In re Simplified Information Systems, Inc.

• Decision Date: 11 May 1988
• Docket Number: Bankruptcy No. 85-1222,87-245.,Adv. No. 85-463
• Citation: 89 BR 538
• Parties: In re SIMPLIFIED INFORMATION SYSTEMS, INC., a/k/a SIS, Debtor. SIMPLIFIED INFORMATION SYSTEMS, INC., a/k/a SIS, Plaintiff, v. Dennis R. CANNON and Robert J. Barthalow, Defendants. Dennis R. CANNON, Plaintiff, v. Robert J. BARTHALOW, Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

89 B.R. 538 (1988)

In re SIMPLIFIED INFORMATION SYSTEMS, INC., a/k/a SIS, Debtor.

SIMPLIFIED INFORMATION SYSTEMS, INC., a/k/a SIS, Plaintiff, v. Dennis R. CANNON and Robert J. Barthalow, Defendants.

Dennis R. CANNON, Plaintiff, v. Robert J. BARTHALOW, Defendant.

Bankruptcy No. 85-1222, Adv. Nos. 85-463, 87-245.

United States District Court, W.D. Pennsylvania.

May 11, 1988.

Bernhard Schaffler, Schaffler & Bohm, Pittsburgh, Pa., for plaintiff/debtor.

Bart J. Tyson, Pittsburgh, Pa., for defendant/Cannon.

Donald J. Barley, Pittsburgh, Pa., for defendant/Barthalow.

ORDER OF COURT

GERALD J. WEBER, District Judge.

AND NOW at Pittsburgh in said District this 11th day of May, 1988, in accordance with the FINDINGS OF FACT and CONCLUSIONS OF LAW executed Mar 14, 1988 it is hereby ORDERED, ADJUDGED and DECREED that Plaintiff Cannon's Complaint be and is hereby DISMISSED on all counts.

United States Bankruptcy Court Western District of Pennsylvania

MEMORANDUM OPINION

BERNARD MARKOVITZ, Bankruptcy Judge.

Before the Court are two (2) adversary proceedings consolidated for trial: 1) Debtor's Complaint to Determine Property of the Estate, and 2) Cannon's Complaint for Judgment against Robert J. Barthalow ("Barthalow"), Debtor's President. In the first action the Debtor asserts that the asset in question, computer software, is property of the Debtor's estate. Cannon challenges that assertion and claims ownership of same. He further contends that the property was only in Debtor's possession as a result of an exclusive licensing agreement. In the second adversary proceeding Cannon accuses Barthalow of breaching his fiduciary duties as a corporate director, wasting corporate assets, and using the corporation as his alter ego. Barthalow challenges Cannon's claims, asserting that he and the Debtor are separate entities, and that in his official capacity, he has exercised care and diligence in the performance of his duties.

Trial was held on February 18, 1988, at which time testimony was heard. Based upon same, and this Court's own research, we find that the computer software constitutes property of the estate. We further find that Cannon's Complaint should be dismissed, as the evidence is woefully insufficient to support the allegations.

JURISDICTION

Cannon originally disputed this Court's jurisdiction to hear this case. At hearing it was determined that Cannon did not in fact contest this Court's jurisdiction to hear the issues, but rather, questioned whether these issues constitute core proceedings, allowing this Court to enter final judgment; or related proceedings requiring this Court to submit Findings of Fact, Conclusions of Law and a Proposed Order to the District Court for final adjudication. Initially, we note that the question of jurisdiction was determined, at least inferentially, by the District Court, when it granted Defendant's application for removal from state court and referral to the Bankruptcy Court.

This Court has previously discussed jurisdiction in substantial detail, In re Allegheny Inc., 68 B.R. 183 (Bankr.W.D.Pa. 1986). Our previous determinations include the following distinction between core and related matters:

. . . core matters are those which either involve a statutorily-created bankruptcy cause of action, such as recovery of preferential transfers and avoidance of liens; or are required for the orderly reorganization of the debtor-creditor relationship, such as turnover actions and determinations of secured status. Related proceedings, on the other hand, are present whenever

. . . the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy . . . if the outcome could alter the debtor\'s rights, liabilities, options or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankruptcy estate. In re Bobroff, 766 F.2d 797, 802 (3rd Cir. 1985) quoting Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir.1984).

In re Yobe, 75 B.R. 873, 875-76 (Bankr.W.D. Pa.1987).

Having this background against which to measure the present issues, we find that the determination as to whether the computer software is property of the estate constitutes a core matter; the remaining issues, raised by Cannon, i.e. alter ego, breach of fiduciary duty, and corporate waste, are related proceedings. While Cannon's Complaint does not involve a bankruptcy cause of action, clearly the outcome affects the administration of Debtor's estate. Had Cannon succeeded on these claims, and had Barthalow been held jointly and severally liable with the corporation, substantial funds would have been saved for the benefit of other creditors of the estate.

