SCANNED ON 812312006
YI-
SUPREME COURT OF THE STATE OF NEW YORK - NEW YORK COUNTY
PRESENT:
Hon.
KARLA MOSKOWITZ
PART
03
Justice
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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 ON0 LENNON,
SIR JAMES PAUL McCARTNEY, RICHARD STARKEY and
MPL COMMUNICATIONS, INC.,
Plaintiffs,
INDEX NO
60438512005
MOTION DATE
MOTION SEQ. NO.
001
MOTION CAL. NO.
-against-
CAPITOL RECORDS, INC. and EMI RECORDS LIMITED,
were read on this motion toifor
The following papers, numbered 1 to
PAPERS WMJ3ERED
Notice of Motion/ Order to Show Cause - Affidavits
Answering Affidavits
- Exhibits
- Exhibits
Replying Affldavits
Cross-Motion:
0 Yes n No
Upon the foregoing papers, it is
ORDERED that this motion is decided in
Decision and Order.
Dated: August$,
2006
KARLA MOSKOWITZ
Check one:
1-1
FINAL DISPOSITION
Check if appropriate:
DO N O T POST
J. s. c.
(%NON-FINAL DISPOSITION
0 REFERENCE
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: IAS PART 3
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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 O N 0 LENNON, SIR JAMES
PAUL McCARTNEY, RICHARD STARKEY and
MPL COMMUNICATIONS, INC.,
Index No. 604385/2005
Plaintiffs,
DECISION and ORnER
-againstCAPITOL RECORDS, INC. and EM1 RECORDS
LIMITED,
\e!
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Defendants.
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MOSKOWITZ, J.:
Plaintiffs, thc individual members of the Beatles
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recording label, Apple Corps Limited and Apple
Capitol Records, Inc. and EM1 Records Limited
royalties. Plaintiffs chargc EMVCapitol with breaching the parties’ coiitracts, abusing plaintiffs’
trust, and engaging in fraudulent schemes in order to pilfer millioiis of dollars of royalties due
aiid owing to plaintiffs and to obtain collateral benefits at plaintiffs’ expense.
EMVCapitol moves, pursuant lo CPLR 321 1 (a)(l) and (a)(7) and CPLR 3016 (b), to (1)
dismiss the first causc 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”).
EMUCapitol claims that the Cornplaint fiiils to state a cause of action, fails to support the relief
plaintiffs seek and fails to state the circumstances constituting thc allcged wrong in sufficient
detail. EMlICapitol also claims that documentary evidence warrants dismissal. For the reasons
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set forth herein, the court denies the motion.
BACKGROUND
The decision of the Appellate Division, First Department in Apple Records, Inc. v C‘upifol
Records, Inc. (137 AD2d 50 [ 1st Dept 19881 [“Apple I”])sets forlh the relevant facts pcrtaining
to the parties’ relatioiiship 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
EMUCapitol’s alleged fraud, violation of fiduciary duties and breach of contract. hi Apple 1,the
lower court, iizter alia, granted EMUCapitol’s motion to dismiss with respect to the fraud cawc
of action (bascd on the conclusioii 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 appcal, the First Department held that plaintiffs’ fraud claim did not repeat its
contract claim. In reaching its conclusion the Appellate Division, First Department coiisidered
the allegations involving “deleiidants’ 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
allcgations:
a
That defendants claimed tlicy had “scrapped” as destroyed or damaged over $19,000,000
Beatles’ recordings whcn in fact they secretly sold them and retained the proceeds;
a
That defendants distributed an excessive nunibcr of proniotional copics of the Beatles
recordings so that Capital Records could gain a promotioiial advantage for its other artists
thereby diluting the market for the sale of the Beatles recordings
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(Id. at 56-57)
In upholding the claim for breach of fiduciary duty, the Appellate Division, First
Department found :
The business dcalings between Capitol Records and the Beatles date back to 1962,
when tlic still unacclaimed Beatles cntrusted 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 degee of popularity and SUCCCSS, they
still continued to rely 011 Capitol Records for the inaiiufacture and distributing of
their recordings. Tt can be said that from such a long enduring relation was born a
special relationship of trust and confidence, one which cxisted independent of tlie
contractual duties, and one which plaintiffs argue was betrayed by fraud in
secretly scllinE records claimed as scrapped and in dilutiiiR the market and
exploiting the Beatles’s popularitv with excessive distribution of prorngtional
copies to benefit othcr aspects of defendants’ business. Plaintiffs’s alleEations,
then. are sufficient to support their claim that an injury separate and distinct from
tlie breach of Contract has been committed and is actionable as a tQrt.
(Emphasis added; Id at 57-58).
The Appellate Court also found further support for tlie 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’ rccordings until same were paid for by Capitol
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 delelidants’s misappropriation of Beatles’ rccordings for thcir own
bciicfit and in total disregard of plaintiffs’ ownership rights, are sufficient to statc
a valid cause of action for fraud based on violations of duties distinct from
defendants’ contractual ob1igations.
( I d at 58).
The parties entered into a global settlenient agreement and new royalty agreemcnts in
Novcinber 1989, in the aftermath of Apple I and other related litigation. The 1989 Agreements
and othcr agreements of the parties tluougli 1995 (the “Royalty Agreements”) are the subject of
this current lawsuit.
