Goldstein v. William Haas & Thinheat, LLC (In re Vitaheat Med., LLC)
| Citation | 629 B.R. 250 |
| Decision Date | 17 May 2021 |
| Docket Number | No. 18 B 35295, No. 20 A 406,18 B 35295 |
| Parties | IN RE: VITAHEAT MEDICAL, LLC, Debtor. Ilene F. Goldstein, chapter 7 trustee, Plaintiff, v. William Haas and Thinheat, LLC, Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Attorney for plaintiff Ilene F. Goldstein, chapter 7 trustee: William J. Factor, FactorLaw, Chicago, IL
Attorneys for defendants William Haas and Thinheat LLC: Kevin M. O'Hagan, Shane M. Bradwell, O'Hagan Meyer LLC, Chicago, IL
A. Benjamin Goldgar, United States Bankruptcy Judge VitaHEAT Medical, LLC manufactured and sold medical products. William Haas was a VitaHEAT director, and his company, Thinheat, LLC, was one of VitaHEAT's members. Thinheat owned several patents and in 2012 issued a patent license to VitaHEAT. Six years later, unhappy with VitaHEAT, Haas had Thinheat terminate the license, and VitaHEAT ended up in a chapter 7 bankruptcy case with Ilene Goldstein as trustee. Goldstein then brought this adversary proceeding alleging that by terminating the license, Haas and Thinheat breached their fiduciary duties to VitaHEAT. She wants damages for the breach. She also alleges that the license's termination was a fraudulent transfer and asks to have the transfer avoided. Haas and Thinheat have moved to dismiss Goldstein's amended complaint for failure to state a claim.
Haas and Thinheat's motion is well taken. For the reasons below, the motion will be granted and the amended complaint dismissed. Goldstein will have leave to amend again.
The court has subject matter jurisdiction under 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). The trustee's fraudulent transfer claim is one "arising under title 11," 28 U.S.C. § 1334(b), and so is a core proceeding, 28 U.S.C. § 157(b)(2)(H). Whether the breach of fiduciary duty claim is core or non-core is uncertain.1 But the core/non-core distinction matters only for entry of final judgment. Stern , 564 U.S. at 473-74, 131 S.Ct. 2594. Since no final judgment will be entered on the current motion, the question need not be answered now.2
On a motion to dismiss, all well-pleaded factual allegations in the complaint are taken as true, and all reasonable inferences are drawn in favor of the non-movant. Cheli v. Taylorville Cmty. Sch. Dist., 986 F.3d 1035, 1038 (7th Cir. 2021). Along with the allegations, the court can consider documents mentioned in the complaint and central to it. O'Brien v. Village of Lincolnshire , 955 F.3d 616, 621 (7th Cir. 2020). The court can also take judicial notice of matters of public record, "including pleadings, orders, and transcripts from prior proceedings in the case." Scherr v. Marriott Int'l, Inc. , 703 F.3d 1069, 1073 (7th Cir. 2013).
Taken together, the complaint, documents mentioned in the complaint, and matters subject to judicial notice allege the following facts.
In early 2012, William Haas formed Thinheat LLC as an Illinois limited liability company. (Compl. ¶ 7). Haas was Thinheat's sole member. (Id. ¶ 14). A few weeks later, VitaHEAT Medical LLC was incorporated as a Delaware limited liability company, it is unclear by whom. (Id. ¶ 9). VitaHEAT manufactured and sold medical products. (Id. ¶ 11). Thinheat was one of VitaHEAT's members, and Haas was a VitaHEAT director. (Id. ¶¶ 5, 13).
Haas owns four patents for "printed conductive ink technology for application in the healthcare field." (Compl. ¶ 6; see Bankr. Dkt. No. 1 at 15). Shortly after forming Thinheat, Haas assigned it his rights in the patents. (Compl. ¶¶ 8, 12). Thinheat then entered into a license agreement with VitaHEAT, giving VitaHEAT the exclusive right to use the patents to manufacture, use, sell, and distribute certain medical products. (Id. ¶ 12). In exchange, VitaHEAT agreed to pay Thinheat monthly royalties. (Id. at 3). Although the rights assigned in the license were exclusive, VitaHEAT could reassign them to third parties. (Mot. Ex. B at 1, 6).
The VitaHEAT license was perpetual, lasting until the patents lapsed or expired, unless either party terminated the license sooner. Thinheat could terminate the license if VitaHEAT breached a material obligation and failed to cure the breach within a specified time after written notice. (Id. at 4). Thinheat could also terminate the license immediately if VitaHEAT stopped doing business, or if it became "subject to any proceeding under applicable liquidation, insolvency, bankruptcy, reorganization or similar laws." (Id. ).
At various times Goldstein does not specify, Haas threatened to terminate the license. (Compl. ¶ 19). Finally, in October 2018 Haas made good on his threats. He and Thinheat sent VitaHEAT a letter terminating the license. (Compl. ¶¶ 19, 20; Resp. Ex.1 at 23). The letter complained that VitaHEAT had "fail[ed] ... to protect" the patents and gave two examples. (Resp. Ex. 1 at 23). One was VitaHEAT's contracting with 3M Corporation and not telling Haas about the contract. (Id. ). The other was VitaHEAT's inaction after a company believed to have links to a VitaHEAT board member used the patented technology. (Id. ).
