Karras v. Stirlen (In re Stirlen)

• Decision Date: 30 April 2020
• Docket Number: Bankruptcy Case No. 17 B 06666,Adversary Case No. 17 A 00424
• Citation: 614 B.R. 837
• Parties: IN RE: Bryce STIRLEN, Debtor. Dimitri Karras, Plaintiff and Counter-Defendant, v. Bryce Stirlen, Defendant and Counter-Plaintiff.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

614 B.R. 837

IN RE: Bryce STIRLEN, Debtor.Dimitri Karras, Plaintiff and Counter-Defendant,

v.Bryce Stirlen, Defendant and Counter-Plaintiff.

Bankruptcy Case No. 17 B 06666

Adversary Case No. 17 A 00424

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed April 30, 2020

Blake W. Horwitz, The Blake Horwitz Law Firm, Ltd., Chicago, IL, Scott A. McMillan, The McMillan Law Firm, APC, La Mesa, CA, for Plaintiff and Counter-Defendant.

Lee Rochelle Laxamanna, Ariel Weissberg, Weissberg and Associates, Ltd., Chicago, IL, for Defendant and Counter-Plaintiff.

MEMORANDUM OPINION

JANET S. BAER, United States Bankruptcy Judge

Before the Court are the motions filed by plaintiff Dimitri Karras to dismiss the counterclaim of debtor-defendant Bryce Stirlen under subsections (b)(1) and (b)(6) of Rule 12 of the Federal Rules of Civil Procedure (made applicable to adversary proceedings by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure ).¹ Having heard the parties' oral arguments, taken judicial notice of the dockets both in this adversary proceeding and in Stirlen's bankruptcy case, and reviewed all relevant documents and transcripts, and for the reasons set forth below, the Court denies Karras's motions to dismiss.

BACKGROUND

On Karras's motions to dismiss under Rules 12(b)(1) and 12(b)(6), the Court accepts as true all well-pleaded factual allegations in the counterclaim. See Silha v. ACT, Inc. , 807 F.3d 169, 173-74 (7th Cir. 2015) ; Gierum v. Glick (In re Glick ), 568 B.K. 634, 641 (Bankr. N.D. Ill. 2017). In addition to considering these allegations, the Court takes judicial notice of the contents of the dockets both in this adversary proceeding and in Stirlen's bankruptcy case. See In re Brent , 458 B.R. 444, 455 n.5 (Bankr. N.D. Ill. 2011). The material facts, gleaned from the counterclaim and other relevant documents, are as follows.

In August 2014, Karras and Stirlen began negotiations in connection with Stirlen's acquisition of assets from Lycurgan, Inc., doing business as Ares Armor ("Lycurgan"), a California corporation owned and controlled by Karras. (See Adv. Dkt. No. 100 ¶¶ 13, 15, 20.² ) Lycurgan designed, manufactured, and sold guns and related components through internet-based sales to people who wanted to assemble their own firearms. (Id. ¶ 13; Tr. at 3:20-4:5.³ )

During the negotiations, Karras told Stirlen that in January 2014, he had caused his Nevada-based corporation Double A Industries, Inc. ("Double A") to file an application to trademark the name "Ares Armor" with the U.S. Patent and Trademark Office. (Adv. Dkt. No. 100 ¶ 19.) Accordingly, Karras said, the transfer of the name "Ares Armor" to a company to be established by Stirlen would not violate the intellectual property rights of any third parties. (Id. )

On September 24, 2014, Ares Defense Systems, Inc. ("Ares Defense"), a Florida-based company that designs, manufactures, and sells firearms and related components under the trademark "Ares," filed an extension with the U.S. Patent and Trademark Office to oppose Double A's trademark application. (Id. ¶¶ 23, 26.)

About three weeks later, on October 16, 2014, Stirlen formed Ares Armor, Inc. under the laws of California, in contemplation of the acquisition of assets from Lycurgan. (Id. ¶ 28.) He established the company in reliance on Karras's representation that the name "Ares Armor" was Lycurgan's intellectual property free and clear of any claims of infringement. (Id. )

On November 28, 2014, after ultimately agreeing to the essential terms of the acquisition, Karras and Stirlen caused an asset purchase agreement to be executed between Lycurgan and Stirlen's new corporation Ares Armor, Inc. (Id. ¶ 30.) Karras and Stirlen signed the asset purchase agreement not only as the president of each of their respective corporate entities, but also personally as guarantors. (Id. ¶¶ 31, 37, Ex. 4 at 9.) Karras also signed the agreement as the majority shareholder of Lycurgan. (Id. ¶ 31, Ex. 4 at 9.) Under paragraph 32 of the agreement, Stirlen unconditionally guaranteed Ares Armor, Inc.'s performance, and Karras did the same for the obligations of Lycurgan. (Id. , Ex. 4 at 7.)

Following consummation of the sale, Stirlen began operating Ares Armor, Inc., and Karras was kept on as an employee. (See Tr. at 7:8-16; 8:3-6.)

