UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Tera Xtal Technology Corp.

v. Civil No. 16-cv-91-PB Opinion No.

GT Advanced Technologies, Inc., et al.

OPINION

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

2 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,

3 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.

1 The claim included storage costs stemming from GTAT’s failure to remove the ten nonconforming furnaces. That portion of the claim was ultimately resolved by a court-approved stipulation.

4 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

prepetition obligations. It also argued in the alternative that

its expenses were the result of GTAT’s postpetition negligence.

See Doc. No. 24-4 at 377–81.

After holding a hearing, the bankruptcy court granted the

Debtors’ motion for summary judgment. Doc No. 24-9 at 781, 790.

The court first determined that TXT’s expenses were not entitled

to priority to the extent that they were based on GTAT’s

postpetition breaches of its prepetition obligations. Id. at

791-94. It then disposed of TXT’s negligence claims on

alternative grounds. First, it determined that the negligence

5 claim advanced a new theory of liability that TXT could not raise

for the first time in an objection to a motion for summary

judgment. Id. at 795-98. It also concluded that the Debtors

were entitled to summary judgment in any event because TXT had

failed to identify sufficient evidence to support a viable

negligence claim against GTAT. Id. at 799-803.

II. STANDARD OF REVIEW

This court has jurisdiction pursuant to

(a)(1) to hear appeals from the bankruptcy court’s final

judgments, orders, and decrees. In resolving this appeal, I

“scrutinize that court’s findings of fact for clear error, and

afford de novo review to its conclusions of law.” Brandt v.

Repco Printers & Lithographics, Inc. (In re Healthco Int’l),

(1st Cir. 1997). Where the court below made

discretionary rulings, I review for abuse of discretion. See

Hoover v. Harrington (In re Hoover),

(1st Cir.

2016). I may “affirm the bankruptcy court order on any ground

apparent from the record on appeal.” Cromwell v. Countrywide

Home Loans, Inc.,

(D. Mass. 2012) (quoting

Spenlinhauer v. O’Donnell,

(1st Cir. 2001)).

The bankruptcy court denied TXT’s administrative expense

claim on summary judgment. TXT’s disputed claim constituted a

“contested matter” under Bankruptcy Rule 9014, to which the

6 summary judgment standard of Rule 56 applies. See Fed. R. Bankr.

P. 7056, 9014(c); see also Gray v. Manklow (In re Optical

Techs., Inc.),

(11th Cir. 2001). Under Rule

56, summary judgment is appropriate where “the movant shows that

there is no genuine dispute as to any material fact and the

movant is entitled to judgment as a matter of law.” Fed. R. Civ.

P. 56(a). The bankruptcy court is required to construe the

evidence “in the light most agreeable to the nonmoving party and

draw all reasonable inferences in that party's favor,” but it

must “afford no evidentiary weight to ‘conclusory allegations,

empty rhetoric, unsupported speculation, or evidence which, in

the aggregate, is less than significantly probative.’” Tropigas

de Puerto Rico, Inc. v. Certain Underwriters at Lloyd’s of

London,

(1st Cir. 2011) (quoting Rogan v. City of

Boston,

(1st Cir. 2001)). I review the

bankruptcy court’s summary judgment ruling de novo. See Daniels

v. Agin,

(1st Cir. 2013).

III. ANALYSIS

TXT has abandoned its initial effort to base its

administrative expense claim on a postpetition failure by GTAT to

abide by its prepetition obligations. See Doc. No. 28 at 2-4.

Instead, it attempts to salvage only its negligence claim by

pointing to three alleged errors in the reasoning process that

7 led the court to reject the claim. First, TXT challenges the

court’s determination that the negligence claim was untimely by

arguing that its timely original claim can be fairly read to

include a negligence claim. Next, it argues that the court’s

timeliness ruing was incorrect even if TXT asserted the claim for

the first time in its objection to the Debtors’ summary judgment

motion. Finally, it challenges the court’s determination that

TXT failed to produce sufficient evidence in response to the

Debtors’ summary judgment motion to support a viable negligence

claim. I address each argument in turn.

A. Does TXT’s Initial Motion State a Claim for Negligence?

TXT argues that its original administrative expense claim

can be fairly read to include a negligence claim because the

claim “specifically referenced ‘negligence’” and “pled the

essence” of a claim based on Reading v. Brown,

(1968), the Supreme Court decision that recognizes a creditor’s

right to claim administrative priority for a postpetition

negligence claim in certain circumstances. Doc. No. 22 at 6. I

am unpersuaded by TXT’s arguments.

