ecf lee v marvel appellant slmi brief 6-9-11
DESCRIPTION
copyright ownership, copyright law, standing, real party in interest, copyrights and bankruptcy, licensing litigation, copyright litigation, stan lee, marvel comics, stan lee media incTRANSCRIPT
11-831 In the
United States Court of Appeals For the Second Circuit
O STAN LEE,
Plaintiff-Appellee,
STAN LEE MEDIA, INC.,
Movant-Appellant,
– v. –
MARVEL ENTERPRISES, INC. and MARVEL CHARACTERS, INC.,
Defendants-Appellees.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
BRIEF AND SPECIAL APPENDIX FOR
MOVANT-APPELLANT
DUNNINGTON BARTHOLOW & MILLER, LLP Attorneys for Movant-Appellant
1359 Broadway, Suite 600 New York, New York 10018
(212) 682-8811
APPELLATE INNOVATIONS
(914) 948-2240 5833
i
CORPORATE DISCLOSURE STATEMENT PURSUANT TO RULE 26.1 OF THE FEDERAL RULES OF APPELLATE PROCEDURE
Pursuant to Rule 26.1 of the Federal Rules of Civil Procedure, Movant-
Appellant in this action, Stan Lee Media Inc., an administratively-dissolved
Colorado corporation (“SLMI”), states that it does not have a corporate parent
and there is no publicly held corporation that owns 10% or more of SLMI stock.
ii
Table of Contents Page
I. STATEMENT OF JURISDICTION ............................................................ 1 II. STATEMENT OF THE ISSUES ................................................................. 1 III. STATEMENT OF THE CASE .................................................................... 4 IV. PROCEDURAL BACKGROUND ............................................................ 12
A. Lee v. Marvel (2002-2005) ............................................................... 12 B. On January 8, 2007, Lee Commenced An Ownership Rights
Case In California, After Which Various Shareholders Attempt To Bring Derivative Lawsuits In SLMI's Name ............................... 13
C. Judge Crotty Dismisses The First New York Derivative Lawsuit Because Putative Plaintiff's Counsel Was Not Authorized To Represent SLMI ....................................................... 15
D. Judge Crotty Dismisses The Second New York Derivative Lawsuit Because Putative Derivative Plaintiffs Had No Standing And Did Not Adequately Represent SLMI ....................... 15
E. The Colorado Court of Appeals Authorizes A New Board For SLMI, And The California Court Lifts The Stay In The California Litigation ......................................................................... 16
F. SLMI's Intervention Into Lee v. Marvel ........................................... 19 G. The California Case Is Stayed Again Pending Determination
Of This Appeal .................................................................................. 21 V. STATEMENT OF FACTS ........................................................................ 23 VI. SUMMARY OF ARGUMENT ................................................................. 26 VII. ARGUMENT ............................................................................................. 30 A. Standard of Review .......................................................................... 30 B. Discussion of Issues ......................................................................... 32
1. The District Court Erred By Declining To Vacate Its Judgment Pursuant To Rule 60 Because The Subject Matter of Lee v. Marvel Was Property Of SLMI's Bankruptcy Estate And, In Addition, Lee's Misconduct, SLMI's Changed Circumstances And The Avoidance Of A Grave Injustice To 1,800 Shareholders Necessitates Rule 60 Relief ............................................................. 32
iii
a. The District Court erred in denying relief under Rule 60(b)(4) because the 2005 judgment entered in Lee v. Marvel violated the automatic stay in bankruptcy ........................................... 33
b. The District Court erred in denying relief under Rule 60(d); 60(b)(5) and 60(b)(6) because: (i) the 2005 judgment was procured by Lee’s misconduct in failing to inform the Court of SLMI’s bankruptcy; (ii) SLMI’s changed status as being empowered with a duly authorized representative for the first time in ten years warrants relief; and (iii) denying relief would result in a manifest injustice to SLMI’s 1800 shareholders. .......................................................................... 37
2. The District Court Erred By Denying SLMI’s Application To Intervene and Be Re-Aligned As A Plaintiff And The Real Party In Interest .............................................................................................. 40 a. The District Court Erred Because Rule 24 of the Federal
Rules of Procedure Required The District Court To Permit SLMI To Intervene As of Right. ........................................... 40
b. The District Court Erred Because Lee Lacked Standing To Sue Marvel Because He Had Previously Assigned His Copyrights To SLMI and Rule 19(a) of The Federal Rules of Civil Procedure Required Both Lee and Marvel To Inform Judge Sweet Of SLMI’s Competing Claim To the Property Lee Claimed To Own ............................................................ 41
3. The District Court Erred By Denying SLMI’s Application To Unseal Documents Filed In Lee v. Marvel That Are Presumptively Public and For Which There Is No Record Of A Compelling Reason To Seal ............................................................................... 43
4. The District Court Erred By Deciding That res judicata Applied And That SLMI Was Adequately Represented By Shareholders Who Had No Standing And Otherwise Could Not prosecute SLMI’s Claims ................................................................................ 45 a. The Court Should Not Reach The Issue Of Res judicata
Because It Was Not Necessary To Judge Sweet’s Decision To Deny Relief. .................................................................... 46
b. Res judicata Should Not Apply Because Judge Crotty’s Purported Merits-Based Determinations Violated The Previously Stay Put In Place By The California Court ......... 48
iv
c. Derivative Plaintiffs Lacked Standing And Thus The Crotty Court Lacked Jurisdiction To Rule On The Merits ............... 50
d. SLMI did not have a full and fair opportunity to litigate the issues that the District Court erroneously determined to be barred by res judicata ............................................................ 51
e. The Putative Derivative Plaintiffs did not and could not adequately represent SLMI .................................................... 52
f. Derivative Plaintiffs Lacked Identity And Privity With SLMI Because They Did Not Adequately Represent SLMI . 57
g. Defendants failed To Demonstrate With Clarity And Certainty That The Issues Before Judge Sweet Were Identical To The Issues Before Judge Crotty Because The Facts And The Burden of Proof Were Different ................... 58
VII. CONCLUSION .......................................................................................... 62
v
Table of Authorities
Page(s) FEDERAL
48th St. Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th St. Steakhouse, Inc.), 835 F.2d 427, 431 (2d Cir.1987) ....................................... 34
ABKO Music, Inc. v. Harrisongs Music, Ltd., 944 F.2d 971 (2d Cir. 1991) .. 41
AEP Energy Services Gas Holding Co. v. Bank of America, N.A., 626 F.3d 699 (2d. Cir. 2010) ..................................................................... 30, 48
Brennan v. N.Y.C. Board of Education, 260 F.3d 123 (2d Cir. 2001) ............ 47
Bridgeport Guardians, Inc. v. Delmonte, 602 F.3d 469 (2d Cir. 2010).......... 47
Carroll v. Tri-Growth Centre City, Ltd. (In re Carroll), 903 F.2d 1266 (9th Cir.1990) .................................................................................................. 34
Central Vermont Public Service Corp. v. Herbert, 341 F.3d 186 (2d Cir. 2003) .................................................................................................. 30
Clark v. Bear Stearns & Co., 966 F.2d 1318 (9th Cir. 1992) ................... 58, 60
Clark ex rel. George Washington Life Insurance Company v. Milam, 872 F. Supp. 307 (S.D. W. Va. 1994)......................................................................... 57
Cobb v. Pozzi, 363 F.3d 89 (2d Cir. 2004) ................................................ 59, 60
Colorado River Water Cons. Dist. v. U.S., 424 U.S. 800 (1976) .................... 48
Curtis v. Citibank, N.A., 226 F.3d 133 (2d Cir. 2000) .................................... 49
Esquire Trade & Finance, Inc. v. CBQ, Inc., 562 F.3d 516 (2d Cir. 2009) ... 54
Fay v. Perles, 484 F. Supp. 2d 6 (D.D.C. 2007) ................................. 47, 52, 57
Fleck & Assocs. v. Phoenix, 471 F.3d 1100 (9th Cir. 2006) ........................... 50
Gambale v. Deutsche Bank AG, 377 F.3d 133 (2d Cir. 2004) .................. 31, 44
Gillig v. Nike, 602 F.3d 1354 (Fed. Cir. 2010) ............................................... 51
Gorman v. Consol. Edison Corp., 488 F.3d 586 (2d. Cir. 2007) .................... 31
vi
Greenwich Ins. Co. v. Media Breakaway, LLC, 2009 WL 2231678, at *5 (C.D.Cal. July 22, 2009) .................................................................................. 53
Guru Denim, Inc. v. Hayes, 2010 WL 1854020, May 6, 2010 *12 ................ 59
Horne v. Flores, 129 S.Ct. 2579 (2009) .......................................................... 38
Hydranautics v. FilmTec Corp., 204 F.3d 880 (9th Cir. 2000) ...................... 58
Joy v. North, 692 F.2d 880 (2d Cir. 1982) ...................................................... 44
Kamikaze Music Corp. v. Robbins Music Corp., 534 F. Supp. 69 (S.D.N.Y. 1982) ................................................................................................................ 41
Lans v. Digital Equipment Corp., 252 F.3d 1320 (Fed. Cir. 2001) ................ 41
Levi Strauss & Co. v. Blue Bell, Inc., 778 F.2d 1352 (9th Cir.1985) ............. 58
Lewis v. Chiles, 719 F.2d 1044 (9th Cir. 1983) .............................................. 51
Lujan v. Defenders of Wildlife, 504 U.S. 555, 570 n. 5, 112 S.Ct. 2130 (1992) ............................................................................................ 42
Martin [v. Wilks], 490 U.S. [755,] 762, n. 2, 109 S.Ct. 2180 [(1989)] ........... 53
Marvel Characters, Inc. v. Simon, 310 F.3d 280 (2d Cir. 2002) .................... 31
Media Technologies Licensing, LLC v. Upper Deck Company, 334 F.3d 1366 (Fed. Cir. 2003) ....................................................................... 51
In re National Century Fin. Enters., 423 F.3d 567 (6th Cir. 2005) ................ 34
New York v. Green, 420 F.3d 99 (2d Cir. 2005) ............................................. 30
Papilsky v. Berndt, 466 F.2d 251 (2d Cir. 1972) ............................................ 57
Paradise Creations, Inc. v. UV Sales, Inc., 315 F.3d 1304 (Fed. Cir. 2003) .. 41
Parklane Hosiery Co. v. Shore, 439 U.S. 322, 327 n.7, 99 S. Ct. 645 (1979) 53
Quinn v. Anvil Corp., 620 F.3d 1005 (9th Cir. 2010) ..................................... 51
Reliance Ins. Co. v. Six Star, Inc., 155 F.Supp.2d 49 (S.D.N.Y. 2001) .......... 49
Reudiger v. U.S. Forest Service, 2005 WL 318795, *4 (D. Ore. 2005) ......... 47
vii
Richards [v. Jefferson County], 517 U.S. [793,] 798, 116 S.Ct. 1761 [(1996)] .................................................................................... 53, 54
Saylor v. Lindsley, 391 F.2d 965 (2d Cir. 1968) ....................................... 50, 57
Sea-Land Services, Inc. v. Gaudet, 414 U.S. 573, 593, 94 S.Ct. 806, 39 L.Ed.2d 9 (1974) ............................................................................................. 53
Semmes Motors, Inc. v. Ford Motor Company, 429 F.2d 1197 (2d Cir. 1970) .................................................................................................. 49
Smith v. McIver, 22 U.S. 532 (1824) ............................................................... 48
Steel Co. v. Citizens for a Better Environment, 523 U.S. 83 (1998) ............... 50
Taylor v. Sturgell, 553 U.S. 880, 892-93, 128 S.Ct. 2161 (2008) ...... 53, 54, 55
United States v. Forma, 42 F.3d 759 (2d Cir.1994) ........................................ 30
United States v. Whiting Pools, Inc., 462 U.S. 198 (1983) ............................. 34
U.S. v. Alpine Land & Reservoir Co., 984 F.2d 1047 (9th Cir. 1993) ............ 38
STATE
James McKinney & Son v. Lake Placid 1980 Olympic Games, 61 N.Y.2d 836, (1984)............................................................................................................... 42
National Financial Co. v. Uh, 279 A.D.2d 374, 375, 720 N.Y.S.2d 17 (1st Dep't 2001) ............................................................................................... 42
STATUTES
11 U.S.C. § 362(a) ........................................................................................... 34
11 U.S.C . § 541(1) .......................................................................................... 33
17 U.S.C. § 204 ............................................................................................... 41
17 U.S.C. § 501 ............................................................................................... 41
viii
28 U.S.C. § 1291 ............................................................................................... 1
28 U.S.C. § 1294 ............................................................................................... 1
28 U.S.C. § 1334(e)(1) .................................................................................... 34
FRCP 17 ........................................................................................................ 1, 3
FRCP 19(a) .................................................................................... 26, 37, 41, 42
FRCP 23 .......................................................................................................... 53
FRCP 23.1 ..................................................................................... 16, 50, 55, 60
FRCP 23.1(a) ............................................................................................. 16, 55
FRCP 24 (a) ............................................................................................... 41, 47
FRCP 24 (a)(2) ................................................................................................ 47
FRCP 56.1 ........................................................................................... 27, 28, 30
FRCP 60(b) .......................................................................... 8, 20, 26, 37, 38, 47
FRCP 60(b)(3) ................................................................................................. 37
FRCP 60(b)(4) ......................................................................... 26, 30, 32, 33, 36
FRCP 60(b)(5) ............................................................................... 26, 32, 37, 38
FRCP 60(b)(6) ............................................................................... 26, 32, 37, 38
FRCP 60(d) ................................................................................ 8, 26, 32, 33, 37
FRCP 60(d)(3) ........................................................................................... 37, 43
OTHER AUTHORITIES
Charles A. Wright, Arthur R. Miller & Edward H. Cooper, 11 Federal Practice & Procedure § 2862 (2d ed. 2002) .................................................... 34
1
Pursuant to Fed. R. App. P. 3, Movant-Appellant Stan Lee Media, Inc.
