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In re Fiori

United States District Court, Third Circuit

September 30, 2013

IN RE DAVID FIORI, JR. DAVID FIORI, JR., Appellant,
v.
BONNIE B. FINKEL and PRECISION INTERFACE ELECTRONICS, INC., Appellees. Bankruptcy No. 09-10960

MEMORANDUM

Juan R. Sánchez, J.

Debtor-Appellant David Fiori, Jr., appeals from a June 6, 2012, Bankruptcy Court Order (the Sale Order) which authorized the trustee of Fiori’s Chapter 7 bankruptcy estate (Chapter 7 Trustee) to sell Fiori’s interest in certain intellectual property assets to Appellee Precision Interface Electronics, Inc. (PIE) free and clear of all liens, claims, interests, and encumbrances pursuant to 11 U.S.C. § 363. Fiori also appeals from the Bankruptcy Court’s July 3, 2012, Order denying reconsideration of the June 6 Sale Order. PIE has filed a motion to dismiss Fiori’s appeal as statutorily moot pursuant to 11 U.S.C. § 363(m). For the reasons set forth below, PIE’s motion to dismiss will be granted.

FACTS

PIE is a private company that manufactures and distributes consumer electronic equipment for use in automobiles. Beginning in 1997, PIE contracted with Fiori, an electrical engineer, through his sole proprietorship, Integrated Electronic Technologies, Inc., to provide research and development in support of PIE’s products in exchange for royalties and other payments. Over time, the business relationship between Fiori and PIE soured, and in 2008, Fiori commenced arbitration proceedings against PIE, asserting claims arising out of PIE’s alleged breach of the parties’ agreement, including a claim for patent infringement. PIE asserted several counterclaims against Fiori in the arbitration. On February 2, 2009, the arbitrator issued a $614, 276.50 award in favor of PIE.[1]

Less than two weeks later, on February 12, 2009, Fiori filed a Chapter 11 bankruptcy petition. In March 2009, Fiori filed a schedule of his personal property in support of his bankruptcy petition, which he amended the following month. In the portion of the schedule pertaining to intellectual property, Fiori listed seven patents, two patent applications, and two copyright infringement items, indicating the current value of these items as either “Unknown” or “0.00.” Supplemental R., Tab 6. He did not schedule certain other intellectual property he owned. In January 2010, Fiori’s bankruptcy was converted to a Chapter 7 case. Following the conversion, in March and May 2010, a meeting of creditors pursuant to 11 U.S.C. § 341 (341 meeting) was held in the Chapter 7 case, at which Fiori testified, consistent with the information in his schedule, that his intellectual property had either no value or unknown value.[2]

PIE is a creditor of Fiori’s bankruptcy estate as a result of the arbitration award. In May 2010, PIE filed an adversary action against Fiori in the Bankruptcy Court, seeking a determination that Fiori’s debt to PIE was non-dischargeable because it was “for money . . . obtained by . . . false pretenses, a false representation, or actual fraud, ” or “for willful and malicious injury by the debtor to another entity.” 11 U.S.C. § 523(a)(2)(A), (a)(6).

PIE and Fiori settled the adversary action on the eve of trial. On July 18, 2011, the day before the trial was scheduled to begin, PIE advised the Bankruptcy Court the parties had reached a settlement in principle and requested a continuance of the trial pending completion of the settlement. The following day, the parties appeared before the Bankruptcy Court and confirmed they had agreed to settle the adversary action based on a payment to PIE from a third party and Fiori’s transfer to PIE of certain intellectual property rights, i.e., his rights in intellectual property his bankruptcy estate might abandon to him at some later date. R., Tab 48 at 4-5. PIE also represented it was in discussions with the Chapter 7 Trustee to resolve PIE’s claim against the estate pursuant to an arrangement whereby PIE would acquire certain of Fiori’s intellectual property owned by the estate in exchange for a payment from PIE. Id. at 5-6. After the hearing, the Bankruptcy Court marked the matter as settled, with a stipulation to be filed within 30 days.

