In Re Winstar Communications Inc.

Filing 19

MEMORANDUM ORDER Denying Appeal and Affirming the Bankruptcy Court's Order dated 8/11/10, ***Civil Case Terminated. Signed by Judge Leonard P. Stark on 11/15/13. (ntl)

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

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INRE:
WINSTAR COMMUNICATIONS, INC., et al.,

Chapter 7
Bankr. Case No. 01-1430-KJC

Debtors.
WINSTAR HOLDINGS, LLC and IDT CORP.,
Plaintiffs,
Adv. Pro. No. 08-50296-KJC

V.

THE BLACKSTONE GROUP, LP, IMPALA
PARTNERS, LLC, and CITICORP.,
Defendants.
WINSTAR HOLDINGS, LLC, and IDT CORP.,
Appellants,
Civ. No. 10-839-LPS

v.
THE BLACKSTONE GROUP, LP, IMPALA
PARTNERS, LLC, and CITICORP,
Appellees.

MEMORANDUM ORDER
At Wilmington this 15th day of November, 2013, this matter coming before the Court
upon an appeal from an order ofthe Honorable Kevin J. Carey, U.S.B.J. (the "Appeal") (D.I. 1),
and having considered the parties' papers submitted in connection therewith;
IT IS ORDERED that the Appeal is DENIED, and the order of the Bankruptcy Court
dated August 11, 2010- "Order and Decree Denying Plaintiffs' Motion for Remand or
Abstention, Granting Defendants' Motions to Dismiss, and Dismissing Complaint" (the "Order")
-is AFFIRMED, for the reasons that follow:

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Background. 1 On April18, 2001, Winstar Communications, Inc. and certain of its
subsidiaries ("Old Winstar") filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code, 11 U.S.C. §§ 101, et seq., in the United States Bankruptcy Court for the

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District of Delaware (the "Bankruptcy Court"); the Chapter 11 cases later converted to ones
under Chapter 7. (See D.l. 2 Ex. 25, August 11,2010 Memorandum Opinion (the "Opinion"),
Adv. Pro. No. 08-50296-KJC, D.l. 48 at 4) Old Winstar had sold certain of its assets (the "Asset
Sale") pursuant to 11 U.S.C. § 363, to Winstar Holdings, LLC ("New Winstar") and IDT Corp.
("IDT") (together, "Plaintiffs" or "Appellants") in late 2001. (See Opinion at 1-2)
In connection with the Asset Sale, The Blackstone Group, LLC ("Blackstone") was
retained as Old Winstar's financial advisor, and Impala Partners, LLC ("Impala") was retained as
its restructuring advisor. (See Opinion at 2; see also D.l. 11 at 1, 6) Citicorp was Old Winstar's
largest creditor during bankruptcy. (See Opinion at 2; see also D.l. 11 at 1) (Blackstone, Impala
and Citicorp will be collectively referred to as "Defendants" or "Appellees.")
The subject adversarial action (the "Adversary Proceeding") arose out of the $42.5
million Asset Sale from Old Winstar to New Winstar and Defendants' roles in connection with
the deal. (See Opinion at 1-2) Plaintiffs challenged the deal by asserting claims against
Defendants for fraud, aiding and abetting fraud, negligent misrepresentation, negligence, and
civil conspiracy. (See Adv. Pro. No. 08-50296-KJC, D.l. 1, Opinion at 2; D.l. 2 Ex. a; see also
D.l. 9 at 2-3) Appellants summarize the history of their challenge as follows:

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More than three years have passed since the entry of the Bankruptcy Court Order that is
the subject of this Appeal; the appellate briefing was completed more than two years ago. The
parties have not provided the Court with any supplemental briefing, status report, or notice of
subsequent developments. Hence, the Court will decide the issues presented in this Appeal
solely on the basis of the briefing and record the parties created several years ago.
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[O]n May 10, 2007, [Plaintiffs] filed a Complaint in the
Supreme Court ofthe State ofNew York, County ofNew York,
asserting New York state law claims against [Defendants].
Plaintiffs requested a jury trial and alleged that Defendants, two of
which are headquartered in New York, were liable for
misrepresentations and omissions that occurred during meetings
held in New York prior to Plaintiffs' purchase of assets from [Old
Winstar], a bankrupt company headquartered in New York.
Defendants asserted bankruptcy jurisdiction under 28
U.S.C. § 1452(a) and removed the case to the United States
District Court for the Southern District of New York, which denied
Plaintiffs' Motion to Remand and granted Defendants' Motion to
Transfer to this Court. This Court then referred the case to the
United States Bankruptcy Court for the District of Delaware.