(“SLMI”) hereby submits its appellate 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. §§ 1291 and 1294. SLMI appeals the
decision of the United States District Court for the Southern District of New
York by the Honorable Robert W. Sweet, dated February 4, 2011 (the
“Intervention Order”), which denied SLMI’s application to (i) unseal court
records; (ii) vacate a prior order and final judgment pursuant to Rule 60 of
the Federal Rules of Civil Procedure; (iii) intervene, substitute and re-align
SLMI as the real plaintiff in interest under Rules 17, 19, and 24 of the
Federal Rules of Civil Procedure; and (iv) file a proposed pleading if leave
to intervene is granted.
II.
STATEMENT OF THE ISSUES
1. Did the District Court err by concluding that another District
Judge’s March 31, 2010 dismissal due to lack of shareholder standing in a
purported shareholder derivative action filed on January 26, 2009 precluded
a Colorado corporation from asserting the viability of a copyright
2
assignment and asserting other claims where: (i) in an action commenced on
January 8, 2007, the U.S. District Court for the Central District of California
determined on January 20, 2009 that the Colorado corporation is a necessary
party to any action involving the termination of the copyright assignment;
(ii) the Colorado corporation had no legally-authorized management from at
least December 5, 2006 to May 27, 2010 and—due to court-supervised
contested elections—it was not represented before then in any action
purportedly brought (directly or derivatively) on behalf of the Colorado
corporation; and (iii) the Colorado Court of Appeals effectively installed
new management of the Colorado corporation on May 27, 2010,
implemented by a Colorado district court order dated January 31, 2011?
Answer: Yes.
2. Where a corporate copyright owner is in bankruptcy, is a
decision of a federal district court transferring royalties belonging to the
copyright owner to a corporate officer of the copyright owner void where it
is issued without notice to (i) the copyright owner; (ii) the copyright
owner’s shareholders; and (iii) the bankruptcy court with exclusive
jurisdiction over the copyright owner’s assets? If so, did the District Court
err in refusing to vacate such a void order and resulting judgment upon
3
application from newly-installed post-bankruptcy management of the
corporate copyright holder?
Answer: Yes.
3. Where a corporate copyright owner seeks to reclaim royalties
diverted by a disloyal manager and controlling shareholder that was the
subject of a collusive litigation during the corporation’s bankruptcy, did the
District Court err in denying an application for relief by the corporation’s
newly-installed management by (i) not recognizing the corporate copyright
owner as the real party in interest under Rule 17 of the Federal Rules of
Civil Procedure; and (ii) not permitting the copyright owner to intervene as
the true plaintiff?
Answer: Yes.
4. Where a company seeks access to presumptively public court
files in a case closed in 2005, did the District Court err in denying access to
the files where: (i) there is no public sealing order in place and (ii) there is
no evidence showing that the documents should be sealed?
Answer: Yes.
4
III.
STATEMENT OF THE CASE
The courts of the State of Colorado have authorized a new board of
directors to act on behalf of SLMI as of May 27, 2010. This new board of
directors is SLMI’s first legally-authorized corporate representation since
SLMI’s bankruptcy was dismissed in December 2006 and the first
management independent of its founder Plaintiff-Appellee Stan Lee since
SLMI was founded in October 1998. The District Court decision below,
however, overlooks and effectively nullifies shareholder elections
supervised by the courts of the State of Colorado that finally resurrected
SLMI’s ability to marshal its assets in the best interests of its approximately
1,800 shareholders. Movant-Appellant non-party SLMI brings this appeal
from a decision of the Hon. Robert W. Sweet dated February 4, 2011
denying a motion to intervene and vacate a 2005 order awarding Lee ten
percent of the royalties of the film Spider-Man: The Movie and subsequent
judgment (“the 2005 Profits Order”) and denying an application by SLMI to
intervene and substitute as the real party in interest (“Intervention Order”).
In 1998, Marvel Enterprises, Inc. (“Marvel”), while in bankruptcy,
rejected its contracts with the then 75-year-old comic book genius Stan Lee.
Lee was the creator or co-creator of hundreds of characters, including
5
Spider-Man, The Incredible Hulk, Iron Man, Thor, the Fantastic Four and X-
Men. Having no source of income, Lee partnered with Peter Paul to create
what became the eponymous Stan Lee Media Inc. (“SLMI”). In exchange
for control of SLMI, a majority of stock and a guaranteed salary for life, Lee
executed a written assignment to SLMI of all of his intellectual property
(including Spider-Man and the right to exploit his name and likeness, among
other things) effective as of October 15, 1998 (“the October 1998
Assignment”).
In 1999, to raise financing from investors, Lee executed written
ratification of the October 1998 Assignment and represented that he had not
assigned his intellectual property rights to anyone else (“the October 1999
Ratification”). Based on these representations, SLMI went public,
eventually achieving a market capitalization on the NASDAQ Exchange in
excess of three hundred million dollars. The October 1998 Assignment and
the October 1999 Ratification were filed with the Securities Exchange
Commission (“the SEC”). Eventually, the October 1998 Assignment was
recorded with the U.S. Copyright Office.
In February 2001, under Lee’s control, SLMI filed for Chapter 11
bankruptcy. During the bankruptcy, SLMI was delisted by the SEC and
administratively dissolved by the State of Colorado. In December 2006,
6
having never even proposed a reorganization plan, SLMI’s bankruptcy was
dismissed due to the failure of its bankruptcy management to comply with
its duties under the Bankruptcy Code. Starting in 2007, SLMI shareholders
commenced proceedings in Colorado State courts to compel court-
supervised elections of new directors. Because of allegations of
wrongdoing among shareholders, the Colorado district court appointed a
Special Master to oversee the proxy solicitation process and to ensure the
regularity of the elections. Lee successfully challenged the seating of the
directors elected at the December 2007 annual meeting, leaving SLMI
without anyone legally authorized to act on its behalf. Lee also challenged
the 2008 elections. On March 17, 2009, the Colorado state district court
rejected the directors elected in December 2008. On May 27, 2010,
however, the Colorado Court of Appeals reversed and, for the first time,
seated the SLMI directors who had been elected by SLMI shareholders in
December 2008. Lee appealed and lost before the Colorado Supreme
Court, and a final order issued on January 31, 2011 confirmed the seating of
the new board of directors.1
1 The Colorado trial court entered judgment seating SLMI’s board of directors on January 31, 2011, 4 days before Judge Sweet made his Intervention Order rulings in this action. SLMI intends to file a motion requesting judicial notice by this Court of that judgment and other relevant recent proceedings in the Colorado and California actions.
7
In June 2010, based upon the May 27, 2010 decision of the Colorado
Court of Appeals affirming the election results, SLMI’s new Board of
Directors retained counsel to marshal SLMI’s assets and to assert claims on
SLMI’s behalf. Among other issues, counsel investigated a November 1998
Assignment of Lee’s intellectual property to Marvel that Lee appeared to
have executed without notice or disclosure to SLMI’s shareholders.
Counsel also investigated the present action. In Lee v. Marvel, Lee brought
the action against Marvel in 2002 in the United States District Court for the
Southern District of New York asserting that he made a “conditional
assignment” of his copyrights to Marvel. In Lee v. Marvel, Lee obtained the
2005 Profits Order: a grant of partial summary judgment awarding him ten
percent of the royalties from Spider-Man: The Movie. Shortly thereafter, Lee
and Marvel entered a confidential settlement and the District Court entered a
final judgment (collectively referred to herein as the “2005 Profits Order”).
Pursuant to SLMI’s investigation, counsel sought access to SLMI’s
books and records and sought to review court records. SLMI’s prior
corporate counsel and management failed to cooperate. During this time, the
office of the Clerk of the U.S. District for the Southern District of New York
informed SLMI’s counsel that Lee’s summary judgment motion in Lee v.
Marvel was filed under seal. SLMI applied to the U.S. District Court for the
8
Southern District of New York by the Hon. Robert W. Sweet to have Lee v.
Marvel records unsealed, to intervene as the real party in interest as the
exclusive copyright owner pursuant to the October 1998 Assignment, to
vacate the 2005 Profits Order and, upon granting leave to intervene, to file a
proposed complaint as a re-aligned plaintiff. Relying mainly on Rules 60(b)
and 60(d) of the Federal Rules of Civil Procedure, SLMI sought to vacate
the 2005 Profits Order as void because the District Court lacked jurisdiction
to enter it while SLMI was in bankruptcy; because the 2005 Profits Order
was issued in violation of due process without notice to SLMI; and because
of Lee’s fraud and misconduct.
In support of the application, SLMI submitted an expert opinion of
Lillian Laserson, former General Counsel of D.C. Comics. Laserson
analyzed the October 1998 Assignment and other relevant documents, and
she concluded that Lee’s assignment to SLMI was valid and that Lee had
never terminated the assignment. The District Judge declined SLMI’s
application to hold an evidentiary hearing on the question of SLMI’s
copyright ownership. Instead, the District Court entertained oral argument
off the record on the motion papers.
While SLMI was in bankruptcy, Lee created two companies called
QED Productions (“QED”) and POW! Entertainment (“POW!”) to exploit
9
his name, likeness and intellectual property. In 2007, Lee, individually and
QED and POW! sued in the U.S. District Court for the Central District of
California, purporting to represent SLMI. The plaintiffs sued SLMI
shareholders to stop them from making claims to intellectual property and
seeking a declaratory judgment that Lee’s intellectual property had never
entered SLMI’s bankruptcy estate.
On January 20, 2009, Judge Stephen V. Wilson concluded that Lee,
QED and POW! had violated the automatic stay in bankruptcy by
transferring certain intellectual properties out of SLMI’s bankruptcy estate.
