CBM Group, Inc. v. Bloom

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
DANIEL WILLIAM COOK and
YOLANDA T. COOK,
Debtors. 	No. 11-04-17704 SA
CBM GROUP, INC.,
Plaintiff,
v. 	Adv. No. 07-1038 S
LINDA BLOOM, TRUSTEE,
Defendant.
MEMORANDUM OPINION AFTER TRIAL ON THE MERITS
This matter came before the Court for trial on the merits of
the Complaint for Injunctive Relief and Declaratory Judgment
filed by CBM Group, Inc. (“CBM”). 	CBM appeared through its
attorney James A. Chavez. 	Defendant appeared through her
attorney Linda S. Bloom PA. 	This is a core proceeding. 	28
U.S.C. § 157(b)(2)(A). 	For the reasons set forth below, the
Court finds that the relief sought by Plaintiff should be granted
in part.
FACTS
1. 	CBM is a Nevada Corporation. 	The Debtors are officers and
sole directors of CBM, and also own at least one share of
its stock.
2. 	Thirteen individuals and trusts, including the Debtors, own
100% of Hydroscope Group (“Hydroscope”). 	Debtors claim to
have the controlling interest in Hydroscope.
3. 	Hydroscope Group owns 100% of Hydroscope Inc., USA (“HUSA”).
Debtors claim to control HUSA.
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4. 	Hydroscope USA owns all but one share of Hydroscope Canada,
an Alberta, Canada corporation. 	One share of Hydroscope
Canada (“HCAN”) is owned by a Canadian barrister. 	Debtors
claim to control HCAN.
5. 	All of the intellectual property (“IP”) (consisting of
patents, patent applications, trademarks, licenses, etc.)
relevant to this lawsuit was originally developed by HCAN or
acquired by HCAN at various times before July 27, 2005, with
the single exception of the “Cook Business Method” (“CBM”)
which was invented by Mr. Cook and had a patent application
pending through HUSA.
6. 	Some or all of the IP required periodic maintenance fees to
be paid to various governmental entities around the world to
maintain or acquire exclusivity.
7. 	Debtors, self-represented, filed a joint voluntary chapter
11 proceeding on October 21, 2004, thereby becoming debtors
in possession, and remained so until August 16, 2006.
8. 	On or about June 17, 2005 (but purportedly “made” on January
25, 2005 and “effective” on January 28, 2005), Debtor Daniel
W. Cook executed a document entitled “Agreement between
Hydroscope Inc., USA [sic], Hydroscope Canada Inc. and the
Cooks as Debtors in Possession and Trustees of their estate
in bankruptcy created on October 21, 2004.” 	Plaintiff’s
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1 The Agreement was amended by a document executed the same
day by Mr. Cook signing on behalf of the same four parties.
Plaintiff’s Exhibit I. 	The amendment does not materially change
the relevant terms for purposes of this decision.
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Exhibit H (“Agreement” or “Exhibit H”). 1 	Mr. Cook signed
four times in four different capacities: Mr. Cook as
Chairman of HCAN, Mr. Cook as President of HUSA, Mr. Cook as
“Trustee, Debtor in Possession”, and Mr. Cook as Chairman,
President & CEO of Hydroscope. 	Page 2 of the Agreement
recites in part as follows:
HCAN acknowledges it has no resources in
which to pay IP maintenance fees on patent
applications filed in HCAN’s name or any
means to maintain any other expenses that are
necessary for HCAN’s survival, including
registration fees and equipment storage fees.
HUSA acknowledges it has no means or business
income in which to pay required fees to
protect its remaining owned IP or any means
to maintain IP or any other expenses that are
necessary for HUSA’s survival, including
registration fees and telephone fees.
The [Bankruptcy] Estate as of January 2005 is
the only entity of this group or parties that
has any funds in which to maintain the
collective value of CBM and Hydroscope IP.
