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Point Blank Solutions - Company Response to Motion by Cohen re Lift of Stay of Appeal Claim

|Includes: Point Blank Solutions, Inc. (PBSO)

Point Blank Solutions filed its response to the motion by David Cohen to lift the automatic stay in Cohen's appeal of the Derivative Action settlement. It makes two basic claims.

 

Argument One: The derivatives claim is part of the bankruptcy estate

(As a non lawyer) I think Point Blank Solutions makes a strong argument that a derivative suit is property of the estate in a bankruptcy proceeding, subject to the oversight of the bankruptcy court.

My interpretation had been that David Cohen's motion does not cite any cases in which the bankruptcy court had agreed a derivative claim was not the property of the estate.

Point Blank Solutions' response cites several cases where courts have ruled a derivative action is property of the estate.

RNI Wind Down Corp consisted of Riverstone Networks, in bankruptcy, attempting to modify a settlement, which had been previously confirmed and appealed by Mr. Charles Grimes.  The court ended up approving the amended settlement, which returned part of the legal fees to the estate.  In reaching its decision to not lift the stay, the court writes:

In his brief in opposition, Mr. Grimes agreed that when a corporation files for protection under the Bankruptcy Code, causes of action, including derivative actions, become property of the estate.  Rather, Mr. Grimes argues (without citation to authority) that the same is not true with respect to an appeal of a court-approved settlement of a derivative action because state law does not give the corporation the right to assert that claim.

Both RNI and Mitchell Excavators refer to derivative actions being the property of the estate, subject to prosecution by the trustee.  Point Blank is not managed by a trustee, and perhaps the court will find this significant.

However, Point Blank management has changed since the settlement was reached, so the party which settled the derivative claim is not the same party which would be charged with deciding whether to prosecute the appeal, under this standard.

Ostano Commerzanstalt was decided by the Second Circuit Court of Appeals, where the settlement is being appealed by Cohen.  It states in part:

An appeal is indisputably a continuation of a judicial action or proceeding, see Cathey, 711 F.2d at 61, and therefore this action is automatically stayed if it is one "against the debtor."

 

Argument Two: Cause does not exist to lift automatic stay

Point Blank Solutions argues the motion to lift the stay should be denied without prejudice, allowing the issue to be revisited, at least delayed until after completion of the Brooks criminal trial.

The primary reason for this is that if Brooks is found guilty in the criminal trial, he may not retain assets to pay any claims under SOX 304, which would mean the settlement would be voided with no benefit to Point Blank.

 

Analysis

Based on the motion and the response, my opinion is the motion to lift the stay will be denied without prejudice.  Lifting the stay now would expose Point Blank to the costs of the breakup of the settlement and re litigation.  One alternative, if possible, would be to have the Appeals Court reach an opinion, because the case has already been briefed and argued, but not have the opinion filed .  This would provide efficiency if the stay is lifted in the future, but I do not know if the law even provides for this.

For shareholders, a delay in the release of the Appeal opinion may not be of great concern.  The Brooks trial will need to be concluded before the 304 action can resume.  If the Appeals Court does rule in Cohen's favor, it seems likely it would return the case to the District Court and thus any conclusion is far into the future even under the best possible scenario.

However, the SEC may hesitate to prosecute the 304 claim if the reimbursement clause of the settlement remains, which apparently renders any 304 case decision against Brooks meaningless.

I do not know for certain if it is noteworthy, but it seems significant to me that neither the SEC nor the DOJ has filed anything in the bankruptcy court related to the Cohen motion to lift the stay.

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