Tera Xtal Technology Corp. v. GT Advanced Technologies Inc. et al
Filing
29
///OPINION. The bankruptcy court's (1) Memorandum of Decision, (2) Order denying TXT's administrative expense claim, and (3) Order granting Debtors' motion for summary judgment are affirmed. So Ordered by Judge Paul J. Barbadoro.(js) Modified on 2/14/2017 to add: /// (js).
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
Tera Xtal Technology Corp.
v.
Civil No. 16-cv-91-PB
Opinion No. 2017 DNH 024
GT Advanced Technologies, Inc., et al.
OPINION
GT Advanced Technologies Limited (“GTAT”) and affiliated
entities are the debtors-in-possession (the “Debtors”) in a
jointly administered Chapter 11 proceeding before the United
States Bankruptcy Court for the District of New Hampshire.
Tera
Xtal Technology Corp. (“TXT”), a creditor in the case, filed an
administrative expense claim that it argued was entitled to
priority pursuant to § 503 of the Bankruptcy Code.
The Debtors
challenged TXT’s claim, a discovery schedule was established, and
a deadline for the filing of dispositive motions was set.
After
discovery closed, the Debtors filed a motion for summary
judgment.
The bankruptcy court granted the motion and this
appeal followed.
When TXT was in bankruptcy court, it initially argued that
its damages were caused by GTAT’s postpetition breaches of
certain prepetition obligations.
In responding to the Debtors’
summary judgment motion, TXT later also claimed that its damages
were caused by GTAT’s postpetition negligence.
court rejected both claims.
The bankruptcy
On appeal, TXT challenges only the
disposition of its postpetition negligence claim.
The bankruptcy
court determined that TXT lost its right to pursue the negligence
claim because it failed to assert the claim until after discovery
had concluded and the Debtors had filed their summary judgment
motion.
The court alternatively rejected the claim on its
merits.
I affirm the bankruptcy court’s ruling.
I.
A.
BACKGROUND
Facts
TXT ordered a total of 98 advanced sapphire furnaces from
GTAT through a series of purchase agreements in 2011.
The
furnaces are used to produce sapphire crystal in the form of
cylinders called “boules.”
Portions of the boules can be of
sufficient quality to be used in commercial applications.
The
furnaces themselves are controlled by computers, which in turn
run software pre-installed by GTAT.
The furnaces do not function
without the software, and the software does not function without
license codes provided by GTAT.
After GTAT delivered thirty furnaces through early 2012, TXT
declined to buy the remaining furnaces because it claimed that
the delivered furnaces did not meet contractually established
2
performance standards.
In response, GTAT remotely deactivated
the license codes for the delivered furnaces.
ensued.
Arbitration
In August 2014, the arbitral tribunal rendered its
award, finding that ten of the delivered furnaces did not conform
to contract standards.
Accordingly, TXT did not have to pay for
the ten nonconforming furnaces or buy any of the furnaces that
had not yet been delivered.
Per the terms of the award, GTAT
also had to “disassemble and remove the 10 non-compliant
[furnaces] from TXT’s facility” and “deliver software licenses to
TXT with respect to the 20 [furnaces]” remaining with TXT.
Doc.
No. 24-4 at 407.
Later in August 2014, GTAT and TXT supplemented the arbitral
award with a separate settlement agreement.
In pertinent part,
the agreement required GTAT to make two payments to TXT and
“provide TXT with software licenses for the 20 [furnaces] that
the Tribunal determined were accepted by TXT.”
290–91.
Doc. No. 24-3 at
GTAT agreed to renew each software license annually and,
“[i]n the event the software ceases to function, . . . provide
whatever service is necessary to render the software
operational.”
Id. at 291.
To the extent the agreement and the
arbitral award conflicted, the agreement controlled.
Id. at 295.
GTAT made the first payment under the settlement agreement.
It also delivered a USB drive on September 30, 2014, containing
license codes for the twenty conforming furnaces.
3
It did not,
however, make the second payment or remove the ten nonconforming
furnaces from TXT’s property.
