Apple Corps Ltd. v Capitol Records, Inc.
Annotate this CaseDecided on August 21, 2006
Supreme Court, New York County
Apple Corps Limited, APPLE RECORDS, INC., KENNETH SIDNEY ROBERTS and NICHOLAS EDMUND VALNER AS EXECUTORS OF THE ESTATE OF GEORGE HARRISON, G.H. ESTATE LIMITED, YOKO ONO LENNON, SIR JAMES PAUL McCARTNEY, RICHARD STARKEY and MPL COMMUNICATIONS, INC., Plaintiffs,
against
Capitol Records, Inc. and EMI RECORDS LIMITED, Defendants.
604385/2005
Karla Moskowitz, J.
Plaintiffs, the individual members of the Beatles (or their representatives) and their recording label, Apple Corps Limited and Apple Records, Inc. ("Apple"), claim that defendants Capitol Records, Inc. and EMI Records Limited (collectively, "EMI/Capitol") owe them royalties. Plaintiffs charge EMI/Capitol with breaching the parties' contracts, abusing plaintiffs' trust, and engaging in fraudulent schemes in order to pilfer millions of dollars of royalties due and owing to plaintiffs and to obtain collateral benefits at plaintiffs' expense.
EMI/Capitol moves, pursuant to CPLR 3211 (a)(1) and (a)(7) and CPLR 3016 (b), to (1) dismiss the first cause of action (breach of fiduciary duty); (2) dismiss the third cause of action (fraud); (3) to strike the prayer for what it describes as "partial rescission;" and (4) to strike the demand for punitive damages in the complaint dated December 15, 2005 ("Complaint"). EMI/Capitol claims that the Complaint fails to state a cause of action, fails to support the relief plaintiffs seek and fails to state the circumstances constituting the alleged wrong in sufficient detail. EMI/Capitol also claims that documentary evidence warrants dismissal. For the reasons set forth herein, the court denies the motion.
BACKGROUND
The decision of the Appellate Division, First Department in Apple Records, Inc. v Capitol Records, Inc. (137 AD2d 50 [1st Dept 1988] ["Apple I"]) sets forth the relevant facts pertaining to the parties' relationship through 1987. Therefore, I will not repeat these facts except where necessary. Plaintiffs sued EMI/Capitol in 1979 based on a variety of legal theories, including EMI/Capitol's alleged fraud, violation of fiduciary duties and breach of contract. In Apple I, the lower court, inter alia, granted EMI/Capitol's motion to dismiss with respect to the fraud cause of [*2]action (based on the conclusion that there was no fraud separate and distinct from the alleged claim sounding in contract), but denied the motion with respect to the breach of fiduciary duty cause of action (based on the conclusion that the pleading sufficiently alleged a fiduciary relationship). On appeal, the First Department held that plaintiffs' fraud claim did not repeat its contract claim. In reaching its conclusion the Appellate Division, First Department considered the allegations involving "defendants' improper disposition of Beatles' recordings and their fraudulent concealment and misrepresentation of those transactions through the rendering of false statements and accountings." (Apple I, 137 AD2d at 56).
Specifically, the Appellate Division, First Department considered the following allegations:
That defendants claimed they had "scrapped" as destroyed or damaged over $19,000,000 Beatles' recordings when in fact they secretly sold them and retained the proceeds;
That defendants distributed an excessive number of promotional copies of the Beatles recordings so that Capital Records could gain a promotional advantage for its other artists thereby diluting the market for the sale of the Beatles recordings
(Id. at 56-57)
In upholding the claim for breach of fiduciary duty, the Appellate Division, First Department found:
The business dealings between Capitol Records and the Beatles date back to 1962, when the still unacclaimed Beatles entrusted their musical talents to defendant Capitol Records. It is alleged that this relationship proved so profitable to defendant that at one point the Beatles constituted 25 to 30% of its business. Even after the Beatles attained their remarkable degree of popularity and success, they still continued to rely on Capitol Records for the manufacture and distributing of their recordings. It can be said that from such a long enduring relation was born a special relationship of trust and confidence, one which existed independent of the contractual duties, and one which plaintiffs argue was betrayed by fraud in secretly selling records claimed as scrapped and in diluting the market and exploiting the Beatles's popularity with excessive distribution of promotional copies to benefit other aspects of defendants' business. Plaintiffs's allegations, then, are sufficient to support their claim that an injury separate and distinct from the breach of contract has been committed and is actionable as a tort.
(Emphasis added; Id. at 57-58).
