Intervenor Complaint, contending that the Assignment Agreement they agreed to purchase from
the trustee before the default judgment was entered gives them the legal right to sell goods
bearing the Trademark. In other words, the DS Entities contend that the court can determine, as a
matter of law, that they own the Trademark and its federal registration and, therefore, that S&P
fails to state a claim for trademark infringement, unfair competition or deceptive trade practices
because S&P has no legal right to the Trademark. In support of their motion to dismiss, the DS
Entities argue that (1) DSI’s assignment for the benefit of creditors effectively bars S&P from
asserting rights in the Assignment Agreement (and Trademark), and (2) the default judgment
issued by the Texas state court is not binding against the DS Entities because they are neither
successors in interest to DSI nor in privity with DSI? The court addresses these arguments in
turn,

Despite the DS Entities’ argument to the contrary, at this stage of the proceedings the
court cannot determine that S&P’s claims are barred as a matter of law simply because DSI
assigned its assets for the benefit of creditors. An assignment for the benefit of creditors is one
option for an insolvent company to liquidate its assets~-it is a “voluntary transfer by a debtor of
{its] property to an assignee in trust for the purpose of applying the properly or proceeds thereof
to the payment of [its] debts.” 6 Am. Jur. 2d, Assignments for Benefit of Creditors, § 1 (1999).
An assignee receives only the rights the assignor possessed---nothing more, Marvel of Illinois,
Inc. vy. Marvel Contaminant Control Indus., Inc., 744 N.E.2d 312, 320 (Ill. App. Ct. 2001); 6 Am.
Jur. 2d, Assignments for Benefit of Creditors, § 73. Further, an assignee accepts the assigned

assets subject “to every defect of title to which [the property] was subject in the hands of the

"In its motion to dismiss, Evergreen adopted the first argument but not the second.

4


The DS Entities argue that S&P has not pled, and will not be able to prove, that the DS
Entities are successors in interest to DSI or that DSI adequately represented their interests in the
Texas litigation.’ S&P does not address the latter argument, but counters that the DS Entities are
successors in interest “because they purchased the very trademark that was the subject of the
Texas case.” (Intervernor’s Resp. Mot. Dismiss at 9). Neither party cites any Texas caselaw
relating to these arguments.

The court concludes that based on the circumstances of this case, as alleged in the
Intervenor Complaint, S&P has not provided a basis for issue preclusion.® The mere fact that the
DS Entities purchased the Trademark at issue in the Texas litigation is not enough to deem them
a successor in interest. For one thing, the DS Entities purchased the Assignment Agreement
from the trustee at an auction, not from DSI. Several cases cited by the DS Entities suggest that
“[t]here is no privity between two companies when one purchases the assets of another through
an independent third party.” Rockwell Graphic Sys,. Inc. v DEV Indus., Inc., Nos. 84 C 6746 and
92 C 5679, 1994 WL 722027, *5 (N.D. Ill. Dec. 29, 1994), vacated on other grounds, 91 F.3d
914 (7th Cir. 1996); Gammon, Inc. v. Lemelson, 442 F. Supp. 211, 214 (D.N.J. 1977). Although
there are certain factual distinctions between those cases and the case at bar, S&P is unable to
cite a single case in which a court found that privity existed between two parties where the

second party purchased the first party’s assets from a third party.

5The allegations do not suggest, nor does S&P argue, that the DS Entities controlled the
Texas litigation.

5In its brief in response to the motion to dismiss, S&P stated that certain individuals
involved with the DS Entities had been involved.with DSI. The court cannot consider this fact or
draw any inferences from it because S&P did not raise it in the Intervenor Complaint.

9


in the Assignment Agrecment at the time the sale closed, and therefore had no right to complete
the sale to thc DS Entitics. Given these allegations, the legality of the trustee’s sale of the
Assignment Agreement to the DS Entities is clearly in dispute.