Instead, GTAT and affiliated
entities filed for Chapter 11 bankruptcy on October 6, 2014.
After GTAT filed for bankruptcy protection, TXT asked for
GTAT’s assistance in installing the license codes onto the twenty
conforming furnaces.
On November 13, 2014, GTAT installed codes
on two furnaces and TXT installed codes on the rest.
After the
parties completed this process, TXT “tried to power on those 20
machines, but the [control boards] of . . . three machines [were]
damaged.”
Hsu).
Doc. No. 24-6 at 551 (deposition of TXT director Peggy
TXT did not go any further in the furnace “initiation
process” with respect to the other seventeen furnaces at that
time because it feared damaging them.
Id.
In February 2015,
though, TXT did “tr[y] to turn on one machine, but there was . .
. no oil in the air pressure machine.”
Id. at 555.
GTAT provided TXT with perpetual software licenses codes on
August 3, 2015.
B.
Proceedings Below
On May 20, 2015, TXT filed a motion asking the bankruptcy
court to approve an administrative expense claim for $3,789,963,
the bulk of which was for lost profits.1
Doc. No. 24-2 at 5–6.
The claim included storage costs stemming from GTAT’s failure
to remove the ten nonconforming furnaces. That portion of the
claim was ultimately resolved by a court-approved stipulation.
1
4
The motion drew on the language of the settlement agreement and
explained that TXT’s losses resulted from GTAT’s “continuing
failure to provide current and compatible software licenses for
the 20 [furnaces] and provide the service necessary to render the
software operational.”
See id. at 10.
The Debtors and the Official Committee of Unsecured
Creditors objected to the claim in part on factual grounds.
id. at 146.
See
Accordingly, the bankruptcy court issued a case
management order establishing a discovery schedule and setting a
deadline for the filing of dispositive motions.
Id. at 146–47.
After discovery closed, the Debtors challenged the claim in a
motion for summary judgment.
See id. at 255–56.
In response,
TXT again contended that its expenses were entitled to priority
because they were caused by GTAT’s postpetition breaches of its
prepetition obligations.
It also argued in the alternative that
its expenses were the result of GTAT’s postpetition negligence.
See Doc. No. 24-4 at 377–81.
After holding a hearing, the bankruptcy court granted the
Debtors’ motion for summary judgment.
Doc No. 24-9 at 781, 790.
The court first determined that TXT’s expenses were not entitled
to priority to the extent that they were based on GTAT’s
postpetition breaches of its prepetition obligations.
791-94.
Id. at
It then disposed of TXT’s negligence claims on
alternative grounds.
First, it determined that the negligence
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claim advanced a new theory of liability that TXT could not raise
for the first time in an objection to a motion for summary
judgment.
Id. at 795-98.
It also concluded that the Debtors
were entitled to summary judgment in any event because TXT had
failed to identify sufficient evidence to support a viable
negligence claim against GTAT.
II.
Id. at 799-803.
STANDARD OF REVIEW
This court has jurisdiction pursuant to 28 U.S.C. §
158(a)(1) to hear appeals from the bankruptcy court’s final
judgments, orders, and decrees.
In resolving this appeal, I
“scrutinize that court’s findings of fact for clear error, and
afford de novo review to its conclusions of law.”
Brandt v.
Repco Printers & Lithographics, Inc. (In re Healthco Int’l), 132
F.3d 104, 107 (1st Cir. 1997).
Where the court below made
discretionary rulings, I review for abuse of discretion.
See
Hoover v. Harrington (In re Hoover), 828 F.3d 5, 8 (1st Cir.
2016).
I may “affirm the bankruptcy court order on any ground
apparent from the record on appeal.”
Cromwell v. Countrywide
Home Loans, Inc., 483 B.R. 36, 40 (D. Mass. 2012) (quoting
Spenlinhauer v. O’Donnell, 261 F.3d 113, 117 (1st Cir. 2001)).
The bankruptcy court denied TXT’s administrative expense
claim on summary judgment.
