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Tekena USA, LLC v. Fisher

August 31, 2006

TEKENA USA, LLC, APPELLANT,
v.
LAWRENCE FISHER, TRUSTEE, APPELLEE.



The opinion of the court was delivered by: Marvin E. Aspen, District Judge

MEMORANDUM ORDER AND OPINION

Currently before us are two appeals by Appellant Tekena USA, LLC ("Appellant") from two bankruptcy court rulings. In the first appeal (Case No. 06 C 2408), Appellant contends that the application for the appointment of a receiver, filed by Chapter 7 Trustee Lawrence Fisher ("Trustee"), was granted in error. The second appeal contests the bankruptcy court's finding of good cause for the appointment of the receiver without the requirement of a bond posted by Trustee (Case No. 06 C 1558). For the following reasons, we affirm the bankruptcy court's rulings in both cases.

BACKGROUND

On July 12, 2005, Teknek LLC ("Debtor") filed a voluntary Chapter 7 bankruptcy case disclosing $73.22 in assets and liabilities of $3,788,609.57. More than ninety-nine percent of these liabilities belonged to a single unsecured judgment creditor, Systems Division, Inc. ("SDI").

In 1999, Debtor, an Illinois corporation, and Teknek Electronics, Ltd., a Scottish company, were sued by SDI for patent infringement in a federal district court in California. Debtor was a distributor of circuit cleaning products and equipment for Teknek Electronics, which after insolvency proceedings was known as Teknek Holdings. Sheila Hamilton ("Hamilton") and Jonathan Kennett ("Kennett") own 15% and 85%, respectively, of these two companies, as well as other Teknek companies. (Hamilton Dep. at 14:1-16, R. Ex. A.)*fn1 Teknek Holdings is not a parent company, but rather a holding company, since each Teknek entity is separately owned by Hamilton and Kennett. (MacKillop Dep. at 20:7-12, 51:12-13, R. Ex. H.) In January 2004, Hamilton and Kennett agreed to reorganize the Teknek group, and in May 2004, they transferred the Debtor's assets to Teknek Electronics and terminated the corresponding distributorship license. (Mins. of Extraordinary General Meeting at 1, R. Ex. Q; Hamilton Dep. at 54:22, R. Ex. A.) The justification of this transfer was the repayment of an "inter-company" loan that allegedly covered some of the Debtor's start-up costs in 1996, (Hamilton Dep. at 58:6-12, 60:19-20, R. Ex. A), though did not appear as a liability on the Debtor's books until 2000, when there was no corresponding increase in cash (Profit and Loss Account for May 2001, R. Ex. BB.) Records show that by the time of the asset transfer, Teknek Electronics was indebted to the Debtor, and not vice versa. (Profit and Loss Account for May 2004, R. Ex. BB.) Hamilton and Kennett conducted the transfer without consideration and with no assessment of the value of the assets. (Hamilton Dep. at 60:3-6, R. Ex. A.) Though the distributorship license was to terminate in May 2004, that same month, Debtor paid by check to secure exhibition space for Teknek America, a successor Hamilton and Kennett-company.

(Invoice 4791 and Check 3803, R. Ex. EE.) During fiscal year 2003, tax documents show that the Debtor paid $400,000 to an overseas Teknek entity for inter-company service fees, yet these payments did not appear on corresponding financial statements. (2003 Form 8804 Statement 1 at 10, R. Ex. DD.) Tax documents from fiscal year ending May 2004 show distributions to Kennett and Hamilton in excess of the Debtor's net income. (Hamilton Dep. at 69:18-70:20, R. Ex. A; 2003 Form 1065 at 4, R. Ex. DD.) After the reorganization, transfers continued from Debtor's accounts into accounts controlled by Kennett. (Bank Statements, R. Ex. T.)

In June 2004, Hamilton and Kennett formed Teknek America, LLC, which opened for business blocks away from Debtor's office. Teknek Electronics (later Teknek Holdings) leased both office spaces, and sub-leased the offices to the Debtor and Teknek America. Tangible assets transferred in the reorganization from the Debtor to Teknek Electronics were moved from Debtor's office to Teknek America's office for their use. Debtor paid its employees for six months after it ceased operations and while those employees worked at Teknek America. (Hamilton Dep. at 79:13-80:24, R. Ex. A.) Teknek Electronics, which had licensed its customer list to the Debtor, revoked this license and entered into a licensing agreement with Teknek America. (Hamilton Dep. at 151:11-21, 152:20-23, R. Ex. A.) Teknek America's annual revenue was approximately $4 million, similar to Debtor's annual revenue figures.

