In re Teknek, LLC

Systems Division, Inc. (SDI) (creditor) sued Teknek LLC (Teknek) (debtor) and Teknek Electronics (Electronics) for patent infringement. While the suit was pending, Teknek’s and Electronics’ shareholders formed a new company, Teknek Holdings (Holdings). The shareholders transferred all of Teknek’s and Electronics’ assets into Holdings, leaving Teknek and Electronics insolvent. A jury subsequently awarded SDI $3.77 million in the patent-infringement action. Because Teknek and Electronics had no assets to satisfy the judgment, the court added the shareholders and Holdings as defendants who were directly liable on the patent judgment under an alter-ego theory, based on the shareholders’ asset transfers to Holdings. Meanwhile, Teknek had filed for bankruptcy, and SDI had filed a notice of claim in the bankruptcy action. The bankruptcy trustee brought an adversary proceeding against the shareholders in bankruptcy court, seeking to recover the SDI judgment from the shareholders (as Teknek’s alter egos) on behalf of the bankruptcy estate. SDI subsequently began negotiating a settlement with the shareholders, and the shareholders asked the bankruptcy court to stay the trustee’s adversary proceeding so they could settle with SDI. However, the bankruptcy court refused and enjoined SDI from collecting the judgment from the shareholders. The bankruptcy court reasoned that SDI’s claim against the shareholders was the bankruptcy estate’s property, and therefore, nobody except the bankruptcy trustee could pursue the claim. The bankruptcy court’s injunction did not recognize that Electronics, a nondebtor, was also jointly and severally liable for the patent judgment or that the shareholders were equally liable as alter egos for Electronics’ and Teknek’s liability. The federal district court vacated the injunction, and the bankruptcy trustee appealed to the Seventh Circuit.