When TXT initially identified the facts supporting its

claim, it did not assert that GTAT acted negligently or mention

any terms generally associated with negligence. Instead,

tracking the settlement agreement, it stated that it “was harmed,

and continues to be harmed, by [GTAT’s] refusal to remove the 10

8 [furnaces]” and “has been damaged due to [GTAT’s] continuing

failure to provide current and compatible software licenses . . .

and provide the service necessary to render the software

operational.” See Doc. No. 24-2 at 9–10. Notwithstanding TXT’s

contrary assertion, this language does not state a claim that

GTAT acted negligently. By largely reflecting GTAT’s obligations

under the settlement agreement, TXT instead suggested only that

GTAT committed postpetition violations of its prepetition

obligations.

Although TXT discussed Reading in its initial claim and

mentioned “negligence” in describing the facts of that case, the

discussion merely provided context for what TXT argued was a

“line of cases stem[ming]” from Reading. TXT began the relevant

portion of its motion by stating that where a “post-petition

transaction” causes “post-petition harm to [a] claimant,” the

claimant may be entitled to an administrative expense. Doc. No.

24-2 at 8. TXT then introduced Reading as the origin of the

“line of cases” establishing this broader rule. See

It next

cited First Circuit cases interpreting Reading, and, immediately

before applying the law to the facts of its case, claimed that

the First Circuit has construed Reading to mean “that where a

debtor continues to breach an order post-petition,” an

administrative expense may be appropriate. Id. at 9 (footnote

omitted). By asserting this rule immediately before identifying

9 the alleged harms to TXT, emphasizing in a footnote that the

arbitral award constitutes an order, and then framing the harms

to TXT in terms of GTAT’s prepetition obligations, TXT merely

raised a claim grounded in GTAT’s postpetition violations of its

prepetition obligations rather than a postpetition negligence

claim. See id. at 9–10 & n.5.

TXT also failed to notify the Debtors of its intent to plead

a negligence claim at any point prior to the filing of its

objection to the Debtor’s summary judgment motion. At a June

2015 hearing before the bankruptcy court, TXT invoked the need

for “factual findings” on the functionality of the furnaces and

software licenses, but made no reference to negligence. Id. at

73–74. Further, in an October 2015 court-approved stipulation

addressing GTAT’s failure to remove 10 nonconforming furnaces,

TXT reserved its other claims but again made no mention of

negligence. Id. at 160. And even though the debtors noted in

their preliminary objection to TXT’s claim that “TXT does not . .

. allege that it suffered any damages on account of a

postpetition tort,” TXT did not rebut that assertion. Id. at 28

n.14. Perhaps most tellingly, when invited on appeal to identify

any correspondence or documents besides its initial motion that

would have specifically notified GTAT of TXT’s postpetition

negligence claim before the Debtors filed their summary judgment

motion, TXT did not point to any documents that would support its

10 position. Doc. No. 28 at 5–7. Accordingly, the bankruptcy court

correctly determined that TXT failed to adequately raise a claim

of postpetition negligence until it filed its objection to the

Debtors’ motion for summary judgment.

B. May TXT Assert Its Negligence Claim for the First Time in Its Objection to a Summary Judgment Motion?

TXT next argues that the bankruptcy court improperly refused

to consider its negligence claim even if TXT presented the claim

for the first time in its objection to the Debtors’ motion for

summary judgment.

The bankruptcy court based its determination that TXT’s

negligence claim came too late on the well-established rule that

“[p]laintiffs may not ‘raise new and unadvertised theories of

liability for the first time in opposition to a motion for

summary judgment.’” Miranda-Rivera v. Toledo Dávila,

(1st Cir. 2016) (quoting Calvi v. Knox County.,

(1st Cir. 2006)). TXT argues, however, that the case

law the court relied on does not apply when an administrative

expense claim is challenged in a motion for summary judgment. In

developing this argument, TXT notes that a disputed

administrative claim is treated as a contested matter, rather

than an adversary proceeding, under the Bankruptcy Rules. See

Doc. No. 22 at 14–15. Because contested matters are not subject

to the amendment standards that apply in adversary proceedings,

11 TXT argues, the case law the bankruptcy court relied on does not

limit its ability to assert a new basis for its claim for the

first time in an objection to a motion for summary judgment. See

at 15–16. Again, I disagree.

