Documentos de Académico
Documentos de Profesional
Documentos de Cultura
____________________________________
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DIGITAL FUNDING, LLC, )
)
Plaintiff, )
)
v. ) Civil Action No. ______________
)
UMPQUA BANK, )
)
Defendant. )
____________________________________)
COMPLAINT
Plaintiff, Digital Funding, LLC, by and through its undersigned counsel, brings this
1. This is an action under the Copyright Act, the Lanham Act and state-law arising
works and registered trademarks, and defendants purposeful interference with plaintiffs
contractual relations with defendants Borrowers. After causing the Borrowers to breach their
License Agreement for the use of plaintiffs intellectual property, plaintiff terminated the License
Agreement with the Borrowers. Defendant then orchestrated the sale of hundreds of thousands
of copies of the Works and Trademarks, the majority of which were sold in a fire sale auction.
Defendant financed the costs of the illegal sales and pocketed the proceeds. In addition, prior to
the termination of the License Agreement, defendant tortiously interfered with the Borrowers
performance of the contract by refusing to permit the Borrowers to pay certain third-party license
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fees that were required under the agreement. Defendants brazen conduct even included the
outright conversion of third-party license fees that belonged to plaintiff. As a result, plaintiff has
THE PARTIES
2. Plaintiff, Digital Funding, LLC, is a limited liability company organized and
3. Defendant Umpqua Bank is a bank chartered under the laws of the State of
4. This Court has subject matter jurisdiction over the copyright and trademark
claims included in this action pursuant to 28 U.S.C. 1331 and 1338. This Court has
supplemental subject matter jurisdiction over the state law claims under 28 U.S.C. 1367.
5. Venue in this Court is proper under 28 U.S.C. 1391 (b) (c), and/or 28 U.S.C.
1400 (a).
6. This Court has personal jurisdiction over defendant because the acts described in
the complaint occurred partly in Delaware and caused harm to plaintiff in Delaware. In addition,
defendant was a direct and intended beneficiary of the transactions between plaintiff and the
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BACKGROUND
8. Plaintiff owns or has the exclusive copyrights in numerous musical and video
works. The works that are the subject of this action are identified on Exhibit A attached hereto
(the Works). Plaintiff owned or had the exclusive rights to the Works at all times during the
Exhibit B attached hereto, which, at all times relevant hereto, have been used in interstate or
foreign commerce (the Trademarks). Plaintiff owned or had the exclusive rights to the
Trademarks at all times during the acts of infringement identified in this complaint.
manufacture and distribution of small independent music and video labels and small consumer
electronics. Among the assets owned by the Borrowers was a catalog consisting of thousands of
master video and audio recordings, contract rights relating to such recordings, artwork associated
with the master recordings, publishing rights associated with the master recordings, trademarks
arising out of or used in connection with the master recordings, and books and records
(collectively, the IP Catalog). The IP Catalog included the Works and Trademarks.
11. The IP Catalog is the lifeblood of the Borrowers businesses as the rights
associated with the catalog enabled the Borrowers to manufacture and sell the content in physical
12. Prior to December 2015, the Borrowers were indebted to defendant and certain
predecessor entities for various loan obligations in the approximate amount of $10 million.
Beginning in the third quarter of 2015, the Borrowers began exploring opportunities to reduce
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the amount of debt owed to defendant through the sales of assets. Defendant was fully aware of
the Borrowers attempt to sell off certain assets to generate cash to reduce their debt to
defendant.
13. In connection with these efforts, on November 30, 2015, Allegro and Somerset,
on the one hand, and plaintiff, on the other hand, entered into a series of agreements led by a
Master Recording Purchase Agreement (the Purchase Agreement), pursuant to which plaintiff
purchased from Allegro and Somerset the IP Catalog for a purchase price of $2 million. At
closing on the Purchase Agreement, the purchase price was conveyed to defendant, which
14. The material terms of the Purchase Agreement, including the purchase price, were
communicated to and approved by defendant prior to the execution of the Purchase Agreement.
In addition, defendant required that the full $2 million purchase price be paid to it at closing on
the Purchase Agreement as consideration to defendant for the release of its liens in the IP
Catalog. At closing, defendant received the purchase price and released its liens in the IP
Catalog.