Nevertheless, even if the trustee had no rights in the Assignment Agreement at the time
the sale closed and thus had no right to proceed with the sale, the DS Entities still may have
obtained legal rights to the Trademark. The critical question for the DS Entities is whether they
were bona fide purchasers of the Trademark. If they were bona fide purchasers without notice
(actual or constructive) that the trustee lacked rights in the Trademark, the DS Entities would be
the lawful owners of the Trademark. See, e.g., Koretz v. Heffernan, No. 92 C 5419, 1993 WL
524438, * 7 (N.D. lll. Dec. 13, 1993) (recognizing that bona fide purchasers’ rights in trademark
are superior to original owners); Arena Auto Auction y. Schmerler Ford, Inc., 377 N.E. 2d 43, 45
(Ill. App. Ct. 1978) (“title of the innocent third party . . . is paramount to the true owner’s”).
“Notice after the agreement for the purchase is made, but before any payment, will destroy the
character of bona fide purchaser,” however, Daniels v. Anderson, 624 N.E.2d 1151, 1159 (Il.
App. Ct. 1993) (quoting 3 Pomeroy’s Equity Jurisprudence, § 750 (Sth ed. 1941) (italics
oinitted)). Thus the merit of S&P’s claims against the DS Entities ultimately will depend on

whether the DS Entitics were bona fide purchasers or whether they received notice prior to

after the judgment was entered and the trustee received notice of the rescission of the Assignment
Agreement. If the DS Entities were correct, a trustee could sell any assets that were assigned to
him even if the trustee knew that the assignor-debtor had no legal right to some of those assets.
That is not the law. If an assignor-debtor fraudulently obtains property, a trustee cannot withhold
that property from its defrauded owner, 6 Am, Jur. 2d, Assignments for Benefit of Creditors,

§ 81. Because the Assignment Agreement was voidable against DSI and its trustee, and indeed
was voided before the sale closed, the court finds the DS Entities’ reliance on Consolidated Pipe
unpersuasive.


assignor....” 6 Am. Jur, 2d., Assignment for Benefit of Creditors, § 80. As a result,

[i]n the case of property obtained by the assignor by fraud, the assignee stands in

the shocs of the assignor, so if the transaction could be avoided as against the

assignor, It can be avoided as against the assignee. An assignee of a fraudulent

buyer succeeds only to the rights and interest of the buyer and is not entitled to

hold the goods as against the defrauded seller.
Id. at § 81 (footnotes omitted).

Accepting S&P’s allegations as true as the court must, Thompson v. Illinois Dep't of
Prof'l Regulation, 300 F.3d 750, 753 (7th Cir, 2002), at the time DSI assigned its assets
(including the Assignment Agreement) to the trustee, the Assignment Agreement was the subject

of litigation but was still in effect. But the default judgment was entered—-and the trustce

received notice that the default judgment had been entered—before the sale of the Assignment

Agreement to the DS Entities closed. Because the default judgment rescinded the Assignment
Agreement on the grounds that DSI had fraudulently induced S&P’s owners to enter that
agreement, that judgment voided the Assignment Agreement against both DSI and ils assignee,

the trustee.’ See id. Accordingly, S&P has a viable argument that the trustee had no legal rights

*Relying heavily on Consolidated Pipe & Supply Co., Inc. v. Rovanco Corp., 897 F.
Supp. 364 (N.D. Ill. 1995), the DS Entities argue that S&P’s claims are barred and that it is
improperly trying to reach property that DSI validly assigned for the benefit of creditors. The
plaintiff in Consolidated Pipe obtained a default judgment against the assignor-debtor, then
attempted to collect the judgment from the assignee. Jd. at 369. The collection effort failed
because “[o]nce a valid assignment for the benefit of creditors has been made, a judgment
creditor of the assignor-debtor cannot reach property of the assignor-debtor now held by the
assignee” to satisfy a judgment. /d. at 370. Under Consolidated Pipe, it is clear that S&P cannot
attempt to collect the $2.1 million default judgment from the trustee. But S&P is not trying to
collect on the judgment, and the case at bar goes beyond the facts presented in Consolidated
Pipe. Consolidated Pipe did not involve property obtained by the assignor’s fraud. Although the
DS Entities do not find that distinction relevant, the court does.

As explained above, the trustee took the Assignment Agrecment subject to any defects of
title. The DS Entities repeatedly state that the default judgment was entered after the assignment,
and contend that fact is dispositive—but their argument ignores that the sale did not close until

