United States Court of Appeals for the Ninth Circuit

Transcription

1 Case: /07/2012 ID: DktEntry: 6 Page: 1 of 70 NO United States Court of Appeals for the Ninth Circuit STAN LEE MEDIA, INC., a Colorado corporation, v. Plaintiff-Appellant, CONAN SALES CO. LLC, a Delaware limited liability company; CONAN PROPERTIES INTERNATIONAL LLC, a Delaware limited liability company; PARADOX ENTERTAINMENT INC., a Delaware corporation; PARADOX ENTERTAINMENT AB, a Sweden corporation; FREDRIK MALMBERG; ARTHUR M. LIEBERMAN; JUNKO KOBAYASHI; GILL CHAMPION, Defendants-Appellees. ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA BRIEF FOR PLAINTIFF-APPELLANT ROBERT E. KOHN KOHN LAW GROUP, INC Avenue of the Stars, Suite 1900 Los Angeles, California (310) LUKE MCGRATH DUNNINGTON, BARTHOLOW & MILLER LLP 1359 Broadway, Suite 600 New York, New York (212) Attorneys for Plaintiff-Appellant

2 Case: /07/2012 ID: DktEntry: 6 Page: 2 of 70 CORPORATE DISCLOSURE STATEMENT Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure, Plaintiff- Appellant in this action, Stan Lee Media, Inc., states that it does not have a corporate parent and there is no publicly held corporation that owns 10% or more of SLMI stock.

3 Case: /07/2012 ID: DktEntry: 6 Page: 3 of 70 TABLE OF CONTENTS TABLE OF AUTHORITIES... iv I. STATEMENT OF JURISDICTION... 1 II. STATEMENT OF THE ISSUES... 2 III. PRELIMINARY STATEMENT... 3 IV. PROCEDURAL BACKGROUND... 6 V. STATEMENT OF THE FACTS... 9 A.. SLMI s Management Resigns Prior To The Disputed Sale Of The Conan Assets... 9 B.. The Disputed Sale Of The Conan Assets C. At The Time Of The Disputed Sale Of The Conan Assets, SLMI Had No Duly Authorized Representative To Act And Receive Notice On SLMI s Behalf D. Insiders Lee, Lieberman, Champion, And Kobayashi Obtained SLMI s Assets For Their Personal Benefit And Put Their Personal Interests Ahead Of SLMI s Interests Lieberman and Champion controlled Kobayashi, who, at the time, purported to act on SLMI s behalf in SLMI s bankruptcy proceedings without legal authorization Lieberman, Champion, and Kobayashi transferred SLMI s other intellectual property to POW! in violation of a Bankruptcy Court order and automatic stay Lieberman and Kobayashi sought to convince the Bankruptcy Court that SLMI had no assets so they could obtain those assets for their personal benefit E. Lieberman Was Both The Purchaser And Seller Of The Conan Assets Without Disclosure To The Bankruptcy Court Page i

4 Case: /07/2012 ID: DktEntry: 6 Page: 4 of 70 F. Almost None Of SLMI s Shareholders Received Notice Of The Disputed Sale Of The Conan Assets VI. STANDARDS OF REVIEW VII. SUMMARY OF THE ARGUMENT VIII. ARGUMENT AND AUTHORITIES A. The District Court Erred In Dismissing Claims Two Through Seven Of SLMI s Complaint The District Court erred in dismissing Claim Four of SLMI s Complaint for Breach of Fiduciary Duty The Disrict Court erred in dimissing Claim Seven of SLMI s Complaint for a Constructive Trust The District Court erred in dismissing Claim Six of SLMI s Complaint for Restitution and Unjust Enrichment The District Court erred in dismissing Claim Five of SLMI s Complaint for an Accounting The District Court erred in dismissing Claim Three of SLMI s Complaint for Avoidance of Transfer The District Court erred in dismissing Claim Two of SLMI s Complaint for Declaratory Relief B. The District Court Erred In Failing To Vacate The Bankruptcy Court Settlement Approval Order As Void Under FRCP 60(b)(4) The District Court erred by not taking as true SLMI s wellpleaded and plausible factual allegations showing that the Settlement Approval Order was void Because SLMI was legally incompetent due to lack of Boardauthorized management, the Settlement Approval Order violated SLMI's due process rights ii

5 Case: /07/2012 ID: DktEntry: 6 Page: 5 of The Settlement Approval Order is void due to the Bankruptcy Court s lack of jurisidction over SLMI, a corporate debtor lacking a legally authorized representative The Settlement Approval Order is void for lack of notice to SLMI s shareholders The Settlement Approval Order is void under federal bankruptcy law and common law C. The District Court Erred In Failing To Vacate The Bankruptcy Court Settlement Approval Order Under FRCP 60(b)(6) Because That Order Was Obtained In Violation Of The Bankruptcy Code D.. The District Court Abused Its Discretion In Declining To Vacate The Bankruptcy Court Settlement Approval Order Under FRCP 60(d)(3) Without Permitting Discovery Because SLMI Raised A Colorable Claim That The Settlement Approval Order Was Obtained Through Fraud On Court IX. CONCLUSION iii

6 Case: /07/2012 ID: DktEntry: 6 Page: 6 of 70 TABLE OF AUTHORITIES FEDERAL Page(s) Anderson v. Cryovac, Inc., 862 F.2d 910 (1st Cir. 1988) Baxter v. Parmigiano, 425 U.S. 308 (1976) Beyene v. Coleman Sec. Services, Inc., 854 F.2d 1179 (9th Cir. 1988) Camacho v. Bridgeport Fin. Inc., 430 F.3d 1078 (9th Cir. 2005) Cassidy v. Tenorio, 856 F.2d 1412 (9th Cir. 1988) Coe v. Armour Fertilizer Works, 237 U.S. 413 (1915) Covey v. Town of Somers, 351 U.S. 141 (1956) Crawford v. Honig, 37 F.3d 485 (9th Cir. 1994) Deakins v. Monaghan, 484 U.S. 193 (1988) Donovan & Schuenke v. Sampsell, 226 F.2d 804 (9th Cir. 1955) Falk v. Allen, 739 F.2d 461 (9th Cir. 1984) FDIC v. O Melveny & Meyers, 969 F.2d 744 (9th Cir. 1992) First State Ins. Co. v. Callan Assocs., Inc., 113 F.3d 161 (9th Cir. 1997) Fuentes v. Shevin, 407 U.S. 67 (1972) Garrett v. City & County of San Francisco, 818 F.2d 1515 (9th Cir. 1987) IIT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980) In re AFI Holding, Inc., 355 B.R. 139 (9th Cir. BAP 2006) In re AVI, Inc., 389 B.R. 721 (9th Cir. BAP 2008) In re Betacom of Phoenix, Inc., 240 F.3d 823 (9th Cir. 2000) In re: Bridgford Co., 237 F.2d 182 (9th Cir. 1956) iv