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In this action, plaintiffs complain of wrongful conduct by EMVCapitol similar to that in
Apple I. Specifically, plaintiffs complain that defendants:
designated various items as “scrap” but then really resold thosc items;
classified distribution of certain recordings as “promotional” and tlicrefore non-royalty
bearing, but then really sold the material;
entered into licenses with third-parties without plaintiffs’ required consent;
failed to disclose money received froin 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-rcportcd thc numbcr of units sold;
utilized incorrcct royalty calculations
Plaintiffs assert three causes of action against EMI/Capitol in the Complaint: lraud (first
cause of action), breach of contract (second cause of action) and breach of fiduciary duty (third
cause of action). Plaintiffs contend that EMKapitol concealed the true extcnt of sales of Beatles
recordings and paraplicnialia to avoid paying millions of dollars in royalties due under the
rclcvaiit agrcements. Plaiiitifrs allege that EMVCapitol’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” (noli-royalty bearing), but then sold the materials, (c) entered into licenses with
third-parties without first obtaining plaintiffs’ rcquircd consent, (d) failed to disclose money
received from third-party cxploitation, such as deals with various record clubs and companies
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that compile and distribute programs to companics for various uses to airlines for in-flight music,
(e) under-reported the number of units sold and (f) failed to make interest payments 011 certain
settlement proceeds.
DISCUSSION
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
EMVCapitol contends that the court must dismiss the third cause of action for breach of
fiduciary duly becausc a fiduciary relationship requires trust and/or confidence and here, despite
the relationship of trust and confidencc the parties may have had 25 years ago, distrust and
contention has permeated the parties’ post-Apple 1relationship,
Plaintiffs argue that EMVCapitol’s nearly half-century exclusive right to exploit
commercially the Beatles’ recordings 011 a worldwide basis gives rise to a fiduciary rclationship.
Plaintiffs further allege that EMVCapitol has become so integrated in the Beatles’ careers,
plaintiffs’ Bcatlcs-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 therc cxists an intimacy between the parties that far exceeds merc
commercial or contractual relationships. Plaintiffs further rely 011 the First Department’s Apple 1
decision that the paities’ 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 sccrctly selling records claimed as scrapped and in diluting the market
and exploiting the Beatles’ popularity with excessive distribution of proiiiotional
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copies to benefit other aspects of defendants’ business.’’
(Apple 1, 137 AD2d at 57).
Because of the allcgations plaintiffs make here and the Apple I decision, I cannot hold, as
a matter of law, that the parties 110 longer have a fiduciary relationship. Rather, plaintiff has pled
a viable, coiitiiiuing 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 rccord. Further, while ordiiiarily 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 C o r - ,v A.A. Records, I m . , supm). Plaintiff has made such allegations hcre and,
accordingly, thc coui-t dcnics defendants’ request for disinissal of the cause of action for breach
of fiduciary duty.
Fraud Cause of Action
EMJ/Capitol submits a list of reasons why the court should dismiss thc fraud cause of
action. EMVCapitol contends that the fraud claim is an invalid attempt io dress up a contract
claim and pleads no more than EMI/Capitol’s pre-existing intent not to coinply with the parties’
contracts. (See e.g. 767 Third Ave. LLC v Greble & Finger, LLP, 8 AD3d 75 [ 1st Dept 20041).
EMKapitol also contends the statute of liinitations bars thc fraud claim and that plaiiitiff has not
pled this claim with particularity as CPLR 30 16 (b) requires.
The court denies the request for dismissal of the h u d claim. Thc First Department, in
Apple 1, on virtually idcntical 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:
“[Wle disagree that the
[I cause of action for fraud inerely restates
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the breach of contract claims. This cause of action is premised on
defendants’ iiiiproper disposition of Beatlcs’ 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 restatc plaintiffs’ breach of contract claims.
Even without the Apple I decision, 1 would deny EMUCapitol’s motion to dismiss the
fraud cause of action because the Complaint adequately allcges the violation of various noncontractual duties. For example, plaintiffs allege that EMVCapitol 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 grcat detail
in the Complaint such that defciidants are on notice of the fraud claim against them.
EMVCapitol is likely to have exclusive knowledge of the operative facts pertaining to the charges
madc here and therefore the court will not require additional particulars. (Pursons h Whitternore
lnc., v Abady Lzittuti Kuiser Suurborn & Muir, P.C., 309 AD2d 665 [ 1st Dept 20031). I also
reject EMUCapitol’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 EMVCapitol “under the Royalty
Agreements and directing that all rights to the Beatles Group and Solo Masters thereunder bc
transferrcd to thc plaintiffs.” (Complaint, 7 138). EMVCapitol characterizes this as an
impermissible demand lor “partial rescission.” EM l/Capitol seeks to strike this demand for relief
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arguing that there is no such thing as partial recision of a coiitract (citing Merynzan v Goltlieh 99
AD2d 893, 894 [3d Dept 19841). However, plaintiffs, in the Complaint, do not seek partial
rescission, but rather seek to exercise their right to tcrminate the parties’ agreements based on
EMVCapitol’s alleged breach of contract, breach of fiduciary dutics and fraud. Therefore, thc
court denies the request to strike this relief.
Demand in the Breach of Contract Claim for Punitive Damages
EMVCapitol contends that the court should strike the demand for punitive damages
because plaintiffs do not allege that EMVCapitol’s coiiduct qualifies as a pattern of activity
“directed toward the general public” or that EMUCapitol’s conduct was sufficiently egregious.
EMVCapitol asserts that this action involvcs, at most, a private wrong, and that the wrongdoing
allegcd does not rise to the level sufficicnt to impose punitive damages. (New York University v
Continental Ins. Co., 87 NY2d 308 [ 19951; Rocunova v Equitable Llfe 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 Sheny Assoc. v Sherry-Netherland, Innc., 273 AD 2d 14, 15 [lst
Dept 20001).
Based 011 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, coiisidcring
the early stage o€ the litigation. (See Licelie Music Corp. v A.A. Records, Jnc., 196 AD2d 467
[ 1st Dept 19931). 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
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are directed to serve their answers to the Complaint within 20 days after the date of service of a
copy of this order with noticc of entry.
Dated: August
a,
2006
ENTER:
J
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