Kipp Flores Architects, LLC v. Mid-Continent Cas. Co., CIVIL ACTION NO. 4:14-cv-02702

• Decision Date: 29 February 2016
• Docket Number: CIVIL ACTION NO. 4:14-cv-02702
• Parties: KIPP FLORES ARCHITECTS, LLC, Plaintiff, v. MID-CONTINENT CASUALTY COMPANY, Defendant.
• Court: U.S. District Court — Southern District of Texas

KIPP FLORES ARCHITECTS, LLC, Plaintiff, v. MID-CONTINENT CASUALTY COMPANY, Defendant.

CIVIL ACTION NO. 4:14-cv-02702

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

February 29, 2016

MEMORANDUM AND RECOMMENDATION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

This matter was referred by United States District Judge Lee H. Rosenthal,¹ for full pre-trial management, pursuant to 28 U.S.C. § 636(b)(1)(A) and (B). (Docket Entry No. 9; Docket Entry No. 85). In this breach of contract action, Plaintiff Kipp Flores Architects, LLC ["KFA"] seeks to recover, as a judgment creditor, from Defendant Mid-Continent Casualty Company ["Mid-Continent"]. (Plaintiff's Complaint ["Complaint"], Docket Entry No. 1). Before the court are the parties' cross-motions for summary judgment. (Plaintiff's Motion for Partial Summary Judgment ["Plaintiff's Motion"], Docket Entry No. 82; Mid-Continent's Opposition to Plaintiff's Motion for Partial Summary Judgment and Cross-Motion for Summary Judgment ["Defendant's Motion"], Docket Entry No. 91). Responses and replies have been filed as well. (Plaintiff's Response to Defendant's Cross-Motion for Summary Judgment ["Plaintiff's Response"], Docket Entry No. 97; Defendant's Reply in Support of Defendant's Cross-Motion for Summary Judgment ["Defendant's Reply"], Docket Entry No. 100). After considering thepleadings, the evidence submitted, and the applicable law, it is RECOMMENDED that Defendant's motion be GRANTED, and that Plaintiff's motion be DENIED.

I. Background

Plaintiff KFA is an architectural firm that creates and markets home designs. (Compl. ¶ 5; Mid-Continent Casualty Company's Second Amended Answer Subject to Motion to Dismiss Under FRCP 12(b) and Motion for Summary Judgment for Lack of Subject Matter Jurisdiction ["Answer"], Docket Entry No. 75, at ¶ 5). Beginning in 2003, KFA entered into a series of licensing agreements with a Texas homebuilder, Hallmark Collection of Homes, LLC ["Hallmark Collection"].² (Compl. ¶¶ 18, 20; Answer ¶¶ 18, 20). Under those agreements, KFA created and delivered architectural designs for Hallmark Collection's use in the construction of its model homes. (Id.). Each design included a license, which allowed Hallmark Collection to build only one house from that architectural plan. (Compl. ¶ 20). For that reason, the agreements required Hallmark Collection to compensate KFA each time it constructed any additional house that was based on a KFA design. (Compl. ¶ 21; Answer ¶ 21). KFA alleges, however, that Hallmark Collection continued to use its designs to build and sell hundreds of houses, without paying for the right to do so. (Compl. ¶ 20).

In March 2009, KFA filed a copyright infringement lawsuit [the "KFA Lawsuit" or the "Underlying Action"], in the Southern District of Texas, against Hallmark Collection, its limited partnership, Hallmark Design Homes, L.P. ["Hallmark Design"], and an individual owner ofHallmark Collection, Joe Partain.³ (Original Complaint, Kipp Flores Architects, LLC v. Hallmark Design Homes, L.P., No. 4:09-cv-00850 (S.D. Tex. Mar. 24, 2009)). After that lawsuit began, Hallmark Collection and Hallmark Design both filed for Chapter 7 bankruptcy protection, on November 16, 2009. (Chapter 7 Voluntary Petition, In re Hallmark Collection of Homes, LLC, No. 4:09-bk-38715 (Bankr. S.D. Tex. Nov. 16, 2009); Chapter 7 Voluntary Petition, In re Hallmark Design Homes, LP, No. 4:09-bk-38714 (Bankr. S.D. Tex. Nov. 16, 2009)). In its bankruptcy filings, Hallmark Collection disclosed liabilities in excess of $2.5 million, but listed no assets that were available for distribution to creditors. (Def.'s Mot. Ex. 6 at 1; Def.'s Mot. Ex. 9 at 1-5, 29). On Schedule F of its petition, Hallmark Collection identified KFA as a creditor, stating that it held an unsecured, nonpriority claim, for an "unknown" amount, which arose out of the Underlying Action. (Def.'s Mot. Ex. 9 at 20).

On November 23, 2009, the district court entered an order to stay, and to administratively close the Underlying Action against Hallmark Collection and Hallmark Design, pending resolution of those bankruptcy proceedings. (Order Staying and Partially Administratively Closing Case, Kipp Flores, No. 4:09-00850, Docket Entry No. 26). The stay was lifted, however, and the KFA Lawsuit did continue against the remaining individual defendant, Joe Partain. (Compl. ¶ 26; Answer ¶ 26).

