## Facts

- ProtoComm Corporation was a judgment creditor of Fluent, Inc. after obtaining a substantial breach-of-contract judgment.
- During the underlying contract dispute, Fluent entered an acquisition transaction with Novell that was restructured from an anticipated asset sale into a stock sale, resulting in Fluent becoming a wholly owned subsidiary.
- Shortly after the acquisition closed, Fluent’s operating assets and employees were transferred into Novell’s corporate structure, leaving Fluent with little to satisfy creditors.
- ProtoComm brought a follow-on action against participants in the acquisition, including former Fluent shareholders/directors who received consideration and were alleged to have authorized distributions connected to the deal.
- ProtoComm alleged the transaction effectively stripped Fluent of assets and left it insolvent, rendering it unable to satisfy ProtoComm’s judgment.
- Some defendants reached a settlement with ProtoComm and jointly sought dismissal with prejudice; the former Fluent shareholders (non-settling defendants) opposed the dismissal.

## Issues

1. Whether the former Fluent shareholders were entitled to summary judgment on claims alleging fraudulent conveyance and wrongful distributions connected to the acquisition and resulting insolvency.
2. Whether the court should grant a Rule 41(a)(2) dismissal with prejudice of settling defendants over the objection of non-settling defendants, and what terms should apply to prevent legal prejudice.

## Decision

- The court denied the former Fluent shareholders’ motion for summary judgment under Rule 56.
- The court held that genuine disputes of material fact remained regarding the substance and sequence of the transaction, Fluent’s solvency, the propriety of distributions, and the shareholders’ knowledge and involvement.
- The court granted the joint motion to dismiss with prejudice the claims against the settling defendants under Rule 41(a)(2), despite the non-settling defendants’ objection.
- The dismissal was conditioned to protect the non-settling defendants’ remaining rights and to address concerns related to contribution, indemnity, or allocation effects.

## Legal Principles

- Summary judgment is improper where the record shows genuine disputes of material fact on elements central to fraudulent transfer and wrongful distribution theories, including solvency and the economic substance of challenged transactions.
- In evaluating creditor challenges to corporate transactions, courts may examine economic reality and sequencing rather than rely solely on formal labels (e.g., stock sale versus asset sale) when assessing alleged asset stripping and related distributions.
- Under Rule 41(a)(2), voluntary dismissal after an answer or motion may be allowed “on terms that the court considers proper,” and is generally granted absent a showing of plain legal prejudice to non-moving parties.
- In multi-defendant cases, a court may approve settlement-based dismissals while imposing conditions to avoid unfair prejudice to non-settling defendants, including addressing potential contribution/offset effects.

## Conclusion

The court allowed ProtoComm’s claims against the non-settling former shareholders to proceed because key factual disputes remained about the transaction’s substance, Fluent’s solvency, and the shareholders’ role in distributions, while approving dismissal of settling defendants under Rule 41(a)(2) subject to conditions intended to prevent unfair prejudice to the remaining defendants.


ProtoComm Corp. v. Novell Advanced Servs., Inc., 171 F. Supp. 2d 459 (E.D. Pa. 2001)