Systems Division Inc. v. Teknek LLC

NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2008-1100
SYSTEMS DIVISION, INC.,
Plaintiff-Appellee,
v.
TEKNEK, LLC (by its Trustee, David Leibowitz),
Defendant-Appellant,
and
SHEILA HAMILTON, JONATHAN KENNETT,
and TEKNEK HOLDINGS, LTD.,
Defendants.
Edward F. O’Connor, O’Connor Christensen & McLaughlin, of Irvine, California,
argued for plaintiff-appellee.
Steven B. Towbin, Shaw Gussis Fishman Glantz Wolfson & Towbin LLC, of Chicago,
Illinois, argued for defendant-appellant.
Appealed from: United States District Court for the Central District of California
Judge David O. Carter
NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2008-1100
SYSTEMS DIVISION, INC.,
Plaintiff-Appellee,
v.
TEKNEK, LLC (by its Trustee, David Leibowitz),
Defendant-Appellant,
and
SHEILA HAMILTON, JONATHAN KENNETT,
and TEKNEK HOLDINGS, LTD.,
Defendants.
Appeal from the United States District Court for the Central District of California in case
no. 00-CV-135, Judge David O. Carter.
____________________________
DECIDED: October 29, 2008
____________________________
Before MAYER, SCHALL, and MOORE, Circuit Judges.
PER CURIAM.
Teknek, LLC, by the trustee of its bankruptcy estate, David Leibowitz, (Trustee)
appeals from an October 12, 2007 order of the United States District Court for the
Central District of California, No. SA CV 00-135 (the California Action), granting
Systems Division, Inc.’s (SDI) motion to hold Teknek Holdings, Ltd., Sheila Hamilton,
and Jonathan Kennett—the defendants in that case (collectively, Joined Defendants)—
in contempt, Docket No. 563 (Contempt Order). This appeal was originally consolidated
with No. 2008-1099, which was brought by the Joined Defendants.
On February 29, 2008, SDI and the Joined Defendants settled in the California
Action and the district court vacated the Contempt Order in full and with prejudice.
California Action, Docket No. 595 (Stipulated Settlement). SDI and the Joined
Defendants subsequently stipulated to the voluntary dismissal of the Joined Defendants’
appeal, which the Trustee opposed. The Trustee’s contention on appeal is that the
now-vacated Contempt Order adversely affects his interests and he asks this court to
vacate the order that the district court has itself already vacated. Because there is no
effectual relief that we can grant to the Trustee, we dismiss this appeal as moot.
Because the Trustee’s appeal to this court is frivolous, we impose sanctions under Rule
38 of the Federal Rules of Appellate Procedure and order the Trustee and his attorneys
to pay SDI’s attorney fees and costs due to this appeal.
BACKGROUND
This is the fourth appeal from the California Action. SDI instituted the California
Action by suing Teknek Electronics, Ltd. and Teknek, LLC (collectively, Original
Defendants) for infringement of three patents relating to “clean machines” in 2000.
Shortly after the California Action began, Hamilton and Kennett formed Teknek Holdings
in Scotland, and as the litigation progressed, Hamilton and Kennett transferred the
assets of the Original Defendants to Teknek Holdings, with no compensation in return. 1
1
Kennett and Hamilton are the sole owners and directors of Teknek
Electronics, Ltd. (a Scottish company), Teknek, LLC (an Illinois company), and Teknek
Holdings, Ltd. (a Scottish company).
2008-1100 2
In July 2004, a jury in the California Action found in favor of SDI, resulting in a
total award of $3.7 million. SDI could not collect the judgment because, as a result of
the asset transfers, the Original Defendants were insolvent. In 2005, Teknek
Electronics filed an insolvency petition in the United Kingdom, and Teknek, LLC filed a
Chapter 7 bankruptcy petition in Illinois. Over 99% of Teknek, LLC’s liabilities belong to
SDI as a now $4 million judgment creditor, including interest. On January 3, 2007, the
district court granted SDI’s motions to add the Joined Defendants to the 2004 judgment
on an alter ego theory, and we affirmed that ruling on October 26, 2007. Sys. Div., Inc.
v. Teknek Elecs., Ltd., 253 F. App’x 31 (Fed. Cir. 2007) (unpublished).
