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Eh Yacht v. Egg Harbor

January 24, 2000

EH YACHT, LLC
PLAINTIFF,
V.
EGG HARBOR, LLC; JOHN DIDONATO, GIGI DIDONATO, RUDOLPH LEHNERT, ROBERT HAZARD, AND JANE AND JOHN DOES A THROUGH Z, JOINTLY AND SEVERALLY AND IN THE ALTERNATIVE,
DEFENDANTS.



The opinion of the court was delivered by: Simandle, District Judge:

HONORABLE JEROME B. SIMANDLE

OPINION

I. INTRODUCTION

In this trademark infringement dispute, two companies each claim the right to use the name EGG HARBOR in connection with the manufacture and sale of luxury sports fishing yachts following the November 1997 cessation of operations of the registered owner of the Egg Harbor mark, Marine Acquisitions, Inc. ("Marine"). Plaintiff--EH Yacht, LLC, and its principal, Dr. Ira Trocki--claims to have purchased title to the name Egg Harbor, and the related trademark of a stylized sailfish wearing a crown, in September 1999 from the statutory receiver court-appointed to wind up Marine's financial affairs. Plaintiff has readied its manufacturing operations, and is now close to completing its first vessel. Defendants--Egg Harbor LLC, and its principals John and Gigi DiDonato--claim that Marine Acquisitions abandoned the EGG HARBOR trademarks when it ceased operations without intent to reopen the business or otherwise use the mark, and that by May 1998, defendant was taking steps to use the abandoned mark.

Presently before the Court are the parties' cross-motions for preliminary injunctive relief. First, defendant Egg Harbor LLC moved to preliminarily enjoin plaintiff (and counterclaim defendant) EH Yacht LLC from using the mark Egg Harbor in connection with its new company. Defendant Egg Harbor LLC, to prevail on its motion, must show, among other requirements for preliminary injunctive relief, that it is likely to prevail on the merits of its claim against EH Yacht LLC. Egg Harbor LLC has the trial burden of demonstrating by clear and convincing evidence that the trademark was abandoned within the meaning of section 45 the Lanham Act, 15 U.S.C. § 1115. This burden will require examination whether there was absence of an intent to resume use of the trademark by those having the right to do so.

In the cross-motion for preliminary injunctive relief, plaintiff EH Yacht LLC seeks to demonstrate that it is the owner of the Egg Harbor trademark as the holder in due course of the assets of the company once known as Egg Harbor Yacht Co. by virtue of an acquisition, for fair market value, of the EGG HARBOR name and mark from the statutory receiver appointed to dispose of Marine's assets. Plaintiff will have the burden of proving its ownership at trial by a preponderance of the evidence, and alleges that it is likely to succeed in meeting this burden. If EH Yacht LLC is able to demonstrate that the statutory receiver indeed possessed all right, title and interest to the mark at the time the receiver sold it to plaintiff, then it should prevail at trial.

Both sides assert that their adversary's actions are unlawful and are causing much confusion in the public's perception of Egg Harbor Yachts. Specifically, the yacht-buying market is unable at this point to tell who is the rightful successor to Egg Harbor's prestigious and venerable name and mark. Both sides assert that they are suffering irreparable harm at the hands of the other company due to confusion in the marketplace and a consequent loss of Egg Harbor's market share.

The facts of this case present an unusual combination of federal trademark law and creditors' rights. The Court is called upon to determine what, if any, rights a creditor has to a registered trademark when the trademark owner discontinues manufacture of the trademarked product and becomes insolvent. As will be discussed in further detail below, if the trademark was abandoned before the creditor's rights vest, then the creditor's interest in the trademark is dissolved. If, on the other hand, the trademark was not abandoned, then the creditor's rights to the trademark vest upon seizure of the debtor's assets. The principal issue then boils down to the question of trademark abandonment, i.e., whether defendant will likely be able to prove by clear and convincing evidence that the trademark was abandoned with no intent to resume use in a reasonable period of time. If abandonment is not demonstrated to this standard, the issue becomes whether the plaintiff is likely to succeed in its claim of rightful ownership though its acquisition of the Egg Harbor trademark from the statutory receiver. For reasons discussed herein, the Court will resolve all issues in favor of the plaintiff, EH Yacht LLC, and will deny defendants' application for preliminary injunctive relief. For these same reasons, the Court will grant plaintiff's cross-motion for preliminary injunctive relief, and will enjoin Egg Harbor LLC from using the Egg Harbor name and logo in connection with the manufacture and sale of luxury yachts.

This Court has received into evidence the numerous exhibits and affidavits accompanying the parties' briefs, together with the arguments of counsel on December 13, 1999. The following findings are entered pursuant to Rules 52(a) & 65, Fed. R. Civ. P.

