brokering business.

Cobra initially located its facilities at USA's previous location, and retained its phone
number and fax number.” It has also hired at least two USA employees, David Dohm,
Director of National Sales and Stacey Bisaltion, General Manager; neither Dohm nor
Bisallion were officers, directors or shareholders of USA. Cobra recently relocated its
manufacturing facility to a new location.

In order for Cobra to conduct business with the DOD, it needed to register with the
Central Contractor Registration (“CCR”), which is a sub-tier organization within the DOD's
Defense Logistics Agency “(DLA"). Prior to registering with the CCR, each private supplier
must obtain a Data Universal Numbering System (“DUNS”) number from Dun & Bradstreet
and also obtain a so-called CAGE code. Cobra could not hope to supply military products
to the government without these two numbers.

Whether intentionally (as LTD alleges), or through secretarial mistake (as Cobra
contends), both parties agree that at least initially, Cobra adopted USA’s DUNS number
and CAGE code for itself. Thus, any government entity searching for a product using
USA's DUNS number would come to Cobra’s profile, which also referenced USA in places.
In its initial brief, LTD also alleges that Cobra also failed to change the product numbering
system on its profile to one that was not identical to LTD's, i.e. Cobra was engaging in the

same behavior which had led USA to be enjoined and sanctioned.?

2 LTD contends, and Cobra has not disputed, that to this day, Cobra continues to use USA's old
phone and fax numbers,

3 As we explain below, Cobra neither admits nor denies using LTD’s identical parts numbers on its
profile. LTD does not address this contention again in its reply brief, so we are uncertain whether Cobra is
still using LTD's parts numbering system on its military profile.

4



judgment). The wife of one of the officer/directors of the original restaurants — who herself
was not a previous officer or director - became the sole director and shareholder of the
new enterprise. However, the restaurants otherwise were nearly identical except for
location. The new restaurant made great attempts to capitalize on the goodwill and name
of the previous restaurants, served similar food, and employed almost all of the same
individuals, including the two brothers who had been the officers, directors and
shareholders of the first enterprises.

In this case, the evidence shows that Cobra is not a mere continuation of USA. The
purchasers of USA's assets, the Wohlfords, had no prior connection to USA other than
owning a company that did business with USA. In fact, their company, Aircraft, was a
creditor of USA. It is true that Cobra was established to manufacture and sell similar or
even identical products to those made by USA, but this activity merely shows that Cobra
plans to continue USA's business enterprise. And unlike the situations in Hexacomb and
Lincoln Nati, there is no evidence that Cobra purchased USA's assets to assist USA or its
Officers, directors and shareholders in evading the court order of contempt against that
company.®

Further, Cobra’s actions with respect to the DOD, even if intentional, actually
demonstrate its attempts to distance itself from any wrongful USA behavior, while still trying
to raceive the full benefit of its business bargain, namely, its agreement to purchase USA's

rights to certain government contracts. The Rome letters argue that Cobra should not be

5 Cobra’s employ of two former USA employees does not strengthen LTD’s argument that Cobra is
a mere continuation of USA. There is no evidence that these two employees were hired because of their
ability to help infringe upon LTD’s injunction, such as in Hexacomb, as opposed to being hired to help Cobra
start up its business enterprise.



originally ordered from USA and whether such order included parts with numbers identical
to LTD's.®
Legal Analysis
A. ervice on Co!

Cobra first argues that USA has not properly served it with a copy of the motion for
a Rule to Show Cause, and thus, Cobra should be dismissed from the proceedings. LTD
does not respond to Cobra’s service argument in its reply brief. Specifically, Local Rule
37.1 holds that service of a motion for a show cause order must be made personally on the
alleged contemnor (or its attorney, if one has appeared), pursuant to the requirements of
Fed.R.Civ.P. 4, which governs service of summons on defendants. Rule 4 does provide
for a waiver of formal service in the interest of saving costs, but Cobra has specifically not
waived its right to proper service. However, Rule 4 also provides that a party has 120 days
to formally serve a defendant that objects to waiver of service. LTD filed this motion on
September 20, 2002, and thus is still within the 120 day period and is able to cure the
service deficiency if it wishes.”
B. Cobra as Successor to USA

Even assuming that Cobra was properly served, we find that legally, Cobra is not
USA's successor in interest such that any injunction against USA also binds Cobra. A

non-party is liable for contempt of an injunction “if, with notice of the injunction, [it] aids or

S itis important to understand that the injunction did not bar USA from supplying particular parts to
the government, only from using LTD's identical parts numbers to identify such parts. Thus, to the extent that
Cobra may wish to fulfill USA's contracts for the same products but with new parts numbers, they would not
run afoul of the injunction.

