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September 12, 2005.

In re: S.M. ACQUISITION CO., d/b/a STYLEMASTER, INC., Debtor. MATRIX IV, INC., Appellant,

The opinion of the court was delivered by: MARVIN ASPEN, Chief Judge, District


S.M. Acquisition Co., d/b/a Stylemaster, Inc. ("Stylemaster") filed a petition for bankruptcy relief under Chapter 11 on March 18, 2002. American National Bank and Trust Company of Chicago (the "Bank") brought a related adversary proceeding against Matrix IV, Inc. ("Matrix") in which the Bank sought a declaration that its lien on certain Stylemaster property was superior to the lien asserted by Matrix. On August 4, 2003, following a bench trial, the United States Bankruptcy Court for the Northern District of Illinois entered judgment in the Bank's favor. See In re S.M. Acquisition Co., 296 B.R. 452 (Bankr. N.D. Ill. 2003) ("Stylemaster I"). Matrix appealed that judgment to our court, as well as the bankruptcy court's earlier decision to strike one of Matrix's affirmative defenses. In an April 29, 2004 Order, we remanded the action to the bankruptcy court on a specific central issue and refrained from ruling on the remainder of the issues raised in that appeal. See In re S.M. Acquisition Co., No. 03 C 7072, 2004 WL 1151575 (N.D. Ill. April 29, 2004) ("Stylemaster II"). On January 13, 2005, the bankruptcy court issued additional findings of fact and conclusions of law supporting its original judgment in the Bank's favor. See In re S.M. Acquisition Co., 319 B.R. 553 (Bankr. N.D. Ill. 2005) ("Stylemaster II").

Matrix appeals the bankruptcy court's findings and conclusions upon the remand. For the reasons stated below, we affirm the original and additional findings and conclusions of the bankruptcy court and the challenged evidentiary and discovery rulings, and remand the case to the bankruptcy court for the limited purpose of entering its memorandum opinion and order on Matrix's equitable subordination defense.


  I. Introduction

  Stylemaster is a company that purchases and sells storage containers that are manufactured using plastic injection molds. Stylemaster I, 296 B.R. at 456, Finding of Fact ("FOF") ¶ 1.*fn2 The Bank is a creditor of Stylemaster. FOF ¶ 3. At the time it filed the present action, Stylemaster owed the Bank over $9.5 million. Id. Matrix, a vendor that manufactured plastic storage containers for Stylemaster using plastic injection molds, is also one of Stylemaster's creditors. FOF ¶ 4. Stylemaster currently owes Matrix over six million dollars. FOF ¶ 5. Stylemaster voluntarily filed for bankruptcy protection in March 2002. FOF ¶ 2. As of March 2002, Matrix was in possession of sixty-two plastic injection molds, which it had used to produce plastic products for Stylemaster. FOF ¶ 4. The present dispute concerns whether the Bank or Matrix is now entitled to these sixty-two molds. II. The Sixty-Two Molds in Matrix's Possession

  The sixty-two molds in question were ordered by Stylemaster and shipped directly from the seller to Matrix's manufacturing plant. FOF ¶ 35-36. Of these sixty-two molds, Stylemaster purchased twenty-one of these molds (the "Bankruptcy Molds") from Plastic Products Estate, a Chapter 11 Debtor in Possession, at a public sale. Stylemaster III, 319 B.R. at 556, Additional Findings of Fact ("AFOF") ¶¶ 70-72.*fn3 As of May 12, 1994, Stylemaster had title to each of the twenty-one Bankruptcy Molds pursuant to a Bill of Sale executed by David Anderson, a representative of Plastic Products Estate. AFOF ¶ 73.