II. FINDINGS OF FACT

The Egg Harbor Yacht Co. ("EHYC"), founded in 1946, once was one of the nation's most prominent boat builders, and one of Egg Harbor City's biggest employers. The Egg Harbor name has been in use in connection with inboard motor boats, yachts, and cruisers since the company's inception in 1946. The most recent renewal of the company's trademark on the Egg Harbor name was filed on behalf of the Egg Harbor Yacht Co. in December 1994, and was approved in September 1996. USPTO Serial Number 74-616074; Registration Number 2002266, available in U.S. Patent and Trademark Office Trademark Text and Image Database . The Egg Harbor logo, a stylized sailfish wearing a crown, *fn1 has been in use at least since the late 1960s. The latest trademark filing on the logo, was made in 1986, was approved in May 1994, with Egg Harbor Yacht Co. listed as owner. USPTO Serial Number 73-631322; Registration Number 1835359.

Despite EHYC's stellar reputation, the company suffered a series of financial setbacks and ownership changes. These difficulties culminated in a filing for Chapter 11 bankruptcy in 1992. After the bankruptcy filing, the company re-emerged with a new owner, William Robinson. As part of Robinson's effort to correct EHYC's financial condition, on September 13, 1993, the company obtained a federal Department of Housing and Urban Development ("HUD") loan through the City of Egg Harbor in the principal amount of $3,550,000.00 to finance EHYC's exit from bankruptcy. The EHYC loan was secured by a duly recorded Mortgage and Security Agreement. To further secure the obligation of EHYC to the City of Egg Harbor, EHYC granted the city a later-perfected Uniform Commercial Code ("UCC") security interest in EHYC's assets, including, among other things, EHYC's owned trademarks and trade names. *fn2 The security interest was to last until the entire indebtedness was paid off. All security interests were assigned to the New Jersey Economic Development Authority ("NJEDA"), an instrumentality of the state of New Jersey, on September 13, 1993.

In April 1996, some of Robinson's investors, incorporated under the name of Marine Acquisitions, Inc. ("Marine"), bought Egg Harbor Yacht Co. from Robinson with the consent of the NJEDA. As part of this sale, consummated on July 1, 1996, EHYC specifically assigned the EGG HARBOR name and trademark to Marine Acquisitions. (Weiss Cert, Ex. A(B)(A), Pl.'s Ex. 11) (seller "assigns, the entire right, title and interest in, to and under all of Egg Harbor's trademarks, service marks . . . related logos . . . whether registered or not").) The record before the Court shows that at the time of the sale to Marine Acquisitions, the trademark to the Egg Harbor name had been registered and the logo registration was underway. Therefore, at the time of sale, the EHYC validly assigned the EGG HARBOR name and logo to Marine.

As a condition of NJEDA's approval of the sale of EHYC's assets to Marine, Marine confirmed to the NJEDA its obligation to repay the loan on the terms and conditions of the 1993 loan, which preserved the NJEDA's security interest in the Egg Harbor Trademark. Among Marine's other creditors were the United States Housing and Urban Development Corporation, Detroit Diesel Capital Corporation, and Bevis Financial Co.

In October 1997 Marine temporarily suspended Egg Harbor manufacturing operations for a day due to cash flow problems. It resumed operations thereafter, only to again suspend manufacturing on November 14, 1997. No public proclamations of the company's intent were made in November 1997.

Confusion surrounded Marine Acquisition's decision to cease manufacturing, and there is a crucial dispute of fact as to whether the production of Egg Harbor Yachts was simply being suspended, or was being discontinued altogether. In a declaration dated December 13, 1999, former Marine Acquisitions financial operations officer Marita James, who was in charge of Marine's debt maintenance and payroll, stated that the suspension of operations was just that--a suspension, and that when making the decision to close the production plant, she assumed that creditors would take control of the assets and dispose of them.

According to James, there was no intent "to abandon to the public domain the Company trademark or the trade name `Egg Harbor', which [she] considered to be a valuable asset of the Company belonging to the creditors." (M. James Decl. ¶¶ 4-5.) Further supporting the notion that the Egg Harbor name was not dead, in an interview with a local paper after the plant closing, one officer said that Marine was negotiating with the lender and hoped to work again under different ownership. Another officer stated in the same interview that he hoped to work with employees "under different ownership." (Pl.'s Ex. 9.)

These statements indicating that the closing was a mere suspension of operations contrast with the declaration of Walter Johnson, a former director of Marine Acquisitions, who said the decision to terminate Marine's operations was sudden and final, and that the directorship had no hope of reviving the company. (W. Johnson Decl.) At any rate, the company's owners did not attempt to sell the company or reorganize it in bankruptcy. Nor was any effort made to shield any of Marine's assets from its creditors.

