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Compliant Dismissed for Improper Strategic Use of Motions

By Lawrence J. Kotler
July 23, 2014
Delaware Business Court Insider

Compliant Dismissed for Improper Strategic Use of Motions

By Lawrence J. Kotler
July 23, 2014
Delaware Business Court Insider

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Lawrence J. KotlerIn a recent decision by U.S. Bankruptcy Judge Peter J. Walsh of the District of Delaware, Forman v. Mentor Graphics (In re WorldSpace), Adversary Proceeding No. 10-53286, the court took issue with the "strategic use of motions to extend time to serve process coupled with a lack of proper notice thereof." In so doing, the court dismissed a complaint to avoid and recover certain preferential transfers that the defendant, Mentor Graphics Corp., allegedly received.

In WorldSpace, the debtor, and later the Chapter 7 trustee, filed a total of nine motions (which were subsequently granted by the court) seeking to extend the time to serve process on defendants in certain adversary proceedings. In particular, the first motion was filed on or about Feb. 11, 2011, and the ninth motion was filed on or about Sept. 23, 2013. Following the ninth motion to extend the time to serve process, the defendant was ultimately served with the complaint on or about Dec. 12, 2013 (more than three years following the filing of the initial complaint). However, instead of serving the defendant actually named in the complaint, Mentor Graphics (Ireland) Ltd. (Mentor Ireland), the trustee served the complaint and summons upon Mentor Graphics Corp.As noted by the court, this was the first time that Mentor Graphics Corp. was "mentioned as a (potential) defendant by either [the Chapter 11 debtor] or the trustee."

In response to receipt of the summons, Mentor Ireland (not the defendant) filed a motion to quash the service of process. The trustee then filed an amended complaint substituting the originally named defendant, Mentor Ireland, with the name of the defendant. After the filing of the amended complaint, the defendant filed a motion to dismiss pursuant to both Rule 12(b)(5) and Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable to the adversary proceeding by Rule 7012 of the Federal Rules of Bankruptcy Procedure.

In reviewing the record, the court noted that Mentor Ireland was only served with the following documents:

  • The first motion and corresponding order.
  • The second motion (but no order).
  • The eighth motion (again, with no order).
  • The ninth motion (also without form of order).

The court also noted that no one appeared to be served with the sixth and seventh motions. Furthermore, during the two-year gap between the service of the second motion to extend and the eighth motion to extend, the underlying statute of limitations pursuant to Bankruptcy Code Section 546(a) had expired.

In addressing the defendant's asserted grounds for dismissal, the court noted that there were significant deficiencies with respect to the notice of the motions to extend time to serve process. In particular, Mentor Ireland was never "made aware of the fact that the second extension motion was granted." Moreover, the court also observed that Mentor Ireland was never made aware of any of the other extension requests until it was served with the eighth motion to extend nearly two years following the initial motion.

Accordingly, the court found that "any notice that Mentor Ireland had at one point concerning the possibility of being named in a lawsuit logically ended when it was never provided with the second signed order extending service." Indeed, the court found that once the extension period stemming from the second extension motion had terminated and Mentor Ireland was not served with a complaint, there was absolutely no reason for Mentor Ireland to know that it should "take pre-litigation precautions, preserve evidence, consult with employees or take any other measure to ensure that it could defend itself on the merits of a claim."

In its decision, the court was troubled by the strategic uses of extension motions and observed that "this court was never apprised of the fact that service was being delayed without the full knowledge of all named defendants. This court was under the impression that the strategic use of the extension motions was to facilitate the cases procedurally, with all interested parties aware of the proceedings." While the court found that there was "nothing inherently improper concerning the use of extension motions in a bankruptcy context to facilitate a reorganization or for some other procedural equitable endeavor," the court was extremely troubled by the lack of service and opined that "had this court known that four years after the original complaint was filed, service would be made for the first time, alerting a corporation to the existence of a potential lawsuit for the first time, this court would have questioned in a different manner the existence of due diligence in service, due diligence prosecution, good cause and prejudice when reviewing the nine extension motions."

In light of the foregoing, the court found that the trustee could not relate the amended complaint back to the original complaint pursuant to Rule 15(c) of the Federal Rules of Civil Procedure. Even though there were nine separate motions to extend the service deadline, which, arguably, would have preserved the trustee's ability to amend the complaint pursuant to Rule 15(c), the court still denied the trustee's request to amend the complaint.

In rejecting the amendment, the court recognized the "inherent injustice in failing to serve a named defendant with an extension motion, which operates to keep a claim alive years after the statute of limitations would have already expunged the issue." Accordingly, the court found that the relevant time period for analyzing the Rule 15(c) amendment should not include any time resulting from a motion to extend that was not properly served upon Mentor Ireland. As Mentor Ireland was only served properly with the second motion to extend, the court determined that any "relation back" period would have to expire after the expiration of the second motion to extend, which was Oct. 10, 2011. As Mentor Graphics Corp. was not served until more than two years later, the court opined that the claims were "stale and the evidence [was] lost or eroded." For this reason, the court granted the defendants' motion to dismiss under both Rule 12(b)(5) and Rule 12(b)(6).

In light of this decision, it would behoove parties using Rule 4(m) motions to extend the deadline to serve process to ensure that adequate notice of the motion and the relief sought therein is given to all interested parties, particularly to any defendant named in a complaint.

Lawrence J. Kotler is a partner at Duane Morris who practices in the area of reorganization and finance, representing Chapter 11 debtors-in-possession, Chapter 11 trustees, Chapter 7 trustees, liquidating trustees, creditors' committees, secured creditors and large institutional unsecured creditors in all facets of bankruptcy.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.