TXT’s disputed claim constituted a
“contested matter” under Bankruptcy Rule 9014, to which the
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summary judgment standard of Rule 56 applies.
P.
See Fed. R. Bankr.
7056, 9014(c); see also Gray v. Manklow (In re Optical
Techs., Inc.), 246 F.3d 1332, 1334 (11th Cir. 2001).
Under Rule
56, summary judgment is appropriate where “the movant shows that
there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.”
P. 56(a).
Fed. R. Civ.
The bankruptcy court is required to construe the
evidence “in the light most agreeable to the nonmoving party and
draw all reasonable inferences in that party's favor,” but it
must “afford no evidentiary weight to ‘conclusory allegations,
empty rhetoric, unsupported speculation, or evidence which, in
the aggregate, is less than significantly probative.’”
Tropigas
de Puerto Rico, Inc. v. Certain Underwriters at Lloyd’s of
London, 637 F.3d 53, 56 (1st Cir. 2011) (quoting Rogan v. City of
Boston, 267 F.3d 24, 27 (1st Cir. 2001)).
I review the
bankruptcy court’s summary judgment ruling de novo.
See Daniels
v. Agin, 736 F.3d 70, 78 (1st Cir. 2013).
III. ANALYSIS
TXT has abandoned its initial effort to base its
administrative expense claim on a postpetition failure by GTAT to
abide by its prepetition obligations.
See Doc. No. 28 at 2-4.
Instead, it attempts to salvage only its negligence claim by
pointing to three alleged errors in the reasoning process that
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led the court to reject the claim.
First, TXT challenges the
court’s determination that the negligence claim was untimely by
arguing that its timely original claim can be fairly read to
include a negligence claim.
Next, it argues that the court’s
timeliness ruing was incorrect even if TXT asserted the claim for
the first time in its objection to the Debtors’ summary judgment
motion.
Finally, it challenges the court’s determination that
TXT failed to produce sufficient evidence in response to the
Debtors’ summary judgment motion to support a viable negligence
claim.
A.
I address each argument in turn.
Does TXT’s Initial Motion State a Claim for Negligence?
TXT argues that its original administrative expense claim
can be fairly read to include a negligence claim because the
claim “specifically referenced ‘negligence’” and “pled the
essence” of a claim based on Reading v. Brown, 391 U.S. 471, 483
(1968), the Supreme Court decision that recognizes a creditor’s
right to claim administrative priority for a postpetition
negligence claim in certain circumstances.
Doc. No. 22 at 6.
I
am unpersuaded by TXT’s arguments.
When TXT initially identified the facts supporting its
claim, it did not assert that GTAT acted negligently or mention
any terms generally associated with negligence.
Instead,
tracking the settlement agreement, it stated that it “was harmed,
and continues to be harmed, by [GTAT’s] refusal to remove the 10
8
[furnaces]” and “has been damaged due to [GTAT’s] continuing
failure to provide current and compatible software licenses . . .
and provide the service necessary to render the software
operational.”
See Doc. No. 24-2 at 9–10.
Notwithstanding TXT’s
contrary assertion, this language does not state a claim that
GTAT acted negligently.
By largely reflecting GTAT’s obligations
under the settlement agreement, TXT instead suggested only that
GTAT committed postpetition violations of its prepetition
obligations.
Although TXT discussed Reading in its initial claim and
mentioned “negligence” in describing the facts of that case, the
discussion merely provided context for what TXT argued was a
“line of cases stem[ming]” from Reading.
TXT began the relevant
portion of its motion by stating that where a “post-petition
transaction” causes “post-petition harm to [a] claimant,” the
claimant may be entitled to an administrative expense.
24-2 at 8.
Doc. No.
TXT then introduced Reading as the origin of the
“line of cases” establishing this broader rule.
See id.
It next
cited First Circuit cases interpreting Reading, and, immediately
before applying the law to the facts of its case, claimed that
the First Circuit has construed Reading to mean “that where a
debtor continues to breach an order post-petition,” an
administrative expense may be appropriate.
omitted).