15. Certain works included in the IP Catalog were subject to license agreements
between original owners and copyright holders and Allegro and Somerset (the Third-Party
Licenses). Under the Third-Party Licenses, in exchange for licensing fees, Allegro and
Somerset maintained exclusive rights to use and exploit the licensed works. Under the Purchase
16. The Third-Party Licenses required the payment of license fees based upon the
sales of licensed content by Allegro and Somerset. Recognizing that Allegro and Somerset
would continue to exploit the licensed content, the Purchase Agreement required Allegro and
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Somerset to continue to pay fees that were owed under the Third-Party Licenses to these
17. To facilitate Allegros and Somersets continued use of the IP Catalog after
closing of the Purchase Agreement, Allegro, Somerset and plaintiff executed a License
Agreement (the License Agreement) under which plaintiff conveyed to Allegro and Somerset
nonsublicensable license to use the IP Catalog in the manufacture and sale of products that
included IP Catalog content in physical format only. A true and correct copy of the License
18. On February 3, 2016, plaintiff and the Licensees executed an amendment to the
License Agreement that clarified the license arrangements with respect to compilations of video
19. Consistent with section 1.2 of the Purchase Agreement, the License Agreement
required the Licensees to pay all royalties, license fees and other charges owed to licensors under
the Third-Party Licenses resulting from the commercial use of the IP Catalog in connection with
their business activities. Under the Purchase Agreement, plaintiff assumed obligations
associated with the Third-Party Licenses arising after transfer of the IP Catalog. The payment of
obligations arising under the Third-Party Licenses by the Licensees was critical to enable
plaintiff to maintain its rights in the IP Catalog. The failure to pay these obligations would
expose plaintiff, not the Licensees, to penalties and damages under the Third-Party Licenses and
20. In addition, prior to closing on the Purchase Agreement, Allegro and Somerset
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under which third-party licensees would pay license fees to Allegro and Somerset for the use of
21. After closing on the Purchase Agreement, plaintiff notified the licensees to pay all
Downstream License Fees to plaintiff directly. However, some of the licensees continued to pay
Allegro and Somerset. When this occurred, Allegro and Somerset would pay over the
22. The license granted under the License Agreement could be terminated by plaintiff
for various events, including, but not limited to, the insolvency of either of the Licensees, either
liquidator, or either of the Licensees became generally unable to pay or failed to pay its debts as
23. On or about December 2, 2015, defendant and the Borrowers executed that certain
Business Loan Agreement (Asset Based) (Loan Agreement) in the principal amount of $10
million pursuant to which defendant agreed to make certain advances to the Borrowers pursuant
to the terms and conditions of the agreement. The Loan Agreement did not represent a new
funding arrangement between the parties but instead constituted a rollover of existing debt that
had been extended by defendant to the Borrowers. A true and correct copy of the Loan
24. The Borrowers obligations under the Loan Agreement were allegedly secured by
a first lien and security interest on substantially all of the Borrowers assets, including inventory,
accounts receivable, equipment and fixtures and general intangibles. Since the Borrowers did
not own the IP Catalog on the closing date of the Loan Agreement (and defendant previously
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released any liens on the IP Catalog in exchange for $2 million), defendant obtained no liens or
25. The Loan Agreement created a revolving line of credit under which cash
generated from sales and other business activities was deposited into a cash collateral account
(the Cash Account) maintained at defendant. (Loan Agreement at p. 8). The Cash Account
was controlled by defendant and defendant, at its election, could withdraw the entire balance
from the account and apply the proceeds to the Borrowers obligations. (Loan Agreement at p.
8). As the Borrowers required cash to operate their businesses, defendant would then advance
funds under the Loan Agreement as additional borrowings under the line of credit. (Loan
Agreement at p. 1).
26. Under the terms of the Loan Agreement, the Borrowers were required to identify
a business consultant by February 1, 2016 and to employ the business consultant no later than
July 1, 2016. (Loan Agreement at p. 8). At the time the Loan Agreement was executed, it was
contemplated that the business consultant would consult with the Borrowers in restructuring or
27. In order to comply with the terms of the Loan Agreement, on or about February 1,
2016, the Borrowers selected Edward Hostmann, Inc. (EHI), as their business consultant. EHI
and its principal, Edward Hostmann (Hostmann), were recommended by defendant and, upon
28. On June 1, 2016, Allegro appointed Hostmann as its chief restructuring officer
with certain powers to act on behalf of the corporation. Despite being appointed by Allegros
Board of Directors, from and after his appointment, Hostmann never took direction from the
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Board and instead communicated directly with defendant to develop and implement the
29. Hostmann relied upon defendant to fund the costs associated with the wind-down
and liquidation of the Borrowers. Hostmann and EHI prepared cash budgets for defendant that
included the costs associated with operating the businesses and selling the Borrowers assets.