Judge Wilson determined that Lee’s attempts to reclaim intellectual
properties based on his allegation that he terminated the October 1998
Assignment “would have to be litigated between Stan Lee and SLMI.”
Judge Wilson found that SLMI was without anyone legally authorized to
speak on its behalf and was a necessary party to resolution of the dispute.
Accordingly, Judge Wilson issued a stay of the issue of whether or not the
October 1998 Assignment was terminated pending the outcome of Colorado
corporate governance proceedings (“the 2009 California Stay Order”).
On January 24, 2011, Judge Wilson lifted the 2009 California Stay
Order and directed SLMI to file a consolidated complaint as the plaintiff.
SLMI filed the complaint on February 14, 2011. Judge Wilson consolidated
10
numerous California actions with SLMI realigned as plaintiff on February
15, 2011 (“the California Action”). On March 16, 2011 Lee, QED and
POW! moved to dismiss or stay the California Action based on Judge
Sweet’s February 4, 2011 Intervention Order. On May 4, 2011, Judge
Wilson stayed the California Action pending the outcome of this appeal (the
“May 2011 California Stay Order”) . The May 2011 California Stay Order
states that if this Circuit Court does not specifically affirm the res judicata
portion of the Intervention Order, the California Action will not be barred by
collateral estoppel.
The 2005 Profits Order that Movant-Appellant sought to vacate was
entered in derogation of the bankruptcy court’s exclusive jurisdiction and in
violation of an automatic stay in bankruptcy and thus should be vacated as
void for lack of subject matter jurisdiction. In addition, this Court should
recognize SLMI as the real party in interest as the assignee of Lee’s rights in
the Spider-Man copyright. The essential relief that SLMI seeks is to have
its day in the appropriate federal court to vindicate its intellectual property
rights under the October 1998 Assignment. Marvel is not a party to the
California Action. Accordingly, in the alternative, if the Court affirms that
SLMI cannot intervene in Lee v. Marvel, SLMI seeks a limited affirmance of
the Intervention Order that, in light of Judge Wilson’s February 15, 2011
11
consolidation, permits the California Action to proceed.
Specifically, should this Court choose to affirm, Movant-Appellant
respectfully requests that the decision of this Court state clearly the limited
grounds necessary for affirmance and respectfully requests that such
affirmance reject the District Court’s determination that a March 31, 2010
dismissal of a putative shareholder derivative claim by order of the U.S.
District Court for the Southern District of New York (Hon. Paul A.
Crotty)(“Derivative Dismissal Order”) has res judicata effect as to non-party
SLMI.
The Intervention Order is based on the erroneous legal premise that
SLMI appeared before Judge Crotty prior to the issuance of the Derivative
Dismissal Order. It is undisputable that SLMI had no legally authorized
representatives from at least December 5, 2006 to May 27, 2010. Indeed,
Lee is collaterally estopped from asserting the contrary because he actually
litigated this issue and lost in the Colorado state courts. Accordingly, as
stated in Judge Wilson’s May 2011 California Stay Order, a limited
affirmance by this Court that does not adopt the Intervention Order’s res
judicata reasoning would permit the Central District of California to resolve
questions of fact raised in a 2007-filed case, consistent with the prior
decisions of the Central District of California and the decisions of the courts
12
of the State of Colorado electing new SLMI management to pursue such
claims.
For these reasons, and those arguments set forth below, the
Intervention Order should be vacated and reversed, remanded for additional
factual findings; or, in the alternative, should this Court choose to affirm,
this Court should reject or simply not address the District Court’s res
judicata reasoning.
IV.
PROCEDURAL BACKGROUND
A. Lee v. Marvel (2002-2005)
Stan Lee commenced this action, Lee v. Marvel, in 2002 alleging that
Marvel breached a conditional assignment of his copyright in the character
Spider-Man by failing to pay him 10 percent of the profits from Spider-Man:
The Movie. The U.S. District Court for the Southern District of New York,
by the Hon. Robert W. Sweet, granted Lee partial summary judgment
issuing the 2005 Profits Order, awarding him ten percent of Marvel’s profits
from Spider-Man: The Movie. After the grant of partial summary judgment,
Lee and Marvel settled on confidential terms, and Judge Sweet approved the
Stipulation settling the matter. At the time of the 2005 Profits Order, SLMI
was in bankruptcy and not a party to Lee v. Marvel. However, Lee had
13
already, in exchange for half of SLMI’s stock, control of SLMI, and a
lifetime salary from SLMI, assigned all of his intellectual property
(including the Spider-Man copyright) to SLMI pursuant to the October 1998
Assignment.
In the wake of the SLMI bankruptcy dismissal in December 2006, a
series of lawsuits erupted between Lee and various shareholder factions that
ultimately led to SLMI’s motions to reopen this case.
B. On January 8, 2007, Lee Commenced An Ownership Rights Case In California, After Which Various Shareholders Attempt To Bring Derivative Lawsuits In SLMI’s Name. On January 8, 2007, Lee and affiliated companies QED Productions
and POW! Entertainment commenced QED Productions et al. v. James
Nesfield, et al., Case No. 07-CV-225 in the Central District of California
(Hon. Stephen V. Wilson). In the original complaint, Lee, QED and POW!
purported to assert individually and on SLMI’s behalf violations of SLMI’s
intellectual property rights against various shareholders involving ownership
of all of Lee’s intellectual property (including Spider-Man). Various
shareholders brought subsequent complaints against Lee in the Central
District of California, including in Stan Lee Media, Inc. v. Stan Lee et al.,
Case No. 07-CV-4438 (SVW) (C.D. Cal. 2007) and in Abadin, et al. v. Stane
14
Lee, Case No. 09-CV-2340 (SVW) (C.D. Cal. 2009). These cases were
eventually consolidated.
On January 20, 2009, Judge Wilson issued the 2009 California Stay
Order. The 2009 California Stay Order determined that Lee, QED, and
POW! violated the automatic bankruptcy stay by attempting to transfer
SLMI’s intellectual property rights while SLMI remained in bankruptcy.
(A-1016-1030). Judge Wilson also identified and reserved the issue of
SLMI’s ownership of its intellectual property and determined that SLMI was
a necessary party to a determination of whether or not Lee had terminated
the October 1998 Assignment:
It appears, however, that resolution of these issues will necessarily involve SLMI in the litigation …. The Court finds that Plaintiff QED did not acquire an interest in the Properties by virtue of a transfer from the bankruptcy court because any such transfer was done in violation of the automatic stay, and was therefore void as a matter of law. As factual issues potentially remain regarding whether Plaintiffs have interests in the Properties sufficient to confer standing, Plaintiffs’ Motion for Partial Summary Judgment on the issue of standing is DENIED.
(A-1029).
Judge Wilson stayed the case pending the outcome of corporate governance
proceedings in Colorado to determine SLMI’s duly authorized
representatives. (A-1030).
15
C. Judge Crotty Dismisses The First New York Derivative Lawsuit Because Putative Plaintiff’s Counsel Was Not Authorized To Represent SLMI.
Also starting in 2007, various shareholders in other districts
brought putative derivative actions, some purporting to be in SLMI’s
name. Shareholders attempted to bring claims in the Southern District
of New York in Stan Lee Media, Inc. v. Marvel Entertainment, Inc., et
al., Case No. 07-CV-2238 (PAC) (S.D.N.Y 2007). On March 15,
2007, a complaint was filed before the Hon. Paul A. Crotty in SLMI’s
name against Lee and others. Because the action was not authorized
by SLMI, on September 9, 2008 Judge Crotty dismissed the action
without prejudice to renewal:
The current affirmation does not establish that counsel has been authorized by the corporate plaintiff to appear on its behalf. Accordingly the matter is dismissed without prejudice to its renewal should a properly constituted corporate entity decide to retain counsel and pursue whatever requests it may have.
(A-534).
D. Judge Crotty Dismisses A Second New York Derivative Lawsuit Because Putative Derivative Plaintiffs Had No Standing And Did Not Adequately Represent SLMI.
Judge Crotty also later dismissed Abadin v. Marvel, Case No. 09-CV-
0715 (PAC) (S.D.N.Y. 2009), a purported shareholder derivative action
commenced on January 26, 2009 (“SDNY Derivative Action”). On March
16
31, 2010, on a motion to dismiss pursuant to Rule 12(b)(6), Judge Crotty
dismissed the action because the putative derivative plaintiffs lacked
standing to sue on behalf of SLMI and could not adequately represent SLMI
(the “Derivative Dismissal”):
Plaintiffs did not own stock at the time of the complained of transaction, and accordingly they lack the requisite standing under the Federal Rules of Civil Procedure and Colorado law.[citation omitted].[fn4] [fn4:] It is doubtful whether the two named Plaintiffs can be said to “fairly and adequately represent the interests of” absent shareholders, as required by Fed. R. Civ. P. 23.1(a) …. These [proposed additional plaintiffs] cannot be allowed to serve in a fiduciary capacity; and they do not cure the deficiencies of Abadin and Belland.
(A-641).
E. The Colorado Court of Appeals Authorizes A New Board For SLMI, And The California Court Lifts The Stay In The California Litigation.
While various litigations were filed and dismissed in federal courts,
elections of new directors to represent SLMI were still being contested in
Colorado court proceedings which permitted minority shareholders to elect a
new Board of Directors for “good cause.” On August 2, 2007, in Belland v.
SLMI, shareholders tried to seat a new Board of Directors at a December
2007 annual meeting in order to pursue SLMI’s intellectual property claims
and claims against former directors. (A-113). The case was dismissed on
17
September 10, 2008 because two proposed directors were jailed for stock
manipulation and the results of the 2007 annual meeting were invalidated.
(A-659; [ No. 07-cv-7536 (Col. Denver Cty.), Trans. No. 21442352]). On
October 1, 2008 another corporate governance action was commenced, PFP
Family Holdings LLP v. SLMI. (A-660, [No. 08-cv-8584 (Col. Denver
Cty.)]).
In December 2008, court-ordered annual meeting occurred and a
Special Master appointed by a Colorado district court presided over a court-
ordered shareholders election. (A-436-482). In a report dated February 9,
2009 (“Special Master Report”), the Special Master outlined the issues that
she believed to be at stake in the outcome of the 2008 SLMI elections:
(i) “[T]he very existence of SLMI. Should a slate of directors be elected and SLMI continue to exist and pursue lawsuits or should SLMI remain dissolved?”
(ii) “[R]einstatement and election of a board of directors of SLMI … are hotly contested issues with … possibly the intellectual property … of SLMI at stake.”
(iii) “There are lawsuits in more than one jurisdiction in which the
parties are seeking control of, or redress for, SLMI’s alleged intellectual property.”
(A-459, Special Master Report at 20).
In an Order, dated March 17, 2009, the Colorado District Court
adopted the Special Master Report in its entirety as an order of the Court.
18
The Special Master Report: (a) disallowed the results of the December 2008
election on quorum grounds; and (b) prevented the Board elected by SLMI
shareholders from having legal authority to act. (A-484-494). The Colorado
district court noted:
In this case, Plaintiff, a shareholder of the Company, seeks the same thing that another shareholder sought in Belland v. Stan Lee Media, Inc., … a court-ordered shareholders’ meeting so that the Company, which has been without directors for years, could elect directors and resume business. Part of the “business” Plaintiff, Belland and other shareholders aligned with them want the Company to resume is to bring various claims against Stan Lee and the Lee Family 1985 Trust, alleging that they stripped the Company of its assets, including intellectual property related to Mr. Lee’s comic book creation, The Incredible Hulk.
(A-484-485).
Accordingly, the Colorado district court made clear that the core
purpose of the Colorado litigation was to determine if SLMI’s shareholders
wished to have a new board of directors pursue “redress for SLMI's alleged
intellectual property.”
