United States District Court, S.D. New York
May 5, 2004.
EMI MUSIC MARKETING (f/k/a EMI MUSIC DISTRIBUTION), a division of CAPITOL RECORDS, INC., Plaintiff, -against- AVATAR RECORDS, INC. and LARRY ROBINSON, Defendants
The opinion of the court was delivered by: VICTOR MARRERO, District Judge
DECISION AND ORDER
Plaintiff EMI Music Marketing ("EMI"), a distributor of recorded
music, brings this action for breach of contract and account stated
against Avatar Records, Inc. ("Avatar"), a music production company, and
Avatar's president, Larry Robinson ("Robinson" and together with Avatar,
the "Defendants"). Avatar has brought counterclaims for breach of
contract, breach of the implied covenant and fair dealing, and unfair
competition. The dispute revolves around a contract by which EMI agreed
to distribute recorded music that Avatar produced. EMI has filed a motion
for summary judgment on all of its claims and Defendants' counterclaims.
For the reasons discussed below, EMI's motion is granted in part and
denied in part.
I. FACTS AND PROCEEDINGS
EMI distributes recorded music in forms such as compact discs and cassettes. Avatar is an independent record company that
produces recorded music for distribution.
EMI and Avatar entered into a three-year distribution agreement dated
January 1, 2000 (the "Distribution Agreement"), pursuant to which EMI
became the exclusive distributor in the United States of recorded audio
and audio video materials ("Records") that Avatar produced. As relevant
to the present case, among its duties under the Distribution Agreement
Avatar is responsible for "the advertisement, promotion and
merchandising" of all its Records. (Distribution Agreement at § 5(g),
attached as Ex. C. to Declaration of Rebecca Lawlor Calkins dated March
22, 2004 ("Calkins Dec.").) EMI's relevant responsibilities under the
Distribution Agreement include "[s]oliciting sales" of Avatar's Records
to EMI's customers; warehousing and shipping Avatar's inventory; and
accepting and processing returned items. (Id. at § 6(a).)
As payment for its services, EMI was to receive a distribution fee in
the form of a percentage of net sales of Avatar's Records during each
year of the Distribution Agreement. EMI also was entitled to charge
Avatar for each unit that retailers returned to EMI and for each
slow-moving unit of inventory. The Distribution Agreement allowed EMI to
deduct from sales a reserve which it could apply towards any amount due from Avatar. As additional security for Avatar's payment
of these fees, the Distribution Agreement provided that EMI would obtain
a security interest in all of Avatar's inventory of Records, master
recordings, artists' contracts, and other Avatar assets. Finally,
Robinson "irrevocably and unconditionally guarantee[d] the full payment
and performance of all obligations of Avatar Records, Inc." under the
Distribution Agreement. (Id. at § 22(i).) The Distribution
Agreement provides that it "may only be altered by an instrument in
writing, executed by authorized officers of all of the parties."
In January 2001, Avatar released and EMI distributed an album titled
"Oz" (the "Oz Album"), a compilation of music inspired by the television
series "Oz." Avatar obtained a bank loan to fund its advertising and
marketing campaign for the Oz album. In April 2001, Avatar requested that
EMI lend or advance to Avatar $435,000, which it needed to pay off the
existing bank loan. Avatar indicated that it would repay EMI from a
pending bank loan.
By a written amendment to the Distribution Agreement dated April 27,
2001 (the "Amendment"), EMI agreed advance Avatar $435,000. Under the
Amendment, Avatar agreed to repay $200,000 before June 15, 2001, with
interest to accrue as of June 1, 2001, and EMI would withhold from the
reserves established in the Distribution Agreement the remaining $235,000
and any unpaid amounts from the $200,000. All terms of the Distribution
Agreement, including Robinson's personal guarantee, applied to the
Neither Avatar nor Robinson paid EMI the amount owed by June 15, 2001.
