United States District Court, E.D. New York
RICHARD HIRSCH, Assignee of Certain Claims of the Bankruptcy Estate of Franklin Industries, LLC, Plaintiff,
QINGDAO ORIEN COMMERCIAL EQUIPMENT CO., LTD., f/k/a AUCMA, JOHN DORAN, MICHAEL WITTHOFT, FIVE STAR ENTERPRISES LIMITED, and ORIEN USA, LLC, Defendants.
MEMORANDUM AND ORDER
ROSLYNN R. MAUSKOPF, District Judge.
On February 28, 2012, Richard Hirsch ("Hirsch") filed this complaint sounding in breach of contract, breach of warranty, and theft of proprietary information. (Compl. (Doc. No. 1).) This case concerns Franklin Industries, LLC ("Franklin"), a seller of refrigeration equipment and non-party that entered bankruptcy in 2009. In 2011, Franklin's Chapter 7 trustee ostensibly assigned to Hirsh certain causes of action upon which basis Hirsch brought this lawsuit.
Before the Court are the motions of defendant Qingdao Orien Commercial Equipment Co, Ltd. ("Qingdao"),  (Doc. No. 40), as well as of defendants Orien USA, LLC ("Orien") and John Doran ("Doran") ("the Doran defendants"), (Doc. No. 37), to dismiss the complaint pursuant to, inter alia, Federal Rule of Civil Procedure ("Rule") 12(b)(1). In these dismissal motions, the Court is tasked with assessing the written assignment instrument, and thus deciding whether Hirsch has standing to sue Qingdao and the Doran defendants.
As set forth below, the Court concludes that the assignment did not transfer to Hirsch the claims against the parties upon which he now sues, and that Hirsch therefore lacks standing. Accordingly, the Qingdao and Doran defendants' motions are granted and the complaint is dismissed against them. Furthermore, for the reasons stated herein, all claims against the two remaining (non-appearing) defendants, Michael Witthoft and Five Star Enterprises Limited, are also dismissed.
I. Hirsch's Allegations
Franklin was an American corporation that designed, manufactured, and sold cooling units. Hirsch was its principal. Franklin employed Doran, its Vice President of Sales and Marketing, from 1999 to 2009. Five Star Enterprises Limited ("Five Star") is a Hong Kong company that Franklin hired to perform quality control at the Chinese factories that manufactured Franklin's products. Michael Witthoft ("Witthoft") was Managing Director of Five Star. (Doc. No. 1 at 2-6.)
In 2009, Doran and Witthoft partnered to form Orien, an American company incorporated in Virginia, which competed with Franklin in the cooling-unit industry. (Id. at 6.) Hirsch claims in his complaint that Doran, Witthoft, Orien, and Five Star ("the competing defendants") misappropriated Franklin's manufacturing specifications, owners' manuals, service manuals, and supplier lists, ( id. at 7-12), and should be held liable for misappropriation of confidential and propriety information and property, ( id. at 15-16), unjust enrichment, ( id. at 16-17), and unfair competition ( id. at 17).
Qingdao is a Chinese company that manufactures cooling units. In 2006, Qingdao contracted with Franklin to produce cooling units for Franklin to market and sell in the United States. This relationship lasted from 2006 to 2009, with the "majority" of those units allegedly proving to be defective and requiring substantial repairs. (Id. at 4, 12.) Qingdao failed to replace those units or to reimburse Franklin for the repairs, and Hirsch claims in his complaint that Qingdao is therefore liable for breach of contract, breach of express warranty, and breach of implied warranty of merchantability. (Id. at 12-15.)
II. The Bankruptcy Proceedings and the First Assignment
On September 11, 2009, Hirsch, on behalf of Franklin, filed a voluntary Chapter 11 bankruptcy petition. On October 8, 2009, the case was converted to a bankruptcy under Chapter 7, and the Bankruptcy Court appointed Debra Kramer as trustee for the bankruptcy debtor's estate ("the Trustee"). (Id. at 2-3.) By stipulation signed by attorneys for Hirsch and the Trustee, dated July 12, 2011, the Trustee agreed to assign certain claims from the debtor's estate to Hirsch.
At the outset, the assignment instrument broadly defines "Causes of Action" to include, inter alia, actions, causes of action, and claims. The instrument then further defined two different "claims" against two Chinese companies that were being assigned to Hirsch. Those claims were against Henan Xinfei Electronics, Ltd., and Quingdao Orien Commercial Equipment Co., Ltd., along with each company's "affiliates, successors, predecessors, and assigns." The assignment identified those claims as the "Henan Claim" and the "Quingdao Claim, " and collectively as the "Claims."
