In re Paragon Trade Brands, Inc.

324 B.R. 829

In re PARAGON TRADE BRANDS, INC., Debtor Randall Lambert, the Litigation Claims Representative for the Chapter 11 Bankruptcy Estate of Paragon Trade Brands, Inc., Plaintiff, v. Weyerhaeuser Company, Defendant.

Bankruptcy No. 98-60930.

Adversary No. 99-6470.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

April 13, 2005.

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John A. Lee, W. Scott Locher, Andrews Kurth LLP, Houston, TX, for Plaintiff Randall Lambert, The Litigation Claims Representative.

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW

MARGARET H. MURPHY, Bankruptcy Judge.

TABLE OF CONTENTS
Page
  I.  INTRODUCTION ....................................................................841
 II.  FINDINGS OF FACT ................................................................842
      A.  Background of the Private-Label Baby Diaper Business Weyerhaeuser
            Transferred to Paragon in the IPO .........................................842
      B.  The IPO .....................................................................850
      C.  Paragon After The IPO .......................................................852
      D.  Paragon Is Driven To Bankruptcy By Intellectual Property Inadequacies .......854
      E.  Paragon's Losses For Which Plaintiff Seeks Damages ..........................855
          1.  Bankruptcy-Related Costs ................................................855
          2.  Product Re-Design Costs .................................................855
          3.  Lost Profits ............................................................855
          4.  Obligations Incurred To PG And KC .......................................856
              a.  PG obligations ......................................................856
              b.  KC obligations ......................................................858
              c.  Wellspring's purchase of Paragon ....................................861
              d.  Cash payments to PG and KC and remaining liability to them ..........863
              e.  SAP compliance costs ................................................863
          5.  Mabesa ..................................................................863
      F.  Plan Confirmation and Proceedings in This Adversary Proceeding ..............864
III.  CONCLUSIONS OF LAW ..............................................................866
      A.  Washington Law Governs ......................................................866
      B.  Prejudgment Interest ........................................................866
      C.  Contractual Indemnity Is Not The Exclusive Remedy ...........................867
      D.  Contract Indemnification Remedy .............................................869
          1.  Actual Liability Defense ................................................869

          2.  Failure To Provide Notice Defense .......................................871
              a.  ATA notice provision ................................................871
              b.  Paragon substantially complied with Section 11.03(a) ................871
              c.  Weyerhaeuser did not suffer actual prejudice ........................872
          3.  Weyerhaeuser Defenses And Counterclaim ..................................875
      E.  Common Law Measures Of Damages ..............................................879
      F.  Cost To Cure Measure Of Damages .............................................882
          1.  PG-Related Losses Arising From Inadequate Intellectual Property
                To Utilize ILG Feature ................................................883
              a.  Cost to cure damages attributable to the PG Royalty .................883
                  (1) "Conversion period" royalties paid ..............................883
                  (2) Other royalties paid ............................................883
                  (3) Loss attributable to post-Plan-confirmation royalty
                        obligation ....................................................883
                  (4) Should the PG royalty-related cost to cure damages be
                        reduced for royalties attributable to products not utilizing
                        the ILG feature on the IPO date? ..............................884
                      (a) Economy diaper and training pant ............................885
                      (b) Supreme diaper ..............................................886
                      (c) Canadian sales ..............................................886
                  (5) Should the PG royalty-related cost to cure damages be
                        reduced based on damages attributable to non-ILG
                        patents? ......................................................886
                  (6) Should the royalty-based damages be reduced to an after-tax
                        measure? ......................................................886
              b.  Cost to cure damages attributable to PG's agreed $158.5 million
                    unsecured claim and $5 million administrative claim ...............887
                  (1) Cash payment ....................................................887
                  (2) Promissory note obligations .....................................887
                  (3) Unpaid portion of PG's unsecured claim ..........................888
                  (4) Deductions to PG's unsecured claim-related cost to cure
                        damages because a portion of damages are attributable to
                        Paragon's non-Ultra diaper products? ..........................888
                  (5) Deductions to PG's unsecured claim-related cost to cure
                        damages because a portion of the damages are attributable
                        to Paragon settling other disputes with PG? ...................888
                      (a) Canadian sales ..............................................889
                      (b) Pre-petition and Post-petition sales allegedly infringing
                            PG's Aziz, Buell, Robertson and Anderson patents ..........889
                      (c) PG released its Motion for Contempt .........................889
          2.  KC-Related Losses Arising From Inadequate Intellectual Property .........890
              a.  The Delaware Judgment was a proximate cause of Paragon
                    incurring KC-related losses .......................................890
              b.  The Tyco decision does not limit Paragon's KC-related losses ........891
              c.  KC royalty-related cost to cure losses ..............................894
                  (1) Royalties paid ..................................................894
                  (2) Loss attributable to KC royalty obligation ......................895
                  (3) Should the KC royalty-related cost to cure damages be
                        reduced for royalties attributable to products not utilizing
                        the ILG feature on the IPO date? ..............................895
              d.  Cost to cure damages attributable to KC's $110 million
                    unsecured claim and $5 million administrative claim ...............895
                  (1) Cash payment ....................................................895
                  (2) Promissory note obligations .....................................895
                  (3) Unpaid portion of KC's unsecured claim ..........................896
                  (4) Deductions to KC unsecured claim-related cost to cure
                        damages attributable to non-Ultra diaper products .............896

              e.  Deductions to KC royalty-related and unsecured claim-related
                    cost to cure damages attributable to settlement of KC's SAP
                    patent infringement claims? .......................................896
              f.  Deductions to KC royalty-related and unsecured claim-related
                    cost to cure damages because the Enloe II and III patents
                    issued post-IPO ...................................................897
              g.  SAP compliance costs ................................................897
          3.  The Cost To Cure Damages Were Foreseeable ...............................897
          4.  Total Cost To Cure Damages ..............................................899
      G.  Difference In Value Measure .................................................899
      H.  Destructioon of Business Loss Measure .......................................906
      I.  Consequential Damages .......................................................907
          1.  Product re-design costs .................................................907
          2.  Lost profits ............................................................908
          3.  Bankruptcy-related costs ................................................911
          4.  Prejudgment Interest ....................................................911
      J.  Mitigation ..................................................................911
      K.  Attorneys' Fees .............................................................916
      L.  Post-Judgment Interest ......................................................917
 IV.  CONCLUSION ......................................................................917

I. INTRODUCTION

1. This adversary proceeding is a breach of contractual warranty case. Plaintiff, Randall Lambert, is the appointed litigation trustee for the...