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In re Teknek

December 21, 2007


The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

Bankruptcy No. 05 C-27545

Adversary Case No. 07-00583

(Bankruptcy Judge Jacqueline P. Cox)


Teknek, LLC ("Teknek") was found guilty of willful patent infringement in August 2004 and filed for bankruptcy in July 2005. The bankruptcy court has enjoined Systems Division, Inc. ("SDI")--the entity whose patents Teknek infringed--from collecting its patent infringement judgment from Teknek, its owners, and certain affiliated entities, all of whom are judgment debtors. SDI appeals this injunction and, for the reasons set forth below, the court vacates the injunction, except insofar as proceedings are stayed against Teknek pursuant to the automatic stay provision of the Bankruptcy Code. The case is remanded to the bankruptcy court for further proceedings.


I. Patent Proceedings

The conflict that gives rise to this litigation began more than seven years ago. SDI filed patent infringement claims against Teknek and Teknek Electronics, Ltd. ("Electronics") in the United States District Court for the Central District of California on February 7, 2000. Sys. Div., Inc. v. Teknek Elecs. Ltd.,Case No. 00-cv-135-DOC-AN (C.D. Cal.).*fn1 Four and a half years later, SDI's claims were tried before a jury, which found that Teknek and Electronics had committed patent infringement. On August 18, 2004, District Judge David O. Carter entered a judgment in favor of SDI and against Teknek and Electronics for willful patent infringement. (00-cv-135 Docket Entry No. 251.) SDI was awarded $3 million plus prejudgment interest and costs. (Id.) On November 5, 2004, the court entered an order awarding SDI prejudgment interest totaling $771,555.25. (00-cv-135 Docket Entry No. 289.)

SDI ran into difficulties protecting and collecting the $3.8 million judgment. On January 20, 2005, SDI filed an application and order for appearance and judgment debtor examination. (00-cv-0135 Docket Entry No. 334 at 3.) On March 7, 2005, Magistrate Judge Arthur Nakazato continued the examination to April 7, 2005. (Id.) On April 18, 2005, Judge Carter entered an order holding Electronics in contempt for failure to appear at the judgment debtor examination and ordering Electronics to pay reasonable costs and attorneys' fees incurred by SDI as it attempted to enforce the judgment. (Id. at 7.) As Teknek had not been served with a notification of the examination, Teknek was not held in contempt. (Id. at 6.) The court also enjoined Electronics from carrying on business in the United States or "transferring or disposing of any of their assets (including monetary assets) to any other Defendant or any third party, or from transferring any assets (including monetary assets) out of the United States." (Id. at 7-8.) This injunction was to remain in place until Electronics appeared for a judgment debtor examination. (Id. at 8.)

After SDI filed its patent infringement claims but before the final judgment was filed, the judgment debtors--Teknek and Electronics--transferred their assets to a third entity: Teknek Holdings, Ltd. ("Holdings"). In June 2005, SDI moved to add Jonathan Kennett, Sheila Hamilton, and Holdings as judgment debtors. (00-cv-135 Docket Entry No. 486 at 4.) Kennett and Hamilton are Scottish citizens. (Id. at 3.) Kennett owns 85% of Teknek and Holdings; Hamilton owns the remaining 15% of each entity. (Id. at 2-3.) Electronics is now a wholly-owned subsidiary of Holdings but, before it became a Holdings subsidiary, it also was wholly owned by Kennett (85%) and Hamilton (15%). (Id. at 2.) Judge Carter found that Holdings was formed in April 2000, that is, approximately two months after SDI filed its patent infringement lawsuit against Teknek and Electronics. (Id. at 2.) Nearly all of Teknek's and Electronics' assets were transferred to Holdings once it was formed, rendering both Teknek and Electronics insolvent. (Id.) Judge Carter found that the fraudulent transfers of assets from entities wholly controlled by Kennett and Hamilton (Teknek and Electronics) to another company wholly controlled by Kennett and Hamilton (Holdings)--indeed, entities controlled in the same 85-15 ratio--deprived SDI of its ability to collect its judgment from Teknek and Electronics. (00-cv-135 Docket Entry No. 486 at 15-18.) Judge Carter also found that to add Holdings, Kennett, and Hamilton as judgment debtors would not offend due process, given the control they had over litigation of the patent proceedings. (Id. at 18-21.) On January 3, 2007, he ordered that Holdings, Kennett, and Hamilton be added as judgment debtors in the patent infringement action under either a theory of alter ego or of successor liability. (Id. at 2-3.)

