Deadline - WordPress.com · Defendant/Counter Plaintiff Discovery Communications, LLC...

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

This Report and Recommendation is submitted to the Honorable John

A. Kronstadt, U.S. District Judge, pursuant to 28 U.S.C. § 636 and in

accordance with Judge Kronstadt’s Order dated November 1, 2016, referring

this matter to the undersigned U.S. Magistrate Judge.

I.

INTRODUCTION

Defendant/Counter Plaintiff Discovery Communications, LLC

(“Discovery”) filed an Application for Writ of Possession under Federal Rule

of Civil Procedure 64 and California Civil Procedure Code §§ 512.010–.120

LMNO CABLE GROUP, INC.,LMNO ENTERTAINMENTGROUP, LLC,

Plaintiffs/CounterclaimDefendants,v.

DISCOVERY COMMUNICATIONS,LLC,

Defendant/CounterclaimPlaintiff.

Case No. 2:16 CV 04543 JAK (SKx)

REPORT ANDRECOMMENDATION TOGRANT DISCOVERYCOMMUNICATIONS, LLC’SAPPLICATION FORWRIT OFPOSSESSION

Case 2:16-cv-04543-JAK-SK Document 67 Filed 12/09/16 of 13 Page ID #:1810

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to compel Plaintiff/Counter Defendant LMNO Cable Group, Inc. (“LMNO”)

to transfer television program materials for Season Two of 7 Little Johnstons

(the “ProgramMaterials”), a show produced by LMNO under a commission

arrangement with Discovery that is at the center of certain disputes in this

action. (ECF No. 35). LMNO filed an Opposition and Discovery filed a

Reply. (ECF Nos. 42, 43). The Court held a hearing on Discovery’s

Application, and the parties filed supplemental letter briefs thereafter. (ECF

Nos. 47, 50, 51). After the Court preliminarily denied the Application

without prejudice on procedural grounds (ECF No. 52), Judge Kronstadt

referred the Application to the Court for the preparation of a Report and

Recommendation. (ECF No. 59). For the reasons below, the Court

recommends that the Application be granted and a writ of possession issued.

II.

BACKGROUND

In January 2004, Discovery and LMNO entered a “Master Agreement”

with standard terms and conditions to govern “the production and

exploitation of program(s) in accordance with attachment(s) . . . to be

attached [thereto] and incorporated by reference [therein].” (Sims Decl.,

Exh. A).1 The parties understood and specified that the Master Agreement

and succeeding “Attachments” would collectively constitute the parties’

agreement to produce specific shows described in each Attachment. (Id.).

1 As used herein, “App.” refers to the Application for Writ of Possession (ECF No. 35)“Opp.” refers to the Opposition to the Application (ECF No. 42) “Reply” refers to theReply in Support of the Application (ECF No. 43) “Sims Decl.” refers to the Declarationof Savalle Sims, EVP Deputy General Counsel at Discovery (ECF No. 35) “Sims Supp.Decl.” refers to Ms. Sims’ Supplementary Declaration (ECF No. 43) “Schotz Decl.” refersto the Declaration of Eric Schotz, CEO at LMNO (ECF No. 42) “Gallagher Decl.” refers tothe Declaration of Cindy Gallagher, SVP, Global Business Services Controller at Discovery(ECF No. 43) and “Exh.” refers to an exhibit attached to a declaration. Each reference isfollowed by the applicable page number, when available. Where the parties submittedidentical exhibits, the exhibits submitted with the Sims Declaration are cited.


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In November 2014, the parties executed a “Commission Attachment” for

production of the show 7 Little Johnstons. (Sims Decl., Exh. B at 1). That

Commission Attachment incorporated the standard terms and conditions in

the Master Agreement. (Id. at 1, 4).

