Beskrone v. Berlin

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

In re: Chapter 7

ROSETTA GENOMICS, INC. Case No. 18-11316 (LSS)

Debtor. Jointly Administered

DON A. BESKRONE, not individually,

but solely as Chapter 7 trustee for

ROSETTA GENOMICS, INC.,,

Plaintiff,

Adv. Pro. No. 23-50336 (LSS)

v.

Kenneth A. Berlin, Ron Kalfus, and Brian

Markison,

Defendants.

MEMORANDUM

Before the Court is the Motion' filed by Kenneth Berlin, Ron Kalfus and Brian

Markison (each a “Defendant” and coilectively, “Defendants”) to dismiss the Complaint?

filed by Don Beskrone (“Plaintiff”) in his capacity as chapter 7 trustee for Rosetta

Genomics, Inc. (“Debtor”).

Defendants argue that the Complaint should be dismissed pursuant to Federal Rules

of Civil Procedure (“Civil Rules”) 12(b)(2), 12(b)(6), the doctrine of forum non conveniens and

Delaware’s statute of limitations.? Defendants also request that this Court withdraw the

' Defs.’ Mot. to Dismiss Compl., Dkt. No. 23 (“Motion”).

? Compl. for Damages, Dkt. No. 1 (“Complaint”).

Motion; Mem. Law Supporting Defs.’ Mot. Dismiss Compl. 8, Dkt. No. 24 (“Opening Br.”).

District Court’s reference to this Court. Finally, Defendants seck to dismiss the Complaint

for failure to state a claim. For the reasons discussed below, with a single exception, the

Motion is denied.

FACTUAL BACKGROUND"

The Debtor was a Delaware corporation with its principal place of business in

Pennsylvania. Rosetta Genomics, Ltd. (“Parent”) was an Israeli company that formed

Debtor as a wholly owned subsidiary to commercialize and expand its business in the

United States. Defendants in this action are former directors and officers of Debtor and

Parent. Berlin served as the CEO of Parent and as the sole director of Debtor. Kalfus

served as the CFO of both Parent and Debtor. Markison served as the Chairman of Parent’s

board of directors. Each Defendant is a citizen of New Jersey.

Parent “develop[ed] and commercialize[d] new diagnostic tests based on various

genomics markers, including DNA, mircoRNA and protein biomarkers and using various

technologies, including qPCR, microarrays, Next Generation Sequencing (NGS) and

Fluorescence In Situ Hybridizaton (FISH).”*> Debtor commercialized Parent’s products and

performed tests in its laboratories to expand Parent’s business in the United States. Debtor’s

most significant assets were its subsidiaries, Minuet Diagnostics, Inc. and CynoGen, Inc., as

well as the diagnostic test RosettaGX Reveal (“Reveal”). Reveal accounted for 75%-85% of

Debtor’s revenue.

4 As required. when considering a motion to dismiss, the facts recited herein are taken from the

Complaint. Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir.

1993).

> Complaint ¢ 43.

Parent also owned another diagnostic test, RosettaGX Cancer Origin Test (“Cancer

Origin”). In 2012, Medicare established a retmbursement rate for Cancer Origin and

published a formalized coverage decision through a Local Coverage Determination

(“LCD”), This LCD meant that Debtor and/or Parent received approved, automatic

payments for claims submitted to Medicare and private insurers for Cancer Origin.

There was no LCD for the Reveal! test. If the Reveal test was correctly coded, it was

rarely reimbursed. But, it was often billed under the coding for Cancer Origin such that

reimbursement was “automatic.”® Prior to 2017, miscoded Reveal tests were reimbursed by

Medicare in 90% of cases. By February 2018, after the miscoding was discovered, Medicare

reimbursement rates plummeted to less than 5%. Defendants knew of the false coding no

later than mid-June 2017. Internal documents reveal that Berlin sent a message to Debtor’s

general counsel stating that the false coding had been present “from Day One.””

A, PUBLIC FILINGS AND THE SECURITIES PURCHASE AGREEMENTS.

On September 26, 2016, Parent filed its Form 6-K, which included its June 30, 2016

unaudited financial statements. The form 6-K was signed by Kalfus. Parent reported

revenues on Reveal tests, but did not disclose that Reveal tests were being billed as Cancer

Origin,

Parent entered into a Securities Purchase Agreement in November 2016 (the “2016

SPA”) with Sabby Healthcare Master Fund, Ltd. and Sabby Volatility Warrant Master

Fund, Ltd. (collectively, “Sabby”). Pursuant to the 2016 SPA, Sabby tendered $3,160,000

to Parent and received 1,095,000 ordinary shares and other warrants in exchange. This

§ Complaint q 45.

? Complaint 4 45.

agreement was executed by Berlin, who made numerous statements regarding Parent’s

revenues, assets and liabilities. Berlin did not disclose the miscoding.

The 2016 SPA, a direct placement subject to Parent’s then-current Registration

Statement, incorporated the 2016 Form 6-K, the Prospectus and the Prospectus Supplement.

The 6-K and the 2016 SPA contain warranties that the incorporated financial statements

complied with Generally Accepted Accounting Principles (GAAP) and “fairly present in all

material respects the financial position of [Parent] and its consolidated subsidiaries as of and

for the dates thereof and the results of operations and cash flows for the periods then ended,

subject, in the case of unaudited financial statements, to normal, immaterial, year-end audit

adjustments.”® These documents did not disclose that Reveal’s high reimbursement rate

and revenue were due to the false coding. Parent acknowledged that Sabby was relying on

its representations in entering into the 2016 SPA.

Debtor provided an absolute guaranty of the 2016 SPA. It also adopted Parent’s

representations and warranties as they related to Debtor. Debtor did not disclose that

Reveal revenues and reimbursement rates were based on false coding or that if discovered,

this could lead to a material decline in reimbursement rates.

