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RoweCom Files for Bankruptcy, Then Sues divine for Fraud
by
Posted On February 3, 2003
In a bizarre twist to the continuing saga of the disappearing subscription money, RoweCom, the beleaguered subsidiary of divine, inc., filed for bankruptcy on Monday Jan. 27 in U.S. Bankruptcy Court, District of Massachusetts, Eastern Division. That same day, RoweCom filed a 14-count lawsuit in the same court against its parent company, alleging that divine had made "fraudulent transfers" of over $73.7 million of RoweCom funds and had looted the company.

Our last NewsBreak on this topic (http://newsbreaks.infotoday.com/nbreader.asp?ArticleID=16789) reported that, just a few days before the bankruptcy filing, Swets Blackwell had withdrawn its bid to buy RoweCom and EBSCO had signed a non-binding letter of intent to acquire the worldwide RoweCom business. At that time, RoweCom said the transaction would be implemented through a chapter 11 bankruptcy filing. When asked about the potential impact of the lawsuit on the acquisition plans, EBSCO representatives said the company had no official comment.

On Jan. 30, divine, as required by the SEC, filed a Form 8-K that sums up the circumstances alleged in the RoweCom lawsuit quite succinctly:

"RoweCom claims that upon its acquisition by divine, divine assumed responsibility for all RoweCom's liabilities and treated divine's payments of these liabilities as intercompany loans made by divine to RoweCom. RoweCom further alleges that divine knew prior to the assumption of these liabilities that RoweCom was experiencing financial difficulties such that it would unlikely be able to repay its obligations to divine. RoweCom claims that divine deepened its insolvency and later bankrupted RoweCom by fraudulently and wrongfully transferring funds from RoweCom to itself in repayment of RoweCom's intercompany loans from divine. RoweCom seeks avoidance of these transfers and recovery in the form of monetary damages.

"RoweCom also alleges that divine dominated and controlled RoweCom to the extent that the 'corporate veil' between RoweCom and divine should be pierced, rendering divine, and possibly other affiliates of divine, jointly and severally responsible for repayment of all RoweCom's obligations, debts, and claims."

Readers interested in the exact text of RoweCom's allegations can read the original complaint filed with the bankruptcy court by downloading this PDF file. [click here to download]

divine's response to questions about the lawsuit came as an e-mail from a company spokesperson: "[I]t is our policy not to comment on the specifics of any pending litigation. That being said, we are not surprised that RoweCom has taken this action, and we believe that the allegations made in this complaint are without merit. We believe this is simply an attempt by RoweCom to preserve any rights it might have in the event the expected resolution does not get finalized. If we are forced to litigate this matter, we are confident that we would prevail in a court of law. However, we remain hopeful that we will achieve a global solution to this matter in the next several days that will resolve all of RoweCom's concerns, including satisfying the delivery requirements to RoweCom's customers."

The steering committee of an ad-hoc creditors' group of publishers and library customers of RoweCom had endorsed the proposed sale to EBSCO, and was facilitating information sharing and the continued negotiation process. According to Mark Seeley, vice president and general counsel of Elsevier Science, who heads the ad-hoc group, divine had previously offered to contribute "some cash," but the creditors were pushing for more. Rumors have it that divine's offer was in the range of a paltry ten cents on the dollar.

Seeley said the ad-hoc creditors committee was not involved in filing the lawsuit. Seeley stated: "We hope that it does not cause a breakdown in the negotiations. We continue to believe that negotiation among all the parties is the right way forward." According to Seeley, bankruptcy trustees were contacting the top creditors and an "official" creditor committee meeting was scheduled for Thursday Feb. 6.

The bankruptcy lawyers representing RoweCom indicate that an informal bankruptcy informational Web site will be available next week at http://www.kccllc.com.

According to information in the bankruptcy filing, RoweCom's largest creditors are the National Institutes of Health Library ($2.4 million), Virginia Tech ($1.6 million), 3M ($1.3 million), and Lawrence Livermore National Labs ($1.2 million). As reported in an earlier NewsBreak (http://newsbreaks.infotoday.com/nbreader.asp?ArticleID=16797), the N.Y. State Attorney General has already filed suit against divine for SUNY Buffalo, with its claim of $1.2 million. divine had agreed to a partial payment of $500,000 to buy more time, but the suit is still pending.

In divine's home state of Illinois, the Illinois Attorney General's office is reportedly collecting information about Illinois customers in order to consider options to protect them and to ascertain any possible violations of Illinois law. James Huesmann is dean of University Libraries at Western Illinois University, which recorded a loss of $504,000 according to the bankruptcy filing. But, after checking, the actual amount of loss has proven to be even higher; the final number for the institution's filing with the bankruptcy court is $627,504.41. Huesmann stated: "Though criminal prosecution [of divine] might make me feel better, it might also be a pyrrhic victory. We might feel good, but it wouldn't help our institution."

Could it be that RoweCom thinks that divine's days are numbered and that's why it is going for the money now? Would a parent company plunder the cash of a subsidiary if it were in a healthy condition?

John Fiero, a partner in the San Francisco law firm, Pachulski, Stang, Ziehl, Young, Jones, & Weintraub, who specializes in complex bankruptcy cases, was asked if this was an unusual case. He said: "This is not the first case like this I've seen [where a subsidiary sues its parent in a bankruptcy situation]. What usually happens is that the parent [company] dies."


Paula J. Hane is a freelance writer and editor covering the library and information industries. She was formerly Information Today, Inc.’s news bureau chief and editor of NewsBreaks.


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