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Copyright Infringement Suit Subject To Barton, Referred to Bankruptcy Court

Friday, December 21, 2012
Jackson v. Olam West Coast Inc., E.D. Cal., No. 1:12-cv-00791 (LJO), 10/12/12

  • Key Holding: Plaintiff should have sought leave of bankruptcy court to pursue claims against trustee; case referred to bankruptcy court.

  • Key Takeaway: Claims arose out of trustee's sale of debtor's intellectual property assets, better suited for bankruptcy court.


By Stephanie M. Acree

An action for copyright infringement and other related claims was dismissed for lack of subject matter jurisdiction and referred to the bankruptcy court Oct. 11 by the U.S. District Court for the Eastern District of California (Jackson v. Olam West Coast Inc., E.D. Cal., No. 1:12-cv-00791 (LJO), 10/12/12).

Judge Lawrence J. O'Neill found that the plaintiff's claims arose in the context of a defendant's bankruptcy and therefore the bankruptcy court was better suited to address the action.

 

Software Systems and Licenses
SK Foods LP was a processor and packager of consumer foods. Thomas A. Jackson owned, designed, licensed, and supported copyrighted software systems for tomato processors. On two occasions prior to 2009, Jackson installed and licensed software systems to SK Foods.

In May 2009, SK Foods filed for Chapter 11 protection in California and a trustee was appointed and assumed control of the company. After the trustee had been appointed but before bankruptcy schedules had been filed, Jackson provided SK Foods with proposals to install new software at various SK Foods facilities.

On June 5, 2009, SK Foods filed bankruptcy schedules but did not list Jackson as a creditor, nor did it list the software systems and licenses as assets. On June 26, 2009, the bankruptcy court approved the trustee's motion to sell substantially all of SK Foods's assets to Olam West Coast Inc. and Olam Tomato Processors Inc. (collectively “Olam”).

 

Sale of Intellectual Property
The purchase agreement between SK Foods and Olam included intellectual property, defined as SK Foods's “right, title and interests to any inventions … trade secrets, information technology systems … and all other proprietary information and intellectual property related to the [p]urchased [a]ssets.” The purchase agreement also defined “accounting systems” to include the “Legacy System used by [SK Foods] to carry on the tomato processing business.”

Shortly after the sale order had been entered, SK Foods instructed Jackson to install the new software. According to Jackson, the “Legacy System” referred to in the purchase agreement included the new software he installed after SK Foods had filed for bankruptcy protection.

 

No Notice of Bar Date
A bar date of Feb. 15, 2010 was set by the bankruptcy court, with the order stating, “Only those parties the Chapter 11 [t]rustee serves with this [n]otice shall be bound by the deadline contained herein.” Jackson, who had not been listed as a creditor in the schedules, was not served with the bar date notice and filed no claim against SK Foods related to the transfer of the software systems to Olam.

On May 14, 2012, Jackson filed a suit in the district court for copyright infringement and related claims. He argued that SK Foods did not have the right to transfer title of the pre-petition software systems to Olam. He also argued that he completed the installation of the new software with the understanding that a license agreement would be negotiated with Olam after closing.

The trustee for SK Foods moved to dismiss the suit due to lack of subject matter jurisdiction because Jackson had failed to seek leave of the bankruptcy court before bringing the action. Olam joined in the motion to dismiss.

 

Proceeding Against the Trustee
Although Jackson's suit named SK Foods as a defendant, the defendants argued and the district court agreed that the suit was “essentially proceeding against [the bankruptcy trustee] in place of SK Foods.” The defendants argued that Jackson was required to seek leave of the bankruptcy court pursuant to the Bartondoctrine, which states that a party must seek leave of the bankruptcy court before initiating an action in another forum against a bankruptcy trustee.

Jackson argued that his claims were against “SK Foods for its post-petition conduct, not against the Chapter 11 [t]rustee for acts in furtherance of his official duties.” The defendants argued that the trustee was acting within the scope of his duties when he sold SK Foods's assets to Olam, and that Jackson's claims arose out of this transaction.

The district court agreed with the defendants that the “transaction giving rise to the complaint's claims was the transfer of the Jackson software systems to Olam which arose during [the trustee's] liquidation and administration of SK Foods's bankruptcy estate.” Therefore, the court found that Jackson's claims were subject to the Barton doctrine and that Jackson should have first sought leave of the bankruptcy court.

 

'Questionable Conduct'
The defendants also argued, in the alternative, that Jackson's claims should be barred because he failed to file a timely claim in SK Foods's bankruptcy and therefore the defendants were entitled to a judgement on the pleadings. The defendants argued that even though Jackson had not been given formal notice of the bar date, a creditor omitted from the list of creditor's must “take steps to ensure receipt of notice of bar dates.” However, the court was not persuaded by this argument.

“Holding Mr. Jackson to the bar date would serve only to promote SK Foods's questionable conduct in failing to disclose the Jackson software system,” the court said. “Defendant's point to no relevant authority that Mr. Jackson's limited, unconfirmed knowledge subjects him to the bar date to preclude his claim arising from events near the time of and after the sale of SK Foods's assets to Olam.”

Finding there was no “legal or factual support” for holding Jackson to the bar date, the court did not grants the defendants a judgment on the pleadings.

 

No Meaningful Opposition
Also in the alternative, the defendants argued the case should be referred to the bankruptcy court because Jackson's claims constituted a “core proceeding subject to bankruptcy court jurisdiction. A matter is considered “core” pursuant to Section 157(b)(1) of the Bankruptcy Code if it arises in or arises under a bankruptcy case.

The defendant's argued that Jackson's claims arose out of the bankruptcy court's approval of the sale to Olam and that the action's outcome will have a “conceivable effect” on the bankruptcy estate . The court said that Jackson “raise[d] no meaningful opposition to bankruptcy referral.”

“At a minimum, the complaint's claims arise in the context of SK Foods's bankruptcy to warrant referral to the bankruptcy court,” the court said. Accordingly, the court dismissed Jackson's complaint without prejudice and referred the action to the bankruptcy court.

By Stephanie M. Acree

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