7 The question of proper service may be a moot point, however, since we deny LTD’s motion on other
grounds.



Next, both parties agree that, in an August, 2002 letter to the General Accounting
Office (‘GAO"), Cobra attorney James Rome (who formerly represented USA) protested
the government's behavior with respect to certain government contracts previously
awarded USA, and identified Cobra as a successor in interest to USA, asking the GAO to
designate Cobra as an approved vendor for the USA contracts. LTD alleges that the
contracts at issue are for products identified with its identical parts numbers. Cobra does
not deny the letter, but merely says that Rome described Cobra as USA's successor in
interest without its consent or approval.‘

After LTD filed its initial brief, Rome sent several other letters to the DOD protesting
its continued failure to consider Cobra for the government contracts described above.
Rome attributes certain actions by the government as being taken against Cobra (such as
barring it from its list of approved contractors), even though the issues of which he
complains actually were taken against USA, well before Cobra’s creation.’ Although
neither party says so specifically, we surmise from Rome's letters that the DOD was
treating Cobra as a continuation of USA, at least with regard to the products Cobra
supplied and the work it wanted to perform for the government. It is unclear whether the

government ever did accept Cobra’s request to supply to the DOD the parts and equipment

‘LTD argues that Rome's letter and Cobra’s secretary's actions could not have really been as
“innocent” as Cobra claims, because if they were, Cobra would have attached affidavits from the individuals
to their response brief explaining the mistakes, and would have immediately contacted the GAO to rectify any
misunderstanding. However, LTD’s contention of what Cobra “should” have done to demonstrate its
innocence does not impact our analysis.

8 Although LTD characterizes this second Rome letter as “ascribing various prior conduct of USA to
Cobra even though that conduct occurred well before Cobra’s . . . incorporation,” we cannot tell whether itwas
Cobra or the DOD that first treated Cobra as USA's predecessor. A third Rome letter explains that included
in Cobra’s purchase of USA's assets were rights to certain government contracts as well as contingent
interests in offers submitted for solicitations. It also explains that it asked the government to effect a name
and parts number change with respect to the solicitatlon, but that the government failed to do so.

5



s

continuation of the seller's business enterprise. /d.

LTD points out that several recent cases in the Seventh Circuit have found the mere
continuation theory to be applicable even when there was not a unity of officers, directors
and shareholders. Further, LTD contends that Cobra's various dealings with the DOD
demonstrate that it fully intended to step into USA's shoes as a successor in interest, and
thus, should be held liable for USA's obligations. We will address each argument
separately.

First, the cases LTD cites in support of its argument that a court may find successor
liability even in the absence of common officers and directors all have facts that are much
more compelling in favor of finding liability than those here. In both Hexacomb, supra, and
Lincoln Nat'l Life Ins. Co. v. Nicklau, Inc., No. 98 C 2453, 2000 WL 656683 (N.D.II., May
17, 2000), the individuals on both sides of the questioned transactions were closely related,
and the actual “sale” or transfer of property was plainly effectuated to avoid some prior
court order. For example, in Hexacomb, the defendant company was subject to an
injunction preventing it from building a certain type of machine for one of its customers.
The owner of defendant arranged for five of his employees (including his son) to be hired
by the customer for the specific purpose of building the machine that defendant had been
enjoined from building itself. The court found that not only were defendant and its owner
in contempt, but the customer was in contempt as well, since it aided in the violation of the
injunction.

In Lincoln Nati, related family members attempted to avoid an outstanding state-
court judgment against them when they opened up a successor restaurant to several

previous restaurants they had owned (which restaurants were the subject of the state court

8



Minute Order Form (06/97)

United States District Court, Northern District of Illinois

‘

sy Maghtate Judge Marvin E. Aspen “than Antgoed Judge Michael T. Mason
CASE NUMBER 01C51 DATE 11/26/2002
CASE Nay-Aids Ltd vs. Nav-Aids Usa Inc
TITLE

[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

MOTION: of the motion being presented.]

DOCKET ENTRY:

(1) Oo Filed motion of [ use listing in “Motion” box above.}

(2) o Brief in support of motion due__.

@) im} Answer brief to motiondue___. Reply to answer briefdue___.