Since the Borrowers had no cash, Hostmann was completely reliant upon defendant for the funds
he needed. Defendant reviewed the cash budgets, decided what costs would be paid and then
advanced funds to cover only the costs it approved. EHIs fees were also included in the funds
advanced by Defendant. All cash generated by Hostmann was deposited into the Cash Account
and swept by defendant on a regular basis. EHI was not authorized by defendant to spend any
cash other than what was included in the budget approved by defendant.
30. Through this process, Hostmann and EHI acted solely for the benefit of
Allegro, Hostmann and EHI have contended (and defendant has agreed) that they acted as a
custodian of the Borrowers assets for the benefit of defendant. As a custodian, Hostmann and
EHI acted as an agent for the administration of the Borrowers property for defendants benefit.
31. In contrast, at no point after June 3, 2016 were the Borrowers directors or owners
responsible for any decision-making with respect to the Borrowers business activities. They did
not approve the cash budgets submitted to defendant, did not request any advances from
defendant under the Loan Agreement, did not sign checks, and did not approve cash expenditures
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32. Defendant also played fast and loose with respect to declaring the Borrowers in
default of the Loan Agreement to perpetuate the illusion that defendant was not in complete
control of the Borrowers. Under the Loan Agreement, the Effect of an Event of Default
appointed as chief restructuring officer. By that date, the Borrowers were not paying their debts
as they became due, and were therefore insolvent. In addition, EHIs and Hostmanns
appointment, and defendants assumption of control over the Borrowers cash expenditures,
plainly constituted a creditor workout that amounted to insolvency under the Loan Agreement.
Loan Agreement and the automatic and non-optional acceleration of the debt. Despite these
events, defendant continued to create the false impression that the Loan Agreement was still in
effect and that funding provided to Hostmann constituted arms-length advances under the loan.
Three months after the real acceleration of the debt, on August 31, 2016, defendant purported to
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accelerate the loan balance. By the time of the acceleration, defendant, through its own actions
and its control of Hostmann, its custodian, had already been exercising complete dominion and
36. After assuming control over the Borrowers through Hostmann and EHI, defendant
caused the Licensees not to pay obligations due under the Third-Party Licenses as required under
the License Agreement. Defendant was aware of these obligations yet refused to provide
funding to pay them, even though funds were made available to Hostmann to satisfy other
under the Third-Party Licenses caused the Borrowers to default on the License Agreement, and
resulted in actual and significant potential injury to plaintiff. Defendants actions are particularly
egregious because the obligations it refused to pay are calculated based on the Borrowers sales
of content covered by the Third-Party Licenses. Thus, defendant received the full benefit of the
sales of this content, but refused to pay the expenses due under the Third-Party Licenses that
38. In addition, EHI and Hostmann, at the direction defendant, refused to turn over
misdirected Downstream License Fees that belonged to plaintiff. Instead, these misdirected
payments were deposited into the Cash Account and taken by defendant, even though they were
39. In one instance in July 2016, plaintiff became aware that approximately $20,000
in Downstream License Fees had been mistakenly paid to Allegro. Plaintiff demanded turnover
of these misdirected payments from EHI and Hostmann. Plaintiff was informed that EHI did not
object to turning over of plaintiffs property, but that defendant had refused to permit EHI to
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return the funds to plaintiff. Upon information and belief, these funds were swept from the Cash
40. By September 2016, multiple grounds existed for termination of the License
Agreement, including the Licensees insolvency, the appointment of EHI and Hostmann and the
41. As a result of these events, on September 12, 2016, plaintiff terminated the
License Agreement and transmitted notice of termination to the Licensees. The Licensees,
42. As a result of the proper termination of the License Agreement, the Licensees
license to manufacture and sell products incorporating the IP Catalog was terminated, and all of
the licensed rights were transferred to plaintiff. As a result of the termination, only plaintiff had
43. Notwithstanding this reality, EHI and Hostmann, acting on behalf of defendant as
its custodian, and under the direction of defendant, continued to sell hundreds of thousands of
units of physical inventory, which included content from the IP Catalog. The unauthorized sale
of plaintiffs proprietary material included an auction conducted on or about October 12, 2016, in
which hundreds of thousands of inventory items including the Works and the Trademarks were
sold at fire-sale prices in direct violation of plaintiffs rights. The liquidator retained by
Hostmann to conduct the auction, Great American Group, conducted extensive advertising and
promotion of the sale of the Borrowers inventory that included IP Catalog content. These
promotional efforts included the use of website promotions and other electronic communications
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44. The unauthorized sale of products incorporating content from the IP Catalog,
especially the auction sale, flooded the market with copies of the Works and the Trademarks and
45. All of the activities conducted by EHI and Hostmann occurred under the direction
of and with the direct knowledge and involvement of defendant, its legal counsel and its agents.