  During the years 1998, 1999, and 2000, Stylemaster ordered thirty-three molds from mold broker Cost Reductions Company (the "Cost Reductions Molds"). AFOF ¶ 74. Cost Reductions contracted with Portuguese mold manufacturers to build molds for its customers in the United States and has supplied molds to Stylemaster since 1991. AFOF ¶ 75. Martha Williams, the president of Stylemaster, was responsible for purchasing molds for Stylemaster. AFOF ¶ 76. To purchase molds from Cost Reductions, Williams would contact Barry Tanner of Cost Reductions to discuss specifications, product design, etc., and submit drawings and other documents pertaining to design. AFOF ¶¶ 78-79. Cost Reductions would send Stylemaster a quotation, and if Williams found it acceptable, she would send a signed purchase order to Cost Reductions. AFOF ¶¶ 80-81. Prior to 2000, the purchase order forms used by Styelmaster contained certain terms and conditions with language giving the buyer a right to return merchandise that was not according to specifications and which stated that all goods were subject to approval before acceptance. AFOF ¶ 86. Beginning in 2000, Stylemaster began using computer-generated purchase order forms that did not contain these terms and conditions. AFOF ¶¶ 87-89. During the manufacturing process for a mold, it was "sampled" by the mold maker, meaning that it was run to determine whether it would produce an acceptable product. AFOF ¶ 92. A number of samples were run on each mold during the manufacturing process, and samples were sent to Stylemaster for review, evaluation, and approval. AFOF ¶ 93. Williams was responsible for approving the final samples run from molds, after which the mold was approved and shipped. AFOF ¶¶ 93-95. Tanner testified that delivery matured Stylemaster's payment obligation to Cost Reductions, which Stylemaster paid in monthly installments. AFOF ¶ 97.

  In 2001, Stylemaster ordered eight molds*fn4 (the "CME Molds") from Chicago Mold Engineering Co. ("CME"), a mold manufacturer that operates out of Chicago, Illinois. AFOF ¶¶ 98-99. Stylemaster's ordering process with CME was substantially similar to its process with Cost Reductions. AFOF ¶ 100. Stylemaster's sampling process for CME molds, however, was different from that with Cost Reductions because CME did not have the capacity to run samples. AFOF ¶ 102. Consequently, Matrix ran the samples for CME molds and shipped the molds back to CME during various phases of the manufacturing process. AFOF ¶¶ 102-03. Stylemaster paid for CME molds on a payment schedule and was fully paid by December 2001. AFOF ¶ 104.

  After shipment, Stylemaster insured and recorded each mold on its balance sheet. AFOF ¶ 126. Many of the molds had the Stylemaster logo engraved onto them. AFOF ¶ 127. Matrix produced over nine million plastic products from the molds after July 25, 2001 and was producing products as late as February 2002. AFOF ¶ 124, 128. III. Stylemaster's Dealings with the Bank

  On November 3, 1997, the Bank and Stylemaster entered into a loan agreement and a security agreement. FOF ¶¶ 6-7. The Loan Agreement indicated that the loan was secured by ". . . all Accounts, Inventory, Equipment owned by [Stylemaster] as of the date hereof . . . and any and all other assets and property of [Stylemaster], wherever located. . . ." FOF ¶ 38. The Security Agreement also provided that Stylemaster granted the Bank a security interest in "all of the Borrower's tangible and intangible assets and property, whether now or hereafter existing and whether now or hereafter owned . . . including, without limitation, all of Borrower's . . . equipment . . . and inventory." FOF ¶ 45. When William Bailes, an officer and co-owner of Stylemaster, applied to the Bank for a loan for Stylemaster, he indicated in the loan application that Stylemaster's molding was done by outside third-party suppliers who possessed and utilized Stylemaster's molds. FOF ¶¶ 38, 40. Among other obligations provided by the Security Agreement, Stylemaster warranted that the collateral securing the loan was located at four specific locations in Illinois, which did not include Matrix or its Woodstock, Illinois facility. FOF ¶¶ 47-50. Within the Loan Agreement, neither paragraph 7.2 nor paragraph 5.13, both of which concerned the location of the secured collateral, mention the Matrix Woodstock facility. FOF ¶¶ 52-54. On November 6, 1997, Bank filed a Uniform Commercial Code ("U.C.C.") financing statement with the Illinois Secretary of State, which stated that the Bank asserted a security interest in all of Stylemaster's then existing and any after-acquired property. FOF ¶ 10, 63.

