In re Amica, Inc.

• Decision Date: 03 January 1992
• Docket Number: Bankruptcy No. 90 B 6964.
• Citation: 135 BR 534
• Parties: In re AMICA, INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

135 B.R. 534 (1992)

In re AMICA, INC., Debtor.

Bankruptcy No. 90 B 6964.

United States Bankruptcy Court, N.D. Illinois, E.D.

January 3, 1992.

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Mitchell R. Nagorsky, Weisman & Weisman, Chicago, Ill., for debtor.

Robert R. Tepper, Cohen, Wulfstat, Semer, Leff & Rosenberg, Ltd., Chicago, Ill., for BB Asset Management, Inc.

Thomas E. Johnson, Baker & McKenzie, Chicago, Ill., for creditorBaker & McKenzie.

Richard Friedman, Office of the U.S. Trustee, Chicago, Ill., U.S. Trustee.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JACK B. SCHMETTERER, Bankruptcy Judge.

This cause came on for trial before the Court on the claim of BB Asset Management, Inc.("Claimant") and objection of Debtor Amica, Inc.("Amica" or "Debtor") and creditor, Baker & McKenzie ("B & M") thereto.Claimant is assignee and transferee under Rule 3001 F.R.Bankr.P. of all rights in a certain Agreement assigned to it by Brown Bag Software, Inc.("BBS").The claim involves assertions by claimant of all rights of ownership, usage, marketing, and copyright in a certain computer program and damages for asserted wrongful use by Debtor of that program.

The claim is pleaded in three Counts.Count I seeks Declaratory Judgment that claimant is owner of the disputed program.Count II seeks damages for asserted breach of contract by Amica in continuing to sell or otherwise use the program.Count III seeks damages for asserted copyright infringement by Debtor.

Following consideration of all the evidence, the Court now makes and enters the following Findings of Fact and Conclusions of Law.

A key witness for claimant left the witness stand against instructions of the Court before cross examination of him was completed.Debtor and B & M jointly moved to strike his testimony.The analysis that follows first considers the evidence as though that witness's testimony stands and concludes that the claim must be disallowed even if that testimony were to stand.The analysis then demonstrates why the motion to strike testimony must be and by separate order is allowed, thereby striking much of the evidence on which claimant relies.

Pursuant to the Findings and Conclusions, by separate Judgment Order entered this date the claim is entirely disallowed and judgment is entered for Debtor.

FINDINGS OF FACT

1.Amica and BBS entered into a written contract on or about June 22, 1989(the "Agreement").A copy thereof is appended as Exhibit A to these Findings and made a part hereof by this reference.Prior to entering into the Agreement, Amica had developed and sold a computer software program known as "PC-Hooker" or "PC Hookup"(hereinafter "PCH") from its Illinois offices for three years.It had achieved some market success in selling that program, with approximately $100,000.00 per year in gross sales.Claimant is transferee, assignee and owner of any claims and rights of BBS pursuant to the Agreement.BBS was based in California.The Agreement provided for transfer of rights by Debtor to BBS in and to PCH with program modifications and related interconnecting cables.The Agreement specifies that the law of California is to apply to its interpretation.

2.Debtor is a corporation whose stock is owned by Barry Watkins and John Dayton.Messrs. Watkins and Dayton are otherwise personally engaged in the consulting and computer software business for the insurance industry.Debtor's operations have consisted of the development and sale of software programs, one of which was PCH.

3.The function of PCH is to transfer data between lap top computers and full size personal computers.There were and are other competitive programs which perform similar functions.

4.During the spring of 1989, Debtor exhibited PCH at a trade show.The show was attended by Sanford Schupper, the President and Board Chairman of BBS.At the show, Mr. Schupper had discussions with Mr. Watkins about the possibility of BBS obtaining a license for PCH so that BBS could include PCH in certain packages of software which BBS sold.

5.Following the trade show, there ensued discussions about the possibility of Debtor selling rights in PCH to BBS.BBS was engaged in the business of marketing software, often including software which had been developed by others and purchased by BBS.

Misrepresentations

6.Prior to entry by Amica and BBS into the Agreement, there were negotiations between those parties.During those negotiations, in order to induce Amica to enter into the Agreement, among other things, Sanford Schupper orally represented the following on behalf of BBS:

(a) BBS was then a viable and solvent company with sufficient funds and resources to successfully promote PC Hooker in the competitive, national market place.