On March 30, 2017, Parent filed its 20-F, which included consolidated financial

statements; this filing was certified by each of the Defendants.

In June 2017, Defendants learned that the false coding of Reveal was under scrutiny

by Medicare. In response, Defendants “purported” to launch an internal investigation and

“purported” to “fix” the miscoding.’ Notwithstanding the internal acknowledgement of the

® Complaint 4 52.

Complaint § 63.

4,

miscoding, Defendants repeatedly appealed the denial of rembursement. Further, the

economic impact on revenues was immediate.

On August 3, 2017, Parent and Sabby entered into a second Securities Purchase

Agreement (“August 2017 SPA”) for the purchase of ordinary shares and warrants. Berlin

signed the August 2017 SPA, but he made no disclosures about Reveal.

On September 28, 2017, Parent and Sabby entered into a third Securities Purchase

Agreement (“September 2017 SPA”) by which Sabby agreed to purchase unregistered

convertible debentures and warrants to purchase ordinary shares. Berlin signed the

September 2017 SPA. There were no disclosures about Reveal.

The terms of the August 2017 SPA and the September 2017 SPA were materially

identical to those in the 2016 SPA, including the incorporation of the Registration

Statement. The August 2017 SPA and the September 2017 SPA were guaranteed by Debtor

with terms materially identical to Debtor’s guarantee of the 2016 SPA. Debtor made no

disclosures about Reveal.

In deciding to enter the August 2017 SPA and the September 2017 SPA, Sabby relied

on financial statements, registration statements, public statements and other representations

and warranties regarding Parent’s and Debtor’s business. Defendants always knew that

Reveal coding was false and that this could have a material impact on its reimbursement

rates. In total, Sabby tendered $7,871,844 to Parent under the three SPAs.

On October 10, 2017, Parent filed its Form 6-K with the SEC. In that disclosure,

Berlin reported that Reveal revenues in the third quarter of 2017 increased by 23%

compared to the previous quarter. Berlin also represented that Reveal “has significant near-

and long-term revenue prospects with relatively high gross margins, which is why we believe

Reveal provides the best path to profitability.” Reveal was a material portion of Parent’s

revenue, accounting for 80% of its revenue for the second quarter and 75% of its total gross

revenue for the first half of 2017. In connection with the Form 6-K, Parent announced that

it was suspending its previous revenue and unit guidance, with the intention to update such

guidance. Nevertheless, Parent issued the prior guidance knowing that Reveal was being

miscoded and that it presented a material risk to existing revenue and forward-looking

statements.

Berlin ignored reasonably available data which would have made clear that his

statements on Parent’s performance were not warranted. Defendants reported higher

incomes in the third quarter by recognizing 100% of third-quarter Medicare claims as

revenue despite Defendants’ knowledge that the proper rembursement rate approached 0%.

These actions violated GAAP rules such that Parent’s accountant later refused to explain

the accounting.

B, THE MERGER AGREEMENT WITH GENOPTIX.

On December 14, 2017, Parent entered into an Agreement and Plan of Merger

(“Merger Agreement”) with Genoptix, Inc. (“Genoptix”). By the Merger Agreement,

Genoptix was to acquire both Parent and Debtor. Defendants never disclosed the

miscoding of Reveal tests, the internal investigation or the declines of revenue and Medicare

reimbursement rates.

Parent held an Extraordinary General Meeting of Shareholders on February 22, 2018

to obtain approval of the proposed merger. The merger was not approved. That same day,

Complaint { 74.

Genoptix terminated the Merger Agreement and entered into a new Agreement and Plan of

Merger (‘New Merger Agreement”). The material terms remained the same except for

changes to the purchase price and the closing date.

Markison approved the Merger Agreement and the New Merger Agreement; the

Agreements state:

WHEREAS, the board of directors of the Company (the “Company Board”)

has unanimously (i) determined that this Agreement, the Merger and the other

transactions contemplated by this Agreement are fair to, and in the best

interests of, the Company and its shareholders and that, considering the

financial position of the merging companies, no reasonable concern exists that

the Surviving Company, will be unable to fulfill the obligations of the Company

to its creditors; (ii) approve this Agreement, the Merger and the other

transactions contemplated hereby; and (iii) determined to recommend that the

shareholders of the Company approve this Agreement, the Merger and the

other transactions contemplated hereby{.]"’

Berlin executed the Merger Agreements.

As an inducement to (and a condition of) Genoptix’s willingness to enter into the

New Merger Agreement, Debtor agreed to sell its subsidiary—Minuet Diagnostics, Inc.

(and Minuet’s subsidiary, CynoGen, Inc.)—to Genoptix outside the context of the merger

transaction (i.e., not conditioned on closing). The relevant documents were executed by

Berlin. As a further inducement, Debtor also entered into a Loan and Security Agreement

by which Genoptix extended Debtor a bridge loan of up to $600,000 monthly, with simpic

interest of 10% per annum. The Loan and Security Agreement was secured by the capital

stock of the Debtor and its subsidiaries. The loan was not contingent on the closing of the

merger.

Complaint { 83.

At the time the various agreements were entered into, Berlin and Kalfus beneficially

owned 45,318 and 2,838 shares of Parent, respectively. Given the financial condition of

both Parent and Debtor, the completion of the merger was the only way to save the

companies and for Berlin and Kalfus not to lose all value in their shares.

To ensure sufficient votes in support of the merger, Berlin solicited Sabby to purchase

additional shares on the open market. In soliciting Sabby’s further investment, Berlin never

disclosed any issues surrounding Reveal. Sabby purchased additional shares in reliance on

Berlin’s solicitation.

The New Merger Agreement was amended on March 11, 2018 and executed by

Berlin. The New Merger Agreement was subsequently amended again, with this

amendment executed by Kalfus.

On April 26, 2018, Parent held another Extraordinary General Meeting of

Shareholders to obtain approval of the proposed merger with Genoptix. With Sabby’s

additional shares, the proposed merger obtained sufficient shareholder approval.