Under section 12.2 of the Master Agreement, Discovery could

terminate the agreement for a show’s production “at any time without

cause.” (Sims Decl., Exh. A at 4). Discovery’s obligation at that point would

be to “reimburse [LMNO] for all actual, documented out of pocket costs

incurred by [LMNO] or irrevocably committed as of the date of termination

in accordance with the approved Production Budget and Production

Schedule.” (Id.). Upon termination, as pertinent here, section 12.3 of the

Master Agreement required LMNO to “promptly deliver to [Discovery] all

Program Materials of any kind produced as of the date of termination.”

(Id.). Once the Agreement was terminated, Discovery retained “all rights

under the Agreement in such Program Materials regardless of the stage of

completion,” and reserved the right to “enter [LMNO’s] premises to take

possession of all or any part of the contracts or Materials not delivered by

[LMNO].” (Id.).

The Commission Attachment for 7 Little Johnstons provided for the

production of the show’s pilot episode and offered options to produce

additional episodes and specials. (Sims Decl., Exh. B at 1, 4). Discovery

exercised these options for the production of the first season of 7 Little

Johnstons between January and May 2015 through written “amendments”

to the Commission Attachment. (Schotz Decl., Exhs. D–F). Section VII of

the Commission Attachment required only “written notice” to exercise such

options. (Sims Decl., Exh. B at 4–5). Discovery provided such written notice

for the production of Season Two of 7 Little Johnstons in early 2016. (Sims

Decl. at 4 Schotz Decl. at 4). At the same time, the parties began drafting an


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amendment for Season Two, but never ultimately executed that amendment,

evidently due in part to certain disputes at issue in this case. (Sims Decl. at

4 Schotz Decl. at 4–5). The unexecuted amendment for Season Two set the

contract price at a flat fee of $2,640,000, and it included language assigning

LMNO’s rights and obligations to its sister company, LMNO Entertainment

Group, LLC (“LEG”). (Schotz Decl., Exh. H at 158–59). Notwithstanding

that the draft amendment was unsigned, LMNO commenced production of

Season Two in February 2016 and sought payment on a rolling basis from

Discovery for direct out of pocket costs incurred in the production, which

Discovery paid. (Schotz Decl. at 5 Sims Supp. Decl., Exhs. B–D).

Production of Season Two continued in this manner until July 1, 2016, by

which time Discovery had paid LMNO $2,007,950.90 in out of pocket costs

for the production of Season Two. (Sims Supp. Decl., Exhs. G–K Gallagher

Decl. at 4 and Exhibits).

Discovery then terminated the Agreement effective July 2, 2016, and

demanded that LMNO promptly deliver ProgramMaterials for Season Two

of 7 Little Johnstons as required by section 12.3 of the Master Agreement.

(Sims Supp. Decl., Exh. F at 1).2 LMNO refused to transfer the Program

Materials, and this lawsuit followed. LMNO’s Eighth Claim for Relief in its

Complaint alleges that Discovery breached the contract governing the

production and distribution of Season Two of 7 Little Johnstons (ECF No. 1

at 22–23), and Discovery’s Fifteenth Counterclaim against LMNO seeks the

provisional relief sought by its Application here, as well as other permanent

2 Discovery could also terminate the agreement for cause, and it alleges in theApplication that it had sufficient cause to terminate the agreement with LMNO based onLMNO’s alleged failure to cure material breaches following allegations of fraud. (App. at6–7, 10–11 Sims Supp. Decl., Exh. F at 1). Because the no cause termination provisionin section 12.2 of the Master Agreement is sufficient for purposes of recommending adisposition of the Application here, the Court need not, and does not, address the parties’disputed allegations regarding the conduct that allegedly gave Discovery cause toterminate. (Sims Decl., Exh. A at 4).


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relief. (ECF No. 17 at 55–58).

III.

