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Tera Xtal Technology Corp. v. GT Advanced Technologies Inc.

United States District Court, D. New Hampshire

February 13, 2017

Tera Xtal Technology Corp.
v.
GT Advanced Technologies, Inc., et al. Opinion No. 2017 DNH 024

          William S. Gannon, Esq. Daniel W. Sklar, Esq. G. Alexander Bongartz, Esq. James T. Grogan, Esq. Luc A. Despins, Esq. Geraldine L. Karonis, Esq.

          OPINION

          Paul Barbadoro United States District Judge

         GT Advanced Technologies Limited (“GTAT”) and affiliated entities are the debtors-in-possession (the “Debtors”) in a jointly administered Chapter 11 proceeding before the United States Bankruptcy Court for the District of New Hampshire. Tera Xtal Technology Corp. (“TXT”), a creditor in the case, filed an administrative expense claim that it argued was entitled to priority pursuant to § 503 of the Bankruptcy Code. The Debtors challenged TXT's claim, a discovery schedule was established, and a deadline for the filing of dispositive motions was set. After discovery closed, the Debtors filed a motion for summary judgment. The bankruptcy court granted the motion and this appeal followed.

         When TXT was in bankruptcy court, it initially argued that its damages were caused by GTAT's postpetition breaches of certain prepetition obligations. In responding to the Debtors' summary judgment motion, TXT later also claimed that its damages were caused by GTAT's postpetition negligence. The bankruptcy court rejected both claims. On appeal, TXT challenges only the disposition of its postpetition negligence claim. The bankruptcy court determined that TXT lost its right to pursue the negligence claim because it failed to assert the claim until after discovery had concluded and the Debtors had filed their summary judgment motion. The court alternatively rejected the claim on its merits. I affirm the bankruptcy court's ruling.

         I. BACKGROUND

         A. Facts

         TXT ordered a total of 98 advanced sapphire furnaces from GTAT through a series of purchase agreements in 2011. The furnaces are used to produce sapphire crystal in the form of cylinders called “boules.” Portions of the boules can be of sufficient quality to be used in commercial applications. The furnaces themselves are controlled by computers, which in turn run software pre-installed by GTAT. The furnaces do not function without the software, and the software does not function without license codes provided by GTAT.

         After GTAT delivered thirty furnaces through early 2012, TXT declined to buy the remaining furnaces because it claimed that the delivered furnaces did not meet contractually established performance standards. In response, GTAT remotely deactivated the license codes for the delivered furnaces. Arbitration ensued. In August 2014, the arbitral tribunal rendered its award, finding that ten of the delivered furnaces did not conform to contract standards. Accordingly, TXT did not have to pay for the ten nonconforming furnaces or buy any of the furnaces that had not yet been delivered. Per the terms of the award, GTAT also had to “disassemble and remove the 10 non-compliant [furnaces] from TXT's facility” and “deliver software licenses to TXT with respect to the 20 [furnaces]” remaining with TXT. Doc. No. 24-4 at 407.

         Later in August 2014, GTAT and TXT supplemented the arbitral award with a separate settlement agreement. In pertinent part, the agreement required GTAT to make two payments to TXT and “provide TXT with software licenses for the 20 [furnaces] that the Tribunal determined were accepted by TXT.” Doc. No. 24-3 at 290-91. GTAT agreed to renew each software license annually and, “[i]n the event the software ceases to function, . . . provide whatever service is necessary to render the software operational.” Id. at 291. To the extent the agreement and the arbitral award conflicted, the agreement controlled. Id. at 295.

         GTAT made the first payment under the settlement agreement. It also delivered a USB drive on September 30, 2014, containing license codes for the twenty conforming furnaces. It did not, however, make the second payment or remove the ten nonconforming furnaces from TXT's property. Instead, GTAT and affiliated entities filed for Chapter 11 bankruptcy on October 6, 2014.

         After GTAT filed for bankruptcy protection, TXT asked for GTAT's assistance in installing the license codes onto the twenty conforming furnaces. On November 13, 2014, GTAT installed codes on two furnaces and TXT installed codes on the rest. After the parties completed this process, TXT “tried to power on those 20 machines, but the [control boards] of . . . three machines [were] damaged.” Doc. No. 24-6 at 551 (deposition of TXT director Peggy Hsu). TXT did not go any further in the furnace “initiation process” with respect to the other seventeen furnaces at that time because it feared damaging them. Id. In February 2015, though, TXT did “tr[y] to turn on one machine, but there was . . . no oil in the air pressure machine.” Id. at 555.

         GTAT provided TXT with perpetual software licenses codes on August 3, 2015.

         B. Proceedings Below

         On May 20, 2015, TXT filed a motion asking the bankruptcy court to approve an administrative expense claim for $3, 789, 963, the bulk of which was for lost profits.[1] Doc. No. 24-2 at 5-6. The motion drew on the language of the settlement agreement and explained that TXT's losses resulted from GTAT's “continuing failure to provide current and compatible software licenses for the 20 [furnaces] and provide the service necessary to render the software operational.” See Id. at 10.

         The Debtors and the Official Committee of Unsecured Creditors objected to the claim in part on factual grounds. See Id. at 146. Accordingly, the bankruptcy court issued a case management order establishing a discovery schedule and setting a deadline for the filing of dispositive motions. Id. at 146-47. After discovery closed, the Debtors challenged the claim in a motion for summary judgment. See Id. at 255-56. In response, TXT again contended that its expenses were entitled to priority because they were caused by GTAT's postpetition breaches of its ...


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