Meanwhile, Genoptix began performing its due diligence of Parent and Debtor, The

Merger Agreement and the New Merger Agreement each contained various representations

regarding the state of Parent’s business, the veracity of previous business statements and

filings and the nonexistence of anything that would materially damage the business. Berlin

and Kalfus approved and caused Parent to make the representations.

On May 22, 2018, Genoptix first identified Parent’s material misrepresentations.

Three days later, Genoptix provided a detailed explanation of the breached representations

and warranties which mostly related to Reveal. On May 29, 2018, Genoptix alleged that it

had discovered documentation of hundreds of Reveal tests being miscoded; Genoptix

subsequently exercised its right under the New Merger Agreement to withdraw from the

transaction,

PROCEDURAL BACKGROUND

On May 31, 2018, Debtor filed for relief under chapter 7. A meeting of creditors was

held on July 18, 2018, after which Plaintiff became the permanent trustee for Debtor

pursuant to 11 U.S.C. § 702(d).

Also on May 31, 2018, Parent commenced liquidation proceedings in Israel,

pursuant to which an Israeli Liquidator was appointed.

On May 27, 2021, this Court entered an Order authorizing Plaintiff to enter into an

assignment agreement with Sabby under which Sabby assigned its direct claims against

Defendants to Plaintiff. In early February 2022, both this Court and the Israeli court

approved an agreement by which Parent’s direct claims against Defendants were assigned to

Plaintiff.

Plaintiff filed a complaint against Defendants and others in the United States District

Court for the Southern District of New York on May 28, 2021 (“SDNY Lawsuit”), which

was subsequently amended to include the claims assigned to Plaintiff by the Israeli

Liquidator. On February 15, 2023, the court dismissed the SDNY Lawsuit for lack of

2 Ord. Approving Motion of Don A. Beskrone, Chapter 7 Tr., to Authorize Entry into Agreement

to Take Assignment of and Prosecute Direct Claims of Sabby Entities Nunc Pro Tunc to May 14,

2021, and for Related Relief, In re Rosetta Genomics, Inc., No. 18-11316 (Bankr, D. Del. May 27,

2021), Dkt. No, 145.

8 Ord. Approving Motion of Don A. Beskrone, Chapter 7 Tr., to Authorize Entry into Agreement

to Take Assignment of and Prosecute Direct Claims of Rosetta Genomics, Ltd. Held by Israeli

Liquidator and for Related Relief, In re Rosetta Genomics, Inc., No. 18-11316 (Bankr. D. Del. Feb. 2,

2022), Dkt. No. 157.

personal jurisdiction without prejudice to Plaintiffs right to pursue the claims in a proper

forum."

On April 14, 2023, Plaintiff filed the Complaint, which sounds in seven counts, as

follows:

Count Origin of Claim Defendants Capacity

I Breach of Fiduciary | Debtor Berlin Director, Debtor

Duty Sabby Kalfus CFO, Debtor

i Gross Negligence Debtor Berlin Director, Debtor

Sabby Kalfus CFO, Debtor

Tl Breach of Fiduciary | Parent Berlin CEO/President, Parent

Duty Kalfus CFO, Parent

Markison Chair of Board, Parent

Gross Negligence Ail Defendants Officers/ Directors of Parent

All Defendants Officers/ Directors of Debtor

Ail Defendants Officers/ Directors of Parent

VII Negligent Parent All Defendants Officers/Directors of Parent

Misrepresentation

Defendants moved to dismiss on multiple grounds: () lack of subject matter jurisdiction, (ii)

lack of personal jurisdiction, (iii) forum non conveniens, (iv) statute of limitations and (v)

failure to state a claim. With their Motion, Defendants filed the Declaration of Aurora

4 Beskrone v. Berlin, 656 F. Supp.3d 496 (S.D.N.Y. 2023).

10

Cassirer in Support of Motion to Dismiss. Plaintiff filed his answering brief.'!° Defendants

filed their reply.!’ This matter is ripe for decision.

JURISDICTION

A, SUBJECT MATTER JURISDICTION EXISTS OVER THIS ADVERSARY PROCEEDING,

Plaintiff asserts the Complaint is related to Debtor’s bankruptcy case so the Court

has subject matter jurisdiction under 28 U.S.C. § 1334.

Defendants do not quite come out and say the Court does not have subject matter

jurisdiction. Instead, they argue that “[iJn this situation, there is less reason for the Court to

find this proceeding is ‘related to’ the Rosetta, Inc. bankruptcy.”"* This “situation” 1s the

assignment of claims by Sabby and Parent and the agreed split of recoveries. Under

Plaintiff's agreement with Sabby, any recoveries on the Sabby-assigned claims first cover

litigation fees and then are split 85% to Sabby and 15% to Debtor’s estate. Under Plaintiffs

agreement with Parent, any recoveries on the Parent-assigned claims first cover litigation

fees and then are split 50% to Sabby and 50% to Debtor’s estate. Further, from the estate’s

share of recoveries on any claims, Plaintiff must pay 33.3% to the Israeli Liquidator. Based

§§ Decl. Aurora Cassirer Supp. Mot. to Dismiss, Dkt. No. 25. While a court can review certain

types of documents on a motion to dismiss, here I will not do so, Defendants ask me to “consider”

all public filings attached to the Cassirer Declaration as well as all public documents in the SDNY

Lawsuit. But aside from citing to one Court of Chancery decision (and no federal decision),

Defendants do not cite relevant authority regarding how these documents should be considered or

for what purpose, Further, they only intermittently cite to the Cassirer Declaration without guiding

me as to what inferences I should draw from it that support the Motion.

