Teknek, LLC v. Systems Division Inc

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-1137
IN RE: T EKNEK, LLC,
Debtor,
P HILLIP D. L EVEY, T RUSTEE,
Plaintiff-Appellant,
v.
S YSTEMS D IVISION, INC.,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07 C 5229—Rebecca R. Pallmeyer, Judge.
A RGUED S EPTEMBER 23, 2008—D ECIDED A PRIL 29, 2009
Before B AUER, C UDAHY and W ILLIAMS, Circuit Judges.
C UDAHY, Circuit Judge. Systems Division, Inc. (SDI)
obtained a judgment for patent infringement against
Teknek LLC (Teknek) and Teknek Electronics (Electronics)
in a district court in California. While the patent suit
was pending, Teknek and Electronics’ sole shareholders,
Jonathan Kennett and Sheila Hamilton, created Teknek
Holdings (Holdings) and proceeded to funnel both compa-
2 No. 08-1137
nies’ assets into Holdings, leaving Teknek and Electronics
insolvent. From here, matters get complicated. After
SDI won its patent suit, it successfully moved the
federal district court in California to add Kennett, Hamil-
ton and Holdings to the judgment as defendants on
an alter ego theory. Meanwhile, Teknek (but not Elec-
tronics) filed for bankruptcy in the Northern District of
Illinois, and the bankruptcy trustee brought an adversary
proceeding against Hamilton, Kennett and other successor
entities of Teknek (but not Electronics or Holdings) alleg-
ing, among other things, that Hamilton and Kennett
were Teknek’s alter egos and seeking to recover the SDI
judgment on behalf of the estate. The question presented
by this appeal is whether SDI’s collection action against
Kennett, Hamilton and Holdings (the alter egos) may
be enjoined so that the trustee can pursue its claim for
the same judgment against Kennett and Hamilton. The
bankruptcy court held that SDI’s claims against the alter
egos were “property of the estate” under § 541 of the
Bankruptcy Code, 11 U.S.C. § 541, and therefore that the
trustee had an exclusive right to bring those claims.
The bankruptcy court accordingly enjoined SDI from
collecting its patent judgment outside of bankruptcy. On
appeal, the district court found that SDI’s alter ego claims
were neither property of the estate nor related to the
bankruptcy proceeding. It therefore ruled that SDI’s claims
were not subject to the automatic stay under § 362, nor
to an injunction under § 105 of the Bankruptcy Code.
We agree with the district court and therefore hold that
it properly vacated the bankruptcy court’s injunction.
No. 08-1137 3
I.
SDI makes “clean machines,” which remove small
particles from flat materials such as film, lamination and
electronic circuitry. Teknek and Electronics were SDI’s
competitors. More precisely, Teknek was a U.S. distributor
of clean machines made by Electronics, Teknek’s Scottish
affiliate. Teknek and Electronics were separate entities,
both controlled by Hamilton and Kennett, Scottish citi-
zens. Kennett owned 85 percent of the shares in both
companies, and Hamilton owned the other 15 percent. In
February 2000, SDI filed its patent infringement suit
against Teknek and Electronics. A few months later,
Kennett and Hamilton created Holdings. Between 2003
and 2004, Electronics transferred £5 million to Holdings,
as well as manufacturing equipment and a building.
Electronics received no consideration for these asset
transfers. In contrast to Electronics’ relatively large asset
holdings, Teknek’s assets were limited to some office
furniture, computers, a car and Teknek’s receivables. These
assets ultimately were transferred to Holdings as well.
Much was made at argument and by both the California
federal district court and the federal district court in
Chicago (which acquired jurisdiction through the bank-
ruptcy filing) about whether Teknek’s assets were trans-
ferred directly to Holdings or first to Electronics.
Because this issue is not material to the outcome, we
do not revisit it here.
Following a jury trial on its patent claims, SDI won a
judgment of $3.77 million against Teknek and Electronics
in August 2004. The defendants’ liability on the judgment
4 No. 08-1137
was joint and several. But by this point, Teknek and
Electronics were judgment proof, so SDI moved the
California federal court to add Kennett, Hamilton and
Holdings as defendants based on an alter ego theory. The
California court granted SDI’s motion, finding that
Kennett and Hamilton were alter egos of both Teknek
and Electronics under California law, because they had
transferred assets from Teknek and Electronics to
Holdings with intent to defraud SDI. The California
federal court’s holding meant that the alter egos were
directly liable for the patent judgment. The court also
found that Holdings was a mere continuation of Electron-
ics and therefore liable for Electronics’ debt to SDI as a
successor corporation. The alter ego finding was later
affirmed by the Federal Circuit. Meanwhile Teknek filed
its Chapter 7 petition in the bankruptcy court for the
Northern District of Illinois. SDI appeared in the Illinois
bankruptcy proceeding and filed a notice of its claim.
