TMM LOSES LAWSUIT!!!
DIMENSION, INC., a Nevada Corporation;
DIGITAL FOCUS MEDIA, INC., a dissolved California Corporation,
Counterclaimants,
v.
TMM, INC., a Nevada Corporation, and DIGITAL FOCUS, INC., a California Corporation;
Counterdefendants.
Case No.: A-13-678054-B
Dept. No.: XI
FINDINGS OF FACT, CONCLUSIONS OF LAW AND JUDGMENT
This matter having come on for non-jury trial (footnote 1) before the Court on November 16 -18, 2016, F. Christopher Austin, Esq. and Ryan Gile, Esq. of the law firm of WEIDE & MILLER, LTD. appeared on behalf of Counterclaimants DIMENSION, INC. and DIGITAL FOCUS MEDIA, INC., and Joe Laxague, Esq. of the law firm of LAXAGUE LAW, INC. and Arash Shirdel, Esq. of the law firm of PACIFIC PREMIER LAW GROUP appeared on behalf of Counterdefendants TMM, INC. and DIGITAL FOCUS, INC., and the Court having read and considered the pleadings filed by the parties; having reviewed the evidence admitted during the trial; and having heard and carefully considered the testimony of the witnesses called to testify; the Court having considered the stipulations of counsel; the oral and written arguments of counsel; and with the intent of deciding all remaining claims before the Court pursuant to NRCP 52(a) and 58; the Court makes the following findings of fact and conclusions of law:
PROCEDURAL POSTURE
The Counterdefendants moved to voluntarily dismiss its Complaint. The Court granted that motion by order entered on February 22, 2016. Following certain motions related to the counterclaim, the remaining issue for trial related to the claim for declaratory relief in the counterclaim. (footnote 2)
FINDINGS OF FACT
I. The PVS/SGI Code also known as the VDK 2.0 Code (the "Code") was created by Iterated Systems, Inc. ("ISI") who is the predecessor in interest of MediaBin.
2. TMM, Inc. ("TMMI") is a Nevada corporation, and the purported holder of the license to the Code.
3. Digital Focus, Inc. ("DFI") is a California Corporation, who entered into an agreement with ISI, for a license to the Code.
4. Digital Focus Media, Inc. ("DFMI") is a California Corporation, who alleges it obtained the license to the Code from DFI.
5. Dimension is a Nevada corporation, and the purported holder of a license to the Code who is the successor in interest of DFMI.
6. Larry Panik ("Panik") was a shareholder in TMMI, DFI, and DFMI.
7. Panik is currently the president and sole director of Dimension.
8. Panik also at certain times served as an officer of DFI and as a director of DFMI.
9. In early 2000, a group of twenty-nine investors transferred their TMMI stock to Thomas Simpson ("Simpson") to use as collateral for a loan for TMMI. Simpson sold the shares without the prior authorization of those shareholders. A portion of the proceeds from the sale of the shares, $500,000, was needed to pay ISI for the License to the Code.
10. On or about March 2000, DFI entered into a license agreement with ISI for the license to the Code ("License Agreement").
11. The License Agreement was executed by Simpson on behalf of DFI and by Alan Sloan on behalf of ISI.
12. The License was purchased for $500,000, and Simpson put the License in a pre-existing inactive company that Simpson owned called "DFI."
13. Under the terms of the License, ISI was to receive 5% of DFI 's stock in exchange for the License. After execution of the License Agreement it was determined that as a subchapter-S corporation, DFI could only issue stock to individuals and not to a company such as ISI.
14. Simpson formed DFMI as the "vehicle for the License Agreement."
15. On or about September 2000, DFMI and ISI signed the Second Addendum to the License Agreement. The Second Addendum indicated that a merger between DFI and DFMI had occurred. (footnote 3)
16. The investors were issued DFMI stock in exchange for the TMMI stock they had previously transferred to Simpson.
17. Simpson conducted business between DFI, DFMI and TMMI without conducting any shareholder or board meetings.
18. The shareholders, who had transferred shares from DFI to DFMI, were repeatedly assured by Simpson in writing that the License-the only asset held by DFI-had been transferred to DFMI:
• In June 2000, Simpson wrote to shareholders "since DFMI is the owner of this technology, it can pursue the licensing of this capability to various providers around the world." (Exh. E1) (footnote 4)
• On September 11, 2000, Simpson wrote a letter to shareholders "We have spoken to Iterated Systems about the transfer of the source code and they support the move in amendment and state that the original contract allows for this. All the source code is at DFMI." (Exh. E2)(footnote 5)
• On October 26. 2000, Simpson wrote to DFMI shareholders "There is a great deal of work ahead of us to complete the task of making your CODEC the only choice for producers." (Exh. E3) (footnote 6)
• On October 27. 2000, Simpson wrote a letter to shareholders "The code that DFMI has reengineered from the fractal source code is DFMl's and DFMl's only. .. . TMM has no rights implied or otherwise to use or view DFMI's source code." (Exh. E4) (footnote 7)
• On April 18. 2001 , Simpson wrote a letter to Hoyt that an interim board of directors of DFMI would have authority to "nsure the safety of all DFMI assets including but not limited to the Fractal Codec." (Exh. E5) (footnote 8)
19. Simpson also assured the shareholders that the documents needed to transfer the License from DFI to DFMI had been executed:
• In a November 2000 communication with shareholder Hoyt, Simpson said: "Paper work transferring the Codec's contract from DFI to DFMI is available for review in the DFMI and DFI due diligence books. (Exh. E6) (footnote 9)
• On April 25, 2001, Simpson wrote a letter to shareholders, "I contacted Robin Haskins [CEO and Chairman of DFI] . . . and asked him to please send me a letter explaining that the Codec that was purchased in the name of DFI was in fact the property of DFMI. He was happy to do that and I received his letter shortly after that. (footnote 10) I also informed ISI, who had no problems also, and made note of this with an addendum to the contract. (Exh. E6). (footnote 11)
• Haskins confirmed DFMI's ownership of the PVS/SGI Source Code in a letter to Simpson, "I have also informed the DFI shareholders that all Iterated source code will be delivered to DFMI and DFI warrants that it has no claims on said code. This code was paid for and belongs to DFMI and will be held by DFMI." (Exh. E8). (footnote 12)
