MTH and Lionel Appear in Bankruptcy Court by Erol Gurcan
January 9, 2006-For the first time since December 14, 2006, when an appeals court vacated MTH’s $40.7 million dollar trade secrets verdict against Lionel, and remanded the case for another trial, attorneys for the two rival model train makers appeared in the Bankruptcy Court for the Southern District of New York today.
Click on the link below to read on
My summary of today’s legal proceedings will be a little different this time, compared with the past. I was present in court today to observe the proceedings, (as was Stuart Rankin aka OGR forumite Lionel LLC). In the past, my information was based on conversations with the party’s principals or their attorneys, or by reviewing the legal documents filed with the court.
Today’s legal proceedings were significant enough that both MTH’s Mike Wolf and Jerry Calabrese were present in court today. The two men shook hands upon seeing each other.
After making several applications for interim compensation on behalf of the attorneys and other professionals representing Lionel, which were quickly approved by Judge Lifland, their attorney Adam Harris, represented to the court that although the appeals court decision was very favorable to Lionel, they were still interested in settling the outstanding trade secrets case, and separate patent infringement lawsuit brought by MTH in June. Mr. Harris proposed to the court that a neutral third party mediator be agreed to by the parties so they could discuss settlement. Not surprisingly, he stated he expects the appeals court to deny the petition for reconsideration of its December 14 decision, filed by MTH with the appeals court on December 28. He also stressed it was in Lionel’s best interests to exit from bankruptcy as soon as possible as there are companies that will not do business with them until that occurs.
Mr. Alec Ostrow, representing MTH, then addressed the court. His proposal was that Lionel be directed to pay their other creditors in full, so they would not be prejudiced, and that the parties continue to litigate the legal matters between them.
As Mr. Ostrow was discussing continuing the litigation between the parties, Judge Lifland, politely but firmly interrupted, and inquired why there was no response to Lionel’s proposed offer of settlement talks between the companies, or agreement to mediate their differences with a neutral third party. Mr. Ostrow requested a short adjournment so that he could confer with MTH’s Mike Wolf. Judge Lifland granted the request. Both Jerry Calabrese and Mike Wolf exited the courtroom to discuss matters with their attorneys.
After re-entering the courtroom, Mr. Ostrow informed Judge Lifland that MTH would agree to mediate the remaining legal issues between the parties.
Judge Lifland informed both sides they have 7 days to agree to a mediator. Mr. Harris proposed that one of the other bankruptcy judges be appointed, rather than selecting one through a private mediation company. Mr. Ostrow agreed this would be acceptable. Judge Lifland stated he would make an inquiry to some of his judicial colleagues, and would notify the parties if one of them would agree to do it. Judge Lifland noted that a “retrial of the trade secrets case would not be palatable to either side, and the lawyers should get out of the way.” In other words, he told the attorneys that they are not to be present when Mr. Wolf and Calabrese discuss settlement of the case between themselves or with a mediator.
Judge Lifland also informed the parties that if the legal issues are not resolved through settlement within one month, he would conduct a Bankruptcy Code section 502c estimation hearing on damages. This procedure allows the court to make a determination of any potential damages MTH would be entitled to for both the trade secrets lawsuit and separate patent infringement lawsuit (the patent infringement lawsuit was filed in the bankruptcy court since Lionel’s bankruptcy was already pending there). Mr. Ostrow stated an estimation hearing would be inappropriate if the case is not resolved through mediation. I suspect his rational for this is he would prefer to allow a jury to decide damages in the trade secrets case, as it did once before (prior to it later being vacated by the appeals court). Judge Lifland responded by stating he would not allow the bankruptcy to continue indefinitely. Lionel has been in bankruptcy since November 15, 2004 a period of over two years.
Both parties were also directed to work out scheduling orders for each litigation matter, even if it looks like the legal matters will settle.
