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In re Louis Frey Co.

March 26, 2007


Chapter 7

Case No. 03-15297 (SMB)

Adv. P. No. 04-3365 (SMB)


I. Background

On or about September 20, 2006, American Reprographics Company, LLC ("ARC") and BP Independent Reprographics ("BPI") (together, "Appellants") appealed, pursuant to 28 U.S.C. § 158(a) and Rule 8001 of the Federal Rules of Bankruptcy Procedure ("Fed. R. Bankr. Pro."), from a Judgment, dated August 16, 2006 ("Judgment"), entered by the Honorable Stuart M. Bernstein, Chief United States Bankruptcy Judge, Southern District of New York ("Bankruptcy Court"), awarding Yann Geron ("Geron" or "Trustee" or "Appellee"), as Trustee of the Estate of Louis Frey Company, Inc. ("Frey" or "Debtor"), $9,061,793.00 in compensatory damages, $2 million in punitive damages, and interest in the amount of $2,377,417.20 following a six day bench trial which had commenced on April 3, 2006. The Bankruptcy Court found that ARC and BPI had "misappropriated the Debtor's confidential customer information, improperly diverted the Debtor's business and destroyed the Debtor's ability to operate."*fn1 (Post-Trial Findings of Fact and Conclusions of Law, dated July 28, 2006 ("FFCL"), at 3.) The Bankruptcy Court also awarded the Trustee interest in the amount of $2,377,417.20 and $2 million in punitive damages. (See Judgment at 2.)

Before filing for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 1101 et seq., on August 22, 2003, Frey was a New York corporation engaged "in the business of creating specialized commercial blueprint reproductions for architects, engineers and contractors." (Joint Pre-Trial Order, dated December 13, 2005 ("JPTO") at 13.)*fn2 ARC is a Delaware corporation which "is a leading provider of reprographic services in the United States and . . . in Canada." (JPTO at 8.) ARC's subsidiary, BPI, "provide[s] reprographics services in the greater New York metropolitan area" and "was a direct competitor of [Frey]." (JPTO at 8.)

On March 24, 2003, Frey and ARC executed a "non-binding letter of intent," dated March 19, 2003, which "set forth ARC's . . . offer to purchase [the Debtor's] business for . . . up to $9.5 million." (JPTO at 9.) The proposed sale never occurred because due diligence revealed, among other things, that "[t]he Debtor was insolvent and in serious financial difficulty." (JPTO at 10.) Instead, Frey and ARC entered into a Management Agreement, dated May 15, 2003 ("Management Agreement"), pursuant to which "ARC had the authority to use its sole discretion in making the Debtor's business decisions." (JPTO at 10.) The Management Agreement "required ARC to operate Debtor's business in a reasonable manner and in the best interests of the Debtor" and provided that "during the term of the agreement, ARC and its affiliates would not use confidential information about Debtor's business or customers obtained by reason of ARC's retention as manager." (JPTO at 11.) Despite ARC's efforts as manager, Frey's "business and . . . financial condition continued to decline." (JPTO at 11.)

By letter dated September 12, 2003 ("Termination Letter"), "ARC purported to terminate its management of the Debtor." (JPTO at 12; see also Appendix to Brief of Appellants/Defendants, dated October 20, 2006 ("Appellants' App."), Exhibit ("Ex.") 13 ("we hereby notify you that ARC has terminated the Management Agreement as of today's date").)*fn3 Despite having sent the Termination Letter, "ARC continued to act as Debtor's manager until September 26, 2003 (the "Shutdown Date"), when "agents of ARC informed the Debtor's employees . . . that ARC would no longer be managing the Debtor's business." (JPTO at 12.) Frey was unable to operate without a manager, and on the Shutdown Date "certain former Louis Frey employees were offered employment with BPI starting the following Monday, September 29, 2003." (JPTO at 13.) Fifteen (former) Frey customers became customers of BPI. (JPTO at 14.)

The Bankruptcy Court concluded, among other things, that ARC and BPI were liable for breaching the Management Agreement by failing to send the Termination Letter to Debtor's counsel (see FFCL at 30 ("the Management Agreement provided that notices had to be sent to the Debtor and to Debtor's counsel . . . but I find from the evidence that ARC never sent a copy to the Debtor's counsel")); for misappropriating the Debtor's trade secrets (see FFCL at 47 ("the Debtor's customer and pricing information were not well known, and were not ascertainable absent access to the Debtor's business records . . . [and Appellants'] use of that information constituted a misappropriation of the Debtor's trade secrets")); and for breaching their fiduciary duties to Frey (see FFCL at 51 ("the recitation of their breaches forms a remarkable catalogue of wrongdoing")).

The Bankruptcy Court's award of damages was based upon the Appellants' liability for breach of fiduciary duty, and no additional damages were awarded for the other causes of action for which liability was found, i.e., breach of contract, misappropriation of trade secrets, and unjust enrichment. (See FFCL at 46, 47, 51.)

On appeal, ARC and BPI argue, among other things, that: (1) "[t]he Bankruptcy Court's finding that ARC breached the Management Agreement . . . is clearly erroneous and directly disproved by the record"; (2) "the Bankruptcy Court erred in holding that the Frey information allegedly misappropriated by ARC were trade secrets"; (3) the "conclusion that ARC breached its [fiduciary] duties to Frey and somehow caused the demise of Frey is untenable in light of the undisputed evidence"; (4) "[e]ven assuming . . . that the Trustee had established tortious conduct by ARC, that would not be sufficient to establish liability [because] . . . [t]he Trustee was also required to prove causation as an element of its claims"; (5) the Bankruptcy Court applied "an improper measure of damages"; and (6) "the Bankruptcy Court erred in awarding punitive damages." (See Brief of Appellants/Defendants From the Judgment of the Bankruptcy Court, dated October 20, 2006 ("Appellants' Brief").)

The Trustee counters that: (1) the finding that the Termination Letter was never sent to Frey's counsel, in violation of the Management Agreement, "is amply supported by the record"; (2) "[o]n the evidence in the record, the bankruptcy court undoubtedly got the trade secret finding correct"; (3) "[t]here is ample evidence in the record to support the bankruptcy court in finding that ARC had breached its fiduciary duty"; (4) "requisite causation is clearly present"; (5) "[t]here is no improper conjecture or guess imbedded in the expert calculations [of damages]"; and (6) the "award of punitive damages for ARC's breach of fiduciary duty was not legal error." (See Appellee's Brief.)

The parties have waived oral argument.

For the reasons set forth below, the Bankruptcy Court's ...

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