Chesterfield, Michigan – November 15, 2004 – Lionel LLC, the nation’s number one model train manufacturer, today announced that it has filed a voluntary petition in the Bankruptcy Court of the Southern district of New York for protection under Chapter 11 of the U.S. Bankruptcy Code_. The filing was prompted by a $40.8 million judgment against the company for the alleged misappropriation of a competitor’s toy train designs by a subcontractor.
Lionel’s day-to-day operations will continue as usual, including meeting all merchandise shipping obligations customary for the holiday selling period and rolling out new products on schedule. The company remains dedicated to creating and manufacturing the quality product for which it has long been known.
Jerry Calabrese, the recently named CEO of Lionel, said, “The MTH judgment alone has forced us to take this action. Lionel is a sound company that enjoys healthy sales, growing demand for our products and the best brand and reputation in the business. Having said that, the size and weight of this judgment is just too much for what is essentially a small business to bear. Taking advantage of bankruptcy protection will not only allow us to pursue an eventual reversal of this unfair decision, it will enable us to create, manufacture and ship our products in our normal and usual way.”
About Lionel LLC
Lionel LLC is one of the world’s leading marketers of model trains and accessories. Established in 1900, the Lionel name is the most widely recognized brand in the toy train industry and one of the most recognized brands in America. Lionel has been at the center of every major innovation in toy train manufacturing and marketing since its in
Well, I knew that this would happen. I just wonder- did Wellspring decide not to appeal the verdict? hopefully, Lionel will emerge as a viable, energetic importer of Chinese and Korean made O scale toy trains—
You can bet your bottom dollar that Lionel will be appealing the verdict. There is little point in the Chapter 11 filing if they don’t. The bankruptcy filing, if accepted, will have the effect of stiffing MTH, at least temporarily, and giving Lionel additional financial and legal flexibility in dealing with the original verdict.
I agree Will, this is not unexpected. The next thing is to see MTH’s reaction, I expect it won’t be pretty. I call this the “blood from a turnip” defense, as in, you can’t get any. My guess is that Wellspring felt an appeal was just throwing good money after bad. This move ends the case, DEAD. It is called an empty judgement, worthless if you can’t collect.
There is a pecking order established when it comes to who gets money from the debtor company. MTH’s lawyers will probably get more than MTH, they stand closer to the head of the line. MTH may get a fraction of a penny on the dollar.
The last thing on Lionel’s plate is a settlement with UP over the licensing of their trademark. Since Athearn settled a while ago, and Lionel’s future is decided, they should move quickly to end that case. My crystal ball says 4 to 6 weeks. We’ll see.[;)]
LLC is an abreviation for Limited Liability Corporation. If my understanding on the matter is correct, the holding company(wellsprings) only has a limited financial obligation to Lionel in a situation such as the 40.8 million.
It is indeed a sad day for the toy train industry. One persons obsession with the demise of his former partner and the crushing of all competition has moved the hobby to a new low. I moved from HO to O because of the FUN toy trains offered. That fun is now deminished. I certainly hope it can be regained in the near future. I hope that Lionel can come through this a stronger and more focused company. They have my support in getting through this rough spot. It’s time to put the FUN back in toy trains!
I fully expected this move by Lionel. It is a sad day that the giant of toy trains has been driven to this by another company who started out copying the giant to begin with. I personally hope MTH never gets more than a token payment and certainly, never, ever the Lionel name.[V]
Chapter 11 does not discharge or reduce any existing debts. Lionel needs to appeal and succeed in reversing the judgement or having it reduced to get out from under the recent court verdict. Chapter 7 is the irreversible dissolution of a company in which the pecking order of creditors is established. If Lionel wanted purely to stiff MTH, and go out of business, they could do a Chapter 7. This, on the other hand, almost certainly is a strategic bankruptcy filing, IMO, with the primary purpose of getting a stay on the collection of the verdict and allow additional time for “other” plans, both offensive and defensive.
So how will Lionel come up with the Bond money for a appeal [?] If Wellspring gives it to them, it would have to be a loan, which Ch 11 will not allow.