  Between 1997 and 2001, the Loan Agreements and related documents between Stylemaster and Bank were amended, including on November 30, 2001, when Stylemaster and Bank entered into the "Seventh Amendment to Loan Documents." FOF ¶ 9, 64. This amendment substituted into the Security Agreement the following language: "Borrower, . . . hereby grants the Bank a security interest in . . . Borrower's tangible and intangible assets and property wherever located." FOF ¶ 64 (emphasis added). IV. Stylemaster's Dealings with Matrix

  From November 1994 until shortly before Stylemaster filed its bankruptcy petition, Stylemaster used Matrix as an outside processor to manufacture plastic containers using plastic injection molds. FOF ¶ 12. Matrix had to "set-up" and "debug" the molds before they could be put into production by setting them up, testing them, and repairing them. FOF ¶¶ 26, 35; AFOF ¶¶ 107, 108. Prior to this litigation, Matrix never billed Stylemaster for set-up costs, nor did Matrix keep any records documenting these costs. FOF ¶ 27. At trial, Matrix asserted payment for set-up costs, which were computed in preparation for trial by Matrix employee John Wenzlaff based on Tool Room Profiles generated from employee time slips. FOF ¶ 28. The bankruptcy court found many problems with these calculations, including that Wenzlaff's methodology for determining significant repair costs versus routine maintenance was questionable; the Tool Room profiles for the 1994-1996 period were not created until 2002; a significant portion of the charges sought were not supported by any time slip and tool logs provided no information about the amount of time spent working on a particular tool; many exhibits for the costs contained duplicate billings; charges were assigned to the wrong mold or did not specify any mold; Matrix seeks an amount equal to 30% of repair costs for "profit" that was derived solely based on what Raymond Wenk, president of Matrix, thought was fair; and Matrix never kept a running tally of its repair charges, nor included receivables, nor issued invoices related to sought repair costs. FOF ¶¶ 28-34.

  Regarding debugging costs, the bankruptcy court found that it was industry practice for the seller of a new mold to pay for debugging cost incurred before the mold could be used in production. FOF ¶ 35. Accordingly, the bankruptcy court determined that Cost Reductions, not Stylemaster, had to pay for the cost of debugging and repair, and that Cost Reductions had in fact paid most of the $80,000 in costs that Matrix billed Cost Reductions. FOF ¶ 36-37.

  In 1994, Matrix received two sets of molds from Stylemaster that had to be repaired before they could be used in production. FOF ¶ 19. Matrix obtained approval from Stylemaster before commencing repairs, and the cost of the repairs was invoiced to Stylemaster, which paid the invoices. FOF ¶ 21.

  Wenk testified that during mid-1995 Williams asked him to defer the cost of repairs made by Matrix to Stylemaster molds. FOF ¶ 23. Under the purported agreement, Matrix would have complete control over the Stylemaster molds until Stylemaster paid all outstanding repair bills, and the molds would be treated as if they were owned by Matrix. Id. Stylemaster could not remove any molds until the repair bills were paid in full, and Matrix would keep a record of the accumulated repair costs. Id. Because this purported agreement to defer repair cost was never documented and there were many inconsistencies and errors in the evidence on the repairs, the bankruptcy court found Wenk's testimony on this agreement not credible. Id.

  In 1996, Matrix and Stylemaster entered an agreement whereby Matrix would include the cost of minor repairs in the unit price Matrix charged Stylemaster for producing each plastic container item. FOF ¶ 24. However, any extraordinary repairs were to be paid by Stylemaster, subject to the requirement that such repairs must be pre-approved by a principal at Stylemaster. Id. Stylemaster has paid all such repair bills invoiced by Matrix. FOF ¶ 25.

  In 1999, a line of molds designed by Williams called the Contempra Line experienced significant problems when put into production and required substantial repairs. AFOF ¶ 111. Matrix, the mold manufacturers, and an outside contractor all performed various repairs to the molds. AFOF ¶¶ 114, 116, 119. Both Cost Reductions and Stylemaster paid for repairs made to molds. AFOF ¶¶ 114, 116, 118, 122, 123. Despite these problems, Stylemaster fully paid for the Contempra Line molds and was able to produce millions of plastic products from these molds. AFOF ¶¶ 120, 121, 123.