The Appellate Court also found further support for the fraud claim in plaintiffs' allegations that the defendnats were bailees of the Beatles' recordings and breached their fiduciary duties as such:
Plaintiffs argue that pursuant to certain provisions of the contract they retained ownership rights to the Beatles' recordings until same were paid for by Capitol [*3]Records. During this interim period, Capitol Records was entrusted with the care and custody of these recordings. These claims in conjunction with plaintiffs' allegations of defendants's misappropriation of Beatles' recordings for their own benefit and in total disregard of plaintiffs' ownership rights, are sufficient to state a valid cause of action for fraud based on violations of duties distinct from defendants' contractual obligations.
(Id. at 58).
The parties entered into a global settlement agreement and new royalty agreements in November 1989, in the aftermath of Apple I and other related litigation. The 1989 Agreements and other agreements of the parties through 1995 (the "Royalty Agreements") are the subject of this current lawsuit.
In this action, plaintiffs complain of wrongful conduct by EMI/Capitol similar to that in Apple I. Specifically, plaintiffs complain that defendants:
designated various items as "scrap" but then really resold those items;
classified distribution of certain recordings as "promotional" and therefore non-royalty bearing, but then really sold the material;
entered into licenses with third-parties without plaintiffs' required consent;
failed to disclose money received from third-party exploitation, such as deals with record clubs like Columbia House and AEI Music Networks, a company that compiles and distributes tape programs to companies for various uses, such as airlines for in-flight music;
under-reported the number of units sold;
utilized incorrect royalty calculations
Plaintiffs assert three causes of action against EMI/Capitol in the Complaint: fraud (first cause of action), breach of contract (second cause of action) and breach of fiduciary duty (third cause of action). Plaintiffs contend that EMI/Capitol concealed the true extent of sales of Beatles recordings and paraphernalia to avoid paying millions of dollars in royalties due under the relevant agreements. Plaintiffs allege that EMI/Capitol's allegedly deceitful behavior came to light after plaintiff conducted an audit examination of EMI/Capitol's books and records for the period 1994 to 1999. Plaintiffs allege that EMI/Capitol (a) designated millions of items as "scrap," but then resold those items, (b) classified distribution of certain recordings as "promotional" (non-royalty bearing), but then sold the materials, (c) entered into licenses with third-parties without first obtaining plaintiffs' required consent, (d) failed to disclose money received from third-party exploitation, such as deals with various record clubs and companies that compile and distribute programs to companies for various uses to airlines for in-flight music, (e) under-reported the number of units sold and (f) failed to make interest payments on certain settlement proceeds.
DISCUSSION[*4]
EMI/Capitol moves to dismiss the fraud and breach of fiduciary causes of action in the Complaint as well as a portion of the prayer for relief and the demand for punitive damages. Plaintiffs oppose the motion.
Breach of Fiduciary Duty Claim
EMI/Capitol contends that the court must dismiss the third cause of action for breach of fiduciary duty because a fiduciary relationship requires trust and/or confidence and here, despite the relationship of trust and confidence the parties may have had 25 years ago, distrust and contention has permeated the parties' post-Apple I relationship.
Plaintiffs argue that EMI/Capitol's nearly half-century exclusive right to exploit commercially the Beatles' recordings on a worldwide basis gives rise to a fiduciary relationship. Plaintiffs further allege that EMI/Capitol has become so integrated in the Beatles' careers, plaintiffs' Beatles-related business interests and the solo recordings of the individual Beatles' members, that plaintiffs and EMI/Capitol do not share a conventional business relationship. Rather, plaintiffs allege that there exists an intimacy between the parties that far exceeds mere commercial or contractual relationships. Plaintiffs further rely on the First Department's Apple I decision that the parties' relationship is one of "trust and confidence":
"from such a long enduring relation[ship] [between Capitol/EMI and The Beatles] was born a special relationship of trust and confidence, one which existed independent of the contractual duties, and one which plaintiffs argue was betrayed by fraud in secretly selling records claimed as scrapped and in diluting the market and exploiting the Beatles' popularity with excessive distribution of promotional copies to benefit other aspects of defendants' business."
(Apple I, 137 AD2d at 57).
Because of the allegations plaintiffs make here and the Apple I decision, I cannot hold, as a matter of law, that the parties no longer have a fiduciary relationship. Rather, plaintiff has pled a viable, continuing fiduciary relationship. Whether or not the level of contentiousness and distrust was so great as to destroy the fiduciary relationship the parties had is an issue that must await development of the factual record. Further, while ordinarily record companies owe no fiduciary duties to recording artists, the law recognizes circumstances where the parties' relationship elevates an arms length transaction to a fiduciary relationship. (See e.g. Licette Music Corp. v A.A. Records, Inc., supra). Plaintiff has made such allegations here and, accordingly, the court denies defendants' request for dismissal of the cause of action for breach of fiduciary duty.