Page 3 states in part:
CONSIDERATION: HUSA, HCAN, and Daniel Cook
individually, all hereby irrevocably grant
any and all their respective ownership
interest, if any, in owned IP and know-how
that requires any financial or technical
support through December 31, 2005,
notwithstanding any alleged lien interest by
Wells Fargo or others, to the Cooks
individually as Trustees of the Cooks’ Estate
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in Bankruptcy. 	For consideration of this
irrevocable ownership grant of any and all
right, title and interest to the Cooks, the
Cooks will pay or cause to have paid
maintenance and prosecution fees on all or a
portion of any IP, but not warranting to pay,
thus attempting to preserve the IP from
expiring, as well as pay HCAN’s storage fees
and HUSA’s telephone bills throughout the
term of this Agreement. 	Although ownership
interest is automatically granted by HCAN,
HUSA, and Daniel Cook to the Cooks as
Trustees for any payment of IP fees applied
to any patents or patent applications, the
Cooks as Trustees hereby obtain a vested
ownership interest in all IP now owned by the
parties that requires maintenance or payment
of any fees through December 31, 2005 or some
another [sic] date as may be extended by the
parties.
9. 	On or about July 27, 2005 (about forty days after the
execution of Exhibit H), CBM and HCAN entered into a
“Purchase and Sale Agreement” (“P&SA”). 	Plaintiff’s Exhibit
A. 	The P&SA was executed by Mr. Cook for CBM and by Mr.
Cook for HCAN, although his capacity is not listed for
either entity. 	It recites that HCAN no longer has the
resources to maintain or utilize the IP; that the Cooks
acquired certain IP “and a vested interest in additional
Hydroscope® IP, all of which has been transferred into the
Estate”; that HCAN continues to own certain IP; and that CBM
desires to purchase and HCAN desires to sell to CBM all
rights, title and interest to all HCAN Hydroscope® IP. 	The
P&SA then “sells, conveys, assigns, transfer and delivers to
CBM” all of HCAN’s IP assets as of July 25, 2005, in
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consideration for which CBM will pay HCAN $175,000 on or
before July 31, 2006. 	Neither the Cooks individually nor as
debtors in possession were parties to the P&SA. 	Thus any
attempt to transfer to CBM any HCAN Hydroscope® IP that had
become property of the estate, if Mr. Cook intended the P&SA
to effect such a transfer, would be ineffective. 	The P&SA
contains an unusual feature; instead of an outright
conveyance, the assets are transferred subject to a
possibility of reverter:
9. Maintenance. 	CBM agrees to be responsible
for all that is required to maintain
Hydroscope® IP Continuing Compliance from
time to time. 	In the event that the Cooks
have commercially reasonable grounds for
insecurity that CBM will not maintain
Hydroscope® IP Continuing Compliance at any
time during 2005 and 2006, then upon written
notice from the Cooks or the Estate, all
Hydroscope® IP and supporting assets shall
automatically, without any further action by
CBM or any other party, revert to the Cooks,
the Estate, and/or HCAN as specified in such
notice from the Cooks or the Estate unless
CBM provides reasonable grounds for security
acceptable to the Cooks that CBM will
maintain Hydroscope® IP Continuing
Compliance.
Black’s defines “possibility of reverter” as “a reversionary
interest that is subject to a condition precedent; specif., a
future interest retained by a grantor after conveying a fee
simple determinable, so that the grantee’s estate terminates
automatically and reverts to the grantor if the terminating event
ever occurs.” 	Black’s Law Dictionary (8 th ed. 2004).
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2Black’s defines Integration Clause as “A contractual
provision stating that the contract represents the parties'
complete and final agreement and supersedes all informal
understandings and oral agreements relating to the subject matter
of the contract.” 	Black’s Law Dictionary (8 th ed. 2004).
3Does this mean CBM has performed all compliance for the
2005-06 period, or does this mean that as of July 31, 2006 CBM
has performed all compliance required by that date?
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The Court notes that the concept of reversion involves an
asset returning to its prior owner. 	Neither the Cooks
individually or the Estate ever sold assets to CBM, nor did
HCAN transfer its reversionary rights to the Cooks or the
Estate. 	The Court cannot see how any of CBM’s assets could
ever revert to the Estate. 	The P&SA also contains an
integration clause 2.