Holdings, Kennett, and Hamilton appealed this order to the Federal Circuit, which affirmed Judge Carter. Sys. Div., 2007 WL 3151697, at *1. The Federal Circuit found that Teknek "sold" all of its assets to Holdings in 2004, and that there is no evidence that Teknek received any compensation for that sale. Id. Electronics also transferred its assets to Holdings, and there is no evidence that Teknek received any compensation for doing so. Id. Ultimately, Electronics became a wholly owned subsidiary of Holdings, although the Federal Circuit's opinion does not say precisely when this occurred. Id. Electronics paid "dividends" to Holdings, including a £3.5 million dividend in 2003 (shortly after a grant of summary judgment for the defendants was reversed)*fn2 and a £1.5 million dividend in 2004 (shortly before the jury verdict in favor of the plaintiff). Id. The Federal Circuit therefore affirmed the order adding Kennett, Hamilton, and Holdings as parties to the 2004 verdict and judgment of infringement on the theory that they fraudulently transferred assets from Teknek and Electronics to themselves, thereby preventing SDI from collecting its patent infringement judgment. Id.

Following the transfer of assets from Teknek and Electronics to Holdings, Teknek and Electronics were insolvent. (00-cv-135 Docket Entry No. 486 at 2.) On May 26, 2005, Electronics, a Scottish company, filed an insolvency petition in the United Kingdom, and Teknek filed its Chapter 7 bankruptcy petition in the United States on July 12, 2005. (Id. at 3; see also Sys. Div., Inc. v. Teknek Elecs., Ltd., No. 2007-1162, 2007 WL 3151697, at *1 n.1 (Fed. Cir. Oct. 26, 2007).) Electronics' bankruptcy proceedings are not at issue in this appeal, which is focused solely on the Teknek bankruptcy proceedings before Bankruptcy Judge Jacqueline P. Cox. Teknek and Electronics made Judge Carter aware of their bankruptcy filings and, on August 1, 2005, Judge Carter stayed all proceedings and pending motions in the patent infringement matter. (00-cv-135 Docket Entry No. 459.) Without articulating his reasons for doing so, Judge Carter lifted the stay on October 5, 2006, at SDI's request. (00-cv-135 Docket Entry No. 470.) Only after Judge Carter lifted the stay did he add Holdings, Kennett, and Hamilton as judgment debtors.

While the Federal Circuit appeal was pending, SDI continued its attempts to collect on the $3.8 million judgment. SDI moved to hold defendants in contempt for violating court orders relating to the failure to pay the judgment or cooperate with judgment debtor examinations on April 6, 2007; because defendants' counsel advised the court that defendants had agreed to pay the outstanding judgment, Judge Carter continued the hearing on the motion to July 23, 2007. (00-cv-135 Docket Entry No. 525.) In June 2007, while that contempt motion was pending, Teknek's Trustee in bankruptcy filed an adversary proceeding against SDI, seeking to recover the assets Teknek transferred before it became insolvent. (07-ap-583 Docket Entry No. 1.) On June 26, Judge Cox issued a preliminary injunction, prohibiting SDI from prosecuting claims or collecting on account of claims from Teknek, Hamilton, Kennett, and "the Teknek parties." (07-ap-583 Docket Entry No. 13.) While Teknek's bankruptcy proceedings will be discussed in more depth below, it is clear that this preliminary injunction implicated SDI's attempts to collect its patent infringement judgment from the judgment debtors. Nevertheless, SDI continued its attempts to collect. On July 17, 2007, Judge Carter again placed the proceedings on hold, this time until September 10, 2007. (00-cv-135 Docket Entry No. 540.) In his order granting another continuance, Judge Carter noted that the bankruptcy court had entered a preliminary injunction barring SDI from collecting its judgment, and that settlement discussions between Holdings and the Teknek Trustee were underway. (Id.) On September 10, Judge Carter continued the hearing until September 25, 2007 and issued a tentative order holding the five defendants in contempt. (00-cv-135 Docket Entry No. 549.)*fn3 Four days later and following a teleconference with the bankruptcy judge and attorneys in Illinois in which he learned that the bankruptcy judge had modified the injunction in place, he issued a revised version of that tentative order. (00-cv-135 Docket Entry No. 546.)