7 Case: /07/2012 ID: DktEntry: 6 Page: 7 of 70 In re Center Wholesale, Inc., 759 F.2d 1440 (9th Cir. 1985)... 29, 34, 42 In re Dawson, 390 F.3d 1139 (9th Cir. 2004) In re EWC, Inc., 138 B.R. 276 (Bankr. W.D. Okla. 1992) In re Federated Dep t Stores, Inc., 44 F.3d 1310 (6th Cir. 1995) In re Fitzgerald, 428 B.R. 872 (9th Cir. BAP 2010) In re F/S Airlease II, Inc., 844 F.2d 99 (3d Cir. 1988) In re Hooper, Goode Realty, 60 B.R. 328 (Bankr. S.D. Cal. 1986) In re Intermagnetics Am., Inc., 926 F.2d 912 (9th Cir. 1991)... 6, 46-49, 53, 54 In re International Fibercom, Inc., 503 F.3d 933 (9th Cir. 2007) In re Lionel Corp., 722 F.2d 1063 (2d Cir. 1983) In re Lowry Graphics, Inc., 86 B.R. 74 (S.D. Tex. 1988) In re Mach I Aviation, Inc., 2011 WL (9th Cir. BAP July 21, 2011) In re Merry-Go-Round Enterprises, Inc., 400 F.3d 219 (4th Cir. 2005) In re Mickey Thompson Entm t Group, Inc., 292 B.R. 415 (9th Cir. BAP 2003) In re Moore, 608 F.3d 253 (5th Cir. 2010) In re Mora, 199 F.3d 1024 (9th Cir. 1999) In re Mushroom Transp. Co., Inc., 366 B.R. 414 (Bankr. E.D. Pa. 2007) In re Perez, 30 F.3d 1209 (9th Cir. 1994) In re Rose, 2011 WL (9th Cir. BAP June 8, 2011) In re Savage Indus., Inc., 43 F.3d 714 (1st Cir. 1994)... 42, 44 In re Schipper, 933 F.2d. 513 (7th Cir. 1991) In re Singh, 457 B.R. 790, 798 (Bkrtcy.E.D.Cal., 2011) v

8 Case: /07/2012 ID: DktEntry: 6 Page: 8 of 70 In re Stone, 588 F.2d 1316 (10th Cir. 1978) In re Texaco Inc., 84 B.R. 889 (Bankr. S.D.N.Y. 1988) In re Trans World Airlines, Inc., 96 F.3d 687 (3d Cir. 1996) In re William A. Smith Const. Co., Inc., 77 B.R. 124 (Bankr. N.D. Ohio 1987) Jeff D. v. Kempthorne, 365 F.3d 844 (9th Cir. 2004) Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375 (1994) Maples v. Thomas, 132 S.Ct. 912 (2012) McNutt v. Gen. Motors Acceptance Corp. of Indiana, 298 U.S. 178 (1936)... 39, 40 Molski v. Foley Estates Vineyard and Winery, LLC, 531 F.3d 1043 (9th Cir. 2008) Molloy v. Wilson, 878 F.2d 313 (9th Cir. 1989) Mosser v. Darrow, 341 U.S. 267 (1951) Neilson v. Union Bank of California, N.A., 290 F. Supp. 2d 1101, 1137 (C.D. Cal. 2003) Nelson v. Adams USA, Inc., 529 U.S. 460 (2000) Pearson v. First NH Mortg. Corp., 200 F.3d 30 (1st Cir. 1999) Pendleton v. Russell, 144 U.S. 640 (1892) Pepper v. Litton, 308 U.S. 295 (1939) Price v. Gurney, 324 U.S. 100 (1945) Procter & Gamble Mfg. Co. v. Metcalf, 173 F.2d 207 (9th Cir. 1949) River City Ranches #1 Ltd. v. CIR, 401 F.3d (9th Cir. 2005) Rome v. Braunstein, 19 F.3d 54, 59 (1st Cir. 1994) Smith v. Arthur Andersen LLP, 421 F.3d 989 (9th Cir. 2005)... 41, 42 vi

9 Case: /07/2012 ID: DktEntry: 6 Page: 9 of 70 Transpac Drilling Venture v. CIR, 147 F.3d 221 (2d Cir. 1998) United States v. Pegg, 782 F.2d 1498 (9th Cir. 1986) United States v. Solano-Godines, 120 F.3d 957 (9th Cir. 1997) Wolf v. Weinstein, 372 U.S. 633 (1963) Wolverton v. Shell Oil Co., 442 F.2d 666 (9th Cir. 1971) York Intern. Bldg., Inc. v. Chaney, 527 F.2d 1061 (9th Cir. 1975) STATE Beal v. Smith, 46 Cal.App. 271 (1920) Favila v. Katten Muchin Rosenman LLP, 188 Cal.App. 4th 189 (2010) Inglewood Teachers Assn. v. Public Emp. Rel. Bd., 227 Cal. App. 3d 767 (1991) Smith v. Blodget, 187 Cal. 235 (1921) Whitten v. Dabney, 171 Cal. 621 (1915) STATUTES 11 U.S.C. 102(1) U.S.C. 102(1)(a) U.S.C U.S.C. 105(a) U.S.C U.S.C. 327(a)... 9, 36, 38, 50, U.S.C U.S.C U.S.C , 45, 46 vii