Hopefully, the apparent willingness of both sides to discuss resolution of the various legal matter s between them, coupled with the judge’s directives, will result in a settlement of their legal disputes. Stay tuned
Erol Gurcan
Erol B. Gurcan, an O Gauge industry legal expert, is a regular contributor to OGaugeWatch.com
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5 Responses to “MTH and Lionel Appear in Bankruptcy Court by Erol Gurcan”
It sounds to me, even though not having been there, nor a lawyer, that Judge Lifland has laid down the law. MTH and Lionel will settle their differences through mediation or he will settle them under his authority, without benefit of jury trial. This is not what MTH wants for several reasons, I’d guess. One, the chances of convincing a bankruptcy judge of their case is, IMO, considerably less than their chance with a jury of largely unsophisticated laymen. Two, as long as Lionel is in bankruptcy, MTH has the advantage that the main competitor they are trying to catch is paying debtor in possession financing rates and legal fees, and MTH is not paying the first and may have considerably lesser expenses for the second if contingency is the basis.
So all in all, it sounds like another major victory in the courts for Lionel. And the industry and hobby, in my opinion. These lawsuits are without substantive merit as far as public information allows one to determine.
Posted by: Neil | Jan 10, 2007 at 9:32 AM
I don’t think the judge has “laid down the law”. Many trade secret cases are attempted resolution in mediation. I don’t know what the outcome normally is though.
However, Neil, your disdain for juries is fear-inducing. Personally, I think cases should be tried with a jury of my peers, its worked for a while now, I don’t think MTH vs. Lionel should change that precedence.
Besides, there was a machinist on the jury that made the original award, and his take was that it was obvious since parts from the Lionel and MTH engines were completely interchangeable. I wouldn’t call a machinist a “layman” when it comes to mechanical parts. A machinist may not do mechanical engineering, but he will have a good understanding of how parts interlock.
Besides, I would doubt today’s trains have much mechanical engineering anyway. Mostly it comes down to gear ratios from available cogs and gears, and the specific RPM and torque characteristics of the can motor, keeping power consumption to a minimum to meet all performance criteria.
Posted by: David L Pearce | Jan 10, 2007 at 6:26 PM
I do not see a role for lay juries in civil cases involving highly technical issues. These should be adjudicated in specialized courts with judges and independent consultants with expertise. A good example is medical malpractice. Juries often fail in these situations.
Juries are invariably used in English common law and American law only in criminal cases, not civil cases.
When I said Judge Lifland laid down the law, it’s because he made it plain that he wasn’t going to allow MTH to take this case back to another jury. If mediation fails, he’s very likely to decide to adjudicate damages (if any) in his court, and if MTH doesn’t like the results, they can then appeal. But right now, MTH is powerless to affect the outcome of either the Lionel bankruptcy case, or their own complaints against Lionel. It’s in the judge’s power, and he’s said what he likely intends to do. There’s a message being sent, and no doubt MTH’s lawyers will have heard it.
Posted by: Neil | Jan 10, 2007 at 7:33 PM
And as to that machinist. He was quoted as saying he could tell from the position of the external screw holes on the locomotives that Lionel had copied MTH’s plans. The only problem is that isn’t illegal, and the documents misappropriated in Korea had nothing to do with the externals, and related only to the drive train and internals. That machinist jurist apparently completely missed the point of what the alleged trade secrets involved in this case. Not an inspiring performance to my way of thinking.
Posted by: Neil | Jan 10, 2007 at 7:35 PM
502c. No, it’s not a rare Lionel postwar variation, so I did a little inquiring and thought other non-bankruptcy experts might be interested in what I found out. It’s a section of the bankruptcy code. It turns out at the Lionel bankruptcy hearing earlier this week, Judge Lifland made it clear to MTH’s attorney that if MTH and Lionel cannot mediate their disputes successfully, he will assist Lionel in exiting bankruptcy by holding a damages estimation hearing for all MTH’s existing claims against Lionel (and vice versa if there are any we don’t know about). MTH’s attorney probably had a significant “oh heck” at hearing this because it is well known, I gather, that such estimations of damages are critical. The bankruptcy judge could decide that MTH’s claims are worth 100 million dollars, zero or anywhere in between. Here’s what one legal text says about 502c hearings:
“Much is at stake in an estimation hearing. Upon confirmation of a chapter 11 plan, the estimated amount will, as a practical matter, act as a cap on the maximum amount of the debtor’s obligation.”
So effectively, if MTH doesn’t come to terms in mediation with Lionel, Judge Lifland will be setting a cap on MTH’s maximal recovery from any subsequent trial.
Posted by: Neil | Jan 12, 2007 at 1:57 PM