Judge: Michael P. Linfield, Case: 24STCV06387, Date: 2024-04-25 Tentative Ruling

Case Number: 24STCV06387    Hearing Date: April 25, 2024    Dept: 34

SUBJECT:        Motion for Preliminary Injunction

Moving Party: Plaintiff Nanette Kinkade

Resp. Party:    Defendant Art Brand Studios, LLC

The Motion for Preliminary Injunction is GRANTED.

BACKGROUND:

On March 14, 2024, Plaintiff Nanette Kinkade (“Plaintiff’) filed her Complaint against Defendant Art Brand Studios, LLC (“Defendant”) for provisional remedies in aid of arbitration, pursuant to Code of Civil Procedure section 1281.8.

On March 15, 2024, Plaintiff filed her Motion for Preliminary Injunction (“Motion”). In support Motion, Plaintiff concurrently filed: (1) Declaration of Nanette K. Kinkade; (2) Declaration of Harry Sandick; and (3) Proposed Order.

On March 18, 2024 Plaintiff filed her Proof of Service.

On March 20, 2024, Plaintiff filed her Notice of Lodging of Thumb Drive and Proof of Service Thereto.

On April 12, 2024, Defendant filed its Opposition to Plaintiffs’ Motion for Preliminary Injunction (“Opposition”). In support of its Opposition, Defendant concurrently filed: (1) Declaration of Mark Mickelson; (2) Objections to the Nanette Kinkade Declaration; and (3) Proposed Order.

On April 18, 2024, Plaintiff filed her Reply to Defendant’s Opposition to Plaintiff’s Motion for Preliminary Injunction (“Reply”). In support of her Reply, Plaintiff concurrently filed: (1) Reply Declaration of Nanette K. Kinkade; (2) Reply Declaration of Harry Sandick; (3) Response to Defendant’s Objections; and (4) Objections to the Declaration of Mark Mickelson.

On April 22, 2024, Defendant filed its Answer to the Complaint.

ANALYSIS:

I.          Evidentiary Objections

A.      Defendant’s Evidentiary Objections

Defendant filed evidentiary objections to portions to Plaintiff’s evidence. The following are the Court’s rulings on these objections.

B.      Plaintiff’s Evidentiary Objections

Plaintiff filed evidentiary objections to portions to Defendant’s evidence. The following are the Court’s rulings on these objections.

        The Court questions the scope and number of objections filed by both sides.  In Nazir v. United Airlines, Inc. (2009) 178 Cal.App.4th 243. the “litigants file[d] blunderbuss objections to virtually every item of evidence submitted. This is hardly good advocacy, and it unnecessarily overburdens the trial court.” (Id at p. 254, fn. 3.) 

        Further, “[w]e sometimes ‘hear’ that a common practice in cases staffed by multiple levels of lawyers is to assign the most junior lawyer to ‘do the objections,’ which was apparently done here. Perhaps a wiser practice would be to have the most experienced lawyer, presumably with a better understanding of the law of evidence, deal with the objections.”  (Id. at p. 257, fn. 6.) 

II.       Legal Standard

“A party to an arbitration agreement may file in the court in the county in which an arbitration proceeding is pending, or if an arbitration proceeding has not commenced, in any proper court, an application for a provisional remedy in connection with an arbitrable controversy, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without provisional relief. The application shall be accompanied by a complaint or by copies of the demand for arbitration and any response thereto. If accompanied by a complaint, the application shall also be accompanied by a statement stating whether the party is or is not reserving the party’s right to arbitration.” (Code Civ. Proc., § 1281.8, subd. (b).)

“As used in this section, ‘provisional remedy’ includes the following: . . . (3) Preliminary injunctions and temporary restraining orders issued pursuant to Section 527.” (Code Civ. Proc., § 1281.8, subd. (a)(3).)

“A preliminary injunction may be granted at any time before judgment upon a verified complaint, or upon affidavits if the complaint in the one case, or the affidavits in the other, show satisfactorily that sufficient grounds exist therefor. No preliminary injunction shall be granted without notice to the opposing party.” (Code Civ. Proc., § 527, subd. (a).)