5


must give the default judgment the same preclusive effect that a Texas state court would give it.
4901 Corp. v . Town of Cicero, 220 F.3d 522, 529 (7th Cir. 2000). As a threshold matter, the
court notes that the issue presented here is not claim preclusion, but rather the offensive use of
issue preclusion. See Fletcher v. Nat'l Bank of Commerce, 825 S.W.2d 176, 177 (Tex. App.
1992). Issuc preclusion bars the relitigation of factual or legal issues that “were actually litigated
and essential to the judgment in a prior suit.” Texas Capital Secs. Mgmt., Inc. v. Sandefer, 80
S.W. 3d 260, 264 (Tex. App. 2002). Under Texas law, a party is subject to issue preclusion only
if it was a party to the prior litigation or is in privity with a party to the prior litigation. Mower v.
Boyer, 811 S.W.2d 560, 563 (Tex. 1991). The DSI Entities were not parties to the Texas
litigation, so the question is whether they are in privity with DSI.* “Privity connotes those who
are in law so connected with a party to the judgment as to have such an identity of interest that
the party to the judgment [can be said to have] represented the same legal right.” Benson v.
Wanda Petroleum Co., 468 S.W.2d 361, 363 (Tex. 1971). Determining whether a party is in
privity with another requires close analysis of the circumstances of a particular case. /d. The
mere fact that parties have an interest in proving the same facts does not establish privity. /d.
Privity extends to successors in interest, those who were not a party but controlled the earlier
litigation, and those whose interests were represented by a party to the earlier litigation. //, The
party that secks to invoke issuc preclusion—here, S&P—bears the burden of proving that issue

preclusion is warranted. See Texas Capital Secs., 80 S.W.2d at 264.

‘If they were in privity with DSI, issue preclusion applies provided that “(1) the facts
sought to be litigated in the [present] action were fully and fairly litigated in the [first] action; (2)
those facts were essential to the judgment in the first action; and (3) the parties were cast as
adversaries in the first action.” Mower, 811 S.W.2d at 563 (internal quotation marks and citation
omitted).


Minute Order Form (06/97)

United States District Court, Northern District of [linois

Name of Assigned Judge Joan B. Gottschall Sitting Judge if Other
or Magistrate Judge . than Assigned Jadge
CASE NUMBER 01 C 4933 DATE 3/10/2003
CASE Evergreen Marine Corporation vs, Division Sales, Inc., ct al.
TITLE
[ln the following box (2) indicate the party filing the motion, ¢.g., plaintif?, defendant, 3rd party plaintiff, and (b) state briefly the nature

MOTION: of the motion being presented.)

DOCKET ENTRY:

(9) oO Filed motion of { use listing in “Motion” box above.]

(2) qQ Brief in support of motion due

(3) Oo Answer brief to motion due___. Reply to answer brief due.

(4) a Ruling/Hearing on setfor____at _

(5) Oo Status hearing[held/continued to] [set for/re-set for]on____—s set for at

{6) gd Pretrial conference{held/continued to} [set for/re-set for] on ___ setfor al

) ia] Trialjset for/re-set for]on at

(8) oO [Bench/Jury trial] [Hearing] held/continued to at

(9) oO ‘This case ts dismissed [with/without] prejudice and without costs{ by/agreement/pursuant to]

CUFRCP4(m) Local Rule 41.1 OFRCP41(a)\(1) Ol FRCP4I(a)(2)
(10) a (Other docket entry] Enter Memorandum Opinion & Order. Evergreen Marine Corporation’s
motion to dismiss the complaint of the intervenor [64-1] is denicd. Defendants Division Sales U.S. and
Division Sales International’s motion to dismiss the complaint of the intervenor [62-1] is granted on the
grounds that the intervenor failed to plead fraud with particularity. Intervenor S&P Wholesale
International, Inc. has twenty days from the issuance of this order to amend its complaint.
(11) a [For further detail see order attached to the original minute order.]
No notices required, advised in open court. Document
No notices required. sunneratnnien Number
Notices mailed by judge’s stat? 5 ay
Notified counsel by telephone. MAR 422 3 .

y¢_| Povketing to mail notices nj Ne .
Mail AO 450 form, Lynga ree abi deputy yf {
Copy (o judge/magistrate judge yt

608 Ly Zp suet ae

courvoom
deputy's

initials Gpen
M N\ Daiehime Reeivedin’ «, S
iting deputy al

central Clerk’s Office



grounds that S&P has failed to plead fraud with particularity; S&P has twenty days from the
issuance of this order to amend the Intervenor Complaint to correct this flaw.
Conclusion

For the reasons explained above, the. DS Entities’ motion to dismiss the Intervenor
Complaint is granted. Evergreen ’s motion to dismiss the Intervenor Complaint, which did not
incorporate the issue preclusion argument, is denied.

