Variable-Parameter Fixture Development Corp. v. Morpheus Lights, Inc.Variable-Parameter Fixture Development Corp. v. Morpheus Lights, Inc.
MEMORANDUM DECISION and ORDER
After reviewing defendants’ objections and plaintiff’s responses to those objections, the Court adopts and confirms Magistrate Judge Buehwald’s Report & Recommendation dated June 25, 1996. At this time, however, because of the automatic stay in effect pursuant to § 362(a) of the Bankruptcy Code of claims against defendant Morpheus Lights, Inc. (“Morpheus”), I will not order any relief with rеspect to Morpheus. Plaintiffs motion for discovery sanctions is granted as to defendant John Richardson (“Richardson”) to the extent recommended by Judge Buchwald.
BACKGROUND
A. Underlying Cause of Action
Plaintiff Variable-Parameter Fixture Development Corporation (“Variable”) is the owner of all rights and title in United States Letters Patent No. 3,845,351 issued October 29, 1974 for “Method and Apparatus for the Adjustment of a Plurality of Flоodlights” (the “ ’351 patent”). (Am.Compl. ¶ 5). On August 28, 1990, Variable initiated this patent infringement action against Morpheus and its sister corporation, PanCommand Systems, Inc., alleging that defendants were lia
In December 1992, Variable moved for leave to amend the complaint to add Richardson as a defendant. Richardson founded Morpheus in 1979 to design, manufacture, and market lighting systems and related services in the United States. (Id. at 3). Richardson was and continues to be the sole shareholder of Morpheus, and also served as its director and president until several months ago. Variable claims that Richardson directly and actively participated in the willful infringement of the ’351 patent and- is personally liable for the damages arising from his tortious conduct. (Id. at 3-4).
B. Variable’s Motion
In December 1995, Variable moved for the imposition оf sanctions against defendants. Specifically, Variable sought a default judgment on the issue of liability, the preclusion of defendants from using any of the financial documents produced after August 4, 1995, the costs of this motion and the costs incurred in reviewing the belated document production. (Report at l). 2
Variable’s motion was predicated on a number of acts by Morphеus that can best be described as a deliberate and protracted failure by Morpheus to comply with Variable’s demands—as well as court orders—for a great deal of discovery. To summarize, the record establishes that: 1) Morpheus failed to produce at least 14,870 relevant documents until after the close of discovery; 2) Morpheus belatedly produсed documents in the fall of 1995 that were responsive to several document requests dating back to 1990; and 3) beginning in 1992, defendants were continuously ordered to comply with the document demands but, under the representation of three separate law firms, repeatedly failed to do so while falsely assuring the court that full disclosure had been made. (Report at 10-11).
Additionally, dеfendants have been sanctioned numerous times on a progressive basis all to no avail. Judge Buchwald warned defendants that further discovery abuses would result in the entry of a default judgment. (Id.). Judge Buchwald stated that defendants had “clearly engaged in a continuing saga of misconduct ... and have been sanctioned ... for their conduct on numerous occasions.” (Id. at 11). Judge Buchwald held that “the. specific conduct which is the subject of this motion fully meets the legal standards for the imposition of the severest sanctions. [and] defendants’ lengthy pattern of misconduct and the imposition on many occasions of less severe sanctions was ineffective to compel compliance with the court’s orders.” (Id. at 15).
C. Report and Recommendation
On June 25, 1996, Judge Buchwald issued a Report and Recommendation (the “Report”). Based on the acts of defendants, Judge Buchwald recommended that Variable’s motion for sanctions be granted. Specifically, the Report recommended that 1) a judgment of default be entered against, defendants on the issue of liability; 2) the burden of proof as to the issues of damages be altered so that defendants havе the burden of establishing what portion, if any, of its revenues from the challenged lighting systems were attributable to non-infringing activity; and 3) reasonable costs, including attorney’s fees attributable to both the motion and the review of the belated document production, be granted in this ease. (Id. at 14-16).
DISCUSSION
Defendants’ object to the Report on three separate grounds. First, defendants claim
A. The Automatic Stay
Defendants claim that the issuance of the Report violated the automatic stay provisions of the Bankruptcy Code. They argue that because the text оf the Report refers to defendants, and is not limited to Richardson, the entire Report is void. Defendants’ interpretation of the Report, however, is incorrect.
Although the text of the Report may refer to “defendants” and not “defendant,” this is not indicative of Judge Buchwald’s intent. Rather, Judge Buchwald clearly limited the scope of the Report in recognition of the automatic stay applicable to Morpheus. Judge Buchwald stated:
We have been informed that defendant Morpheus has filed, a voluntary petition pursuant to Chapter 11 of the Bankruptcy Code. As there is another defendant, the automatic stay provisions do not prevent this case from proceeding against defendant John Richardson. Thus, despite the bankruptсy filing, we are submitting this Report and Recommendation.
(Report at 1 n. 1) (emphasis added). The implications of that statement are clear. Although the Report addresses the actions of both Morpheus and Richardson, the recommendations in the Report are, at this point, meant to apply solely to Richardson.
Additionally, the Report is only a recommendation, not a judgment or order. Defendants offer no support for the proposition that a recommendation alone, having no binding legal effect, could violate the automatic stay provisions of the Bankruptcy Code. Moreover, the legislative history of § 362 supports the opposite proposition. Congress stated that § 362 is meant to give “the debtor a breathing spell from his creditors [and] ... permit[ ] the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.” See S.Rep. No. 95-989, at 54-55 (1978), reprinted in U.S.Code Cong. & Admin.News 1978, pp. 5787, 5840-41. The issuance of a report and recommendation does not interfere with these goals. Thus, the mere act of writing the Report did not violate the stay applicable to Morpheus and does not render the Rеport void.