10 Case: /07/2012 ID: DktEntry: 6 Page: 10 of U.S.C. 363(b) U.S.C. 363(b)(1) U.S.C. 510(b)... 45, 46, U.S.C , 27, U.S.C. 1109(b) U.S.C U.S.C U.S.C U.S.C F.R.B.P. 2002(d)... 43, 44 F.R.B.P , 50, 51 F.R.B.P F.R.B.P F.R.B.P , 19, 44, 45, 46 F.R.B.P. 9019(a)... 44, 45 F.R.C.P. Rule F.R.C.P. Rule 12(b)(6)... 21, 24 F.R.C.P. Rule , 7, 8, 23, F.R.C.P. Rule 60(b)... 2, 6, 22, 30 F.R.C.P. Rule 60(b)(4)... 5, 7, 21, 22, 29, 34, 37, 40 F.R.C.P. Rule 60(b)(6)... 8, 22, 51 F.R.C.P. Rule 60(d)(3)... 8, 22, 52 viii

11 Case: /07/2012 ID: DktEntry: 6 Page: 11 of 70 Pursuant to Rule 3 of the Federal Rules of Appellate Procedure, Plaintiff- Appellant Stan Lee Media, Inc. ( SLMI ), an administratively-dissolved Colorado corporation, submits this brief. I. STATEMENT OF JURISDICTION The Court has jurisdiction over this appeal from a final decision of a U.S. District Court under 28 U.S.C and SLMI appeals from a final judgment of the U.S. District Court for the Central District of California (the District Court ) entered on February 9, 2012 (DE# 191), based on an order by the Honorable Stephen V. Wilson, dated February 8, 2012 (the Dismissal Order ). The Dismissal Order dismissed SLMI s Complaint challenging the sale of the copyrighted character Conan the Barbarian and related but independent Claims alleging declaratory relief; avoidance of unauthorized transfer; breach of fiduciary duty; restitution and unjust enrichment; an accounting; and constructive trust. The District Court had federal question jurisdiction for federal questions arising under 11 U.S.C. 105, 362, and 363. The District Court had diversity jurisdiction under 28 U.S.C due to the diversity of citizenship of the parties and an amount in controversy exceeding $75,000, and supplemental jurisdiction of related state and common law claims under 28 U.S.C II. 1

12 Case: /07/2012 ID: DktEntry: 6 Page: 12 of 70 STATEMENT OF THE ISSUES 1. Did the District Court err in dismissing Claims Two through Seven without any determination of the viability of SLMI s Claims for: Declaratory Relief (Claim 2); Avoidance of Unauthorized Transfer (Claim 3); Breach of Fiduciary Duty (Claim 4); an Accounting (Claim 5); Restitution and Unjust Enrichment (Claim 6); and Imposition of a Constructive Trust (Claim 7)? Answer: Yes. 2. Did the District Court err in failing to invalidate the Bankruptcy Court order approving a transfer outside SLMI s ordinary course of business and of substantially all of its assets without notice to SLMI and its shareholders or an opportunity to be heard? Answer: Yes. 3. Did the District Court err in not treating SLMI s factual allegations as true under FRCP 60(b)? Answer: Yes. 4. Did the District Court err in failing to invalidate the Bankruptcy Court order approving a transfer outside SLMI s ordinary course of business and of substantially all of its assets where SLMI was a corporate debtor lacking a legally authorized representative? Answer: Yes. 2

13 Case: /07/2012 ID: DktEntry: 6 Page: 13 of Did the District Court err in failing to invalidate the Bankruptcy Court order approving a transfer outside of SLMI s ordinary course of business and of substantially all of its assets in violation of the Bankruptcy Code? Answer: Yes 6. Did the District Court err in failing to invalidate the Bankruptcy Court order approving a transfer outside SLMI s ordinary course of business and of substantially of its assets where Appellant provided a colorable claim of fraud on the court but was not permitted discovery? Answer: Yes. III. PRELIMINARY STATEMENT This case is about self-dealing insiders of a bankrupt company who concealed conflicts of interest in order to take assets out of the bankruptcy estate without full and fair disclosure while creditors and shareholders received nothing. SLMI appeals from the District Court s dismissal of the challenge to a transfer of what was all or substantially all of the declared assets remaining in SLMI s bankruptcy estate: Conan the Barbarian and his fellow fictional copyrighted characters. The Conan Transaction took place after Kenneth Williams, SLMI s legally authorized representative in the SLMI bankruptcy, had resigned. Because 3

14 Case: /07/2012 ID: DktEntry: 6 Page: 14 of 70 no court appointed representative such as a Bankruptcy Trustee took Williams place, no further transactions should have occurred or been approved. What happened in SLMI s bankruptcy, however, is that the safeguards of the Bankruptcy Code and due process were turned on their head. Without disclosure to the bankruptcy court or notice to SLMI s shareholders, SLMI s temporary bookkeeper (Junko Kobayashi) and SLMI s Intellectual Property lawyer (Arthur Lieberman) administered the bankruptcy estate even though neither Lieberman or Kobayashi had legal authority to do so. As a result, the Bankruptcy Court had no subject matter jurisdiction over the corporate debtor under Article III of the U.S. Constitution (because the debtor-in-possession lacked duly authorized management); SLMI the corporation was not afforded due process because it was legally incompetent could not have received notice or been heard; and SLMI s shareholders were not afforded due process because they never received notice of the Conan Transaction or the opportunity to be heard. In 2010 and 2011, the Colorado Court s recognized and seated for the first time a new Board of Directors independent of those insiders who controlled SLMI during its bankruptcy after Williams resigned. At that time, after a duly diligent investigation, SLMI s new Board brought the instant matter to recover the Conan Asset and seek relief from two groups of defendants: (1) the former SLMI fiduciaries who orchestrated the taking of the Conan asset; and (2) the beneficiaries 4

15 Case: /07/2012 ID: DktEntry: 6 Page: 15 of 70 of the transaction the Paradox Appellees who purport to currently hold title to the Conan Asset. In dismissing the Complaint, the District Court committed two central errors. First, the District Court erred in dismissing SLMI s Claims Two through Seven without comment or explanation. These Claims were: Declaratory Relief (as to the ownership of Conan Properties) (Claim 2); Avoidance of Unauthorized Transfer (of Conan Properties) (Claim 3); Breach of Fiduciary Duty (Claim 4); An Accounting (Claim 5); Restitution and Unjust Enrichment (Claim 6); and Imposition of a Constructive Trust (Claim 7). Each of these Claims Two through Seven satisfied the pleading requirements of Rule 8 of the Federal Rules of Civil Procedure and should not have been dismissed, particularly without notice under Rule 56 of the Federal Rules of Civil Procedure or the opportunity to conduct discovery into disputed facts. The decision appealed from does not set forth the District Court s reasoning in dismissing these Claims. Second, the District Court erred in dismissing Claim One, which sought relief from a Bankruptcy Court order approving the sale of the Conan Assets (the Settlement Approval Order ). The District Court clearly erred as a matter of law in failing to declare the Settlement Approval Order void under Rule 60(b)(4) because that order violated SLMI s rights as guaranteed by the Due Process Clause of the U.S. Constitution. In addition, the Bankruptcy Court committed legal error 5