Defendant not only authorized and encouraged the sale of products including the Works and the
Trademarks, it approved and funded all of the costs associated with the sales and pocketed the
sale proceeds.
46. As a result of defendants actions, plaintiff has suffered significant injuries and
COUNT I
Tortious Interference with Contractual Relations
47. Plaintiff incorporates by this reference the preceding paragraphs of this complaint
48. The Licensees breached the License Agreement by virtue of various events,
49. Defendant was aware of the obligations owed on the Third-Party Licenses that are
included in the License Agreement. Defendant benefited from the Third-Party Licenses and the
License Agreement because the proceeds of sales of products that exploited the IP Catalog were
50. Despite defendants awareness of the License Agreement and its receipt of direct
benefits from the business activities of the Licensees, defendant intentionally refused to permit
the Licensees to satisfy their obligations under the License Agreement by refusing to advance
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funds to the Licensees or permit the use of its cash collateral to satisfy the Licensees obligations
51. Defendants actions as described herein are intentional acts that caused direct
injury to plaintiff by exposing plaintiff to injuries caused by the Licensees failure to satisfy their
52. Defendants actions in taking the proceeds of sales of products that included
content in the IP Catalog while, at the same time, interfering with the Licensees ability to satisfy
their obligations under the License Agreement, constitutes extreme and outrageous conduct that
WHEREFORE, plaintiff respectfully requests that this Court enter the relief against
COUNT II
Conversion
53. Plaintiff incorporates by this reference the preceding paragraphs of this complaint
54. Defendant exercised dominion and control over the Downstream License Fees
that were erroneously received by the Borrowers and deposited into the Cash Account.
55. Defendant was aware of the fact that the Downstream License Fees were not
56. Defendant wrongfully refused Plaintiffs demand for return of the Downstream
License Fees even though Defendant knew that these funds were not the Borrowers property
and, therefore, defendant had no right whatsoever to retain possession of these funds.
57. As a result of the foregoing, defendant converted the Downstream License Fees
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58. Defendants conversion of the Downstream License Fees constitutes extreme and
WHEREFORE, plaintiff respectfully requests that this Court enter the relief against
COUNT III
Direct Copyright Infringement
59. Plaintiff incorporates by this reference the preceding paragraphs of this complaint
60. From and after June 3, 2016, Hostmann and EHI acted as defendants agent with
respect the operation of the Borrowers businesses, including the unauthorized sale of Works
after the License Agreement was terminated. Defendant accepted the benefits of the agency
relationship.
61. Defendants activities in selling the copies of the Works after termination of the
License Agreement through its agents, Hostmann and EHI, infringed plaintiffs copyrights in the
Works and violated the exclusive rights conferred upon plaintiff under 17 U.S. C. 106.
62. As a direct and proximate result of defendants direct infringement of the Works,
WHEREFORE, plaintiff respectfully requests that this Court enter the relief against
COUNT IV
63. Plaintiff incorporates by this reference the preceding paragraphs of this complaint
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64. Alternatively, at all times relevant hereto, defendant had the right and ability to
supervise and/or control the infringing conduct of the Borrowers, EHI and Hostmann with
respect to the unauthorized sale of Works after the License Agreement was terminated by,
without limitation, refusing to permit the sale of inventory that included the Works, refusing to
fund the costs and expenses associated with the inventory sales that included the Works, or
directing Hostmann and EHI to segregate inventory that included the Works to insure that the
65. Prior to the infringing activity, defendant was fully aware of the existence of the
66. The unauthorized sales of copies of the Works infringed plaintiffs copyrights in
the Works and violated the exclusive rights conferred upon plaintiff under 17 U.S. C. 106.