In a letter dated September 13, 2001, EMI notified Avatar that it was
applying the entire Avatar reserve account of $788,098 towards Avatar's
balance of $1,349,479.57, which reflected the $435,000 advance and other
amounts Avatar owed EMI pursuant to the Distribution Agreement. EMI
demanded that Avatar notify it by October 1, 2001 of how it intended to
repay the remaining balance of $561,381.57. In response to this letter,
Avatar acknowledged its debt and presented EMI with a repayment plan.
From February 2000 through July 2003, Avatar received monthly account
statements from EMI. Robinson or another individual at Avatar reviewed
the statements on Avatar's behalf when they were received. Defendants
never objected to the accuracy of any of the monthly statements.
Defendants also never repaid any portion of the balance to EMI.
In July 2002, Robinson proposed a restructuring of the Distribution
Agreement which would enable Avatar to pay its balance to EMI and extend
the Distribution Agreement for one year. In September 2002, Giulio
Proietto ("Proietto"), EMI's vice president of finance, informed Robinson during a series of
telephone calls that EMI's chief financial officer and president had both
approved the restructuring proposal, including the one-year extension of
the Distribution Agreement. No writing was exchanged between EMI and
Avatar extending the Distribution Agreement.
In the late summer of 2002, Avatar and EMI prepared for the scheduled
October 8, 2002 release of an album entitled "National Vinyl Association
Straight from the Crates Vol. 1" (the "NVA Album"). Robinson met
with EMI sales and marketing staff to discuss promotion of the NVA Album,
and Avatar made expenditures to promote and market the NVA Album.
In September 2002, EMI's marketing staff, with Defendants' consent,
moved the release date of the NVA Album to January 2003. Between January
2002 and September 2002, Avatar and EMI had released three singles from
the NVA Album in advance of the release of the complete album. On
November 1, 2002, one of those singles reached number one on the hip-hop
college radio chart of the music industry magazine "Urban Network."
Robinson reported this development to EMI's vice president of sales and
marketing, Ronn Werre ("Werre"), who asked his staff to collect
information about the song to maximize its success. Another EMI executive
instructed EMI's regional directors, major accounts staff, and Urban Team
on November 5, 2002 to monitor the third single from the upcoming NVA
Album. On November 14, 2002, Jennifer McDaniels ("McDaniels"), an EMI
senior urban marketing executive, met with two Avatar marketing
consultants, Bob Grossi ("Grossi") and Brian Shafton ("Shafton") to
continue discussions for the marketing of the NVA Album, and emailed a
summary of the discussions to Werre. Avatar continued to spend funds on a
marketing and advertising campaign designed around a January 28, 2003
release date for the NVA Album. Avatar claims to have spent approximately
$150,000 on that marketing drive. For reasons explained below, EMI never
distributed the NVA Album for Avatar. Avatar ultimately entered into an
agreement with another distributor and the album was released in June
During the fall of 2002, at the same time that EMI and Avatar were
planning the release of the NVA Album, the parties began discussing a new
promotional campaign for the Oz Album to coincide with a new season of
the Oz television show, which was scheduled to premiere on January 6,
2003. Grossi and Shafton met with Werre and McDaniels on September 30,
2002 to devise a marketing strategy for the Oz Album, and over the next
several months they and other members of the marketing staff from EMI and
Avatar exchanged ideas and suggestions to increase sales of the Oz Album.
By November 14, 2002, Werre had agreed to include the Oz Album in EMI's catalog restocking
program, and EMI sales staff was instructed to promote the album as part
of any upcoming retail programs such as Black History Month in February
While EMI's marketing staff was spending the fall of 2002 developing
plans for promoting the NVA and Oz albums in early 2003, EMI's senior
legal and business executives continued to demand that Defendants pay EMI
its balance owed of $1,131,860.96. In a letter to Robinson dated November
13, 2002, Dina Hellerstein ("Hellerstein"), EMI's vice president for
legal and business affairs, indicated that EMI was prepared to exercise
its right to terminate the Distribution Agreement or let it expire
naturally on December 31, 2002, and pursue legal options for the balance
owed. Hellerstein made a formal demand on behalf of EMI for prompt
partial payment of $300,000. On November 26, 2002, Hellerstein sent an
email to Robinson stating "[w]e received from Avatar the new release
sheet on NVA for the January 28, 2003 New Release Book. As you know, our
deal ends on December 31, 2002 and we have not yet agreed to extend it.
