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`IN THE UNITED STATES BANKRUPTCY COURT
`FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
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`) CASE NO. 17-bk-1200
`) CASE NO. 17-bk-1201
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`) Chapter 11
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`Jointly Administered
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`IN RE:
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`PROTEA BIOSCIENCES, INC., AND
`PROTEA BIOSCIENCES GROUP, INC.
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` Debtors.
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`MEMORANDUM OPINION & ORDER
`Protea Biosciences Inc., and Protea Biosciences Group, Inc. (collectively, “Protea”), object to an
`unsecured proof of claim filed by Laidlaw & Company (UK) Ltd. (“Laidlaw”), in the amount of $380,000
`and to an unsecured proof of claim filed by PPLL Partners, LLC (“PPLL”) in the amount of $360,000.
`Protea also requests that both unsecured claims be recharacterized as capital contributions. Laidlaw and
`PPLL move to dismiss the objection and request for recharacterization on the grounds that: (1) a request
`for recharacterization requires an adversary proceeding; (2) Protea improperly objected to two claims in a
`single document; and (3) any objection is premature until it can be ascertained that a dividend will be
`payable to unsecured creditors in Protea’s bankruptcy case.
`For the reasons stated herein, the court will deny Laidlaw’s and PPLL’s motion to dismiss and set
`a scheduling conference regarding Protea’s objection to claims and request for recharacterization.
`I. MOTION TO DISMISS A CONTESTED MATTER
`Laidlaw and PPLL seek to dismiss Protea’s objection to claim pursuant to Fed. R. Civ. P. 12(b),
`which is made applicable to bankruptcy adversary proceedings under Fed. R. Bankr. P. 7012.
`An objection to a proof of claim, however, is treated as a contested matter. 9 Collier on Bankruptcy
`¶ 3007.01 (2018). Once a contested matter is initiated, many of the rules governing adversary proceedings
`automatically apply; however, Fed. R. Bankr. P. 9014(c) does not make Fed. R. Bank. P. 7012 applicable
`to contested matters. Consequently, unless specifically ordered by the court on notice to the parties, there
`is no motion to dismiss a contested matter that is governed by the Fed. R. Civ. P. 12(b). Laidlaw and PPLL
`have asserted an inapplicable motion in response to Protea’s objection to their claims.
`Nevertheless, the court will adjudicate Laidlaw’s and PPLL’s preliminary response to Protea’s
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`claims objection under Fed. R. Bankr. P. 3007(b), which states that “[a] party in interest shall not include a
`demand for relief of a kind specified in Rule 7001 in an objection to the allowance of a claim, but may
`include the objection in an adversary proceeding,” and Fed. R. Bankr. P. 3007(c), which generally prohibits
`multiple objections to proofs of claim being filed in a single document.
`II. BACKGROUND1
`According to a Declaration filed by Protea in this case on December 2, 2017, it is a publicly traded
`Delaware Corporation that uses mass spectrometry imaging to provide bioanalytical services to the
`healthcare industry. Its lab provides services to major pharmaceutical, chemical, and biotechnology
`companies to identify and quantify biologically active molecules in living cells and tissue samples.
` According to Protea’s objection to claims, Laidlaw represented that Laidlaw could use Laidlaw’s
`business contacts at Massachusetts General Hospital (“Mass General”) to facilitate a joint venture or close
`working relationship between Mass General and Protea. More specifically, Protea was to work with Mass
`General’s Vaccine and Immunotherapy Center to develop a diagnostic methodology for obtaining cancer
`cell molecular profiles, including the distribution of drugs with cancer cells and molecular response
`indicators (the “Collaboration Agreement”).
`Before entering the Collaboration Agreement, however, Protea states that Mass General required a
`$360,000 fee. Because Protea did not have the funds available to make that payment, the principals of
`Laidlaw offered to make a loan of $360,000 to Protea through PPLL. Instead of directly loaning the money
`to Protea, PPLL was to make payments required by the Collaboration Agreement to Mass General.
`In contrast, PPLL states that its $360,000 claim is based on both the execution of the Collaboration
`Agreement with Mass General and PPLL’s Services Agreement with Protea. Exhibit C to the Service
`Agreement is a Non-Negotiable Convertible Promissory Note in the amount of $360,0002 that allowed
`Protea the “absolute right, commencing at any time from and after July 15, 2018, to pay the entire principal
`amount and all accrued interest . . . by issuing to PPLL an aggregate of thirty-six million . . . shares of
`common stock . . . .” (Claim No. 19-3, p.8). In PPLL’s October 13, 2018 amended proof of claim, it attached
`evidence of wire transfers from it to Mass General in the aggregate amount of $254,000 and PPLL states
`that the remaining amount, $106,000, is due it under the Services Agreement.