“[T]rial courts should evaluate two interrelated factors when deciding whether or not to issue a preliminary injunction.¿The first is the likelihood that the plaintiff will prevail on the merits at trial. The second is the interim harm that the plaintiff is likely to¿sustain if the injunction were denied as compared to the harm that the¿defendant is likely to suffer if the preliminary injunction were issued.” (IT Corp. v. Cnty. of Imperial (1983) 35 Cal.3d 63, 69–70, citations omitted.)

“Thus, the court examines all of the material before it¿in order to consider ‘whether a greater injury will result to the defendant from granting the injunction than to the plaintiff from refusing it’ . . . In making that determination the court will consider the probability of the plaintiff's ultimately prevailing in the case and, it has been said, will deny a preliminary injunction unless there is a reasonable probability that plaintiff will be successful in the assertion of his rights.” (Cont’l Baking Co. v. Katz (1968) 68 Cal.2d 512, 528, quoting Santa Cruz Fair Bldg. Ass’n. v. Grant (1894) 104 Cal. 306, 308, other citations omitted.)

“The ultimate goal of any test to be used in deciding whether a preliminary injunction should issue is to minimize the harm which an erroneous interim decision may cause.” (IT Corp., supra, 35 Cal.3d at p. 73.)

“In seeking a preliminary injunction, [the party seeking the injunction bears] the burden of demonstrating both likely success on the merits and the occurrence of irreparable harm.” (Savage v. Trammell Crow Co. (1990) 223 Cal.App.3d 1562, 1571; Citizens for Better Streets v. Bd. of Sup'rs of City and Cnty. (2004) 117 Cal.App.4th 1, 6.)

“The law is well settled that the decision to grant a preliminary injunction rests in the sound discretion of the trial court.” (IT Corp., supra, 35 Cal.3d at p. 69.)

III.     Discussion

A.      The Parties’ Arguments

Plaintiff moves the Court to issue a preliminary injunction. (Motion, pp. 2–4.)

Plaintiff argues: (1) that a preliminary injunction is necessary to prevent ongoing harm to the Plaintiff; (2) that Plaintiff is likely to prevail on the merits; (3) that Defendant is engaging in trademark infringement and unfair competition; (4) that Defendant is tortiously interfering with Plaintiff’s prospective economic relations; (5) that Plaintiff has made a presumptive showing of irreparable harm; (6) that the balance of harms favors Plaintiff; (7) that an injunction is necessary to prevent the arbitration from being rendered ineffectual; and (8) that Defendant cannot avoid an injunction by disputing termination. (Motion, pp. 15:19–20, 16:11–13, 18:11–12, 20:1–2, 22:5–6, 22:12–13.)

Defendant opposes the Motion, arguing: (1) that Plaintiff is not likely to prevail on the merits; (2) that Defendant is not engaged in trademark infringement or unfair competition; (3) that Defendant is not tortiously interfering with Plaintiff’s prospective economic advantage; (4) that Plaintiff cannot show irreparable harm; (5) that Defendant would face greater harm if the Court granted the preliminary injunction than Plaintiff would face if the injunction was denied; and (6) that Plaintiff should not be allowed to circumvent the arbitration proceeding by way of preliminary injunction where there is no showing that they cannot obtain full relief at arbitration should they prevail. (Opposition, pp. 5:13, 5:19, 6:20–21, 8:1, 13:7–8, 14:5–7.)

In her Reply, Plaintiff argues: (1) that the government loan unilaterally taken out by Defendant for unknown purposes is not “Acquisition Debt”; and (2) reiterates its prior arguments. (Reply, pp. 5:24–25, 6:15–16, 9:20–21, 10:7–8, 11:9, 13:1.)

B.      The Likelihood of Plaintiff Prevailing on the Merits at Trial

The issue at hand hinges on a contract dispute. Specifically, it appears that three things need to be true for Plaintiff to prevail in this litigation:

(1)       Plaintiff needs to have correctly ascertained that the contract allows for Plaintiff to accelerate a full pay-off of the loan in the case of Defendant’s breach via default;

(2)       Defendant needs to have breached via default; and

(3)       Plaintiff needs to have fully paid off the loan.

Has Plaintiff demonstrated a reasonable probability of these three things?

Based on the evidence presented to the Court at this time, the answer is “yes.”

