United States District Court, W.D. New York
Mark S. Wallach, Appellant,
David Smith & Jennifer Smith, Appellees.
DECISION AND ORDER
LAWRENCE J. VILARDO, UNITED STATES DISTRICT JUDGE
adversary proceeding brought by Trustee Mark S. Wallach
("Trustee" or "Wallach"), the Bankruptcy
Court granted summary judgment to the defendants, David and
Jennifer Smith. At stake in this appeal is $700, 000 (plus
interest)-the balance remaining on a stock-subscription
agreement signed in March 2009, 16 months before
NanoDynamics, Inc., the debtor corporation, filed for
bankruptcy. Because 11 U.S.C. § 356(c)(2) precludes the
bankruptcy trustee from assuming "any executory
contract. . . to issue a security of the debtor, " this
Court AFFIRMS the decision of the Bankruptcy
several occasions, David and Jennifer Smith invested sizeable
sums in the technology industry. One beneficiary of those
investments was the debtor here, NanoDynamics, Inc., a
company engaged in research and development of such
commercial applications as cement additives, nano-metal
particles, and water-filtration and halloysite products.
NanoDynamics sought and received multiple investments from
the Smiths-in 2004, 2005, and 2007-at different prices per
October 2008, NanoDynamics again looked to the Smiths for
capital. As it had in the past, NanoDynamics provided the
Smiths with a Confidential Private Placement Memorandum
("PPM"), this one offering shares of stock for $5
per share. The PPM apprised prospective investors of the
company's financial condition and stated that the
"business is dependent upon the proceeds of this
Offering to fund our existing obligations and continuing
operations." Docket Item 4-22 at 16.
time later, the Smiths invited NanoDynamics representatives
to meet with them and other potential investors. Mr. Smith
maintains that during this meeting, he privately asked Keith
Blakely, then-CEO of NanoDynamics, whether an investment of
$2.5 million would be sufficient to take the debtor through
to an initial public offering ("IPO"). According to
Mr. Smith, Blakely said that it would.
about the same time, NanoDynamics was struggling to remain
solvent. In fact, the corporation's officers contemplated
filing for bankruptcy, and they met with professionals to
discuss that possibility. The Smiths were not explicitly
informed about that before they signed the contract giving
rise to the current dispute. They did, however, receive a
First Addendum to the PPM ("First Addendum") in
December 2008. The First Addendum addressed the
corporation's increased risk of insolvency, stating that
NanoDynamics "is overdue in its payment to most
vendors" and that "[t]he funds to be raised in this
Offering are required if the Company is to continue as a
going concern." On March 9, 2009, the Smiths and
NanoDynamics signed a stock-subscription agreement
("Agreement") in which the Smiths agreed to
purchase 2.5 million shares in NanoDynamics for $1 per share.
The first $500, 000 of the subscription price was to be paid
upon the Agreement's execution, and the remaining $2
million balance was to be paid by March 31, 2009.
NanoDynamics agreed to issue the corresponding stock
certificates for the purchased shares within five business
days of each payment received.
parties did not strictly comply with the dates in the
Agreement. Instead, the Smiths invested the initial $500, 000
by April 1, 2009, and they invested an additional $1.3
million over the next few months: $1 million on April 10;
$200, 000 on April 20; and $100, 000 on June 8. Within five
days of each of these payments, and as provided in the
Agreement, NanoDynamics issued the corresponding certificates
of stock to the Smiths.
27, 2009, having received $1.8 million of the $2.5 million
that the Smiths agreed to pay, NanoDynamics filed for
bankruptcy under Chapter 7 of the United States Bankruptcy
Code. BK Docket Item 1.
the declaration of bankruptcy, Wallach was appointed trustee,
and the debtor filed its schedule of assets. The debtor's
schedule included the $700, 000 balance still owing from the
Smiths, and the Trustee moved, pursuant to 11 U.S.C. §
365(a), to assume "an unexpired executory
contract"-namely, the Agreement. BK Docket Item 109.
February 2011, Wallach filed an amended complaint, alleging
that the Smiths were liable under the Agreement and N.Y. Bus.
Corp. Law § 628(a); were liable for breach of contract;
and owed $700, 000 to the bankruptcy estate under 11 U.S.C.
§ 542. Docket Item 3-8 at 2-3. In response, the Smiths
moved to dismiss, AP Docket Items 5, 7, 10, a motion that the
Bankruptcy Court denied in May 2011, AP Docket Item 19. About
three years later, in March 2014, the defendants filed what
would be their final amended answer, raising several
affirmative defenses and counterclaims. See Docket
Item 3-3. Both sides moved for summary judgment-on March 4,
2014 (Docket Item 4-15), and March 7, 2014 (Docket Item
4-16), respectively-and all responses and replies were filed
by August 1, 2014.
reviewing the submissions and hearing oral argument, and
after issuing an interlocutory decision on the dueling
motions, Docket Item 1-2, United States Bankruptcy Judge
Michael J. Kaplan granted the defendants' motion for
summary judgment and dismissed the complaint in its entirety.
Docket Item 1-4. The plaintiffs filed a notice of appeal from
the Bankruptcy Court's decisions on December 22, 2015.
Docket Item 1. The plaintiff filed its brief in February 2016
(Docket Item 6); the defendants responded in March 2016
(Docket Item 8); and the plaintiff replied in April 2016
(Docket Item 9). This Court held oral argument in February
2017 and reserved decision. Docket Item 16.
Jurisdiction and Standard of Review on ...