(4) Qo Ruling/Hearingon_____—set for at

(5) Qo Status hearing[held/continued to] [set for/re-set for] on setfor_ at

(6) oO Pretrial conference{held/continued to] [set for/re-setfor}on__—_—setfor__—s at.

(2) im Trial[set for/re-set for} on at

(8) o {Bench/Jury trial] [Hearing] held/continuedto____at

(9) q This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) ClLocal Rule 41.1. COFRCP41(a\(1) OO FRCP41(a)(2).

do) [Other docket entry] Enter Memorandum Opinion and Order.

(1) [For further detail see order attached to the original minute order.]

No notices required, advised in open court,

No notices required,

Notices mailed by judge’s staff,

Notified counsel by telephone.

a | Docketing to mail notices.
Mail AO 450 form.

Juno s91aisia's"
Z| copy jugermaginae utes ig nsla sin

courtroom GS :O1H¥ 92 AON ZO

MF deputy's

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held liable for any possible USA debarment and simply request that Cobra be considered
an approved vendor of USA's products. Cobra’s appropriation of USA’s DUNS number
and CAGE code was short-lived; Cobra now has its own numbers that presumably do not
direct a user to any USA information. And LTD has provided no evidence that Cobra has
persisted in using those parts numbers that USA was enjoined from employing.® Instead,
Cobra has been moving away from certain associations with USA; it has moved to a new
location and changed all its logos.

We are not unsympathetic to LTD’s plight; it is not unreasonable for it to want to
have its judgment against USA satisfied. However, we do not find that Cobra’s purchase
of USA's assets in an arms length transaction between two unrelated entities makes Cobra
a successor in interest to USA's liability to LTD or subject to the terms of the injunction.
Thus, we deny LTD’s motion for an order of contempt." It is so ordered.

ENTER:

‘
DI LFA cots
MICHAEL T. MASON
United States Magistrate Judge

Dated: November 26, 2002

® Of course, if LTD obtains information that Cobras also using LTD's identical parts numbers, it may
seek appropriate relief against Cobra itself.

10 To the extent that both sides ask that we award attorneys’ fees and costs, we deny their requests;
we find that both parties were justified in thelr filings and thus an award of fees is not Justified.

10



abets the enjoined party in the violation of the injunction or [is] a successor in interest to
the property subject to litigation.” See Hexacomb Corp. v. GTW Enterprises, No. 93 C
3107, 1994 WL 171533 (N.D.IIl., May 2, 1994) (internal citations omitted). Generally, a
corporation that purchases the assets of another corporation is not liable for the
transferor’s debts or liabilities. See Vernon v. Schuster, 688 N.E.2d 1172, 1175 (Ill. 1997).
This rule was established to protect “bonafide purchasers from unassumed liability.” /d.,
citing Tucker v. Paxon Machine Co., 645 F.2d 620, 623 (8" Cir. 1981).

There are four exceptions to the general rule, however. A purchaser of a

corporation's assets will be liable for prior debts (i.¢., will be found a successor in interest)
in the following situations: 1) where there is an express or implied agreement of
assumption; 2) where the transaction amounts to a consolidation or merger of the
purchaser and seller corporations; 3) where the purchaser is a mere continuation of the
seller; and 4) where the transaction is for the fraudulent purpose of escaping liability for the
seller's obligations. Stee! Co. v. Morgan Marshall Industries, Inc., 662 N.E.2d 595 (Ill.
1996) (internal citations omitted). In this case, the third exception is at issue; LTD
contends that Cobra is a “mere continuation” of USA and thus should be liable for its
previous obligations to LTD and subject to the permanent injunction.

Under the “mere continuation” theory of successor liability, courts generally look to
see if the purchasing corporation “maintains the same or similar management and
ownership, but merely ‘wears different clothes” than the seller. Vernon, 688 N.E.2d at 1176
citing Bud Antle, Inc. v. Eastern Foods, Inc., 758 F.2d 1451, 1458 (11” Cir. 1985). Thus,
most courts consider whether there is a common identity of officers, directors and

shareholders, that is, a continuation of the corporate entity of the seller, not simply a

7



B. The Creation of Cobra

The following facts about the creation of Cobra, its purchase of USA's assets, and
its activities in getting the business up and running are not in dispute, although the parties
do disagree about whether Cobra's actions with respect to how it did or did not differentiate
itself from USA were intentional or accidental. Cobra and its sister corporation, Aircraft
Product Supply, Inc. (“Aircraft”) are entirely owned by Mark and Jeanette Wohlford, who
are also both companies’ sole directors, officers and shareholders. Aircraft is a broker of

aircraft parts and supplies to various companies in the airline industry. One of its

customers was USA.