While the 2007 appeal was pending, SDI continued its efforts to collect the
judgment in the California Action. On April 6, 2007, SDI moved to hold the Joined
Defendants in contempt and asked the California court to issue an order with multiple
types of sanctions. The Joined Defendants then agreed to satisfy the underlying
judgment in the case plus interest, and the district court continued the hearing on the
contempt motions to give the parties time to negotiate the details of the settlement.
During that interval, the Trustee sought and obtained a preliminary injunction from the
bankruptcy court purporting to bar SDI from collecting judgment in the California Action.
Levey (in re Teknek, LLC) v. Sys. Div. Inc., No. 05-27545, 07-ap-0583 (Bankr. N.D. Ill.
June 26, 2008) (Docket No. 13) (PI Order).
On October 12, 2007, the California court found the Joined Defendants and
Teknek Holdings in contempt for various failures to appear for a judgment debtor
examination. Contempt Order at 22-23. The Contempt Order enjoined the Joined
Defendants and the Original Defendants from carrying out business in the United
2008-1100 3
States, and enjoined the same parties from transferring or disposing of their assets. Id.
at 22.
The combination of the PI Order and the Contempt Order created a stalemate,
and despite having won its judgment, SDI was unable to collect. Although it is not
immediately apparent why it matters whether SDI collects straight from the Joined
Defendants or through the bankruptcy estate, it does substantially affect SDI’s ability to
collect the judgment to which it is entitled. Had the Joined Defendants paid the $4
million to the bankruptcy estate, the Trustee would have taken approximately 25% ($1
million) as his contingent fee and then paid the remainder to SDI as a judgment creditor.
SDI would then only recover $3 million of its $4 million judgment.
The Trustee’s plan to divert SDI’s judgment through the bankruptcy estate was
derailed when, on December 21, 2007, the Northern District of Illinois vacated the
bankruptcy PI Order. Teknek, LLC (in re Teknek, LLC) v. Sys. Div. Inc., No. 07 C 5229,
2007 U.S. Dist. LEXIS 94038 (N.D. Ill. Dec. 21, 2007) (NDI Decision). This permitted
the Joined Defendants and SDI to settle directly, which they did. On February 29, 2008,
the district court in the California Action recognized the satisfaction of SDI’s judgment—
including all pre- and post-judgment interest—entered the Stipulated Settlement, and
vacated the Contempt Order in full and with prejudice. Stipulated Settlement at 2-3.
The Trustee then appealed the NDI Decision to the U.S. Court of Appeals for the
Seventh Circuit, which heard oral argument on September 23, 2008 and appealed the
vacated Contempt Order from the settled California action to us.
2008-1100 4
DISCUSSION
I.
We do not have jurisdiction to hear this appeal, as the issues raised are moot. “If
an event occurs while a case is pending on appeal that makes it impossible for the court
to grant ‘any effectual relief whatever’ to a prevailing party, the appeal must be
dismissed as moot.” Nasatka v. Delta Sci. Corp., 58 F.3d 1578, 1580 (Fed. Cir. 1995)
(quoting Church of Scientology v. United States, 506 U.S. 9, 12 (1992)); see Calderon
v. Moore, 518 U.S. 149, 150 (1996) (“It is true, of course, that mootness can arise at
any stage of litigation; that federal courts may not give opinions upon moot questions or
abstract propositions; and that an appeal should therefore be dismissed as moot when,
by virtue of an intervening event, a court of appeals cannot grant any effectual relief
whatever in favor of the appellant.” (citations omitted)).
As we explained in Nasatka, “[t]he test for mootness is whether the relief sought
would, if granted, make a difference to the legal interests of the parties (as distinct from
their psyches, which might remain deeply engaged with the merits of the litigation).” 58
F.3d at 1580-81 (citing Air Line Pilots Ass'n Int'l v. UAL Corp., 897 F.2d 1394, 1396 (7th
Cir. 1990)). “In deciding whether this appeal must be dismissed as moot, we examine
whether the decision of any disputed issue ‘continues to be justified by a sufficient
prospect that the decision will have an impact on the parties.’” Id. at 1581 (quoting
Flagstaff Med. Ctr., Inc. v. Sullivan, 962 F.2d 879, 884 (9th Cir. 1992)).