FACTS

Robert J. Barthalow ("Barthalow") and Dennis R. Cannon ("Cannon") were employees of Control Data Corporation: Barthalow as a financial manager and engineer; and Cannon as a software developer. Nedra Barthalow, Robert's wife ("Nedra"), was employed as a computer consultant and medical records specialist for various health related companies.

Early in 1981 Barthalow approached Cannon with an idea to create and sell computer-based billing/charting systems for use in physicians' offices. The parties met several times to discuss incorporating for this purpose. Concurrently with these discussions, Cannon's position with Control Data was eliminated. Since this radically changed his financial picture, Cannon insisted that if he agreed to this venture, he be permitted to devote time to pursuing other, more immediately lucrative computer opportunities.

The Debtor was incorporated on April 22, 1981. Barthalow and Nedra owned 50% of the corporation and Cannon owned the other 50%. In consideration for such shares, the Barthalows contributed $10,000.00, and Cannon contributed $5,000.00 and an Apple Computer and Printer, with an estimated value of $5,000.00.

On May 29, 1981, two employment contracts were executed: one between the Debtor and Barthalow; the other between the Debtor and Cannon. These contracts were identical, other than the titles bestowed upon the parties: Barthalow as Associate Executive Director, and Cannon as Executive Director. Neither contract contained an explicit "job description"; they stated only that Barthalow and Cannon were to devote their ". . . full and exclusive time and attention and their best efforts to the discharge of their duties . . ." Plaintiff's Exhibits 2A and 2B.¹ Barthalow and Cannon testified as to what their specific jobs included:

1) Barthalow was to raise capital by locating investors, and to sell the computer hardware and software packages to physicians.²

2) Cannon was to take the information offered by Nedra, combine it with his specialized computer skills, and create the computer software to perform the necessary functions.

On June 29, 1981 Debtor registered its stock with the Pennsylvania Securities Commission. Its registration, and stock offering memorandum, both executed by its President, Cannon, certify that its business ". . . is to develop a simplified computer system for the medical profession, with emphasis on the single doctor practice, to be operated by personnel without data processing background." Plaintiff's Exhibit 4.³

Barthalow was still employed by Control Data Corporation, and began depositing substantial portions of his paychecks into Debtor's checking account for Debtor's use. Between August 1981 and June 1982 those moneys were routinely paid to Cannon, as compensation, while he designed the computer software.⁴ Barthalow has never received any salary from the Debtor.

PROPERTY OF THE ESTATE

Debtor has asserted that the computer software, created by Cannon, is property of the estate. Cannon argues that Debtor merely possesses an exclusive license to use the software for the life of the corporation, with reversion to Cannon upon corporate dissolution. Cannon bases this assertion upon his claim that Barthalow and he made an oral contract to that effect.

With the exception of certain factors not presently relevant, property of the estate includes ". . . all legal or equitable interests of the Debtor in property as of the commencement of the case." 11 U.S.C. § 541(a). This also includes both intangible and transitory property. In re Sheppard's Dental Centers Inc., 65 B.R. 274 (Bankr.S. D.Fla.1986); Glosband v. Watts Detective Agency Inc., 21 B.R. 963 (D.Mass.1981). Therefore, software ownership can be property of the estate. However, the parameters of Debtor's interest are determined by state and federal non-bankruptcy law. Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); In re Livingston, 804 F.2d 1219 (11th Cir.1986); In re William H. Vaughan & Co. Inc., 52 B.R. 701, affirmed 63 B.R. 438 (E.D.Pa.1986). In the instant case we must turn to federal copyright law in order to determine ownership of the software design.

The right of copyright is statutorily created, and is based upon Article I, § 8, cl. 8 of the U.S. Constitution. M. Kramer Mfg. Co. v. Andrews, 783 F.2d 421 (4th Cir. 1986); Digital Communications Associates, Inc. v. Softklone Distributing Corporation, 659 F.Supp. 449 (N.D.Ga.1987). The Copyright Act of 1976, as amended in 1980, is codified at 17 U.S.C. § 101 et seq. Section 102(a) states in pertinent part:

§ 102(a). Copyright protection subsists in accordance with this title, in original works of authorship fixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced or otherwise communicated, either directly or with the aid of a machine or device. Works of authorship include the following categories:

(1) literary works; . . .

A computer program is a work of authorship and is classified as a literary work for the purpose of obtaining copyright protection. Whelan Associates Inc. v. Jaslow Dental Laboratory Inc., 797 F.2d 1222 (3rd Cir.) cert. denied, 479 U.S. 1031, 107 S.Ct. 877, 93 L.Ed.2d 831 (1987); Digital...