N2N Commerce, Inc.,

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UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS

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Inre
N2N COMMERCE, INC., Chapter 7
Alleged Debtor Case No, 09-16581-JNF

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MEMORANDUM
Upon consideration of 1) the Involuntary Petition filed by NaviSite, Inc., TIBCO
Software, Inc. and Optaros, Inc. (the “petitioning creditors”) against N2N Commerce, Inc.
(“N2N” or the “ Alleged Debtor”); 2) the record of proceedings in the previous Chapter 7
case filed by Joseph F. Finn, Jr., the Assignee (the “Assignee”) for the Benefit of the
Creditors of N2N (Case No. 09-10246-JNF), on behalf of N2N, which case the Court

dismissed on May 1, 2009, see In re N2N Commerce, Inc., 405 B.R. 34 (Bankr. D. Mass. 2009);

3) the Motion to Dismiss Involuntary Case filed by Lawrence Bohn (“Bohn”), Joel Cutler
(“Cutler”), Sharen Turney (“Turney”), Martyn Redgrave (“Redgrave”), Ruben Pinchanski
(“Pinchanski”), Stephen. Asbaty (” Asbaty”), Wendy LaHaye (“LaHaye”) and Mark Delcher

(“Delcher”)(collectively the “Movants”);' 4) the Memorandum filed by the Movants in

1 According to Movants,

N2N’s initial investors were General Catalyst Group IV, L.P. and General
Catalyst Entrepreneurs Fund IV, L.P. (together, “General Catalyst”), and
L.B.I. Holdings, Inc. (“LBI”), a'subsidiary of Ohio retailer Limited Brands,
Inc. (“Limited Brands”). LBI had two designees on N2N’s

Board — Movants Redgrave and Turney. General Catalyst also had two
designees — Movants Bohn and Cutler. The fifth director was Movant
Pinchanski, N2N‘s Chief Executive Officer. Movants Asbaty and LaHaye

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conjunction with their Motion to Dismiss Involuntary Case in which they argue that this
Court lacks jurisdiction to retain the involuntary case because the petitioning creditors do
not hold claims against N2N (or, alternatively, their claims are contingent and disputed),
that the petitioning creditors should be estopped from pursuing the involuntary: cise, that
dismissal under 11 U-S.C. § 305a)(1)* is warranted because Chapter 7 relief is unnecessary
to protect creditors and serves no purpose, that the involuntary petition is a misguided
attempt at forum shopping and contravenes bankruptcy policy favoring assignments
which precede the petition by more than four months, and that the case should be
dismissed under 11 U.S.C. § 707(b); 5) the Objection to the Motion to Dismiss Invcluntary
Case filed by NaviSite, Inc. and Optaras, Inc., in which they state that they reprasent in
excess of 48% of the claims against the Debtor, that dismissal of the involuntary ca3e is not
in the best interest of all creditors, the Debtor‘s estate and parties in interest, and that all
the former officers and directors of N2N, including all but one of the Movan:s, have

resigned, have no authority to act on behalf of the Alleged Debtor, and are not creditors;

were N2N officers, and Movant Delcher was an N2N employee.

2 Section 305(a)(1) provides:

(a) The court, after notice and a hearing, may dismiss a case under this
title, or may suspend all proceedings in a case under this title, at any time
if-

(1) the interests of creditors and the debtor would be better

served by such dismissal or suspension ....

11 US.C. § 305(a)(1).

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6) Movants’ Reply to Petitioning Creditors’ Objection to Motion to Dismiss Involuntary
Case; 7) the Declaration of Gail M. Stern in Support of Motion to Dismiss Involuntiry Case;
8) the absence of any objection to the involuntary petition filed by the Assignee; and 9) the
representations and arguments made at the October 7, 2009 hearing on the Motion to
Dismiss Involuntary Case, the Court shall enter an order denying the Motion to Dismiss
Involuntary Case.

In Inre N2N Commerce, Inc., this Court discussed the concept of standing, stating:

The issue of standing is a “threshold question in every federal
case, determining the power of the court to entertain the suit.”
Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343
(1975). To have standing to bring an appeal from a final
bankruptcy court order, an appellant must be a “person
aggrieved.” Spenlinhauer v. O'Donnell, 261 F.3d 113, 117 (1st
Cir.2001). As such, standing exists only where the order
“directly and adversely affects an appellant's pecuniary
interesis.” Id, at 117-18 (citation omitted). A party’s pecuniary
interests are affected if the order diminishes the appealing
party’s property, increases its burdens, or detrimentally affects
its rights. Kehoe v. Schindler (In re Kehoe), 221 B.R. 285, 287
(1st Cir. BAP 1998),

N2N Commerce, Inc., 405 B.R. at 39 (citing In re High Voltage Eng’g Corp., 397 B.R. 579,

597 (Bankr. D. Mass. 2008), aff'd, 403 B.R. 163 (D. Mass. 2009), and In re Murphy, 288 B.R.
1, 4 (D. Me.2002)). The Court concluded:
Under this broad definition of standing, this Court finds that Movants’ rights
will be affected if the bankruptcy case remains in this Court and the Assignve
proceeds with litigation against them. Accordingly, they have standing’ as
persons aggrieved to.seek dismissal.
405 B.R. at 39.