The rule that prevents litigants from raising new theories

of liability for the first time in response to a summary judgment

motion is grounded in Rule 56. See Miranda-Rivera,

; Calvi, 470 F.3d at 430–31. And Rule 56 applies in contested

matters. See Fed. R. Bankr. P. 7056, 9014(c). In the absence of

this rule, plaintiffs would have less incentive to plead with

care, and defendants would likely be required to devote more of

their efforts to investigating theories not pleaded. Such an

outcome would not only be generally wasteful, but it would also

prejudice defendants who conduct discovery and prepare for

summary judgment without notice of a theory pleaded later.

The facts of this case reinforce the bankruptcy court’s

ruling and underscore the importance of the rule. Recognizing

that the facts underlying TXT’s claim were in dispute, the

bankruptcy court allowed for a period of discovery that ended on

November 6, 2015. See Doc. No. 24-2 at 151. The court also set

December 15, 2015, as the deadline for dispositive motions.

. In reliance on this schedule, the parties conducted

discovery, the Debtors filed a motion for summary judgment at the

deadline, and TXT responded with an objection asserting a claim

12 that it had not included in its initial motion. See id. at 230;

Doc. No. 24-4 at 366-67. Raising a new claim after the discovery

and dispositive motion deadlines had passed prejudiced the

Debtors. They expended time and resources conducting discovery

and preparing for summary judgment without adequate notice of

TXT’s new claim.2 Given this prejudice, TXT’s arguments that the

Debtors could have engaged in additional discovery or asked for

time to respond are unavailing. See Doc. No. 22 at 20.

The record is also devoid of evidence suggesting that

unusual circumstances prevented TXT from including a negligence

claim in its initial motion. TXT asserts that evidence

supporting a negligence claim — evidence that GTAT acted

gratuitously postpetition, instead of pursuant to contract —

first came to light during discovery. See id. at 9, 19.

However, TXT did not need to wait for such evidence to arise to

2 This misallocation of time and resources is particularly prejudicial here because delay in resolving TXT’s administrative claim could have jeopardized the Debtors’ reorganization. See Doc. No. 24-9 at 745 (February 4, 2016 hearing) (bankruptcy court noting, in context of another administrative expense claim, that “[i]f the confirmation is delayed, there will be no company”). The entities who committed exit financing to the Debtors conditioned the financing on, inter alia, (1) the Debtors’ reorganization plan going into effect by March 7, 2016, (eventually March 14 in the court-approved plan) and (2) the Debtors’ having at least $27.5 million in cash when the plan became effective, not including any amounts paid or reserved for administrative expenses. See Doc. No. 24-2 at 174, 205-7; Doc. No. 24-9 at 962.

13 present its negligence claim. GTAT’s engineers installed license

codes at TXT’s request in November 2014. Shortly thereafter TXT

knew that its furnaces had been damaged. Thus, TXT should have

been aware of a possible negligence claim well before the

discovery and dispositive motion deadlines passed in late 2015.

Under these circumstances, the bankruptcy court correctly

determined that TXT waited too long to raise its postpetition

negligence claim.3

C. Does the Record Contain Sufficient Evidence to Support a Negligence Claim?

TXT’s negligence claim has evolved during the course of this

litigation. In bankruptcy court, TXT based its claim primarily

on its contention that its damages were caused by GTAT’s breaches

of its prepetition duties “to provide the software licenses” and

“to provide whatever service was necessary to render the software

operational.” See Doc. No. 24-2 at 377–79 (quoting settlement

agreement for latter duty). It then argued that GTAT breached

these duties by “failing to provide the necessary software to

operate the [furnaces], by failing to exercise reasonable care in

3 To the extent that TXT contends that its negligence claim should have been treated as a de facto amendment to its original claim, the Debtors argue that the amendment came too late because it was asserted after the bar date for administrative claims. See Doc. No. 24 at 26–28. I need not address this argument, which neither party has adequately analyzed, because TXT waited too long to assert its new claim regardless of whether the claim was subject to the bar date.