In Nasatka, we reviewed a district court’s dismissal without prejudice of
Nasatka’s patent infringement claim against Delta Scientific Corp. (Delta) for failure to
conduct an adequate pre-filing investigation pursuant to Rule 11 of the Federal Rules of
2008-1100 5
Civil Procedure. Prior to the filing of Nasatka’s appeal, on May 12, 1994, the district
court granted Delta’s motion for Rule 11 sanctions. Later, after the filing of the appeal,
on July 5, 1994, the district court granted Nasatka’s motion for reconsideration,
rescinding the Rule 11 sanctions and finding that Nasatka had indeed conducted an
adequate pre-filing investigation. Although the court reconsidered the adequacy of the
investigation, the dismissal without prejudice remained in effect. Nasatka persisted in
his appeal of the dismissal order despite the fact that he was free to refile his complaint.
We dismissed Nasatka’s appeal as moot because a decision in his favor “could
not afford him any relief more meaningful than that which Nasatka can obtain by simply
refilling his complaint.” Nasatka, 58 F.3d at 1581. Nasatka argued that “a ruling by this
court that the pre-filing investigation as originally presented to the district court was
adequate would benefit [his] legal interests in future proceedings in this case.” Id.Nasatka was concerned that Delta could use the district court’s dismissal against him in
its motion for fees and costs pursuant to 35 U.S.C. § 285, and it sought a holding that
the evidence he “originally presented to the district court in response to Delta’s motion
to dismiss demonstrated an adequate prefiling investigation for purposes of Rule 11.”
Id. We held that “the only relief which Nasatka seeks on appeal, has no bearing on
Nasatka’s right to proceed with this litigation or any sanction, it can make no difference
to his legal interest.” Id.Just as in Nasatka, there is no effectual relief that we can grant to the Trustee in
this case. The district court entered the Stipulated Settlement, while this appeal was
pending and more than seven months prior to oral argument. In the Stipulated
Settlement, the district court vacated the Contempt Order—now on appeal—in full and
2008-1100 6
with prejudice. SDI argues that because of the Stipulated Settlement, this appeal must
be dismissed as moot. We agree.
According to the Trustee, the Contempt Order aggrieves him because it
“effectively enjoins the Trustee from administering assets of the Debtor’s Estate by
preventing the Trustee from collecting the Estate’s claims from those persons and
entities named in the injunction provisions of the [Contempt Order], including the [Joined
Defendants].” Appellant’s Br. 7. In other words, the Trustee believes that the Contempt
Order prevented him from completing his settlement with the Joined Defendants
because the Contempt Order enjoined Teknek Holdings from transferring the $4 million
to the bankruptcy estate. The Trustee also believes that the Contempt Order “appears
to have unduly influenced the [Northern District of Illinois], particularly with regard to” the
factual and procedural background of the California Action. Appellant’s Reply Br. 10.
The Trustee asks us to either vacate the already vacated Contempt Order, or to
modify the vacated Contempt Order to “exclude the Trustee from its injunctive
provisions” 2 and “delete all references to misrepresentations and fabrications of fact.”
As best as we can determine, the Trustee wants us to first vacate the Stipulated
Settlement, presumably reviving the now-vacated Contempt Order, and then revacate
the Contempt Order.
2
The parties dispute the scope of the Contempt Order. The order first lists
Teknek, LLC among the parties enjoined, but then appears to except Teknek, LLC in a
footnote. The footnote states that although the district court believes that it should issue
an injunction against the Trustee because of his attempts in bankruptcy court to
interfere with SDI’s recovery, the court nonetheless “recognizes the impropriety of
interfering with the bankruptcy court’s proceedings.” Contempt Order at 22 n.12. The
scope of the injunction arguably has some bearing on the question of standing, but is
not relevant to the issue of whether the appeal is moot, therefore, we do not address it.
2008-1100 7
By doing so, the Trustee believes that we would be granting them the relief of
vacating the Contempt Order for the correct reason. Oral Arg. 14:00-14:09, available at
http://oralarguments.cafc.uscourts.gov/mp3/2008-1100.mp3 (“[The Contempt Order]
wasn’t vacated because it was wrong; it wasn’t vacated because it was improper; it was
vacated because it fulfilled its purpose.”). By vacating the Contempt Order for the
correct reason, the Trustee argues, the Seventh Circuit will find the contents of the
Contempt Order less compelling. Oral Arg. at 7:45-7:57 (“Even though the [Contempt
Order] is vacated, [SDI is] using it in the Seventh Circuit—wholesale relying on it—to
convince the Seventh Circuit that [the NDI Decision] was correct.”). Thus, the Trustee
concludes, even though “the Seventh Circuit certainly will deal with the consequences
of the settlement, what we want to do your honor is prevent [the Contempt Order] from
being used against us.” Oral Arg. at 7:20-7:36.