On May 27, 2010, the Colorado Court of Appeals reversed the district
court’s rejection of the election results and authorized the seating of the
Board of Directors elected by shareholders in December 2008. (A-111,
130). Lee unsuccessfully appealed and the Colorado Supreme Court denied
certiorari on October 18, 2010. (A-1089; [Stan Lee Media Inc. v. P.F.P
19
Family Holdings, L.P., No. 10-SC-451 (Col. Supr. Crt. 2010)]). On
November 8, 2010, the Colorado Court of Appeals issued its mandate
returning jurisdiction over the corporate governance litigation to the
Colorado district court. [P.F.P. Family Holdings, L.P. v. Stan Lee Media
Inc., No. 08-cv-8584, (Col. Denver Cty.) Trans. No. 34482317]. On January
31, 2011 the Colorado district court issued a confirmatory order, based upon
the Court of Appeals ruling, formally seating the new Board of Directors.
[P.F.P. Family Holdings, L.P. v. Stan Lee Media Inc., No. 08-cv-8584, (Col.
Denver Cty.) Trans. No. 35683810].
F. SLMI’s Intervention Into Lee v. Marvel Legally authorized at last, SLMI’s new Board authorized an
investigation into the disappearance of SLMI’s assets prior to, during, and
after its bankruptcy. Lee and his counsel, however, have delayed and
obstructed the turnover of SLMI’s books and records.
On July 14, 2010, SLMI’s newly authorized Board caused SLMI’s
new counsel to move Judge Sweet to unseal the summary judgment motion
made by Lee in Lee v. Marvel and the accompanying motion papers. (A-6,
Docket 32). On July 26, 2010, SLMI moved to vacate, intervene and re-
open the case in Lee v. Marvel, which had been closed in 2005, and for
permission to appear in the case as a real party in interest re-aligned as the
20
true plaintiff. (A-7, [Docket 42]) On February 4, 2011, Judge Sweet denied
SLMI’s motion to re-open and intervene because Lee v. Marvel did not
involve “copyright interests” and because the 2005 Profits Order granting in
part summary judgment had no effect on SLMI’s claims. (A-1103, 1120).
SLMI argued that as the owner of the intellectual property assigned to
it by Lee but exploited by Lee during SLMI’s bankruptcy, (i) SLMI was the
real party in interest in this action and (ii) the 2005 Profits Order was void
because it disposed of SLMI assets while SLMI was in bankruptcy—
pointing to Judge Wilson’s 2009 California Stay Order determining that
SLMI was a necessary party to any determination of whether the October
1998 Assignment had been terminated. Judge Sweet denied SLMI’s
applications in the Intervention Order, the decision appealed here.
The Intervention Order concluded that the question of whether or not
the October 1998 Assignment was terminated was res judicata based on the
Derivative Dismissal Order.
The Intervention Order focused on three issues. First, Judge Sweet
determined, first, that SLMI failed to demonstrate extraordinary
circumstances with “highly convincing evidence” in order to demonstrate
that post-judgment intervention and Rule 60(b) relief was warranted in the
closed case, Lee v. Marvel. (A-1082, 1085, 1097-1108). Next, Judge Sweet
21
determined that SLMI could not demonstrate that it was a necessary party to
Lee v. Marvel because Lee v. Marvel involved a private contract dispute
between Lee and Marvel and did not involve “copyright interests.” (A-
1109). These determinations were the only determinations necessary to the
Court’s conclusion and decision that Lee v. Marvel would remain closed and
SLMI could not intervene. Lastly, after the two previous rulings, the
Intervention Order stated that derivative plaintiffs in the earlier putative
SDNY Derivative Action before Judge Crotty “adequately represented”
SLMI—and thus, Judge Crotty’s merits determination in the putative SDNY
Derivative Action had res judicata effect as to SLMI. (A-1118). SLMI
appeals this Order.
G. The California Case Is Stayed Again Pending Determination Of This Appeal. Following the Colorado Court of Appeals decision, Judge Wilson
heard argument on January 24, 2011 on Lee’s motion to further stay the
California Action. At the hearing, the Court summarized the triable issue of
ownership before the Court, stating that:
the dispute, which has been absolutely lost in the shuffle, is whether Stan Lee had a right to breach the — not breach — but void the contract with SLMI — as he says he did — shortly before the SLMI bankruptcy or, alternatively, whether the contract between Stan Lee and SLMI was voidable at the outset and because the essential dispute is who has the copyrights to the creations of Stan Lee.
22
(SLMI v. Lee, No. 07-cv-225 (C. D. CA. 2011), Trns. Hrg., Jan. 24, 2011 at
4:6-13 (statement of Judge Wilson))
On January 24, 2011, Judge Wilson denied the Lee, QED, and POW!
motion for a stay and directed SLMI to file a consolidated complaint. (SLMI
v. Lee, No. 07-cv-225 (C. D. CA. 2011) [Docket 150]). By order dated
February 15, 2011, the Court consolidated the California Action. (SLMI v.
Lee, No. 07-cv-225 (C. D. CA. 2011) [Docket 153]).
Relying on the Intervention Order, on March 16, 2011, Lee, QED, and
POW! applied to Judge Wilson in Stan Lee Media Inc. v. Stan Lee et al. to
dismiss or stay SLMI’s complaint in the California Action. (SLMI v. Lee,
No. 07-cv-225 (C. D. CA. 2011) [Docket 158]). In an “In Chambers Order”
order dated May 4, 2011, Judge Wilson stayed the California Action pending
the resolution of this appeal, declining to determine whether SLMI’s
complaint should be dismissed on res judicata or collateral estoppel
grounds, because of the potential ramifications of the present appeal. (SLMI
v. Lee, No. 07-cv-225 (C. D. CA. 2011) [Docket 182]) Judge Wilson noted:
Should the Second Circuit affirm [Lee v. Marvel] on res judicata grounds, this Court may be estopped from relitigating that issue. Should the Second Circuit reverse [Lee v. Marvel] or affirm it without addressing the res judicata determination, Judge Sweet’s opinion will have no collateral estoppel effect [citations omitted].
(Id. at 2).
23
V.
STATEMENT OF FACTS
In July 1998, when Marvel rejected Lee’s 1994 employment contract
in Marvel’s bankruptcy, Lee regained his rights in characters he created or
co-created such as Spider-Man, The Incredible Hulk, The X-Men, Iron Man,
The Fantastic Four, Thor, Daredevil, and many others (“the Lee
Characters”). (A-61, 262, 1041).
In October 1998, Lee co-founded SLMI’s predecessor in interest
(together, with SLMI, referred to herein as “SLMI”). (A-292, 505, 717). At
that time, Lee assigned all of his intellectual property and rights to SLMI in
the October 1998 Agreement. (A-91-95). In exchange for his intellectual
property, Lee became SLMI’s Chairman and received managerial control of
SLMI, a majority of SLMI’s stock, and a salary for life. (A-91). The
document containing the October 1998 Assignment also had an employment
agreement with a severability clause, in case any of its provisions might be
found void. (A-95, 1036, 1042-1046).
One month after executing the October 1998 Agreement,
unbeknownst to SLMI, Lee executed a similarly worded assignment with
Marvel in November 1998. (A-18, 205; [Docket 1, Ex. 1]). In October
1999, to attract additional investment in SLMI and to take SLMI public, Lee
24
executed a written ratification of the October 1998 Assignment, specifically
stating that he had never assigned his intellectual property to anyone else.
(A-201, 1096). With Lee in control, SMLI offered its shares to the public in
early 2000 and achieved a market capitalization in excess of three hundred
million dollars ($300,000,000). (A-253).
On January 30, 2001, while SLMI was preparing to file for
bankruptcy, Lee’s and SLMI’s attorney, Arthur M. Lieberman, sent a letter
to SLMI’s chief executive officer on behalf of Lee that alleged a breach of
contract—but which actually waived Lee’s rights, if any, to challenge the
assignment of Lee’s intellectual property to SLMI. (A-855). On February
16, 2001, SLMI, under Lee’s control, filed for bankruptcy in the U.S.
Bankruptcy Court for the Central District of California. (A-403, 405, 409,
656). Lee did not disclose the October 1998 Assignment in SLMI’s asset
and liability schedules, and Lee did not file a proof of claim informing the
California bankruptcy court about any purported termination of the October
1998 Assignment. (A-952, 1034)
From October 1998 through May 2010 (before, during and after
SLMI’s bankruptcy), Lee dominated and controlled the Company. During
SLMI’s Bankruptcy, in March 2002, Lee caused SLMI to appoint SLMI’s
Controller, Junko Kobayashi (“Kobayashi”), as SLMI’s authorized agent to
25
make decisions on SLMI’s behalf. (A-1012). At that time, Kobayashi
worked at POW!, an entity created and controlled by Lee for the purpose of
receiving assets from SLMI’s bankruptcy estate. (Id.).
While under Lee’s control, SLMI was de-listed from the NASDAQ by
the Securities Exchange Commission and administratively dissolved by the
State of Colorado for non-payment of taxes. (A-87, 105).
In 2006, the U.S. Bankruptcy Court for the Central District of
California dismissed SLMI’s bankruptcy. SLMI received no discharge in
bankruptcy. (A-107-110, 652). On May 27, 2010, the Colorado Court of
Appeals recognized SLMI’s board as the duly authorized management of
SLMI, providing SLMI with a duly authorized representative that is not
beholden to Lee for the first time since SLMI was founded in 1998. (A-
111).
In Lee’s complaint in Lee v. Marvel filed in November 2002 while
SLMI remained in bankruptcy, Lee asserted that he owned his intellectual
property after he granted a “conditional” assignment to Marvel in November
1998. (A-15, 18).
26
VI.
SUMMARY OF ARGUMENT
Four aspects of the District Court’s Intervention Order are erroneous
as a matter of law:
First, the District Court’s denial of Rule 60(b) relief is clearly
erroneous. Lee transferred all of his intellectual property to SLMI and then,
while he was still an officer of SLMI, but SLMI was in bankruptcy, he
brought a lawsuit against Marvel in which he asserted that he owned the
intellectual property he had previously transferred to the bankrupt SLMI.
Under these circumstances, the District Court should have granted Rule
60(b) and 60(d) relief because: (i) under Rule 60(b)(4) the District Court’s
prior judgment was void as in violation of the automatic stay in SLMI’s
bankruptcy; (ii) under Rule 60(d) SLMI is entitled to vacatur because Lee
and Marvel both were required under Rule 19(a) of the Federal Rules of
Civil Procedure to notify the Court that SLMI was a necessary party to the
action—but both Lee and Marvel failed to do so; (iii) under Rule 60(b)(5)
the changed circumstances of SLMI’s re-incarnation pursuant to the
Colorado state corporate governance rulings in May 2010 and January 2011
justify giving SLMI its day in court; and finally (iv) under 60(b)(6), without
relief, a manifest injustice would befall SLMI’s 1800 shareholders who had
27
elected SLMI’s new management for the purpose of investigating SLMI’s
claims against Lee and marshaling SLMI’s assets.
Second, the District Court’s denial of SLMI’s application to intervene
as of right is clearly erroneous. SLMI has a legitimate ownership claim to
Lee’s intellectual property. Lee asserted in his complaint in this matter that
he—not SLMI—owned rights revenues generated from the exploitation of
the Spiderman comic-book character. In addition, the October 1998
Assignment—an assignment from Lee to SLMI of Lee’s intellectual
property and rights—expressly included language stating that payments and
benefits to Lee for the exploitation of any Lee character would inure to
SLMI. The District Court declined to hold a hearing and make sure factual
findings sufficient to support the Intervention Order. Accordingly, based
upon SLMI’s ownership interest in the Spiderman character contrary to
Lee’s asserted ownership and the fact that payments to Lee were to inure to
SLMI’s benefit, SLMI is entitled to intervene in Lee v. Marvel as of right.
Third, the District Court’s denial of SLMI’s application to unseal
court records is clearly erroneous. Lee submitted a Rule 56.1 Statement in
support of Lee’s motion for summary judgment in Lee v. Marvel under seal.