67. As a direct and proximate result of defendants failure to supervise and/or control
the activities relating to the unauthorized sales of the Works as described herein, defendant
permitted and, in fact, openly supported and encouraged, infringing activities associated with the
68. Defendant derived significant and direct financial benefit from the infringing
activities of the Borrowers as all proceeds from the unauthorized sales of the Works were taken
by defendant.
69. Defendants acts of vicarious infringement have been willful, intentional and
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WHEREFORE, plaintiff respectfully requests that this Court enter the relief against
COUNT V
Contributory Copyright Infringement
71. Plaintiff incorporates by this reference the preceding paragraphs of this complaint
72. Alternatively, the Borrowers, EHIs and Hostmanns activities in selling the
copies of the Works infringed plaintiffs copyrights in the Works and violated the exclusive
73. Defendant was fully aware of the existence of the License Agreement and
plaintiffs termination of the License Agreement, which occurred prior to the infringing activity.
As a result, defendant had direct knowledge of, or had reason to know of, the infringement of the
Works.
74. Through its actions as described herein, defendant materially contributed to the
infringing activity.
75. Defendant derived significant and direct financial benefit from the infringing
activity as all proceeds from the unauthorized sales of the Works were taken by defendant.
76. Defendants acts of contributory infringement have been willful, intentional and
WHEREFORE, plaintiff respectfully requests that this Court enter the relief against
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COUNT VI
Vicarious Trademark Infringement
78. Plaintiff incorporates by this reference the preceding paragraphs of this complaint
79. By engaging in sales of goods with the Trademarks affixed to them after
termination of the License Agreement by plaintiff, the Borrowers, EHI and Hostmann have
violated the exclusive rights granted to plaintiff under the Lanham Act.
80. Through its actions as described herein, since Hostmann and EHI were
defendants admitted custodian of the Licensees inventory that included goods affixed with the
Trademarks, defendant acted in partnership with the Borrowers, Hostmann and EHI with respect
81. In addition, through its actions as described herein, defendant exercised joint
83. As the owner of the Trademarks, plaintiff has suffered an injury caused by
defendants vicarious infringement of the Trademarks, and is entitled to relief under the Lanham
Act.
WHEREFORE, plaintiff respectfully requests that this Court enter the relief against
COUNT VII
Contributory Trademark Infringement
84. Plaintiff incorporates by this reference the preceding paragraphs of this complaint
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85. By engaging in sales of goods with the Trademarks affixed to them after
termination of the License Agreement by plaintiff, the Borrowers, EHI and Hostmann have
violated the exclusive rights granted to plaintiff under the Lanham Act.
86. Through its actions as described herein, defendant directly induced and
87. In addition, by controlling the funds necessary to enable the Borrowers, EHI and
Hostmann to conduct unauthorized sales of goods with the affixed Trademarks, defendant
directly controlled and monitored the instrumentalities used to engage in the infringing activities.
88. Defendant was aware that the License Agreement covered the use of the
Trademarks included in the IP Catalog, that the License Agreement was terminated and,
thereafter, that the sales of goods affixed with the Trademarks would violate plaintiffs exclusive
rights in the Trademarks. Notwithstanding this knowledge, defendant continued to support and
encourage the infringing activities by providing financial and other support to facilitate the sales
of infringing goods.
90. As the owner of the Trademarks, plaintiff has suffered an injury caused by
defendants contributory infringement of the Trademarks, and is entitled to relief under the
Lanham Act.
WHEREFORE, plaintiff respectfully requests that this Court enter the relief against
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Plaintiff respectfully requests that the following relief be entered against defendant and in
favor of plaintiff, together with costs of suit and such other and further relief as is just and
proper:
As to Count I
As to Count II
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4. Treble damages;
Plaintiff demands a trial by jury with respect to all claims for which a jury trial is
/s/Richard M. Beck
Richard M. Beck (DE Bar No. 3370)
Sally E. Veghte (DE Bar No. 4762)
919 Market Street, Suite 1000
Wilmington, Delaware 19801-3062
Telephone: (302) 426-1189
Facsimile: (302) 426-9193
Email: rbeck@klehr.com
sveghte@klehr.com
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