The letter added that it had "become clear" VitaHEAT was "effectively insolvent ... trigger[ing] ... the Termination Provision[ ]." (Id. ). There had even been "conversations .... related to a bankruptcy filing," and Haas and Thinheat had been "very recently advised" that VitaHEAT's assets, including the license, might be auctioned. (Id .). "For these reasons, and others," the letter concluded, "Haas, individually and on behalf of Thinheat LLC ... immediately revokes its License Agreement." (Id. ).
Haas's threats to terminate the license made it difficult for VitaHEAT to enjoy its benefits, harming the company's continued operations. (Compl. ¶ 25). The eventual termination of the license left VitaHEAT unable to operate at all. (Id. ).
Two months after the termination, VitaHEAT filed this chapter 7 bankruptcy case. (Id. ¶ 27). Goldstein was appointed trustee. (Id. ¶ 4).
In June 2019, Haas and Thinheat moved jointly for relief from the automatic stay and to compel Goldstein to abandon any interest in the patents. (Compl. ¶ 21; Bankr. Dkt. No. 17). In the motion, Haas and Thinheat took seemingly inconsistent positions on whether the license had been terminated. Assuming it had, they argued that abandonment was appropriate because the termination left the estate with no interest in the license or the patents. (Compl. ¶¶ 21, 30; Bankr. Dkt. No. 17). But they also asked for an order lifting the stay so Thinheat could "ensure the license is terminated." (Bankr. Dkt. No. 17 at 1).
After a hearing at which Goldstein expressed no objection to the motion (Bankr. Dkt. No. 34; Tr. at 1-6), the court entered two orders. One compelled abandonment of the estate's interests in the patents (id. No. 21); the other modified the stay to allow Thinheat to terminate the license (id. No. 23).3
Goldstein then filed this adversary proceeding against Haas and Thinheat. Her amended complaint has two counts. Count I is a claim for damages alleging that Haas and Thinheat breached their fiduciary duties to VitaHEAT in threatening to terminate and ultimately terminating the license. Count II is a claim under section 548 of the Bankruptcy Code to avoid the license's termination as constructively fraudulent and recover its value under section 550.
Haas and Thinheat move under Rule 12(b)(6) of the Federal Rules of Civil Procedure, Fed. R. Civ. P. 12(b)(6) (made applicable by Fed. R. Bankr. 7012(b)), to dismiss both counts of the amended complaint for failure to state claims.
The motion to dismiss will be granted. The amended complaint fails to state claims for breach of fiduciary duty or avoidance of a fraudulent transfer.
To survive a motion to dismiss under Rule 12(b)(6), a complaint must clear "two easy-to-clear hurdles." EEOC v. Concentra Health Servs., Inc. , 496 F.3d 773, 776 (7th Cir. 2007). First, the complaint must describe the claim in enough detail to give the defendant fair notice of its nature. Cornielsen v. Infinium Capital Mgmt., LLC , 916 F.3d 589, 598 (7th Cir. 2019). "[A] formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
Second, the claim must be "plausible on its face," id. , at 570, 127 S.Ct. 1955, meaning the plaintiff's right to relief must rise above a "speculative level," id. at 555, 127 S.Ct. 1955 ; see also Cornielsen , 916 F.3d at 598. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; see also Nelson v. City of Chi. , 992 F.3d 599, 603 (7th Cir. 2021).
Count I fails to meet these standards and will be dismissed. Goldstein has alleged that Haas and Thinheat owed a fiduciary duty to VitaHEAT, but she has not alleged that they breached that duty.
The first question is whose law applies to the fiduciary duty claim, a subject on which the parties appear to disagree. Neither side acknowledges the disagreement or addresses choice of law, but Goldstein relies on Delaware law in her brief, and Haas and Thinheat cite Illinois law.
Deciding the applicable law has two steps. First, the court "must determine what choice-of-law rule should be used." In re Morris , 30 F.3d 1578, 1581 (7th Cir. 1994) ; Gierum v. Glick (In re Glick), 568 B.R. 634, 659 (Bankr. N.D. Ill. 2017). Then, the court must apply the controlling choice-of-law rule to determine the substantive law that governs the dispute. In re Aircrash Disaster near Roselawn, Ind. , 948 F. Supp. 747, 751 (N.D. Ill. 1996) ; Glick ,...
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Terminating A License When The Licensee Goes Bust
...re EBC I, Inc.), 356 B.R. 631, 641 (Bankr. D.Del. 2006). 6. Id. at 362-63. 7. See Goldstein v. Hass, et al. (In re VitaHEAT Medical, LLC), 629 B.R. 250 (Bankr. N.D. Ill. 8. The court acknowledged that the express terms of the license permitted the licensee to assign its rights to third part......
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Terminating A License When The Licensee Goes Bust
...re EBC I, Inc.), 356 B.R. 631, 641 (Bankr. D.Del. 2006). 6. Id. at 362-63. 7. See Goldstein v. Hass, et al. (In re VitaHEAT Medical, LLC), 629 B.R. 250 (Bankr. N.D. Ill. 8. The court acknowledged that the express terms of the license permitted the licensee to assign its rights to third part......