Donald F. Duncan, Inc. v. Royal Tops Manufacturing Co., 15851.

• Decision Date: 08 September 1967
• Docket Number: No. 15851.,15851.
• Citation: 381 F.2d 879
• Parties: DONALD F. DUNCAN, INC., Plaintiff-Appellee, v. ROYAL TOPS MANUFACTURING COMPANY, Inc., and Randy Brown, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

381 F.2d 879 (1967)

DONALD F. DUNCAN, INC., Plaintiff-Appellee, v. ROYAL TOPS MANUFACTURING COMPANY, Inc., and Randy Brown, Defendants-Appellants.

No. 15851.

United States Court of Appeals Seventh Circuit.

June 1, 1967.

Rehearing Denied September 8, 1967.

Stanley M. Cahn, Cummings & Wyman, Chicago, Ill., for Randy Brown.

Maxwell E. Sparrow, Mark H. Sparrow and Sparrow & Sparrow, New York City, for Royal Tops Mfg. Co.

Owen J. Ooms, Erwin F. Adams, Chicago, Ill., for amicus curiae.

Before HASTINGS, Chief Judge, and KILEY and SWYGERT, Circuit Judges.

Rehearing Denied September 8, 1967, en banc.

SWYGERT, Circuit Judge.

Royal Tops Manufacturing Company, Inc. and Randy Brown appeal from that portion of a judgment of the district court dismissing counterclaims filed by them against Donald F. Duncan, Inc. in a trademark infringement action commenced by Duncan.¹ The principal questions are whether the district court had jurisdiction over the subject matter of the counterclaims and, if so, whether the court properly dismissed them.

This case, which began in 1961, is here for the second time. The complaint originally filed by Duncan charged Royal Tops and Brown with, among other things, infringement of Duncan's registered trademarks "Yo-Yo" and "Genuine Duncan Yo-Yo." The defendants' answer denied the allegations of Duncan's complaint and asserted counterclaims based upon section 38 of the Lanham Trademark Act, 15 U.S.C. § 1120, section 2 of the Sherman Act, 15 U.S.C. § 2, and section 4 of the Clayton Act, 15 U.S.C. § 15, charging that Duncan obtained its trademark registrations by false and fraudulent statements and that Duncan was attempting to use them illegally to obtain a monopoly.

Following a trial on the merits of the issues raised by both the complaint and the counterclaims, the district court held Duncan's trademarks valid and infringed and dismissed the defendants' counterclaims. Inadvertently, however, the dismissal of the counterclaims was not included in the court's judgment order granting the relief requested by Duncan.² The defendants appealed from the judgment, but made no attempt to seek review of the dismissal of the counterclaims. This court reversed the judgment. Donald F. Duncan, Inc. v. Royal Tops Mfg. Co., 343 F.2d 655 (7th Cir. 1965). We held that Duncan's trademarks were invalid because the word "yo-yo" was a generic word long used in the Philippine Islands as the name of a certain toy and because the word had also become descriptive in this country by continued usage. We expressed no opinion as to the merits of the defendants' counterclaims, of course, because no issue with respect to them was before us. On May 13, 1965, our mandate issued directing the district court to undertake "such further proceedings as may not be inconsistent with the opinion of this court."

On May 28, 1965, before any action was taken by the district court in accordance with the mandate, an involuntary petition in bankruptcy was filed against Duncan in the district court. The bankruptcy case was assigned to a different district judge than the one who had heard the trademark infringement action. On June 7, 1965, the bankruptcy court granted Duncan leave to file its plan of arrangement under Chapter XI of the Bankruptcy Act and entered a general order restraining all persons from commencing or continuing any actions against the alleged bankrupt. It was specifically agreed, however, upon the oral request of the defendants Royal Tops and Brown, that the order was not to be construed as affecting the proceedings pending before the district judge in the trademark infringement action. A motion for judgment on the mandate in this case was continued generally by the district court.

Thereafter, several matters worthy of brief mention occurred in the bankruptcy proceeding. First, the defendants Royal Tops and Brown submitted proofs of claim aggregating over one million dollars (as amended). These proofs of claim were based almost entirely upon the once-dormant counterclaims (alleging violations of the antitrust and trademark infringement laws) which had been heard on the merits in the instant case. Second, Duncan's plan of arrangement was dismissed and Duncan was adjudicated a bankrupt. Next, on March 24, 1966, pursuant to a motion filed by the defendants Royal Tops and Brown, the referee in bankruptcy entered an order designating the bankruptcy court as the appropriate forum for the liquidation of the defendants' claims. The order recited that the defendants and the trustee in bankruptcy were in agreement that "in the interests of conserving the assets" of the bankrupt estate, the defendants' claims should be compromised and approved in the amount of $415,000, subject to formal application for approval by the trustee. The compromise of the defendants' claims thus proposed was approved by the referee on June 14, 1966, following notice and hearing upon the objections of creditors. The referee's approval was subject to the condition that the amount paid to the defendants upon distribution should not exceed $17,500.³

The extent to which the district judge in the instant case was aware of the foregoing proceedings in the bankruptcy court is unclear. Counsel for the defendants and the trustee in bankruptcy met with him on March 28, 1966. The defendants have stated in their brief that at that time they endeavored to inform the district judge of the status of the bankruptcy proceedings, including the referee's order of March 24, 1966. From the district judge's later remarks, however, it appears that it was not until shortly before the approval of the compromise by the referee on June 14, 1966 that the district judge realized that the defendants' claims in the bankruptcy proceeding were based principally upon the counterclaims he had heard previously.

On June 10, 1966, several of the creditors in the bankruptcy proceeding, including the attorney who had represented Duncan in its trademark litigation, filed a motion requesting the district judge to "assert his jurisdiction" over the claims filed in bankruptcy by the defendants. The motion was opposed by the defendants and the trustee in bankruptcy, and a hearing on it was continued until June 14, 1966. On that day the district judge was informed that the referee had just approved the proposed compromise of the defendants' claims. Following arguments by counsel for the defendants, the trustee, and the creditors, the matter was taken under advisement.

On June 30, 1966, the district judge entered a memorandum order, findings of fact and conclusions of law, and the judgment order from this appeal is taken. The memorandum order dissolved the continuance which had been granted earlier regarding the motion for entry of judgment on the mandate of this court. It also denied the motion of the creditors requesting the district judge to assume jurisdiction over the defendants' claims in the bankruptcy proceeding. In his findings of fact and conclusions of law, in addition to stating that the Duncan trademarks "Yo-Yo" and "Genuine Duncan Yo-Yo" were void as generic (as directed by this court), the district judge held that no fraud was practiced and no false statements were made by Duncan in procuring the registration for these trademarks. The judgment order, in accordance with these determinations, declared the trademarks invalid and dismissed the defendants' counterclaims.

The defendants first contend that the district court had no jurisdiction over the subject matter of their counterclaims. They argue that the bankruptcy court "specifically assumed" exclusive jurisdiction over the subject matter of these claims and did not relinquish it, thus depriving the district court of the power to render judgment upon them. We think the defendants' argument is not well taken.

It is true that a court of bankruptcy has broad powers concerning nearly all matters affecting the assets of the bankrupt estate. It is also true, however, that a bankruptcy proceeding, merely by virtue of its maintenance, does not divest other courts of jurisdiction over lawsuits involving the bankrupt which are pending at the time the bankruptcy petition is filed. Connell v. Walker, 291 U.S. 1, 5, 54 S.Ct. 257, 78 L.Ed. 613 (1934); In re Tinkoff, 141 F.2d 731, 733 (7th Cir. 1944). Many of such actions pending when a bankruptcy proceeding is...