1.      Acceleration Due to Default Under the Contract

The Secured Subordinated Promissory Note defines and provides for what occurs in the “Event of Default”:

“6.    Events of Default.      The occurrence of any one or more of the following events shall constitute an event of default hereunder (‘Event of Default’):

“(a) If Buyer shall fail to pay when due any payment of principal or interest on this Note and such failure continues for fifteen (15) days after Holder notifies Buyer thereof in writing.

“(b) If Buyer, after the date hereof, shall (i) become insolvent or generally fail to pay, or admit in writing its inability or unwillingness generally to pay, its debts as they become due, (ii) apply for, consent to, or acquiesce in the appointment of a trustee, receiver, sequestrator or other custodian for any substantial part of the assets or other property of any such person, or make a general assignment for the benefit of creditors, (iii) in the absence of such application, consent or acquiesce to or permit or suffer to exist, the appointment of a trustee, receiver, sequestrator or other custodian for a substantial part of the property of any thereof, and such trustee, receiver, sequestrator or other custodian shall not be discharged within ninety (90) days, or (iv) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law or any dissolution, winding up or liquidation proceeding, in respect thereof, and, if any such case or proceeding is not commenced by such person, such case or proceeding shall be consented to or acquiesced in by such person, or shall result in the entry of an order for relief or shall remain for ninety (90) days undismissed.”

“7.    Remedies Upon Event of Default.       Upon the occurrence of an Event of Default hereunder, Holder at its option, may declare the entire unpaid principal balance and all unpaid accrued interest owing on this Note, due and payable immediately, without further presentment, demand, protest, notice, grace, or action of any nature whatsoever, all of which are specifically waived by Buyer.”

(Decl. Kinkade, Exh. B, Secured Subordinated Promissory Note, pp. 2–3 [actual pages 87–88 of 263].)

        As Plaintiff correctly argues, the contractual language indicates that a default (defined as failure to pay payment of principal or interest for fifteen days after notice in writing) allows Plaintiff to accelerate a full pay-off of the loan in the case of Defendant’s breach via default.

2.      Defendant’s Breach of the Contract Via Default

Plaintiff declared under penalty of perjury that Defendant missed multiple royalty payments and still has not paid certain interest payments. (Decl. Kinkade, ¶¶ 29–31, 35–38.) Plaintiff also declared under penalty of perjury that, through her attorneys, she gave Defendant the required notices of the same. (Ibid.)

Defendant’s Chairman, Mark Mickelson, declares that Defendant “is current and has paid all Royalties due to the Kinkades” and “is compliant with all other material obligations under the [contract].” (Decl. Mickelson, ¶¶ 21–22.) Notably, Defendant has not provided any documentary evidence of these royalty payments, and Declarant Mickelson’s declaration does not address the issue of the allegedly unpaid interest payments.

The Court has examined all of the material before it and it appears that there is sufficient evidence for Plaintiff to show that Defendant breached the contract via default. (Cont’l Baking Co., supra, 68 Cal.2d at p. 528.)

3.      Plaintiff’s Full Payment of the Acquisition Debt

The remaining part of Defendant’s argument is that Plaintiff did not and has not fully accelerated and paid off the contract because not all of the “Acquisition Debt” (i.e., the loans Defendant took out in order to initially pay for its interest in managing the intellectual property at issue) have been paid off. (Opposition, pp. 1:15–2:13 [including fn. 3–4], 3:20–4:3.)

According to Defendant, Defendant initially received financing (i.e., incurred “Acquisition Debt”) from Breakaway Capital Management, LLC. (Decl. Mickelson, ¶ 5.) Defendant provides a copy of this financing agreement, and Plaintiff’s signature is on this financing agreement. (Decl. Mickelson, Exh. 1 [actual page 132 of 376].)

According to Defendant, Defendant later received refinancing through AvidBank. (Decl. Mickelson, ¶ 10.) Defendant provides a copy of this refinancing agreement, and Plaintiff’s signature is also on this refinancing agreement. (Decl. Mickelson, Exh. 2 [actual page 216 of 376].)

According to Defendant, Defendant later received refinancing through United States Paycheck Protection Program (“PPP Loans”) and Economic Injury Disaster Loans (“EIDL Loans”). (Decl. Mickelson, ¶ 13.) Also, according to Defendant, the PPP Loans and EIDL Loans “replaced the AvidBank Financing Agreements with re-financing . . . making those related loan documents the operative Financing Agreements.” (Ibid.) Notably, Defendant does not provide a copy of any documentation regarding the PPP Loans or the EIDL Loans, much less any documentation that indicates Plaintiff knew about and signed off on those loans.

