Hallmark Industries, Inc. v. Hallmark Licensing, LLC

IN THE UNITED STATES DISTRICT COURT FOR THE

WESTERN DISTRICT OF MISSOURI

WESTERN DIVISION

HALLMARK INDUSTRIES, INC., )

)

Plaintiff, )

)

v. ) No. 4:18-cv-0236-DGK

)

HALLMARK LICENSING, LLC, )

)

Defendant. )

ORDER GRANTING MOTION TO ESTABLISH FACTS BY

COLLATERAL ESTOPPEL

This case arises from a long-running dispute over trademarks. Plaintiff Hallmark

Industries, Inc. (“Plaintiff”), is a New Jersey corporation engaged in the manufacture, marketing,

sale, and wholesale distribution of jewelry. Defendant Hallmark Licensing, LLC (“Defendant”),

is a wholly owned subsidiary of Kansas City based Hallmark Cards, Inc., which owns and licenses

various marks that include the HALLMARK mark and Crown logo. This action is primarily an

appeal from a final decision of the Trademark Trial and Appeal Board that denied Plaintiff’s

applications to use certain words on its jewelry products because the applications were likely to be

confused with two of Defendant’s registered marks.1

Now before the Court is Defendant’s motion to establish facts by collateral estoppel (Doc.

77). Defendant argues Plaintiff should be estopped from litigating two holdings of the Bankruptcy

Court for the District of New Jersey: (1) that Rosenthal & Rosenthal (“Rosenthal”) had a first

priority, secured claim in the nature of a first priority, secured lien on all of Diastar, Inc.’s

(“Diastar”) assets, up to $5,754,117.08; and (2) Rosenthal’s claim survived Diastar’s Chapter 7

1 Plaintiff also seeks a declaratory judgment that it is the owner of two other marks and has asserted claims for

trademark infringement, false designation of origin, counterfeiting, common law and statutory unfair competition,

deceptive acts and practices, and tortious interference with economic advantage.

bankruptcy proceedings. Plaintiff argues the Court should deny the motion because Defendant did

not reserve estoppel as an affirmative defense in its pleadings, and because fairly adjudicating the

issues in the present case may necessitate addressing some issues relating to the bankruptcy case.

The Court holds Defendant’s failure to list estoppel as an affirmative defense in its Answer

does not preclude the Court from recognizing these two facts have been established by collateral

estoppel, and that the five elements necessary to establish facts by collateral estoppel are satisfied.

The Court makes no ruling on whether, or to what extent, adjudicating the issues in this case will

address other issues related to the bankruptcy case. Defendant’s motion is GRANTED.

Background

The present dispute concerns one of the key issues in this case, namely, the ownership

history of the marks at issue.

Diastar, a corporation owned by Plaintiff’s corporate representative, Pramod Jain, and his

brother, Pradip Jain, allegedly purchased the marks in 1988 from Hallmark Jewelry, a company

which had owned the trademarks since the 1950s. In 2006, a third-party, Rosenthal, acquired a

security interest in Diastar’s assets.

On March 17, 2008, Diastar filed for bankruptcy protection. One month before the

bankruptcy filing, Diastar purportedly transferred its interest in the applications for the marks to

the wives of Diastar’s owners, Anita Jain and Monica Jain (the “Jain wives”). Diastar did not

notify the U.S. Patent and Trademark Office regarding these purported assignments until

September 2012, nor did it notify Rosenthal of the transfer. Diastar also omitted from its

bankruptcy schedules the transfers of the applications for the marks to the Jain wives through the

purported assignment.

Rosenthal timely filed a proof of claim in the Diastar bankruptcy. Diastar objected. After

a hearing, the bankruptcy court allowed Rosenthal’s claim in the amount of $5,754,117.08. It

ruled Rosenthal’s claim was “a first priority, secured claim, [constituting] a first priority, secured

lien on all of [Diastar’s] assets, up to the amount of the Allowed Claim. . . .” Diastar appealed the

bankruptcy court’s order, and the appeal was dismissed for lack of subject matter jurisdiction.

In July 2009, the bankruptcy court converted Diastar’s Chapter 11 to Chapter 7. In May

2010, the bankruptcy court issued a final decree and closed the case. As a corporation debtor under

Chapter 7, Diastar’s debts were not discharged.2 Diastar did not appeal the bankruptcy court’s

disposition.

In 2012, the Jain wives purportedly transferred the marks to Plaintiff.

Defendant contends that in August, 2014, pursuant to Article 9 of the Uniform Commercial

Code and in partial satisfaction of its claim against Diastar, Rosenthal foreclosed its security

interest in the marks, and Defendant purchased both marks from Rosenthal at a private foreclosure

sale.

Standard

Issue preclusion, or collateral estoppel, bars “successive litigation of an issue of fact or law

actually litigated and resolved in a valid court determination essential to the prior judgment,” even

if the issue recurs in the context of a different claim. New Hampshire v. Maine, 532 U.S. 742,

748–749 (2001). By preventing parties from re-litigating matters that they already “had a full and

fair opportunity to litigate,” the doctrine protects against “the expense and vexation attending

multiple lawsuits, conserves judicial resources, and fosters reliance on judicial action by

2 Under 11 U.S.C. § 727(a)(1) of the bankruptcy code, only individuals, not corporations, are discharged of their debt

in Chapter 7 bankruptcy.

minimizing the possibility of inconsistent decisions.” Montana v. United States, 440 U.S. 147,

153–154 (1979).