`Laidlaw states that it made loans to Protea by wire transfers on October 3, 4, and 5, 2017 in the
`amount of $100,000.00, $10,000.00, and $150,000.00, and that it is owed a $120,000.00 “fee for placing
`Wawrla loan.” (Case No. 17-bk-1201, Claim No. 18-1, p. 4), for a total claim of $380,000.00. Only one
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`1 The background information set forth herein is derived from the parties’ arguments and exhibits. This background
`information is not to be construed as findings of fact by the court.
`2 Oddly, the introductory paragraph to the July 17, 2017 promissory note states that the loan amount is both
`$360,000 and $750,000.
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`note, however, is attached to Laidlaw’s proof of claim. That note is dated October 3, 2017, and it provides
`an acknowledgement by Protea for the receipt of $110,000. The “fee for placing the Wawrla loan” relates
`to an Engagement Agreement whereby Laidlaw agreed to place securities in Protea.
`III. ANALYSIS
`PPLL and Laidlaw jointly assert that a request for recharacterization of a claim requires Protea to
`file an adversary proceeding. They also assert that Protea has improperly combined an objection to two
`different proofs of claim in a single document and that Protea’s objection is premature.
`A. Adversary Proceeding and a Request for Recharacterization
`Laidlaw and PPLL argue that Protea’s effort to recharacterize their asserted unsecured claims into
`capital contributions requires an adversary proceeding under Fed. R. Bankr. P. 3007(b) and 7001(2), (7),
`and/or (8). On this basis, they contend that the court lacks subject matter jurisdiction and they have received
`improper process or improper service of process.
`1. Subject Matter Jurisdiction
`A bankruptcy court’s subject matter jurisdiction derives from 28 U.S.C. § 1334. That statute grants
`district courts original and exclusive jurisdiction over all bankruptcy cases commenced under title 11 of the
`United States Code, and original but not exclusive jurisdiction over all civil proceedings arising under,
`arising in, or related to a case under title 11. By order of reference last amended on April 2, 2013, this grant
`of bankruptcy jurisdiction was referred to this bankruptcy court.
`Because Laidlaw and PPLL have submitted proofs of claim in Protea’s bankruptcy case, and
`because Protea has objected to those proofs of claim under Fed. R. Bankr. P. 3007, this is an action that
`arises in or under title 11, and this court has subject matter jurisdiction to hear and determine Protea’s
`objection to claims. Adjudicating a claim for recharacterization in an objection to a proof of claim is not
`issue of subject matter jurisdiction; rather, it is an issue that concerns the appropriate form of the bankruptcy
`proceeding.
`2. Form of Proceeding
`A request for recharacterization, which is often filed in conjunction with other causes of action that
`fall within the scope of Fed. R. Bankr. P. 7001, may be adjudicated through an adversary proceeding. See,
`e.g., Highland Constr. Mgmt. Servs., LP v. Wells Fargo (In re Highland Constr. Mgmt. Servs., LP), 569
`B.R. 673 (E.D. Va. 2017) (noting that Count I of the adversary complaint was for recharacterization and
`Count II was for equitable subordination).3 Here, however, Laidlaw and PPLL assert that a request for
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`3 Laidlaw and PPLL cite many cases for the proposition that recharacterization is an adversary proceeding. In each
`of the cases cited, however, there was an independent reason for asserting recharacterization in an adversary
`proceeding. See, e.g., Wilson v. Moir (In re Wilson), 359 B.R. 123 (Banrk. E.D. Va. 2006) (noting that the adversary
`proceeding contained requests to determine the priority of liens in property, a lien avoidance action, an equitable
`subordination action, and a recharacterization claim).
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`recharacterization – standing alone – also requires the filing of an adversary proceeding under Fed. R.
`Bankr. P. 7001(2), (7) and/or (8).
`Fed. R. Bankr. P. 7001(8) specifically states, with some exceptions, that “a proceeding to
`subordinate any allowed claim or interest” is an adversary proceeding.
`Recharacterization and subordination, however, are different. “Subordination is a remedy in which
`the order of payment rather than the existence of the debt is in issue.” 4 Collier on Bankruptcy ¶ 510.02[1]
`(2018). Subordination is often based on creditor misconduct such as fraud or usury. Id. In contrast,
`recharacterization generally occurs when a party asserts that a loan was made but the original circumstances
`of the loan compels treating the advance not as debt but as equity. Id. at [3]. Thus, “[r]echaracterization
`cases turn on whether a debt actually exists,4 not on whether the claim should be equitably subordinated.”
