King v. Ionization Intern., Inc.

• Decision Date: 04 August 1987
• Docket Number: Nos. 86-2594,86-2663,s. 86-2594
• Citation: 825 F.2d 1180
• Parties: 5 UCC Rep.Serv.2d 228 Eric M. KING, Plaintiff-Appellee, Cross-Appellant, v. IONIZATION INTERNATIONAL, INC., Andrew J. Pincon, and Andromeda Pincon, Defendants, and Water Management, Inc. and Photozone, S.A., Intervening Plaintiffs-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1180

825 F.2d 1180

5 UCC Rep.Serv.2d 228

Eric M. KING, Plaintiff-Appellee, Cross-Appellant, v. IONIZATION INTERNATIONAL, INC., Andrew J. Pincon, and Andromeda Pincon, Defendants and Water Management, Inc. and Photozone, S.A., Intervening Plaintiffs-Appellants, Cross-Appellees.

Nos. 86-2594, 86-2663.

United States Court of Appeals Seventh Circuit.

Argued April 15, 1987.

Decided Aug. 4, 1987.

Lawrence C. Gegun, Jenner & Block, Chicago, Ill., for intervening plaintiffs-appellants.

Richard C. Leng, Chicago, Ill., for plaintiff-appellee.

Before POSNER and COFFEY, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

POSNER, Circuit Judge.

This litigation over liens in a patent license raises questions of Illinois lien and fraudulent-conveyance law--some of which, however, we are able to duck--plus jurisdictional issues, which we can never duck.

Andrew Pincon owns a patent (actually two patents, but we shall simplify the facts to make the opinion easier to follow) on the "photozone" process for purifying water. In 1977 he formed Ionization International, Inc. to exploit the process. He was its principal officer and shareholder. He gave the corporation an exclusive license to practice the patent in North America in exchange for the corporation's promise to pay him royalties on products using the patented process. In 1980 he sold 20 percent of the stock of Ionization to Eric King for $300,000. The purchase entitled King to a seat on Ionization's board of directors.

Shortly afterward, King and Pincon had a falling out, and King sued Pincon and Ionization. The suit was settled in 1981 by an agreement under which Ionization repurchased King's stock, giving King two promissory notes for a total of $320,000. The notes were secured by the patent license, but King failed to file the security agreement with the Illinois Secretary of State, which is the usual method of perfecting a security interest in Illinois. The settlement agreement entitled King to retain his seat on the board of directors but he resigned in favor of his brother-in-law John Kitanoja, who agreed to be King's representative on the board.

By the middle of 1983 Ionization was in deep financial trouble. It had defaulted on one of the promissory notes to King and was in danger of being forced into bankruptcy; it may already have been insolvent. It owed money to a number of other people as well, including Pincon--to whom it owed almost $160,000 in back wages and royalties and almost $106,000 for cash loans that he had made to the company--and Pincon's wife, Andromeda, who also worked for the company and who was owed more than $60,000 in back wages. At a meeting of the board of directors on September 27, 1983, Pincon proposed that the corporation issue fresh promissory notes to all its creditors (including the Pincons), secured by Ionization's assets--the principal asset being the patent license. The board, controlled by Pincon, approved the proposal, the action being reflected in the minutes of the board meeting. The notes were issued several weeks later. The total face amount of the notes was $428,000, of which $327,000 was for the Pincons. (We have rounded off all dollar figures to the nearest thousand.) John Kitanoja received a note for $7,000. At its meeting on January 26, 1984, the board unanimously approved the minutes of the previous meeting; Kitanoja was one of the directors who voted to approve them. It was also at this meeting that Kitanoja received his note, which he deposited in his safe-deposit box. The Pincons and the other recipients of the notes filed them promptly with the Secretary of State in an effort to obtain perfected security interests in the patent license and other assets of Ionization.

King brought this diversity suit in February 1984 to collect the unpaid balance of one of his notes, the other having been paid. He named as defendants Ionization and the Pincons, who had guaranteed the note. The district court entered a default judgment against the defendants in April 1984, and proceedings to collect the judgment ensued before a federal magistrate. See Fed.R.Civ.P. 69. In June, King obtained a writ of execution--thereby at last perfecting his security interest. See Kaiser-Ducett Corp. v. Chicago-Joliet Livestock Marketing Center, Inc., 86 Ill.App.3d 216, 219, 41 Ill.Dec. 651, 653, 407 N.E.2d 1149, 1151 (1980); Asher v. United States, 436 F.Supp. 22, 25 (N.D.Ill.1976), aff'd, 570 F.2d 682 (7th Cir.1978); see generally General Telephone Co. v. Robinson, 545 F.Supp. 788, 792-97 (C.D.Ill.1982). In July the magistrate ordered the defendants to turn over certain assets to King in satisfaction of the judgment. The order was later vacated, reinstated, then repeatedly stayed. The magistrate entered another order restraining the defendants from disposing of the assets, and later she ordered the defendants to deposit some of those assets--including the patent license--with the United States Marshal to satisfy King's judgment.