Id. at 9 (footnote
By asserting this rule immediately before identifying
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the alleged harms to TXT, emphasizing in a footnote that the
arbitral award constitutes an order, and then framing the harms
to TXT in terms of GTAT’s prepetition obligations, TXT merely
raised a claim grounded in GTAT’s postpetition violations of its
prepetition obligations rather than a postpetition negligence
claim.
See id. at 9–10 & n.5.
TXT also failed to notify the Debtors of its intent to plead
a negligence claim at any point prior to the filing of its
objection to the Debtor’s summary judgment motion.
At a June
2015 hearing before the bankruptcy court, TXT invoked the need
for “factual findings” on the functionality of the furnaces and
software licenses, but made no reference to negligence.
73–74.
Id. at
Further, in an October 2015 court-approved stipulation
addressing GTAT’s failure to remove 10 nonconforming furnaces,
TXT reserved its other claims but again made no mention of
negligence.
Id. at 160.
And even though the debtors noted in
their preliminary objection to TXT’s claim that “TXT does not . .
. allege that it suffered any damages on account of a
postpetition tort,” TXT did not rebut that assertion.
n.14.
Id. at 28
Perhaps most tellingly, when invited on appeal to identify
any correspondence or documents besides its initial motion that
would have specifically notified GTAT of TXT’s postpetition
negligence claim before the Debtors filed their summary judgment
motion, TXT did not point to any documents that would support its
10
position.
Doc. No. 28 at 5–7.
Accordingly, the bankruptcy court
correctly determined that TXT failed to adequately raise a claim
of postpetition negligence until it filed its objection to the
Debtors’ motion for summary judgment.
B.
May TXT Assert Its Negligence Claim for the First
Time in Its Objection to a Summary Judgment Motion?
TXT next argues that the bankruptcy court improperly refused
to consider its negligence claim even if TXT presented the claim
for the first time in its objection to the Debtors’ motion for
summary judgment.
The bankruptcy court based its determination that TXT’s
negligence claim came too late on the well-established rule that
“[p]laintiffs may not ‘raise new and unadvertised theories of
liability for the first time in opposition to a motion for
summary judgment.’”
Miranda-Rivera v. Toledo Dávila, 813 F.3d
64, 76 (1st Cir. 2016) (quoting Calvi v. Knox County., 470 F.3d
422, 431 (1st Cir. 2006)).
TXT argues, however, that the case
law the court relied on does not apply when an administrative
expense claim is challenged in a motion for summary judgment.
In
developing this argument, TXT notes that a disputed
administrative claim is treated as a contested matter, rather
than an adversary proceeding, under the Bankruptcy Rules.
Doc. No. 22 at 14–15.
See
Because contested matters are not subject
to the amendment standards that apply in adversary proceedings,
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TXT argues, the case law the bankruptcy court relied on does not
limit its ability to assert a new basis for its claim for the
first time in an objection to a motion for summary judgment.
id. at 15–16.
See
Again, I disagree.
The rule that prevents litigants from raising new theories
of liability for the first time in response to a summary judgment
motion is grounded in Rule 56.
See Miranda-Rivera, 813 F.3d at
76; Calvi, 470 F.3d at 430–31.
And Rule 56 applies in contested
matters.
See Fed. R. Bankr. P. 7056, 9014(c).
In the absence of
this rule, plaintiffs would have less incentive to plead with
care, and defendants would likely be required to devote more of
their efforts to investigating theories not pleaded.
Such an
outcome would not only be generally wasteful, but it would also
prejudice defendants who conduct discovery and prepare for
summary judgment without notice of a theory pleaded later.
The facts of this case reinforce the bankruptcy court’s
ruling and underscore the importance of the rule.
Recognizing
that the facts underlying TXT’s claim were in dispute, the
bankruptcy court allowed for a period of discovery that ended on
November 6, 2015.
See Doc. No. 24-2 at 151.
The court also set
December 15, 2015, as the deadline for dispositive motions.
at 164.
Id.
In reliance on this schedule, the parties conducted
discovery, the Debtors filed a motion for summary judgment at the
deadline, and TXT responded with an objection asserting a claim
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that it had not included in its initial motion.