10. 	On or about July 31, 2006, CBM and HCAN entered into a
“First Amendment to Purchase and Sale Agreement”
(“Modification”) with a purported “Effective Date” of July
31, 2006. 	Plaintiff’s Exhibit B. 	The Amendment was
executed by Mr. Cook for CBM and by Mr. Cook for HCAN,
although his capacity is not listed for either entity. 	It
contains nine “recitals” and three substantive amendments to
the P&SA. 	One recital is significant: “CBM has performed
all 3 Hydroscope® IP Continuing Compliance to maintain the
value of assets the Hydroscope® IP owned by CBM.” 	The
amendments defer the due date of the $175,000 to December
31, 2007, accrues interest on that amount at 5.5% from July
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31, 2006, and reaffirms both parties’ intention to follow
through on the P&SA and Amendment.
11. 	On August 16, 2006, the Court appointed Ms. Bloom as Chapter
11 Trustee (“Trustee”). (Main case, doc 379).
12. 	On February 14, 2007, the Trustee transmitted her “Notice of
Chapter 11 Trustee’s Exercise of Reversion Pursuant to
Purchase and Sale Agreement” (“the Notice”)(Plaintiff’s
Exhibit U). 	It provides:
You are hereby noticed that on February 14,
2007, pursuant to paragraph 9 of Purchase and
Sale Agreement between CBM Group, Inc. and
Hydroscope Canada, Inc. effective July 27,
2005, as amended on July 31, 2006 (“Purchase
Agreement”), the Chapter 11 Trustee for the
Bankruptcy Estate of Daniel William Cook and
Yolanda Teresa Cook caused the Hydroscope IP
and supporting assets to revert to the
Bankruptcy Estate of Daniel William Cook and
Yolanda Teresa Cook due to the Chapter 11
Trustee’s commercially reasonable belief for
insecurity that CBM will not maintain the
Hydroscope IP and supporting assets.
13. 	On February 14, 2007, the Trustee, Scott Garrett and Pamela
Jane Garrett (individually and as Trustees of a family trust
and in their derivative capacity on behalf of Hydroscope)
(collectively, “the Garretts”) and Wells Fargo Bank, N.A.
(“Wells Fargo”) filed a Stipulated Motion to Approve
Compromise of Controversy in the main bankruptcy case (doc
503). 	Briefly, the compromise resolves litigation pending
in both the state court and bankruptcy court. 	Under the
compromise the Trustee will approve a stipulated foreclosure
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4 The Court currently has the motion under advisement,
pending the outcome of this litigation.
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judgment for the IP in favor of Wells Fargo, which in turn
sells the IP to the Garretts for $850,000.00 and pays
$100,000.00 to the estate. 	Wells Fargo also foregoes any
deficiency claim in the bankruptcy. 	Parties then mutually
release each other. 	The compromise is subject to Bankruptcy
Court approval 4.
14. 	This adversary proceeding followed. 	Plaintiff seeks
injunctive and declaratory relief that CBM is the lawful
owner of the HCAN IP, that the proposed compromise of
controversy is an unlawful attempt to convert CBM’s property
(i.e., the HCAN IP), and that CBM is entitled to a judgment
declaring that the Trustee is not entitled to ownership as
against CBM arising from the P&SA, the Amendment, the
Notice, or the proposed compromise of controversy.
Defendant’s answer admits the existence of the various
documents and states that they speak for themselves. 	She
denies that Plaintiff is entitled to the relief sought.
15. 	Mr. Cook testified at trial. 	The Trustee had a standing
objection to Mr. Cook’s testimony regarding the intent of
anyone surrounding the formation or interpretation of any
contracts, paragraphs or words, based on the parol evidence
rule. 	This objection is overruled as discussed below.
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5The Debtors were still self-represented at this time. 	Mr.
Cook did not distinguish between property he might own
individually from estate property.
6He also testified that the Garrett Group and Wells Fargo
contended that the bankruptcy estate acquired no IP. 	Presumably
this is an issue in one of the state court proceedings, where the
Garrett Group and Wells Fargo are challenging the transfers of IP
as fraudulent.
