Signature Apparel Grp. LLC v. Laurita (In re Signature Apparel Grp. LLC), Case No. 09–15378 (REG)

Citation577 B.R. 54
Decision Date24 August 2017
Docket NumberAdversary No. 11–02800 (REG),Case No. 09–15378 (REG)
Parties IN RE: SIGNATURE APPAREL GROUP LLC, Debtor Signature Apparel Group LLC, Plaintiff, v. Joseph Laurita, Christopher Laurita, New Star Group, LLC, ROC Fashions LLC, RVC Enterprises, LLC, Ruben Azrak, Victor Azrak, Charles Azrak, Iconix Brand Group, Inc., and Studio IP Holdings LLC, Defendants. ROC Fashions LLC, Third–Party Plaintiff, v. Studio IP Holdings LLC, Third–Party Defendant.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

Kyle C. Bisceglie, Michael S. Fox, Jonathan Koevary, Olshan Frome Wolosky LLP, New York, NY, for Plaintiff.

Amos Alter, New York, NY, Jeffrey A. Kramer, Andrew J. Pincus, Seidman & Pincus, LLC, Hasbrouck Heights, NJ, Tracy L. Klestadt, Klestadt Winters Jureller Southard & Stevens, LLP, Harris N. Cogan, Andrew T Hambelton, Evan J. Zucker, Andrew B. Eckstein, Anthony A. Mingione, Blank Rome LLP, New York, NY, for Defendants.

Nazar Khodorovsky, Office of the United States Trustee, New York, NY, for U.S. Trustee.

MEMORANDUM DECISION

Robert E. Grossman, United States Bankruptcy Judge

1. Introduction

Anthony Labrosciano (the "Plaintiff"), the Chapter 11 Responsible Person of the estate of Signature Apparel Group LLC (the "Debtor"), appointed pursuant to a confirmed liquidation plan, commenced this adversary proceeding under the Bankruptcy Code, New York and Delaware law asserting a variety of claims arising from the Debtor's exclusive license agreement to manufacture and distribute juniors sportswear apparel bearing the Rocawear trademark. The defendants remaining in this adversary proceeding are Christopher Laurita, New Star Group, LLC ("New Star"), Iconix Brand Group, Inc. ("Iconix") and Studio IP Holdings, LLC ("Studio IP") (collectively, the "Defendants").

The Debtor's precarious financial positon made an injection of capital into the company critical in order to meet its obligations under the exclusive Rocawear license. The principals of the Debtor and Iconix, the parent company of Studio IP, which was the licensor, commenced negotiations to transfer the Rocawear license granted to the Debtor to a viable new entity in a manner designed to reduce any disruption in the flow of merchandise to retailers and to mitigate significant potential losses to Studio IP and Iconix. Iconix, had recently purchased the entire Rocawear brand and the Debtor had an exclusive license to manufacture and merchandise a portion of the Rocawear brand.

The commencement of the involuntary bankruptcy proceeding under Chapter 7 by three of the Debtor's largest suppliers exacerbated the situation and the negotiations assumed a new urgency. Negotiations to dismiss the involuntary proceeding failed, and the parties quickly entered into a plan designed to grant the exclusive right to manufacture and distribute this segment of Rocawear apparel to a third party, despite the risk that such grant would violate the automatic stay and constitute a breach of the exclusive license agreement between the Debtor and Studio IP. Understanding that time was critical, the parties believed that seeking the approval of the Bankruptcy Court was antithetical to their objectives. Therefore, the parties embarked on a plan which was based on a false premise, that the license which was the Debtor's single most valuable asset was not property of the estate, having been terminated prior to the commencement of the involuntary petition. The Defendants, along with certain of the professionals, were well aware that this was false, and yet continued to submit documents to the Court stating the Rocwear license had been terminated prepetition. In fact, the Rocawear license was not terminated as of the date of entry of the order for relief, and remained an asset of the Debtor's estate after the order for relief was entered. As a result of certain activities which took place during the time period between the filling of the involuntary petition and entry of the order for relief, and the concealment of these activities through confirmation of a liquidating plan, the Debtor lost the benefit of its most valuable asset for no compensation. No steps were taken in this case to formally abandon the license agreement, or to seek permission from the Court to terminate the license agreement. In fact, the Debtor never pursued a breach of contract claim against Studio IP for its conduct during the early stages of the bankruptcy proceeding. To do so would have exposed the fact that Christopher Laurita failed to disclose that the license agreement was not terminated prepetition, and that with the assistance of Iconix and others, a third party was reaping the benefits of the exclusive rights under the license agreement. The Defendants acknowledged the risks of proceeding with this course of conduct in their communications at the time, yet continued despite these risks.