On Monday, November 17, 1997, the Monday following Marine's Friday cessation of operations, Mr. William Kendall, NJEDA Senior Asset Recovery Officer, appeared on site, secured the premises and took custody and control of the plant and equipment. On November 18, 1997, the NJEDA placed signs around the premises that stated: "THIS PROPERTY HAS BEEN REPOSSESSED BY THE UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT BY ACTION OF THE NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY, ITS AGENT." (Pl.'s Ex. 44.)

Soon thereafter, on December 1, 1997, the NJEDA commenced a receivership action in the Superior Court of New Jersey, Atlantic County. The purpose of this action was to retrieve boats removed from the premises by a competing secured creditor, Detroit Diesel, and otherwise marshal and sell off the assets of the company. Although a statutory receiver was not appointed until late 1998, after the initiation of the receivership action Mr. Kendall was contacted by approximately twenty individuals about the sale of the Egg Harbor name and trademark. (Kendall Dep. 79:15-20.) Mr. Kendall testified at his Deposition dated December 3, 1999 that in all cases, his response to such queries was that the NJEDA was unable to sell the company name or other assets, and that the person who would have the authority to do so was the Statutory Receiver. (Id. at 80:11-18.)

In late 1997 and early 1998, Detroit Diesel, the secured creditor with the primary security interest in boats under construction at the time plant operations ceased, repossessed and sold several partially- completed boats to parties interested in acquiring them at a discount. One such buyer was defendant John DiDonato. Ultimately, Mr. DiDonato decided not to keep the boat himself, but to sell the 42-foot yacht, and two other partially completed yachts, a 37-foot boat and a 52-foot boat. In order to complete fabrication of these yachts, Mr. DiDonato, acting in his capacity as agent for his company Vision Properties LLC, leased from the NJEDA molds necessary to make fiberglass parts necessary to complete the boat hulls. (Pl.'s Ex. 4.) Mr. DiDonato then copied the molds, and "splashed" the hull of the 52-foot boat. Apparently, splashing is a reverse-engineering process during which a wax mold of the hull is made, and new boats molded therefrom. (Declaration of Robert Hazard at ¶ 19.)

During this same period, there was considerable confusion in the market as to whether Egg Harbor was planning to resume business. According an interview with a yachting industry publication, as of mid- December 1997, Egg Harbor dealers were not told of the status of the Marine shutdown, and continued to sell Egg Harbor boats purchased from Marine Acquisitions t/a EHYC. (Soundings Trade Only, Jan. 1998, Statement of Bill Cacciatore, Vice President of Harbor Yacht Sales in Dania, Fla., Ex. B of DiDonato Supp. Decl.) These sales of residual Egg Harbor Yachts were still continuing as of January 1998: "Right now we're going to continue to sell their boats and believe that someone else will purchase the company and start building boats again. . . . Owners have been through this before. Hopefully this will turn out for the better." (Id.)

In early 1998, Mr. DiDonato decided to go into the yacht-making business and quickly began taking steps to appropriate the goodwill surrounding the EGG HARBOR name for his own company. DiDonato contacted Attorney Nelson Johnson about the prospects of taking over Egg Harbor, and Mr. Johnson began his investigation into the requirements of such a takeover in February 1998. In April 1998, Mr. Johnson and Mr. DiDonato contacted Mr. Kendall, and NJEDA counsel Joan Weidner, both of whom apparently asserted that the NJEDA had the authority to sell Marine's Assets, including intellectual property, even before the appointment of the statutory receiver. (N. Johnson Decl. ¶ 5.) Johnson contacted William Robinson, a former CEO of Marine, who apparently asserted that the Egg Harbor marks were personally held by him, and he had exclusive rights to market title to the name and logo. Additionally, Johnson contacted the attorney for the owners of EHYC's predecessor, Egg Harbor Boat Company, James Mercanto and Robert Traenkle. Both Mercanto and Traenkle apparently told Johnson that they owned the mark.

Concluding that there was confusion over the ownership of the name Egg Harbor, and that this confusion meant that the name had fallen into disuse, in May 1998 DiDonato began using the name Egg Harbor in connection with his new yacht building enterprise, notwithstanding the ongoing receivership action in the Superior Court of New Jersey. In September 1998 DiDonato formed the entity now known as Egg Harbor LLC, the operations of which included "splashing" *fn3 the hull of the Egg Harbor Yacht he bought from Detroit Diesel, and making parts from molds from leased from the EDA.