Teknek’s bankruptcy trustee filed an adversary pro-
ceeding in the bankruptcy case, asserting claims for, inter
alia, fraudulent transfers and breach of fiduciary duty
against Kennett and Hamilton. The trustee’s complaint
also seeks to hold Kennett and Hamilton personally
liable for Teknek’s obligation on the judgment to SDI
based on an alter ego theory. This claim is identical to
SDI’s claim, except that Holdings is not a defendant in
the trustee’s complaint and the trustee seeks to reach the
alter egos through Teknek only, rather than through
Electronics or by virtue of the California federal court’s
order that the alter egos, too, are judgment debtors on
the patent claims.
No. 08-1137 5
SDI and the alter egos came close to reaching a settle-
ment outside the bankruptcy proceeding in the spring of
2007. In May of that year, Kennett and Hamilton filed a
motion to stay the trustee’s adversary proceeding in
the bankruptcy court so that they could complete their
settlement with SDI. The bankruptcy court denied the
motion. Then in June, the bankruptcy judge entered the
preliminary injunction that is the subject of this appeal.
The bankruptcy court’s injunction order does not care-
fully distinguish between Teknek and Electronics. Al-
though it acknowledges that SDI’s patent suit was
against both Teknek and Electronics, and that SDI sought
to add Hamilton, Kennett and Holdings as defendants
on an alter ego theory, the bankruptcy court states that
the judgment in the patent suit is only against “the
Debtor.” The bankruptcy court’s order omits any men-
tion at all of Electronics’ joint and several liability on the
patent judgment. Also omitted is the California district
court’s alter ego ruling that Kennett, Hamilton and Hold-
ings are equally on the hook for the liability of Electronics
as they are for the liability of the debtor. The order
indicates that the debtor is the only entity directly liable
for the patent judgment. If this were the case, SDI would
have been properly enjoined from pursuing its claim, as
it would have been a claim against the debtor reserved
for the bankruptcy trustee. But this is not the case. Never-
theless, neither Electronics nor the alter egos are men-
tioned as being directly liable. The bankruptcy court’s
injunction order concludes misleadingly that “the [Califor-
nia] District Court’s determination that Hamilton, Kennett
and Holdings could be properly added as defendants
6 No. 08-1137
to the SDI Judgment and pursued for collection of the
same was based on SDI’s claims that (a) Hamilton and
Kennett were the alter egos of the Debtor; (b) that Hamilton
and Kennett caused the transfer of the Debtor’s assets
with the actual intent to defraud SDI; (c) that the assets
were transferred for no consideration; and (d) that such
transfers were intended to result in the Debtor’s insol-
vency.”
Because of the bankruptcy court’s injunction, a settle-
ment conference scheduled for July 2007 between SDI
and the alter egos in California was canceled. In August,
the trustee filed his own settlement motion in the
Illinois bankruptcy court. In October the bankruptcy court
entered an order finding that SDI’s proceedings in Cali-
fornia were adversely affecting the trustee’s attempts
to settle the case. Then the California federal court
issued a sanctions order purporting to nullify the bank-
ruptcy court’s preliminary injunction and to enjoin the
debtor, Electronics and the alter egos from transferring
any assets. SDI appealed the bankruptcy court’s prelimi-
nary injunction order to the district court for the
Northern District of Illinois.
The district court in Chicago vacated the preliminary
injunction, finding that the bankruptcy court lacked
jurisdiction to enjoin SDI’s settlement with the alter egos.
The district court concluded that the automatic stay, 11
U.S.C. § 362, did not extend to SDI’s claim. The court
reasoned that SDI’s claim was personal to it and inde-
pendent of any claim a hypothetical general creditor
could have brought against Teknek. Therefore the claim
No. 08-1137 7
was not property of the estate, and not covered by the
automatic stay. “SDI seeks to collect its patent infringe-
ment judgment directly from Electronics, Holdings,
Kennett, and Hamilton. . . . Electronics, Holdings, Kennett,
and Hamilton are directly liable to SDI for the patent
infringement judgment, and neither Teknek nor any
claimant or creditor has any interest in that judgment.
Thus, SDI’s claims are personal and do not belong to
the estate.” In re Teknek, LLC, No. 07 C 5229, 2007 WL
4557813, at *7 (N.D. Ill. Dec. 21, 2007).