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The Bankruptcy Court denied Plaintiffs' Motion to Remand
and granted Defendants' Motion to Dismiss the Complaint as
barred by Delaware's three-year statute of limitations, which it
found applied because of the Delaware borrowing statute, 10 Del.
C.§ 8121.
(D.I. 9 at 1)
New Winstar filed a Notice of Appeal on August 25, 2010 (see D.l. 12 Ex. 27, Adv. Pro.
No. 08-50296-KJC, D.l. 51), which was entered on the docket ofthis Court on October 1, 2010

(see D.I. 1, 3). New Winstar seeks reversal ofthe Bankruptcy Court's Order (see D.l. 1, 2 Ex.
26, Adv. Pro. No. 08-50296-KJC, D.l. 49) and either equitable remand to New York State Court
under 28 U.S.C. § 1452(b) or permissive abstention under 28 U.S.C. § 1334(c)(2) (see generally
D.I. 9, 15; see also D.l. 2 at 19-20).
Contentions. On appeal, New Winstar argues that the Bankruptcy Court erred in applying
Delaware's statute oflimitations, 10 Del. C.§ 8106, and "borrowing statute," 10 Del. C.§ 8121,
to the Adversary Proceeding. (See generally D.l. 9, 15; see also D.l. 2 at 19-20) In Appellants'
view, New York has the "most significant" relationship to Plaintiffs' claims, so New York's

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longer six-year statute oflimitations should apply. (See D.I. 9 at 2, 7-8; D.I. 15 at 6-7)
Plaintiffs' complaint alleged that Defendants' misdeeds occurred during the due diligence period
ofNovember 30 through December 5, 2001. (See Adv. Pro. No. 08-50296-KJC, D.I. 2 Ex. A;
Opinion at 14; see also D.I. 9 at 2-3) The asset purchase agreement ("APA") was executed on
December 18, 2001 and approved by the Bankruptcy Court the next day; the Asset Sale closed on
December 20,2001. (See Adv. Pro. No. 08-50296-KJC, D.I. 2 Ex. A; Opinion at 14-15; see also
D.l. 9 at 3)
If New York's six-year statute of limitations is applicable, then Plaintiffs' May 2007
complaint was timely filed. Alternatively, if, as the Bankruptcy Court concluded, Delaware's
three-year statute of limitations applies, then Plaintiffs' claims are not timely and must be
dismissed.
Standard of review. Appeals from the Bankruptcy Court to this Court are governed by 28
U.S.C. § 158. Pursuant to§ 158(a), district courts have mandatory jurisdiction to hear appeals
"from final judgments, orders, and decrees" and discretionary jurisdiction over appeals "from
other interlocutory orders and decrees." 28 U.S.C. § 158(a)(1) and (3). In conducting its review
ofthe issues on appeal, the Court reviews the Bankruptcy Court's findings of fact for clear error
and exercises plenary review over questions oflaw. See Am. Flint Glass Workers Union v.
Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). "A finding is 'clearly erroneous' when
although there is evidence to support it, the reviewing court on the entire evidence is left with the
definite and firm conviction that a mistake has been committed." United States v. US. Gypsum
Co., 333 U.S. 364,395 (1948). The Court must "break down mixed questions oflaw and fact,
applying the appropriate standard to each component." Meridian Bank v. A/ten, 958 F.2d 1226,

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1229 (3d Cir. 1992).
Analysis. The Court agrees with the Bankruptcy Court that Delaware's three-year statute
oflimitations, and not New York's six-year statute oflimitations, applies to Plaintiffs' claims.
(See Opinion at 14-19)2 Delaware's borrowing statute provides, in pertinent part:

Where a cause of action arises outside of this state, an action
cannot be brought in a court of this State to enforce such a cause of
action after the expiration of whichever is shorter, the time limited
by the law of this State, or the time limited by the law of the state
or country where the cause of action arose, for bringing an action
upon such cause of action.
10 Del. C. § 8121. If Plaintiffs' causes of action arose in Delaware - because they arose out of
Old Winstar's bankruptcy case, which was pending in Delaware; "the due diligence performed in
this case was done as part of the sale process approved by this [Delaware] Bankruptcy Court,
using professionals employed with the approval ofth[e] [Delaware] Bankruptcy Court;" the
"Asset Sale under Bankruptcy Code§ 363 was an integral part ofthe Debtors' Delaware
bankruptcy case;" and "[a]lthough the Defendants were not parties to the APA, the Plaintiffs
agreed to resolve any disputes related to the APA in the Delaware Bankruptcy Court" (Opinion at