On December 22, 2014, Ares Defense filed a notice with the U.S. Patent and Trademark Office to oppose the registration of the "Ares Armor" trademark by Double A. (Adv. Dkt. No. 100 ¶ 38.) Subsequently, on July 8, 2015, Ares Defense brought an action for trademark infringement in the United States District Court for the Middle District of Florida against Ares Armor, Inc., Stirlen, Lycurgan, Karras, and others. (Id. ¶ 39.)

About nine months later, on March 25, 2016, Ares Armor, Inc. and Stirlen entered into a settlement agreement with Ares Defense to resolve the trademark infringement suit. (Id. ¶ 50.) Pursuant to the settlement, Ares Armor, Inc. agreed to: (1) change the name of its business to American Weapons Components, Inc. ("AWC"), and (2) pay Ares Defense $24,375. (Id. ¶ 51.) The new name, and a corresponding change to the company's website address, caused both online traffic and sales to plummet. (Id. ¶¶ 52-54, 56.) Neither traffic nor sales ever rebounded. (Id. ¶ 58.)

Nearly one year later, on March 5, 2017, Stirlen filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. (Bankr. Dkt. No. 1.) Subsequently, on December 4, 2018, the case was converted on the Court's own motion to a case under chapter 7. (Bankr. Dkt. No. 254.)

On June 14, 2017, about three months after the bankruptcy had commenced, Lycurgan filed a claim in the case in the amount of $3,900,000, asserting, among other things, that $600,000 of the claim was secured by a lien on property in which the bankruptcy estate had an interest. (See Bankr. Claims Register, Claim No. 15.) On September 6, 2017, Stirlen filed an objection to the claim to the extent that it asserted a secured interest in his assets. (Bankr. Dkt. No. 121.) After conducting a one-day evidentiary hearing, the Court sustained Stirlen's objection on January 9, 2018. (Bankr. Dkt. No. 177.) Because no further objections were subsequently filed, Lycurgan has an allowed unsecured claim of $3,900,000 in Stirlen's bankruptcy case. (See id. )

After disputes arose over the agreement that resulted in the acquisition of Lycurgan's trade name and related business assets, as well as certain allegedly tortious acts by Stirlen in his individual capacity, Karras filed an adversary complaint against Stirlen on March 14, 2018. (Adv. Dkt. No. 60.⁴ ) In the complaint, Karras alleges that Stirlen fraudulently induced him to enter into the agreement, to become an employee of Stirlen's business, and to sign a non-compete agreement. Karras also asserts that Stirlen used Karras's credit card without permission and failed to pay the charges that were incurred, causing the account to go into default. He further contends that Stirlen committed a number of intentional torts, including defamation, invasion of privacy, and retaliatory termination. Accordingly, Karras seeks a determination of nondischargeability pursuant to §§ 523(a)(2)(A), (a)(4), and (a)(6) of the Bankruptcy Code.

On June 26, 2019, in response to Karras's complaint, Stirlen filed what he styled a counterclaim in which he asserts that he is entitled to set off the alleged debts that he owes to Karras pursuant to paragraph 16 of the asset purchase agreement. (See Adv. Dkt. No. 100 ¶ 32(b), Ex. 4 at 4-5.) He argues, inter alia , that he has a right to do so because Lycurgan and Karras breached both the asset purchase agreement and the warranty bill of sale, failed to indemnify Ares Armor, Inc. for the infringement of the "Ares" trademark, and caused Ares Armor, Inc. and Stirlen to incur significant financial losses. Stirlen suggests that Karras is responsible for these acts either directly or as a guarantor.

On July 24, 2019, Karras filed two motions to dismiss Stirlen's counterclaim under subsections (b)(1) and (b)(6) of Rule 12 of the Federal Rules of Civil Procedure. (Adv. Dkt. Nos. 103 & 104.) After the motions were fully briefed, the Court took the matters under advisement. Having reviewed the relevant documents, the arguments of the parties, and the applicable case law, the Court is now ready to rule.

DISCUSSION

1. Karras's Motion to Dismiss Stirlen's Counterclaim Under Rule 12(b)(6)

On a Rule 12(b)(6) motion to dismiss, the Court draws all reasonable inferences from the well-pleaded facts in favor of the non-movant. See Killingsworth v. HSBC Bank Nev., N.A. , 507 F.3d 614, 618 (7th Cir. 2007) ; Hernandez v. City of Goshen , 324 F.3d 535, 537 (7th Cir. 2003). Modern rules of pleading require, inter alia , "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2) (made applicable to adversary proceedings by Fed. R. Bankr. P. 7008 ). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and 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) (internal citations omitted); see also Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (finding that the plaintiff must include more than "unadorned, the defendant-unlawfully-harmed-me accusation[s]"). Legal conclusions may help to structure a complaint, but they must be supported by factual allegations. Iqbal , 556 U.S. at 678-79, 129 S.Ct. 1937.

A complaint will be dismissed under Rule 12(b)(6) unless it clears "two easy-to-clear hurdles." E.E.O.C. v. Concentra Health Servs., Inc. , 496 F.3d 773, 776 (7th Cir. 2007). First, the complaint must provide fair notice of the claim and the...