Upon information and belief, SLMI asserts that the Rule 56.1 statement re-
asserts Lee’s purported Spider-Man copyright ownership claim first made by
28
Lee in his complaint in this matter. SLMI seeks to unseal these records to
confirm that Lee improperly asserted to the District Court that he owned his
intellectual property at issue in Lee v. Marvel when, in fact, SLMI owned
that property and SLMI was still in bankruptcy. Under the adversarial
system, SLMI should be permitted to test and use this evidence. The
Intervention Order at first concludes that SLMI’s application was an
attempted end-run around a previous discovery ruling. However, SLMI was
not a party to that action, and that action was dismissed because Judge
Crotty concluded that the attorneys bringing that action did not demonstrate
due authorization from SLMI. Next, the District Court concluded that SLMI
had already received Lee’s Rule 56.1 statement in discovery in that previous
action. However, SLMI was not a party to that action and did not receive the
documents. SLMI’s current counsel, as officers of the court, represented
that to their knowledge, SLMI did not have the documents. The facially
contradictory conclusions of the District Court should be reversed. These
documents are presumptively public.
Fourth, the District Court’s determination that res judicata applies to
SLMI is based on the clearly erroneous premise that SLMI participated in
the proceedings before Judge Crotty. SLMI was absent from the
proceedings, and thus lacks privity, and is not bound by them. Further, the
29
District Court misconstrued the legal definition of “adequate representation.”
SLMI had no representation in the prior action and thus could not have fully
and fairly litigated the issues the District Court concluded had res judicata
effect. Also, as a threshold matter, the District Court’s res judicata decision
came after logically predicate decisions in which the District Court
concluded there was no basis to re-open Lee v. Marvel and no basis to allow
SLMI to intervene. Since SLMI was not permitted to intervene in Lee v.
Marvel, the District Court lacked subject matter jurisdiction to proceed to
determine the res judicata issue. Thus, the District Court’s res judicata
determination could not have been necessary to the District Court’s decision
denying SLMI relief. Furthermore, the Intervention Order directly
contradicts Judge Crotty’s determinations: (i) that SLMI was not a party; (ii)
that the putative derivative plaintiffs lacked standing, (iii) that it was
“doubtful” derivative plaintiff could adequately represent SLMI and (iv) that
derivative plaintiffs had previously released their right to bring derivative
claims—which together conclusively establish that Judge Crotty’s prior
decision could have no res judicata effect on SLMI.
30
VII.
ARGUMENT
A. Standard of Review
The district court’s order denying SLMI’s Rule 60(b)(4) motion (A-
1082-1120) is reviewed de novo because there are no disputes over the
subsidiary facts pertaining to the issue of the court’s own jurisdiction to
dismiss the case, with prejudice pursuant to a settlement agreement while the
SLMI bankruptcy case was still pending. Central Vermont Public Service
Corp. v. Herbert, 341 F.3d 186, 189 (2d Cir. 2003) citing United States v.
Forma, 42 F.3d 759, 762 (2d Cir.1994). Under Rule 60(b)(4), no deferential
standard of review is appropriate because, if the underlying judgment is
void, it is a per se abuse of discretion for a district court to deny a movant's
motion to vacate the judgment under Rule 60(b)(4). Id. (citations omitted).
On appeal, “we review de novo a District Court’s legal interpretation of the
Federal Rules of Civil Procedure and review for clear error any factual
findings that underlie the court’s resolution of a Rule 60(b) motion.” New
York v. Green, 420 F.3d 99, 105 (2d Cir. 2005).
Since the district court’s denial of SLMI’s request for leave to file an
amended complaint (A-1108-1120) was based on a legal interpretation (A-
1117-1118), it too is subject to de novo review. AEP Energy Services Gas
31
Holding Co. v. Bank of America, N.A., 626 F.3d 699, 725 (2d. Cir. 2010)
citing Gorman v. Consol. Edison Corp., 488 F.3d 586, 592 (2d. Cir. 2007).
“We review a district court’s decision to vacate or modify a protective
order,” such as SLMI’s motion to unseal the summary judgment record here
(A-84-85) “for abuse of discretion.” Gambale v. Deutsche Bank AG, 377
F.3d 133, 139 (2d Cir. 2004) (affirming court’s order to unseal summary
judgment records that had been protected by stipulated confidentiality
order).
Determining the preclusive effect of a federal judgment, such as Judge
Crotty’s dismissal order of March 31, 2010 in the putative SDNY Derivative
Action (A-632-645) is a question of law subject to de novo review. Marvel
Characters, Inc. v. Simon, 310 F.3d 280, 286 (2d Cir. 2002). SLMI replied
to Lee’s res judicata arguments [Docket 61], but the District Court
erroneously agreed with Lee’s arguments and applied res judicata against
SLMI.
32
B. Discussion of Issues
1. The District Court Erred By Declining To Vacate Its Judgment Pursuant To Rule 60 Because The Subject Matter Of Lee v. Marvel Was Property Of SLMI’s Bankruptcy Estate And, In Addition, Lee’s Misconduct, SLMI’s Changed Circumstances And The Avoidance Of A Grave Injustice To 1800 Shareholders Necessitates Rule 60 Relief.
The District Court erred in denying SLMI’s request for Rule 60 relief
for two reasons. First, the District Court erred in denying relief under Rule
60(b)(4) because the 2005 judgment entered in Lee v. Marvel violated the
automatic stay in bankruptcy. Second, the District Court erred in denying
relief under Rule 60(d); 60(b)(5) and 60(b)(6) because: (i) the 2005
judgment was procured by Lee’s misconduct in failing to inform the Court
of SLMI’s bankruptcy; (ii) SLMI’s changed status as being empowered
with a duly authorized representative independent of Lee for the first time in
ten years warrants relief; and (iii) denying relief would result in a manifest
injustice to SLMI’s 1800 shareholders. At a minimum, given SLMI’s
proffer of the Laserson Declaration showing the continuing validity of the
October 1998 Assignment, the Intervention Order should have made
findings of fact regarding the October 1998 Assignment sufficient for this
Court to review the District Court’s conclusion that SLMI had not proffered
sufficient evidence of ownership of the Spider-Man copyright. See Philips
Lighting Co. v. Schneider, 395 Fed.Appx. 796, 799, 2010 WL 3959820, 3
33
(2d Cir. 2010) (remanding denial of motion to vacate pursuant to Rule 60(d)
for additional findings of fact). “On remand, the district court should clarify
these factual issues, which may bear on its decision whether to vacate the
judgment. The district court may do so by conducting a hearing or directing
the parties to submit additional factual materials.” Id. Accordingly, the
Court should reverse and remand this matter for further proceedings.
a. The District Court erred in denying relief under Rule 60(b)(4) because the 2005 judgment entered in Lee v. Marvel violated the automatic stay in bankruptcy.
The District Court denied SLMI vacatur of the 2005 Profits Order on
the asserted ground that Lee v. Marvel did not adjudicate copyright claims
and that “[t]here is no language in the SLE/Lee Employment Agreement
granting SLMI any rights to Lee’s salary, profit participation or other
compensation from Marvel.” (A-1098)(referring to the October 1998
Assignment). This is clear error because SLMI’s right to revenues generated
from the exploitation of Lee’s creations were assets of SLMI’s bankruptcy
estate under 11 U.S.C. § 541(1).
Under 11 U.S.C. § 541(1) property of the estate is defined as
comprising “all of the following property, wherever located and by
whomever held,” including but not limited to “all legal or equitable interests
of the debtor in property as of the commencement of the case.” See, e.g.,
34
United States v. Whiting Pools, Inc., 462 U.S. 198, 205-206, n. 9 (1983). A
judgment from a non-bankruptcy court that disposes of property in which a
bankruptcy estate has an interest, without a previous application to the
bankruptcy court to lift the automatic stay, is void under 11 U.S.C. § 362(a)
and the bankruptcy court’s exclusive jurisdiction over property of the
bankruptcy estate under 28 U.S.C. 1334(e)(1). See, e.g., 48th St.
Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th St. Steakhouse, Inc.),
835 F.2d 427, 431 (2d Cir.1987) cert. denied, 485 U.S. 1035, 108 S.Ct. 1596
(1988); Carroll v. Tri-Growth Centre City, Ltd. (In re Carroll), 903 F.2d
1266, 1270-71 (9th Cir.1990); accord In re National Century Fin. Enters.,
423 F.3d 567 (6th Cir. 2005). Such a void judgment cannot acquire validity
due to the passage of time or laches on the part of the party against whom it
is sought to be enforced. See Charles A. Wright, Arthur R. Miller & Edward
H. Cooper, 11 Federal Practice & Procedure § 2862 (2d ed. 2002).
Here, the October 1998 Assignment grants to SLMI all of Lee’s
intellectual property rights – including any right Lee possessed to share in
the exploitation of these intellectual property rights with Marvel or any other
party. (A-94). The November 1998 Assignment Lee executed with Marvel
containing terms for salary, profit participation, and any “other
compensation” appears to be a grant by Lee for Marvel to exploit the rights
35
Lee purported to possess but where owned by SLMI. In other words, the
profit participation claims Lee asserted in Lee v. Marvel for Spider-Man:
The Movie were based on Lee’s asserted ownership of the rights to the
Spider-Man property, which were actually owned by SLMI.
Notwithstanding Lee’s second-in-time agreement with Marvel, The
October 1998 Assignment contained the following terms:
(a) Paragraph 3(b): “You [Lee] shall receive bonuses on those projects you personally initiate and/or accomplish with approved entities from your participation as assigned to the company.”
(b) Paragraph 4(a): “I [Lee] assign, convey and grant to the Company forever, all right, title and interest I may have or control, now or in the future, in the following: Any and all ideas, names, titles, characters, symbols, logos, designs, likenesses, visual representations, artwork, stories, plots, scripts, episodes, literary property, and the conceptual universe related thereto, including my name and likeness (the ‘Property’) which will or have been in whole or in part disclosed in writing to, published, merchandised, advertised, and/or licensed by Company, its affiliates and successors in interest and licensees (which by agreement inures to Company's benefit) or any of them and any copyrights, trademarks, statutory rights, common law, goodwill, moral rights and any other rights whatsoever in the Property in any and all media and/or fields, including all rights to renewal or extensions of copyright and make applications or institute suits therefor (the ‘Rights’).” [emphasis added].
(A-93-94).
In addition, Paragraph 2 of the October 1998 Agreement allows Lee to
undertake a limited employment at Marvel but does not authorize Lee to
divert profit participation or other compensation inuring to SLMI. (A-91).
36
Paragraph 2 states only that Lee can work for Marvel “no more than an
average of 10-15 hours per week” without violating his exclusive services
obligation to Appellant. This “carve-out” is separate and unrelated to Lee’s
grant of his intellectual property and rights under the agreement. Critically,
the only part of Paragraph 2 that expressly deals with rights to Lee’s
participation from another entity indicates that such participation belongs to
SLMI: “All other services performed and intellectual property created for
the Company, or for any other entity, which entity shall be approved in
writing by the Company, shall inure to the benefit of the Company to the
entire extent your participation provides.” (A-91) [emphasis added]. This
contract language, coupled with Paragraph 4(a) which also states that
licenses inure to SLMI’s benefit, unambiguously states that any benefits Lee
may receive—such as the profit participation that was the subject matter of
Lee v. Marvel—inures to SLMI.
Because SLMI owned the rights Lee asserted in Lee v. Marvel, the
2005 Profits Order is void and the District Court erred by not vacating it
based upon the exclusive jurisdiction of the Bankruptcy Court. Accordingly,
the Court should reverse the District Court and vacate the judgment in this
matter under Rule 60(b)(4).