The issue of whether Movants have standing with respect to their Motion tc Dismiss

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Involuntary Case is different than the issue presented in the voluntary Chapter 7 petition
filed by the Assignee. Because the Movants have not and may not be sued by a Chapter
7 trustee following the entry of an order for relief, the Movants are not at this :uncture
“persons aggrieved.” Unlike the circumstance presented by the Chapter 7 petitior. filed by
the Assignee, the involuntary petition was commenced by creditors. While the Movants
argue that the petitioning creditors should be estopped because of their execution of the

Assignment for the Benefit of Creditors, citing, inter ailia, Moulton v. Coburn, 131 F. 201 (1st

Cir. 1904), cert. denied, 196 U.S. 640 (1905), the petitioning creditors are not parties to the
litigation commenced by the Assignee in the Massachusetts Superior Court or the
declaratory judgment action commenced by Movants in the Court of Chancery for the State

of Delaware.’

3 In In re N2N Commerce, Inc., the Court found as follows:

On December 17, 2008, following the liquidation of the assets of N2N,
Finn commenced an action in Massachusetts Superior Court Department
of the Trial Court against Pinchanski, Asbaty, LaHaye, and Delcher.
Pursuant to his four-count complaint, Finn sought the avoidance of
allegedly fraudulent transfers under the Massachusetts version of the
Fraudulent Transfer Act, see Mass. Gén. Laws ch, 109A, §§ 5 and 6, with
respect to bonusés, severance payments, and other expenditures made to.
or authorized by them, in August of 2007 and December 2007 while N2N
was undercapitalized and insolvent. See Finn vy. Asbaty, Civ. Action No.
08-5575-BLS.

On January 5, 2009, approximately oné week before the commencement of
the bankruptcy case, Movants commenced a three-count declaratory
judgment action in the Court of Chancery for the State of Delaware, see
Pinchanski y. Finn, Civil Action No. 4266-CC, seeking declarations that, as
officers and directors of N2N, they did not breach their fiduciary duties
under Delaware law, that they did not commit waste of corporate assets,

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Section 303 of the Bankruptcy Code provides in relevant part the followirg:

(b) An involuntary case against a person is commenced by the filing with the
bankruptcy court of a petition under chapter 7 or 11 of this title-

(1) by three or more entities, each of which is either a holder of
aclaim against such person that is not contingent as to liability
or the subject of a bona fide dispute as to liability or amount,
or an indenture trustee representing such a holder, if such
noncontingent, undisputed claims aggregate at least $13,475
more than the value of any lien on property of the debtor
securing such claims held by the holders of such claims;

eae

(d) The debtor, or a general partner ina partnership debtor that did not join
in the petition, may file an answer to a petition under this section.

11 U.S.C. § 303(b), (d). The court in In re MarketXT Holdings Corp., 347 B.R. 15é (Bankr.
§.D.N-Y. 2006), recently construed the language of the section 303. It stated:

[T]the sufficiency of an involuntary petition may only be challenged by the
debtor and not by creditors or third parties.... As... BDC 56 LLC [Key:
Mech, Inc. v. BDC 56 LLC (In re BDC 56 LLC), 330 F.3d 111, 118 (2d Cir.
2003)] recognizes, a petition may be controverted by defenses that are based
of matters such as the nature and amount of the petitioning creditors’ claims.
See 2 Collier on Bankruptcy 303.10[4] (15th ed. rev.2006). Section 303(d) of
the Bankruptcy Code provides, however, that only “[t]he debtor, or a general
partner in a partnership debtor that did not join in the petition, may file'an
answer to a petition under this section.” See Fed. R. Bankr. P. 1011(a). A
“creditor is not authorized to contest an involuntary petition because a
creditor may have an incentive to protect a preference or to gain some unfair
advantage [at] the'expense of other creditors.” In re Westerleigh Dev. Corp.,
141 B.R. 38, 40 (Bankr. S.D.N-Y. 1992); In re New Era Co, 115 BR. 41, 45
(Bankr. $.D.N.Y. 1990), aff'd, 125 B.R. 725 (S.D.N.Y. 1991) (citing cases).

and that they are not liable for any fraud.