In 2001, USA fell behind in paying its invoices to Aircraft; Aircraft subsequently
required USA to execute a security agreement before it would agree to continue selling
USA parts. Aircraft thereafter perfected its security agreement and eventually purchased
the security interest of USA's only other secured creditor, Fifth Third Bank. Thus, at the
time USA dismissed its bankruptcy petition, Aircraft was USA’s only secured creditor.
Soon thereafter, Aircraft initiated a public sale of all USA's assets pursuant to Uniform
Commercial Code (“UCC”) section 9-610. Aircraftinformed LTD about the sale and offered
to sell USA's assets to it. LTD declined to either purchase any of USA’s assets or attend
the sale.

Aircraft publicized the sale and entertained inquiries from potential buyers, butin the
end Aircraft itself was the only bidder for USA's assets. Aircraft purchased the assets with
the intent of manufacturing products similar to those made by USA, with the hope that the
Wohlfords could create a parts and supplies manufacturing business. They incorporated

Cobra in order to keep their new manufacturing company separate from Aircraft’s parts

3



A. LTD. v. USA

LTD and USA both manufactured and sold ground equipment for aircraft to private
customers and the United States government. In October, 2001, the District Court issued
a preliminary injunction against USA to prevent it from using LTD's identical parts numbers
when designating its parts to customers or misrepresenting in any way that its products
were authorized or approved by LTD.’ Soon thereafter, LTD brought a Motion for a Rule
to Show Cause why USA should not be held in contempt for violating the injunction. While
that motion was pending, the parties entered into a settlement agreement that held, inter
alia, the preliminary injunction would become permanent.

In January, 2002, LTD filed a second Motion for a Rule to Show Cause, alleging that
USA was continuing to violate the injunction by offering for sale military parts using LTD's
identical parts number. We found USA in contempt of the permanent injunction and
ordered it to disgorge to LTD any monies it had earned as a result of selling products with
identical LTD parts numbers. The parties were to begin discovery of USA's assets, but
such discovery never occurred because USA filed a voluntary petition for Chapter 11
bankruptcy in June, 2002. LTD then filed a separate adversary proceeding against USA,
contesting the bankruptcy petition on the ground that it was merely a ploy by USA to avoid
its obligations under the injunction or our court order. In August, 2002, USA voluntarily

dismissed the bankruptcy proceeding.

1 One of the specific issues was USA's use of LTD's identical parts numbers to sell parts and
equipment to the U.S. government. Both USA and LTD were approved providers of products to the
government and as such, had official profiles on the websites that Department of Defense (“DOD”) and other
contractors used to search for parts to purchase. When USA used LTD’s identical parts number, any web
search for an LTD part by number brought up both USA's and LTD's profile. .

2



IN THE UNITED STATES DISTRICT COURT Lop;
NORTHERN DISTRICT OF ILLINOIS ET Ep

an Hlinols corporation,

EASTERN DIVISION Noy 2
? 002
NAV-AIDS LTD., )
a Quebec corporation, )
)
Plaintiff, )
) No. 01 C 0051

Vv. )

) Chief Judge Aspen

NAV-AIDS USA, INC., ) Mag. Judge Mason
)
)
)

Defendant.
MEMORANDUM OPINION AND ORDER

Michael T. Mason, United States Magistrate Judge:

This is the third time that plaintiff, Nav-Aids, Ltd. (“LTD.") has moved for an order
of contempt against defendant Nav-Aids USA, Inc. (“USA”) for allegedly violating an
injunction that it not use LTD’s identical parts numbers when selling its ground support
equipment and parts for aircraft. The twist now is that USA no longer exists in its previous
form; it sold all of its assets to a company called Cobra Systems, Inc. (“Cobra”) and Cobra
has now begun selling the same sort of aircraft equipment as USA did previously. LTD
argues that Cobra is indistinguishable from USA, and thus, we should hold Cobra liable for
the judgments we formerly issued against USA, and further, assess additional penalties
against Cobra for continuing the same breaches of the injunction. For the following
reasons, we Deny LTD's motion.

Facts

The facts of this case are not significantly in dispute. It is important to understand

what transpired between the parties both before and after the creation of Cobra, so we will

set forth some of the case’s early procedural background as well.

\