DiDonato made no public claim of having bought Marine's assets, nor did he claim to have rightfully purchased the EGG HARBOR name. Instead, DiDonato's offered only vague public explanations of how he came to head the manufacturer of Egg Harbor Yachts. For example, an Egg Harbor LLC website operated by DiDonato in connection with his venture states that DiDonato took the helm of Egg Harbor LLC in early 1998. The site includes a press article that quoted DiDonato as stating he "isn't sure how he became owner of Egg Harbor . . . [b]ut now he's in the driver's seat, he wants to steer the company back to the top." (, Pl.'s Ex. 2 at 1 & 31.)

Hoping to quickly substantiate his title to the Egg Harbor trademarks he was using, defendant hired Intellectual Property Attorney Robert Zielinsky to advise him. Mr. Zielinsky concluded that the mark had become abandoned due to the abrupt discontinuance of manufacture of Egg Harbor Yachts, and was in disuse. There is no indication in the record, however, that defendants inquired into the rights of Marine's creditors to the trade name and mark at this point, notwithstanding the on-going receivership action. Having concluded that the trademark was, in essence, unowned due to Marine's cessation of operations, Zielinsky filed on plaintiff's behalf applications with the U.S. Patent and Trademark Office to cancel the existing trademark registration for the name Egg Harbor and the sailfish logo, and to have these trademarks registered to Egg Harbor LLC. (Zielinsky Decl. ¶ 6.) Those applications are still pending.

In December 1998, approximately one year after Marine Acquisitions closed its doors, the New Jersey Superior Court appointed David Weiss, Esquire as statutory receiver for the remaining assets of Marine Acquisitions, Inc. Weiss immediately did an accounting of the assets of Marine, and determined that Marine still owned the Egg Harbor trademarks being used by Egg Harbor LLC. Mr. Weiss determined that in order to obtain the best price possible for the company's assets, the business should be sold as a going concern to a sophisticated buyer, and that the company represented an unusual opportunity for someone to start up where the prior owners had left off.

Upon learning that Egg Harbor LLC was operating under the Egg Harbor flag, Weiss filed in state court for a Temporary Restraining Order enjoining DiDonato from using the Egg Harbor name. This application for emergency relief was denied by the New Jersey Superior Court on February 2, 1999 because there was no showing of irreparable harm as the receiver was not then manufacturing boats. (Oral Opinion of the Honorable L. Anthony Gibson, JSC, Docket No. ATL-C-14-99 (N.J. Super Ch. Div. Feb. 2, 1999), Pl.'s Ex. 12.) Judge Gibson made it clear that he was not ruling on the merits of the receiver's trademark claims. (Id. at 10:2-14.)

There is some dispute as to when, but sometime in early 1999 Weiss and Mr. DiDonato met to discuss a proposal under which Egg Harbor LLC would purchase from the receivership certain assets of Marine Acquisitions, including the Egg Harbor name and logo. According to Mr. Weiss, DiDonato quickly terminated this meeting. Soon thereafter, the receiver filed the present action in June 1999 on behalf of Marine Acquisitions, seeking to quiet title to the EGG HARBOR name and mark.

After Weiss filed the present action, he and DiDonato met again on August 19, 1999. (Weiss Decl. ¶10.) At this second meeting, Weiss states, he and DiDonato reached an agreement under which the receiver would drop the suit pending in this Court and sell Egg Harbor LLC all assets of Marine, excluding real estate, for approximately $377,000.00. Weiss declares that he and DiDonato also agreed that, once he had removed the tangible assets from the Egg Harbor site, DiDonato would leave the premises "broom clean". *fn4 (Id. at ¶ 11.) Weiss's understanding of these negotiations was memorialized in a letter to DiDonato dated August 24, 1999. In this letter, however, Weiss unilaterally raised the asking price to $452,000.00. DiDonato apparently found the disparity in asking price too great, and negotiations were terminated.

After these negotiations broke down, Weiss began discussions with Dr. Ira Trocki. He consummated a sale with Dr. Trocki on September 29, 1999, under which Trocki acquired all Marine assets for the sum of $1,450,000.00. This price did not include any guarantees to the Egg Harbor name or logo, but rather sold all assets "AS IS, WHERE IS AND WITH ALL FAULTS." (Receiver's Agreement of Sale, Pl.'s Ex. C, at ¶ 15.2.)

Concerned that Trocki would launch a competing Egg Harbor Yacht business, Mr. Zielinski contacted Dr. Trocki's attorney, Robert Grossman, Esquire to inquire into whether Trocki would observe the status quo pending a judicial resolution of the trademark issue. Zielinsky allegedly was told that Trocki had no intention of wading into the yacht-building business until the trademark issues were ironed out. Nevertheless, in November 1999 Trocki started up EH Yacht LLC, which professed itself to be the successor of the old Egg ...


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