On August 9, 2011, Fiori and PIE executed a “Full and Final Mutual Release and Settlement Agreement” (Settlement Agreement), the proper interpretation of which is at the heart of Fiori’s appeal. Under the terms of the Settlement Agreement, the parties released all claims against each other with the sole exception of PIE’s claim against Fiori’s bankruptcy estate for the transfer of intellectual property from the estate to PIE. In consideration for the mutual release, (1) PIE agreed to dismiss the adversary action with prejudice, (2) Fiori agreed to “ensure payment to PIE for the sum of $100, 000, ” upon dismissal of the adversary action, and (3) Fiori also agreed, upon dismissal of the adversary action,

[to] assign[], transfer[], quitclaim[], and convey to PIE all of Fiori’s intellectual property rights, if any, including but not limited to all copyright interests and all patent licensing rights, to the software, processes, methodologies, circuitry and designs used in all of the products joint developed pursuant to the agreement and its amendments. Substantially all of those products are listed in Schedule A (“the Products”) subject however to the approval and or consent of the bankruptcy court and or the trustee in the bankruptcy as may be required (“Bankruptcy Court Approval”).

R., Tab 46. The parties further agreed

It shall be PIE’s responsibility to obtain such Bankruptcy Court Approval and Fiori shall cooperate to the extent requested by PIE to obtain such Bankruptcy Court Approval but the failure to obtain such Bankruptcy Court Approval shall not in any way effect the validity of the release set forth in paragraph 2 above or the dismissal of the Adversarial Litigation contemplated herein.

Id. The parties submitted the Settlement Agreement to the Bankruptcy Court as part of a stipulation and order dismissing the adversary action on August 18, 2011, and the Bankruptcy Court approved the stipulation on August 23, 2011. R., Tab 47.

Two months later, on October 26, 2011, PIE and the Chapter 7 Trustee entered into an “Asset Purchase and Sale Agreement” (Sale Agreement), in which PIE agreed to purchase “all right, title and interest” in certain intellectual property rights of Fiori’s bankruptcy estate for a payment of $7, 500 and the release of its claim in the bankruptcy.[3] Specifically, PIE agreed to purchase “all right, title and interest” in “[a]ll intellectual property rights of the Debtor’s estate whether scheduled or unscheduled, including but not limited to” four categories of intellectual property rights (the IP Assets): (a) “copyright interests and all patent licensing rights to the software, processes, methodologies, circuitry and designs used in all of the products jointly developed by Debtor and PIE pursuant to their agreement, as amended, related to the products identified in Schedule 1”; (b) the two copyright infringement items listed in Fiori’s schedule of personal property; (c) the seven patents and two patent applications listed in Fiori’s schedule of personal property; and (d) three unscheduled copyrighted works authored by Fiori. See R., Tab 12 at 3-4. The Sale Agreement also provided the Chapter 7 Trustee would seek the Bankruptcy Court’s approval of the sale.

On May 7, 2012, the Chapter 7 Trustee filed the contemplated motion for an order approving the sale and sent notice of the motion to all interested parties, including Fiori, advising them of the May 25, 2012, deadline for filing objections to the motion and the June 6, 2012, hearing thereon. On May 24, 2012, Fiori filed a written objection to the motion, alleging (1) he believed he had an agreement with the Trustee concerning the disposition of the assets to which the motion pertained; (2) PIE’s release of its claim against the bankruptcy estate had no value to the estate, since PIE had already released its claims in its settlement of the adversary action; and (3) to the extent his prior agreement with the Trustee was not enforced, he intended to make a higher bid for the assets.[4] The objection did not disclose the amount Fiori was willing to bid.

The Bankruptcy Court held a hearing on the Trustee’s motion on June 6, 2012, at which the Trustee, Fiori, and PIE all appeared by counsel.[5] During the course of the hearing, the Trustee described how the Sale Agreement had evolved: Following the 341 meeting, at which Fiori testified his scheduled intellectual property had no value, the Trustee received no expressions of interest in any of the intellectual property until PIE’s counsel contacted her about acquiring the IP Assets. PIE initially proposed to acquire the Assets for a lesser amount on the theory that since Fiori had said the Assets were worth nothing, the Trustee would likely end up abandoning them. Hr’g Tr. 46, June 6, 2012. The ...


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