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Leibowitz v. Bowman International, Inc.

United States District Court, N.D. Illinois, Eastern Division

November 17, 2016

DAVID LEIBOWITZ, Trustee of McDonough Associates, Inc., Plaintiff,
v.
BOWMAN INTERNATIONAL, INC. f/k/a Bowman International, LLC and Bowman Consulting Group, Ltd., Defendants.

          MEMORANDUM OPINION AND ORDER

          MATTHEW F. KENNELLY, District Judge:

         McDonough Associates, Inc. (MAI) entered bankruptcy after some of its creditors filed an involuntary petition. After the petition was filed, MAI allegedly transferred some of its assets to Bowman International, Inc. and Bowman Consulting Group, Ltd. (together, Bowman). The bankruptcy court then appointed David Leibowitz as trustee for the MAI estate. The Trustee has brought claims against Bowman to void the transfer as unlawful under 11 U.S.C. § 549 (claim 1) and to hold Bowman liable for MAI's debts under a theory of successor liability (claim 2). Bowman has moved for summary judgment on both claims. Bowman has also moved to bar the testimony of the Trustee's expert, John Pruitt. The Trustee has moved to strike three of the affirmative defenses that Bowman raised in its answer.

         For the reasons stated below, the Court denies Bowman's motion for summary judgment on both claims. The Court also denies Bowman's motion to bar Pruitt's testimony and the Trustee's motion to strike three of Bowman's affirmative defenses.

         Background

         MAI was an engineering consulting firm that worked primarily on projects for the Illinois Department of Transportation (IDOT) and the Illinois State Toll Highway Authority. In June 2012, IDOT suspended MAI from conducting any business with IDOT due to overbilling and fraud. MAI lost a substantial portion of its income and became unable to make payments to its secured creditor, Associated Bank. On June 13, 2012, Associated issued MAI a notice of default. Soon after, the two entered into a forbearance agreement under which MAI agreed to find a buyer for its business.

         That same month, MAI entered into discussions for a potential sale with Bowman, a national engineering consulting firm based in Virginia. In July 2012, Bowman conducted a review of MAI's business and records. On September 21, the two companies entered into a letter of intent in which Bowman agreed to purchase MAI's assets. In October and November, Bowman continued to review MAI's financial records, customer contracts, and computer system. Bowman interviewed MAI employees and began the process of qualifying to receive projects from IDOT and the City of Chicago.

         MAI's financial situation continued to decline. In November 2012, Associated told MAI that if a sale of the assets did not close by November 30, Associated would foreclose. Senior managers of Bowman and MAI met at MAI's offices on November 30 to close the sale. While the meeting was taking place, three of MAI's other creditors filed an involuntary bankruptcy petition. When Bowman's lenders learned of the petition, they decided they would no longer consent to the transaction. Bowman and MAI never executed the asset purchase agreement. MAI then told the petitioning creditors that the Bowman deal was dead. Associated froze MAI's bank account and began to plan how it would collect MAI's receivables, on which Associated had a lien.

         Despite these adverse developments, Bowman and MAI managers continued to meet for the rest of the day and eventually reached a new agreement. The parties dispute the nature of this agreement. Regardless, a number of changes occurred at MAI in the following days. Feroz Nathani, the president of MAI, and Dan Curley, another employee, informed MAI employees that the company was closing. Many MAI employees left MAI and were immediately hired by Bowman. The parties dispute whether MAI fired the employees before they were hired by Bowman. Bowman made Matthew Letson, a senior MAI employee, a vice president and put him in charge of Bowman's new Chicago office. Nathani resigned from MAI and became an executive vice president of Bowman; he also joined Bowman's board of directors. In all, Bowman hired twelve former MAI shareholders. The parties dispute whether these employees also became shareholders of Bowman; Bowman claims that they did not. The employment agreements between Bowman and these new hires provided for distribution of Bowman stock to them within sixty days of hiring as well as over the course of their employment. As of the time of this litigation, Bowman has not issued any of these shares.

