In re Benun

• Decision Date: 10 March 2006
• Docket Number: Bankruptcy No. 03-32195(MS).,Adversary No. 03-2615(MS).
• Citation: 339 B.R. 115
• Parties: In re Jack C. BENUN, Debtor. Fuji Photo Film Co., Ltd., Plaintiff, v. Jack C. Benun, Defendant.
• Court: U.S. Bankruptcy Court — District of New Jersey

339 B.R. 115

In re Jack C. BENUN, Debtor Fuji Photo Film Co., Ltd., Plaintiff, v. Jack C. Benun, Defendant.

Bankruptcy No. 03-32195(MS).

Adversary No. 03-2615(MS).

United States Bankruptcy Court, D. New Jersey.

March 10, 2006.

COPYRIGHT MATERIAL OMITTED

Bruce Buechler, Esq., Lowenstein Sandler PC, Roseland, NJ, Matthew W. Siegal, Esq., Stroock, Stroock & Lavan, LLP, New York, NY, for Fuji Photo Film Co., Ltd.

Joseph L. Schwartz, Esq., Riker Danzig, Morristown, NJ, for Defendant, Jack C. Benun.

Warren A. Usatine, Esq., Cole, Schotz, Meisel, Forman & Leonard, PC, Hackensack, NJ. for Brian T. Moore, Liquidating Trustee.

OPINION

MORRIS STERN, Bankruptcy Judge.

I. Background.¹

Fuji Photo Film Co., Ltd ("Fuji") seeks to depose Jeffrey I. Kaplan, Esq. ("Kaplan"), and to require production of certain documents from his file, in connection with his representation of Jazz Photo Corp. ("Jazz"). Kaplan also represented Jack C. Benun ("Benun"), at times jointly with Kaplan's representation of Jazz. Jazz, a Chapter 11 debtor, is presently under the control of Brian T. Moore ("Moore"), as liquidating trustee. Benun is currently a debtor in a Chapter 7 bankruptcy case. In immediate dispute are knotty attorney client privilege issues.²

This adversary proceeding has a near decade-long history, with Benun and Jazz being pursued by Fuji for patent infringement. Fuji seeks to deny Benun a discharge and to except from any bankruptcy discharge (if one should issue) its claims against Benun. Fuji's claims to exception to discharge are (now) based upon 11 U.S.C. § 523(a)(6) ("willful and malicious injury ... to property...."). Denial of discharge would be grounded in 11 U.S.C. § 727(a)(2)(3) and (5) (transfer, etc. of estate property, failure, etc. to keep records, and failure to explain loss of assets).

Jazz, in liquidation following confirmation of a liquidating plan, had been a corporation whose stock was owned by Benun's family but which operated under his control. Kaplan is a patent lawyer whose representation of both Benun and Jazz, variously, was in an array of litigation, regulatory/enforcement proceedings and appeals over the period of this odyssey. The Benun-Jazz-Fuji litigation trail, in summary form for present purposes, began with a Fuji-prompted investigation by the International Trade Commission ("ITC-I"). On June 28, 1999 the ITC adopted an administrative finding that the importing and sale of certain "Lens-Fitted Film Packages" (disposable cameras referred to as "LFFPs") by Jazz and a number of other importers violated Fuji's patents. The Commission issued a General Exclusion Order and Order to Cease further infringement of Fuji's patents (hereinafter the "Cease and Desist Order"). Jazz (not Benun) and others appealed to the Federal Circuit ("Appeal I"). In significant part, the appeal centered on what manner of refurbishment of Fuji-patented disposable camera shells would be an allowable "repair," as distinguished from an infringing "reconstruction." Meanwhile, immediately on the heels of the 1999 ITC-I decision, Fuji sued Jazz, its Hong Kong subsidiary and Benun in an infringement/damage action in the District Court for the District of New Jersey ("District Court I"). The chronology of these three matters is:

• ITC initial investigation (ITC-I)-March 18, 1998 to June 28, 1999;

• Fuji District Court patent suit (District Court I) — June 23, 1999 to March 18, 2003 (judgment date); and

• Appeal of ITC-I to Federal Circuit (Appeal I) — September 28, 1999 to August 21, 2001 (decision date).

Kaplan was counsel to Jazz in ITC-I and Appeal I, and counsel (along with co-counsel) to Jazz and Benun in District Court I.

Appeal I resulted in a lengthy opinion and, in effect, a manual of "how to" refurbish LFFPs so that the affirmative defense of "repair" could be advanced by Jazz and others.³ There was a remand to the ITC for implementation of the decision, which, in turn, generated a request for comment by the ITC. On January 10, 2002 Kaplan responded for Jazz; Fuji's January 16, 2002 response included a request for an enforcement proceeding (as to the earlier Commission Cease and Desist Order), targeting not only Jazz, but also Benun and Jazz's then president (Cossentino). Thus, Fuji alerted Kaplan (and the ITC) on January 16, 2002 to Fuji's intention to put Benun in further jeopardy beyond the then pending District Court I infringement action in which Kaplan had appeared for both Jazz and Benun. On September 24, 2002 the ITC did, in fact, accede to Fuji's request by initiating an enforcement proceeding against Jazz, Benun and Cossentino ("ITC-II"). Kaplan dutifully appeared on behalf of Jazz and Benun in ITC-II, and represented them throughout that proceeding, which concluded on or somewhat after January 14, 2005.