On August 18, 2004, after a jury verdict, the court granted SDI a judgment of approximately $3.7 million against the Debtor, (Certificate of J. & J., R. Ex. M), which was upheld on appeal. Attempting to collect on the judgment in March 2005, SDI registered it with the United States District Court for the Northern District of Illinois, where Debtor is organized and maintains its place of business. On June 2, 2005, Judge Shadur found owners Kennett and Sheila Hamilton, as well as Teknek America, LLC, in civil contempt for disobeying the California court's order. (Civil Contempt Order at 3, R. Ex. V.) Judge Shadur enjoined the contemnors from engaging in any commercial activity within the United States until otherwise directed, and ordered that Teknek America, LLC, close its doors. (Id. at 4-5.) On June 22, 2005, Mark Rollinson, a former sales manager for Teknek LLC, and then Teknek America, registered and became member manager and president of Tekena, USA. (Form LLC-5.5, R. Ex. E.) Within weeks, and as the sole employee, Rollinson was making $40,000 per week in sales, (Rollinson Dep. at 126:3-15, R. Ex. C), and was then joined by three other Appellant owners, also former Teknek America employees. (Id. at 36:13-14, 75:12-16.)

When Debtor filed its voluntary petition under Chapter 7, it failed to include its vehicles and incoming funds (shown on bank statements) on its Statement of Affairs. (Hamilton Dep. at 86:8-87:6, R. Ex. A.) For months after the cessation of business, hundreds of thousands of dollars were received by and withdrawn from the Debtor's accounts. (Id. at 87:7-98:23.) Debtor's bank statements were being sent to Appellant's address. (July, Aug. & Sept. 2005 Bank Statements, R. Ex. T.) Checks written out to Debtor and found in the trash outside Appellant's office had been negotiated by Appellant. (TRO/Receiver Hr'g at 24:12-17, 69:3-8, Jan. 23, 2006, R. Ex. Tab E; Check Stubs, R. Ex. Z.) On September 13, after Judge Shadur's injunction had been lifted, Appellant purchased assets from Teknek America, including distribution rights and the rights to the name Teknek America, customer lists, a small amount of stock, brochures, office equipment, payroll information and other records (everything but bank accounts and receivables) for $38,500 -- an assessment obtained by Teknek America. (Rollinson Dep. at 103:11-22, R. Ex. C.) Rollinson relied on this assessment and did not seek his own appraisal. One week prior to the asset transfer, Teknek America paid approximately $3,500 for an exhibition space at a September 2006 exhibition. (Check 1037, R. Ex. EE.)

Appellant employees, formerly employed by Debtor and then by Teknek America, currently drive vehicles still titled and registered to Debtor and Teknek Electronics. (Titles, R. Ex. AA; Rollinson Dep. at 93:9-96:10, R. Ex. C.)

PROCEDURAL HISTORY

On December 30, 2005, Trustee Lawrence Fisher ("Trustee") filed an adversary complaint (Adversary No. 06-00412) against Hamilton, Kennett, Rollinson and the three other owners of Tekena, Tekena itself, and Kenham, LLC (formerly Teknek America). Count I, relevant to Tekena, alleges fraudulent transfers under 11 U.S.C. § 544(b) and 740 Ill. Comp.

Stat. § 160/5, made by Kennett and Hamilton from Debtor to Teknek America, and, under 11 U.S.C. § 550, to subsequent transferee Tekena. The remaining counts include a request to pierce the corporate veils of American Teknek entities owned by Kennett and Hamilton, allegations that Kennett and Hamilton received wrongful distributions of profit from an LLC, that Kennett and Hamilton breached fiduciary duties to its debtors and creditors, and allegations that Rollinson has possession of a vehicle to which Debtor holds legal title and that this vehicle should be surrendered to the bankruptcy trustee.

On January 19, 2006, Trustee filed an emergency motion to appoint a receiver or, in the alternative, for a temporary restraining order. At an evidentiary hearing on January 23, 2006, the bankruptcy court found an adequate showing of fraudulent transfers of nearly all of the Debtor's assets to Appellant prior to the Chapter 7 petition, as well as the presence of concealed assets and unauthorized post-petition transfers. (Corrected Prelim. Findings in Supp. of Receivership and Conditional TRO at 1-2, R. Ex. Tab G [hereinafter Corrected Order].) The bankruptcy court granted Trustee's application for appointment of a receiver to monitor the Appellant's operations, in order to preserve the Debtor's assets. (Id. at 4.) The court also modified an existing temporary restraining order against the transfer of assets worth more than $1000 by further restraining Appellant from destroying any records or ...


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