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16. 	Mr. Cook testified that beginning in 2005 HCAN needed to
maintain IP but had no money. 	Although he was already in
Chapter 11 and never sought Court approval, Mr. Cook paid
HCAN’s maintenance fees with estate funds and in return
received the patents for which he paid the fees. 	He
described the situation as one where he had an “option” to
pay more fees through December, 2005, but anything he paid
for “he” 5 would then own. 	He testified that from January to
March, 2005, he purchased six patents 6 which are listed on
Exhibit A-2 to Plaintiff’s Exhibit A and on Plaintiff’s
Exhibit E.
The Agreement (Exhibit H) was executed on June 17,
2005, but “made” on January 25 and “effective” on January
28, 2005. 	Effectively, therefore, Mr. Cook was “papering”
the transactions that had already taken place in January,
February and March 2005.
In June, 2005, Debtors filed a motion to obtain debtor-
in-possession financing, (main case, doc 109), which was
unsuccessful. 	Debtors were unable to pay further
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7Mr. Cook also testified that an attorney prepared a draft
original of Plaintiff’s Exhibit A, but that he made final
changes. 	The draft original was not put into evidence.
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maintenance fees. 	Therefore, HCAN sold the rest of its IP
to CBM. 	Plaintiff Exhibit A 7. 	The estate acquired no
additional IP after June, 2005. 	The estate made no further
payments for IP maintenance after June, 2005.
Mr. Cook also testified to his understanding of how
Plaintiff’s Exhibit H worked, i.e., if, through the end of
2005, he paid maintenance fees he would own the related
patent. 	Mr. Cook also testified as to Exhibit A. 	He
believed that the term “vested interest in additional
Hydroscope® IP” meant he had the right to purchase more
patents by paying the maintenance fees.
When asked why ¶ 9 was put in the P&SA (Plaintiff
Exhibit A), Mr. Cook explained that CBM acknowledged the
estate’s right to purchase additional IP through December
31, 2005, so this provision was inserted to preserve that
right and have CBM assume the obligation to sell the assets
to the estate.
Mr. Cook explained the reversion of ¶ 9. 	At the time
the documents were executed, he did not understand whether
he personally owned the Cook Business Method because it was
his “idea” originally, or whether it had passed to and now
belonged to the bankruptcy estate. 	Hence, if the property
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8Mr. Cook testified that he alone prepared the Modification.
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were ever to revert, it should revert to the proper previous
owner.
Mr. Cook also testified about the Modification.
Plaintiff’s Exhibit B 8. 	The P&SA was modified because CBM’s
plans to merge with Galtech (a third party that would
provide funds to CBM) had not gone as expected. 	Mr. Cook
testified that CBM had fulfilled all maintenance
requirements, so the purpose of ¶ F was to eliminate the
reversion from the P&SA. 	He also testified that no IP was
ever lost due to CBM’s failure to make a payment.
CONCLUSIONS OF LAW
1. 	The parol evidence rule does not bar this Court’s hearing
evidence of the circumstances surrounding the making of a
contract and of any relevant usage of trade, course of
dealing, and course of performance in order to decide
whether the meaning of a term or expression in the contract
is actually unclear. 	Mark V, Inc. v. Mellekas, 114 N.M.
778, 781, 845 P.2d 1232, 1235 (1993)(citing C.R. Anthony Co.
v. Loretto Mall Partners, 112 N.M. 504, 508-09, 817 P.2d
238, 242-43 (1991). 	When the evidence presented is so plain
that no differing interpretations are possible, the Court
interprets the agreement as a matter of law. 	Id. 	However,
if the Court determines that the contract is reasonably and
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fairly susceptible to different constructions, an ambiguity
exists. 	Id. (citing Vickers v. North Am. Land Dev., Inc.,
94 N.M. 65, 68, 607 P.2d 603, 606 (1980)). 	If the Court
finds an ambiguity, the meaning to be assigned to the
ambiguous term is a question of fact. 	Id. (citing Segura v.