  On July 30, 1996, counsel for Matrix sent a letter to Martha Williams in which Matrix notified Stylemaster that it was asserting a tool and die lien on the Stylemaster molds in its possession. FOF ¶ 16. As of November 6, 1997, Stylemaster owed Matrix approximately $2.4 million for processing work. FOF ¶ 13, 66. However, by the end of December 1999, Stylemaster had fully satisfied its preN-ovember 6, 1997 debt to Matrix. Id. Stylemaster continued to owe Matrix for work performed after that date. On February 22, 2002, Matrix filed a complaint against Stylemaster and Martha Williams. FOF ¶ 17. During March 2002, Matrix filed a proof of secured claim under the Illinois Tool and Die Act for approximately $6.6 million, and during the same month, Stylemaster filed for bankruptcy. FOF ¶ 5.

  V. Procedural History

  At an adversary proceeding before the bankruptcy court, the Bank sought a declaratory judgment that it was entitled to a first-priority lien on all of Stylemaster's property, including the sixty-two plastic injection molds that were purchased by Stylemaster and are currently held by Matrix. The Bank claimed that this lien stems from the loan and security agreements entered into between the Bank and Stylemaster in which Stylemaster granted the Bank a first priority lien on all of its property. Matrix presented several counter-arguments. First, Matrix argued that Stylemaster did not have the authority to give the Bank a lien on the molds because Stylemaster lacked sufficient possessory interest to give anyone a security interest in those molds. Second, Matrix argued that it had tool and die and artisan's liens on the molds which trump the lien asserted by the Bank. Following the bench trial, the bankruptcy court entered judgment in favor of the Bank. See Stylemaster I, 296 B.R. at 474. Thereafter, Matrix appealed, arguing that the bankruptcy court erred when it concluded that 1) Stylemaster could and did grant the Bank a security interest in the molds; 2) Matrix's tool and die lien was trumped by the Bank's lien; 3) Matrix did not have an artisan's lien on the molds. Matrix also appealed the bankruptcy court's decision to strike its eight affirmative defense based upon equitable subordination.

  In an April 28, 2004 Order, we remanded this adversary proceeding to the bankruptcy court for further evidentiary proceedings, if necessary, and for a more specific statement of its reasons for concluding that Stylemaster had sufficient rights in the molds, which was central to the issue of whether Stylemaster could grant the Bank a security interest in the molds. Stylemaster II, 2004 WL 1151575, at *4. We reserved decision on the remaining issues of the appeal until after the bankruptcy court had issued its findings on the remanded issue. Id. In July and August of 2004, the bankruptcy court conducted proceedings on the remanded issue, and on January 13, 2005, the bankruptcy court issued additional findings of fact and conclusions of law supporting its decision that Stylemaster had sufficient rights in the molds at issue to convey a security interest in them. See Stylemaster III, 319 B.R. 553. Matrix now appeals the bankruptcy court's findings of fact and conclusions of law on the remanded issue, as well as several discovery and evidentiary rulings made upon the remand. We now address this appeal as well as the remainder of the issues presented by the parties on the original appeal.


  In a bankruptcy appeal, we examine findings of fact for clear error, accepting the bankruptcy court's version of the facts unless "[we are] left with the definite and firm conviction that a mistake has been committed." In the Matter of Sheridan, 57 F.3d 627, 633 (7th Cir. 1995) (internal citations omitted). As the Seventh Circuit has explained, to be clearly erroneous, "`a decision must strike us as more than just maybe or probably wrong; it must . . . strike us as wrong with the force of a five-week old, unrefrigerated dead fish.'" Piraino v. Int'l Orientation Res., Inc., 137 F.3d 987, 990 (7th Cir. 1998) (quoting Parts & Elec. Motors, Inc. v. Sterling Elec., Inc., 866 F.2d 228, 233 (7th Cir. 1988)). Furthermore, when findings of fact are based on determinations of witness credibility, the deference accorded the bankruptcy judge is even more significant. Id.

  We review questions of law and mixed questions of fact and law under a de novo standard. See Mungo v. Taylor, 355 F.3d 969, 974 (7th Cir. 2004). De novo review requires that we make an independent examination of the bankruptcy court's judgment without giving deference to that court's analysis or conclusions. Rulings by the bankruptcy court on discovery and ...

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