Wallis v. Levine
| Decision Date | 02 January 2013 |
| Docket Number | Case No. 12 C 5285 |
| Parties | SCOTT WALLIS, Individually and as Sole Beneficiary of USA Baby Inc.'s Assets Plaintiff, v. ALAN LEVINE, et al., Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION & ORDER
Plaintiff Scott Wallis has brought a forty-count Amended Complaint on behalf of himself individually and as beneficiary of USA Baby, Inc. ("USA Baby"). Wallis asserts claims against approximately 190 defendants, not all of whom have been served. He seeks $500 million in damages for alleged breaches of an automatic bankruptcy stay, "interference in interstate commerce, trafficking in good or services bearing counterfeit marks, copyright infringement, the deprivation of civil rights, conspiracy to violate said civil rights," negligence in preventing civil rights violations, racketeering, and conspiracy to commit racketeering. (Am. Compl. ¶ 4, ECF No. 7.) For the reasons that follow, the court dismisses the Amended Complaint in its entirety.
USA Baby sold children's products through franchise stores. At one time, it had between fifty and seventy franchise locations. USA Baby owned various registered trademarks, and pursuant to franchise agreements, the franchisees paid royalties to use the trademarks. Wallis served as an executive of USA Baby from January 1, 2005, until April 11, 2009, and he held an equity stake in the company. By 2008, some franchises had gone out of business, and most of the remaining franchisees had stopped paying franchise royalties, depriving USA Baby of its primary source of income.
On September 5, 2008, three USA Baby franchisees and creditors filed an involuntary bankruptcy petition against USA Baby under Chapter 11 of the Bankruptcy Code. Involuntary Petition, In re USA Baby, Inc., No. 08-23564 (Bankr. N.D. Ill. Sept. 5, 2008). An automatic bankruptcy stay went into effect, pursuant to 11 U.S.C. § 362. On February 11, 2009, the Bankruptcy Court appointed Barry Chatz as trustee of USA Baby's assets. Trustee Letter of Appointment, In re USA Baby, Inc., No. 08-23564 (Bankr. N.D. Ill. Feb. 11, 2009). The trustee determined that a successful reorganization was impossible, and the bankruptcy was converted to a Chapter 7 proceeding.
In May 2009, Commerce Capital, LP ("Commerce Capital") was granted relief from the automatic bankruptcy stay to foreclose on a lien against USA Baby's assets. On July 6, 2009, Commerce Capital conducted a foreclosure sale of the assets, which included USA Baby's trademarks and franchise agreements, and through credit bidding, purchased the assets itself for$1 million. Id. On November 18, 2009, Commerce Capital brought a claim against a franchisee group, the United Storeowners Association of Baby Stores, LLC, for the unauthorized use of intellectual property formerly belonging to USA Baby and currently belonging to Commerce Capital. Commerce Capital subsequently settled a number of claims against the franchisees regarding the trademarks and franchise agreements. Id.; see also Commerce Capital, LP v. United Storeowners Assoc. of Baby Stores, LLC, Stipulation of Dismissal, No. 09 C 7229 (N.D. Ill. Apr. 2, 2010).
In multiple motions and filings in the bankruptcy court, the Northern District of Illinois, and the Seventh Circuit, Wallis contested the appointment of Chatz as trustee and challenged decisions made by Chatz on behalf of USA Baby. See, e.g., In re USA Baby, Inc., 674 F.3d 882 (7th Cir. 2012); In re USA Baby, Inc., 424 F. App'x 558, 561 (7th Cir. 2011); Wallis v. Levine, 2012 WL 1531989 (N.D. Ill. Apr. 27, 2012). Among his claims were that the trustee and franchisees had committed fraud and that USA Baby should have been allowed to collect royalties from the franchisees in order to facilitate its reorganization. In re USA Baby, Inc., 674 F.3d at 883. In 2009, Wallis moved to stand in for Chatz to pursue claims against the franchisees on behalf of the USA Baby estate. That motion was denied. On appeal, the Seventh Circuit held that Chatz exercised reasonable diligence in preserving and protecting the estate property, and that he properly exercised his discretion in declining to pursue claims against the franchisees on behalf of the estate and in opposing Wallis's motion to pursue the claims. In re USA Baby, Inc., 424 F. App'x at 561.
Along with USA Baby CEO Ron Eriksen, Wallis filed an adversary complaint in the bankruptcy proceeding on June 1, 2010, asserting thirty-five counts relating to alleged breaches of the automatic bankruptcy stay, violations of the Racketeering Influenced and CorruptOrganizations Act ("RICO"), and civil rights violations. The bankruptcy court dismissed the complaint, holding that any claims relating to violations of the automatic stay or RICO belonged to the debtor's estate, and could only be brought by the trustee. Wallis v. Levine, 2012 WL 1531989, at *1. Wallis's personal claims, meanwhile, fell outside the jurisdiction of the bankruptcy court. Id. at *4.