405 B.R. at 37.

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347 BR. at 160. See also In re Ceiling Fan Distrib., Inc., 37 B.R. 701, 702 (Bankr. M.D. La.
1983) (“There is no authority for a stockholder (or anyone else) to. answer the petition.”).
But see In re Oakland Popcorn Supply, Inc., 213 F.Supp. 665, 667 (D. C. Cal. 1963) (“While
it is true that stockholders of a bankrupt corporation have no statutory right te contest an
involuntary petition, it is within the discretion of the bankruptcy court to permit them to

do so.”). The court in MarketXT Holdings Corp. added:

Calling one requirement “jurisdictional” is no justification for invalidating
another part of the same statute. The predecessor to § 303(d) was added to
the Bankruptcy: Act in the 1938 amendments, and the Second Circuit affirmed
its application as written as early as 1940. See Inre Carden, 118 F 2d 677,679
(2d Cir.1941). In Canute SS. Co. v. Pittsburg’ Vest Vir
US. 244, 44 S.Ct. 67, 68 L.Ed. 287 (1923), it was argued that the requiremen cS
of § 59b of the Bankruptcy Act that an involuntary petition be filed by three
creditors with provable claims was “jurisdictional” and could not be cured
by the joinder of additional petitioners more than four months after the
commission of an act of bankruptcy. The Supreme Court held that focus on
the requirements of § 59b alone “fails to give due weiglit to the plain
provisions of Section 59f supplementing and modifying the provisions of
Section 59b.” 263 U.S. at 248, 44 S.Ct. 67. (Section 59f provided for the joinder
of additional petitioners “at any time.”) The Court added, “the filing of a
petition, sufficient upon its face . . . clearly gives the © bankruptcy court
jurisdiction of the proceeding.” Id. (citation omitted). .

347 B.R. at 160-61.‘ The court also relied wpon the Fed. R. Bankr. P. 1011 and the 1983

Net Media Holdings, LLC), 550 F 3d 1038 ith Cir. 2008), the United States Court of
Appeals for the Eight Circuit noted:

[T]he circuit courts are split on whether the requirements of § 303(b) mus:
be satisfied to. convey subject matter jurisdiction over an involuntary case
upon the bankruptcy court or whether, instead, they are merely
“substantive matters which must be proved or waived for petitioning
creditors to prevail in involuntary proceedings.” Rubin v, Belo Broad.
orp. (In re Rubin), 769 F.2d 611, 614 n. 3 (9th Cir.1985). In other words,

6

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Advisory Committee Note te thatrule. It concluded that “There is no cause to extnd BDC.
56 LLC and allow creditors who seek to gain a special advantage to seize on the word
‘jurisdiction’ and, in direct contravention of § 303(d) and § 303(h) of the Bankruptzy Code,
interrupt the administration of an estate with ‘jurisdictional’ motions.” 347 B.R. at 162.
In view of the decisions set forth above, the Court finds that Movants lack standing

to seek dismissal of the involuntary case. Further, the Court finds that the appoiritment
ofa Chapter 7 trustee is in the best interests of creditors. Accordingly, the Court shall enter
an order denying their Motion to Dismiss Involuntary Case and entering the order for
relief.

By the Court,

Jer 4, Birwasg—

- Joan N. Feeney

Dated: October 14, 2009 United States Bankruptcy Judge

ce: Michael J. Pappone, Esq., John G. Loughnane, Esq., D. Ethan Jeffery, Esq., Mark T.
Power, Esq., U.S. Trustee

do the commencement requirements of § 303(b) in Title 11 address the
jurisdictional power of the court to hear an involuntary case, or does Title
28 contain the jurisdictional grant and do § 303(b)’s requirements simply
constitute elements that must be established to sustain an involuntary
proceeding?

950 F.3d at 1040-41. The court added that most courts conclude that section 303’s filing
requirements are not subject matter jurisdictional, id. at 1041, although it recognized
that the Second Circuit in In te BDC 56 LLC, 330 F.3d 111, 118 (2nd Cir. 2003), adopted
the minority view. The Eighth Circuit determined that section 303(b) does not implicate
subject matter jurisdiction and thus its requirements can be waived. 550 F.3d at “1046.
See also In re Mclsaac, 19 B.R. 391, 397 (Bankr. D. Mass. 1982) (citing In re Nat'l Republic
Co,, 109 F.2d 167 (7th Cir, 1940), cert denied, Arbetman v. Reconstruction Fin. Corp., 309
U.S. 671 (1940).