United States District Court, N.D. Illinois, Eastern Division
THE COMPAK COMPANIES, LLC, Plaintiff,
JIMMIE L. JOHNSON, RON BOWEN, BRUCE CARLSON, PATPAK, INC., DUO TECH HOLDINGS, INC., DUOTECH PACKAGING, LLC, and OLMARC PACKAGING COMPANY, Defendants.
The opinion of the court was delivered by: JOHN GRADY, Senior District Judge
Before the court are two motions: (1) certain defendants'
motion to refer these proceedings to the bankruptcy court or, in
the alternative, for a stay; and (2) the Chapter 7 Trustee's
motion to intervene. For the reasons explained below, defendants'
motion is granted, and the Trustee's motion is denied as moot.
Plaintiff The Compak Companies, LLC ("Compak LLC") filed this
action against defendants DuoTech Holdings, Inc. ("DuoTech");
DuoTech Packaging, LLC ("DuoTech Packaging"); Olmarc Packaging Company ("Olmarc"); Patpak, Inc. ("Patpak"); Jimmie L. Johnson,
Ron Bowen, and Bruce Carlson.*fn1
A brief summary of plaintiff's allegations is in order.
Defendant Johnson formed Compak Corporation ("Compak") in 1992 to
manufacture and market various products. Among the patent
applications that Johnson filed was one for a Communion cup.
Johnson assigned the application to Compak. In 1993, the United
States Patent Office issued to Johnson what we will call the '106
Patent, which Johnson subsequently assigned to Compak.
Thereafter, Johnson applied for and received two other patents,
which we will call the '351 and '388 patents, and applied for a
patent that was eventually issued as the '312 patent. Johnson did
not assign these patents to Compak, and plaintiffs contend that
Johnson thereby violated his fiduciary duty to Compak and
misappropriated Compak's property.
In August 1996, Johnson formed Patpak and purported to assign
to Patpak the '351 and '388 patents and the application for the
'312 patent. Plaintiff contends that this assignment was without
consideration and a fraudulent conveyance. In May 1997, Johnson
caused Patpak to assign back the '351 patent and grant an
exclusive license in the '388 and '312 patents to Compak.
According to plaintiffs, Johnson and Bowen then made representations to Compak
investors and shareholders that Compak owned outright the four
patents at issue (the "Patents").
Johnson formed DuoTech in July 2001. Plaintiffs allege that
another fraudulent conveyance took place the following month when
Johnson and Carlson executed a license agreement between Compak
and DuoTech purporting to grant DuoTech a license to manufacture
products pursuant to the Patents.
In 2002, Compak and a related company, Communion Packaging
Company ("CPC"), filed petitions for reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code. The cases were
later consolidated and converted to Chapter 7 proceedings. In
March 2003, substantially all of the debtors' assets were
auctioned and sold to an entity called BMJ Partners ("BMJ"). The
bankruptcy court entered an order approving the sale. According
to plaintiff, the Patents were included in the sale, and BMJ
thereafter assigned the Patents to plaintiff.
On September 9, 2003, DuoTech Packaging, an affiliate of
DuoTech, filed an adversary complaint in interpleader in the
bankruptcy proceeding against Compak Corporation; David
Leibowitz, the Chapter 7 Trustee; Patpak; BMJ; and Johnson.
DuoTech Packaging seeks declaratory relief regarding ownership
and licensing rights in the Patents and to whom royalties should
be paid. On October 21, 2003, plaintiff filed the instant action. The
complaint contains four counts. The first is a request for the
imposition of a constructive trust; plaintiff alleges that the
1996 assignment to Patpak and the 2001 license to DuoTech were
fraudulent conveyances. Plaintiff contends that Compak was the
true owner of the Patents and seeks an order requiring Johnson to
transfer legal title to the Patents to plaintiff.
Count II of the complaint is a patent infringement claim.
