Unpublished Dispositionin Re Dezign Corporation, Debtor,drd, Ltd., Plaintiff-appellee, v. Dezign Corporation, Defendant,paul O. Russell, Jr., Non-party Appellant, 834 F.2d 172 (6th Cir. 1987)

This is a contract dispute involving rights to certain "monochrome technology" used in the manufacture of outdoor signs. Plaintiff DRD, Ltd. sought to recover the technology from Dezign Corporation after Dezign filed a petition in bankruptcy. The bankruptcy court upheld DRD's claim. After reviewing the record de novo, the district court adopted the bankruptcy court's findings and conclusions. Paul Russell, a shareholder of Dezign and the corporation's former president, appeals from the district court's order on the grounds that the district court failed to conduct a proper de novo review of the bankruptcy court's findings of fact and conclusions of law and erroneously considered a document not properly admitted in evidence. In addition, he argues that the district court erred as a matter of law in holding that Dezign was bound by a certain "Development Agreement," in holding that improvements to the technology developed after January 31, 1984, were not assets of Dezign, and in holding that a certain amendment to the Development Agreement was properly terminated prior to the commencement of the bankruptcy proceeding. Dezign, represented by the trustee in bankruptcy, did not appeal the district court judgment. For the reasons that follow, we shall affirm the judgment of the district court.

* A man named David Gilliland founded Dezign Corporation, a company organized under the law of Tennessee, to engage in the business of selling conventional outdoor signs. In 1982 Gilliland approached a Memphis attorney, Frank Watson, to ask whether he and his business associates would invest in Dezign. In his initial overtures Gilliland described an idea for using fiber optics in outdoor signs. He suggested to Watson that this idea had the potential for achieving substantial energy and maintenance savings.

Although Watson chose not to become an investor in Dezign, he formed a limited partnership called DRD, Ltd., as a vehicle for investment in monochrome sign technology developed by Dezign. Watson owned Randell Corporation, which became the general partner of DRD. Discussions between Watson and Gilliland led to the execution of certain agreements that set forth the relationship between DRD and Dezign. The initial agreements, signed on November 1, 1982, were called the Development Agreement, the Technology License Agreement, the Option Agreement, and the Granting Agreement and Option Contract. The agreements provided that DRD would become the owner of the technology and license its use to Dezign.

Dezign was obligated to reach certain developmental milestones within specified periods of time. For example, Dezign was committed to producing a certain number of reader boards and price signs (preliminary prototypes for outdoor signs) by certain dates. The agreements also provided that the Development Agreement would terminate when all of the project's funds were exhausted. The agreements called for DRD's investors to provide $400,000 in new capital for use by Dezign in developing the technology. The agreements provided that if this money were used up before the project was completed, the license would terminate and the technology would revert to DRD.

Dezign ran out of money in 1983. Watson did not demand possession of the technology, however, but worked with Gilliland to develop a new arrangement. Dezign decided to make a $500,000 equity offering, and Sam Chavitz and Eleanor Hyde, two associates in Watson's law firm, were assigned the task of preparing a private placement memorandum.

To keep the project alive until the stock offering could be made, DRD's investors agreed to provide an additional $100,000. Negotiations began between DRD and Dezign for amendments to the original set of agreements. Attorney Eleanor Hyde drafted the amendments that became known as the First Amendment to the Development Agreement, the First Amendment to the Technology License Agreement, and the First Amendment to the Option Agreement. The First Amendment to the Development Agreement set an absolute deadline for completion of the project:

"In the event Dezign fails to complete the project as defined herein by September 30, 1984, such failure shall constitute a default under this First Amendment to the Development Agreement, the Development Agreement, the Technology License Agreement, the First Amendment to the Technology Agreement and the Patent License Agreement and DRD shall have the right to terminate all such agreements and take full possession and control over any and all patents, plans, drawings, specifications, materials, records, inventions, discoveries, equipment, technology, royalty bearing products and spare parts relating to sign research and development, any Technology connected therewith and all assets listed on Exhibit 'A' attached hereto."

The essence of the First Amendment to the Development Agreement was also set forth in Section 6b of the private placement memorandum prepared by Chavitz and Hyde. Russell and Gilliland were both given drafts of the memorandum, as was Gilliland's wife Melody, so that they could make comments during the preparation process. All three were members of Dezign's board of directors at the time the board approved the issuance of the private placement memorandum. This memorandum provided, in pertinent part, as follows:

"Risk of Default Under Agreements with DRD--The corporation plans to complete the monochrome system research and development by June 30, 1984. If the corporation does not fulfill its contractual obligations to DRD to complete the research and development program by September 30, 1984, DRD has the right to cancel all agreements it has with the corporation, including the various license agreements, and take full possession of and control over all patents, plans, specifications, materials, records, inventions, discoveries, equipment, technology and technology relating to the sign research and development and any royalty-bearing spare parts.