14 installing the software, failing to provide the necessary

standard operating procedures and checklist to reoperate the

[furnaces], and by failing to inform TXT of the harm in

attempting to operate furnaces that had been idled for two

years.” Id. at 378. On appeal, TXT argues only that its damages

stem from a voluntarily assumed duty by GTAT to warn TXT that it

needed to refurbish the furnaces before it attempted to operate

them. See Doc. No. 28 at 9–16.

As narrowed, TXT’s negligence claim suffers from two

fundamental flaws. First, there is insufficient evidence in the

record to support TXT’s claim that GTAT ever voluntarily assumed

a postpetition duty to warn TXT that it needed to refurbish the

furnaces before attempting to operate them. At most, the

evidence suggests that GTAT may have voluntarily assumed the duty

to properly install license codes on the furnaces, but TXT does

not currently argue that its damages were caused by a breach of

that duty. See Doc. No. 28 at 13–15.

In a last ditch effort to save its claim, TXT points

primarily to a single deposition excerpt in which GTAT’s general

counsel was questioned about an email chain between TXT and GTAT

in which TXT expressed concern about the operability of the

furnaces. The excerpt includes the following exchange:

Q. Okay. And does that series of emails reflect the fact that GT was continuing to work with TXT as of [August 2015] to try to render the 20 [furnaces]

15 functional?

A. Well we were -- we were doing what we could reasonably do within the context of the settlement agreement and other circumstances of our relationship.

Doc. No. 24-5 at 488. TXT argues that this exchange supports its

claim that GTAT voluntarily assumed a duty to assist TXT in

getting the furnaces to work, which necessarily included a duty

to warn TXT that the furnaces needed to be refurbished. I

disagree. Even when the excerpt is construed in the light most

favorable to TXT, it merely describes GTAT’s decision to assist

TXT with the installation of the license codes. It does not

amount to an admission that it had assumed a broader duty to warn

TXT that the furnaces needed to be refurbished.4

Even assuming the record supports TXT’s claim that GTAT had

a duty to warn TXT about the danger of operating idled furnaces

without refurbishment, it still does not contain sufficient

evidence to support a claim that GTAT’s failure to warn caused

4 TXT’s negligence claim also fails for a related reason. Under New York law, which the parties agree is the governing law in this case, a voluntary assumption of duty cannot support a negligence claim unless “defendant’s conduct placed plaintiff in a more vulnerable position than plaintiff would have been in had defendant done nothing.” Heard v. New York,

(1993); see also Ward v. Edinburg Marina,

(App. Div. 2002). Here, the record does not support a claim that TXT’s decision to restart the furnaces without first refurbishing them was in any way based on GTAT’s actions in this case. Therefore, even if GTAT had an unexpressed intention to do more than merely assist TXT with the installation of license codes, that unexpressed intention could not make it liable to TXT on a failure-to-warn theory.

16 TXT’s injuries. The record shows, without triable dispute, that

TXT knew that any attempt to operate the furnaces without

refurbishment after a long period of disuse could cause damage.

TXT’s general counsel submitted a declaration to the bankruptcy

court stating that, at an internal meeting on October 1, 2014,

TXT “discussed . . . whether [GTAT] would be required to provide

a standard operating procedure or an inspection checklist to

ensure that TXT’s [furnaces] would be able to reoperate without

damage because the [furnaces] had been inoperable for two years.”

Doc. No. 24-4 at 386. In a deposition, TXT director Peggy Hsu

described the same meeting and noted that the idled furnaces had

to “follow a standard operating procedure in order to prevent”

damage. Doc. No. 24-6 at 544-45. Because TXT was aware of the

risk of operating the furnaces without refurbishment, it cannot

hold GTAT liable for failure to warn it of a danger that it

already understood. See Spano v. Bertocci,

(App. Div. 2002) (where plaintiff already knew about risks of

medication, no rational basis to find that doctor’s failure to

warn was proximate cause of injury); Ohlhausen v. City of New

York,

, 123–25 (App. Div. 2010) (where driver did

not rely on bus driver’s hand gesture to enter intersection, bus

driver did not proximately cause driver’s subsequent collision

with plaintiff); cf. Heard,

.

17 IV. CONCLUSION For the reasons provided above, the bankruptcy court’s (1)

Memorandum of Decision, (2) Order denying TXT’s administrative

expense claim, and (3) Order granting Debtors’ motion for summary

judgment are affirmed.

SO ORDERED.

/s/Paul Barbadoro Paul Barbadoro United States District Judge

February 13, 2017

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

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