The Trustee’s appeal is moot because none of the remedies he requests grants
him any effectual relief or makes any difference to his legal interest. The Contempt
Order—indeed the entire California Action—has been dismissed in full and with
prejudice. Whatever the injunctive effect of the Contempt Order might have been, that
question is moot because the Contempt Order has no effect now. If it ever presented a
barrier to negotiations between the Trustee and the Joined Defendants, it certainly does
not now that it stands vacated. Any modification or duplicative vacatur of the Contempt
Order can have no effect on the California Action. Thus, vacating the Contempt Order,
or modifying the Contempt Order’s injunctive effect provides no effectual relief to the
Trustee.
2008-1100 8
As did Nasatka, the Trustee here wishes us to opine on the merits of a district
court conclusion that no longer affects his legal interest. Nasatka asked us to hold that
certain evidence relied upon by the district court was sufficient to constitute an adequate
prefiling investigation—but such a determination would have had no impact on Nasatka.
In essence, Nasatka wanted us to vacate the district court’s determination for “the right
reason”—the Trustee’s argument is the same here. And as here, Nasatka argued that
such a holding would beneficially impact a tangentially related legal proceeding. The
Trustee’s argument must fail just as Nasatka’s did.
The vacatur or modification of the Contempt Order would not have any effect on
the Trustee’s legal interests with regard to the proceedings in the Seventh Circuit. We
will not revisit the factual determinations underlying the Contempt Order, which were
previously affirmed in this court. Sys. Div., Inc., 253 F. App’x 31. Even assuming that
there are “misrepresentations and fabrications of fact” in the Contempt Order, these
alleged errors are only relevant to the proceedings in the Seventh Circuit, and the
appropriate amount of weight given to factual findings recited in a vacated contempt
order is a question relevant to those proceedings and to be answered by the Seventh
Circuit.
Finally, the Trustee argues that we should couple our dismissal of his appeal with
an explicit vacatur of the Contempt Order in accordance with United States v.
Munsingwear, Inc., 340 U.S. 36 (1950). In relevant part, the Supreme Court in
Munsingwear noted that:
[t]he established practice of the Court in dealing with a civil case from a
court in the federal system which has become moot while on its way here
or pending our decision on the merits is to reverse or vacate the judgment
below and remand with a direction to dismiss. That was said in Duke
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Power Co. v. Greenwood County, 299 U.S. 259, 267, to be “the duty of
the appellate court.” That procedure clears the path for future relitigation
of the issues between the parties and eliminates a judgment, review of
which was prevented through happenstance. When that procedure is
followed, the rights of all parties are preserved; none is prejudiced by a
decision which in the statutory scheme was only preliminary.
Munsingwear, 340 U.S. at 41.
The Supreme Court emphasized that the Munsingwear decision does not create
an inflexible rule. Rather, “from the beginning we have disposed of moot cases in the
manner most consonant to justice in view of the nature and character of the conditions
which have caused the case to become moot.” U.S. Bancorp Mortgage Co. v. Bonner
Mall P’ship, 513 U.S. 18, 24 (1994). The Munsingwear vacatur is not appropriate here
because the Trustee does not suggest that it desires further relitigation in the California
Action. Nor does his suggested remedy eliminate a judgment in accordance with
Munsingwear because the Contempt Order has already been vacated. Nor are the
Trustee’s rights in any way prejudiced by the now-vacated Contempt Order, the alleged
effect of which is doubtful, and in any event is properly determined by the Seventh
Circuit. Accordingly, we hold that this appeal is moot and must be dismissed for lack of
jurisdiction.
II.
A. This Appeal is Frivolous
Rule 38 of the Federal Rules of Appellate Procedure provides that “[i]f a court of
appeals determines that an appeal is frivolous, it may, after a separately filed motion or
notice from the court and reasonable opportunity to respond, award just damages and
single or double costs to the appellee.” The Trustee’s appeal is frivolous because he
persisted even when the appeal became incontrovertibly moot upon the issuance of the
2008-1100 10
Stipulated Settlement. See Nasatka, 58 F.3d at 1582 (“By seeking to litigate to its
appellate conclusion an obviously moot issue, Nasatka has clearly argued a frivolous
appeal.” (citing Munson v. Antisdel, 982 F.2d 360, 361 (9th Cir. 1992) (dismissing
appeal as moot and sanctioning appellant’s attorney under Fed. R. App. P. 38))).