37
b. The District Court erred in denying relief under Rule 60(d); 60(b)(5) and 60(b)(6) because: (i) the 2005 judgment was procured by Lee’s misconduct in failing to inform the Court of SLMI’s bankruptcy; (ii) SLMI’s changed status as being empowered with a duly authorized representative for the first time in ten years warrants relief; and (iii) denying relief would result in a manifest injustice to SLMI’s 1800 shareholders.
The District Court also erred because SLMI is entitled to Rule 60
relief due to fraud and misconduct and changed circumstances, as well as—
under the Rule 60(b) catch-all—in order to avoid a grave injustice to SLMI’s
approximately 1800 shareholders.
First, the District Court’s judgments are subject to vacatur based upon
misconduct, misrepresentation and/or fraud upon the Court under Rule
60(d)(3).2 Lee and Marvel were required under Rule 19(a) of the Federal
Rules of Civil Procedure to inform the Court of any party with an interest in
the subject matter of an action. It appears, however, that during the time Lee
prosecuted Lee v. Marvel, neither Lee nor Marvel informed the District
Court that: (i) Lee previously granted of all of his intellectual property to
SLMI; and (ii) SLMI was in bankruptcy. Under Rule 60(d), the Court is
empowered to vacate a judgment to address questions of misrepresentations,
including misleading omissions, that operate to undermine the Court’s just
2 SLMI did not move under Rule 60(b)(3), but did move under Rule 60(d)(3).
38
determinations of matters before it. See Philips Lighting Co., 395 Fed.
Appx. at 799.
Second, “changed circumstances” under Rule 60(b)(5) support Rule
60(b) relief here. As set forth in a March 17, 2009 opinion of the Colorado
district court, following the dismissal of SLMI’s bankruptcy in 2006, SLMI
had no legally authorized management and had not had any for years. (A-
484-493). In light of the rulings from the Colorado Courts empowering
SLMI’s new Board, for the first time, SLMI is now free from the direct
control of Lee and its former management and can assert claims that,
hitherto, it was unable to bring. Under these changed circumstances (and in
light of the facts discussed herein) it is no longer equitable to allow the
Court’s previous judgments to stand. See FRCP 60(b)(5); Horne v. Flores,
129 S.Ct. 2579, 2592 (2009).
Third, and finally, under Rule 60(b)(6) this Court may vacate a
judgment to avoid manifest injustice where circumstances beyond a party’s
control prevented timely action to protect its interests. See U.S. v. Alpine
Land & Reservoir Co., 984 F.2d 1047, (9th Cir. 1993), cert. denied, 510
U.S. 813, 114 S.Ct. 60 (1993). Here, the Colorado courts have only recently
empowered SLMI to pursue claims and marshal its assets for the benefit of
its shareholders. As proffered before the District Court, SLMI can
39
demonstrate SLMI’s ownership of Lee’s creations, but its shareholders have
been unable to benefit from SLMI’s ownership due to the fact that SLMI has
been without a duly authorized representative independent of Lee for
approximately a decade. Previous to a final determination from the
Colorado courts, Judge Crotty dismissed a putative SDNY Derivative Action
that has erroneously become the basis for Judge Sweet’s rulings in this
matter. Out of deference to the Colorado courts which have undertaken to
empower SLMI to assert claims on behalf of its shareholders best interests,
SLMI should be allowed to have its day in court. Otherwise, the Colorado
decisions are a nullity and the shareholders damaged by SLMI’s dismissed
bankruptcy will suffer the manifest injustice of having the Company barred
from marshaling its assets. In sum, denying SLMI an opportunity to litigate
its ownership claim would not only unjustly enrich Marvel and Lee, two
parties who failed to advise the District Court of SLMI’s status as a
necessary party to this action, but also damage SLMI’s shareholders.
Accordingly, the Court should reverse the District Court’s Intervention
Order, vacate the 2005 Profits Order and remand for further proceedings.
40
2. The District Court Erred By Denying SLMI’s Application To Intervene and Be Re-Aligned As A Plaintiff And The Real Party In Interest.
As discussed above, the District Court denied SLMI’s application to
intervene and be re-aligned as the real party in interest because Lee v.
Marvel did not adjudicate any copyright claims and, according to the
Intervention Order, nothing done in this matter affected SLMI’s claims. (A-
1108-1116). This determination was in error because Lee asserted in his
Complaint that he was the owner of his intellectual property when, in fact,
he had previously granted his intellectual property to SLMI. In addition, this
matter has already prejudiced SLMI’s rights and appears to be used again to
further prejudice SLMI and its shareholders. Accordingly, SLMI should be
allowed to intervene as the real plaintiff in interest in Lee v. Marvel.
a. The District Court erred because Rule 24 of the Federal Rules of procedure required the District Court to permit SLMI to intervene as a right.
Rule 24 of the Federal Rules of Civil Procedure provides that, on
timely motion, the court must permit anyone to intervene who: (1) is given
an unconditional right to intervene by a federal statute; or (2) claims an
interest relating to the property or transaction that is the subject of the action,
and is so situated that disposing of the action may as a practical matter
impair or impede the movant’s ability to protect its interest, unless existing
41
parties adequately represent that interest. See Fed. R. Civ. P. 24(a). Here,
SLMI claimed a legitimate interest to the property and transaction that was
the subject matter of Lee v. Marvel. Accordingly, the District Court erred in
refusing to permit SLMI to intervene.
b. The District Court erred because Lee lacked standing to sue Marvel because he had previously assigned his copyrights to SLMI and Rule 19(a) of the Federal Rules of Civil Procedure required both Lee and Marvel to inform Judge Sweet of SLMI’s competing claim to the property Lee claimed to own.
Under federal law, a pre-litigation assignment of intellectual property
ownership deprives the plaintiff-assignor of standing to sue. See, e.g.,
Paradise Creations, Inc. v. UV Sales, Inc., 315 F.3d 1304, 1310 (Fed. Cir.
2003); Lans v. Digital Equipment Corp., 252 F.3d 1320, 1328 (Fed. Cir.
2001). An assignee of a copyright is the owner of a copyright and thus
the “real party in interest” with standing to bring ownership and
infringement claims. 17 U.S.C. § 501; ABKO Music, Inc. v. Harrisongs
Music, Ltd., 944 F.2d 971, 980-81 (2d Cir. 1991). Where standing is based
on an assignment of copyrights, recording the assignment is sufficient to
permit a plaintiff-assignee standing to assert ownership and infringement
claims. 17 U.S.C. § 204; Kamikaze Music Corp. v. Robbins Music Corp.,
534 F. Supp. 69 (S.D.N.Y. 1982) (Sweet, J.). Under New York law, where a
plaintiff assigns rights before filing a lawsuit, the plaintiff has no standing.
42
National Financial Co. v. Uh, 279 A.D.2d 374, 375, 720 N.Y.S.2d 17 (1st
Dep't 2001); James McKinney & Son v. Lake Placid 1980 Olympic Games,
61 N.Y.2d 836, 838 (1984). Furthermore, standing to sue under Article
III of the U.S. Constitution, like other bases of federal court jurisdiction,
must be present at the time of commencement of the federal lawsuit. See,
e.g., Lujan v. Defenders of Wildlife, 504 U.S. 555, 570 n. 5, 112 S.Ct. 2130
(1992) (plurality opinion).
Lee averred in the Complaint that he owned the Historical Characters:
“Defendants were given the right and assumed the obligation to
commercially exploit Mr. Lee’s characters, as well as his name Defendants
received a conditional assignment of Mr. Lee’s rights in his many world
famous and hugely popular characters . . .” (A-18). However, Lee did not
have standing to assert copyright ownership because he had previously
assigned such ownership to SLMI. Without ownership, Lee had no standing
to sue. Indeed, this is the very issue – Lee’s standing to assert ownership of
intellectual property transferred under the October 1998 Agreement— that
Judge Wilson stayed in 2009 in the California Stay Order because a
determination of Lee’s ownership involved SLMI as a necessary party. (A-
1030). In fact, Lee and Marvel were required by Rule 19(a) to inform the
Court of any party with an interest in the subject matter of an action. They
43
did not (which constitutes grounds for SLMI’s request for Rule 60(d)(3)
relief discussed above. Accordingly, the District Court erred in refusing to
allow SLMI to intervene as of right and in failing to re-align the Company as
the real plaintiff in interest with standing to bring ownership and
infringement claims against Lee and Marvel. Accordingly, the District
Court erred because Lee had no standing to assert ownership of SLMI’s
property in Lee v. Marvel.
3. The District Court Erred By Denying SLMI’s Application To Unseal Documents Filed In Lee v. Marvel That Are Presumptively Public and For Which There Is No Record Of A Compelling Reason To Seal. SLMI’s application to unseal court records should have been granted.
On July 14, 2010, after the Colorado appellate court had ruled in favor of
seating its board of directors SLMI moved to unseal the following
documents: “…and other documents not appearing on the Docket.” (A-6,
84-85). The district court denied that motion in the Intervention Order,
citing two grounds: (a) that seeking the records was an end-run to
“circumvent” an earlier order limiting discovery in the matter of Case No.
07-CV-2238 (dismissed without prejudice) (A-1119-1120) and, also because
the court concluded that Lee had previously produced the disputed
documents to SLMI in discovery during the course of the Case No. 07-CV-
2238 litigation. (A-1119). These self-contradictory reasons are clearly
44
erroneous. (The court’s reasons were self-contradictory because, if Lee had
indeed previously produced the records to SLMI in discovery, then
unsealing those same records to allow access by SLMI in this action could
not possibly have offended any discovery limitations imposed in the
previous action.)
In part because they relate to a court’s adjudication process,
“documents used by parties moving for, or opposing, summary judgment
should not remain under seal absent the most compelling reasons.” Joy v.
North, 692 F.2d 880, 893 (2d Cir. 1982); Gambale v. Deutsche Bank AG,
377 F.3d 133, 139 (2d Cir. 2004). Although parties to litigation may thus
overcome the presumption of access by supplying “most compelling
reasons,” they cannot expunge the public interest by the simple expedient of
filing a stipulation of dismissal with the court. Here, there is no evidence in
the record establishing that SLMI does indeed possess these sealed records.
There was no proffer in the record of any reason why these documents
should remain under seal—let alone a proffer of “good cause” or any “most
compelling reasons.” No publicly-filed sealing order had stated any reasons
supporting the district court’s original sealing of these documents; indeed,
prior to SLMI’s investigation, no mention of the documents in question
appeared anywhere on the docket sheet for this matter. (A-1-14). In
45
contrast, SLMI’s diligent search has failed to uncover the disputed sealed
documents as being in its possession. Contrary to Lee’s assertion before that
he has produced these documents in the previous litigation of Case No. 07-
CV-2238 [Docket 56 at 1]. Lee has failed to provide a production bates
range to confirm this production to counsel authorized to represent SLMI.
Lee never produced any documents to SLMI during discovery because, as
the record also clearly establishes, that SLMI was not a party to the litigation
in Case No. 07-CV-2238.
Accordingly, because there is no good or compelling reason to keep
these records sealed, and SLMI’s proffer that it does not possess these
documents remains unchallenged, the Court should reverse and remand with
directions to unseal the disputed documents for access by SLMI and the
public.
4. The District Court Erred By Deciding That res judicata Applied And That SLMI Was Adequately Represented By Shareholders Who Had No Standing And Otherwise Could Not Prosecute SLMI’s Claims
The District Court erred here because it misconstrued the legal
definition of “adequate representation” in the context of a derivative action
under the circumstances presented by the complex and admittedly confusing
procedural history of this and related matters involving Lee and SLMI.