The issue here is that the Parties’ contract does not allow non-mutual modifications.

“8.5  Modification; Waiver. No provision of this Note may be amended, supplemented, waived or otherwise modified except by a written agreement mutually executed by Buyer and Holder, and subject to the terms of the Subordination Agreement. Neither any failure nor any delay by Buyer or Holder in exercising any right, power or privilege under this Note or any of the documents referred to in this Note will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power or privilege will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no waiver that may be given by Buyer or Holder will be applicable except in the specific instance for which it is given, and (b) no notice to or demand on Buyer or Holder will be deemed to be a waiver of any obligation of that party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Note.” (Decl. Kinkade, Exh. B, Secured Subordinated Promissory Note, p. 4 [actual page 89 of 263].)

        Defendant has not provided any evidence, other than his own statement, that there was actually a PPP Loan or an EIDL Loan to refinance the underlying Acquisition Debt. Because Plaintiff paid the remainder of the refinanced amount, it appears that Plaintiff has fully paid off the Acquisition Debt. (Decl. Kinkade, ¶ 42.)

        Furthermore, even if Defendant had taken out a PPP Loan (which has allegedly been forgiven) and an EIDL Loan (which allegedly remains outstanding), there is no evidence that Plaintiff was aware of and mutually agreed to use it as a modification of the underlying contract between the Parties. Thus, based on the evidence presented to the Court at this time, it appears that any EIDL Loan that does exist would be the sole responsibility of Defendant, not Plaintiff.

In summary, Plaintiff has submitted sufficient evidence to the Court to meet her burden of demonstrating a reasonable probability of success on the merits. (Savage, supra, 223 Cal.App.3d at p. 1571.)

C.      Balance of the Relative Harms

Based on the evidence submitted on the Court at this time, and only for the purposes of considering a preliminary injunction, the Court considers the following.

·                 The Parties entered into a contract.

·                 The contract allowed for acceleration and full payment by Plaintiff of remaining debts if Defendant breached the contract via default.

·                 Defendant breached the contract via default.

·                 Plaintiff accelerated payments and made full payment on the contract.

·                 The contract is now terminated, and Defendant has no rights under the contract.

        Plaintiff has testified to various harms that would occur if Defendant were to continue managing the intellectual property at issue. According to Plaintiff, such irreparable harms include but are not limited to: (1) damage to the reputation of the late Thomas Kinkade, the creator of all of this intellectual property; (2) damage to relationships between Plaintiff and licensees and sublicensees; and (3) loss of licensing income that will never be recovered. (Decl. Kinkade, ¶¶ 57, 62.)

Defendant has testified to various harms that would occur if Plaintiff were to receive the injunction. According to Defendant, such irreparable harms include but are not limited to: (1) termination of all of Defendant’s employees; and (2) termination of all ongoing commercial relationships related to the intellectual property. (Decl. Mickelson, ¶¶ 27–28.)

        While the Court is concerned about the livelihoods of the employees and commercial relationships of the businesses at issue, Defendants’ business arises from the intellectual property of the late Thomas Kinkade. Plaintiff, who controls Kinkade’s intellectual property, is also trying to protect his reputation. The evidence before the Court indicates that much greater damage could befall Kinkade’s reputation than might befall Defendants’ lucrative businesses, and for that reason alone the balance of the harms should tip in favor of a preliminary injunction.

        In addition, and independently, the evidence before the Court indicates that Defendant no longer has any rights under the contract. That alone would tip the balance of the harms in favor of Plaintiff, and greatly so.

        Upon considering all of the evidence presented, the Court determines that Plaintiff has demonstrated a reasonable probability of success on the merits, that irreparable harm would occur if a preliminary injunction did not issue, and that the balance of the harms tips in favor of issuing a preliminary injunction (i.e., that greater injury will result from a preliminary injunction not issuing).

        The Court ISSUES a preliminary injunction.

IV.      Conclusion

The Motion for Preliminary Injunction is GRANTED.  Plaintiff to prepare the order for the Court.