Szilagyi v. Chicago American Mfg., LLC (In re Lakewood Eng'g & Mfg. Co.)

• Decision Date: 29 September 2011
• Docket Number: Adversary No. 09 A 341.,Bankruptcy No. 09 B 5320.
• Citation: 459 B.R. 306
• Parties: In re LAKEWOOD ENGINEERING & MANUFACTURING CO., INC., Debtor.Gregg Szilagyi, not individually but as Trustee of Lakewood Engineering & Manufacturing Co., Inc., and Sunbeam Products, Inc. d/b/a Jarden Consumer Solutions, Plaintiff, v. Chicago American Manufacturing, LLC, Scott Jackson and Chungkin Yee, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

459 B.R. 306

In re LAKEWOOD ENGINEERING & MANUFACTURING CO., INC., Debtor.Gregg Szilagyi, not individually but as Trustee of Lakewood Engineering & Manufacturing Co., Inc., and Sunbeam Products, Inc. d/b/a Jarden Consumer Solutions, Plaintiff,

v.Chicago American Manufacturing, LLC, Scott Jackson and Chungkin Yee, Defendants.

Bankruptcy No. 09 B 5320.

Adversary No. 09 A 341.

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

Sept. 29, 2011.

Scott R. Clar, Crane Heyman Simon Welch & Clar, Chicago, IL, for Gregg E. Szilagyi.

Joseph D. Frank, Jeremy C. Kleinman, Micah R. Krohn, Frank/Gecker LLP, Chicago, IL, Michael Annis, Husch Blackwell Sanders LLP, St. Louis, MO, for Sunbeam Products, Inc. d/b/a Jarden Consumer Solutions.

Richard Hoffman, Cohen, Salk & Huvard, P.C., Northbrook, IL, Martin D. Snyder, Law Offices of Martin D. Snyder, PC, William J. Barrett, Barack Ferrazzano Kirschbaum Nagelberg, Chicago, IL, for Chicago American Manufacturing LLC.Adam B. Goodman, Goodman Law Offices LLC, Chicago, IL, for Scott Jackson and Chungkin Yee.

MEMORANDUM OPINION

PAMELA S. HOLLIS, Bankruptcy Judge.

On December 17, 2008, Chicago American Manufacturing, LLC (“CAM”) and Lakewood Engineering & Manufacturing Co. (“Lakewood”) signed a three page contract (with a one page exhibit), titled “Supply Agreement.” The purpose of the Supply Agreement was to facilitate the production of certain 20 inch box fans. Lakewood had manufactured these fans for many years, but in 2008 decided to outsource their production to CAM.

Execution of the Supply Agreement, and the events that followed shortly thereafter—an involuntary bankruptcy case filing against Lakewood on February 19, 2009; rejection of the Supply Agreement; and the sale of certain of the Lakewood bankruptcy estate's assets to a third party—resulted in this litigation, filed on April 20, 2009.

A six day trial was held in September and October 2010 on Counts IV and VI–XI of the Amended Adversary Complaint (the “Complaint”) filed by Gregg Szilagyi, not individually but as Trustee of Lakewood Engineering and Manufacturing Co., Inc. (the “Trustee”), and Sunbeam Products, Inc. d/b/a Jarden Consumer Products (“Jarden”) (together, “Plaintiffs”) against CAM. Szilagyi's original co-plaintiff was Wells Fargo Foothill, Inc. Wells Fargo sought leave to withdraw its claims, however, after Jarden purchased certain assets of the Debtor. Jarden was eventually given leave to intervene as a plaintiff. Other counts in the Complaint were dismissed earlier by stipulation, including all counts against former Defendants Scott Jackson and Chungkin Yee.

All of the counts allege that CAM acted wrongfully in its manufacture and sale of the box fans. In Counts IV and VI, the Trustee and Jarden allege that CAM infringed patents. Counts VII and VIII allege trademark infringement and unfair competition under the Lanham Act. Counts IX, X and XI also allege trademark infringement and unfair competition, but under Illinois common law, the Consumer Fraud and Deceptive Business Practices Act and the Illinois Uniform Deceptive Trade Practices Act, respectively.

The court heard eight witnesses ¹, including two experts, and reviewed hundreds of pages of exhibits.

Having heard the testimony presented in court, reviewed the exhibits admitted into evidence, and analyzed the facts under the applicable law, the court finds in favor of CAM on all counts. Judgment will be entered for CAM, the remaining Defendant, on Counts IV and VI through XI.

JURISDICTION

Under 28 U.S.C. § 1334(a), the district courts have exclusive jurisdiction over bankruptcy cases. The District Court for the Northern District of Illinois referred its bankruptcy cases to the bankruptcy court of this district pursuant to 28 U.S.C. § 157(a) and its own Internal Operating Procedure 15(a). When presiding over a referred case, the bankruptcy court has jurisdiction under 28 U.S.C. § 157(b)(1) to enter orders and judgments in core proceedings within the case.