On February 20, 2008, SDI filed a motion to dismiss this appeal. On March 7,
2008, in reply to the Trustee’s opposition to the motion to dismiss, SDI noted the
Stipulated Settlement. The Trustee understood the importance of the Stipulated
Settlement, but opposed dismissal. In his motion for leave to file a supplemental
exhibit, the Trustee acknowledged the Stipulated Settlement and argued that it cannot
moot the appeal. By an order issued on April 1, 2008, we dismissed SDI’s motion and
advised it to make its arguments in its brief, pursuant to Federal Circuit Rule 27(f).
On September 24, 2008, two weeks prior to oral argument, we advised the
parties to be prepared to discuss whether the appeal is frivolous due to lack of
jurisdiction. At that point, the Trustee should have reconsidered his arguments,
especially in light of our established practices:
WARNING AGAINST FILING OR PROCEEDING WITH A FRIVOLOUS
APPEAL OR PETITION. The court’s early decision in Asberry v. United
States, 692 F.2d 1378 (Fed. Cir. 1982), established the policy of enforcing
[Rule 38] vigorously. Since then, many precedential opinions have
included sanctions under the rule. Damages, double costs, and attorney
fees, singly or in varying combinations, have been imposed on counsel,
parties, and pro se petitioners for pursuing frivolous appeals.
Federal Circuit Practice Note to Fed. R. App. P. 38. Nonetheless, at oral argument,
counsel for the Trustee offered no new arguments and was unfamiliar with our
precedent on frivolousness, including the obviously relevant Nasatka. Such a careless
response to our notification pursuant to Rule 38 further militates toward our holding of
2008-1100 11
frivolousness because “a party whose case has been challenged as frivolous is
expected to respond or to request dismissal of the case.” Federal Circuit Practice Note
to Fed. R. App. P. 38; see Abbs v. Principi, 237 F.3d 1342, 1351 (Fed. Cir. 2001)
(“Appellants likewise failed at oral argument to show cause why sanctions should not be
imposed. Even worse, appellants simply reiterated the baseless arguments made in
their briefs.”).
B. Sanctions Are Warranted
The Trustee failed to articulate any reasonable basis for the appeal other than
the hope of a contingency fee recovery. We thus order that sanctions be imposed on
the Trustee and on his attorneys, jointly and severally. To this end, we award for the
maintenance of so frivolous an appeal the payment—by the Trustee and his attorneys
personally to SDI—of the reasonable costs and attorneys’ fees incurred in defending
this appeal before this court after February 29, 2008, the date the California district
court entered the Stipulated Settlement and vacated the Contempt Order. We impose
these sanctions bearing in mind the rationale articulated in Finch v. Hughes Aircraft Co.:
Appellate courts must consider the importance of conserving scarce
judicial resources. A frivolous appeal imposes costs not only upon the
party forced to defend it, but also upon the public whose taxes supporting
this court and its staff are wasted on frivolous appeals. . . . The diversion
of resources in our considering a frivolous appeal, on the possibility that a
nonfrivolous contention might have been found lurking, delays access to
the court by deserving litigants. . . . Sanctions under Rule 38 thus perform
two vital functions: They compensate the prevailing party for the expense
of having to defend a wholly meritless appeal, and by deterring frivolity,
they preserve the appellate calendar for cases truly worthy of
consideration.
2008-1100 12
926 F.2d 1574, 1578 (Fed. Cir. 1991) (citations omitted). The Trustee has dragged SDI
through this appeal at great expense to both SDI and the judicial system with no
prospect of a benefit to his legal interest; we must deter such behavior.
CONCLUSION
Because we conclude that there is no effectual relief that we can grant to the
Trustee, we dismiss this appeal as moot. Because the Trustee’s appeal to this court is
frivolous, we impose sanctions and order the Trustee and his attorneys, jointly and
severally, to pay SDI’s attorney fees and costs expended due to this appeal after
February 29, 2008.
DISMISSED—SANCTIONS IMPOSED
COSTS
Costs to be paid by the Trustee and his attorneys.
2008-1100 13