In re Jazz Photo Corp.

• Decision Date: 03 August 2004
• Docket Number: No. 03-26565 (MS).,03-26565 (MS).
• Citation: 312 B.R. 524
• Parties: In the Matter of JAZZ PHOTO CORP., Debtor-in-Possession.
• Court: U.S. Bankruptcy Court — District of New Jersey

312 B.R. 524

In the Matter of JAZZ PHOTO CORP., Debtor-in-Possession.

No. 03-26565 (MS).

United States Bankruptcy Court, D. New Jersey.

August 3, 2004.

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Michael D. Sirota, Esq., Cole, Schotz, Meisel, Forman & Leonard, PC, Hackensack, NJ, for Jazz Photo Corp.

Michael S. Etkin, Esq., Bruce Buechler, Esq., Lowenstein Sandler, PC, Roseland, NJ, Lawrence Rosenthal, Esq., Stroock, Stroock & Lavan, LLP, New York, NY, for Fuji Film Co., Ltd.

Margaret Jurow, Esq., Office of the United States Trustee, Newark, NJ, Howard S. Greenberg, Esq., Ravin Greenberg, PC, Roseland, NJ, for Official Committee of Unsecured Creditors.

Dennis O'Grady, Esq., Riker Danzig, Morristown, NJ, for Jack C. Benun.

OPINION

MORRIS STERN, Bankruptcy Judge.

I. Background

Sanctions are sought against both a creditor and its counsel who are accused of filing and pursuing, out of ill-will and without reasonable factual underpinnings, a motion to have a Chapter 11 trustee appointed.

Jazz Photo Corp. ("Jazz") and its operating principal, Jack Benun,¹ were driven into Chapter 11 bankruptcy cases by an unrelenting creditor-competitor, Fuji Photo Film Co., Ltd. ("Fuji"). The critical and immediately precipitating event causing the debtors' filings in this court was the entry of a judgment against them for infringement of Fuji patents. That district court judgment, in the amount of almost $30 million, was the culmination of Fuji's long-term pursuit of its claims that Jazz's reuse of disposable camera shells violated Fuji patents.² Along the way, the parties venued their dispute with the International Trade Commission (the "ITC") and, on appeal, with the Federal Circuit.³

The District Court Opinion and its March 2003 monetary judgment addressed infringement claims only through August 21, 2001. Thus, when the bankruptcy petitions were filed on May 20, 2003, there was no determination that patent violations were ongoing. Fuji has alleged that Jazz has not changed its method of operation so as to avoid infringement; Jazz has argued to the contrary, while preserving its more fundamental position (now once again in the Federal Circuit in the appeal of the district court judgment) that Jazz has never infringed the Fuji patents.

Fuji pressured the debtors from the outset of the bankruptcy cases. Early on, it moved for the appointment of a Chapter 11 trustee for Jazz, contending both that infringement was ongoing and that Benun should not be entrusted with the stewardship of a debtor-in-possession. The latter point is, in Fuji's view, bolstered by an April 8, 2003 Opinion and Order of the district court, denying a stay of its judgment pending appeal. The district court detailed Benun's "practice of causing himself to be paid a substantial portion of Jazz's available funds and disposing of them." From June 1999 through December 2002, Benun received a total of $11.9 million from Jazz.⁴ Benun's questionable history in the camera business was also cited.⁵

Eventually, Fuji chose to pursue its application to the ITC for relief as to its claim of continuing Jazz infringement (a prosecution permitted by order of this court), effectively severing determination of the patent issues from the trustee appointment motion. Thus, as the Chapter 11 trustee motion moved through hearings and interlaced discovery, the ITC action was regenerating and the appeal from the district court judgment was maturing.⁶ Obviously, the stakes here are high and the intensity of the parties is white-hot.

II. Jazz's Disposable Camera Business

Jazz is a New Jersey corporation with its principal place of business in Carteret, New Jersey. At the time of filing, Jazz had wholly owned subsidiaries, including JPHK. JPHK was the purchasing arm of Jazz in China.

Jazz operates by importing and selling disposable cameras, relatively simple cameras which consumers purchase, use to take pictures, and then deliver to photo processors, who remove the exposed film for development by opening a compartment that holds the film. Once the film is removed, the remaining camera shells are either discarded by the developers, sold back to the original manufacturer, or sold to collectors who then resell them to companies that "refurbish" the cameras by, among other things, reloading the cameras with new film. Jazz acquires these shells after they have been reloaded and otherwise refurbished in a network of Chinese factory works. Jazz then sells the LFFPs in the United States. Until some time after the district court judgment and before the bankruptcy petition date, JPHK was Jazz's gathering point for and source of LFFPs.