16 PL.’s Mem, Law Opp’n Defs.’ Mot. to Dismiss Compl., Dkt. No, 26 (“Answering Br.”).

17 Reply Mem. Law Further Supp. Defs.’ Mot. to Dismiss Compl., Dkt. No. 27 (“Reply Br.”).

'8 Opening Br. 10.

11

on this arrangement, Defendants contend that “a substantial amount” of any recoveries will

not redound to the estate.

It is well settled in the Third Circuit that “related to” jurisdiction exists where “the

outcome of that proceeding could conceivably have any effect on the estate being

administered in bankruptcy.”” Ifthe outcome of the proceeding could aiter the debtor’s

estate, there is jurisdiction; “certainty, or even likelihood, is not a requirement.””°

Conceivability is the focal point of the analysis.”’ Defendants do not cite to any case for the

proposition that bankruptcy jurisdiction is grounded in the amount of recovery that may be

realized in pursuing a cause of action. Such a conclusion flies in the face of Pacor’s

capacious language. Thus, even assuming Defendants are correct that Sabby and the Israeli

Liquidator will receive a significant portion of any net proceeds,” because the outcome of

this proceeding cou/d result in money flowing into Debtor’s estate, this proceeding is “related

to” a case under title 11. Subject matter jurisdiction exists.

But, this is a non-core proceeding. Accordingly, I cannot issue final orders unless the

parties consent. While Plaintiff does, Defendants do not. Ultimately, then, I will need to

issue findings of fact and conclusions of law to the district court.”

19 Superior Contracting Grp. Inc. v. Rachmale (In re LTC Holdings, Inc.), 587 B.R. 25, 36 (Bankr. D. Del.

2018) (quoting Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6 (1995).

20 Binder v. Price Waterhouse & Co., LLP (I re Resorts Int'l, Inc.), 372 F.3d 154, 164 (3d Cir. 2004)

(quoting In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 264 (3d Cir. 1991).

23 Nuveen Mun. Tr. ex rel. Nuveen High Yield Mun. Bond Fund v. WithumSmith Brown, P.C., 693 F 3d

283, 294 (3d Cir. 2012).

22 Defendants do not provide any hypothetical examples of recoveries, but as is clear from the

sharing agreements, the estate’s recoveries will depend on which counts, if any, are winners.

This is not a final decision.

12

B, Tuts COURT HAS PERSONAL JURISDICTION OVER DEFENDANTS.

Plaintiff asserts in the Complaint that the Court has personal jurisdiction over

Defendants,

each of whom are United States citizens, are officers and/or directors of a Delaware

corporation (or its parent) and the claims against them involve their actions

undertaken in the United States in their official capacities as officers and/or

directors.”

Relying on § 3114 of Title 10 the Delaware Code (“Service of Process on nonresident

directors, trustees, members of the governing body or officers of Delaware corporations”)

and § 278 of Title 8 (“Continuation of corporation after dissolution for purposes of suit and

winding up affairs”), Defendants argue that Delaware law cannot be used to establish

personal jurisdiction because the Complaint was filed more than three years after “the date

of the corporation’s expiration.”* Defendants also assert that jurisdiction relating to all

Defendants in their capacity as directors and officers of Parent is lacking because Parent was

not a Delaware corporation.”

Plaintiff responds by arguing that he is not relying on Delaware statutes to establish

personal jurisdiction. Rather, he relies on Federal Rule of Bankruptcy Procedure 7004 and

its nationwide reach.”’ Plaintiff further asserts that he complied with the requirements under

Bankruptcy Rule 7004, so this Court has personal jurisdiction over Defendants.** Plaintiff

also argues that, to the extent relevant, § 278 limits a dissolved company’s ability to sue or

4 Complaint { 14.

Opening Br. 11.

76 Opening Br. 11.

Answering Br. 5-7,

28 Answering Br. 5-7.

13

be sued, but § 279 specifically excludes a trustee or receiver from the three year limitations

period,”

Personal jurisdiction exists over each Defendant. Personal jurisdiction in bankruptcy

court is governed by Bankruptcy Rule 7004(H, which provides:

If exercising jurisdiction is consistent with the United States Constitution and

laws, serving a summons or filing a waiver of service under this Rule 7004 or

the applicable provisions of Fed. R. Civ. P. 4 establishes personal jurisdiction

over a defendant:

(1) in a bankruptcy case; or

(2) in a civil proceeding arising under the Code, or arising in or related

to a case under the Code.”

Rule 7004(f) thus establishes three prerequisites on a bankruptcy court seeking to exercise

personal jurisdiction.*’ First, service of process must have been made upon a defendant

pursuant to Bankruptcy Rule 7004 or Civil Rule 4.” Second, the bankruptcy court must

have subject matter jurisdiction under 28 U.S.C. § 1334.% Third, the bankruptcy court’s

exercise of personal jurisdiction must comport with the Constitution and laws of the United

States.*4

Here, all three requirements are met. First, Plaintiff asserts, and Defendants do not

contest, that service was made upon Defendants by mail and through their counsel in

2 Answering Br. 6-7.

Fed, R. Bankr. P. 7004().

31 Cap. Corp. v. Cote (In re Finova Cap, Corp.), 358 B.R. 113, 119 (Bankr, D. Del. 2006) (quoting 10

Collier on Bankruptcy § 7004.07 (15th ed. 2006)); see also 10 Collier on Bankruptcy { 7004.07 (16th ed.

2023).

Finova Cap. Corp., 358 B.R. at 119.

33 Ia.

34 Id.

14

compliance with Bankruptcy Rule 7004(b)(1) and (8).* Second, “related to” jurisdiction

exists. Third, the exercise of personal jurisdiction over Defendants is consistent with the

Constitution and laws of the United States. Due process requires only that a defendant

“have certain minimum contacts with [the forum] such that the maintenance of the suit does

not offend ‘traditional notions of fair play and substantial justice.’”** Because Bankruptcy

Rule 7004(d) provides for nationwide service of process, and because service of process was

made under that federal law, the forum in question is the United States as a whole rather

than Delaware.*’ Defendants’ contacts with the United States satisfy the Imternational Shoe

standard. As residents of the forum, exercise of personal jurisdiction is proper under the

Constitution and laws of the United States (.e., there is general jurisdiction over each

Defendant as residents of New Jersey).

