opportunity to overbid. The Conrad Parties submitted neither a valid overbid nor evidence of the value of the Subject Assets. The Court finds the sales price is fair and reasonable.
Likewise, there is no evidence that the deal struck between L-3 and the Trustee was other than a good faith arm's length deal. The Trustee has declared that the sales price and settlement were the result of negotiations with L-3, and the Court has no evidence or cause to discount that testimony.
With respect to the Purchased Documents, the Conrad Parties had objected that the scope was overly broad. At the hearing counsel for Dr. Conrad explained that any problems relating to the scope of the Purchased Documents could be resolved so long as he was given an opportunity to sign off on the order.
CONCLUSION
For all of the foregoing reasons and those set out in the Aries Order, the Court grants the Trustee's Motion and approves the sale of the Subject Assets and Purchased Documents to L-3 and the related settlement. Counsel for the Trustee or L-3 shall submit an order consistent herewith to counsel for the Conrad Parties for their signature within thirty (30) days of the entry of this Order. If the parties are unable to agree on a form of order counsel for the Trustee or L-3 shall lodge an order consistent herewith, to which opposing parties are free to object.
IT IS SO ORDERED.
__________________
PETER W. BOWIE, Chief Judge
United States Bankruptcy Court