Federal law governs the preclusive effect given to federal-court decisions. See Semtek Int’l

Inc. v. Lockheed Martin Corp., 531 U.S. 497, 500 (2001). For a fact to be established by collateral

estoppel, five elements must be satisfied:

(1) the party sought to be precluded in the second suit must have

been a party, or in privity with a party, to the original lawsuit; (2)

the issue sought to be precluded must be the same as the issue

involved in the prior action; (3) the issue sought to be precluded

must have been actually litigated in the prior action; (4) the issue

sought to be precluded must have been determined by a valid and

final judgment; and (5) the determination in the prior action must

have been essential to the prior judgment.

Sandy Lake Band of Miss. Chippewa v. United States, 714 F.3d 1098, 1102–03 (8th Cir. 2013).

Finally, Federal Rule of Civil Procedure 8(c) states that a party must plead estoppel as an

affirmative defense. Failure to comply with the rule, however, is not necessarily fatal. First Union

Nat’l Bank v. Pictet Overseas Trust Corp., 477 F.3d 616, 622 (8th Cir. 2007). A trial court may

consider a late-raised affirmative defense as long as it does not result in unfair surprise. Id. In

fact, a trial court may raise the issue of estoppel sue sponte if it would conserve trial time by

eliminating testimony on an issue that has been previously litigated. See Hanig v. City of Winner,

S.D., 527 F.3d 674, 678 (8th Cir. 2007) (holding the district court “properly invoked res judicata”

even after defendant failed to plead it as an affirmative defense and “explicitly disclaimed the

doctrine’s applicability,” because the court did so “to avoid unnecessary judicial waste and then

gave [plaintiff] ample opportunity to argue the issue.”).

Discussion

Plaintiff raises a threshold argument that the Court should not consider Defendant’s

estoppel argument because it failed to plead it as an affirmative defense. Plaintiff argues it will be

prejudiced if the Court considers estoppel now since discovery has closed and the issue of the

Rosenthal secured claim “is one with many aspects and cannot be assumed to have been covered

by discovery if it was not introduced as a defense ahead of time.” Suggestions in Opp’n at 3 (Doc.

83).

But the facts related to the Rosenthal claim have been fully discovered. Plaintiff does not

dispute that during discovery all documents related to the Rosenthal claim were produced and a

deposition taken of the Rosenthal executive in charge of the matter. Nor has Plaintiff identified a

single issue it would have investigated or litigated differently had Defendant pled estoppel as an

affirmative defense. Accordingly, the Court holds Plaintiff has not been prejudiced. The Court

also finds that Plaintiff has had ample opportunity to argue the issue, and that allowing Defendant

to raise the issue now will prevent re-litigating an issue previously decided in the bankruptcy

proceeding and avoid waste of judicial resources.

Turning to the five elements, the Court finds they are satisfied with respect to the two

propositions Defendant seeks to establish. These propositions are: (1) that Rosenthal had a first

priority, secured claim in the nature of a first priority, secured lien on all of Diastar’s assets, up to

$5,754,117.08; and (2) Rosenthal’s claim survived Diastar’s Chapter 7 bankruptcy proceedings.

The five elements are satisfied because Plaintiff is in privity with Diastar for purposes of

establishing the effect of the bankruptcy order. See Taylor v. Sturgell, 553 U.S. 880, 892 (2008)

(explaining nonparty preclusion may be justified based on substantive legal relationships,

including preceding and succeeding owners and assignees and assignors of property). The value

and nature of Rosenthal’s claim against Diastar was at issue before the bankruptcy court; that issue

was actually litigated; and the bankruptcy court ruled Rosenthal had a secured claim for over $5

million. This was a valid and final judgment, and the value and nature of Rosenthal’s claim was

essential to the judgment.

Indeed, Plaintiff does not really dispute that the five elements are satisfied, instead arguing

that these findings do “not include the trademarks at issue or in any way address the past transfers

of, current ownership of, or value of the trademarks at issue because these marks were not

contemplated by the bankruptcy court.” Suggestions in Opp’n at 3-4 (emphasis in original). In its

reply, Defendant agrees with Plaintiff, confirming it is making “no claim that the bankruptcy estate

included” the trademark applications for the marks at issue (which are now registered marks).

Defendant explains that at trial it

will prove up that the Rosenthal security interest included all of

Diastar’s intellectual property, that Diastar's transfer of the Subject

Marks to the wives of its owners before the bankruptcy filing did

not affect Rosenthal’s lien upon them (UCC § 9-315(a)), and that

Hallmark Licensing properly purchased the Subject Marks at a

private foreclosure sale held by Rosenthal in accordance with UCC

procedure.

Reply at 3 (Doc. 84).

The Court holds the two propositions above have been established by collateral estoppel.

It makes no ruling on whether, or to what extent, adjudicating the issues in this case will address

other issues related to the bankruptcy case.

Conclusion

For the reasons discussed above, Defendant’s motion (Doc. 77) is GRANTED.

IT IS SO ORDERED.

Date: February 5, 2019 /s/ Greg Kays

.

GREG KAYS, JUDGE

UNITED STATES DISTRICT COURT