`Id. See also Fairchild Dornier GmbH v. Official Comm. of Unsecured Creditors (In re Dornier Aviation
`(N. Am.), Inc.), 453 F.3d 225, 232 (4th Cir. 2006) (“[A]lthough recharacterization and equitable
`subordination lead to a similar result, they ‘address distinct concerns’ and require a bankruptcy court to
`conduct different inquiries.”); Official Comm. of Unsecured Creditors of Russell Cave Co. v. Gen. Elec.
`Capital Corp. (In re Russell Cave. Co.), 107 Fed. Appx. 449, 451 (6th Cir. 2004) (stating that a request for
`recharacterization is the same as objecting to the claim’s allowance because it is “a request for the
`bankruptcy court to hold a debt, and hence any claim, is non-existent.”). “Recharacterization is a
`definitional attack.” FCC v. Airadigm Communs., Inc. (In re Airadigm Communs., Inc.), 616 F.3d 642, 658
`(7th Cir. 2010).
`Consequently, a request for recharacterization does not fall within the scope of Fed. R. Bankr. P.
`7001(8) because recharacterization seeks a determination as to the claim’s proper classification in the
`Bankruptcy Code and does not seek the subordination of a valid claim based on inequitable conduct.
`Similarly, a request for recharacterization of a debt, which is represented by a proof of claim, to a
`capital contribution, which is generally represented by a proof of interest, is not a proceeding to obtain an
`“injunction or other equitable relief” as provided in Fed. R. Bankr. P. 7001(7). The term “other equitable
`relief” generally includes accountings, specific performance, marshalling, constructive trusts, and orders to
`compel compliance with state law. E.g., 10 Collier on Bankruptcy ¶ 7001.08 (2018) (listing types of “other
`equitable relief”). A request to properly and originally classify the existence of a claim or interest against a
`bankruptcy estate is not consistent with the with the nature of an injunction or other equitable relief as
`contemplated by Fed. R. Bankr. P. 7001(7).5
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`4 A “‘debt’ means liability on a claim,” a “claim” is “a right to payment,” 11 U.S.C. § 101(5), (12). The term “debt”
`does not include an equity interest. Carrieri v. Jobs.com, Inc., 393 F.3d 508, 525 (5th Cir. 2004). This distinction is
`carried over to 11 U.S.C. § 502(a) where holders of debt file a proof of claim and equity holders file a proof of
`interest. In bankruptcy, debt claims are paid before equity interests. § 726.
`5 A bankruptcy court has the “equitable power” to recharacterize filed claims as equity interests. E.g., Fairchild
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`Laidlaw’s and PPLL’s reliance on Fed. R. Bankr. P. 7001(2) is also improper. More specifically,
`Rule 7001(2) is for proceedings “to determine the validity, priority or extent of a lien or other interest in
`property . . . .” Here, neither Laidlaw nor PPLL have asserted any lien in property. The last phrase of Rule
`7001(2), “other interest in property,” can refer to a dispute over the ownership of stock in a debtor. 10
`Collier on Bankruptcy ¶ 7001.03[3] (2018). In this case, however, there is no dispute between the parties
`over ownership of Protea’s stock. Instead, the dispute is whether Laidlaw’s and PPLL’s asserted claims, to
`the extent those claims exist, are actually capital contributions. See generally In re Micro-Precision
`Technologies, Inc., 303 B.R. 238, 243 (Bankr. D.N.H. 2003) (finding that a request to recharacterize a debt
`claim as a capital contribution "is not a type of action listed in Rule 7001 that must be brought as an
`adversary proceeding"); In re 431 W. Ponce De Leon, LLC, 515 B.R. 660, 674 (Bankr. N.D. Ga. 2014)
`(“While the recharacterization of debt has typically been addressed in the Eleventh Circuit through an
`adversary proceeding, there is no rule requiring such.”); Algonquin Power Income Fund v. Ridgewood
`Heights, Inc. (In re Franklin Indus. Complex, Inc.), 2007 Bankr. LEXIS 3004, at *45 n. 17 (Bankr.
`N.D.N.Y. Aug. 30, 2007) (“Plaintiffs' request for recharacterization of the Defendants' claims does not
`require the commencement of an adversary proceeding pursuant to Fed. R. Bankr. P. 7001.”).
`Therefore, the court finds no merit in Laidlaw’s and PPLL’s contention that a request for
`recharacterization of an unsecured debt to a capital contribution requires an adversary proceeding under
`Fed. R. Bankr. P. 3007(b) and 7001(2), (7), and/or (8).6
`B.
