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With a pair of opinions, Senior U.S. District Judge Lowell A. Reed Jr. has set the stage for a battle of the experts in a trial about the $12.5 million verdict that got away. The plaintiff in the suit, ProtoComm Corp., is a computer software company that won a $12.5 million verdict in 1996 in a breach of contract suit against Fluent Inc. over a failed joint venture. In the new suit, ProtoComm Corp. v. Novell Advanced Services Inc., lawyers at Schnader Harrison Segal & Lewis say ProtoComm has found it impossible to collect the verdict because Fluent was drained of all funds in a cash-for-stock sale designed to leave it penniless. Now Reed, of the U.S. District Court for the Eastern District of Pennsylvania, has issued a pair of opinions that crop the case, frame the issues for trial and clear the expert witnesses on both sides to take the stand. In a 23-page summary judgment opinion, Reed refused to dismiss ProtoComm’s claim under the Pennsylvania Uniform Fraudulent Conveyances Act, but dismissed a “wrongful dividend” claim under Delaware law. In a separate 14-page opinion, Reed found that the expert witnesses on both sides are qualified and that their testimony passes the Daubert test. The suit alleges that in 1993, while ProtoComm’s suit against Fluent was pending, Novell and Fluent made plans for a merger in which Fluent would become a wholly owned subsidiary of Novell. The agreement also provided that as a condition precedent to the merger, the ProtoComm lawsuit must be resolved. But despite that condition precedent, ProtoComm claims that the merger was consummated in July 1993 and was restructured as a stock acquisition in which Novell purchased all of Fluent’s stock for approximately $17.5 million paid directly to the shareholders, not to Fluent’s treasury. The suit alleges that Novell’s acquisition of Fluent was deliberately structured to leave Fluent with no assets to meet the potential judgment against it in ProtoComm’s suit. As a result of the merger, the suit says, Fluent was left as “a shell corporation, wholly controlled by Novell, with no assets, no employees, no meaningful business activities of its own, no board of directors and no observance of corporate formalities.” In a previous opinion, Reed refused to dismiss the fraudulent conveyance claim after finding that ProtoComm could prove the claim by showing that the stock transaction was just part of a complex transaction that transferred Fluent’s assets to Novell, paid the money to shareholders and left Fluent insolvent. But while the prior opinion approved only the theory of the case, Thursday’s opinion assesses the evidence ProtoComm has mustered and gives the case a green light. Reed found that ProtoComm has evidence that could convince a jury that the stock transfer was actually an asset sale or that the initial transaction was not complete until the assets were physically transferred. He also found that the evidence meets the requirement of “constructive intent” in the Pennsylvania fraudulent conveyance law by showing that the transfer occurred without “fair consideration.” Reed found that a jury “could reasonably find that an asset sale occurred that was structured to deplete Fluent’s treasury.” And under the “actual intent” provisions in the law, Reed found that a jury, upon finding that the transaction was an asset sale, could find that it was done “with the intent or belief that creditors could not be satisfied.” Turning to the Delaware wrongful dividend claim, Reed said he was forced to reconsider his prior ruling that ProtoComm had standing to bring such a claim. Reversing himself, Reed found that ProtoComm lacks standing because it did not receive its judgment in the first lawsuit until after Novell’s acquisition of Fluent had occurred. In the expert witness opinion, Reed found there was no need to hold a pretrial Daubert hearing because he was satisfied that all three experts — one for ProtoComm and two for the defense — are qualified to testify as experts and that their opinions “fit” the case. ProtoComm’s expert, Michael Patker, is a certified public accountant and fraud examiner who has more than 20 years of experience in accounting, auditing, and investigative and forensic services. Defense lawyers argued that while Patker is a qualified accountant, he is not qualified to render opinions on fraudulent conveyances and wrongful liquidation. But Reed found that Patker meets the liberal standard because he has “specialized knowledge” that “is clearly beyond that of the average layman in this case: the characterization of complex business transactions and fraudulent conveyances.” In his expert report, Patker found that while the transaction was labeled as a sale of stock, its substance was a sale of Fluent’s assets to Novell. The purchase price paid by Novell went directly to Fluent’s shareholders, Patker said, and Fluent’s treasury received nothing, leaving it with no assets to pay the $12.5 million judgment to ProtoComm. On the basis of those facts, Patker concluded that Novell’s acquisition of Fluent was either “a wrongful dividend that left Fluent with no assets to pay its creditors or a liquidation in which not all creditors were paid before shareholders received distributions.” Defense lawyers argued that Patker’s opinions lacked sound methodology because he failed to articulate an accounting or financial standard by which his opinions were evaluated. Reed disagreed, saying that the case is “unique,” and therefore that “simple accounting standards may not explain the full nature of the transactions at issue here.” Patker’s opinion, he said, was based on his knowledge and experience and “a seemingly copious review of a multitude of relevant business documents.” Reed found that the defense lawyers “are really arguing that Patker’s opinions are inaccurate in light of the facts. In other words, they focus not on whether the reasoning is valid and the methodology reliable, but rather on whether the conclusions themselves are correct.” Such arguments, Reed said, are “not the proper inquiry in a test for admissibility.” ProtoComm’s lawyers also challenged two defense experts — Gabriel F. Nagy, an investment banker and lawyer, and Ellis L. Levin, a certified public accountant and certified fraud examiner. Nagy concluded that Novell’s purchase of Fluent’s outstanding stock did not and could not adversely impact the rights of Fluent’s creditors. Levin concluded that the transaction was “ordinary” and “common” and that, after the merger, Fluent was in a better financial condition. As he had with Patker, Reed found that both defense experts had engaged in a “meaningful review of the relevant documents in this unique case,” and that their opinions “fit” the case. “Like defendants’ attack on Patker, plaintiff essentially argued that the opinions of Nagy and Levin are inaccurate in light of the facts,” Reed wrote. But instead of seeking disqualification of such an expert, Reed said, the lawyer’s job is to challenge the expert’s opinion “through traditional trial tactics.”

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