20. In December 2000, Panik filed a derivative lawsuit against, among others, DFMI.
21. As part of the settlement agreement to the 2000 lawsuit, on June 1 , 2001 , Simpson resigned as officer and director of DFMI.
22. Also as part of the settlement agreement to the 2000 lawsuit, on June 1, 2001, Simpson, Joe Stratter on behalf of DFI and Panik executed a "Letter Agreement" in which they all acknowledge that DFMI may have some rights to the License Agreement, through a merger or assignment.
23. This settlement agreement to the 2000 lawsuit was approximately 10 months after the alleged merger between DFI and DFMI.
24. Simpson, (footnote 13) as the primary corporate representative of the company, (footnote 14) cannot now claim that those activities were unauthorized by his failure to follow proper corporate governance procedures which would detrimentally impact the other shareholders who relied upon his representations and actions.
25. In 2002, DFMI filed suit against, among others, TMMI regarding the ownership of the License Agreement. That agreement ended in a settlement agreement, in which Simpson agreed to turn over to DFMI an executable version of the source code, which could not be modified, in exchange for approximately $150,000 subject to an audit called for under that agreement.
26. DFMI never provided Simpson with $150,000, as a result of the audit which found additional monies were owing from Simpson.
27. Simpson signed both the DFMI and DFI federal tax returns for 2000 and that he used the same tax accountant to prepare both returns.
28. DFI did not list the License as an asset in its 2000 return.
29. DFMI did list the License as an asset in its 2000 return.
30. The schedule for the form 1120 filed by DFMI for the tax year ending 12/31/2000 identified in the section "other current assets" the property "Fractal Codes" a beginning value of $0 and an ending value of $846,500. This is consistent with the acquisition of the license as a result of the execution of the assignment and second addendum executed effective March 28, 2000.
31. From 2002 to 2011, DFI never listed the License as an asset on its tax retums. (footnote 15)
32. Panik entered into a secured promissory note with DFMI in March 2007, to provide a cash infusion for continued operations. As a result of DFMI 's inability to repay the loan, Panik foreclosed on all of DFMI's assets, including the rights to the License Agreement.
33. Panik then transferred the rights to Dimension.
34. Simpson on behalf of DFI assigned the License to DFMI. (footnote 16)
35. Simpson on behalf of DFI represented to various individuals and entities, including the IRS, that it had made such and assignment.
36. DFMI and its shareholders detrimentally relied upon the representation made to them.
37. TMMI had notice of DFMI's and its successor-in-interest Dimension's claims to the License at the time it acquired DFI.
38. Simpson was not a credible witness. The Court relies to the extent possible on the documentary evidence.
39. Any finding of fact set forth herein more appropriately designated as a conclusion of law shall be so designated.
CONCLUSIONS OF LAW
1. DFI assigned the License to DFMI.
2. Dimension is the successor to DFMI 's rights in the License.
3. Dimension is the sole holder of the License to the Code.
4. Simpson listed the right to the "fractal codes" on DFMI's federal tax returns and not on DFI's. This representation is one which is given great weight by the Court especially given the representation made in communications Simpson made to the shareholders.
5. The representations made by Simpson were relied upon by Counterclaimants to their detriment.
6. As a matter of public policy, DFI is prohibited from asserting a position contrary to that which it took on its federal tax returns.
7. TMMI is not a bona fide purchaser because TMMI had actual notice that DFMI, Panik and Dimension claimed rights to the License at the time TMMI acquired DFI in 2012.
8. Counterdefendant DFI is estopped from denying the assignment of the License to DFMI.
9. Because DFI also represented, contemporaneous to the execution of the Assignment and thereafter, that DFI had assigned the License to DFMI and because the Court has found that DFMI relied to its detriment on that representation, DFI is also estopped from now denying it made such an assignment.
10. Any conclusion of law set forth herein more appropriately designated as a finding of fact shall be so designated.
JUDGMENT
THE COURT HEREBY DECLARES that Counterclaimants are the sole and exclusive owners of the License to the PVS/SGI Source Code, also known as the VDK 2.0 Code.
IT IS SO ORDERED.
Dated this 22nd day of November, 2016
