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OBJECTWAVE CORPORATION v. AUTHENTIX NETWORK

April 10, 2003

OBJECTWAVE CORPORATION, AN ILLINOIS CORPORTION PLAINTIFF, VS. AUTHENTIX NETWORK, INC., A CALIFORNIA CORPORATION DEFENDANT.


The opinion of the court was delivered by: Michael T. Mason, United States Magistrate Judge

MEMORANDUM OPINION AND ORDER

Before us is plaintiff Objectwave Corp.'s ("Objectwave") petition for a rule to show cause against defendant Authentix Network, Inc. ("Authentix") and the law firm of Levun, Goodman and Cohen ("LGC"). For the following reasons, we grant Objectwave's petition for a rule to show cause as to why Authentix and LGC should not be held in contempt of court for dissolving a reserve fund on July 25, 2002 which had been held by Authentix's legal counsel, LGC, for the benefit of Qbjectwave.

FACTS

This case began as a straightforward breach of contract matter. Objeciwave alleged that Authentix owed it payments under three different parts of a contract: (1) $90,000.00 for completed contract milestones; (2) $30,000.00 for partially completed contract milestones; and (3) payment for an extra 680 hours of work performed by Objectwave pursuant to a verbal modification of the contract. While the case was pending, Authentix planned to sell its operating assets to a third party. Objectwave requested a preliminary injunction barring the sale, On February 28, 2001, Judge Rosemond issued a report and recommendation (which was subsequently adopted by the District Court) that Objectwave's request for a preliminary injunction be granted, prohibiting Authentix from ". . . conveying its operating assets . . . to a third party unless and until an adequate reserve fund is established for the benefit of [Objectwave] pending resolution of the litigation." (Report of Judge W. Thomas Rosemond, Jr., p.13) In a motion filed on March 5, 2001. Authentix proposed that the reserve fund be held in the Client Trust Account of Authentix's counsel, LGC, "for the benefit of [Objectwave] pending resolution of the litigation." Authentix's CEO, Mal Gurian, whose affidavit was submitted in support of the motion, asserted that the monies deposited in the reserve fund would remain in the LGC Client Trust Fund "until further order of this Court." (Affidavit of Mal Gurian, 03/01/2001) Judge Rosemond directed the establishment of the reserve fund pursuant to Authentix's proposal that same day, March 5, 2001.

On July 3, 2002, the District Court granted summary judgment in favor of Authentix with respect to the claim for the 680 hours of extra work performed, but entered judgment in favor of Objectwave as to its claim for $90,000.00 for the completed contract milestones. The District Court advised the parties that Objectwave was "free to file a motion and supporting memorandum detailing its entitlement, if any, to specific attorney's fees, costs and interest on this judgment." (July 3, 2002 Opinion, p.7) Subsequently, on July 18, 2002, a settlement conference to resolve the third remaining issue — Objectwave's claim for $30,000 for the partially completed contract milestones — was held. The parties reached an agreement that day, and, on July 18, 2002, the District Court entered an order dismissing and terminating the case.

Following the settlement conference, Objectwave's counsel requested that a general release be drafted, which LGC did and then forwarded to Objectwave's counsel, informing them that the settlement payment would be expedited by the timely return of the agreement. Through a series of correspondence, the parties appeared to be close to reaching an agreement on July 23, 2002. However, before any release was executed, Objectwave's counsel informed LGC that Objectwave intended to seek recovery of its attorneys' fees and interest on the judgment of $90,000. No general release was ever executed.

On July 29, 2002, Objectwave filed a motion for attorney fees, costs and interest associated with the judgment in its favor and the settlement. Authentix argued, in response, that the District Court's July 18, 2002 order dismissing and terminating the case barred Objectwave from seeking its fees and interest. On October 3, 2002, however, this Court held that Objectwave did not act improperly in seeking recovery of such items at that time, and granted Objectwave's request for pre-judgment interest in the amount of $9,084,60.*fn1 Authentix filed objections to this Court's October 3, 2002 order which were subsequently denied.

After the ruling on Authentix's objections, Objectwave's counsel sent a letter to LGC requesting payment of the $9,084.60 award of pre-judgment interest. In response, LGC informed Objectwave that the assets in the reserve fund had been distributed on July 25, 2002 to a third party (the entity who had purchased Authentix's assets), and no funds remained available to satisfy Objectwave's demand for payment of the award of pro-judgment interest. Objectwave then filed a petition for a rule to show cause against LGC as to why it should not be held in contempt of court for violating the Court's reserve fund order of March 5, 2001, and against Authentix for its violation of the Court's order of February 28, 2001 barring it from conveying the assets in the reserve fund to a third party until the litigation was resolved. Objectwave's petition is before us now.

Legal Analysis

The question before the Court is whether LGC's dissolution of the reserve fund on July 25, 2002 violated the Courts order on March 5, 2001 establishing the reserve fund. For the reasons discussed below, we find that it does, and therefore grant Objectwave's petition for a rule to show cause.

LGC presents three reasons as to why the petition for a rule to show cause should be denied: (1) it verily and in good faith believed that the litigation had been resolved as required by the reserve fund order (and therefore should be deemed in compliance with such order); (2) the issues between the parties cannot be re-litigated under the doctrine of res judicata; and (3) the reserve fund order of the Court on March 5, 2001 lacked specificity, precluding a finding of contempt for the dissolution of the fund. We address each argument in turn.

1. Good Faith

LGC argues that the petition should be denied because it acted in good faith in concluding that the litigation was resolved when the District Court entered the dismissal order on July 18, 2002 (and thus prior to the time it dissolved the fund). In support of this contention, LGC cites the events surrounding the settlement conference (e.g., that Objectwave never suggested it might be filing a motion for fees, costs and interest during the settlement conference), the actions of Objectwave's counsel with respect to the preparation of the general release (e.g., that Objectwave's counsel requested that a general release be prepared immediately after the settlement conference and appeared willing to finalize the matter), and the entry of the Court order "dismissing" and "terminating" the case.

This Court makes no finding as to whether LGC acted in good or bad faith when it dissolved the reserve fund on July 25, 2002, as it finds such argument to be irrelevant to the analysis here. As a preliminary matter, the Court notes that LGC cites no authority to support its proposition that good faith is even a sufficient basis upon which to deny a petition for a rule to show cause. Moreover, the argument presupposes a violation of the reserve fund order. Thus, we find that, regardless of whether LGC acted in good faith, its ...


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