Lionel Wins Major Rulings In Bankruptcy Court
Lionel won two major and important rulings from Judge Lifland in the bankruptcy court this morning. The more important of these was the decision that the future trial (in others words,the Bankruptcy Code section 502c "damages estimation hearing’) in the trade secrets case would be tried before the judge, instead of a jury trial in the Federal District Court in Detroit, Michigan. The second important ruling was Lionel was granted a fifth extension of time, giving it the exclusive right to file its bankruptcy reorganization plan.
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As you may recall, Lionel’s attorneys previously made a motion requesting that Judge Lifland try the trade secrets case to expedite its exit from bankruptcy. MTH cross-moved, seeking to move the case to the Detroit District Court (the court where a jury awarded them $40.8 million dollars in June 2004 which was later vacated on appeal on December 14, 2006) for a jury trial there.
A hearing on the motions was begun on June 27. On that day, Lionel CEO and President Jerry Calabrese and CFO Scott Turkington testified it was in Lionel’s best financial interests to have the trade secrets and separate patent infringement lawsuit tried as quickly as possible. The hearing was not concluded that day as Lionel needed to call a third witness, Mr. William Hardie. The hearing was adjourned a couple of times in July as the two rivals conducted settlement talks.
The most interesting part of the proceedings was when MTH’s attorney, Mr. Swift was cross-examining Mr. Hardie. Judge Lifland became annoyed with Mr. Swift’s line of questioning of the witness about Lionel’s finances, calling them a "trojan horse." Judge Lifland instead asked the witness if "it is cheaper to be in or out of bankruptcy?" This question drew a chuckle from the small crowd in the courtroom. The hearing concluded following Mr. Hardie’s testimony. MTH’s attorney’s did not call any witnesses to testify.
As stated above, Judge Lifland sided with Lionel and ruled from the bench that he will try the trade secrets case. He will also enter a more detailed written order, outlining rules and procedures concerning the trial, including the date it will begin etc. As of the evening of June 2nd, a written order had not been posted on the court’s website, so I do not know some of the additional details.
The decision, although important and favorable to Lionel, is hardly unexpected. Since at least the court conference on January 9, 2007, Judge Lifland has said several times he will try the trade secrets case rather than allowing the Detroit District Court to hear it. However, in an effort to be fair to both parties, the judge allowed the parties to make motions on the issue, and held a hearing before formally deciding it. The patent infringement claim will also be tried by Judge Lifland since that lawsuit was brought in the bankruptcy court.
In the second important ruling, Lionel was also given an exclusive period of time to file its bankruptcy reorganization plan. In other words, during the exclusive period, no other creditors including MTH can propose plans to the court. Although Lionel’s motion asked for a 120 day period (to October 16 since the motion was made on June 16), Judge Lifland did not specify a particular period of time when he ruled from the bench today. I expect a specific period of time will be set forth in his written decision/order.
Following the hearing, Lionel attorney Adam Harris told me that the parties are still discussing settlement, but that he needed to move the litigation process forward in case a resolution is not possible.
Lastly, Judge Lifland made some interesting comments following his rulings. He stated this case has become an "emotional laden litigator’s delight", meaning the extensive and emotional driven litigation is making the lawyers rich. He also correctly stated he is well aware that Lionel and MTH are the two main players in the O gauge hobby, and the other companies are small by comparison. He noted the litigation has become an "entrepreneurial battle" between the two.
Stay tuned.
Erol Gurcan
Erol B. Gurcan, an O Gauge industry legal expert, is a regular contributor to OGaugeWatch.com
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