The Henan Claim referred to a "Cause of Action for alleged damages in the estimated amount of $1.5 million, against Henan Sinfei Electronics, Ltd.... and any of its affiliates, successors, predecessors and assigns, including Henan's parent company, Hong Leong Asia Ltd., a Singapore entity... resulting from defective products allegedly produced by Henan and purchased by the Debtor prepetition (the Henan Claim')." (First Stip. (Doc. No. 38-1) at 34 (ECF pagination).) The Quingdao Claim referred to:
A Cause of Action for alleged damages against Quingdao Orien Commercial Equipment Co., Ltd., formerly known as Aucma, a company incorporated under the laws of the People's Republic of China, and any of its affiliates, successors, predecessors or assigns (collectively, "Quingdao"), relating to product liability issues as well as claims relating to the alleged theft of the Debtor's proprietary information, such as customer lists, product literature, care and use manuals, solicitation of former employees and direct sales to the Debtor's customers (the "Quingdao Claim" and together with the Henan Claim, the "Claims").
(Id. at 34-35.) (bold in original)
The stipulation stated that the Trustee, in the exercise of her business judgment, determined that the bankruptcy estate would have to spend significant funds to pursue the Claims without any guarantee of success, and that Hirsch had expressed an interest in "purchasing and pursuing the Claims." (Id. at 35.) Consequently, the Trustee, "by and through her counsel, " had "negotiated" the transfer of the Claims in exchange for "good and valuable consideration." Per the stipulation, the Trustee "absolutely and unconditionally sells, transfers and assigns to Hirsch... as of the date this Stipulation is approved by the [Bankruptcy] Court, all of the Trustee's right, title and interest in and to the Claims against Henan and Quingdao." (Id. ) The stipulation further enumerated percentages of any recovery that the Trustee would receive from Hirsch as consideration for the assignment - namely, twenty percent for the Henan Claim and ten percent for the Qingdao Claim. (Id. at 36.)
The stipulation also contained an "integration" or "merger" clause. The parties agreed that the document "constitute[d] the[ir] entire agreement... with respect to the transaction contemplated herein, and supersede[d] all previous and contemporaneous negotiations, promises, covenants, agreements, understandings, representations and warranties in respect thereof, all of which have become merged and finally integrated into this Stipulation." (Id. at 38.) The parties further agreed that their rights thereunder would be "governed by and interpreted and determined in accordance with the laws of the State of New York." (Id. )
In a motion to the Bankruptcy Court dated August 19, 2011 (styled a motion seeking approval of a stipulation "regarding the assignment of the estate's claim against certain foreign entities"), the Trustee sought approval of the assignment as against Henan and Qingdao. (First Mot. to Approve Stip. (Doc. No. 38-1) at 41 (ECF pagination).) That motion mirrored the stipulation in all material respects, although the Trustee additionally noted that the stipulation was the result of an "arms' length negotiations" between attorneys for the Trustee and Hirsch. (Id. at 43.) And, in explaining why the assignment was in the Trustee's sound business judgment, the Trustee stated that the effort of the debtor's estate to pursue the claims would be an "expensive and potentially lengthy endeavor given the nature of the Claims and the fact that Henan and Quingdao are foreign entities based in China and Singapore." (Id. at 46.)
On September 22, 2011, the Trustee and Hirsch appeared through counsel before the Bankruptcy Judge, the Honorable Jerome Feller. The Trustee advised Judge Feller that the parties were seeking approval of a stipulation "with respect to the assignment of two claims that the estate has against two Chinese entities." (9/22/01 Minutes (Doc. No. 38-2) at 5 (ECF pagination).) The Trustee noted that those two claims "stem[med]" from "alleged product defaults with respect to the debtor's business, " that no lawsuits had been commenced against either company, and that Hirsch was in the process of obtaining documents and reviewing claims. (Id. at 6-8.) The Bankruptcy Court concluded that it was a reasonable business judgment for the Trustee to assign the Claims, thereby authorizing the Trustee to transfer "these two claims" pursuant to the terms of the stipulation. (Id. at 8.)
One week later, on September 27, 2011, Judge Feller issued a one-page order approving the stipulation assigning the claims against Henan, Qingdao, and any of their affiliates, successors, predecessors, and assigns. The order expressly encompassed the "record" of the "hearing" on September 22nd, and provided that, pursuant to Bankruptcy Code § 363(b)(1), the Trustee was authorized to sell, transfer, and assign "the Claims against Henan and Quingdao to Hirsch or his designee or ...