In re Vidangel, Inc.

Citation593 B.R. 340
Decision Date09 November 2018
Docket NumberBankruptcy Number: 17-29073
Parties IN RE: VIDANGEL, INC., Debtor.
CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Utah

J. Thomas Beckett, Michael Ronald Brown, Grace S. Pusavat, Brian M. Rothschild, Parsons Behle & Latimer, Salt Lake City, UT, for Debtor.

MEMORANDUM DECISION GRANTING THE STUDIOS' MOTION FOR RELIEF FROM STAY

KEVIN R. ANDERSON, U.S. Bankruptcy Judge

I. INTRODUCTION

The matter before the Court is a motion for relief from stay to allow the film studios to continue their prosecution of pending copyright litigation against the Debtor in the Central District of California. The Court has heard the arguments of counsel, heard the testimony of witnesses, and received exhibits into evidence as noted on the record. The Court has also read the motions, objections, and other briefing by the parties and has conducted its own independent investigation of applicable law. The Court is prepared to rule and will now issue its findings of fact and conclusions of law as permitted by Fed. R. Civ. P. 52(a), made applicable in this contested matter through Fed. R. Bankr. P. 9014 and 7052. Any of the findings of fact herein are deemed, to the extent appropriate, to be conclusions of law, and any of the conclusions of law herein are similarly deemed to be findings of fact, and they shall be equally binding as both.

II. JURISDICTION, NOTICE, VENUE

The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(a) & (b) and 28 U.S.C. § 157(b). The motion for relief from stay is a core proceeding under 28 U.S.C. § 157(b)(2)(A) & (O), and the Court may enter a final order. Venue is appropriate in this District under 28 U.S.C. § 1408 & § 1409 and notice of this hearing was properly given to all parties in interest.

III. FINDINGS OF FACT
A. The California Copyright Litigation

1. On June 9, 2016, Disney Enterprises, Inc., Lucasfilm Ltd. LLC, Twentieth Century Fox Film Corporation, and Warner Bros. Entertainment Inc., (the "Studios") filed a complaint in the United States District Court for the Central District of California, the Honorable André Birotte Jr. presiding (the "California District Court" or the "California Copyright Litigation").1 The complaint alleged that VidAngel circumvented the technological protection measures that control access to the Studios' copyrighted works in violation of the Digital Millennium Copyright Act ("DMCA") and infringed their exclusive rights of reproduction and public performance under the Copyright Act (the "Copyright Complaint"). The Copyright Complaint included a demand for a jury trial.2

2. On September 16, 2016, VidAngel filed its amended answer and counterclaims against the Studios.3

a. In its answer, VidAngel asserted affirmative defenses under the Family Movie Act and the fair-use provision of the Copyright Act.4
b. Counts one through three of the counterclaim alleged that the Studios violated federal and state antitrust laws. Counts four through seven sought declaratory relief that VidAngel's disc-based and streaming filtering services did not violate the DMCA and the Copyright Act and were permitted under the Family Movie Act (the "Counterclaims").5

3. After exchanging expedited discovery with VidAngel, consisting of approximately 2,000 pages of documents, the Studios filed a motion for a preliminary injunction.

4. On December 12, 2016, Judge Birotte granted the Studios' motion for a preliminary injunction, holding: (1) the Studios were likely to succeed on their copyright infringement claims; (2) VidAngel was unlikely to succeed on its defenses; and (3) the Studios had demonstrated a likelihood of imminent, irreparable injury (the "Injunction").6

5. Eight months later, the Ninth Circuit affirmed the Injunction.7 The Ninth Circuit held that because VidAngel did not use authorized copies of movies to provide its filtering services, it was unlikely to prevail on its argument that the Family Movie Act exempted it from liability for copyright infringement. It further held that VidAngel was unlikely to succeed on its "fair use" defense.

6. While appealing the Injunction, VidAngel asserted it had a new "stream-based" model that would not violate copyright laws.

7. VidAngel then filed two motions for clarification that its modified streaming service was outside the scope of the Injunction.

8. The California District Court denied both motions, finding that VidAngel was essentially, and inappropriately, seeking declaratory relief, and making clear that, regardless of the label used to describe its service (stream-based or disc-based), the Injunction bars VidAngel from violating the Studios' rights under the DMCA or violating the Studios' copyrights.8

9. On August 10, 2017 Judge Birotte granted the Studios' motion to dismiss VidAngel's Counterclaims.9 As to the counterclaims for declaratory relief, the court stated: "Each of the issues that VidAngel raises in its claims for declaratory relief will be decided through Plaintiff's claims in this action or Defendants affirmative defenses thereto. Because this would amount to duplicative litigation, the Court, in its discretion, denies VidAngel's fourth through seventh claims for declaratory relief."10