Jerry Calabrese, the recently named CEO of Lionel, said, “… Taking advantage of bankruptcy protection will not only allow us to pursue an eventual reversal of this unfair decision, it will enable us to create, manufacture and ship our products in our normal and usual way.”
Obviously the strategy has been put in motion for an appeal. If they can successfully get the amount of judgment down to something that they can handle, then they will pay the amount and declare themselves out from under Chapter 11. If they can’t, they may be forced to liquidate. When they liquidate, the creditors including MTH will tell the federal courts how much Lionel owes them. They usually get pennies on the dollar. I don’t know the frequency, but Lionel will be required to show a plan to the bankruptcy court on how they are going to pay off their debts.
The fat lady had not even gotten on stage. More to come.
BTW, did anybody notice where they filed for bankruptcy. Could they have been shopping for a particular judge? [?][?][?]
I wondered about filing in New York. I wonder if that’s because their law firm is there or because the owners of Sanda Kan and their non-MTH creditors are there?
Who owns the Lionel name and how would the sale of it work? If the Lionel name comes up for auction, would MTH be in the best position to buy? Would anyone interested need to payoff the money to MTH to buy the name and would they be less inclined to buy? MTH on the other hand could drive up the price up in an auction and would in essence only have to pay themselves in the end if they won. If they lost, then they would get the 40 million from the auction anyway? Is this a possibility?
Having been involved with LLC’s, patent, copyright, real trains, and model trains, here’s my take.
The reverse engineering of patented mechanisms and assemblies is indeed a criminal act of theft. I have had lots of hard work ‘appropriated’ by bad guys, and it’s not pretty. Where it gets fuzzy, though, is to define a point where competitive imitation of function crosses over into duplication of product. The Courts and Congress have been moving in the direction of a lower threshold of proof for both patents and copyrights, not to mention longer life spans for both. This means that it may be possible that MTH’s imitations of Lionel were ‘legal’ then, but would be deemed ‘illegal’ now; likewise, it may be possible that under previous standards MTH might not have a viable case against Lionel. I guess the whole thing will clog up the Courts until sanity prevails (if only!)
As far as the LLC goes, there is limitation of liability, provided that active partners all acted in good faith. If someone was ‘asleep at the switch’ during the alleged theft of technology from MTH, the LLC ‘shell’ may not protect potentially negligent partners.
The UP and other trademark issues are a 50/50 proposition. I can understand UP, CSX, BNSF, Ford, Chevy, etc. enforcing their rights over logos and the like that are protected by copyright, trademark, or patent CURRENTLY in force. Earlier items, such as the SP or NYC monikers may never have been properly registered in the first place, or if they have, may not have been defended prior to the last few years. Where does this all end–at the Stockton and Darlington or the C&O Canal Corporation names?
Common Law suggests that ‘old is old’ and is part of posterity. ‘New’, on the other hand, is what stokes the fires of trade. Do we really want to create an entire new practice of law in the area of antique patents / trademarks / and copyrights? Even though our lips say NO our behavior says otherwise.
Well, I have no expertise in bankruptcy law, but a bankruptcy filing provides protection from creditors while the bankruptcy is in effect, including civil judgements of the sort MTH just won. Lionel would certainly be able to pursue an appeal of this decision while under bankruptcy protection, so there are many advantages to Lionel and none to MTH of this filing. You’ll note that in their press release, MTH says that Lionel may use bankruptcy to unfairly shield themselves from the verdict. Which they are attempting to do, fairly in my opinion.
In the event of a liquidation, a secured creditor such as one related to a bank loan or payment for materials or merchandise received would have first claim in most instances both in terms of when the debt was incurred and the hierarchy of debt "importance, " as compared with a creditor such as MTH, with a recent civil judgement.
Another player not heard from yet is JP Morgan Chase, which is, I believe, the owner of Sanda Kan, the largest train manufacturer in China. I have heard some say that Lionel is one of the largest, if not the largest importer of Sanda Kan’s products. Thus the Lionel name has importance to JP Morgan Chase in protecting their investment in Sanda Kan, which probably does tens of millions of dollars of business with Lionel each year. In any liquidation, I suspect they would have some interest in any bidding for the Lionel name.
Perhaps the bankruptcy experts here can chime in, but this is what I understand from conversations with a local guru :).