(b) BBS then had a strong, active, operating, and effective sales department which could and would actively and aggressively promote and market PC Hooker in the national market place.

(c) BBS had a few major-size manufacturers ready to purchase PC Hooker at that time.

7.Schupper also predicted and estimated that sales of PC Hooker would generate approximately $100,000.00 per year in royalty payments to Amica.While such remarks did not consist of a factual representation, they illustrated the scope of Schupper's representations concerning BBS's promotional and sales capabilities.

8.Sanford Schupper drafted the Agreement.While Mr. Watkins showed it to Amica's counsel, that lawyer did no drafting and did not participate in the negotiations.Discussions between the parties resulted in its execution.

9.Prior to entry by the parties into the Agreement and during the time that the foregoing representations were made, BBS was not a financially sound or solvent company.At that time, BBS owed over $3,000,000.00 in debts to various creditors, and it had been in default to several of its secured creditors in an aggregate amount of $800,000.00 for six months.

10.Prior to entry by the parties into the Agreement and during the time that the foregoing representations were made there were also substantial claims being asserted by various creditors against BBS including a number of lawsuits pending against it and unsatisfied judgments which had already been entered.

11.BBS's actual tangible assets were then approximately $450,000.00, and it was insolvent at the time that the foregoing representations were made by Mr. Schupper.In this regard, Mr. Schupper knowingly made misrepresentations.Finding No. 6(a)Claimant did not establish at trial its present financial capability to market PCH.

12.At the time that Schupper made the foregoing representations to Debtor, BBS did not have a sales department of the scope represented, and had no major size manufacturers lined up and ready to purchase PC Hooker.In this additional regard, Mr. Schupper knowingly misrepresented.Finding Nos. 6(a) and 6(b)Claimant did not establish at trial its present ability to conduct a national marketing effort through an existing sales force, nor did it establish that it has now obtained any identified major purchasers of PCH.

13.The foregoing misrepresentations made by Schupper (FindingNo. 6) were material to Amica.The potential value to Amica from dealing with BBS under the Agreement was to obtain in BBS a financially stable major marketing potential that might generate large royalties in place of promising but still modest direct sales by Amica.Amica relied upon those misrepresentations and was mislead by them into entering in the Agreement with BBS and into performing its side of the Agreement.

14.Following execution of the Agreement, Amica discontinued its marketing of PC Hooker and for several months Amica was dependent upon marketing by BBS in order to receive income therefrom pursuant to the Agreement.

Breach of Warranty

15.In the Warranties, Representations and Indemnification section of the Agreement (Exhibit A hereto, Section 4;page 3), BBS warranted that it would "use its best efforts to aggressively market and promote" PCH and related products.That warranty related directly to Mr. Schupper's foregoing representations (FindingNo. 6), and meant in context that BBS warranted that it possessed and would use its represented financial strength, resources, and strong sales department to engage in an aggressive and effective national marketing effort and promotional campaign.

16.Schupper also mentioned to Watkins that he had several marketing ideas in mind, including a magazine insert of one million diskettes.While this was not a contract term or itself a representation, it illustrated the large and expensive scope of activity promised in the warranty of "best efforts to aggressively market and promote" PCH.

17.The substantial marketing efforts promised and warranted to Amica were never materially undertaken by BBS.No major marketing program or promotional campaign was ever furnished or carried out by BBS to sell PCH.Certainly no program of the scope warranted ever materialized.Indeed, BBS lacked resources, organization, and personnel necessary to launch such a program.

Anticipatory Repudiation, Breach of Contract and Failure of Consideration

18.Certain modifications to PCH were agreed to be performed by Debtor in phases.The Agreement provided that BBS would make payment to Amica for specified Phase One modifications upon delivery of those modifications, and would pay one-half of the payment due for Phase Two modifications upon Amica's commencing the latter modifications.(Exhibit A hereto, Section 2, last paragraph)

19.Following execution of the Agreement, the parties modified the specifications for revisions to the computer software program by oral agreement and written communications.

20.BBS agreed to pay for all cost of modifications pursuant to the revised specifications.

21.When the Agreement was signed, the computer software program which BBS was to purchase had not yet been created in the...