Further, I conclude that § 278 of the Delaware General Corporation Law does not

prohibit suit against these Defendants. Section 278 generally provides that corporations

shall continue to exist for three years after their dissolutions in order to sue and be sued.

Defendants argue that since this lawsuit was filed three years after the forfeiture of Debtor’s

charter, the filing comes too late and therefore there is no personal jurisdiction over

Defendants. Defendants do not attempt to reconcile this state statute with the undeniable

facts that (x) Debtor filed its bankruptcy case and so is under the jurisdiction of this Court

(since prior to the forfeiture of its charter) and (y) they are being sued by the chapter 7

36 Int'l Shoe Co. v. Wash., 326 U.S. 310, 316 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463

(1940)).

37 Finova Cap. Corp., 358 B.R. at 119-20.

15

trustee (not the corporation). Further, to the extent that it matters, this lawsuit was

originally brought within the three year period---when Plaintiff sued Defendants on May 28,

2021 in the Southern District of New York. Under § 278, such a lawsuit does not abate.*

For these reasons, I conclude that personal jurisdiction exists over all Defendants.”

DISCUSSION

A, PLAINTIFF'S CLAIMS ARE TIMELY.

Defendants next seek to dismiss the Complaint as time barred by Delaware’s three

year statute of limitations.” Plaintiff counters that this lawsuit is timely under Delaware’s

savings statute.’ Plaintiff is correct.

Defendants contend that “the last possible date upon which Plaintiff could have

brought any claims in this proceeding was May 31, 2021.” The complaint in the SDNY

Lawsuit (“New York Complaint”) was filed on May 28, 2021. Accordingly, Defendants

admit that the New York Complaint was timely filed. The New York Complaint was

dismissed for lack of personal jurisdiction on February 15, 2023. Plaintiff filed the

Complaint here two months later, on April 12, 2023. The only question, then, is whether

the savings statute serves to save the Delaware filing.

38 See also Marnavi 8.P.A, v. Keehan, 900 F.Supp.2d 377 (D. Del. 2012).

® T also note that in connection with their statute of limitations argument, Defendants contend that

the Complaint should have been filed in this court in the first instance. See infra.

40 Opening Br. 8 (referring to Del. Code Ann. tit. 10, § 8106).

4l Answering Br. 7 (citing Del. Code Ann. tit. 10, § 8118).

4 Opening Br. 8

16

“Tt is a well recognized principle that a statute of limitations is not tolled by the filing

of a complaint subsequently dismissed without prejudice.”** Accordingly, without more,

when a complaint is dismissed without prejudice but after the applicable statute of

limitations, a plaintiff is foreclosed from further pursuing the action.“ But, the Delaware

Code contains a savings statute that “reflects [Delaware’s] public policy preference for

deciding cases on their merits.”** The savings statute reads in relevant part:

If in any action duly commenced within the time limited therefor in this chapter

_., the writ is abated, or the action otherwise avoided or defeated .. . for any

matter of form ... a new action may be commenced, for the same cause of

action, at any time within | year after the abatement or other determination of

the original action, or after the reversal of the judgment therein.”

In order for the savings statute to apply, a plaintiff must show that (1) the original complaint

was duly commenced and (2) the original complaint was abated or defeated for a matter of

form.*’ An action is duly commenced when a plaintiff “diligently seeks to bring a defendant

into court... .’“8 An action is not “duly commenced” where the initial action was

intentionally brought in an improper forum.”

Cardio-Med. Assocs., Ltd. v. Crozer-Chester Med. Ctr., 721 F.2d 68, 77 Gd Cir. 1983),

“4 Brennan v, Kulick, 407 F.3d 603, 606 (3d Cir. 2005).

45 Reid v. Spazio, 970 A.2d 176, 180 (Del. 2009).

46 Del, Code Ann. tit. 10, § 8118(a) (2025).

Criswell vy. McFadden, No. Civ.A. 05-231, 2006 WL 435717, at *2 (D. Del. Feb. 23, 2006).

7d. at *3 (citing Russell v. Olmedo, 275 A.2d 249, 250 (Del. 1971)).

Td.

17

Defendants urge that filing in New York was forum shopping, claiming that Plaintiff

should have originally brought the claims in this court or in Israel.” Plaintiff alleges he filed

the original complaint in New York under the good faith belief that New York was an

appropriate forum.*' Defendants do not specifically respond to that assertion.

Defendants’ bare assertion of forum shopping, without more, is too thin a reed upon

which to rest their argument. While the New York Complaint was dismissed for lack of

personal jurisdiction, there is nothing in the opinion to suggest that it was filed there in bad

faith or without any argument for proper jurisdiction. Judge Engelmayer ultimately

concludes that the governing law provision upon which Plaintiff relied was not up to the

task.” In doing so, however, he recognized a line of Second Circuit decisions (upon which

Trustee relied) enforcing forum selection clauses against non-signatories, but he found that

line of cases distinguishable. Thus, I conclude the first prerequisite to the savings statute’s

applicability is satisfied.’

I also determine that the SDNY Lawsuit was dismissed as a “matter of form.”

Several courts have concluded that lack of personal jurisdiction is a “matter of form” giving

rise to the savings statute’s grace. In Cloud, the Delaware district court held that the

“Savings Statute applies to actions initially brought in a foreign jurisdiction and dismissed

°0 See Reply Br. 4 (“From the outset, Plaintiff could and should have brought Rosetta, Inc.’s claims

in this venue, or worked with the Israeli Liquidator to bring all claims in Israel.”).

* Complaint § 35.