ENTER:

P/GOTTSCHALL

nited States District Judge

DATE: March 10, 2003

11


More importantly, a finding of privity must comport with the fundamental fairness
requirements of due process. 47 Am. Jur. 2d, Judgments, § 663 (1995). “A party will not be
bound if its [purported] representative ‘fail[s] to prosecute or defend the action with due
diligence and reasonable prudence and the opposing party was on notice of facts making that
failure apparent.” Diversified Fin. Sys., Inc. v. Boyd, 678 N.E.2d 308, 313 (Ill. App. Ct. 1997)
(quoting Restatement (Second) of Judgments § 75(2), at 209 (1982)). And there is no privity
unless DSI’s incentives to litigate were substantially the same as those of the DS Entities. Chase
Manhattan Bank, N.A. y. Celotex Corp., 56 F.3d 343, 346 (2d Cir. 1995). Here, given the default
judgment, it is clear that DSI failed to defend the Texas litigation. It is also clear that S&P knew
that DSI had assigned its assets for the benefit of creditors before the default judgment was
entered. S&P therefore had notice that DSI lacked an incentive to litigate the Texas action.
Further, it is evident that DSI’s incentive to litigate was quite different from the DS Entities’
incentive. Unlike the DS Entities, who have a significant incentive to protect their rights to use
the Trademark, DSI had no such incentive after it assigned its assets to the trustee to liquidate.
Once DSI assigned its assets for the benefit of creditors, it no longer had any interest in the
Assignment Agreement and thus, having no incentive to defend itself in the Texas litigation, DSI
allowed the default judgment to be entered.

For these reasons, it would be fundamentally unfair for the DS Entities to be bound by the
default judgment. Accordingly, S&P must establish the basis of its purported rights in the
Trademark without relying on the default judgment. Because those rights are premised on DSI’s
fraudulent conduct, S&P must allege that fraud with particularity as required by Fed. R. Civ. P.

9(b), which it has not done. The court therefore grants the DS Entities’ motion to dismiss on the

10



closing on their purchase of the Assignment Agreement that the Agreement had been rescinded.
S&P has not alleged that the DS Entities fail to qualify as bona fide purchasers, but no such
allegations are necessary. 77 Am. Jur. 2d, Vendor & Purchaser, § 518 (2003). “The right to
protection as a bona fide purchaser is regarded as an affirmative defense . . .,” so the DS Entities
must raise the defense and bear the burden of proof. /d.; see also Oscar Gruss & Son v. First
State Bank, 582 F.2d 424, 433 n.12 (7th Cir, 1978). Accordingly, with respect to the DS
Entities’ first argument, there is no basis for dismissal of the Intervenor Complaint.

The DS Entities also argue for dismissal on the grounds that the default judgment does
not preclude them from using the Trademark because that judgment does not bind them under
principles of either claim preclusion (res judicata) or issue preclusion (collateral estoppel). As
explained above, the critical question for the DS Entities is whether they qualify as bona fide
purchasers. If they do, whatever rights S&P may have in the Trademark vis a vis DSI and its
trustee, as documented by the default judgment, are of no consequence because a bona fide
purchaser’s rights are superior. See, e.g., Koretz, 1993 WL 524438 at *7. That said, the bona
fide purchaser defense does not come into play unless S&P establishes that it has rights to the
Trademark. The issue therefore is whether S&P can establish its rights to the Trademark through
the default judgment, or whether S&P must allege (and litigate) the basis of its purported rights.
The DS Entities argue that S&P cannot simply rely on the default judgment and further contend
that because S&P’s purported rights are premised on DSI’s fraudulent conduct, S&P must allege
that fraud with particularity but have failed to do so as required by Fed. R. Civ. P. 9(b). The
court agrees,

To comply with the full-faith-and-credit requirements of 28 U.S.C. § 1738, this court


and made “‘a material misrepresentation and/or a promise to perform under [the Assignment
Agreement] with no intention to perform ....” Dancer y, Division Sales, Inc., Case No. 2001-
17690, slip op. at 1-2 (Tex. Dist. Ct. Aug. 10, 2001), The Texas state court therefore ordered that
the Assignment Agreement was rescinded and void.