In addition, the corporation's license agreements with DRD may be cancelled if certain production criteria are not met on a timely basis. Such events would cause the corporation to lose a significant portion of its potential. (See Business Financing, Research and Development.)"

The additional $500,000 to be raised through the stock offering was intended to help Dezign complete the technology project, to pay outstanding debts, and to provide Dezign with working capital. Dezign Corporation of Tennessee would be merged into a new Delaware corporation of the same name with no change in the officers and directors. As a condition to the equity subscription, Melody Gilliland, a Dezign shareholder who had served as President of Dezign since 1982, agreed to resign as president immediately after the equity subscription was closed. Appellant Paul Russell, who had previously acted as a consultant to the company, became president.

On January 31, 1984, a meeting was held to execute the new agreements between DRD and Dezign and the documents necessary to close the equity subscription. Among those present were Dezign directors Melody Gilliland, David Gilliland, and Paul Russell; Frank Watson for DRD; and attorneys Sam Chavitz and Eleanor Hyde.

There is a factual dispute as to whether Melody Gilliland, as president, signed the First Amendment to the Development Agreement at this meeting. She has admitted signing the other two "First Amendments" and the documents related to the equity subscription, but has testified that she did not recall reviewing or signing the development agreement amendment on January 31, 1984. Instead, she has alleged that Eleanor Hyde induced her to sign the agreement in February of 1984 by misrepresenting it as simply a "housekeeping matter."

The agreement itself bears the signature of Melody Gilliland and the date January 31, 1984. The bankruptcy court and the district court both found as a fact that Mrs. Gilliland had signed the agreement on that date. Eleanor Hyde, Frank Watson, and Sam Chavitz all testified that Melody Gilliland signed the agreement in their presence on January 31.

On September 30, 1984, Dezign had not completed the project and had not produced any prototype reader boards. Again, Watson did not immediately declare a default; he attempted to rescue the project by securing other venture capital. Those efforts were unsuccessful, and in a letter dated July 31, 1985, Watson finally declared a default, terminated the agreements, and demanded possession of the technology. This letter was delivered on August 5 or 6, 1985, to Michael Post, who had become Acting President of Dezign.

On August 23, 1985, Dezign filed a voluntary petition under Chapter 11 of the bankruptcy code. On October 22, 1985, DRD filed a motion seeking relief from the automatic stay and asking for possession of the monochrome technology. David Gilliland and Paul Russell objected on two grounds: (1) Melody Gilliland had not signed the First Amendment to the Development Agreement, and (2) DRD had failed to terminate the agreements, which meant that the agreements were executory contracts that could be assumed by the trustee.

The bankruptcy court determined that the matter was a non-core proceeding under 28 U.S.C. § 157(c) (1), and that the dispositive issues were whether valid contracts existed and whether the contracts had been broken. On January 15, 1986, after an evidentiary hearing, the bankruptcy court issued findings of fact and conclusions of law. The court found that the First Amendment to the Development Agreement was duly executed by Melody Gilliland, then President of Dezign, on January 31, 1984, in the presence of Dezign's other principals. The court concluded that Mrs. Gilliland had apparent authority to execute the Amendment on behalf of Dezign. The court initially found that Dezign was not in default under the agreements and that the contracts were therefore executory. Upon DRD's motion for reconsideration, however, the court modified its findings to conclude that Dezign was in default, except as to the royalty payments due on September 30, 1985.

DRD asked the district court to adopt the bankruptcy court's findings and conclusions, and Russell and Gilliland filed objections to them. The district court agreed with the objectors (and with the bankruptcy court) that the matter was a non-core proceeding requiring de novo review, but noted that the result would be the same whether the matter were reviewed de novo or under a "clearly erroneous" standard. On November 11, 1986, the district court filed a memorandum opinion adopting the bankruptcy court's proposed findings and conclusions in their amended form. Judgment was entered in accordance with that opinion on December 9, 1986. Paul Russell filed a notice of appeal from the judgment on December 23, 1986.

II

Mr. Russell argues that the district court did not conduct a de novo review of the bankruptcy court's findings and conclusions as required under 11 U.S.C. § 157(c) (1). Although he claims that he is not requesting a new trial, his primary point appears to be that the district court failed to conduct a new hearing with live appearances by the witnesses who had testified in the bankruptcy court. He argues that the district court could not make the necessary determinations of credibility from a paper record.

This argument reflects a fundamental misunderstanding of the concept of de novo review. In conducting such a review, a district court may hear such evidence as it deems appropriate, and may accept, reject, or modify, in whole or in part, any of the bankruptcy court's findings and conclusions. See Oklahoma Natural Gas Co. v. Mahan & Rowsey, Inc., 48 B.R. 767 (D.C.Okla.1985), aff'd, 786 F.2d 1004 (10th Cir.), cert. denied, 107 S. Ct. 185 (1986), (de novo review of bankruptcy court findings and conclusions concerning state claims under "referral rule"). When it reviews a bankruptcy court's findings de novo, the district court is not required to accord the findings the deference to which they would be entitled under a "clearly erroneous" standard. The district court's de novo review of non-core bankruptcy proceedings is similar in scope to the court's de novo review of a magistrate's report; and in United States v. Raddatz, 447 U.S. 667, 674-76 (1980), the Supreme Court found that de novo review under the Federal Magistrates Act does not require the district court to conduct a new hearing on contested issues. The district court applied the correct standard of review to the record of the proceedings in the bankruptcy court in the case at bar.