The district court in Chicago then acknowledged that,
even if not property of the estate, SDI’s claim may be
within the bankruptcy court’s “related-to” jurisdiction
under 28 U.S.C. § 1334(b). The court concluded however
that SDI’s claim was not “related to” the bankruptcy case,
because the “harm” SDI suffered was patent infringe-
ment—a harm no other creditor could claim—and because
allowing SDI to collect from the non-debtors on the patent
judgment would not prevent the trustee from also pursu-
ing fraudulent transfer claims on behalf of the debtor’s
estate. 2007 WL 4557813, at *8, *10. Because the district
court in Chicago agreed with the California federal court’s
finding that Teknek had transferred all of its assets
directly to Holdings, instead of to Electronics, the court
also concluded that there was no need for the bankruptcy
court to untangle Teknek’s assets from Electronics’ assets,
obviating that basis for related-to jurisdiction. The court
also focused on the fact that SDI was Teknek’s only major
creditor: allowing SDI to settle its claim outside bank-
ruptcy would not impair the recovery of a larger class
of creditors, so the primary function of the trustee—to
8 No. 08-1137
maximize recovery on behalf of creditors as a whole—was
not implicated. Id. at *8.
Further, the district court found there was no indica-
tion the alter egos would not be able to satisfy both
SDI’s claim and any fraudulent transfer claims the trustee
brought on behalf of the estate. Id. at *12. As a practical
matter, then, the court found that allowing SDI to
control the settlement would not derail the bankruptcy
proceedings. We agree with most of these conclusions,
though, as will appear, the fact that the underlying harm
suffered by SDI was patent infringement does not, by
itself, make it a claim no other creditor could assert. By
such logic, all creditors’ claims would be personal to the
specific creditor: a supplier’s claim for payment on sup-
plies would be deemed personal because no other
creditor could claim payment for the same supplies; an
employee’s claim for his back pay would be personal to
the extent that no other employee could claim back pay
for that employee’s hours worked. If all such claims were
“personal,” no creditor would have to wait in line behind
the bankruptcy trustee to assert her claims. With such
segregation of claims, the bankruptcy system would
collapse. What is significant about SDI’s patent infringe-
ment claim is not that it is for patent infringement;
instead significance lies in SDI’s reduction of the claim to
judgment against both the debtor and an independent non-
debtor, Electronics. It is Electronics’ joint and several
liability that makes SDI’s claim special. Because of Elec-
tronics’ independent liability on the judgment, we also
do not find it significant whether Teknek transferred
assets first to Electronics and then to Holdings or directly
No. 08-1137 9
to Holdings—either way, Electronics’ independent
liability remains. For the same reasons, we do not put
much weight on the fact that SDI is the sole creditor in
the bankruptcy case.
The Illinois federal district court also found that “the
equities counsel against the bankruptcy court’s exercise
of jurisdiction.” Id. at *13. This seems to be a species of
abstention rather than further support for the court’s
holding regarding the absence of related-to jurisdiction. In
this respect, the district court relied on Teachers Ins. &
Annuity Ass’n of Am. v. Butler, 803 F.2d 61, 65–66 (2d Cir.
1986), for its conclusion that wrongdoers cannot take
advantage of the bankruptcy jurisdiction to avoid paying
a judgment against them. The court found that Kennett,
Hamilton and Holdings had used “complicated machina-
tions to avoid paying a judgment.” In re Teknek, 2007 WL
4557813, at *13. “Bankruptcy procedures cannot be used to
achieve this end, and the bankruptcy court thus lacked
jurisdiction.” Id. Yet Teachers did not explicitly address the
bankruptcy court’s related-to jurisdiction. Its decision was
based on the bankruptcy court’s “general equity powers
under 11 U.S.C. § 105.” 803 F.2d at 65. Teachers also pre-
ceded this court’s decision in Fisher v. Apostolou, 155
F.3d 876 (7th Cir. 1998), which plainly finds that bank-
ruptcy jurisdiction may exist even where it enjoins a
creditor from collecting from non-bankrupt co-defendants
who have acted in bad faith. See Fisher, 155 F.3d at 880.
Following the Illinois district court’s decision, the alter
egos paid SDI in full satisfaction of the judgment against
them. The trustee’s appeal of the district court’s order
10 No. 08-1137
vacating the bankruptcy court’s preliminary injunction
is now before us.
II.
There is no dispute that if SDI were trying to collect its
patent judgment from Teknek, the debtor, it would be
barred by the terms of the § 362 automatic stay. But SDI
also has a judgment on the same claim against Electronics.
Electronics’ liability is joint and several with that of the
debtor and, importantly, Electronics is directly liable to
SDI. A further wrinkle, however, is that Electronics, like
Teknek, is insolvent. SDI addressed this problem by
seeking to have Kennett, Hamilton and Holdings added
to the patent judgment as additional judgment debtors.