Wallis alleges that on February 9, 2011, USA Baby's residual assets were abandoned to him by order of the bankruptcy court, and that he now owns those assets, "including claims in law, tort, or equity." He has filed a number of actions asserting claims on behalf of USA Baby, including the present action and Wallis v. Levine, No. 12 C 6466 (N.D. Ill.) (Chang, J.) (filed Aug. 15, 2012), which seeks $1.5 billion in damages for many of the same claims asserted this action, along with additional claims of violations of admiralty law.
Before and during the bankruptcy proceedings, many of the defendants in this case were involved in actions brought against USA Baby, Wallis, and/or Eriksen. In 2006, the Ohio Attorney General, represented by Assistant Attorney General Michael R. Sliwinski, brought an action against USA Baby's officers and USA Baby franchise group Midwest Baby Group, LLC ("Midwest Baby") for violations of Ohio consumer protection laws. The defendants entered into a consent decree on November 13, 2008.
Wallis alleges that Alan Levine and Barry Cohodes, represented by Lawrence Kamin, Saunders, and Uhlenhop, LLC ("LKSU"), sued USA Baby, Eriksen, and Wallis in the Circuit Court of Cook County in 2007 for violating a shareholder's agreement. The plaintiffs obtained a final judgment from Judge Richard Billick on April 3, 2009. (Am. Compl. ¶ 95.)
On December 8, 2008, former USA Baby employee Thomas Gierlak, represented by Seyfarth and Shaw LLP ("Seyfarth") and attorney Scott Schaefers, filed a wage claim with the Illinois Department of Labor ("IDOL"). The IDOL pursued the claim against Erikson and USA Baby before administrative law judge Claudia Manley. On January 21, 2009, Gierlak filed a complaint against Wallis and Erikson for unpaid 401(k) contributions in the Circuit Court of DuPage County. Judges John Elsner, Bruce Kelsey, and Hollis Webster allowed the case to proceed. Wallis alleges that the judges' orders allowed Gierlak and Seyfarth to obtain possession of protected documents and trade secrets belonging to USA Baby.
On December 13, 2007, USA Baby entered into a loan agreement with Fifth Third Bank ("Fifth Third"). The note was paid off through another agreement with American Chartered Bank, into which USA Baby entered on August 28 or 29, 2008. Fifth Third then entered into another loan agreement with USA Baby for $150,000. On February 20, 2009, Fifth Third, represented by Mulherin Rehfeldt & Varchetto, P.C. ("MRV"), filed a complaint against Eriksen in the Circuit Court of DuPage County to collect on that loan, without seeking relief from the bankruptcy stay. Judge Hollis Webster presided over the case.
On July 27, 2009, American Chartered Bank filed a complaint seeking $520,881.10 against Eriksen in the Circuit Court of Kane County. See American Chartered Bank v. Eriksen, No. 09 L 489 (Cir. Ct. Kane Cnty. July 27, 2009). Fuchs & Roselli, Ltd. represented American Chartered Bank. Judges James Murphy and Alan Cargerman entered orders in the case. Deborah Seyller is the Kane County Clerk of Courts. Wallis alleges that the action was filed in violation of the automatic bankruptcy stay.
On February 17, 2009, Petti Murphy & Associates ("Petti Murphy"), who had represented USA Baby in 2007 and 2008, filed a complaint against Wallis and Eriksen in theCircuit Court of Kane County in an effort to collect on a debt involving a bad check. See Petti Murphy & Assoc. v. Eriksen, 2009 AR 224 (Cir. Ct. of Kane Cnty.). Wallis alleges that in filing the complaint, Petti Murphy violated the automatic bankruptcy stay.
On May 6, 2011, the United States Department of Labor ("DOL") filed a complaint against USA Baby and its officers to collect 401(k) and group health insurance payments. See Solis v. Wallis, No. 11 C 3019, 2012 WL 3779065, at *2 (N.D. Ill. Aug. 30, 2012). The DOL alleged that instead of remitting participant contributions to a 401(k) plan and transferring health insurance premiums to insurance providers, USA Baby and its officers retained them to pay for the company's general operating expenses, in violation of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001, et seq. Id. The district court denied the defendants' motion to dismiss the action or to stay it pursuant to the automatic stay provisions of the Bankruptcy Code, citing the government regulatory exception to the automatic stay provisions of the Code. Id. at *16; see 11 U.S.C. § 362(b)(4). In the Amended Complaint, Wallis brings claims against four federal officials involved in the DOL action: DOL Secretary Hilda Solis, DOL Solicitor M. Patricia Smith, retired Chicago Regional Solicitor Joan E. Gestrin, and Steven L. Haugen, the Chicago Regional Director of the Employee Benefits Security Administration.
Wallis alleges that USA Baby's franchisees used its trademarks...
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