Op. & Ord. at 20-28, Beskrone v. Berlin, 1:21-cy-04803 (S.D.N.Y. Feb. 15, 2023), Dkt. No. 84.

Criswell, 2006 WL 435717, at *3 (plaintiff's counsel filed the first complaint in good faith based on

multiple facts that she believed established jurisdiction; plaintiff's error in bringing her action in the

Pennsylvania Court of Common Pleas did not prevent it from being “duly commenced” under the

savings statute.).

18

for reasons other than on the merits of the claim.”** There, the plaintiff filed a personal

injury suit in Texas, only to have the case dismissed for lack of personal jurisdiction.” The

district court reasoned that the purpose of the savings statute is to ameliorate the harshness

of the statute of limitations against a plaintiff who promptly brought his action but was

defeated by a technicality and concluded that the Delaware savings statute applied.**

Reviewing the reasoned decisions, I conclude that dismissal for lack of personal

jurisdiction is within the ambit of “any matter of form.” Accordingly, the savings statute

sranted Plaintiff one year from the original suit’s dismissal to commence a new action.

Because the SDNY Lawsuit was dismissed on February 23, 2023, and because the

Complaint was filed on April 12, 2023, Plaintiff's action is timely.

B. Tats CouRT CANNOT WItHDRAW THE DISTRICT COURT’S REFERENCE.

Defendants argue that the reference to the Bankruptcy Court should be withdrawn.*’

Any such request must be made in compliance with Del. Bank. L.R. 5011-1 and is a

decision for the district court to make.

C. THIs COURT WILL NOT DISMISS FOR FORUM NON CONVENIENS.

Defendants next implore the Court to dismiss for forum non conveniens. Defendants

assert that because they do not live in Delaware, the events did not occur in Delaware and

the claims relate in large part to Parent, an Israeli company, Israel would provide a more

4 Cloud v. Amquip Corp., No. Civ.A. 02-1316, 2003 WL 21037653, at *2 (D. Del. Apr. 28, 2003).

3 Id, at *1-2.

© See also Criswell, 2006 WL 435717, at *1, *3 (Delaware’s saving statute saved lawsuit previously

dismissed for lack of personal jurisdiction).

57 Opening Br. 9-10.

19

appropriate forum. Defendants argue that Plaintiff's choice of forum is entitled to less

deference because he is asserting claims on behalf of Sabby and the Israeli Liquidator,

neither of whom reside in Delaware.’ Defendants also assert that the Delaware-endorsed

factors set forth in Cryo-Maid, Inc. support dismissal.”

Plaintiff argues that the Delaware bankruptcy court is a convenient forum because

the claims are asserted by a Delaware trustee on behalf of a Delaware debtor's estate.*

Plaintiff further states that Defendants are United States residents and that the relevant

actions and business operations did not occur in Israel—Defendants’ proposed alternative

forum.” Plaintiff cites to the three-part test articulated by the Third Circuit in Wind.

Upon review, the standards are substantially similar. In Cryo-Maid, the Delaware

Supreme Court identified the relevant factors as (1) the relative ease of access to proof,

(2) the availability of compulsory process for witnesses; (3) the ability to view the premises,

if relevant; (4) whether the controversy is dependent upon the application of Delaware law,

and (5) all other practical problems that would make the trial of the case easy, expeditious

Opening Br. 11.

Opening Br. 11 (first citing Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 504 (1947); and then citing

Sinochem Int'l Co., Ltd. v. Malay. Int’l Shipping Corp., 549 U.S, 422, 430 (2007).

6 Opening Br. 12 (citing Gen. Foods Corp. v. Cryo-Maid, Inc., 198 A.2d 681, 684 (Del. 1964).

Defendants do not discuss why this federal court sitting in bankruptcy jurisdiction should look to

Delaware state court decisions on forum non conveniens.

6! Answering Br. 9-10.

& Answering Br. 9-10.

Windt v. Qwest Comme’ns Int'l, Inc., 529 F.3d 183, 189-90 (3d Cir. 2008).

20

and inexpensive.” In weighing these factors, courts are directed to dismiss for forum non

conveniens “only in a rare case” where the defendant establishes “with particularity, that it

will be subjected to undue hardship and inconvenience if required to litigate in

Delaware... .”° The Delaware Supreme Court’s undue hardship standard suggests that a

plaintiff's choice of forum is entitled to some deference.”

In Windt, courts are directed to (1) determine whether an adequate alternative forum

exists; (2) determine the appropriate amount of deference to give to the plaintiffs choice of

forum; and (3) balance the public and private interest factors.®’ The relevant private interest

factors are: (i) the relative ease of access to proof; (1i) the availability of compulsory process

for unwilling witnesses; (iii) the cost of attendance for willing witnesses; (iv) the possibility

of viewing the premises if relevant; and (v) all other considerations to make the trial easy,

expeditious and inexpensive.® Public interest factors to be considered include

(i) administrative difficulties from court congestion; (11) the mterest in having local

controversies decided at home; (iit) the interest of keeping the action in the location of the

applicable law; (iv) the avoidance of unnecessary problems with conflict of laws; and (v) the

unfairness of burdening citizens in an unrelated forum with jury duty.” Courts may

exercise their discretion and dismiss for forum non conveniens if “the chosen forum would

6 198 A.2d at 683-84 (analogizing the issue of whether to stay an action In favor of a similar action

pending in another jurisdiction to the issue of whether to dismiss for forum non conveniens.).

8 Chrysler First Bus. Credit Corp. v. 1500 Locust Ltd, P’ship, 669 A.2d 104, 107 (Del. 1995),

6 Id.

6? 529 F.3d at 189-90.

fd, at 189,

Td,

21

result in oppression or vexation of the defendant out of all proportion to the plaintiff's

convenience ,,..””