DISCUSSION

In federal court, the prejudgment remedy of replevin is available

pursuant to Federal Rule of Civil Procedure 64, which gives effect to

applicable state law. See Granny Goose Foods, Inc. v. Bhd. of Teamsters &

Auto Truck Drivers Local No. 70, 415 U.S. 423, 436 (1974). California has

codified its common law remedy of replevin in California Civil Procedure

Code §§ 512.010–.120, collectively referred to as the Claim and Delivery

statute. See Fran Well Heater Co. v. Robinson, 182 Cal. App. 2d 125, 129

(1960) (citing prior code sections). The Claim and Delivery statute enables a

party to obtain provisional recovery of disputed personal property by filing

an Application for Writ of Possession. See Cal. Civ. Proc. Code § 512.010(a).

Section 512.010(b) of the statute sets forth the verified pleading

requirements for a valid Application, section 512.060(a)(1) lays out the

substantive standard for granting relief, and section 512.060(a)(2) addresses

the undertaking requirements by incorporating the statutory undertaking

provisions of section 515.010 of the California Code of Civil Procedure.

Discovery’s Application in relation to each of these three provisions is

discussed below.

A.Discovery’s Application Satisfies the Verified Pleading

Requirements for Claim and Delivery of the Program

Materials Under § 512.010(b)

Under California’s Claim and Delivery statute, a valid verified

Application for a Writ of Possession must include the following elements:

(1) A showing of the basis of the plaintiff's claim and that theplaintiff is entitled to possession of the property claimed. If thebasis of the plaintiff's claim is a written instrument, a copy of theinstrument shall be attached.


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(2) A showing that the property is wrongfully detained by thedefendant, of the manner in which the defendant came intopossession of the property, and, according to the bestknowledge, information, and belief of the plaintiff, of the reasonfor the detention.

(3) A particular description of the property and a statement ofits value.

(4) A statement, according to the best knowledge, information,and belief of the plaintiff, of the location of the property and, ifthe property, or some part of it, is within a private place whichmay have to be entered to take possession, a showing that thereis probable cause to believe that such property is located there.

(5) A statement that the property has not been taken for a tax,assessment, or fine, pursuant to a statute or seized under anexecution against the property of the plaintiff or, if so seized,that it is by statute exempt from such seizure.

Cal. Civ. Proc. Code § 512.010(b)(1)–(5). Discovery’s Application meets

these five pleading requirements.

First, the Application sets forth and attaches the Master Agreement

and the Commission Attachment for 7 Little Johnstons, which together

provide the contractual basis for Discovery’s claim that it is entitled to

possession of the ProgramMaterials. Second, the Application alleges that

LMNO is in wrongful possession of the ProgramMaterials because, upon

termination of the agreement, LMNO did not comply with section 12.3 of the

Master Agreement and currently retains possession of the Program

Materials, despite having received more than $2 million for the

substantiated out of pocket costs incurred by LMNO in producing Season

Two of the show.

Third, Discovery’s itemized list of the Program Materials sufficiently

describes and values the property that it seeks. Those ProgramMaterials are

described in Discovery’s June 23, 2016, demand letter to LMNO and consist

of:


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All source material delivered on drivesMasters completed through July 2, 2016Rough Cuts, Fine Cuts and Locked Cuts completed throughJuly 2, 2016 — delivered on HDCAM SRGraphics Master(s), if anySource Tape LogsMusic Cue Sheets for masters.EDL’s for uncompleted projects if applicableAny additional Program ContentUS Labor Report for Season TwoCost Report as of July 2, 2016All Program Deliverables identified on Program Deliverablesexhibit as of July 2, 2016

(Sims Decl., Exh. G at 2–3). Discovery alleges that the value of these

Program Materials is “no less than $2 million, based on the amounts

Discovery has already paid LMNO for these deliverables.” (App. at 12).