10. On August 31, 2017, VidAngel filed a declaratory relief action in the United States District Court for the District of Utah (the "Utah District Court" or the "Utah Declaratory Relief Action").11 VidAngel amended its complaint on September 22, 2017.12

a. The Utah Declaratory Relief Action named a dozen film studios, all corporate affiliates and business partners of the California Plaintiffs, as defendants. Three of the defendants in the Utah Declaratory Action—Marvel, new Line, and Turner—are also Plaintiffs in the California Action.
b. The Utah Declaratory Relief Action sought a ruling that VidAngel's new stream-based service and "hybrid" service did not violate copyright laws; essentially the same issues the California District Court had addressed in response to VidAngels' motions to clarify

11. On September 28, 2017, Judge Birotte entered a scheduling order on the Copyright Complaint, which set a five to seven-day trial starting June 5, 2018.

12. On September 29, 2017, the Studios filed a Motion for Partial Summary Judgment as to VidAngel's liability under the DMCA and the Copyright Act.13

13. On October 18, 2017, two days before its opposition to the motion for summary judgment was due, VidAngel filed this bankruptcy case.

B. VidAngel's Bankruptcy Case

14. VidAngel, Inc. filed for Chapter 11 relief on October 18, 2017.

15. The Debtor's Statement of Financial Affairs, filed on November 1, 2017, indicated that VidAngel had $3,449,285 in cash.14 VidAngel's most recently filed monthly operating report for the period ending September 30, 2018 lists an ending cash balance of $1,896,075.15 This is decrease of over $1.5 million in cash since the petition date.

16. Since filing the petition, the Court has awarded Baker Marquart, VidAngel's litigation counsel, over $200,000 in fees.16 Of that amount, all but $4,300 was for litigation of the Utah Declaratory Relief Action.17 In addition, the Court awarded Debtor's counsel $20,430.50 for "non-bankruptcy litigation involving the Debtor in the federal courts."18 Thus, VidAngel has incurred over $216,000 in fees pursuing its litigation in other courts.

17. On November 8, 2017, the Studios filed a motion to dismiss the Debtor's bankruptcy case, or, in the alternative, to grant relief from stay.19

18. At the hearings on the motion to dismiss, VidAngel stated that they had switched their filtering service from a disc-based model to a new streaming model. Thus, VidAngel argued that it needed additional time to move customers to the new streaming service, and to allow the Utah District Court to rule on its complaint for declaratory relief. The parties agreed to continue without date a ruling on the motion for relief from stay pending a resolution or other disposition of the Utah Declaratory Relief Action.20

19. On February 14, 2018, the Studios filed unsecured proofs of claim for copyright damages in an amount to be determined by the California District Court.21 Those claims expressly reserved the Studios' right to a jury trial, to contest this Court's jurisdiction, and to have the claims liquidated by the California Court.

20. On February 15, 2018, VidAngel filed a complaint in the bankruptcy case against the Studios (the "Bankruptcy Adversary Proceeding").22

a. The first cause of action seeks the disallowance of the Studios' claims under 11 U.S.C. § 502.
b. The second cause of action incorporates the fourth through seventh causes of action that VidAngel asserted in its Counterclaim in the California Action that were dismissed by Judge Birotte. These causes of action seek a declaratory judgment that VidAngel's filtering technologies do not violate copyright laws.23

21. On the same day, VidAngel filed a motion to withdraw the reference, asking the Utah District Court to hear the Bankruptcy Adversary Proceeding.

22. On November 1, 2018, Judge Nuffer entered his order withdrawing the reference as to the Bankruptcy Adversary Proceeding and ordered the parties to file briefs "addressing why the Adversary Complaint should not be dismissed for lack of jurisdiction or other good cause."24

23. No creditors' committee has been formed in the Chapter 11 case.25 According to the United States Trustee, there were "too few unsecured creditors willing to serve for the United States Trustee to form a Creditors' Committee."26

24. On September 10, 2018, VidAngel filed its third motion to extend the exclusivity period for filing a reorganization plan. The Studios objected to the extension. Due to the pending motion for relief from stay and the recent dismissal of the Utah Declaratory Relief Action, the Court extended the exclusivity period through January 14, 2019.27

C. VidAngel's Declaratory Judgment Action in the Utah District Court

25. On August 31, 2017, VidAngel filed the Utah Declaratory Relief Action against...

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    ...court that knows the parties and the factual and legal issues and can schedule final hearings in short order." In re VidAngel, Inc., 593 B.R. 340, 349 (Bankr. D. Utah 2018) (internal quotations and citations omitted). The decision to lift the stay may be upheld on judicial economy grounds a......
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    ...to debtor or creditors was questionable, and claimants could suffer abrogation of their right to jury trial.); In re VidAngel, Inc. , 593 B.R. 340, 350 (Bankr. D. Utah 2018) (denying estimation because "the [claimants] have a constitutional right to a jury trial before an Article III tribun......

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