Under both standards, the burden rests with Defendants to persuade me that this

Court is an inconvenient forum.”' And under both standards, I conclude that Defendants

have not met their burden. Plaintiff's choice of forum is entitled to deference. To overcome

this deference, Defendants assert that Parent is an Israeli company, that essential witnesses

are residents of Israel, that most of the relevant documents are in Israel and that Israeli law

applies.” Plaintiff counters these arguments, asserting that this action is centered on events

occurring exclusively within the United States by US directors and involving US regulatory

filings and public statements.” Plaintiffs assertions are supported by the Complaint.

Defendants do not argue that relevant documents located in Israel could not be transported

by mail or electronically. Thus, the issue of the relative ease of access of evidence—even if

Defendants’ contested assertions are believed—does not demonstrate overwhelming

hardship,

Likewise, I am unconvinced that the lack of compulsory process causes

overwhelming hardship. While Defendants assert that “many nonparty officers, directors,

and employees who will be essential witnesses are residents of Israel[,]” Defendants fail to

® Td, at 190,

GCX Ltd. v. Standard Chartered Bank (In re GCX Ltd.), 634 B.R. 441, 449 (Bankr, D. Del. 2021);

Chrysler First, 669 A.2d at 107.

Opening Br. 12.

3 Answering Br. 3.

22

demonstrate the need for compulsory process given that these are Defendants’ witnesses.”

As to the law to be applied, Defendants contend that Israeli law mirrors Delaware law on

the law of fiduciary duties.” The applicable law to the other counts is not contested.

Further, Plaintiff is a Delaware trustee and Defendants are residents of New Jersey.

Delaware is certainly closer and more convenient for Defendants than Israel. Additionally,

Parent maintained an office in Pennsylvania.”

Finally, [ note that Defendants argue that “Plaintiff could and should have brought

[Debtor’s] claims in this venue... .””’ They are thus hard pressed to make a forum non

conveniens argument.

This forum does not “result in oppression or vexation of the defendant out of all

proportion to the plaintiffs convenience.” The motion is denied on this ground.

D, FAILURE TO STATE 4 CLAIM.

With the preliminaries out of the way, Defendants move to dismiss for failure to

state a claim. The briefing, however, is not as crisp as it could be for at least two reasons.

First, Defendants begin their briefing by devoting five pages to a discussion of the

documents they believe are in Plaintiff's possession and what they believe those documents

show. While that might be appropriate in the summary judgment context (where

Defendants could append those documents to an affidavit so that they could be considered

Opening Br. 12.

® Opening Br. at 28 (“Israeli law mirrors Delaware law on the breach of fiduciary duty... .”).

Reply Br. 6.

™ Reply Br. 4.

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by the court}, they do not bear on a motion to dismiss.” Second, because, as Defendants

rightly point out, Plaintiff did not specify which fiduciaries duty(ies) Defendants purportedly

breached, Defendants are forced to guess. Defendants thus spend most of their time briefing

the duty of oversight (Caremark). In his answering brief, however, Plaintiff disavows that

theory and states that Defendants have pleaded the duty of care and loyalty.

Notwithstanding, instead of addressing the duties of care and loyalty, most of Defendants’

reply brief focuses on the duty of oversight. I will not address Defendants’ oversight

arguments as Plaintiff insists he is not bring a Caremark claim, and Plaintiff will be so limited

going forward. Further, I will address only those arguments made germane to a motion to

dismiss based on failure to state a claim.”

Generally speaking, notice pleading is the standard for complaints filed in Federal

court. The cases Defendants cite that are based on Chancery Court decisions are therefore

inapposite.*°

1. Count I (Breach of Fiduciary Duty/ Debtor).

With respect to Count I, Defendants make only a few arguments. First, Defendants

argue that Berlin is protected by an exculpation provision in Debtor’s charter and that

® See Stanziale v. Nachtomi (In re Tower Air, Inc.), 416 F.3d 229, 238 (3d Cir, 2005) (where “a

defendant’s motion to dismiss articulates the plaintiff's claims that supposedly lack factual support”

dismissal is not appropriate. “To hold otherwise would be effectively to transform Rule 12(b)(6)

motions into multi-purpose summary judgment vehicles. That we will not do.”),

Even in the Caremark portion of brief, Defendants argue the merits of the claims, not the pleading

standard.

80 Tower Air, 416 F.3d at 236-37 (discussing difference between Civil Rule 8 and Chancery Court

Rule 8 and ruling that the District Court erred in equating federal notice pleading decisions with

Delaware notice pleading decisions).

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Plaintiff cannot overcome the existence of that provision.*' The existence of an exculpation

provision is irrelevant, however, because an exculpatory provision is an affirmative defense

not properly considered at the motion to dismiss stage unless Plaintiff alleges the business

judgment rule in his complaint.”

Second, Defendants argue (perhaps with respect to both Berlin and Kalfus) that the

business judgment rule protects Defendants’ acts.** Again, the business judgment rule is a

defense to a plaintiff's allegations so it is not properly considered on a motion to dismiss

Third, Defendants raise, but do not develop, an argument that under “established

Delaware law” a wholly owned subsidiary operates for the benefit of its parent such that

“Berlin and Kalfus, in their capacities as a director and an officer of [Debtor], respectively,

could exercise no control over the contents of [Parent’s] public filings or agreements.”®

While couched in “oversight” language, Plaintiff responds by acknowledging the distinction

between duties owed by wholly owned subsidiaries depending on solvency. Plaintiff alleges

he has pleaded insolvency during all relevant periods and cites to multiple paragraphs in the

Complaint.

In the Complaint, Plaintiff alleges facts that show:

e § 341 meeting, Kalfus testified that Debtor did not operate profitably

in “the years prior to the Petition Date and was insolvent.” “To address its

financial condition, the Debtor pursued a number of options, including sale

or merger with other companies.”