III

In his second assignment of error, Mr. Russell argues that the court erred in considering a document that was not admitted in evidence before the bankruptcy court. The basis for this claim is the district court's statement that " [s]ubsequent to January 31, 1984, DRD did acquire patent assignments on technology." The district court found that in addition to the plain language of the agreements and a common sense evaluation of the parties' intentions, performance under the agreements supported DRD's claim to any improvement in the technology. The court cited no specific source in the record for this conclusion. On appeal, Russell contends that the finding results from the district court's improper consideration of an attachment to a brief filed in the district court by DRD on June 2, 1984. Russell concedes the authenticity of the document, but claims he did not have an opportunity to present evidence of its improper execution.

Whether the district court actually considered the document makes no difference, in our view, because we do not consider the document essential to the court's decision. We agree with the district court that DRD is entitled to the improved technology on the basis of the contract language and a common sense evaluation of the parties' intentions.

IV

In his third assignment of error, Mr. Russell argues that the First Amendment to the Development Agreement is void because (1) it was obtained by misrepresentation, (2) Mrs. Gilliland did not have authority to execute it, and (3) Dezign did not receive any consideration for it.

As to the first reason, the bankruptcy court and the district court both found that Mrs. Gilliland signed the amendment on January 31, 1984, on the last day of her term as president. They rejected the contention that she had been tricked into signing the amendment later, and we have no basis for reversing that factual determination.

Mrs. Gilliland had apparent authority to sign the amendment. Russell makes much of the fact that the Dezign board of directors did not expressly authorize the amendments, citing Colish v. Brandywine Raceway Association, 119 A.2d 887 (Del.Super.Ct.1955), a case he describes as "dispositive of the issue regarding the president's lack of authority to execute the amendment." In Colish, the court found that the vice-president and treasurer of the corporation, who were board members, did not have apparent authority to employ an architect where the president and secretary (also board members) did not know about the contract. Id. at 891-92. In the instant case, in contrast, the Dezign board had actual knowledge of the September 30, 1984, deadline and the consequences of default. The board had officially approved the private placement memorandum that clearly referred to the September 30 deadline subsequently set out in the First Amendment to the Development Agreement. In addition, at least three of the directors of the corporation were present on January 31, 1984, at the meeting where the amendment was signed, and director David Gilliland reviewed all documents before President Melody Gilliland signed them. Finally, the corporation accepted the $100,000 benefit of the amendment executed by Mrs. Gilliland, and it is equitably estopped from denying Mrs. Gilliland's authority.

Dezign received ample consideration for the First Amendment to the Development Agreement. DRD paid Dezign approximately $70,000 in anticipation of the execution of the agreement, and paid an additional $30,000 between January 31 and April 1984.

V

In his fourth assignment of error, Mr. Russell argues that DRD was not entitled to improvements in the technology made after January 31, 1984. He contends that there could be no transfer of future improvements without a clear and unambiguous assignment, and he argues that the term "improved technology," as used in Section 3 of the First Amendment to the Development Agreement, was intended to refer only to improvements existing at that time. We agree with the courts below that DRD owns all the technology in question.

Relevant documents in the record include section 9 of the original Technology License Agreement, entitled "Improvements," which specifically provides that improvements to the technology automatically become part of the technology licensed by the agreement. Section 3 of the First Amendment to the Development Agreement gives DRD the rights to "any and all patents, plans, drawings, specifications, materials, records, inventions, discoveries, equipment, technology, royalty bearing products and spare parts relating to sign research and development, any Technology connected therewith and all assets listed on Exhibit 'A' attached hereto." Exhibit "A(2)" lists " [a]ll patent, copyright, trade secret and other intellectual property rights pertaining to the development, manufacture and use of the signs." There is ample support in the record for the district court's conclusion that DRD was entitled to all improvements in the technology.

VI

Finally, Mr. Russell argues that no default under the contract occurred prior to the commencement of the bankruptcy proceeding. He argues that the original September 30, 1984, deadline had been extended by Michael Post, President of Randell Corporation, and that the Dezign board of directors was not officially notified of default. He makes no attempt to explain away Watson's letter of July 31, 1984, to Acting Dezign President Post declaring a default and demanding the return of the technology. In view of the clear language of the letter and the undisputed fact of its delivery on August 5 or 6, 1984, Mr. Russell's argument on this issue is without merit.

The judgment is AFFIRMED.