16 Case: /07/2012 ID: DktEntry: 6 Page: 16 of 70 and Appellees committed fraud on the Bankruptcy Court, both grounds for relief under Rule 60(b). The facts of this case parallel the facts of In re Intermagnetics Am., Inc., 926 F.2d 912 (9th Cir. 1991), where this Court refused to allow insiders to divest a bankrupt company of its assets. Accordingly, the District Court ruling must be reversed and this matter must be remanded for further proceedings. IV. PROCEDURAL BACKGROUND On August 19, 2011, SLMI filed its Complaint in the District Court alleging the following Claims: (1) Relief from Order; (2) Declaratory Relief as to Ownership of Conan Properties; (3) Avoidance of Transfer of Conan Properties; (4) Breach of Fiduciary Duty; (5) an Accounting; (6) Restitution and Unjust Enrichment; and (7) Imposition of a Constructive Trust. (Record ( R. ) 1194). On September 30, 2011, the Paradox Appellees 1 filed a motion to dismiss. (See R. 1). Subsequently, on October 12, 2011, Appellees Lieberman, Kobayashi, and Champion (the Management Appellees ) filed a motion to dismiss. (See id.). On December 5, 2011, the District Court held a hearing on Appellees motions to dismiss. (R. 712). At that hearing, the District Court: (1) informed the parties that the District Court would construe SLMI s first claim of Relief from 1 The Paradox Appellees consist of Conan Sales Co., LLC ( CSC ), Conan Properties, Paradox Entertainment, Inc. ( PEI ), Paradox Entertainment AB, and Fredrik Malmberg. 6

17 Case: /07/2012 ID: DktEntry: 6 Page: 17 of 70 Order as a separate motion under FRCP 60; (2) instructed the parties that it would consider that part of SLMI s pleading before addressing SLMI s other Claims; and (3) ordered the parties to provide briefing and declarations on FRCP 60. (See R. 716:16-717:5). In doing so, the District Court recognized that there were other Claims in SLMI s Complaint that would have to be addressed regardless of FRCP 60 relief. (R. 716:16-25) ( THE COURT: Let me hear from the plaintiff in this regard. I m wondering whether I missed something or have I correctly stated that the Rule 60 motion has to be addressed first and then other matters? MR. McGRATH: Your Honor, I would agree with the court. ). At that hearing, SLMI requested discovery because the District Court converted SLMI s first claim to a motion under FRCP 60. (R. 738:21-739:1; R. 741:20-742:1; R. 743:24-25). The District Court denied SLMI s discovery requests. (R. 744:1-3). On January 3, 2012, SLMI submitted its FRCP 60 memorandum of law, arguing that the Settlement Approval Order should be vacated as void pursuant to FRCP 60(b)(4) because: (1) SLMI was legally incapacitated on March 25, 2002, the date of the Settlement Approval Order; (2) the Bankruptcy Court lacked jurisdiction to divest a legally incompetent company of its assets; and (3) the Settlement Approval Order was procured in violation of constitutional due process (and bankruptcy law) due to the lack of notice to a legally authorized 7

18 Case: /07/2012 ID: DktEntry: 6 Page: 18 of 70 representative of SLMI (or its shareholders). SLMI further argued that the Settlement Approval Order should be vacated as a result of fraud upon the court pursuant to FRCP 60(d)(3) and the Bankruptcy Court s legal error pursuant to FRCP 60(b)(6). In connection with SLMI s FRCP 60 memorandum, SLMI submitted a declaration attaching the evidence SLMI had in its possession, without the aid of discovery, demonstrating why SLMI s requested relief was warranted. (R ). Appellees objected to SLMI s proffer of evidence. (R. 78; R. 203). In connection with their opposition papers, Appellees submitted declarations attaching certain evidence. (R ; R ; R ; R ). SLMI, in turn, objected to Appellees declaration and evidence. (R ). Specifically, SLMI argued that Appellees proffered evidence was inadmissible on a number of grounds. (R ). The District Court never ruled on SLMI s or Appellees evidentiary objections. (See R ). On January 30, 2012, the District Court heard oral argument on the FRCP 60 briefing (R ). On February 8, 2012, the District Court issued the Dismissal Order in which it denied SLMI s converted motion for relief under FRCP 60, but also improperly dismissed the rest of SLMI s action in its entirety. (R.1-10; R ( Case Terminated )). Notably absent from the Dismissal Order is any analysis of SLMI s Claims that are not contingent upon FRCP 60. (R. 1-10). 8

19 Case: /07/2012 ID: DktEntry: 6 Page: 19 of 70 V. STATEMENT OF THE FACTS A. SLMI s Management Resigns Prior To The Disputed Sale Of The Conan Assets. On December 6, 2006, the Bankruptcy Court entered an order dismissing a Chapter 11 bankruptcy case that had originally been filed on February 16, 2001 on behalf of SLMI by Kenneth Williams, SLMI s then-ceo. (R. 422). Williams legal authority to file a Chapter 11 bankruptcy proceeding for SLMI was set forth in a corporate resolution adopted by SLMI s then Board of Directors. (R ). During SLMI s bankruptcy proceedings: (a) Williams resigned his position as SLMI s CEO, effective as of January 11, 2002 (R. 265); (b) SLMI s Board of Directors never adopted a corporate resolution authorizing anyone to replace Williams to administer SLMI s Chapter 11 bankruptcy proceedings (see R ; R ); (c) the Bankruptcy Court never authorized anyone else, as required by Section 327(a) of the Bankruptcy Code, to replace Williams as a legally authorized management representative for SLMI as a Chapter 11 debtor-inpossession (see R ; R ); and (d) no plan of reorganization was ever proposed for SLMI (id.). On January 20, 2009, in a separate action before the District Court, Judge Wilson held that SLMI was a necessary party to an action involving SLMI s 9

