Ex-Execs Say Ch. 7 Trustee Can't Drop Amazon Doc Storage

Feb 2022 | LAW360 | Rick Archer

The founders of shuttered fecal testing service uBiome are asking a Delaware bankruptcy judge to bar the company's Chapter 7 trustee from ending its e-storage deal with Amazon, saying they may need the data to defend against legal claims.

In a motion filed Wednesday, Jessica Richman and Zachary Apte argued that trustee Alfred Giuliano shouldn't be allowed to end uBiome's electronic storage contract, saying the stored files could contain evidence they need to defend themselves against a suit by Giuliano claiming they duped investors and engaged in a fraudulent billing scheme.

"Destroying this potentially relevant evidence would create irreparable harm to the putative defendants in the trustee's case as well as three other ongoing civil and criminal cases," they said.

Ubiome, founded in 2012 by Richman and Apte to provide mail-in fecal testing services, filed for bankruptcy in 2019 after a federal probe into its insurance billing practices and the rushed departure of CEO Richman and chief scientific officer Apte rocked the company, which had just been valued at $600 million.

In March 2021, a federal grand jury in San Francisco handed up a criminal indictment alleging that Apte and Richman masterminded uBiome's practice of tricking doctors into ordering tests regarding gut and vaginal microbiomes that were, according to prosecutors, "not validated and not medically necessary."

At the same time, the U.S. Securities and Exchange Commission filed its own suit, alleging the pair duped investors into putting $60 million into the company by concealing the fraudulent billing.

Giuliano, who was appointed trustee when the bankruptcy was converted to a Chapter 7 liquidation, filed suit in September 2021 against Richman in bankruptcy court, alleging she had breached her fiduciary duty and employment agreement by adopting the billing practices and making misrepresentations to and withholding information from shareholders and the board of directors concerning the practices.

The adversary action, which names Apte as a co-conspirator, seeks $25.3 million in damages.

In December, Giuliano filed a motion asking the court for permission to abandon electronic documents curently stored by Amazon Web Services while allowing interested parties to preserve documents at their own expense.

He said that since the case was converted to a Chapter 7, the estate has paid $490,000 in storage fees. All the records needed to continue the bankruptcy case have been copied and preserved, he said.

"The estate should not continue to bear the burden of AWS electronic storage fees when there is no benefit to the estate, and where third parties have their own self-interests in preserving the documents going forward for their own investigatory, litigation, or other needs," he said.

Richamn and Apte, however, argued there was no reason to conclude that the trustee preserved all the documents relevant to their defense, and that forcing them to search for them unfairly shifted deposition costs to them.

"The trustee has decided to initiate the adversary proceeding against putative defendants. The estate must bear the costs of that litigation," they said.

They also argued the sale order entered when uBiome's assets were sold to Psomagen in 2020 requires him to preserve the records, and that the SEC has also required that the records be preserved.

Counsel for the trustee declined comment. Counsel for Richman and Apte did not immediately respond to requests for comment late Wednesday.

Richman is represented by Brett D. Fallon, Jaclyn C. Marasco and Joel Hammerman of Faegre Drinker Biddle & Reath LLP

Apte is represented by L. Katherine Good of Potter Anderson & Corroon LLP and W. Douglas Sprague of Covington & Burling LLP.

The trustee is represented by Bradford J. Sandler, Peter J. Keane and Colin R. Robinson of Pachulski Stange Ziehl & Jones LLP.

The bankruptcy case is In re: uBiome Inc., case number 19-11938, and the adversary action is Alfred T. Giuliano v. Jessica Richman, case number 21-51032, both in the U.S. Bankruptcy Court for the District of Delaware.

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