9, 11, 19)- then Delaware's three-year statute of limitations applies. Alternatively, even if the
causes of action are deemed to have arisen in New York, Plaintiffs' claims are still time-barred,
as these claims "cannot be brought in a court of this State to enforce such a cause of action after
the expiration" of"the time limited by the law of this State," which is shorter than "the time
limited by the law of the state ... where the cause of action arose."
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While it is apparently undisputed that the AP A requires New York substantive law to
apply to Plaintiffs' causes of action (see D.I. 9 at 6; D.I. 11 at 8 n.3), the Court agrees with the
Bankruptcy Court that the choice-of-law clause in the APA did not expressly mandate that New
York's statute oflimitations also apply (see Opinion at 17; see also D.I. 11 Ex. 1 at 27).
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Appellants' discussion of the Delaware Supreme Court's discussion in Saudi Basic Indus.

Corp. v. Mobil Yanbu Petrochemical Co., Inc., 866 A.2d 1, 16-17 (Del. 2005), does not alter the
outcome. 3 In Saudi Basic, the Court held that a literal application ofthe Delaware borrowing
statute was not appropriate when it would circumvent the purpose of the statute, adding that "the
overriding purpose of borrowing statutes ... is 'to prevent shopping for the most favorable
forum."' 866 A.2d at 15, 17. Under the circumstances presented here, the purpose of the
borrowing statute is promoted by application of the literal terms of the Delaware borrowing
statute. Otherwise, Plaintiffs could succeed in shopping for a forum with a longer statute of
limitations than should be applied given that their claims arise in Delaware and relate to the
bankruptcy proceedings in Delaware. See generally K&K Screw Prods., L.L.C. v. Emerick

Capital Invs., Inc., 2011 WL 3505354, at *15 n.96 (Del. Ch. Aug. 9, 2011) (recognizing that "in
certain situations, Delaware courts do not apply the borrowing statute, even though its literal
requirements may be satisfied, where such application would 'subvert' its overriding purpose,
which is to prevent a plaintiff from shopping for a favorable limitations period under Delaware
law as compared to the law of the state where the cause of action arose") (emphasis added).
That this case ended up in Bankruptcy Court in Delaware due to Defendants' exercise of
their right of removal and the granting of their motion to transfer does not compel a contrary
conclusion. As Appellees argue:

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While the Bankruptcy Court did not cite Saudi Basic - most likely because it was not
cited by the parties (see D.I. 9 at 1-2)- this Court has concluded that proper consideration of the
case does not warrant reversal of the Bankruptcy Court's Order.
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Indeed, the Saudi Basic court's rationale for not applying the
borrowing statute - in order to discourage forum shopping confirms why the Bankruptcy Court's interpretation of the
borrowing statute was manifestly correct, because Defendants
would not have had to move to transfer the case to Delaware if
Plaintiffs previously had not shopped for a forum with a more
favorable limitations period.
(D.I. 11 at 5) The Court further agrees with Appellees that, "Defendants were not shopping for a
more favorable forum when bringing the case to Delaware; they were transferring the case to the
only forum where Plaintiffs should have filed in the first instance. This dispositive fact
immediately distinguishes Saudi Basic and confirms that the Bankruptcy Court's application of
the borrowing statute was correct." (!d. at 13; see also Wins tar Holdings, LLC v. Blackstone
Group, L.P., 2007 WL 4323003, at *5 (S.D.N.Y. Dec. 10, 2007) (granting motion to transfer to

Delaware, as Plaintiffs' claims go "directly to the proper performance of duties by professionals
retained by the bankruptcy estate, with the approval of the Bankruptcy Court, ... bear[ing]
directly on the distribution of the debtor's estate"))
Appellants' request that, following reversal of the Bankruptcy Court's Order, their causes
of action not be returned to the Bankruptcy Court but, instead, be equitably remanded to the New
York State Court (see, e.g., D.l. 9 at 2; see also 28 U.S.C. § 1452(b)), is moot, given that the
Court has not reversed the Bankruptcy Court Order. Likewise, there is no basis for permissive
abstention. (See 28 U.S.C. § 1334(c); see generally Kerusa Co. LLC v. WI OZ/515 Real Estate
Ltd. P'ship, 2004 WL 1048239, at *3 (S.D.N.Y. May 7, 2004) ("Courts in this district have

treated the analysis under these two statutory provisions as essentially identical .... "))

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Conclusion. For the reasons stated, the Bankruptcy Court's August 11, 2010 Order
denying Appellants' request for remand or abstention and dismissing all claims against Appellees
is AFFIRMED. The Clerk of Court is directed to CLOSE this case.

Wilmington, Delaware

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