20 Case: /07/2012 ID: DktEntry: 6 Page: 20 of 70 bankruptcy estate and stayed that action because SLMI was legally incompetent at the time. (R. 920). That action currently remains pending before Judge Wilson. On May 27, 2010, the Colorado Court of Appeals issued a corporate governance ruling that authorized a new Board of Directors, independent of Lee and the Management Appellees, to act as SLMI s new legal representative. (R ). In October 2010, the Colorado Supreme Court rejected efforts by Lee and the Management Appellees to regain control over SLMI. (R. 865). On January 31, 2011, the Colorado state District Court issued an order in favor of SLMI s new Board enforcing these corporate governance rulings. (R. 867). B. The Disputed Sale Of The Conan Assets. In September 2000, in a transaction brokered by Lieberman, SLMI and CSC entered into a Stock Purchase Agreement pursuant to which SLMI purchased all of the issued and outstanding stock in Conan Properties. (R ). The Stock Purchase Agreement purportedly provided CSC with the right to foreclose on the Conan Assets in the event of a default. (See R. 3). On August 24, 2001, CSC filed a motion for relief from an automatic stay in SLMI s bankruptcy proceedings alleging that SLMI had defaulted under the Stock Purchase Agreement and that CSC was thus entitled to foreclose on the Conan Assets. (See R. 3; R. 403). The Bankruptcy Court made no ruling concerning that motion (see R ) and, in March 2002, Lieberman-controlled CSC and 10

21 Case: /07/2012 ID: DktEntry: 6 Page: 21 of 70 Lieberman-Kobayashi controlled SLMI purportedly reached a settlement of the dispute that included the disputed sale of the Conan Assets. (See R ). On March 4, 2002, SLMI s bankruptcy counsel filed a motion seeking approval of the Conan Transaction (the Approval Motion ). (R ). On March 25, 2002, without all the facts, or a hearing or notice to SLMI s shareholders, the Bankruptcy Court entered the Settlement Approval Order pursuant to FRBP (See R ; R ; R ). On April 30, 2002, CSC and Kobayashi executed documents purportedly implementing the Conan Transaction, pursuant to which SLMI agreed to transfer ownership of Conan Properties to CSC in exchange for $275,000. (R ; see R. 3-4). C. At The Time Of The Disputed Sale Of The Conan Assets, SLMI Had No Duly Authorized Representative To Act And Receive Notice On SLMI s Behalf. On January 29, 2001, at a special meeting, SLMI s Board of Directors authorized Williams, as SLMI s President and CEO, to execute documents on SLMI s behalf in the administration of SLMI s forthcoming bankruptcy estate. (R ; R ). On February 12, 2001, Williams certified a corporate resolution empowering him to act as the authorized representative of SLMI during SLMI s bankruptcy (the SLMI Resolution ). (R ). 11

22 Case: /07/2012 ID: DktEntry: 6 Page: 22 of 70 On January 2, 2002, Williams resigned, effective January 11, (R. 265). Previous to his resignation, in November 2001, Williams and Richard Madden (SLMI s General Counsel) both testified that, by that date, Williams was the only full-time SLMI employee and officer during the bankruptcy. As for Junko Kobayashi, both men (the CEO and GC of SLMI) testified that she was merely a part-time independent contractor and bookkeeper, not an officer or authorized agent of SLMI. (R. 292:12-24; R. 353:22-354:19; R. 367:23-368:4). After a duly diligent search of the records in SLMI s custody, SLMI certified that there is no previous or subsequent SLMI Board resolution or any other appropriate documentation filed with the Bankruptcy Court empowering anyone to replace Williams as an authorized representative in administering SLMI s bankruptcy estate. (R ; see R ; R ). D. Insiders Lee, Lieberman, Champion, And Kobayashi Obtained SLMI s Assets For Their Personal Benefit And Put Their Personal Interests Ahead Of SLMI s Interests. 1. Lieberman and Champion controlled Kobayashi who, at the time, purported to act on SLMI s behalf in SLMI s bankruptcy proceedings without legal authorization. As discussed above, by March 2002, SLMI had no employees, but Kobayashi acted part-time as a contract worker providing controller services to SLMI (R. 292:12-24; R. 353:22-354:19; R. 367:23-368:4), while working full time at POW! as its CFO. (R. 819). Public filings of POW! reveal that Lieberman was 12

23 Case: /07/2012 ID: DktEntry: 6 Page: 23 of 70 POW! s Executive Vice President, Business Affairs, and Director, and that Champion acted as POW! s COO and co-founder. (R ). A witness who worked closely with Kobayashi testified that Kobayashi was dominated and controlled by Lieberman and Champion. (R ; R ; R ). As discussed in detail in the Arguments and Authorities Sections below, Kobayashi was dominated and controlled by Lieberman and Champion at the same time that she was purporting to act on SLMI s behalf in SLMI s bankruptcy proceedings without legal authorization. 2. Lieberman, Champion, and Kobayashi transferred SLMI s other intellectual property to POW! in violation of a Bankruptcy Court order and automatic stay. Lieberman, Champion, Kobayashi, and Lee created POW! for the purpose of developing, promoting and exploiting SLMI s intellectual property during SLMI s bankruptcy proceedings (see R ; R. 684), even though the Bankruptcy Court had only approved the transfer of that property to another entity under specific strictures (see R , 917). Indeed, on January 20, 2009, the District Court invalidated asset transfers involving POW! in 2002 (the Void Transactions ) because the Void Transactions contravened a Bankruptcy Court order and the automatic bankruptcy stay. (Id.) ( Here, the bankruptcy judge approved the sale of assets to SLC, LLC, but never approved such sale to QED. 13