Molycorp., Inc., 97 N.M. 13, 18, 636 P.2d 284, 289 (1981).
To determine the meaning of an ambiguous term, the Court may
consider extrinsic evidence of the language and conduct of
the parties and the circumstances surrounding the agreement
and oral evidence of the parties’ intent. 	Id. at 782, 845
P.2d at 1236 (citing American Bank of Commerce v. M & G
Builders, Ltd., 92 N.M. 250, 252, 586 P.2d 1079, 1081
(1978)).
2. 	Whether a contract contains an ambiguity is a legal
conclusion. 	McNeil v. Rice Engineering and Operating, Inc.,
133 N.M. 804, 808, 70 P.3d 794, 798 (Ct. App.), cert.
denied, 133 N.M. 771, 70 P.3d 761 (2003). 	Therefore, the
absence of ambiguity is not a fact issue on which the
parties can stipulate.
3. 	The Court finds that the contract at issue here, i.e., the
P&SA as modified by the Modification, is ambiguous. 	See
C.R. Anthony Co., 112 N.M. at 509 n.2, 817 P.2d at 243 n.2:
Ambiguity, as it has been used in this state,
is best understood as a proxy for describing
lack of clarity in the parties' expressions
of mutual assent. 	The term, as it has been
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employed, incorporates a variety of
conceptual problems including the distinctive
notions of ambiguous syntax, ambiguous terms,
vagueness, and general lack of clarity.
and cf. McNeill, 133 N.M. at 812, 70 P.3d at 802 (“Although
a written contract need not detail every term, essential
terms must be expressly provided or necessarily implied by
construction for a court to find the contract unambiguous on
its face.”)(citing C.R. Anthony Co., 112 N.M. at 507, 817
P.2d at 241.) 	Specifically, Recital C of the Modification
could equally mean that CBM was relieved of all future
duties of maintenance because it had paid all maintenance by
that date, or it could mean that as of the date of the
Modification CBM was current. 	See Ruggles v. Ruggles, 116
N.M. 52, 69, 860 P.2d 182, 199 (1993)(“A contract is
ambiguous if it is reasonably and fairly susceptible of
different constructions.”)(Citation and quotation omitted.)
Because of this ambiguity, extrinsic evidence of intent may
be considered to interpret the contract’s terms. 	C.R.
Anthony Co., 112 N.M. at 504, 817 P.2d at 242. 	This is true
even though the contract that contains an integration
clause. 	Ruggles, 116 N.M. at 69, 860 P.2d at 199.
Mr. Cook’s testimony cures the ambiguity; his testimony
was that CBM had performed all that was required under the
entire contract for maintenance, and that therefore the
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9Defendant’s expert testimony was not to the contrary. 	The
IP that was lost was the Estate’s.
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reversion in the P&SA was no longer in play. 	CBM had, in
fact, maintained exclusivity and no IP was lost. 9
4. 	Ms. Bloom’s exercise of the reversion was void and of no
effect.
5. 	Because the Court finds that the reversion was no longer in
play, the Court need not make further findings or
conclusions regarding whether other terms in the P&SA are
ambiguous.
6. 	The Court need not make any findings or conclusions on
commercial insecurity or CBM’s attempted cure because the
exercise of the reversion was void.
7. 	The Court need not make any findings on whether the right of
reversion was personal to the Cooks or passed to the Estate.
8. 	Because the right of reversion expired when CBM fully
completed its duties under the P&SA, no IP entered the
estate pursuant to any reversion, and therefore the issues
of fraudulent transfers of Estate property and breach of
fiduciary duties by the Cooks are moot.
9. 	HCAN is not before the Court, so the Court cannot make any
rulings on whether the P&SA is still in effect nor can it
make any determination as between CBM and HCAN which party
owns any particular asset.
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Honorable James S. Starzynski
United States Bankruptcy Judge
date entered on docket: 	January 31, 2008
copies to:
James A Chavez
320 Gold SW Ste 1400
Albuquerque, NM 87102-3248
Linda S. Bloom
Trustee
PO Box 218
Albuquerque, NM 87103-0218
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