On January 7, 2010, the Chapter 7 Trustee in the Hallmark Collection bankruptcy filed a "Notice of Assets, Notice to Creditors and Other Parties in Interest of the Need to File Claims." (Notice of Assets, Notice to Creditors and Other Parties in Interest of the Need to File Claims,Hallmark Collection, 4:09-bk-38715, Docket Entry No. 8). That notice provided, in relevant part, that:

It having appeared from the schedules of [Hallmark Collection] at the time of filing that there was no estate from which any dividend could be paid to creditors, the notice to creditors advised that it was unnecessary for any creditor to file his claim at that time.

It appearing subsequently that there is an estate from which a dividend to creditors may be paid, creditors must now file claims in this case in order to share in any distribution from the estate. CLAIMS MUST BE FILED ON OR BEFORE NINETY (90) DAYS FROM THE ISSUANCE OF THIS NOTICE.

Claims which are not filed timely as set forth above will not be allowed, except as otherwise provided by law.

(Id.).

Three months later, on April 6, 2010, KFA filed a proof of claim, in the amount of $63,471,000.00, against Hallmark Collection. (Def.'s Mot. Ex. 12). That proof of claim was based on a purported "copyright infringement."⁴ (Id. at 1). In support of its claim, KFA attached a copy of the complaint from the Underlying Action, as well as a three-page document entitled "Explanation and Synopsis of Kipp Flores Architect's Proof of Claim." (Id. at 2-4). In that "Explanation," Plaintiff calculated the claim amount "[b]ased on the deposition testimony of Mr. Partain in the [KFA] Lawsuit." (Id. at 2). In making the calculation, KFA estimated "the number of infringing houses," "their typical sale price," and "the amount of gross revenue from such sales." (Id.). Plaintiff stated that it was "continuing to seek evidence from third parties to verify these figures," and that it would subsequently "amend its proof of claim to reflect its findings." (Id. at 3). The last paragraph of the document stated the following:

KFA recognizes that [Hallmark Collection] may be able to reduce its liability by proving its expenses for the houses at issue with admissible evidence. However,in the absence of such proof, the estimation of Hallmark's gross receipts from the sales of infringing houses stands as the measure of [its] liability to KFA[.]

(Id. at 4).

KFA never amended its proof of claim against Hallmark Collection. (See Def.'s Mot. Ex. 11). No objections were filed to KFA's proof of claim, and no order allowing or disallowing the claim was ever entered. (Id.). On August 17, 2010, the Chapter 7 Trustee submitted a No Asset Report, stating that there were no proceeds from the Hallmark Collection estate for distribution to creditors. (Chapter 7 Trustee's Report of No Distribution, Hallmark Collection, 4:09-bk-38715). The No Asset Report stated, in full, that:

Chapter 7 Trustee's Report of No Distribution: I, Lowell T Cage, having been appointed trustee of the estate of [Hallmark Collection], report that I have neither received any property nor paid any money on account of this estate; that I have made a diligent inquiry into the financial affairs of the debtor[] and the location of the property belonging to the estate; and that there is no property available for distribution from the estate over and above that exempted by law. Pursuant to Fed R Bank P 5009, I hereby certify that the estate of [Hallmark Collection] has been fully administered. I request that I be discharged from any further duties as trustee. Key information about this case as reported in schedules filed by the debtor[] or otherwise found in the case record: This case was pending for 9 months. Assets Abandoned: $ 0.00, Assets Exempt: $ 0.00, Claims Scheduled: $ 267818.68, Claims Asserted: Not Applicable, Claims scheduled to be discharged without payment: $ 267818.68.

(Id.). Five weeks later, on September 21, 2010, the Hallmark Collection bankruptcy case was closed. (Final Decree, Hallmark Collection, 4:09-bk-38715, Docket Entry No. 14).

In the interim, on April 29, 2010, KFA filed an amended complaint in the Underlying Action, naming two additional defendants, Laura Partain and William Graper. (First Amended Complaint, Kipp Flores, No. 4:09-cv-00850, Docket Entry No. 41). Approximately nine months later, on February 4, 2011, Joe Partain and Laura Partain filed a joint Chapter 7 bankruptcy petition. (Chapter 7 Voluntary Petition, In re Partain, No. 11-bk-31204 (Bankr. S.D. Tex. Feb. 4, 2011), Docket Entry No. 1). Shortly thereafter, on March 28, 2011, KFA filed a motion towithdraw reference to the bankruptcy court of those claims that had been made against Hallmark Design, Joe Partain, and Laura Partain in the Underlying Action. (Def.'s Mot. Ex. 18, Ex. 19). No such request was ever made in regard to the claim made against Hallmark Collection, however, as that bankruptcy case had been closed almost one year earlier. (See Final Decree, Hallmark Collection, 4:09-bk-38715, Docket Entry No. 14). The district court granted KFA's motion to withdraw reference, on August 25, 2011. (Order, Kipp Flores, No. 4:09-cv-00850, Docket Entry No. 92).

On November 29, 2011, KFA filed an amended proof of claim in the Hallmark Design bankruptcy action, in the amount of $83,610,829.00. (Def.'s Mot. Ex. 14). KFA filed an identical proof of claim in the Partain bankruptcy action. (Def.'s Mot. Ex. 25). Those claims were purportedly based on "Hallmark's records of the gross sales prices of houses that were illegally constructed from various KFA plans."...