1 Opening Br. 19.

8 See Tower Air, 416 F.3d at 242; Carickhoffv. Cantor (In re Live Well Fin., Inc.), Adv. Pro. No. 21-

50990, 2023 WL 4025816, at *3 n.19 (Bankr. D. Del. June 14, 2023) (collecting cases).

8 Opening Br. 20.

8 Tower Air, 416 F.3d at 238.

8 Opening Br. 24.

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« “The Debtor’s insolvency in the years prior to the Petition Date was such

that its Schedules and Statements show assets of $696,396.42.”

e The Claims register shows $53,667,345.75 in claims against Debtor.

e In 2017, Reveal was responsible for 75%-85% of Debtor’s revenues.

e Reveal tests were falsely coded from “Day One” such that revenues from

Reveal tests were significantly inflated.

e Parent’s April 5, 2018 Form 6-K shows a deteriorating financial condition

and the possibility of needing to seek protection under the bankruptcy laws.

While, admittedly, Plaintiff could have alleged more financial details, taking all inferences

in his favor, Plaintiff has pleaded that Debtor was insolvent during ali relevant time periods.

In particular, I note Kalfus’s own testimony, under oath, at the § 341 meeting that Debtor

was insolvent for the years prior to the petition date. Because, for purposes of this motion to

dismiss, Debtors are insolvent, Berlin and Kalfus have a fiduciary duty to Debtor. Thus,

Plaintiff's claim based on Debtor’s causes of action against Berlin and Kalfus will not be

dismissed on the basis that Plaintiff failed to state a claim.

On the other hand, Count I will be dismissed as to Sabby’s claims against Berlin and

Kalfus on that ground. In Count I, Plaintiff, bringing creditor Sabby’s direct claim, alleges

that Berlin and Kalfus breached the fiduciary duties they owed to Debtor and its creditors.

As Defendants rightly argue, creditors of an insolvent entity “have no right, as a matter of

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law, to assert direct claims for breach of fiduciary duty against the corporation’s directors.”

That is, even if a corporation is insolvent, Sabby has no direct claim.*’

2. Count IT (Breach of Fiduciary Duty/ Parent).

In Count IE, Plaintiff asserts Parent’s claims for breach of fiduciary duty against its

own directors and officers: Berlin, as CEO and President, Kalfus as CFO and Markison as

Chair of the Board of Directors. Defendants make two arguments in addition to those

already rejected above. First, they argue that Plaintiff's allegations are conclusory and

second, they argue that there are no specific allegations that the Genoptix stockholder vote

was not informed.

As to the first, my review of the Complaint differs from Defendants’, Plaintiffs

allegations are sufficiently concrete for Defendants to understand the nature of the

allegations against them. As to the second, Defendants fall back to the business judgment

rule with respect to the interestedness of Defendants in the stockholder vote. As already

concluded, the business judgment rule is a defense, not addressed at this stage of the case.

86 Am, Cath. Educ. Programming Found. Inc. v. Gheewalla, 930 A.2d 92, 94 (Del. 2007). See

Opening Br. 29. As the Delaware Supreme Court explained

It is well established that the directors owe their fiduciary obligations to the corporation and its

shareholders. While shareholders rely on directors acting as fiduciaries to protect their interests,

creditors are afforded protection through contractual agreements, fraud and fraudulent

conveyance law, implied covenants of good faith and fair dealing, bankruptcy law, general

commercial law and other sources of creditor rights... . “[T]he general rule is that directors do

not owe creditors duties beyond the relevant contractual terms.”

Id. at 99 (quoting Geyer v. Ingersoll Publ’ns Co., 621 A.2d 784, 787 (Del. Ch. 1992).

87 Further, there is no need for Sabby to assert any derivative claim because Plaintiff asserts Debtor’s

claims on its own behalf.

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3. Counts 1 and IV (Gross Negligence).

Defendants’ one paragraph argument with respect to Counts II and IV is:

Counts Two and Four of the Complaint alleges [sic] gross negligence claims by

[Debtor] against Berlin and Kalfus, and by [Parent] against all Defendants,

respectively. While these [are] denominated as claims for ‘gross negligence,’ under

Delaware law, such claims are interpreted as claims for breach of the duty of care, as

gross negligence is the standard for breach. As set forth above, Plaintiff fails [to]

state a claim for breach of the duty of care, and thus, gross negligence.™

As set forth above, Defendants’ only basis for their failure to state a claim for breach of the

duty of care argument is an exculpation clause. Because Defendants equate gross

negligence with the duty of care, relief on Counts IT and TV is denied.

4, Counts V and VI (Fraud),

Defendants’ one paragraph argument with respect to Counts V and VI is:

Counts Five and Six of the Complaint allege fraud claims by [Debtor] and [Parent]

against all Defendants. The conclusory allegations focus on allegedly-fraudulent

statements and omissions to third-parties such as (a) to commercial payors and

Medicare (Complaint 4149); (b) to creditors and investors (id.); (c) to Genoptix (id);

and (d) to Sabby (Complaint { 150). The claims do not allege any different wrongs

than were alleged in Counts One and Three, alleging breach of fiduciary duty, and

they also fail to state a claim and should be dismissed.

Defendants equate the fraud claims with the breach of fiduciary duty claims. As those have

survived the motion to dismiss, the fraud claims do as well.

5. Count VU (Negligent Misrepresentation).

Defendants’ one paragraph argument with respect to Count VI is:

In Count Seven of the Complaint, [Parent] alleges misrepresentation against all

Defendants. Each of the allegations therein, however, is characterized as a breach of

the duty of care, and should be dismissed.

For the same reasons, Count VII will not be dismissed.

8 Opening Br. 30.

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CONCLUSION

For the reasons stated above, the Motion is DENIED except with respect to the

claim in Count 1 asserted on the Sabby-assigned claims. A separate order will enter.

Dated: July 14, 2025 (/ Cousweeleeve Atul

Laurie Selber Silverstein

United States Bankruptcy Judge

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