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In re Men's Sportswear Inc.

decided: November 27, 1987.

IN RE: MEN'S SPORTSWEAR, INC., F/K/A CLAUDE CLEMENT, LTD., DEBTOR; MEN'S SPORTSWEAR, INC., PLAINTIFF-APPELLEE, SASSON JEANS, INC., DEFENDANT-APPELLANT


Appeal from an order of the United States District Court for the Southern District of New York, affirming entry of a default judgment by the bankruptcy court against appellant. Affirmed, but remanded to modify the award of damages in part.

Pratt and Mahoney, Circuit Judges, and Bright, Senior Circuit Judge, United States Court of Appeals for the Eighth Circuit, sitting by designation.

Author: Bright

BRIGHT, Senior Circuit Judge:

Appellant Sasson Jeans, Inc. (Sasson) appeals a $1. 1 million default judgment awarded against it by the bankruptcy court and affirmed by the district court. For reversal, Sasson contends the following: (1) Men's Sportswear, Inc. (Sportswear) brought a "non-core" proceeding, requiring the district court to review de novo the bankruptcy court's findings; (2) the default judgment should have been vacated by the bankruptcy court; and (3) the bankruptcy court's computation of the damage award was clearly erroneous. We affirm the judgment of the district court but remand to that court on one aspect of the damage award.

I. BACKGROUND

In August of 1980, Sasson and Sportswear entered into several licensing agreement by which Sportswear was given the right to manufacture and sell men's garments bearing the "Sasson" trademark and logo (hereinafter referred to as Licensed Products). The agreements required Sportswear to pay Sasson a three percent royalty based on net sales of the Licensed Products, which royalties Sasson was required to use for the sole purpose of advertising the Licensed Products. Further, Sasson was required to obtain Sportswear's approval for all advertising paid for by Sportswear's three percent royalty payments.

In 1982, Sportswear filed a breach of contract action in the Supreme Court of New York, alleging that Sasson had breached its obligations under the licensing agreement. Sasson postponed answering the complaint through October 14, 1983, at which point Sportswear filed a Chapter 11 petition with the bankruptcy court. The contract action progressed no further, for Sasson challenged Sportswear's attempt to assume the license agreements as executory contracts under the Bankruptcy Code, and this "license assumption" litigation occupied the parties for the next three years.

The "license assumption" war was fiercely fought. Battles raged over Sasson's reluctance to produce documents, inability to adhere to deposition schedules, and general failure to proceed with the case. Sasson employed several different law firms in succession throughout this litigation. The changing of Sasson's guards frequently occurred just as the case was beginning to progress toward trial, usually accompanied by a request for adjournment. Sportswear ultimately prevailed in the "assumption" proceedings in May of 1986. Bankruptcy Judge Lifland authorized the assumption and imposed a $1500 sanction against Sasson for its misconduct throughout the litigation.

Tow weeks after the conclusion of the assumption proceedings, Sportswear moved for leave to file an additional claim in the breach of contract action. The complaint alleged that Sasson breached its obligations under the license agreements as refined by the 1985-1986 advertising plan devised by both parties.

The promotional plan for the 1984-1985 advertising year (July 1, 1984 -- June 30, 1985) provided that forty percent of the royalty payments Sportswear made to Sasson would be used by Sasson to fund its own promotional campaign featuring a television commercial by Elton John. The remaining sixty percent would be used by Sportswear subject to content approval by Sasson for those cooperative advertising expenditures Sportswear incurred directly. The parties intended the 1985-1986 advertising program, featuring a commercial made by rock star Simon Le Bon, to be substantially similar to the 1984-1985 program, incorporating the same sixty/forty percent split. The Le Bon commercial, however, was never aired, and Sportswear was not reimbursed for any of its cooperative advertising expenses. Sasson's failure to broadcast the Le Bon commercial or reimburse Sportswear for its expenses formed the basis of the claims Sportswear sought, in the spring of 1986, to add to its original 1982 contract action.

Sasson served no papers opposing Sportswear's motion to amend. Instead, at a June 11 hearing, the firm of David Breitbart (one of the many firms Sasson had retained in the license assumption litigation) sought adjournment of the motion on the grounds that it had believed another firm would represent Sasson in this revived action. Bankruptcy Judge Lifland denied Sasson's adjournment request, and entered an order granting Sportswear leave to amend and directing Sasson to respond to the amended complaint within ten days of service. The pleading deadline passed without a response by Sasson. Nearly two weeks later, Sasson filed an Order to Show Cause seeking an extension on the ground that it was in the process of finding new counsel. Sportswear filed its own Order to Show Cause for default judgment and contempt sanctions. At a hearing on both Orders, the bankruptcy court found the reason Sasson tendered for its delay in filing an answer insufficient and entered a default judgment in favor of Sportswear on the issue of liability.

Following a hearing on August 14, at which both Sportswear and Sasson fully tried the damage issues, the bankruptcy judge awarded Sportswear $888,707.05 in lost profits caused by Sasson's failure to advertise in the spring of 1986. The judge also ordered Sasson to pay Sportswear an additional sum of $209,195.30 for damages caused by Sasson's failure to reimburse Sportswear for its cooperative advertising expenses pursuant to both the license agreements and the 1985-1986 advertising plan.

On appeal, the district court held that the bankruptcy judge's order was not "clearly erroneous" and thus affirmed the entry of default ...


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