The California federal court obliged, holding that
Kennett, Hamilton and Holdings were also jointly and
severally—and directly—liable for the entire patent
judgment, because they were the alter egos of both
Teknek and Electronics. SDI’s “claim” is therefore in the
nature of a collection action—this “claim” has already
been reduced to judgment against not merely the
debtor, but also the four non-debtors, Electronics,
Kennett, Hamilton and Holdings. SDI argues that it can
reach the alter egos directly because of this judgment, and,
in any event, that it can reach the alter egos via
Electronics on a veil-piercing theory. At the same time,
the trustee argues that it can reach the alter egos via
Teknek and collect on SDI’s judgment on behalf of the
estate because that judgment is a debt the alter egos also
owe to the debtor. This is because, in addition to looting
No. 08-1137 11
Electronics, the alter egos also looted the debtor. The
alter egos are therefore liable to the debtor for the SDI
judgment because of their responsibility for the debtor’s
inability to repay it. In essence, then, both SDI and the
trustee have a claim against the alter egos, but only one
of them can receive satisfaction, because the patent judg-
ment can only be recovered once.
To determine what entity may exercise this right of
satisfaction against the alter egos, it is necessary to con-
sider the kinds of claims that may be brought only by
the trustee in bankruptcy. The purpose and duty of the
trustee is to gather the estate’s assets for pro rata dis-
tribution to the estate’s creditors. See Koch Ref. v. Farmers
Union Cent. Exch., Inc., 831 F.2d 1339, 1352 (7th Cir. 1987).
In aid of that duty, and as discussed in detail below, the
trustee has the sole right and responsibility to bring
claims on behalf of the estate and on behalf of creditors
as a class—so-called “general” claims. But the trustee’s
right to bring claims on behalf of creditors is not infinite.
Individual creditors retain the right to bring “personal”
claims that do not implicate the trustee’s purpose. The
distinction between “general” and “personal” claims
ensures that the trustee will be able to fulfill the purpose
of the bankruptcy laws without allowing the bankruptcy
jurisdiction to swallow claims only tangentially related to
the debtor. See Fisher, 155 F.3d at 880 (“The trustee, acting
on behalf of the estate or the creditors as a whole, obvi-
ously may not roam around collecting whatever
property suits her fancy. Her task instead is to recover
and manage the ‘property of the estate,’ . . .”).
12 No. 08-1137
As for the kinds of claims reserved for the trustee, first,
the trustee has the sole responsibility to represent the
estate by bringing actions on its behalf. Fisher, 155 F.3d at879 (citing, inter alia, 11 U.S.C. § 323). In this respect, the
bankruptcy estate is defined as “all legal or equitable
interests of the debtor in property as of the commence-
ment of the case.” 11 U.S.C. § 541. The estate includes
any action a debtor corporation may have “to recover
damages for fiduciary misconduct, mismanagement or
neglect of duty,” and the trustee succeeds to the right to
bring such actions. Koch, 831 F.2d at 1343–44. Second, the
trustee has creditor status under 11 U.S.C. § 544 and is
the only party that can sue to represent the interests of
the creditors as a class. Koch, 831 F.2d at 1342–43; see also
Matter of Kaiser, 791 F.2d 73, 76 (7th Cir. 1986). However,
the trustee has no standing to bring “personal” claims
of creditors, which are defined as those in which the
claimant has been harmed and “ ‘no other claimant or
creditor has an interest in the cause.’ ” Fisher, 155 F.3d
at 879 (quoting Koch, 831 F.2d at 1348).
“[A]llegations that could be asserted by any creditor
could be brought by the trustee as a representative of
all creditors. If the liability is to all creditors of the
corporation without regard to the personal dealings
between such officers and such creditors, it is a general
claim. . . .
“A trustee may maintain only a general claim. His right
to bring a claim depends on whether the action vests
in the trustee as an assignee for the benefit of creditors
or, on the other hand, accrues to specific creditors.”
No. 08-1137 13
Fisher, 155 F.3d at 879–80 (quoting Koch, 831 F.2d at1348–49); Ashland Oil, Inc. v. Arnett, 875 F.2d 1271, 1280 (7th
Cir. 1989) (holding that RICO claims were personal, and
plaintiffs were therefore entitled to sue on their own,
because their injuries were distinct from the injuries to
creditors in general resulting from the diversion of corpo-
rate assets); see also Steinberg v. Buczynski, 40 F.3d 890,
891–92 (7th Cir. 1994) (holding that the trustee could not
bring a claim against sole shareholders of bankrupt
corporation where shareholders had not looted or other-
wise injured the corporation). “The equally valid mirror-
image principle is that a single creditor may not main-
tain an action on his own behalf against a corporation’s
fiduciaries if that creditor shares in an injury common to
all creditors and has personally been injured only in an
indirect manner.” Koch, 831 F.2d at 1349 (citing, inter alia,
Delgado Oil Co., Inc. v. Torres, 785 F.2d 857, 861 (10th Cir.