24 Case: /07/2012 ID: DktEntry: 6 Page: 24 of 70 Thus, any transfer of the assets to QED, or to any other entity for that matter, was void and had no effect. ). In addition, later, in 2006, Champion and Kobayashi each signed an assignment of rights to facilitate the improper transfer of rights to various SLMI intellectual property to POW!. (R ). This transfer was submitted to the United States Copyright office. (R ). In the Certificates of Service for the notice of the Conan Transaction, notice is purportedly served on SLC, LLC, the California company that was supposed to receive some of SLMI s assets in 2002 which were instead improperly transferred to POW!. Importantly, the Certificates of Service purport to send notice to SLC, LLC, care of Arthur Lieberman, at Lieberman s law firm, Lieberman & Nowak. (R ). At this time (March 2002), however, SLC, LLC apparently did not exist. (See R ). Instead, Lieberman, Kobayashi and Champion (with Lee) had covertly created POW!, without notice to the Bankruptcy Court and into which Kobayashi was to transfer SLMI s intellectual property. (R ; see R. 684; see also R ). In short, Lieberman received notice in 2002 on the part of a non-existent or, at the very least, non-functioning entity, SLC, LLC, at and around the same time that he, Kobayashi and Champion were improperly transferring various SLMI intellectual property to POW! in the Void Transactions. Lieberman never informed the Bankruptcy Court that SLC, LLC did not function 14

25 Case: /07/2012 ID: DktEntry: 6 Page: 25 of 70 or exist or ask for SLMI s service list to be amended to correct any error. (See R ; ). Instead, Lieberman perpetrated the fiction that SLC LLC existed at the same time he was undertaking to get approval for the Conan Transaction. 3. Lieberman and Kobayashi sought to convince the Bankruptcy Court that SLMI had no assets so they could obtain those assets for their personal benefit. On August 2, 2001, in a letter to Craig Rankin, Esq. (SLMI s bankruptcy counsel), Gary Klausner, Esq. (the Creditors Committee s counsel) wrote that he was surprised to see Lieberman acting unilaterally in regard to SLMI s intellectual property rights. (R. 686). This letter demonstrates earlier actions in which Lieberman acted to control SLMI and SLMI s intellectual property. On February 12, 2003, Kobayashi wrote to SLMI s bankruptcy counsel stating that she was outraged by the settlement of a case brought against SLMI and Lee. (R. 688). In that letter, Kobayashi demonstrates her loyalties to Lee as opposed to SLMI, stating the company [SLMI] owes a duty to Stan Lee ethically, morally, and legally to indemnify him and demanding that the settlement be amended to protect Lee. (Id.). In response, SLMI s bankruptcy counsel explained that if Kobayashi does not approve the settlement, [s]uch conduct, however, will likely prompt the [Creditors] Committee to immediately seek the appointment of a Chapter 11 Trustee, which will turn over all control of these cases to an 15

26 Case: /07/2012 ID: DktEntry: 6 Page: 26 of 70 independent third party. I believe that such a result is very realistic and likely in this case. (R. 691). In that same letter, SLMI s bankruptcy counsel informed Kobayashi that SLMI s accountants had not received documentation of SLMI s bank accounts from Kobayashi and, as a result, starting in December 2001, SLMI had failed to file monthly reports with the Office of the United States Trustee which, among other information, provided reports on SLMI s bank accounts. (R ). In other words, SLMI s bankruptcy counsel s letter demonstrates that Kobayashi was in complete control of SLMI s finances and records and was not disclosing transactions in and out of SLMI s bank accounts that she controlled before, during, and after the Conan Transaction. On February 25, 2003, Lieberman faxed Kobayashi at POW! from his then law firm (the Dickstein Shapiro firm) providing Kobayashi with a written response to be sent to SLMI s bankruptcy counsel. (R ). At the end of the fax, Lieberman instructs Kobayashi Lieberman s employee at POW! that Junko, this letter should be signed by you even though it was written by Lieberman. (R. 696). In addition, as represented to the District Court at the hearing on December 5, 2011 (R. 741:20-23), Ronald Sandmann, a POW! shareholder who previously worked closely with the executives at POW!, submitted a declaration testifying that Lieberman controlled Kobayashi and that Lieberman and others sought to 16

27 Case: /07/2012 ID: DktEntry: 6 Page: 27 of 70 convince the Bankruptcy Court that SLMI had no assets (when it did) in order that SLMI would be dissolved. (R ). E. Lieberman Was Both The Purchaser And Seller Of The Conan Assets Without Disclosure To The Bankruptcy Court. Public documents demonstrate that Lieberman has appeared as counsel in litigation for both Conan Properties and SLMI; and as Intellectual Property counsel before the U.S. Patent and Trademark Office in filings for both companies. (R. 771 at Attorneys and Law Firms ; R. 780 at Attorney of Record ; R. 785, 789, 790; R ; R ; R ). On July 12, 2000, months before SLMI entered bankruptcy, Lieberman admitted to a true conflict in regard to his ownership interest in Conan Properties before its sale to SLMI. (R. 700). Lieberman s admission is evidence of his conflict of interest when he: (1) represented SLMI in the Stock Purchase Agreement entered into in September 2000; and (2) acted for both CSC and SLMI in seeking to recover the Conan Assets for his own personal benefit in March and April 2002 pursuant to the Conan Transaction. On October 16, 2000, counsel to an adversary of SLMI sent Lieberman a faxed letter in which, among other things, counsel stated: Your [Lieberman s] Client: Stan Lee Media, Inc.; Our Client Stan Lee Corporation. (R. 704). In papers filed in SLMI s bankruptcy on June 8, 2001, SLMI listed Lieberman as the SLMI contact person for Conan Properties, the SLMI subsidiary 17

28 Case: /07/2012 ID: DktEntry: 6 Page: 28 of 70 that held the Conan Assets. ( See SLMI s Bankruptcy Docket, Case No. 01- bk11329, DE # 131). On June 21, 2001, Lieberman provided a letter to SLMI s then bankruptcy counsel, apparently as SLMI s Intellectual Property counsel, purporting to opine on the value of SLMI s assets. (R. 711). On August 1, 2001, Lieberman wrote to Counsel for the Creditors Committee criticizing the manner in which counsel acted and stating that he would help in any way he could to seek a buyer for SLMI s interest in Conan Properties, but that when the Creditors Committee tries to act on its own without his help, in his view the matter is taken out of [his] hands. (R. 709). In November 2001, Madden, SLMI s former General Counsel, testified that Lieberman acted as SLMI s Intellectual Property counsel. (R. 277:20-278:4). Also in November 2001, Williams (SLMI s CEO at the time) testified that CSC and Lieberman purported to put a cloud over SLMI s Conan Assets, which cloud (according to Williams) made it impossible to sell or license the Conan Assets for the benefit of SLMI. (R. 357:16-360:1). Lieberman negotiated the sale of CSC to PEI (R ; R , 12, 15, 20-21, 23) and on April 30, 2002, Lieberman signed the papers on behalf of CSC purporting to consummate the Conan Transaction. (R. 1237; R. 1248; R. 1260; see also R. 1287). 18