Plaintiff asserts that DuoTech, Johnson, Bowen, and Carlson have
infringed the patents by causing Olmarc to manufacture products
that come within the scope of the patents and by selling those
Plaintiff alleges in Count III that Olmarc breached an oral
contract by failing to pay plaintiff monies Olmarc held in a
reserve account to cover purchases of raw materials. According to
plaintiff, the reserve account was part of the accounts
receivable purchased by BMJ at the bankruptcy sale and assigned
to plaintiff. Shortly after plaintiff acquired the assets of
Compak, Olmarc agreed to manufacture for plaintiff under an oral
agreement in the same form as the prior agreement between Olmarc
Count IV is an intentional interference with contract or
prospective economic advantage claim against Johnson, Bowen,
Carlson, and DuoTech. The claim is based on those defendants'
purported inducement of Olmarc to stop manufacturing products for plaintiff, of raw material vendors to not sell raw materials to
plaintiff, and of long-standing Compak customers to not buy their
products from plaintiff. Plaintiff seeks compensatory and
punitive damages as well as costs and attorney's fees.
The DuoTech entities and Carlson now move for a referral of the
instant case to the bankruptcy court or alternatively for a
temporary stay of these proceedings pending the bankruptcy
court's ruling on the adversary complaint. Bowen and Olmarc join
in the motion. In the meantime, the bankruptcy court granted
DuoTech Packaging's motion to join Compak LLC, the plaintiff in
this proceeding, as a defendant in the adversary proceeding.
Additionally, David Leibowitz, the Chapter 7 Trustee, moves to
intervene in this action.
A. Defendants' Motion to Refer
A district court may refer to a bankruptcy court proceedings
"arising under title 11" or "arising in . . . a case under title
11." 28 U.S.C. § 157(a). A proceeding falls into the "arising
under" or "arising in" category when it involves a cause of
action created by federal bankruptcy law or is one concerning the
administration of the bankruptcy estate. See Wood v. Wood (In
re Wood), 825 F.2d 90, 96-97 (5th Cir. 1987); Zerand-Bernal
Group, Inc. v. Cox, 23 F.3d 159, 162 (7th Cir. 1994). We may also refer cases that are "related to" bankruptcy cases.
28 U.S.C. § 157(a). This type of bankruptcy court jurisdiction is
limited; disputes are "related to" bankruptcies only when they
"affect the amount of property available for distribution or
the allocation of property among creditors." Elscint, Inc. v.
First Wis. Fin. Corp. (In re Xonics, Inc.), 813 F.2d 127, 131
(7th Cir. 1987).
Counts I and II of the complaint, which seek a constructive
trust and assert patent infringement, do not arise under title 11
or arise in a title 11 case because those claims do not invoke
rights created by bankruptcy law or involve administration of the
bankruptcy estate. The claims, however, do appear to be "related
to" the bankruptcy at issue. Central to the disposition of Counts
I and II is a determination of exactly what BMJ (and therefore
plaintiff) acquired in the sale of Compak's assets. Another facet
of these claims is plaintiff's assertion that Compak, the debtor,
made a fraudulent conveyance to DuoTech. The relief sought by
plaintiff clearly would affect the amount of property in the
estate available for creditors.
Counts III and IV of the complaint are a different matter.
Plaintiff asserts a breach of contract claim against Olmarc and a
tortious interference claim against Johnson, Bowen, Carlson, and
DuoTech. These claims do not fall into the "arising under/arising
in" category. Nor can they be said to "relate to" the bankruptcy proceeding because their resolution would not have any impact on
Accordingly, Counts I and II of the complaint will be referred
to the bankruptcy court, but Counts III and IV will not. The
proceedings as to Counts III and IV will be stayed pending the
bankruptcy court's resolution of Counts I and II.
B. The Trustee's Motion to Intervene
Because we have referred the primary claims of the complaint to
the bankruptcy court, the Trustee's motion to intervene in this
action will be denied as moot without prejudice to refiling after
the bankruptcy court's resolution of Counts I and II and the
lifting of the stay as to Counts III and IV.
For the foregoing reasons, defendants' motion to refer this
action to the bankruptcy court or in the alternative for a stay
is granted. Pursuant to 28 U.S.C. § 157(a), Counts I and II of
the complaint are referred to the bankruptcy court on the ground
that they are "related to" the bankruptcy of Compak Corporation
currently pending before Judge Black. Counts III and IV of the
complaint are not referred to the bankruptcy court, but the
proceedings as to those counts are stayed pending the bankruptcy
court's resolution of Counts I and II.
The Trustee's motion to intervene is denied as moot.