B. The Stay Does Not Apply to Claims Against Richardson
Defendants claim that the stay applicable to Morpheus as a bankruptcy debtor should be extended to actions against Richardson as well. Defendants argue that 1) Variable’s alter ego claims against Richardson are “property” of Morpheus’s bankruptcy estate and thus are covered by the stay, and 2) that the relationship between Morpheus and Richardson qualifies as an unusual situation warranting the extension of the stay to Richardson, Morpheus’s non-bankrupt co-defendant. (Defs.’ Objs. at 9-15).
1. Variable’s Claims Against John Richardson are Not Property of Morpheus’s Bankruptcy Estate
Defendants assert that the Report, insofar as it applies to Richardson, is void because Variable’s claims against Richardson are within the ambit of the automatic stay
In support of their position, defendants rely primarily on
In re Davey Roofing, Inc.,
Defendants’ reliance on Davey, however, is misplaced. Although defendants correctly interpret Davey аnd the law of California on the issue of generalized alter ego claims, they incorrectly characterize the nature of Variable’s claims against Richardson. Variable’s alter ego claims allege a “particularized injury” and thus Davey is inapposite.
Under California law there are two types of alter ego claims. The first type alleges general injury to the corporatiоn and gives rise to a right of action on the part of the corporation against the “alter ego.”
Davey,
Defendants assert that Variable’s claim against Richardson is “based bn an alter ego theory that Richardson was alleged to have withdrawn' the corporate funds available to satisfy a judgment for plaintiff against Morpheus.” (Defs.’ Objs. at 3). Defendants argue that' since Variable has alleged injury only to Morpheus the claim constitutes a “generalized alter ego” claim and thus is the property of Morpheus’s bankruptcy estate. (Id. at 9).
Defendants’ characterization of Variable’s claims, however, is simply incorrect. While Variable’s amended complaint does allege that Richardson siphoned assets from Morpheus and thereby damaged Morpheus, this is not the gist of the claim against Richardson. Rather, Variable alleges that Richardson “directly arid actively participated in ... willful infringement [of the ’351 patent] .;. and is personally hable for the damages arising from his tortious conduct.” (Pl.Mem. at
Therefore, Variable’s alter ego claims against Richardson do not fall into the category of a “generalized alter ego” claim as Morpheus argues. The claim are not for а “general injury, common to all creditors and derivative of injury to the debtor.”
In re Sunshine Precious Metals, Inc.,
Accordingly, the claims dо not fall within the ambit of the automatic stay applicable to Morpheus. Defendants’ contention that this action may not proceed against Richardson is rejected.
2. The Automatic Stay Should Not Be Extended to Richardson
Section 362(a) of the Code provides in part:
a petition filed under Section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities, of (1) The commencement or continuation, including issuance or employmеnt of process, of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the commencement of the case under this title____
The automatic stay provision of § 362 is one of the most fundamental protections afforded to debtors. It is designed to prevent the dissipation of the debtor’s аssets during the pendency of a Chapter 11 case and to protect the debtor from a multitude of lawsuits in a number of forums.
In re Johns-Manville Corp.,
Although the plain language of § 362 limits the extension of an automatic stay to a “proceeding against the debtor,”
CAE Indus. Ltd. v. Aerospace Holdings,
The
Robins
court, however, specifically excluded from the “unusual situation” exception those cases in which the non-bankrupt co-defendant is “independently liable” to the creditor.
Id
Therefore, where the debtor and non-debtor co-defendant “are joint tortfeasors or where the non-debtor’s liability rests upon his own breach of duty,” a stay clearly cannot be extended to the non-debtor.
Id.
This limitation on the “unusual situation” exception has been adopted in this district and by numerous other courts.
See, e.g., Robins,
Defendants’ argument, however, is unavailing. Under California law) a judgment obtained against a corporation and its alter ego is enforceable against both separately and leads to joint and several liability.
Mesler,
CONCLUSION
After having reviewed the Report, thе objections thereto, and the responses to those objections, I hereby confirm and adopt the Report in its entirety. Accordingly, plaintiffs motion for discovery sanctions is granted and the following relief is ordered: 1) judgment by default will be entered against Richardson on the issue of liability; 2) a trial will be held solely on the amount of damages; 3) the burden of proof as to damages is altered so that Richardson now has the burden of establishing what portion, if any, of Morpheus’ revenues from the challenged lighting systems were attributable to non-infringing activity; and 4) Richardson shall pay the reasonable costs incurred by plaintiff, including attorney’s fees attributable to both the motion and the review of the belated document production.
The parties are dirеcted to appear for a status conference on November 22,1996.
SO ORDERED.
Notes
. References to plaintiff's Memorandum in Support of Variable-Parameter’s Motion to Amend Its Complaint to Join Mr. John Richardson as a Defendant are cited as "Pl.Mem. at__"
. References to Judge Buchwald's Report, and Recommendation dated June 25, 1996 are cited as “Report at_
. Rеferences to Defendants' Written Objections to Magistrate Buchwald’s June 25, 1996 Report and Recommendation are cited as ’’Defs.’ Objs. at._
. Alter ego claims are governed by state. law. Accordingly, the state law to be applied to those claims must be determined' by the choice of law principles of the forum state—in this case New York. To analyze choicе of law problems, New York has adopted an "interest analysis” approach: "The law of the jurisdiction having the greatest interest in the litigation will be applied____"
Kalb, Voorhis & Co. v.. American Fin. Corp.,