Doc. No. 24-4 at 366-67.
See id. at 230;
Raising a new claim after the discovery
and dispositive motion deadlines had passed prejudiced the
Debtors.
They expended time and resources conducting discovery
and preparing for summary judgment without adequate notice of
TXT’s new claim.2
Given this prejudice, TXT’s arguments that the
Debtors could have engaged in additional discovery or asked for
time to respond are unavailing.
See Doc. No. 22 at 20.
The record is also devoid of evidence suggesting that
unusual circumstances prevented TXT from including a negligence
claim in its initial motion.
TXT asserts that evidence
supporting a negligence claim — evidence that GTAT acted
gratuitously postpetition, instead of pursuant to contract —
first came to light during discovery.
See id. at 9, 19.
However, TXT did not need to wait for such evidence to arise to
This misallocation of time and resources is particularly
prejudicial here because delay in resolving TXT’s administrative
claim could have jeopardized the Debtors’ reorganization. See
Doc. No. 24-9 at 745 (February 4, 2016 hearing) (bankruptcy court
noting, in context of another administrative expense claim, that
“[i]f the confirmation is delayed, there will be no company”).
The entities who committed exit financing to the Debtors
conditioned the financing on, inter alia, (1) the Debtors’
reorganization plan going into effect by March 7, 2016,
(eventually March 14 in the court-approved plan) and (2) the
Debtors’ having at least $27.5 million in cash when the plan
became effective, not including any amounts paid or reserved for
administrative expenses. See Doc. No. 24-2 at 174, 205-7; Doc.
No. 24-9 at 962.
2
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present its negligence claim.
GTAT’s engineers installed license
codes at TXT’s request in November 2014.
Shortly thereafter TXT
knew that its furnaces had been damaged.
Thus, TXT should have
been aware of a possible negligence claim well before the
discovery and dispositive motion deadlines passed in late 2015.
Under these circumstances, the bankruptcy court correctly
determined that TXT waited too long to raise its postpetition
negligence claim.3
C.
Does the Record Contain Sufficient Evidence to Support a
Negligence Claim?
TXT’s negligence claim has evolved during the course of this
litigation.
In bankruptcy court, TXT based its claim primarily
on its contention that its damages were caused by GTAT’s breaches
of its prepetition duties “to provide the software licenses” and
“to provide whatever service was necessary to render the software
operational.”
See Doc. No. 24-2 at 377–79 (quoting settlement
agreement for latter duty).
It then argued that GTAT breached
these duties by “failing to provide the necessary software to
operate the [furnaces], by failing to exercise reasonable care in
To the extent that TXT contends that its negligence claim
should have been treated as a de facto amendment to its original
claim, the Debtors argue that the amendment came too late because
it was asserted after the bar date for administrative claims.
See Doc. No. 24 at 26–28. I need not address this argument,
which neither party has adequately analyzed, because TXT waited
too long to assert its new claim regardless of whether the claim
was subject to the bar date.
3
14
installing the software, failing to provide the necessary
standard operating procedures and checklist to reoperate the
[furnaces], and by failing to inform TXT of the harm in
attempting to operate furnaces that had been idled for two
years.”
Id. at 378.
On appeal, TXT argues only that its damages
stem from a voluntarily assumed duty by GTAT to warn TXT that it
needed to refurbish the furnaces before it attempted to operate
them.
See Doc. No. 28 at 9–16.
As narrowed, TXT’s negligence claim suffers from two
fundamental flaws.
First, there is insufficient evidence in the
record to support TXT’s claim that GTAT ever voluntarily assumed
a postpetition duty to warn TXT that it needed to refurbish the
furnaces before attempting to operate them.
At most, the
evidence suggests that GTAT may have voluntarily assumed the duty
to properly install license codes on the furnaces, but TXT does
not currently argue that its damages were caused by a breach of
that duty.
See Doc. No. 28 at 13–15.