Although the trustce’s auction took place in July, the assets were not conveyed to the
purchasers until late September—after the default judgment was entered in the Texas litigation
and after S&P’s attorneys notified DSI and its trustee, Eber, of that final judgment. Thus S&P
claims that the trustee’s conveyance of the Trademark to the DS Entities “was void and of no
effect” because the Assignment Agreement had already been rescinded by the default judgment

Although S&P contends that it is the sole owner of the Trademark, DS-U.S. has taken the
position that it owns the Trademark, that the default judgment has no legal effect on the
ownership of the trademark registration, and that it has the right lo sell products bearing the
Trademark. Accordingly, S&P filed the Intervenor Complaint seeking a declaration that it is the
sole owner of the Trademark and the related trademark registration and that the assignment of the
Trademark to DS-U.S, and/or D.S.-International is (and always was) of no force and effect. S&P
also secks a permanent injunction to prevent any of the parties from selling or distributing goods
bearing the Trademark, as well as compensatory damages and disgorgement of profits
Analysis

According to S&P, resolution of its claims for trademark infringement, unfair
competition and deceptive trade practices will require the court to determine who has the legal
right lo the Trademark, S&P or the DS Entities. The DS Entities, on the other hand, argue that

there is no issue for resolution: they (joined in part by Evergreen) moved to dismiss the



DS Entities’ motion to dismiss is granted.
Background

S&P is in the business of importing and distributing certain retail items, such as crafis,
candles and gift wrapping materials, According to S&P, starting in 1997 it used the trademark
CORNERSTONE CREATIONS (the “Trademark’) to identify its goods. S&P subsequently
registered the Trademark with the United States Patent & Trademark Office; the registration was
issued on November 30, 1999 and remains in full force and effect. On March 22, 2000, S&P and
DSI entered an agreement under which S&P assigned its rights in the Trademark to DSI (the
“Assignment Agreement”). Just over a year later, in April 2001, S&P sued DSI in Texas state
court for breach of contract and fraud (the “Texas litigation”) secking rescission of the
Assignment Agrcement (as well as other contracts unrelated to this action).

On July 12, 2001, while the Texas litigation was pending, DSI “entered into a trust
agreement and assignment for the benefit of creditors with Michael J. Eber of High Ridge
Partners, Inc. [(‘High Ridge’)], in which all of the assets of [DSI], including the Trademark, were
placed in a trust known as the ‘Division Sales Trust Agreement,’ of which Michael Eber was
trustee.” (IC at | 19.) Less than a week later, on July 19, 2001, S&P’s attorncys gave High
Ridge and its attorneys written notice regarding the Texas liligation and S&P’s claims against
DSL. On July 24, 2001, the trustee auctioned off DSI’s assets, including the Assignment
Agreement. DS-U.S. and/or DS-International purchased the Assignment Agreement, which the
trustee sold with no warranties as to title.

On August 10, 2001, the Texas state court entered a default judgment against DSI,

finding in relevant part that DSI fraudulently induced S&P to enter the Assignment Agreement


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION : ,
MAR i 2 2003
EVERGREEN MARINE CORPORATION, )
)
Plaintiff, ) Case No. 01 C 4933
)
Vv. )
)
DIVISION SALES, INC., et al ) Judge Joan B. Gottschail
)
Defendants. )

MEMORANDUM OPINION & ORDER

S&P Wholesale International, Inc. (“S&P”) intervened in this action to enforce its
purported trademark rights in the CORNERSTONE CREATIONS mark. S&P has filed a
complaint against Division Sales, Inc. (“DSI”), Justen-Marks Manufacturing, Ltd., Addjoin
Enterprises, Ltd., Sunburst Trading Company, Ltd., High Ridge Partners, Inc., Division Sales
U.S., L.L.C. (“DS-U.S.”), Division Sales International, L.L.C. (“DS-International”’) and
Evergreen Marine Corporation (“Evergreen”) alleging federal claims of trademark infringement
under 15 U.S.C. § 1114 and unfair competition and false designation of origin under 15 U.S.C.
§ 1125(a), as well as a state law claim for deceptive trade practices under 815 ILCS 505/2 and
815 ILCS 510/2.! Defendants DS-U.S. and DS-International (the “DS Entities”) have filed a
joint motion to dismiss the complaint of the intervenor (“Intervenor Complaint” or “IC”)
pursuant to Fed. R. Civ. P. 12(b)(6). Evergreen, the plaintiff in the underlying action, also filed a
motion to dismiss the Intervenor Complaint, adopting certain arguments raised by DS-U.S. and

DS-International. For the reasons stated below, Evergrecn’s motion to dismiss is denied but the

'The court notes that although the complaint also names Justen-Marks & Addjoin, both of
those parties were dismissed with prejudice from the case by the court’s order of 1/23/02, before

S&P’s motion to intervene was granted.
4 |