Saturday, July 18, 2009
Luna Innovations files for Chapter 11
Roanoke-based Luna has listed debts of $55.6 million.
Jeanna Duerscherl | The Roanoke Times
Thomas Amos, a research associate for Luna Innovations, heats the neck of a beaker during a vacuum distillation on Friday.
operating officer Scott Graeff and CEO Kent Murphy. Luna Innovations Inc. filed for Chapter 11 bankruptcy protection, but plans to continue to operate normally.
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Roanoke-based Luna Innovations Inc. filed for bankruptcy protection in Virginia on Friday morning, as the company seeks to reduce the amount it owes a California company from $36.3 million to $1.3 million.
With locations in Roanoke, Blacksburg, Charlottesville and Danville, Luna officials said the bankruptcy filing will not affect operations or the employment of its approximately 200 workers.
"We've done this because we believe it is in the best interest of our shareholders, employees, creditors and communities," said Kent Murphy, Luna's chairman and CEO.
In addition to submitting its initial filing for Chapter 11 with the U.S. Bankruptcy Court for the Western District, Luna also submitted a plan for reorganization and coming out of bankruptcy. Murphy said he hoped the company's time in bankruptcy would be short, with everything being resolved within a few months.
The Chapter 11 reorganization filing comes nearly three months after a California jury ordered Luna to pay Hansen Medical Inc. $36.3 million in damages for breach of contract and misappropriation of trade secrets.
Since the jury verdict was announced, Luna has sought to have it thrown out, while Hansen has asked that the damages be increased by nearly $20 million.
In documents filed with the bankruptcy court, Luna listed assets of about $29.8 million and debts of about $55.6 million.
Instead of continuing to fight the verdict before the Superior Court of California County of Santa Clara, Luna opted to ask a federal judge in Virginia to determine what it owes Hansen.
As part of its bankruptcy filing, Luna asked the Virginia judge to cut the award to Hansen to $1.3 million.
Friday's bankruptcy filing halts the California court proceedings. Hansen and Luna were scheduled to appear Monday in Santa Clara, where Luna was arguing for the award to be reduced. The California jury verdict has not yet been finalized and entered as a judgment.
But with Friday's bankruptcy filing, Luna is looking to have the federal court make that determination.
"We believe a restructuring could resolve this matter more quickly and more efficiently than an appeal process that would take up to two years to resolve and likely would have required Luna to file for reorganization in order to pursue the appeal anyway," said Scott Graeff, Luna's chief operating officer.
It is somewhat unusual for a company to file for bankruptcy prior to having a jury award finalized, said Steven Walt, a professor specializing in bankruptcy law at the University of Virginia School of Law.
"In most cases there would be a judgment and then they would file for bankruptcy," Walt said.
While the bankruptcy judge does have the authority to determine how much Luna owes Hansen, Walt said the judge could also decide to let the California proceedings continue. Additionally, the bankruptcy judge could determine that Luna owes the amount the jury initially awarded.
Harold McElhinny, an attorney representing Hansen, said he had not seen the bankruptcy filing yet and therefore could not comment.
While Luna was trying to negotiate a deal with Hansen, the company had also been working on the bankruptcy plan for about six weeks, Graeff said.
If Luna's reorganization plan is confirmed by the court, it would allow Luna to pay its creditors 100 percent and leave its current shareholders in place.
Besides Hansen, the bankruptcy filing lists Carilion Clinic as a major creditor. Carilion holds $5 million in convertible notes.
Carilion spokesman Eric Earnhart said the nonprofit hospital continues to believe that Luna has "great potential and is a good investment."
"This is a small part of our investment portfolio, so we're not concerned about the potential financial impact to Carilion," Earnhart said in an e-mail.
Earnhart added that Luna is a valuable member of the region's business community. Luna's headquarters are located in the Riverside Center, which is owned by Carilion, and Carilion's CEO sits on Luna's board of directors.
On Wednesday Luna settled one of its largest debts, paying Silicon Valley Bank $4.2 million and terminating its loan and security agreement with the bank. By doing this, the bank no longer has any liens against Luna's assets, Graeff said.
Graeff maintained that Luna is operationally sound and if it weren't for the Hansen jury verdict, the company would be on track to being cash-flow positive. Murphy said Luna was profitable for nearly 15 years as a private company. But Luna has not been profitable since the company went public in June 2006.
The news of Luna's bankruptcy filing sent shares of the company down nearly 38 percent to 33 cents Friday morning in heavy volume.
The filing also prompted Nasdaq to send a letter to the company saying Luna would be delisted from the stock exchange. The letter said trading of Luna's common stock will be suspended on July 28, unless Luna requests a hearing to appeal the delisting. Luna plans to request the hearing, and the stock will remain listed on the market pending the outcome of the hearing.
First-day motions before the bankruptcy judge will be heard in Charlottesville at 1:30 p.m. Monday.