29 Case: /07/2012 ID: DktEntry: 6 Page: 29 of 70 F. Almost None Of SLMI s Shareholders Received Notice Of The Disputed Sale Of The Conan Assets. A review of the Bankruptcy Dockets and the certificates of service filed in the SLMI bankruptcy demonstrates that at no time was a list of SLMI s shareholders filed with the Bankruptcy Court. (See R ; R ) (revealing no shareholder list filed in violation of the requirement of FRBP 1007(a)(3)). In addition, virtually all of SLMI s shareholders were never served with any notice of any order directing SLMI s shareholders to file a proof of stock interest in SLMI within any time period. (See R ; R ). In fact, no notice regarding the bankruptcy for any purpose was ever sent to SLMI s shareholders. (See R ; R ; R ). In seeking approval of the Conan Transaction, Appellees filed notices under FRBP 9019 and served these notices on creditors. (R ). However, these notices erroneously purport to be addressed to the interested parties in this action, but they were not addressed to virtually all of SLMI s shareholders. (R ). Appellees admit that these notices were only served on creditors and not shareholders. (R. 734:23-735:3). A review of the Certificates of Service (R ) against the Shareholder List used in the Colorado corporate governance litigation (R ; R ) 19

30 Case: /07/2012 ID: DktEntry: 6 Page: 30 of 70 demonstrates that many shareholders of record with significant interests as stakeholders during SLMI s bankruptcy did not receive notice of the Conan Transaction. For example, based upon a review of the list of shareholders of SLMI s common stock, showing only shareholders possessing in sum 20,000 or more shares, shareholders holding more than 1,205,935 shares and a 7.65% interest in SLMI did not receive notice. (See R. 245). In addition, no notice was given to Shareholder No Cede & Co., the depository which the Colorado courts recognized as holding 3,154,302 shares (or 20%) of SLMI common stock as of November 12, (See R. 539; see also R. 567) (showing that as of May 11, 2001, prior to the Conan Transaction, Cede & Co. actually held 3,781,269 shares)). A review of the Certificates of Service (R ) against the Beneficial Shareholder List used in the Colorado corporate governance litigation (R ) demonstrates that many beneficial shareholders of record with significant interests as stakeholders during SLMI s bankruptcy did not receive any actual notice of the Conan Transaction. For example, based upon a review of the list of beneficial shareholders of SLMI s common stock held by Cede & Co., showing only beneficial shareholders possessing in sum 20,000 or more shares, shareholders holding more than 801,500 shares and a 5.08% interest in SLMI did not receive notice. (See R. 247). 20

31 Case: /07/2012 ID: DktEntry: 6 Page: 31 of 70 These two groups together which are only a sampling of the shareholders who did not receive notice held in aggregate more than a 12% interest in SLMI, but did not receive any notice of the Conan Transaction. (See R ). Moreover, Atom Entertainment did not receive notice, even though Atom Entertainment appears to be SLMI s sole possessor of Series A Preferred Stock, possessing 856,429 shares of Series A Preferred Stock. (R. 554; 247). VI. STANDARDS OF REVIEW 1. A district court s decision to grant a motion to dismiss pursuant to FRCP 12(b)(6) is reviewed de novo. Camacho v. Bridgeport Fin. Inc., 430 F.3d 1078, 1079 (9th Cir. 2005). 2. A district court s failure to decide a motion is reviewed de novo. Garrett v. City & County of San Francisco, 818 F.2d 1515, 1518, n.3 (9th Cir. 1987). 3. A district court s allocation of the burden of proof is a legal question reviewed de novo. Molski v. Foley Estates Vineyard and Winery, LLC, 531 F.3d 1043, 1046 (9th Cir. 2008). 4. A district court s ruling upon a FRCP 60(b)(4) motion to set aside a judgment as void is reviewed de novo. Crawford v. Honig, 37 F.3d 485, 487 (9th Cir. 1994). 21

32 Case: /07/2012 ID: DktEntry: 6 Page: 32 of A question of law underlying a district court s denial of a FRCP 60(b) motion is reviewed de novo. Jeff D. v. Kempthorne, 365 F.3d 844, (9th Cir. 2004). 6. A district court s ruling upon a FRCP 60(d)(3) motion to set aside a judgment for fraud upon the court is reviewed for an abuse of discretion. See Molloy v. Wilson, 878 F.2d 313, 315 (9th Cir. 1989); Anderson v. Cryovac, Inc., 862 F.2d 910, 927 (1st Cir. 1988). VII. SUMMARY OF THE ARGUMENT The Dismissal Order should be reversed for at least four reasons. First, the District Court erred in dismissing Claims Two through Seven of SLMI s Complaint without addressing those claims. Second, the District Court erred in failing to vacate the Bankruptcy Court Settlement Approval Order as void under FRCP 60(b)(4). Third, the District Court erred in failing to vacate the Bankruptcy Court Settlement Approval Order under FRCP 60(b)(6) because that order was obtained in violation of the Bankruptcy Code. Fourth, the District Court abused its discretion in declining to vacate the Bankruptcy Court Settlement Approval Order under FRCP 60(d)(3) without permitting discovery because SLMI raised a colorable claim that the Settlement Approval Order was obtained through fraud on the court. 22

33 Case: /07/2012 ID: DktEntry: 6 Page: 33 of 70 VIII. ARGUMENT AND AUTHORITIES A. The District Court Erred In Dismissing Claims Two Through Seven Of SLMI s Complaint Without Addressing Those Claims. A district court has a virtually unflagging obligation to adjudicate claims within its jurisdiction. Deakins v. Monaghan, 484 U.S. 193, 203 (1988). Dismissing an action without properly adjudicating claims asserted is reversible error. First State Ins. Co. v. Callan Assocs., Inc., 113 F.3d 161, 162 (9th Cir. 1997). On December 5, 2011, the District Court informed the parties that it would only recharacterize SLMI s first claim for relief as a FRCP 60 motion, to be determined before the District Court addressed Claims Two through Seven of SLMI s Complaint. (R. 716:16-21) ( THE COURT: I m wondering whether I missed something or have I correctly stated that the Rule 60 motion has to be addressed first and then the other matters. MR. McGRATH: Your Honor, I would agree with the court. ) (emphasis added). Ultimately, and for reasons unknown to Appellant, the District Court went beyond its own self-imposed procedure and dismissed SLMI s entire Complaint without adjudicating Claims Two through Seven, which Claims were not dependent upon SLMI prevailing on claim one. (R. 1-10). Specifically, the District Court did not adjudicate SLMI s Claims for: Declaratory Relief that SLMI 23