LMNO does not contest the list of ProgramMaterials or Discovery’s

suggested valuation of no less than $2 million.3

Fourth, Discovery has established sufficient probable cause to believe

that the ProgramMaterials are located at LMNO’s primary place of business

in Encino, California. (Id.). Although LMNOmaintains that the Program

Materials are not its property to surrender because the ProgramMaterials

are supposedly in the legal possession of its sister company, LEG, there is no

question that LMNO has at least constructive possession. LMNO and LEG

are part of the same corporate family and share the same physical office

3 Contrary to LMNO’s position, the fact that some of the ProgramMaterials may exist indigital format on hard drives should not preclude their transfer since those materials are“capable of identification and seizure.” Lamus v. Engwicht, 39 Cal. App. 523, 528–29(Cal. Ct. App. 1919). In fact, LMNO has previously identified and transferred toDiscovery the same type of materials — in digital format — for Season One of 7 LittleJohnstons. The necessary and inescapable digital form of certain ProgramMaterialsdoes not make them “intangible” property immune from a writ of possession. See id.(distinguishing an incorporeal property interest from an interest in identifiable propertycapable of seizure).


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space. The mere technicality of which corporate entity has formal

possession of the materials should not preclude their legal transfer by

LMNO. In any case, the possibility that property is in the hands of a third

party “is not sufficient to destroy the probable cause that the [property] is at

[defendant’s] place of business.” 4Wall Las Vegas, Inc. v. Triebwasser, No.

2:12 CV 2746 KJN, 2013 WL 930620, at *6 (E.D. Cal. Mar. 8, 2013).

Fifth and finally, Discovery asserts, and LMNO does not contest, that

the Program Materials “have not been taken for a tax, assessment, or fine,

pursuant to a statute or seized under an execution against the property of

Discovery.” (Sims Decl. at 10).

B.Discovery Has Established the Probable Validity of its Claim

to Possession under § 512.060(a)(1)

The Claim and Delivery statute provides that a writ of possession shall

issue if “[t]he plaintiff has established the probable validity of the plaintiff's

claim to possession of the property.” Cal. Civ. Proc. Code § 512.060(a)(1).

The writ must be issued “if the court finds that the plaintiff’s claim is

probably valid and the other requirements for issuing the writ are

established.” Civ. Proc. § 512.040(b). “A claim has ‘probable validity’ where

it is more likely than not that the plaintiff will obtain a judgment against the

defendant on that claim.” Civ. Proc. § 511.090. “The determination of the

actual validity of the claim will be made in subsequent proceedings in the

action and will not be affected” by a provisional decision issuing the writ.

Civ. Proc. § 512.040(b).

In this case, it is more likely than not that Discovery will obtain a

judgment establishing its right to possess the ProgramMaterials. As

outlined above, Discovery (1) terminated the Agreement governing the

production of Season Two of 7 Little Johnstons (2) invoked, at a minimum,

section 12.2 of the Master Agreement, which allows for termination without


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cause so long as Discovery reimburses LMNO for any direct out of pocket

costs incurred and irrevocably committed as of the date of termination and

(3) issued a demand that LMNO turn over the Program Materials pursuant

to section 12.3 of the Master Agreement, which confers upon Discovery a

contractual right of immediate possession — including a right to enter

LMNO’s premises to secure possession — of the ProgramMaterials. (App. at

9–10 Reply at 14 Sims Decl., Exh. A at 4). None of these facts is materially

disputed and they are more than sufficient to establish the probable validity

of Discovery’s claim to possession of the Program Materials.

LMNO’s only argument against the probable validity of the success of

Discovery’s claim is that the parties produced Season Two in reliance on the

terms of the unsigned amendment for Season Two, which set a contract price

of $2,640,000 and purported to assigning LMNO’s rights and obligations to

LEG. (Opp. at 6). Therefore, LMNO contends that Discovery is not entitled

to possession of the ProgramMaterials because Discovery is in breach of its

obligation to pay the full contract price and because LEG, not LMNO, owns

the underlying intellectual property until such time that the full contract

price is paid. (Opp. at 8). While it is possible these arguments may have

some bearing on how the underlying contract and intellectual property

disputes between LMNO and Discovery should ultimately be resolved in this

action, neither argument undermines the probable validity of Discovery’s

claim to immediate possession of the Program Materials for purposes of

issuing a writ of possession.