1986)); see also In re MortgageAmerica Corp., 714 F.2d
1266, 1277 (5th Cir. 1983) (holding that a fraudulent
transfer claim against a corporate debtor’s control person
belongs to the corporate debtor, not to specific creditors);
Dana Molded Prods., Inc. v. Brodner, 58 B.R. 576, 580–81
(N.D. Ill. 1986) (holding that a judgment creditor lacked
standing under RICO to bring a personal claim for bank-
ruptcy fraud committed against the corporation itself in
an attempt to hinder creditors generally).
To determine whether an action accrues individually to
a claimant or generally to a corporation, then, we must
look to the injury for which relief is sought. We must
consider whether that injury is “peculiar and personal to
the claimant or general and common to the corporation
14 No. 08-1137
and creditors.” Koch, 831 F.2d at 1349. In making this
distinction it is helpful to compare the facts of the leading
cases. In Koch, for instance, we found that a group of oil
companies’ claims against a debtor’s fiduciaries were
general claims. The oil companies had regularly ex-
changed petroleum products with the debtor, Energy
Cooperative, Inc. (ECI). 831 F.2d at 1340. ECI, as debtor-in-
possession, brought preference actions against the oil
companies, and also sued its member-owners, who were
regional agricultural cooperatives that had formed ECI
to ensure a steady supply of petroleum products for
their agricultural businesses. Id. ECI alleged that the
member-owners had breached their fiduciary duties by
preventing ECI from remedying breaches of contract and
by causing ECI to take other actions contrary to its best
interests. Id. ECI’s suit sought to hold the member-owners
liable for all of ECI’s debts under a “veil-piercing ” the-
ory. ECI’s Chapter 11 reorganization case was
later converted to a Chapter 7 liquidation, and a trustee
was appointed who continued pursuit of ECI’s lawsuits
in bankruptcy. The oil companies then brought their
own suit seeking a declaration that the member-owners
were ECI’s alter egos and that ECI was solvent when it
filed its bankruptcy petitions, such that the oil
companies were entitled to recover from the member-
owners whatever amounts the bankruptcy trustee recov-
ered from the oil companies in its preference actions.
831 F.2d at 1341. The district court found that the oil
companies had raised essentially the same allegations
as those made by the trustee in bankruptcy. Id. We agreed.
The oil companies’ complaint alleged that they were
No. 08-1137 15
injured only because of the member-owners’ misuse of
ECI and of ECI’s corporate form, and that the oil compa-
nies were entitled to recover from the member-owners
only due to the member-owners’ manipulation of ECI to
the plaintiffs’ detriment. 831 F.2d at 1349.
The injury alleged by the oil companies, it can be
clearly seen, is to the corporation directly and to the
oil companies indirectly. The trustee’s complaint, as
well, underscores that the debtor is a victim of the
Member-Owners and has been harmed directly. The
oil companies are only indirect or secondary victims;
they have alleged nothing about their detrimental
position that is peculiar and personal to them and
not shared by ECI’s creditors.
Id. Therefore, the oil companies’ claim was general and
could be pursued only by the trustee in bankruptcy.
In Fisher, by contrast, we found that a group of creditor-
investors’ fraud claims against a debtor’s agents accrued
to the creditor-investors personally. 155 F.3d at 877. In
Fisher, the corporate debtor, Lake States, was a bogus
commodities business that the individual debtor, Thomas
Collins, and a group of accomplices had used as a “bucket
shop,” similar to a Ponzi scheme. After Collins’ fraud
was detected, he and Lake States were forced into bank-
ruptcy. At the time of their bankruptcy filing, Lake States
had only about $2 million in assets, not enough to
satisfy its outstanding investor debt of about $64 million.
In addition to the trustee’s claims against the non-debtor
accomplices to recover on behalf of the estate, a group
of Lake States investors sought to bring securities, com-
16 No. 08-1137
modities and common law fraud claims outside the
bankruptcy proceeding against the same non-debtor
accomplices. To the extent that this group of creditor-
investors sought to sue the accomplices merely to
recover debts that arose out of the creditor-investors’
transactions with Lake States, we held that they stood in
the same position as the rest of the investors, “pursuing
identical resources for redress of identical, if individual,
harms.” 155 F.3d at 881. Unlike in Koch, however, we
found that the creditor-investors’ fraud claims were not
the same as those available to the trustee, even though,
if the creditor-investors were allowed to pursue their
claims, “there might be nothing left in the defendants’
coffers from which the bankrupt’s estate could recover.”
Fisher, 155 F.3d at 881 (discussing Bankers Trust Co. v.
Rhoades, 859 F.2d 1096 (2d Cir. 1988)). In this respect, we
quoted approvingly the Second Circuit’s holding in
Bankers Trust Co.: “ ‘[I]f [the creditor] Bankers was injured
by [the non-debtor] defendants’ acts, . . . it has standing
to bring a RICO claim, regardless of the fact that a bank-
rupt BAC might also have suffered an identical injury
for which it has a similar right of recovery.’ ” Fisher, 155
F.3d at 881 (quoting Bankers Trust Co., 859 F.2d at 1101).