In a last ditch effort to save its claim, TXT points
primarily to a single deposition excerpt in which GTAT’s general
counsel was questioned about an email chain between TXT and GTAT
in which TXT expressed concern about the operability of the
furnaces.
The excerpt includes the following exchange:
Q.
Okay. And does that series of emails reflect
the fact that GT was continuing to work with TXT as of
[August 2015] to try to render the 20 [furnaces]
15
functional?
A.
Well we were -- we were doing what we could
reasonably do within the context of the settlement
agreement and other circumstances of our relationship.
Doc. No. 24-5 at 488.
TXT argues that this exchange supports its
claim that GTAT voluntarily assumed a duty to assist TXT in
getting the furnaces to work, which necessarily included a duty
to warn TXT that the furnaces needed to be refurbished.
disagree.
I
Even when the excerpt is construed in the light most
favorable to TXT, it merely describes GTAT’s decision to assist
TXT with the installation of the license codes.
It does not
amount to an admission that it had assumed a broader duty to warn
TXT that the furnaces needed to be refurbished.4
Even assuming the record supports TXT’s claim that GTAT had
a duty to warn TXT about the danger of operating idled furnaces
without refurbishment, it still does not contain sufficient
evidence to support a claim that GTAT’s failure to warn caused
TXT’s negligence claim also fails for a related reason. Under
New York law, which the parties agree is the governing law in
this case, a voluntary assumption of duty cannot support a
negligence claim unless “defendant’s conduct placed plaintiff in
a more vulnerable position than plaintiff would have been in had
defendant done nothing.” Heard v. New York, 623 N.E.2d 541, 544
(1993); see also Ward v. Edinburg Marina, 741 N.Y.S.2d 304, 306
(App. Div. 2002). Here, the record does not support a claim that
TXT’s decision to restart the furnaces without first refurbishing
them was in any way based on GTAT’s actions in this case.
Therefore, even if GTAT had an unexpressed intention to do more
than merely assist TXT with the installation of license codes,
that unexpressed intention could not make it liable to TXT on a
failure-to-warn theory.
4
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TXT’s injuries.
The record shows, without triable dispute, that
TXT knew that any attempt to operate the furnaces without
refurbishment after a long period of disuse could cause damage.
TXT’s general counsel submitted a declaration to the bankruptcy
court stating that, at an internal meeting on October 1, 2014,
TXT “discussed . . . whether [GTAT] would be required to provide
a standard operating procedure or an inspection checklist to
ensure that TXT’s [furnaces] would be able to reoperate without
damage because the [furnaces] had been inoperable for two years.”
Doc. No. 24-4 at 386.
In a deposition, TXT director Peggy Hsu
described the same meeting and noted that the idled furnaces had
to “follow a standard operating procedure in order to prevent”
damage.
Doc. No. 24-6 at 544-45.
Because TXT was aware of the
risk of operating the furnaces without refurbishment, it cannot
hold GTAT liable for failure to warn it of a danger that it
already understood.
See Spano v. Bertocci, 749 N.Y.S.2d 275, 278
(App. Div. 2002) (where plaintiff already knew about risks of
medication, no rational basis to find that doctor’s failure to
warn was proximate cause of injury); Ohlhausen v. City of New
York, 898 N.Y.S.2d 120, 123–25 (App. Div. 2010) (where driver did
not rely on bus driver’s hand gesture to enter intersection, bus
driver did not proximately cause driver’s subsequent collision
with plaintiff); cf. Heard, 623 N.E.2d at 546.
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IV.
CONCLUSION
For the reasons provided above, the bankruptcy court’s (1)
Memorandum of Decision, (2) Order denying TXT’s administrative
expense claim, and (3) Order granting Debtors’ motion for summary
judgment are affirmed.
SO ORDERED.
/s/Paul Barbadoro
Paul Barbadoro
United States District Judge
February 13, 2017
cc:
William S. Gannon, Esq.
Daniel W. Sklar, Esq.
G. Alexander Bongartz, Esq.
James T. Grogan, Esq.
Luc A. Despins, Esq.
Geraldine L. Karonis, Esq.
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