Even though the District Court had already determined that this closed case
46
would not be re-opened for other reasons logically antecedent, Judge Sweet
then undertook the additional and unnecessary task of determining that the
proposed SLMI complaint against Lee and Marvel was barred by res
judicata. This determination was in error five reasons: (i) the Court should
not reach the issue of res judicata because it was not necessary to Judge
Sweet’s decisions denying relief; (ii) Judge Crotty’s purported merits-based
determinations were not but simply a ruling on a motion to dismiss pursuant
to Rule 12(b)(6); (iii) the putative derivative plaintiffs lacked standing; (iv)
the putative derivative plaintiffs did not and could not adequately represent
SLMI; (v) SLMI did not have a full and fair opportunity to litigate the
issues that the District Court concluded to be barred by res judicata; and (vi)
the issues before Judge Crotty on a motion to dismiss pursuant to Rule
12(b)(6) were not identical to the issues before Judge Sweet because the
facts and the burden of proof were different. The Intervention Order
erroneously assumes that Judge Crotty made determinations on the merits
rather than dismissing a complaint pursuant to Rule 12(b)(6).
a. The court should not reach the issue of res judicata because it was not necessary to Judge Sweet’s decision to deny relief.
The District Court also erred in making a determination on res
judicata because doing so was not necessary to its decision on SLMI’s
motions. Where an issue is not necessary to a Court’s determination the
47
court should not reach that issue. Reudiger v. U.S. Forest Service, 2005 WL
318795, *4 (D. Ore. 2005). See Fay v. Perles, 484 F. Supp. 2d 6, 9, 10-11
(D.D.C. 2007). On an intervention application, (a) the Court typically lacks
the power to adjudicate the merits of a proposed pleading; and (b) merits
issues involving the proposed pleading should typically be deferred for a
determination until after discovery and fact-finding proceedings have taken
place. Bridgeport Guardians, Inc. v. Delmonte, 602 F.3d 469, 474-475 (2d
Cir. 2010); Brennan v. N.Y.C. Board of Education, 260 F.3d 123, 129-131
(2d Cir. 2001) (reversing denial of intervention motion, noting that “[t]he
sufficiency of an interest entitles the intervenor to contest the merits of
his/her claim based on that interest [and] [a]n interest that is otherwise
sufficient under Rule 24(a)(2) does not become insufficient because the
court deems the claim to be legally or factually weak” and stating that “[t]he
merits can, therefore, be resolved only after appellants have an opportunity
for discovery and the presentation of evidence as a party to the action.”).
In the Intervention Decision, Judge Sweet, first, denied SLMI Rule
60(b) relief; and second, denied intervention. (See A-1084, 1086, 1108-
1116, Intervention Decision at 1, 3, 25-33). These determinations were the
only determinations necessary to the Court’s conclusion and decision that
Lee v. Marvel would remain closed and SLMI could not intervene. In short,
48
res judicata does not apply and is not necessary to Judge Sweet’s case
ruling. Accordingly, and the Court should vacate (or decline to reach) the
District Court’s res judicata determination.
b. Res judicata should not apply because Judge Crotty’s purported merits-based determinations violated the previously stay put in place by the California Court.
The District Court further erred in finding that res judicata applied
because Judge Crotty’s purportedly merits-based rulings were, instead,
granting a motion to dismiss. Given the previous stay put in place by Judge
Wilson in the first-filed California SLMI litigation, the Intervention Order’s
assumption that Judge Crotty’s decision was “on the merits” is clearly
erroneous. In AEP Energy Services Gas Holding Company v. Bank of
America, N.A., this Circuit applied the first-filed doctrine to vacate a merits
ruling by a New York District Court, due to the existence of a previously
filed litigation in a Texas federal court involving the same issues. The Court
stated that: (a) the first-filed doctrine implicates the threshold ground of
“whether a District Court has, or has acquired, the power to adjudicate a
particular dispute;” and (b) a New York District Court has “an independent
obligation to defer to the primacy of the first-filed suit.” 626 F.3d 699, 718-
725 (2d Cir. 2010); see also, e.g., Colorado River Water Cons. Dist. v. U.S.,
424 U.S. 800, 818 (1976); Smith v. McIver, 22 U.S. 532, 535 (1824) (“In all
49
cases of concurrent jurisdiction, the court which first has possession of the
subject matter must decide it”); Curtis v. Citibank, N.A., 226 F.3d 133, 138
(2d Cir. 2000). This rule is applicable even where the parties in the two
actions are not identical [cits. om.].”); Semmes Motors, Inc. v. Ford Motor
Company, 429 F.2d 1197, 1292 (2d Cir. 1970); Reliance Ins. Co. v. Six Star,
Inc., 155 F.Supp.2d 49, 54 (S.D.N.Y. 2001) (“The party opposing
application of the first-filed doctrine has the burden to show that special
circumstances justify an exception [cits. om.].”).
Here, in the Stay Order dated, January 20, 2009, Judge Wilson ruled
on summary judgment motions filed in the first-filed, federal court litigation
over disputed ownership rights involving Stan Lee pending before the
United States Court for the Central District of California. In the Stay Order,
Judge Wilson: (a) invalidated as void purported transfers of SLMI’s
intellectual property assets to Stan Lee or his affiliates during Appellant's
bankruptcy case; and (b) stayed and reserved issues of ownership of Lee’s
intellectual property until a duly authorized representative appeared on
behalf of SLMI.
On March 31, 2010, Judge Crotty dismissed the putative SDNY
Derivative Action case for lack of standing to sue on behalf of non-party
Appellant (A-640-641). Although Judge Crotty’s Derivative Dismissal
50
Order went further and addressed merits-based issues not before the Court,
because putative derivative plaintiffs lacked standing and SLMI was not a
party (A-641-645) such observations are nonbinding dicta vis-à-vis SLMI.
Accordingly, the District Court erred. Applying principles of comity
relevant to the first-filed rule, this Court should vacate that branch of the
District Court’s Intervention Order that purports to determine the res
judicata effect of Judge Crotty’s Derivative Dismissal Order because
applying res judicata here fails to provide deference to issues stayed and
reserved by Judge Wilson in a first-filed action in which SLMI is a party.
c. Derivative Plaintiffs lacked standing and thus the Crotty Court lacked jurisdiction to rule on the merits.
In addition, the District Court’s decision is in error because Judge
Crotty’s decision rested on the fact that the putative derivative plaintiffs
lacked standing to assert claims on SLMI’s behalf. When a derivative
lawsuit is dismissed because the putative derivative plaintiff lacked standing
to represent the corporation, there can be no res judicata effect on other
shareholders or the corporation. Saylor v. Lindsley, 391 F.2d 965, 967 (2d
Cir. 1968); Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 109-
110 (1998); Fleck & Assocs. v. Phoenix, 471 F.3d 1100, 1107, n.4 (9th Cir.
2006). Standing to pursue a derivative action under Rule 23.1 of the Federal
Rules of Civil Procedure is a “necessary predicate” and a “logical
51
antecedent” to Article III standing. No Article III standing can exist if the
plaintiff lacks sufficient standing to “step into the corporation’s shoes” of the
Corporation and act adequately as a representative on its behalf. Quinn v.
Anvil Corp., 620 F.3d 1005, 1012 (9th Cir. 2010)(citing Lewis v. Chiles, 719
F.2d 1044, 1047 (9th Cir. 1983))
Here, SLMI was not, itself, a party represented in the lawsuit because
at the time Judge Crotty rendered the Derivative Dismissal Order, the
corporate governance proceedings in Colorado had not yet concluded. (A-
112-130, 640-641). As a result, where, as here, a derivative plaintiff lacks
standing, no case or controversy remains and a federal court lacks subject
matter jurisdiction and is powerless to adjudicate the merits of a case. See
Media Technologies Licensing, LLC v. Upper Deck Company, 334 F.3d
1366, 1370 (Fed. Cir. 2003); Gillig v. Nike, 602 F.3d 1354, 1361 (Fed. Cir.
2010). Accordingly, the Derivative Dismissal has no preclusive or res
judicata affect as to SLMI.
d. SLMI did not have a full and fair opportunity to litigate the issues that the District Court erroneously determined to be barred by res judicata
Furthermore, SLMI did not have a full and fair opportunity to litigate
the issues barred by res judicata under the Intervention Order. A party that
is not given an opportunity to appeal an issue is not subject to res judicata
52
on the issue. See Fay v. Perles, 484 F.Supp.2d at 9, 10-11; see Charles A.
Wright, Arthur R. Miller & Edward H. Cooper, 11 Federal Practice &
Procedure § 4421 at 570 (2d ed. 2002). This Court previously denied
SLMI’s motion to intervene in the Appeal of the Derivative Dismissal.
[Abadin v. Marvel, No. 10-1717, (2d Cir. 2010), Docket 47]. Thus, this
Circuit previously determined that SLMI was not a necessary party
aggrieved by the Derivative Dismissal, which holding further demonstrates
that no rulings in the SDNY Action can have res judicata effect as to SLMI.
e. The putative derivative plaintiffs did not and could not adequately represent SLMI.
According to the District Court, “SLMI’s interests were adequately
represented in Abadin [the case Judge Crotty dismissed on March 31,
2010].” (A-1118). As a result, the District Court undertook to determine
that the proposed SLMI complaint against Lee and Marvel was barred by res
judicata. Id. That conclusion was legally incorrect because SLMI was not a
party in the action before Judge Crotty—and because Judge Crotty’s
dismissal order of March 31, 2010 (A-631-645) shows that none of the
actual parties were capable of representing SLMI in the SDNY Derivative
Action.
Under any enlightened system of law, “[i]t is a violation of due
process for a judgment to be binding on a litigant who was not a party or a
53
privy and therefore has never had an opportunity to be heard.” Parklane
Hosiery Co. v. Shore, 439 U.S. 322, 327 n.7, 99 S. Ct. 645 (1979).3 Unless a
litigant appeared as a plaintiff or was served with summons as a defendant in
the prior action, there are only six established grounds for holding that
litigant bound by a prior adjudication. Taylor v. Sturgell, 553 U.S. 880, 892-
93, 128 S.Ct. 2161 (2008). Only one of those six grounds is arguably
applicable here:
Third, we have confirmed that, “in certain limited circumstances,” a nonparty may be bound by a judgment because she was “adequately represented by someone with the same interests who [wa]s a party” to the suit. Richards [v. Jefferson County], 517 U.S. [793,] 798, 116 S.Ct. 1761 [(1996)] (internal quotation marks omitted). Representative suits with preclusive effect on nonparties include properly conducted class actions, see Martin [v. Wilks], 490 U.S. [755,] 762, n. 2, 109 S.Ct. 2180 [(1989)] (citing Fed. Rule Civ. Proc. 23), and suits brought by trustees, guardians, and other fiduciaries, see Sea-Land Services, Inc. v. Gaudet, 414 U.S. 573, 593, 94 S.Ct. 806, 39 L.Ed.2d 9 (1974). See also 1 Restatement [(Second) of Judgments] § 41 [(1980)].
Taylor, 553 U.S. at 894-95.4 This Court has since recognized the strict Due
3 Whether to accord preclusive effect to the rulings and pronouncements made by Judge Crotty in other federal actions is governed by federal law. Federal law applies here even insofar as the Complaint invokes diversity jurisdiction. See Greenwich Ins. Co. v. Media Breakaway, LLC, 2009 WL 2231678, at *5 (C.D. Cal. July 22, 2009).
4 The substantive legal relationships justifying preclusion based upon each of the six traditionally-recognized grounds are sometimes referred to as “privity.” “The term ‘privity,’ however, has also come to be used more broadly, as a way to express the conclusion that nonparty preclusion is appropriate on any ground.” Taylor, 553 U.S. at 894 n.8 (citation omitted). “To ward off confusion” (id.), the Supreme Court avoided using the term “privity” in the Taylor opinion, and SLMI likewise does not use that term here.
54
Process limitations that Taylor imposes upon applying the bar of res judicata:
The [Supreme] Court’s earlier decision in Richards “established that representation is ‘adequate’ for purposes of nonparty preclusion only if (at a minimum) one of ... two circumstances is present”: (1) “special procedures to protect the nonparties’ interests” or (2) “an understanding by the concerned parties that the first suit was brought in a representative capacity.” Taylor, 128 S.Ct. at 2174. Because neither of the required circumstances is present in this case, we hold that affording the order dismissing the Socrates Action res judicata effect against Esquire would violate due process.