The former operation of JPHK in obtaining LFFPs from rural China's vast pool of job shops lacks transparency to this court, as does Jazz's current offshore supply system. Benun and Jazz made an obvious strategic decision to exclude JPHK from Jazz's Chapter 11 case, notwithstanding the fact that the subsidiary was subject to the district court's judgment. Eventually, Fuji pressed JPHK through the Hong Kong court system and the Jazz subsidiary was, essentially, liquidated. Jazz personnel apparently remain in Hong Kong as quality control/purchasing agents, working through (perhaps among others) Polytech Enterprise Ltd. ("Polytech"), a company formed with Jazz's support shortly before the judgment. The current supply system includes Polytech and an offshore supplier formed in 2001 also with Jazz's direct support (Photo Recycling Enterprise, Ltd. or "PRE"). A Benun confidant, Leon Silvera, is both a principal of PRE and Polytech's designated representative on the Creditors Committee in Jazz's Chapter 11 case.⁷

The change in lines of supply apparently served to move profit from the offshore JPHK to Jazz. This result is the antithesis of Fuji's early contention that Jazz's Chapter 11 estate was being drained of funds. Nevertheless, though Jazz blunted the primary thrust of Fuji's argument, the relative ease with which margins could be adjusted and allocated by Benun to offshore or domestic enterprises as he saw fit is apparent to this court.⁸

III. Motion Chronology

Barely one month into Jazz's Chapter 11 case, on June 24, 2003, Fuji filed its motion for the appointment of a trustee. The motion was initially heard on July 30, 2003, then carried to an October 21, 2003 evidentiary hearing. Before that hearing, fourteen days of depositions were conducted in the United States and in Asia by Fuji's counsel.

On October 3, 2003 Fuji filed its memorandum discussing evidence and law in support of its trustee motion. After reviewing Fuji's evidence memorandum, on October 16, 2003 Jazz served Fuji with a letter (the "Initial Notice Letter") demanding that Fuji withdraw its motion. See Appendix hereto (particularizing Jazz's claims that Fuji's motion was baseless). On October 17, 2003 Jazz filed and served its summary of evidence in response to Fuji's evidence memorandum.

The evidentiary hearing on the trustee motion went forward on October 21 and 22, 2003 with testimony from several witnesses. No conclusion was reached and the matter was continued to February 6, 2004. On January 15, 2004 Jazz wrote to Fuji a second time inquiring whether it intended to go forward with its motion and reiterating its intention to seek sanctions if Fuji did not withdraw its motion.

On January 27, 2004 Fuji requested a two-month adjournment of the February 6 scheduled hearing. Following a court-initiated conference call with all parties during which the court advised Fuji that it would deny Fuji's request for an adjournment, Fuji withdrew its motion. Thereafter, on February 3, 2004, Jazz filed and served its motion seeking sanctions under Fed. R. Bankr.P. 9011 ("Rule 9011") and 28 U.S.C.1927. Benun joined in Jazz's motion on March 8, 2004 by filing a paper denominated "Joinder."

IV. Scope and Procedural Requirements — Fed. R. Bankr. P. 9011

A. Scope of Rule. The actions that trigger liability under Rule 9011⁹ are "signing, filing, submitting or later advocating" a paper that violates the Rule's certification standards. Central to the matter at bar is the Rule 9011(b)(3) standard that the document signed by the attorney must be well grounded in fact. Inquiry will also focus on the requirement that the document signed by the attorney must not be filed for an improper purpose. Fed. R. Bankr.P. 9011(b)(1). Signing or advocating a paper which violates these standards may result in the imposition of sanctions. Fed. R. Bankr.P. 9011(c). A motion to appoint a Chapter 11 trustee is covered by Rule 9011. Computer Dynamics Inc. v. Merrill (In re Computer Dynamics Inc.), 252 B.R. 50, 57 (Bankr.E.D.Va.1997).

Rule 9011 parallels Fed. R. Civ. P. 11 ("Rule 11"). Courts apply the same standard in interpreting cases under Rule 9011 as in cases involving Rule 11. Landon v. Hunt, 977 F.2d 829, 833 n. 3 (3d Cir.1992). Rule 9011 discourages in bankruptcy proceedings the same conduct that Rule 11 proscribes. Cinema Service Corp. v. Edbee Corp., 774 F.2d 584, 585 (3d Cir.1985). The common purpose of the Rules is to deter baseless filings. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990). More particularly, the Third Circuit has summarized the essence of Rule 11 as follows:

[T]he rule imposes an obligation on counsel and client analogous to the railroad crossing sign, "Stop, Look and Listen." It may be rephrased, "Stop, Think, Investigate and Research" before filing papers whether to initiate a suit or to conduct the litigation. These obligations conform to those practices which responsible lawyers have always employed in vigorously representing their clients while recognizing the court's duty to serve the public efficiently.

Gaiardo v. Ethyl Corp., 835 F.2d 479, 482 (3d Cir.1987) (citing Lieb v. Topstone Indus., Inc., 788 F.2d 151 (3d Cir.1986)). Rule 11 and Rule 9011 sanctions are imposed when a pleading constitutes "abusive litigation or...