District Court I, long stayed pending the Federal Circuit's decision in Appeal I, resulted in a near $30 million judgment against Jazz, its Hong Kong subsidiary and Benun, jointly and severally. The judgment of March 18, 2003 (covering infringement only through the date of the decision in Appeal I, August 21, 2001) propelled Jazz and Benun into this court. Jazz filed a Chapter 11 petition on May 20, 2003, and Benun filed a like petition on July 2, 2003.

The judgment in District Court I was then appealed to the Federal Circuit by counsel other than Kaplan (Notice of Appeal filed April 9, 2003, "Appeal II"). However, on April 22, 2003 Kaplan filed a declaration in support of a stay pending appeal on behalf of both Jazz and Benun. Ultimately, on January 14, 2005 the judgment against Benun and Jazz was affirmed.

ITC-II was initially stayed by the bankruptcies. Eventually, the stays were lifted and Kaplan was authorized by this court to continue to represent both Jazz and Benun in that enforcement proceeding. Things went badly there for the debtors. On July 27, 2004 the ITC adopted administrative findings that Jazz, with Benun's complicity, had again infringed Fuji's patents (now, after August 21, 2001). On the day of the Federal Circuit's January 14, 2005 affirmance (Appeal II), the ITC levied a $13,675,000 penalty (for violation of the 1999 Cease and Desist Order for the August 21, 2001 through December 12, 2003 period), jointly and severally, against Jazz and Benun. This amount is due the United States government; however, Fuji has filed claims in the Jazz and Benun bankruptcies based upon the ITC findings. The ITC-II penalty was appealed, again to the Federal Circuit ("Appeal III"), on Benun's behalf (only) by Kaplan. Appeal III is pending.⁴

Eventually, Jazz was rendered subject to liquidation (an ongoing post-confirmation process) and Benun's individual Chapter 11 case was converted. Jazz's liquidation plan was confirmed by an Order of May 13, 2005, and Benun's case was converted to one in Chapter 7 on March 11, 2005.

On or about May 16, 2005, Moore, Jazz's liquidating trustee, initiated a legal malpractice case against Jazz's lawyers (including Kaplan) for their alleged errors in defense in District Court I. After being removed from state court and "stopping off' in this court long enough to allow this court some limited insight into the claims this case moved (via withdrawal of the bankruptcy reference) to the District Court ("District Court II"). At some point during the pendency of District Court II, Benun, a nonparty, provided plaintiff Moore with a declaration. It alleged that Benun had requested that a certain legal theory be advanced in District Court I (based upon the view that Appeal I announced "new law" in requiring "first sale in the United States" as a prerequisite to the affirmative defense of permissible repair, and that the requirement should not have been applied retroactively in District Court I). Benun's alleged advice or request was said to have been ignored. Appeal II would not address the issue, deeming it to be waived as not having been raised in District Court I.

Kaplan, taking umbrage and seeking (in the name of his law firm, "KGGD") to be relieved as Benun's counsel in Appeal III, advised the Federal Circuit in November 2005, as follows:

Here, withdrawal is mandated under Rule of Professional Conduct 1.7 because the representation of Benun in this appeal will be "materially limited ... by the lawyer's own interests." KGGD will be introducing specific documents, and specific testimony, which will refute the declaration that Mr. Benun has submitted in the malpractice action.... Those documents and that testimony, much of which represents previously privileged communications between Mr. Benun and/or his former company, Jazz Photo Corp., and KGGD as counsel, will most definitely undermine the truthfulness and good faith of Mr. Benun, and will have a detrimental effect on Mr. Benun's rights in this Appeal on several other issues.... Indeed, KGGD is reluctant to disclose those specific documents and testimony presently for full consideration by this Court now, as mere disclosure of them would have a detrimental impact on Mr. Benun's rights. However, counsel believes that there are specific arguments to be made in this appeal that will be undermined and indeed refuted by the privileged information that KGGD will likely be submitting in the malpractice action, and by the arguments it will be making there, to refute Benun's declaration ....

Siegal Declaration, Docket Entry 46, Ex. 2 at 3. Thus, in a forum where review of Benun's good faith effort to comply with the ITC Cease and Desist Order was a prominent issue, Kaplan signaled that privileged documents and his testimony would be contra. Fuji, of course, quickly picked up on the attorney-client schism and the potential for proofs as to Benun's lack of good faith. Fuji's obvious hope is to use Kaplan's file and testimony to establish Benun's "willful and malicious" infringement of its patents for exception to discharge purposes in the immediate adversary proceeding.

This adversary proceeding was initiated by...