By now it was 1985 and various creditors of Ionization, notably Water Management, Inc., intervened in the post-judgment proceedings. Water Management is another corporation formed by Andrew Pincon. Although he does not own any stock in it, he has served as its president, and one of its shareholders is a foreign holding company owned in part by a trust for the benefit of Pincon's children by a previous marriage; the record does not show how large the trust's indirect stake in Water Management is. In January 1985 Water Management had bought from Andrew and Andromeda Pincon the notes that Ionization had issued to them in 1983. Water Management had also purchased two judgments against Ionization, one in favor of the First National Bank & Trust Co. of Evanston and the other in favor of McWilliams, Mann & Zimmer.

Also intervening in King's suit against Ionization and the Pincons was Photozone, S.A., another corporation that Pincon had formed and that is owned in part by the foreign holding company that is a part owner of Water Management. Photozone had loaned Ionization some $20,000 and had been among the creditors to receive secured notes.

The magistrate ruled that King's judgment had priority over all of Water Management's and Photozone's claims except the claim based on the First National judgment, and over all other creditors' claims as well. She entered a final judgment for King under Fed.R.Civ.P. 54(b), retaining jurisdiction to determine whether he had collected part or for that matter all of the default judgment by selling goods covered by the Pincon patent license without paying royalties to Ionization. Water Management and Photozone have appealed, and King has cross-appealed in the hope of knocking out Water Management's claim based on the First National judgment.

Before we can reach the merits we must satisfy ourselves that we have jurisdiction of these appeals. If this were a bankruptcy proceeding, an order fixing priorities among creditors would be deemed sufficiently final to be appealable even under the new bankruptcy appeals statute (28 U.S.C. Sec. 158(d)), which makes only final orders appealable to the courts of appeals. See In re Wagner, 808 F.2d 542, 544-45 (7th Cir.1986). This would be so although further proceedings might (as here) be necessary to determine how much money each creditor would actually realize from the liquidation of the bankrupt estate. See In re Morse Elec. Co., 805 F.2d 262, 264-65 (7th Cir.1986); In re J. Catton Farms, Inc., 779 F.2d 1242, 1250 (7th Cir.1985); In re Fox, 762 F.2d 54, 56 (7th Cir.1985); In re Saco Local Development Corp., 711 F.2d 441, 446-48 (1st Cir.1983). However, not only is this not a bankruptcy proceeding, it is a post-judgment proceeding. And while the principles that govern the appeal of pre-judgment orders as well as of final judgments are reasonably well settled, this is not true of post-judgment orders. Obviously the last order can be appealed, but beyond that the picture dims. See 15 Wright, Miller & Cooper, Federal Practice and Procedure Sec. 3916 (1976). The analogy to bankruptcy is relevant, however, since decisions like Wager and Morse, in distinguishing between the establishment of the creditor's claim and the determination of how much money he will actually receive on the claim given the existence of competing claims, rely on the distinction between (1) an ordinary civil judgment and (2) post-judgment proceedings to collect on it. The finality of (1) is not compromised by the uncertain outcome of (2), even though a case might become moot if appeals were postponed to the very end of the collection proceedings, because the defendant might turn out to be judgment-proof. See 808 F.2d at 545; 805 F.2d at 264. The possibility of mootness is not decisive against allowing an immediate appeal, because there is value in having the merits of a suit finally resolved before incurring the expense and travail--often irrevocable and sometimes embittering (as readers of Pickwick Papers will recall)--of collection proceedings, and because there is little danger that should those proceedings generate their own appeal it will raise issues overlapping the appeal from the judgment on the merits and thus require duplicative effort by the court of appeals.

Treating the post-judgment proceeding as a separate lawsuit akin to a bankruptcy proceeding--and the functional resemblance is close, since the purpose of the post-judgment proceeding is to adjust rights among competing creditors--we must decide whether the order fixing priorities is enough like a conventional final judgment to be appealable even though proceedings to collect on the order are in process. See generally Ex Parte Farmers' Loan & Trust Co., 129 U.S. 206, 9 S.Ct. 265, 32 L.Ed. 656 (1889); Motorola, Inc. v. Computer Displays Int'l, Inc., 739 F.2d 1149, 1154 (7th Cir.1984); Ohntrup v. Firearms Center, Inc., 802 F.2d 676, 678 (3d Cir.1986) (per curiam); United States v. Washington, 761 F.2d...