On October 3, 2007, SDI requested that Judge Carter and the Northern District of Illinois consult to clarify the bankruptcy court's jurisdiction. (00-cv-135 Docket Entry No. 552.) Holding that the appeal currently before this court is the proper avenue for SDI to pursue, Judge Carter denied this request on October 12. (00-cv-135 Docket Entry No. 561.) On the same day, Judge Carter held Holdings, Kennett, and Hamilton in contempt, issuing an expanded version of his amended tentative order. (00-cv-135 Docket Entry No. 563 at 22.) His final order expressly examined the jurisdiction of the bankruptcy court to enjoin proceedings in the Central District of California, which the tentative order had not; ultimately, however, the order imposed the same sanctions contemplated in the amended tentative order. (Id.; see also 00-cv-135 Docket Entry No. 546.) In his contempt order, Judge Carter declined to exercise his power under the All Writs Act, 28 U.S.C. § 1651(a) but made clear that he would exercise this power to enjoin attempts to enforce the bankruptcy court's injunction in his court. (00-cv-135 Docket Entry No. 563 at 16.) By way of sanctions, he enjoined the judgment debtors--Teknek, Electronics, Holdings, Kennett, and Hamilton--from carrying on business within the United States, from transferring assets to any other defendant or third party, and from transferring any assets out of the United States. (Id. at 22.) He imposed these same restrictions on Teknek Manufacturing Ltd., Teknek Japan Ltd., Teknek China Ltd., Teknek Howwood Ltd., Teknek Automation A/S, Teknek Asia Ltd., Teknek Europe Ltd., and Kenham LLC. (Id.)*fn4 These injunctions were to remain in effect until Holdings appeared for a judgment debtor examination and provided SDI with certain documents. (Id. at 23.) Finally, he ordered Holdings, Kennett, and Hamilton to provide SDI with certain information about the various Teknek entities, including a list of all employees, officers, directors, agents, representatives, and licensees; an accounting of revenue and accounts receivable; and customer lists. (Id.) On November 9, 2007, the Teknek Trustee as well as Holdings, Kennett, and Hamilton filed notices of appeal. (00-cv-135 Docket Entries No. 576 & 578.) Their appeals are currently pending before the Federal Circuit.

II. Bankruptcy Proceedings

As described briefly above, in the wake of the $3.8 million patent infringement judgment, Teknek filed for voluntary bankruptcy in the United States Bankruptcy Court for the Northern District of Illinois on July 12, 2005, Bankruptcy Case No. 05-27545. (Brief of Appellee Phillip D. Levey, Trustee in Bankruptcy for the Estate of Teknek, LLC ("Levey Br.") at 4; Brief of Appellant, Systems Division, Inc. ("SDI Br.") at 3.) Teknek's bankruptcy proceedings are currently pending before Bankruptcy Judge Cox. In the bankruptcy proceedings, Teknek disclosed $73.22 in assets and $3.79 million in liabilities. (SDI Br. at 3.) Lawrence Fisher was appointed as the original bankruptcy trustee. (Levey Br. at 4-5.)*fn5 On July 20, 2005, SDI, through its attorneys, filed an appearance in the bankruptcy court. (Id. at 5.) On February 1, 2006, SDI filed a claim for $3,823,564.90 in the bankruptcy proceedings. (Id.; Systems Division, Inc. Proof of Claim, Ex. 25 to Levey Br. at Ex. A.)