`Improperly Combining Pleadings
`Laidlaw and PPLL assert that Protea improperly combined its objection against Laidlaw’s claim
`and its objection to PPLL’s claim in a single document. Under Fed. R. Bankr. P. 3007(c), “unless otherwise
`ordered by the court . . . objections to more than one claim shall not be joined in a single objection.”
`Rule 3007(c) does not specify the method by which a court may order more than one claim to be
`joined in a single objection. In Protea’s opposition to Laidlaw’s and PPLL’s motion to dismiss, it
`specifically requests the court enter an order allowing it to object to both claims in a single objection on the
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`Dornier GmbH v. Official Comm. of Unsecured Creditors (In re Dornier Aviation (N. Am.), Inc.), 453 F.3d 225, 233
`(4th Cir. 2006) (“A bankruptcy court's equitable powers have long included the ability to look beyond form to
`substance and we believe that the exercise of this power to recharacterize is essential to the implementation of the
`Code's mandate that creditors have a higher priority in bankruptcy than those with an equity interest.”). The court’s
`equitable power to recharacterize a proof of claim as an interest in the debtor, however, is not based upon any
`inequitable conduct of a party that might be remedied by an injunction or some type of specific performance as
`contemplated by Fed. R. Bankr. P. 7001(7).
`6 Laidlaw and PPLL assert that an adversary proceeding should be filed on the basis that they need appropriate time
`to present counterclaims and conduct discovery. The court notes, however, that discovery between the parties is
`currently ongoing, discovery is available in contested matters under Fed. R. Bankr. P. 9014(c), and should Laidlaw
`or PPLL actually file an adversary proceeding against Protea, the court can control both courses of litigation
`following a case management conference.
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`basis that Laidlaw and PPLL are related entities, with the same counsel, and both entities were, at least in
`part, involved with Protea’s business relationship with Mass General. According to 9 Collier on Bankruptcy
`¶ 3007.03 (2018), the court should consider whether the claimants will receive “fair notice of any objection”
`when determining whether to allow an objection to more than one claim in a single document.
`The court will allow Protea to combine its objection to both Laidlaw’s and PPLL’s proofs of claim
`in a single claims objection for the reasons set forth by Protea, and because both Laidlaw and PPLL are
`fully aware of Protea’s objection to their claims.
`C.
`Prematurity
`Laidlaw and PPLL assert that Protea’s bankruptcy estate is administratively insolvent; thus, no
`purpose is served by objecting to their unsecured claim until such time as there might be a return to
`unsecured creditors.
`Protea asserts that its bankruptcy case is administratively solvent and, pursuant to a plan, there will
`be a return to unsecured creditors and a litigation trust whereby further causes of action might be pursued
`that could bring value to the bankruptcy estate. Protea also references a contemplated sale that it estimates
`will bring about $1 million into the bankruptcy estate.
`The court notes that as of the date of this Memorandum Opinion, there are $632,424.50 in
`professional fee applications. On this basis, and in light of a pending sale motion, the Court finds that
`Protea’s objection to claims is not premature.
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`IV. ORDER
`Based on the reasons set forth above in the court’s Memorandum Opinion, it is
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`ORDERED that the Motion of Laidlaw and PPL to Dismiss the Debtor’s Amended Objection to
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`Proofs of Claim and Motion to Recharacterize Debt and Equity (Document No. 361), filed on September
`24, 2018, be and hereby is DENIED. It is
`FURTHER ORDERED that under Fed. R. Bankr. P. 3007(c), Protea may combine its objection
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`to Laidlaw’s proof of claim and its objection to PPLL’s proof of claim in a single document. It is
`FURTHER ORDERED that the Reply of Laidlaw and PPLL to the Debtor’s Opposition to Motion
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`to Dismiss Debtor’s Amended Objection to Proofs of Claim and Motion to Recharacterize Debt as Equity
`(Document No. 375), filed on October 8, 2018, be and hereby is DEEMED to be the timely filed response
`to Protea’s Amended Objection to Proof of Claim filed by PPLL and Laidlaw and Motion to Recharacterize
`Debt as Equity (Document No. 332), except to the extent that Paragraphs 1-2, & 5-7 of Document No. 375
`have been fully adjudicated by this Memorandum Opinion and Order. It is
`FURTHER ORDERED that that a telephonic hearing is scheduled for Tuesday, November 13,
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`2018, at 3:00 pm for the purpose of conducting a prehearing conference to set discovery and related
`deadlines and for setting a date for an evidentiary hearing on Protea’s Objection to Claims and
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`accompanying Motion for Recharacterization (Document Nos. 332 & 375). To participate in the hearing
`parties are instructed to dial (877) 848-7030 and provide access code 6500181 when prompted to do so.
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