Accordingly, in Fisher we held that the investor-creditors
had independent, personal claims for fraud against the
debtors’ accomplices, even though their claims arose
from the accomplices’ misuse of the funds they had
invested in Lake States. In finding that the investor-credi-
tors’ fraud claims were personal to them, we reasoned
that fraud inflicts a separate and distinct injury on its
victims, one that is inflicted directly on those victims by
No. 08-1137 17
its perpetrators, and that sometimes may be redressed by
punitive damages. The creditor-investors’ injuries from
that fraud may not have been fully measured by the
debts the accomplices owed to Lake States for the
misuse of the investors’ funds. Therefore we held that the
creditor-investors should be allowed to bring their
fraud suits—after the bankruptcy proceedings con-
cluded—to recover any shortfall in their pro rata share
as general creditors, as well as any individualized
damages not compensated by their pro rata share. 155
F.3d at 883.
Nevertheless, in Fisher we upheld the bankruptcy
court’s jurisdiction to enjoin the creditor-investors’ fraud
claims because those claims were so closely related to
the bankruptcy proceedings. We explained that in
limited circumstances the trustee may temporarily block
claims that are not property of the estate by petitioning
the bankruptcy court to enjoin such claims, if they are
sufficiently “related to” claims on behalf of the estate. 155
F.3d at 882 (citing 28 U.S.C. § 1334(b)). “The jurisdiction
of the bankruptcy court to stay actions in other courts
extends beyond claims by and against the debtor, to
include ‘suits to which the debtor need not be a party
but which may affect the amount of property in the
bankrupt estate,’ or ‘the allocation of property among
creditors.’ ” 155 F.3d at 882 (quoting Zerand-Bernal Group,
Inc. v. Cox, 23 F.3d 159, 161–62 (7th Cir. 1994), and In re
Mem’l Estates, Inc., 950 F.2d 1364, 1368 (7th Cir. 1992)). To
protect this jurisdiction, the bankruptcy court may issue
“any order, process, or judgment that is necessary or
appropriate to carry out the provisions of this title.” 11
18 No. 08-1137
U.S.C. § 105(a); Fisher, 155 F.3d at 882. Thus, even though
the investor-creditors’ fraud claims were personal and
distinct from claims that could be brought by other credi-
tors, they were so related to the bankruptcy proceeding
that, if not temporarily enjoined, they would have
derailed those proceedings’ efforts to recover for the
class of creditors as a whole.
The case sub judice, however, is distinct from both Koch
and Fisher. In both of those cases, the creditors’ claims
against the non-debtor fiduciaries depended on the non-
debtor’s misconduct with respect to the corporate debtor. In
Koch, the oil companies sought to hold the member-owners
liable based on their alleged breach of fiduciary duties
to the debtor, ECI, 831 F.2d at 1340, and in Fisher, the
creditor-investors’ fraud claims were based on the ac-
complices’ looting of the debtor corporation in which the
plaintiffs had invested, 155 F.3d at 881. In this regard,
general claims and claims that are “related to” the bank-
ruptcy seemingly always involve transfers from the debtor
to a non-debtor control person or entity. See, e.g., In re
MortgageAmerica Corp., 714 F.2d at 1275. To be sure, the
case before us involves those facts as well—Teknek trans-
ferred all of its assets to the non-debtor Holdings, which
is controlled by Kennett and Hamilton—but it also in-
volves a separate non-debtor, Electronics, that is directly
liable to SDI on the patent judgment without regard to
the debtor’s liability. SDI has already proven to a jury
that Electronics inflicted an independent injury against
it, and SDI has proven to the California district court
that the alter egos inflicted an independent injury
against Electronics—they looted Electronics and left it a
No. 08-1137 19
shell—without regard to any injury Teknek inflicted on
SDI, or any injury the alter egos inflicted on Teknek. SDI’s
claim against the alter egos does not depend on the
alter egos’ misconduct with respect to the debtor. SDI
has equal recourse against the alter egos because of the
injury suffered by Electronics. This distinction makes
our case more like In the Matter of Johns-Manville Corp., 26
B.R. 405 (Bankr. S.D.N.Y. 1983), where the debtor and
the non-debtors were sued as joint tortfeasors in
asbestos product liability suits. The non-debtor co-defen-
dants were not alter egos of the debtor, but rather were
independent companies whom the plaintiffs alleged were
jointly liable with the debtor for asbestos injuries. 26 B.R.
at 407. Electronics is like the co-defendants in Johns-
Manville. The presence of Electronics and its involve-
ment in the underlying patent suit distinguishes this case
from Fisher, where we held that “[w]hile the Apostolou
Plaintiffs’ claims are not ‘property of’ the Lake States
estate, it is difficult to imagine how those claims could be
more closely ‘related to’ it. They are claims to the same
limited pool of money, in the possession of the same
defendants, as a result of the same acts, performed by
the same individuals, as part of the same conspiracy.”