According to § 157(b)(1), core proceedings arise under Title 11, or in a case under Title 11. The resolution of this particular proceeding concerns the administration of the estate under § 157(b)(2)(A), even though the Trustee sold his claims against CAM to Jarden. This is so because if Jarden prevails, “the estate will share in the litigation proceeds, in the amount of 25% of the net monetary recoveries.” Jarden Mot. for Intervention and Related Relief, ECF No. 20, p. 5 at ¶ 17. It is also a core proceeding under § 157(b)(2)(N) (“orders approving the sale of property”) and (O) (“other proceedings affecting the liquidation of the assets of the estate”).

The Supreme Court recently issued an opinion concerning the jurisdiction of the bankruptcy court. Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). In Stern v. Marshall, a creditor filed a claim and the debtor filed a counterclaim. Id. at 2601. The dispute before the Court centered on whether the debtor's counterclaim was a “core proceeding” under § 157(b)(2)(C), which includes “counterclaims by the estate against persons filing claims against the estate” in the non-exclusive list of core proceedings at § 157(b)(2). Id. at 2601–02.

The Court determined that although § 157(b)(2)(C) permitted the bankruptcy court to enter a final judgment on the debtor's counterclaim, Article III of the Constitution did not. As Justice Roberts concluded:

Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim.

Id. at 2620.

The instant adversary proceeding presents an entirely different procedural posture from Stern v. Marshall. Although CAM filed a proof of claim, the Plaintiffs' claims against CAM are not counterclaims. Indeed, in the “short and plain statement of the grounds for the court's jurisdiction” required by Fed.R.Civ.P. 8, and modified by Fed. R. Bankr.P. 7008(a) to require a statement that the proceeding is core or non-core, the Amended Complaint cites five of the 16 possible categories of core proceedings, but does not include § 157(b)(2)(C).

CAM brought a motion to withdraw the reference from this court, arguing that twelve of the 17 counts in the complaint seek relief for alleged infringement of Plaintiffs' patent and trademark rights. CAM Mot. for Withdrawal of the Reference, Szilagyi et al. v. Chicago American Manufacturing, LLC et al., 09 CV 5779, ECF No. 1. Such rights do not arise under Title 11, which is federal bankruptcy law. The district court denied the motion to withdraw the reference, noting that it was possible that resolution of the issue of the effect of rejection of the Supply Agreement could “resolve, or at least simplify, some or all of the non-bankruptcy issues in the case.” Minute Order, 09 CV 5779, ECF No. 14.

That is exactly what transpired. As Plaintiffs anticipated, “the principal issues in the adversary proceeding are whether CAM has a valid license to use certain Lakewood marks and patents under Illinois law and whether any such license was terminated when the Bankruptcy Court approved the rejection of CAM's purported license under 11 U.S.C. § 365.” Id. In the end, the district court's prediction was fulfilled; this court is ruling only on claims “derived from or dependent upon bankruptcy law,” unlike the state law tort action at issue in Stern v. Marshall. Stern, 131 S.Ct. at 2618.

In the course of this Memorandum Opinion, this court interprets a contract under principles described in Illinois law, and then determines the effect of rejection of that contract under bankruptcy law. Rejection of a contract and the effects thereof are creations purely of bankruptcy law. This action clearly “stems from the bankruptcy itself.” Id.

There is a discussion in this Memorandum Opinion of CAM's proof of claim, but only insofar as it relates to whether CAM elected to retain its rights under bankruptcy law; there are no counterclaims being litigated. As District Judge Dow stated in denying CAM's motion to withdraw the reference: “The issues concerning the rejection of the supply agreement and CAM's asserted license rights under that agreement are core proceedings.” Minute Order, 09 CV 5779, ECF No. 14.

For all of the reasons described above, this is a core proceeding, and this court has jurisdiction to enter a final judgment on the complaint.

FINDINGS OF FACT

The parties agreed to certain stipulated facts prior to beginning the trial. These facts are incorporated into the court's Findings of Fact where the court finds them to be relevant.

History of CAM and Lakewood

Mark Herman and Jeffrey Skinner have been in the steel business together since Skinner joined Herman at Blackhawk Steel, a steel service center, in 1987. Skinner, p. 192. Herman and Skinner wanted to move from processing into the manufacturing business. Herman, p. 31; Skinner, p. 135. In order to make that move, Herman and Skinner created CAM in 2005. They accomplished this by purchasing the assets of a manufacturer through an assignment for the benefit of creditors. Herman, p. 31; Skinner, pp. 134–135. CAM is owned by Herman (60%), members of Herman's family (30%) and Skinner (10%). Skinner, p. 133.

Prior to 2008, Lakewood was one of the three largest manufacturers of box fans in the United States. Stipulated Facts, ¶ 1. Box fans are one of eight or nine different types of fans within the portable fan marketplace. Martin, pp. 260–261. In 2007, between 8 million and 11 million box fans were sold in the United States. Martin, p. 270.

One of the products Lakewood manufactured was a 20 inch box fan under the...