The Debtor's principals and the parent company of the licensor, with the full knowledge of certain of the professionals in this case, hid the true facts from the Court and the creditors of the Debtor throughout the entire Chapter 11 proceeding. A plan of liquidation was confirmed by the Court on the false premise that the exclusive license agreement was not property of the Debtor's estate, and that Studio IP did not breach the contract post-petition. A review of the record in this case reveals a consistent failure to comply with the most basic requirements of the Debtor to provide full and complete disclosure to the Court and the creditors of the Debtor. The ultimate result of this scheme was to confer financial gain upon the Defendants and the subsequent licensee, at the expense of the Debtor. Among the many defenses raised by the various defendants to this adversary proceeding, one was consistent: The asset was inconsequential and had no value to the Debtor because the Debtor could not fulfill the requirements under the terms of the license agreement. Because it had no value to the Debtor, the failure to disclose the existence of the license agreement did not result in any damages. This argument fails to recognize that the Debtor was the only party vested with the exclusive right to manufacture and sell junior apparel under the Rocawear license as of the date of entry of the order for relief in this case. Therefore, under the various causes of action set forth, damages may be significant.

Based on the conduct of the parties involved, the Court finds that Christopher Laurita and Iconix are liable for fraud, negligent misrepresentation and tortious interference with contractual relations. Christopher Laurita is liable for breach of his fiduciary duty to the Debtor and Iconix is liable for aiding and abetting Christopher Laurita's breach of his fiduciary duty. Studio IP is liable for breach of contract, and New Star is liable for unjust enrichment.

This adversary proceeding has been before the Court for several years, there was extensive discovery, many trial days, thousands of pages of testimony and hundreds of exhibits. All of this was necessitated by the Defendants' desire to transfer the economic benefits of the Rocawear license to third parties, to the detriment of the Debtor's creditors. To achieve these objectives, the parties, with the knowledge of certain of the professionals, embarked on a course of conduct that failed to honor and comply with the most basic rules set forth in the Bankruptcy Code. The Bankruptcy laws and procedures, developed to protect the rights of creditors and interested parties, are designed to avoid exactly what happened in this case. The Bankruptcy Court is meant to be an honest forum through which the assets of a debtor can be allocated according to the law. Principals of the debtor do not get to enrich themselves to the detriment of creditors. Powerful creditors do not get to manipulate the debtor for their own particular benefit. That is precisely what happened in this case. The Defendants, along with their enablers, turned a blind eye to what they knew was right and in doing so committed a fraud on not only the creditors, but on the Court itself. While liability under the causes of action is determined, after reviewing the record in its entirety, the Court finds that the evidence and testimony is insufficient to determine damages on each cause of action except for the ninth cause of action for unjust enrichment against New Star. Therefore, an additional hearing shall be held in order to fix damages.

Relevant Facts
a. Events Leading Up to the Petition

The Debtor was formed in 2003 by, inter alia, Joseph Laurita and Christopher Laurita (collectively, the "Laurita Brothers"), for the purposes of designing, manufacturing and distributing branded apparel. Joint Pretrial Order, ¶ 2. As of January 15, 2007, the Laurita Brothers were the sole members, managers, directors and officers of the Debtor. Joint Pretrial Order, ¶ 3. In 2004, the Debtor acquired the right to manufacture and distribute junior sportswear apparel bearing the Rocawear trademark by entering into a license agreement ("Signature License Agreement") with Rocawear Licensing, LLC.1 The Rocawear brand, along with the Artful Dodger brand, were initially developed by Shawn Carter, more commonly known as Jay–Z. Under the management of the Debtor, the Rocawear brand became quite successful, and grew in sales from approximately $30 million in 2004 to between $70 million and $80 million in 2007. 4/22/15 Trial Tr. 138–139 (Laurita). Under the Signature License Agreement, Signature was obligated to pay to the licensor certain fees, including a royalty fee on sales and advertising fees. T–3 at § 1(a). The Debtor was also obligated to pay guaranteed minimum royalties and guaranteed minimum advertising fees for each year. By letter amendment dated December 1, 2006, the Debtor and Rocawear Licensing amended the Signature License Agreement (the "Amendment"). T–4. Under the Amendment, the term of the Signature License Agreement was extended for three years...

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