Fraud Cause of Action
EMI/Capitol submits a list of reasons why the court should dismiss the fraud cause of action. EMI/Capitol contends that the fraud claim is an invalid attempt to dress up a contract claim and pleads no more than EMI/Capitol's pre-existing intent not to comply with the parties' contracts. (See e.g. 767 Third Ave. LLC v Greble & Finger, LLP, 8 AD3d 75 [1st Dept 2004]). EMI/Capitol also contends the statute of limitations bars the fraud claim and that plaintiff has not pled this claim with particularity as CPLR 3016 (b) requires.
The court denies the request for dismissal of the fraud claim. The First Department, in Apple I, on virtually identical facts, already held that plaintiffs adequately stated a valid cause of action for fraud and that the conduct plaintiff pleaded was collateral to the contract: [*5]
"[W]e disagree that the [] cause of action for fraud merely restates the breach of contract claims. This cause of action is premised on defendants' improper disposition of Beatles' recordings and their fraudulent concealment and misrepresentation of those transactions through the rendering a false statements and accountings."
(Apple I, 137 AD2d at 56).
Thus, the First Department has already spoken on this identical issue between the identical parties. I follow the First Department's decision in Apple I and hold that the fraud cause of action does not merely restate plaintiffs' breach of contract claims.
Even without the Apple I decision, I would deny EMI/Capitol's motion to dismiss the fraud cause of action because the Complaint adequately alleges the violation of various non-contractual duties. For example, plaintiffs allege that EMI/Capitol pursued secret undisclosed collateral side deals by using the Beatles recordings as currency for its own improper mission independent of the applicable agreements. Further, plaintiffs plead the fraud claim in great detail in the Complaint such that defendants are on notice of the fraud claim against them. EMI/Capitol is likely to have exclusive knowledge of the operative facts pertaining to the charges made here and therefore the court will not require additional particulars. (Parsons & Whittemore Inc., v Abady Luttati Kaiser Saurborn & Mair, P.C., 309 AD2d 665 [1st Dept 2003]). I also reject EMI/Capitol's statute of limitations claim because it is unclear when plaintiffs discovered the alleged fraud for purposes of determining commencement of the statute of limitations.
Appropriateness of Remedy Sought by Plaintiffs
Plaintiffs request an order "terminating the rights" of EMI/Capitol "under the Royalty Agreements and directing that all rights to the Beatles Group and Solo Masters thereunder be transferred to the plaintiffs." (Complaint, ¶ 138). EMI/Capitol characterizes this as an impermissible demand for "partial rescission." EMI/Capitol seeks to strike this demand for relief arguing that there is no such thing as partial recision of a contract (citing Merryman v Gottlieb 99 AD2d 893, 894 [3d Dept 1984]). However, plaintiffs, in the Complaint, do not seek partial rescission, but rather seek to exercise their right to terminate the parties' agreements based on EMI/Capitol's alleged breach of contract, breach of fiduciary duties and fraud. Therefore, the court denies the request to strike this relief.
Demand in the Breach of Contract Claim for Punitive Damages
EMI/Capitol contends that the court should strike the demand for punitive damages because plaintiffs do not allege that EMI/Capitol's conduct qualifies as a pattern of activity "directed toward the general public" or that EMI/Capitol's conduct was sufficiently egregious. EMI/Capitol asserts that this action involves, at most, a private wrong, and that the wrongdoing alleged does not rise to the level sufficient to impose punitive damages. (New York University v Continental Ins. Co., 87 NY2d 308 [1995]; Rocanova v Equitable Life Assurance Soc. of the U.S., 83 NY2d 603 [1994]).
New York law, however, does not require a public wrong to award punitive damages for breach of fiduciary duty. (See Sherry Assoc. v Sherry-Netherland, Inc., 273 AD2d 14, 15 [lst Dept 2000]).
Based on the allegations in the Complaint, I am not prepared to hold that the wrong alleged is not sufficiently egregious to warrant the imposition of punitive damages, considering the early stage of the litigation. (See Licette Music Corp. v A.A. Records, Inc., 196 AD2d 467 [*6][1st Dept 1993]). Accordingly, the request to strike the demand for punitive damages is denied.
CONCLUSION
Accordingly, it is
ORDERED that defendants' motion to dismiss the Complaint is denied, and defendants are directed to serve their answers to the Complaint within 20 days after the date of service of a copy of this order with notice of entry.
Dated: August 21, 2006
ENTER:
______________________J.S.C.
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