         MAI also assigned the lease for its Chicago office space to Bowman. Bowman took over the space and began to use MAI's furniture, equipment, and electronic files. Bowman also began transferring employees' files from MAI equipment to Bowman systems. Bowman began contacting former MAI clients to indicate that many from the MAI team were coming on board and to offer Bowman as a replacement on MAI's uncompleted projects. According to Bowman, Alan Swanson, an officer and director of MAI, assigned MAI's contracts with the City of Chicago to Bowman in February 2013. The Trustee agrees that Swanson purported to do this but argues he lacked authority to do so because he was already working for Bowman at the time.

         Meanwhile, Curley stayed with MAI to oversee the bankruptcy proceedings. During this time, Curley and Swanson (while still with MAI) often communicated by email with MAI's counsel, Stephen Brown, regarding the bankruptcy proceedings. Swanson also forwarded these e-mails to Nathani, who by that point had already left MAI to join Bowman. On the day that the creditors filed the involuntary petition, Brown had told the creditors that MAI would not contest the petition. On December 5, 2012, however, MAI told the bankruptcy judge that it was opposing the involuntary petition. The bankruptcy court appointed Leibowitz as Trustee in February 2013. At that time, the Trustee abandoned some MAI records that were still at the Chicago property but retained many as well. Likewise, the Trustee obtained permission from the bankruptcy court to abandon or sell some of the telephone and computer equipment that Bowman was not using.

         The Trustee then filed the current complaint against Bowman. The Trustee alleges that Bowman's takeover of MAI's business constitutes a post-petition transfer of MAI's assets and therefore is voidable under 11 U.S.C. § 549. Compl. ¶¶ 76-84. The Trustee further alleges that Bowman's conduct made it a successor of MAI and therefore liable for all of MAI's debts. Id. ¶¶ 85-92. In its answer, Bowman denies the Trustee's allegations and raises a number of affirmative defenses, including the following: 1) any recovery under claim 1 should be reduced by value Bowman may have provided to MAI during the exchange; 2) the Trustee has unclean hands, which should prevent his recovery under claim 2; and 3) MAI was at least as responsible for the damage to its bankruptcy estate, and therefore the Trustee should be barred from recovering under claim 2 on the basis of in pari delicto.

         Bowman moved for summary judgment on both of its claims and moved to bar the expert testimony of Pruitt. The Trustee moved to strike the three affirmative defenses discussed above. In this decision, the Court considers all three motions.

         Discussion

         I. Bowman's motion for summary judgment

         Because Bowman has moved for summary judgment, the Court views the evidence in the light most favorable to the Trustee and draws reasonable inferences in his favor. See Bunn v. Khoury Enters., Inc., 753 F.3d 676, 681 (7th Cir. 2014). Summary judgment is appropriate only when the record discloses no dispute on any material fact. Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002). If a reasonable jury could return a verdict for the non-moving party, the court should deny summary judgment. See Bunn, 753 F.3d at 681.

         A. Claim 1

         In claim 1, the Trustee alleges that Bowman received a post-petition transfer of MAI's assets in violation of 11 U.S.C. § 549. The Trustee alleges that Bowman took over MAI's "space, equipment, unfinished business, and computers" and "took possession of [MAI's] paper and electronic business files." Compl. ¶ 78. In moving for summary judgment, Bowman argues that it did not receive any assets belonging to MAI.

         Section 549 authorizes a trustee to avoid a transfer of "property of the estate that occurs after the commencement of the case." 11 U.S.C. § 549(a). Once the bankruptcy petition is filed, "all of the debtor's property becomes property of the estate." Matter of Jones, 768 F.2d 923, 926 (7th Cir. 1985). The scope of the estate is broad and includes "all interests of a debtor, both legal and equitable." Id. These property interests are defined by state law. Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594, 598 (7th Cir. 2012).

         1. Office space

         Both parties agree that, after the filing of the involuntary petition, MAI assigned the lease of its office space to Bowman. See Def.'s Mem. in Support of Mot. for Summ. J. at 4; Pl.'s Resp. to Def.'s Mot. for Summ. J. at 12. Further, Bowman does not argue that a lease is not a property interest under Illinois law. Bowman instead argues that the lease was not an asset but rather a liability that would have been treated as an administrative expense in bankruptcy, and therefore the trustee cannot avoid the transfer. Def.'s Reply at 3. Section 549 of the Bankruptcy Code, however, does not draw this distinction, and Bowman cites no authority in support of its position. A leasehold clearly qualifies as a property interest under Illinois law and is included in the bankruptcy estate. See Munroe v. Brower Realty & Mgmt. Co., 206 Ill.App.3d 699, 704-05, 565 N.E.2d 32, 36 (1990); see also In re Rickel Home Ctrs., Inc., 209 F.3d 291, 300 (3d Cir. 2000). A reasonable fact-finder could conclude that, in taking over the lease, Bowman received a transfer of MAI assets.