In addition to the Teknek bankruptcy case, there are two associated adversary proceedings pending before Judge Cox. On January 19, 2006, Fisher, as Teknek Trustee, initiated adversary proceedings against a number of individuals and entities, including Kennett, Hamilton, and Holdings, see Adversary Proceeding No. 06-412. In that action, the Teknek Trustee seeks to recover the assets fraudulently transferred by Teknek in an attempt to avoid paying the judgment owed to SDI. After Fisher resigned as the Teknek Trustee for medical reasons on May 31, 2006, Phillip D. Levey was appointed the successor trustee for the Teknek estate. (Levey Br. at 6.) Levey commenced adversary proceedings against SDI on June 22, 2007, Adversary Proceeding No. 07-00583. (Levey Br. at 8.) Levey sought, among other relief, a preliminary and a permanent injunction enjoining SDI from collecting or otherwise pursuing collection of the patent infringement judgment from Kennett, Hamilton, and Holdings. (Id.) The court granted the Teknek Trustee's motion for a preliminary injunction on June 26, and on June 29, 2007 entered an order enjoining SDI from collecting or taking any action against: Teknek, Hamilton, Kennett, Holdings, Electronics, and certain Teknek affiliates: Teknek America, LLC; Kenham, LLC; and Tekena, LLC. (Id. at 8-9; SDI Br. at 5.) The preliminary injunction remained in effect until July 27, 2007. (Levey Br. at 8-9.)

A few weeks before the preliminary injunction was set to expire, SDI moved to modify its terms. (SDI Br. at 5.) On July 13, 2007, Judge Cox extended the injunction through August 28, 2007 and continued SDI's motion to modify the preliminary injunction order until that same date. (Id. at 5.) On August 21, 2007, the Teknek Trustee moved for a permanent injunction and for authority to compromise. (SDI Br. at 6.) The Trustee argued that Holdings would satisfy the outstanding patent infringement judgment if and only if a permanent injunction were issued preventing SDI and anyone affiliated with SDI from collecting or otherwise pursuing collections of that judgment. (Id.) SDI countered that Holdings' proposed payment would not fully satisfy the judgment. (Id.) Judge Cox noted that SDI never appealed the June 29, 2007 order granting the preliminary injunction; SDI agreed to the extension of the preliminary injunction to August 28, 2007; and there had been no material changes to the facts or circumstances surrounding the first motion for a preliminary injunction. (07-ap-583 Docket Entry No. 78 at 4.) Thus, Judge Cox extended the preliminary injunction to and through November 27, 2007. (Id.) On September 5, SDI filed a Notice of Appeal with this court.


I. Jurisdiction

SDI appeals the bankruptcy court's entry of the June 29, 2007 and August 28, 2007 preliminary injunction orders. SDI suggests that the court's jurisdiction is grounded in 28 U.S.C. § 158(a)(1), which entrusts district courts with jurisdiction to hear appeals "from final judgments, orders, and decrees." In non-bankruptcy proceedings, appeals of the grant of preliminary injunctions are considered interlocutory. 28 U.S.C. § 1292(a)(1); Duct-O-Wire Co. v. United States Crane, 31 F.3d 506, 508 (7th Cir. 1994). In bankruptcy proceedings, however, courts construe finality more liberally than in non-bankruptcy proceedings. In re Forty-Eight Insulations, 115 F.3d 1294, 1299 (7th Cir. 1997). Thus, the Ninth Circuit has recently held that an injunction staying arbitration proceedings is appealable as a final order. Solidus Networks, Inc. v. Excel Innovations, Inc. (In re Excel Innovations, Inc.), 502 F.3d 1086, 1092 (9th Cir. 2007).

This court will, however, review the preliminary injunction even if it does not technically constitute a "final order" -- that is, one which, even under the broader definition appropriate in the context of a bankruptcy appeal, "ultimately determine[s] a creditor's position in the bankruptcy proceeding." Forty-Eight Insulations, 115 F.3d at 1299. Even if the preliminary injunction at issue here does not ultimately determine SDI's position in the bankruptcy proceeding, this court may exercise jurisdiction over this appeal pursuant to 28 U.S.C. ยง 158(a)(3). Id. ("the district court may choose to take jurisdiction from interlocutory orders of bankruptcy courts"). Particularly given that a dispute has arisen between a District Judge in the Central District of California and a Bankruptcy Judge in the Northern District of Illinois, exercise of the ...

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