Esquire Trade & Finance, Inc. v. CBQ, Inc., 562 F.3d 516, 521-22 (2d Cir.
2009).
Importantly, Taylor establishes that there is no broader “virtual
representation” exception to the rule against binding nonparties to the results
of prior litigation. See 553 U.S. at 894-95. As a result, SLMI could only be
bound by Judge Crotty’s rulings “according to the established grounds for
nonparty preclusion described in this opinion.” Id. at 904. Here, as in the
Esquire Trade & Finance case, those grounds do not apply as a matter of
law.
Judge Crotty understood that SLMI was not a party in the derivative
case before him, and he correctly recognized at the time of his dismissal
ruling in that case that “SLMI’s status as a viable corporation had not been
restored.” (A-638). He then specifically held that dismissal was required—
precisely because no legally valid representative of SLMI was present. Both
55
of the named Plaintiffs, Jose Abadin and Chris Belland, had acquired their
shares in 1999, after the 1998 transaction assignment from Lee to Marvel
that Judge Crotty viewed as the heart of the alleged wrongdoing. (A-640-
641). As a result, he held that the named derivative plaintiffs “lack the
requisite standing under the Rules of Civil Procedure and Colorado law.”
(A-641). In addition, Judge Crotty also recognized that both putative
derivative plaintiffs had previously released any and all derivative claims
that they could assert in an earlier class action settlement. (A-635, 639).
Under these circumstances, there was no “understanding by the concerned
parties that the first suit was brought in a representative capacity,” Taylor,
553 U.S. at 897, and therefore no grounds for imposing the bar of res
judicata.
In fact, Lee and the other defendants submitted strong arguments why,
at that time, the putative derivative plaintiffs appearing before Judge Crotty
could not adequately represent SLMI. [Abadin v. Marvel, No. 09-cv-0715,
Docket 24 at 6-11.] Judge Crotty agreed with these assertions made in the
motions to dismiss in the SDNY Action. In fact, Judge Crotty stated his
views as to the adequacy of the putative derivative plaintiffs as follows:
It is doubtful whether the two named Plaintiffs [i.e. Abadin and Belland] can be said to “fairly and adequately represent the interests of” absent shareholders, as required by Fed. R. Civ. P. 23.1(a). Both are close associates of Peter F. Paul who stands
56
convicted on his plea of guilty to securities fraud: manipulating SLMI stock. The same may said of the four additional corporate entities in the proposed Second Amended Complaint (Excelsior Productions Inc., Continental Entities Inc., Hollywood Holdings Corp., and PFP Family Holdings L.P.) who have the same deficiencies found in Abadin and Belland. According to the indictment to which Paul pled guilty, he created the nominees which were then used in his conspiratorial scheme to manipulate SLMI stock. At least two of the nominees were created post 1998. (See Shore Affidavit, Ex. I, pp. 5-10). These 4 entities cannot be allowed to serve in a fiduciary capacity; and they do not cure the deficiencies of Abadin and Belland.
(A-641). (emphases added).
Judge Crotty’s views on this matter were more than a mere expression
of “doubt.” Judge Crotty directly relied upon these views as a finding upon
which he based his order denying putative derivative plaintiffs’ requested
leave to amend the derivative complaint in that action. Thus, Judge Crotty
conclusively established that SLMI was not adequately represented by the
putative derivative plaintiffs that appeared before him in the SDNY
Derivative Action.5 The District Court was bound by this determination.
5 This Court too expressly recognized that SLMI was not a party to the derivative case. The putative derivative plaintiffs appealed Judge Crotty’s order of dismissal. During the course of that appeal, on September 16, 2010, this Court made the following order: “IT IS HEREBY ORDERED that the motion by non-party Stan Lee Media, Inc. for permission to intervene to file an application to stay briefing schedule to obtain indicative ruling and file appeal is DENIED.” [Abadin v. Marvel, No. 10-1717 (2d Cir. 2010), Docket 47].
57
f. Derivative plaintiffs lacked identity and privity with SLMI because they did not adequately represent SLMI.
The District Court also erred because SLMI was not in privity with
the derivative shareholders. In the derivative context, a nonparty
corporation (such as SLMI) is not deemed in “privity” with individual
shareholders from a putative derivative suit where the court never authorized
those shareholders to serve as representatives of the corporation. See Fay v.
Perles, 484 F. Supp. 2d 6, 9, 10-11 (D.D.C. 2007) (“Fay was not joined in
the prior suit [because his motion to intervene was denied], nor did he
‘assume control’ of the Perles v. Kagy litigation such that he should be
bound by it. … Accordingly, Fay cannot be barred in the present action by
the doctrine of res judicata.”); see also Section 41 of the Restatement
(Second) of Judgments; Saylor v. Lindsley, 391 F.2d at 967-968; Papilsky
v. Berndt, 466 F.2d 251, 260 (2d Cir. 1972); Clark ex rel. George
Washington Life Insurance Company v. Milam, 872 F. Supp. 307, 316 (S.D.
W. Va. 1994) (“If the minority shareholders did not have standing to bring
the derivative action, they cannot be considered to be representative of either
GW CORP or GW LIFE, and privity between the parties would not exist.”).
Here, Judge Crotty dismissed the putative derivative complaint for lack of
standing; because plaintiffs had previously released their rights to bring
derivative claims; and, because it was “doubtful” that putative derivative
58
plaintiffs (as well as the proposed additional plaintiffs added in a proposed
amended complaint) could adequately represent SLMI or its shareholders at
that time. (A-641). Thus, based upon Judge Crotty’s determinations, there
can be no privity between SLMI and derivative plaintiffs sufficient to
support the District Court’s application of res judicata as against SLMI here.
g. Defendants failed to demonstrate with clarity and certainty that the issues before Judge Sweet were identical to the issues before Judge Crotty because the facts and the burden of proof were different.
The District Court erred because the issues before it were different
from the issues before Judge Crotty. In order to demonstrate res judicata,
Defendants must demonstrate each element of res judicata or collateral
estoppel “with clarity and certainty.” See Hydranautics v. FilmTec Corp.,
204 F.3d 880, 885 (9th Cir. 2000); Levi Strauss & Co. v. Blue Bell, Inc., 778
F.2d 1352, 1357 (9th Cir.1985) (en banc). Similarity between issues does
not suffice; res judicata or collateral estoppel is applied only when the
issues are identical. Levi v. Blue Bell, 778 F.2d at 1357. If different facts
are in issue in a second case from those that were litigated in the first case,
then the parties are not collaterally estopped from litigation in the second
case. Id. Also, if the burden of proof in the present case is different from
the burden of proof on the previously-decided issue, then the issue is deemed
not identical for the purposes of issue preclusion. See Clark v. Bear Stearns
59
& Co., 966 F.2d 1318, 1322 (9th Cir. 1992); accord Cobb v. Pozzi, 363
F.3d 89, 113 (2d Cir. 2004).
Here, more than the proof is different—the facts are different. As
with Levi and the unpublished decision, Guru Denim, Inc. v. Hayes, 2010
WL 1854020, *12 (C.D. CA. May 6, 2010) (copy attached hereto), the
subject matter of the two cases must be identical. Before Judge Crotty, the
Court purported to determine merits issues and copyright interests as well as
claims relating to unauthorized use of different properties and trademarks in
the SDNY Derivative Action filed in 2009. In contrast, before Judge
Sweet—as Judge Sweet made perfectly clear in his Order—the subject
matter of that case was NOT copyright interests: “No claim was presented
with respect to Lee or Marvel’s copyright interests. Lee and Marvel
resolved a private dispute resulting in complete relief between the parties
and the judgment entered had no effect on any rights now being asserted by
SLMI.” (A-1109). According to Judge Sweet, he resolved a contract
dispute filed in 2002 involving payments under a 10 percent profit-sharing
agreement for Spider-Man: The Movie. (A-1108-1109). These facts are
different from the 2009 SDNY Derivative Action because the timing of the
filings are different and SLMI’s ownership claims purportedly brought
60
derivatively in 2009 implicate scores of properties and marks that have little
or nothing to do with Spider-Man: The Movie.
In addition, the issues between the two cases are not identical because
the burden of proof for SLMI in Lee v. Marvel was different before Judge
Sweet than the burden on the putative derivative plaintiffs before Judge
Crotty in the SDNY Derivative Action. See Clark v. Bear Stearns & Co.,
966 F.2d 1318, 1322 (9th Cir. 1992); accord Cobb v. Pozzi, 363 F.3d 89,
113 (2d Cir. 2004). Before Judge Sweet, SLMI has no burden of proof on
the issue of res judicata (and, thus, the issue of “adequate representation”)
because Lee and Marvel each shouldered the burden of proving the
affirmative defense of res judicata by attempting to prove with “certainty
and clarity” that SLMI was adequately represented by the putative derivative
plaintiffs. However, in the earlier SDNY Derivative Action before Judge
Crotty, putative derivative plaintiffs had the burden of demonstrating that
they adequately represented SLMI under Rule 23.1 of the Federal Rules of
Civil Procedure. Indeed, before Judge Crotty, Lee and Marvel sought to
demonstrate the opposite of what they sought to proof before Judge Sweet:
that the putative derivative plaintiff could not and did not adequately
represent the interests of SLMI and its shareholders. In the end, Judge
Crotty recognized Lee and Marvel’s efforts to demonstrate that the putative
61
derivative plaintiffs could not represent SLMI by stating in a footnote that
that the derivative shareholders in that action (as well as the proposed
additional plaintiffs added in a proposed amended complaint) did not
adequately represent SLMI or its shareholders at that time. (A-641). This
shifting of the burden of persuasion and the conflicting arguments made by
Lee before Judge Sweet and Judge Crotty demonstrates that the issues before
those two Judges were not identical. This lack of identity of issue is fatal to
the District Court’s application of res judicata as to SLMI.
62
VII.
CONCLUSION
The U.S. District Court for the Central District of California has
stayed its hand, after permitting SLMI to substitute as plaintiff and the real
party in interest in a 2007 proceeding brought in SLMI’s name, pending the
outcome of this appeal. The District Court’s 2005 Profits Order that
Movant-Appellant sought to vacate was entered in violation of an automatic
stay in bankruptcy and should be vacated, SLMI recognized as the real party
in interest as the assignee of Lee’s rights in the Spider-Man copyright, and
either permitted to proceed, or, in the alternative and consistent with the
first-filed rule, dismissed without prejudice to the California Action
proceeding. Alternatively, Movant-Appellant SLMI respectfully requests
that this Court remand for additional findings of fact relative to whether the
profits from Spider-Man: The Movie were property part of SLMI’s
bankruptcy estate. However, in the additional alternative, should this Court
choose to affirm, Movant-Appellant respectfully requests that this Court
state clearly the limited grounds necessary for affirmance and respectfully
requests that such affirmance not adopt the District Court’s reasoning with
respect to the res judicata effect of Judge Crotty’s Derivative Dismissal
Order. As stated in Judge Wilson’s May 4, 2011 California Stay Order,
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such a limited affirmance would free the hand of the California court to
permit SLMI to advance its claims in California and thus would achieve a
result consistent with both the prior decisions of the District of California
and the decisions of the courts of the State of Colorado electing new
management for SLMI. Additionally, since the record reveals no basis for
sealing court records, the District Court should be directed to permit SLMI
access to all court records relating to this action.
Dated: New York, New York June 9, 2011
DUNNINGTON, BARTHOLOW & MILLER LLP
By: __________/S/___________ Raymond J. Dowd Luke A. McGrath 1359 Broadway, Suite 600 New York, NY 10018 Tel: (212) 682-8811 Fax: (212) 661-7769 [email protected]