34 Case: /07/2012 ID: DktEntry: 6 Page: 34 of 70 owns Conan Properties (Claim 2); Avoidance of the Transfer of Conan Properties to CSC and CSC s subsequent transfers under Section 549 of the Bankruptcy Code (Claim 3); Breach of Fiduciary Duty (Claim 4); an Accounting (Claim 5); Restitution and Unjust enrichment (Claim 6); and Imposition of a Constructive Trust (Claim 7). (Compare R. 1-10, with R. 1194, ). A proper analysis demonstrates that Appellees failed to meet their burden under FRCP 12(b)(6) to dismiss Claims Two through Seven of SLMI s Complaint. As discussed below, SLMI adequately stated causes of actions for these Claims. Further demonstrating that dismissal of these Claims is inappropriate under FRCP 12(b)(6), in their motions to dismiss, Appellees raised factual issues and relied upon submissions extrinsic to the Complaint, demonstrating that there are genuine issues of material fact with respect to Claims Two through Seven of SLMI s Complaint. (See R ; R ). 1. The District Court erred in dismissing Claim Four of SLMI s Complaint for Breach of Fiduciary Duty. To state a cause of action for breach of fiduciary duty, a plaintiff must allege: (1) the existence of a fiduciary relationship; (2) its breach; and (3) damage proximately caused by that breach. Neilson v. Union Bank of California, N.A., 290 F. Supp. 2d 1101, 1137 (C.D. Cal. 2003). Here, SLMI alleged that Appellees Lieberman, Kobayashi, and Champion all owed fiduciary duties of the highest standard of duty imposed by law (R ) and that the Paradox Appellees 24

35 Case: /07/2012 ID: DktEntry: 6 Page: 35 of 70 assumed fiduciary duties to SLMI by exercising control over Conan Properties after April (R ). SLMI further alleged that Appellees breached their fiduciary duties by obtaining the Conan Assets for their personal gain, and that such breached caused SLMI to suffer great loss, in an amount that cannot readily be ascertained, but substantially in excess of the $75,000 jurisdictional amount. Accordingly, SLMI adequately stated a cause of action for breach of fiduciary duty and the District Court erred in dismissing Claim Four of SLMI s Complaint without adjudicating that claim. 2. The District Court erred in dismissing Claim Seven of SLMI s Complaint for Imposition of a Constructive Trust. To state a cause of action for imposition of a construction trust, a plaintiff must allege: (1) the existence of a res (some property or some interest in property); (2) the plaintiff s right to that res; and (3) the defendant s gain of the res by fraud, accident, mistake, undue influence or other wrongful act. United States v. Pegg, 782 F.2d 1498, 1500 (9th Cir. 1986). Here, SLMI alleged Appellees hold the Conan Assets that justly belong to SLMI and that Appellees obtained the Conan Assets through fraudulent, malicious, and oppressive conduct in conscious disregard of SLMI s rights (R ). Accordingly, SLMI adequately stated a cause of action for Imputation of a Constructive Trust and the District Court erred in dismissing Claim Seven of SLMI s Complaint without adjudicating that claim. 25

36 Case: /07/2012 ID: DktEntry: 6 Page: 36 of The District Court erred in dismissing Claim Six of SLMI s Complaint for Restitution and Unjust Enrichment. To state a cause of action for restitution and unjust enrichment, a plaintiff must allege: (1) receipt of a benefit; and (2) the unjust retention of the benefit at the expense of another. Here, SLMI alleged that Appellees received the Conan Assets and that their receipt was the result of their fraudulent, malicious, and oppressive conduct in conscious disregard of SLMI s rights. (R ). Accordingly, SLMI adequately stated a cause of action for restitution and unjust enrichment and the District Court erred in dismissing Claim Six of SLMI s Complaint without adjudicating that claim. 4. The District Court erred in dismissing Claim Five of SLMI s Complaint for an Accounting. A claim for accounting lies in fraud as well as where there is a fiduciary relation between the parties and the facts are peculiarly within the defendants knowledge. (Smith v. Blodget, 187 Cal. 235 (1921). Here, SLMI adequately alleged that the fiduciary obligations owed to SLMI by Appellees give rise to a duty to account for any property or funds received or diverted from SLMI where SLMI no longer has access to the books and records of Conan Properties. (R ). Accordingly, SLMI adequately stated a cause of action for an accounting and the District Court erred in dismissing Claim Five of SLMI s Complaint without addressing that claim. 26

37 Case: /07/2012 ID: DktEntry: 6 Page: 37 of The District Court erred in dismissing Claim Three of SLMI s Complaint for Avoidance of Transfer. To plead a cause of action for avoidance of a transfer under Section 549 of the Bankruptcy Code, a plaintiff must plead: (i) the transfer occurred after the filing of the bankruptcy petition; and (ii) the transfer was not authorized by either the bankruptcy court or the Bankruptcy Code. In re Mora, 199 F.3d 1024, 1026 (9th Cir. 1999). Here, SLMI has alleged both elements required to state a cause of action for avoidance of transfer. First, SLMI has adequately alleged that the transfer occurred after the filing of the bankruptcy petition, because the Complaint alleges that: (i) SLMI commenced a voluntary Chapter 11 bankruptcy case on February 16, 2001; and (ii) the disputed transfer took place in (R ; R ; R ; R ). Second, SLMI has adequately alleged that the transfer was not authorized by either the bankruptcy court or the Code (R ; R ; R ). Accordingly, SLMI adequately stated a cause of action for avoidance of transfer under Section 549 of the Bankruptcy Code and the District Court erred in dismissing Claim Three of SLMI s Complaint without addressing that claim. 27