155 F.3d at 882. Here, though SDI’s claims involve the
same pool of money as the trustee’s claims, and that
money is in the possession of the same defendants (the
alter egos), the claims are not based on the same acts. The
alter egos looted both Teknek and Electronics. Those are
separate acts, which caused separate injuries to two
separate companies, only one of which is in bankruptcy.
20 No. 08-1137
The fact that the same alter egos controlled both Elec-
tronics and Teknek is not sufficient to bring SDI’s claim
against Electronics under the umbrella of the bankruptcy
proceeding. With respect to the alter egos, this case is
akin to “the more common case” referred to in Fisher
where a creditor of a bankrupt files a claim against an
insurer or guarantor of the bankrupt and is allowed to
proceed because the suit is “ ‘only nominally against
the debtor because the only relief sought is against his
insurer,’ guarantor, or other similarly situated party.”
Fisher, 155 F.3d at 882–83 (quoting In re Hendrix, 986
F.2d 195, 197 (7th Cir. 1993)). The alter egos in the case
before us are like an insurer or guarantor. As in Hendrix,
now that SDI’s claim has been reduced to judgment, its
collection action is only nominally against Electronics
and Teknek, because the only relief sought is against the
non-debtor alter egos. See Hendrix, 986 F.2d at 197 (“[A]s to
whether such an injunction extends to a suit only nomi-
nally against the debtor because the only relief sought
is against his insurer, the cases are pretty nearly unani-
mous that it does not.”) (collecting cases).
A final distinguishing characteristic of this case is the
fact that SDI is the debtor’s only major creditor. Allowing
SDI to settle its claim outside of bankruptcy therefore
will have no effect on a larger class of creditors, and in
this sense it will not “derail the bankruptcy proceed-
ings.” Fisher, 155 F.3d at 883. We do not make too much
of this distinction, however. If not for the presence of
Electronics, an independent non-debtor that is directly
liable to SDI for the patent judgment, we would have
been required under Fisher to find that SDI’s claim was
No. 08-1137 21
so related to the bankruptcy case that it could be
properly enjoined by the bankruptcy court. As a proce-
dural matter, the lack of other creditors would have
served better as the basis for a motion to dismiss the
bankruptcy proceeding than as the basis for the juris-
dictional argument SDI makes here. See In re Am. Telecom
Corp., 304 B.R. 867, 873 (Bankr. N.D. Ill. 2004) (dismissing
Chapter 7 case where debtor’s two shareholders had
filed bankruptcy petition only to avoid paying a judg-
ment to the debtor’s sole creditor, because such a
petition “does not adequately implicate any of the
policies that the U.S. Bankruptcy Code was enacted to
serve”). SDI never filed such a motion. Still, the absence
of other creditors is relevant. The trustee’s “paramount
duty” in Chapter 7 is to marshal the estate’s assets for a
pro rata distribution to all creditors. See Koch, 831 F.2d at
1352. To the extent that there is no larger creditor class,
that duty will not be vindicated, and there is less of a
principled basis for requiring a claim to be brought by
the trustee rather than by the individual creditor.
III.
Before concluding, we address a matter in tension
with our jurisdiction. While this appeal was pending
before us, the trustee filed a motion in the bankruptcy
court to compromise all of his claims with Teknek’s alter
egos. On March 13, 2009, as our opinion was about to
be issued, the bankruptcy court below issued a memo-
randum opinion purporting to grant the trustee’s motion,
In re Teknek, LLC, No. 05 B 27545, ___ B.R. ____, 2009 WL
22 No. 08-1137
648598 (Bankr. N.D. Ill. Mar. 13, 2009), notwithstanding
this appeal, and in apparent violation of the ancient
stricture that, when a case is on appeal, all lower courts
lose jurisdiction over it and related matters. In the Matter
of Statistical Tabulating Corp., Inc., 60 F.3d 1286, 1289 (7th
Cir. 1995) (citing Griggs v. Provident Consumer Disc. Co., 459
U.S. 56, 58 (1982)). The purpose of this rule is to avoid
the confusion of placing the same matter before two
courts at the same time and to preserve the integrity of
the appeal process. Whispering Pines Estates, Inc. v. Flash
Island, Inc., 369 B.R. 752, 757 (B.A.P. 1st Cir. 2007). The
situation before us is a perfect example of why this
rule matters.