At the outset, the unsigned amendment is not determinative of the

Application because Discovery’s claim to possession is not rooted in any

“amendment” — executed or not. Instead, Discovery’s claim to possession is

grounded in the Master Agreement and the Commission Attachment for 7

Little Johnstons, which together constituted the parties’ pertinent agreement


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as to the television show’s production. The Master Agreement contemplated

the production of specific shows “in accordance with attachment(s),” one of

which was the Commission Attachment that initiated production of 7 Little

Johnstons. Discovery exercised its options under the Commission

Attachment to produce Season One by drafting three amendments to the

Agreement, but such amendments were not mandatory because Section VII

of the Commission Attachment required only “written notice” to exercise

such options. Discovery provided such notice in early 2016. The parties’

decision to proceed with production of Season Two on a reimbursement

basis, even in the absence of a new signed amendment, did not somehow

vitiate the overarching terms and conditions laid out in the preexisting

Master Agreement and Commission Attachment.

Furthermore, even if the draft unexecuted amendment for Season Two,

relied upon so heavily by LMNO, were deemed the governing agreement, it

would not affect Discovery’s claim to possession. The unexecuted

amendment — like all the executed amendments that preceded it —

incorporated the standard terms and conditions of the Master Agreement.

No evidence has been presented to suggest that it superseded or negated the

Master Agreement. Thus, when Discovery exercised its right to terminate its

relationship with LMNO without cause and receive prompt delivery of all

Program Materials under sections 12.2 and 12.3 of the Master Agreement,

no additional agreement was necessary to confer a contractual right of

possession.4 (Sims Decl., Exh. A at 4). Thus, it does not matter for purposes

4 Discovery asserts that it complied with section 12.2’s requirement to reimburse LMNOfor “actual, documented out of pocket costs incurred by [LMNO] or irrevocablycommitted as of the date of termination” by paying LMNO $2,007,950.90. LMNO assertsthat it is still owed a “committed balance” of $121,670 for the production period endingJuly 1, 2016. (Opp. at 16 Sims Decl., Exh. D at 34). Even if LMNO can substantiate thisamount, which Discovery presently contests, such additional amount, if owed, can beaddressed at the damages stage of this action. See infra p. 11.


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of deciding the Application here — and the Court therefore does not decide

— whether the unexecuted amendment that LMNO seeks to have enforced in

this action is valid and binding. Even if it is, the unsigned amendment

incorporates the Master Agreement and that agreement confers upon

Discovery a right of possession upon termination.

Finally, the Court’s determination that Discovery’s claim to possession

is probably valid is bolstered by the fact that immediate transfer of the

Program Materials will not prejudice LMNO’s claims for damages or impair

its asserted intellectual property rights. Transfer of possession does not

depend on a final resolution of damages claims. See RCA Serv. Co. v.

Superior Court, 137 Cal. App. 3d 1, 3 (Cal. Ct. App. 1982) (“Whatever real

party’s right may be to damages for the alleged defects in the equipment, it

cannot defeat petitioner’s ownership rights and right to reclaim the

equipment.”). Nor should any ongoing disputes about intellectual property

rights in the ProgramMaterials preclude the transfer. See 17 U.S.C.A. § 202

(“Transfer of ownership of any material object . . . does not of itself convey

any rights in the copyrighted work embodied in the object.”).5 Indeed, the

Claim and Delivery statute makes clear that the issuance of a writ of

possession “shall have no effect on the determination of any issues in the

action other than the issues relevant to [the writ] proceedings,” and the

“determinations of the court under [the writ proceedings] shall not be given

in evidence nor referred to in the trial of any such action.” Cal. Civ. Proc.

Code § 512.110.