         2. Other physical property

         The Trustee further alleges that Bowman received from MAI equipment, computers, furniture, and paper and electronic business files. Again, Bowman does not contend that MAI did not have a property interest in these items. Instead Bowman appears to argue that MAI never transferred these items to Bowman and that the Trustee abandoned this property. See Def.'s Mot. for Summ. J. at 6.

         There is a genuine factual dispute over whether Bowman received and used this property. Testimony by former MAI employees indicates that Bowman began using these items immediately after the November 30 meeting. See Pl.'s Resp. to Def.'s SUDF, Exh. 1 (Letson Dep.) 47:6-22, 50:8-52:3, 59:2-12; Letson Dep., Exh. 259.

         There is also a genuine dispute regarding whether MAI still retained an interest in this property. First, to the extent that the Trustee abandoned any property, he did not do so until late 2013 through early 2015, long after Bowman began using the property in 2012. See P.'s Resp. to Def.'s SUDF, Exh. 6 (Leibowitz Affid.) ¶¶ 5-6. Any later abandonment by the Trustee therefore had no effect on Bowman's use during this period. Further, the Trustee stated that, although he eventually abandoned some furniture and records, he "retained a large quantity of records" as well as computers of MAI employees. Id. The Trustee also sold other computer equipment and telephone hardware. Leibowitz Affid. ¶ 6. Finally, the abandonment orders issued by the bankruptcy court state that the Trustee did not waive any rights or arguments with respect to possible litigation. Def.'s SUDF, Exh. R (Abandonment Orders) at 2. A finder of fact could reasonably conclude that Bowman used this property and that it still belonged to MAI. Thus there is a genuine dispute regarding whether Bowman received a post-petition transfer of this property in violation of 11 U.S.C. § 549.

         3. Intangible assets

         The Trustee also contends that Bowman received a transfer of MAI's intangible assets. Pl.'s Resp. to Def.'s Mot. for Summ. J. at 6-7. The Trustee appears to argue that Bowman received MAI's goodwill, including its relationships with employees and customers and its organizational structure. See Id. at 7-10. Bowman argues that MAI's alleged goodwill is actually the personal goodwill of each MAI employee. Def.'s Mem. in Support of Mot. for Summ. J. at 7. Further, Bowman contends that, by the time of the alleged transfer, MAI had lost virtually all of its value as a going concern and therefore had nothing to transfer to Bowman. Def.'s Reply at 4-7.

         Under Illinois law, a company's goodwill is an intangible property right and therefore can belong to the bankruptcy estate. See Wetekamp v. Lane, 250 Ill.App.3d 1017, 1025-26, 620 N.E.2d 454, 460-61 (1993). Illinois courts define goodwill as "the advantages a business has over competitors as a result of its name, location and owner's reputation." See Russell v. Jim Russell Supply, Inc., 200 Ill.App.3d 855, 862- 63, 558 N.E.2d 115, 121-22 (1990). "Its value consists of the probability that the customers of the old firm will continue to be customers to the new." Id. at 863, 558 N.E.2d at 121. In order for a court to protect an interest in goodwill through injunctive relief, the goodwill must have substantial value. Id. at 862, 558 N.E.2d at 121.

         There is a genuine factual dispute regarding whether MAI transferred its goodwill to Bowman. The evidence indicates that Bowman immediately began using MAI's office space, equipment, and files. See Letson Dep. 47:6-22, 50:8-52:3, 59:2-12; Letson Dep., Exh. 259. Further, Bowman hired twelve MAI employees in December 2012. Def.'s SUDF ¶ 10; Pl.'s Resp. to Def.'s SUDF ¶ 10. Bowman contacted many of MAI's customers who had outstanding projects in order to assert itself as MAI's replacement. Letson Dep. 60:2-65:11. Bowman also asked Letson ...


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