We came across the bankruptcy court’s opinion ap-
proving settlement quite by chance; none of the parties
brought it or the settlement to our attention. We immedi-
ately issued an order to the parties to address what
effect this ruling might have on our appeal and to show
cause why they should not be sanctioned for proceeding
in apparent disregard of our jurisdiction. The alter egos
did not respond to our order. They are not parties to this
appeal, so perhaps that failure is excusable. SDI responded
to our order with a tersely worded statement that it had
no involvement in the settlement. Teknek responded
with a slightly less terse filing, asserting that the settle-
ment had no effect on our jurisdiction, because it involved
the settlement of claims “separate and apart from the
claims at issue in the present appeal.” The trustee’s re-
sponse to our order to show cause provides the most
context for the proceedings that have taken place in the
bankruptcy court since the filing of this appeal. The trustee
No. 08-1137 23
explains that, although he believes his settlement does
not compromise our jurisdiction, he has previously been
“vigilant in his defense of this Court’s jurisdiction” in
response to SDI’s own attempts to impair our ability to
decide this appeal. The trustee reports that he has
opposed both summary judgment by SDI—seeking dis-
missal by the bankruptcy court of the trustee’s action
now on appeal—as well as SDI’s attempt to withdraw
its claim from the bankruptcy, all on grounds that our
appeal deprived the bankruptcy court of jurisdiction.
These related facts only now come to our attention, SDI
not having mentioned them in response to our order to
show cause. These facts provide grounds for sanctioning
SDI, as well as giving the trustee credit for getting
the jurisdiction question right early on, though he has
clearly gotten it wrong since then.
We cannot fathom how the bankruptcy court could lack
jurisdiction to dismiss SDI yet retain jurisdiction to ap-
prove the settlement between the trustee and the alter
egos. Indeed, as the trustee himself pointed out to the
bankruptcy court in his response to SDI’s motion to
withdraw its claim, “[u]ntil the Seventh Circuit has
ruled on the Trustee’s appeal, this Court should take
no action that would alter the status quo or result in any
legal prejudice to the Estate’s claims.” Yet that is
exactly what the bankruptcy court did when it approved
the trustee’s settlement. The trustee cannot have it
both ways.
To be clear, while the trustee’s settlement does not
directly and specifically address the issues immediately
24 No. 08-1137
before us, it purports to deal with matters that are
integral to this appeal. The trustee brought the injunction
action now on appeal only so that he could pursue
SDI’s claim against the alter egos on behalf of the bank-
ruptcy estate. But the trustee’s settlement purports to
compromise all of the trustee’s claims against the alter
egos, leaving little if anything for the trustee to pursue
on that score. The trustee now focuses on other relief he
might have obtained from SDI had he won this appeal
(relief that is largely ignored in his brief): damages for
SDI’s violation of the automatic stay and a turnover of the
settlement proceeds SDI received from the alter egos. But
the trustee mitigated his damages by settling with the
alter egos outside our jurisdiction; any turnover of SDI’s
settlement proceeds would have been followed quickly
by a return of those proceeds to SDI, the sole creditor
in this case. Thus, although the matter on appeal is techni-
cally a separate adversary proceeding from the matter
at issue in the trustee’s settlement, the relationship is so
close that it is obvious that the bankruptcy court lacked
jurisdiction to approve the settlement. Therefore, the
bankruptcy court’s purported approval of the settlement
is null and void. Moreover, because the trustee is re-
quired to get the bankruptcy court’s approval before
settling claims, the settlement itself is apparently of no
effect. See Fed. R. Bankr. P. 9019; see also, e.g., Yorke v.
N.L.R.B., 709 F.2d 1138, 1147 (7th Cir. 1983). Because the
settlement does not purport to settle the issues directly
before us, however, and because the settlement has not
been validly approved by the bankruptcy court, the case
before us is not moot and we retain jurisdiction to
No. 08-1137 25
decide it. See In re Markarian, 228 B.R. 34, 48 (B.A.P. 1st
Cir. 1998) (“Since the Bankruptcy Court had no jurisdiction
to approve the parties’ compromise and enter dismissal,
those orders are void; therefore, a case or controversy
still existed when the Panel issued its October 28, 1998
Order.”).
One final issue remains, and that is proper sanctions.
We think a sanction of $5,000 against the trustee, payable
to the court, for entering the rogue bankruptcy settle-
ment at issue here is sufficient to deter similar actions
in derogation of this court’s jurisdiction in the future,
while recognizing that the trustee acted correctly in
opposing SDI’s various motions below. We sanction SDI
the same amount for its abortive attempts to extricate
itself from the bankruptcy, again in apparent disregard of
our exclusive jurisdiction over these matters. We leave
to the bankruptcy court in due course the decision
whether to sanction the alter egos, who are not before this
court.
The district court’s holding that SDI’s claim is not
property of the Teknek estate or related to the bankruptcy
proceeding is A FFIRMED, and the district court’s vacation
of the preliminary injunction order is also A FFIRMED.
4-29-09