5 This would be true even if, as LMNO contends, LEG is the copyright owner of theProgramMaterials. Even when LMNO proposed to have its rights assigned to LEG, it stillmaintained that the Master Agreement would govern that assignment. Counsel forLMNO agreed in writing that “it would make sense to keep this project under the [LMNOCable Group, Inc.] Master but provide for the right to assign” to LEG. (Sims Supp. Decl.,Exh. A at 10).


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C. No Undertaking Should Be Required Under § 512.060(a)(2)

Because LMNO Lacks Any Possessory Interest in the

ProgramMaterials

The Claim and Delivery statute, by incorporating the undertaking

provisions of section 515.010, ordinarily requires that the plaintiff post an

undertaking prior to the defendant’s transfer of possession. See Cal. Civ.

Proc. Code § 512.060(a)(2). Statutorily, the undertaking must be in an

amount “not less than twice the value of the defendant’s interest in the

property.” Civ. Proc. § 515.010(a). However, “if the court finds that the

defendant has no interest in the property,” the court “shall waive the

requirement of the plaintiff’s undertaking[.]” Civ. Proc. § 515.010(b). Here,

the parties’ agreement obviates the requirement that Discovery provide an

undertaking under section 512.060(a)(2) because it establishes that LMNO

has no ultimate possessory interest in the ProgramMaterials.

Section 2.1 of the Master Agreement vests in Discovery “sole and

exclusive” ownership and all associated rights in any show produced under

the Master Agreement and classifies LMNO’s work product as “works made

for hire for [Discovery],” which Discovery has the “sole and exclusive right to

exploit in any manner or media.” (Sims Decl., Exh A. at 1). Section 2.3 also

designates Discovery the “sole and exclusive” owner of “all equipment, goods

and other property” obtained by LMNO “for and in connection with the

Program or purchased by [LMNO] . . . with any of the Budget Contribution”

and gives Discovery the right to “take possession of such Property” upon

completion of production. (Id.). In short, no matter how the agreement

between Discovery and LMNO is satisfied — whether voluntarily or by a

judgment enforcing its terms — LMNO’s interest under the agreement is,

and will always remain, getting paid for the production of 7 Little Johnstons

it has no ultimate interest in retaining exclusive, physical possession of the


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show as embodied in the ProgramMaterials. Whatever LMNOmay be owed

and possibly awarded at judgment for its production of Season Two of 7

Little Johnstons, the end result will be the transfer of possession of the

Program Materials to Discovery. Thus, because LMNO has no ultimate

possessory interest in the ProgramMaterials, Discovery should not be

required to provide an undertaking.6

IV.

RECOMMENDATION

For the reasons set forth above, the Court recommends that the

District Judge issue an Order accepting this Report and Recommendation

and issuing a writ of possession in Discovery’s favor. When issuing a writ of

possession, the court may also issue an order “directing the defendant to

transfer possession of the property to the plaintiff” or be held in contempt of

court. Cal. Civ. Proc. Code § 512.070. Because of the impracticality of

having a writ of possession formally levied by local law enforcement, the

Court further recommends that LMNO be ordered to deliver the Program

Materials pursuant to California Code of Civil Procedure § 512.070 within 10

days of any final order issuing a writ of possession.

DATED: December 9, 2016STEVE KIMU.S. MAGISTRATE JUDGE

6 When the plaintiff’s undertaking requirement is waived because the defendant isdeemed to have no possessory interest in the disputed personal property, defendant mustordinarily post an undertaking in an amount sufficient to cover the costs and damagesthat may ultimately be awarded to the plaintiff upon entry of final judgment. See Cal. Civ.Proc. Code §§ 515.010(b), 515.020(b). But because this requirement is designed toprotect the plaintiff seeking the writ of possession, and Discovery has not sought any suchundertaking by LMNO if a writ is issued, the Court deems Discovery to have waived thatrequirement.

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