We therefore cannot include NVA in the book," (Email dated Nov. 26, 2002
from Hellerstein to Robinson, attached as Exh. 10 to Declaration of Larry
Robinson dated April 6, 2004 ("Robinson Dec.").) In her email,
Hellerstein also indicated she had not yet received a response to her November 13 letter.
Avatar's then-counsel Denis Kellman ("Kellman") responded to
Hellerstein on December 4, 2002 by stating that "Avatar has never wavered
in its willingness to fulfill its financial obligations to EMI." (Letter
dated December 4, 2002 from Kellman to Hellerstein (the "Dec. 4 Letter"),
attached as Exh. N to Calkins Dec.) In the letter, Kellman indicated that
Proietto had informed Robinson during the Summer of 2002 that EMI's
president had approved a one-year extension of the Distribution Agreement
as part of Avatar's plan to repay its debt to EMI. Kellman's letter also
stated that "[r]elying upon the fact that an agreement had been reached
between EMI and Avatar with respect to the modified Avatar [repayment]
Plan, Mr. Robinson continued to expend considerable time, money and
effort readying Avatar's new releases." (Id.) Kellman then
wrote that "Avatar continues to be very excited about its 2003 release
schedule and is very much desirous of moving . . . forward with EMI
and making EMI whole." (Id.)
Between December 20, 2002 and February 5, 2003, Avatar and EMI
exchanged a series of proposals and counter-proposals aimed at reaching
an agreement for Avatar to pay off its balance to EMI and continuing the
business relationship between the parties. In the last proposal provided
in the record, a letter from Hellerstein to Kellman dated February 5, 2003, Hellerstein wrote "I think the parties are very close and we
hope to quickly resolve the outstanding issues." (Letter dated Feb. 5,
2003 from Hellerstein to Kellman, attached as Exh. R to Calkins Dec.)
Hellerstein's optimism was apparently misplaced, however, for on April 9,
2003 she wrote to Robinson and stated that "[b] ecause [EMI] has come to
the point where we think such negotiations are no longer fruitful, as of
April 1, 2003, [EMI] will no longer distribute the Avatar Records
catalog." (Letter dated April 9, 2003 from Hellerstein to Robinson,
attached as Exh. L to Calkins Dec.)
This litigation followed. EMI brought claims against Avatar for an
account stated, breach of contract, and foreclosure of security interest,
and against Robinson individually for breach of the guaranty clause of
the Distribution Agreement. EMI seeks damages in the amount of
$1,136,160.71 plus interest and attorneys' fees. Avatar cross-claimed for
breach of written contract, breach of oral contract, breach of the
implied covenant of good faith and fair dealing, unfair competition, and
rescission. Avatar seeks damages in the amount of $2 million plus
interest and attorneys' fees, an order rescinding the Distribution
Agreement, and punitive damages for what it describes as EMI's "willful,
malicious and oppressive conduct." (Amended Answer to Complaint Adding
Counterclaims, dated June 23, 2003, at 18.)
A. STANDARD OF REVIEW
The Court will grant summary judgment to the moving party "if the
pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law." Fed.R.Civ.P. 56(c); Blouin ex rel.
Estate of Pouliot v. Spitzer, 356 F.3d 348, 356 (2d Cir. 2004).
"Only disputes over facts that might affect the outcome of the suit
under the governing law will properly preclude the entry of summary
judgment." Anderson v. Liberty Lobby., Inc., 477 U.S. 242, 248
(1986). To survive a motion for summary judgment, the non-moving party
"must do more than simply show that there is some metaphysical doubt as
to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith
Radio Corp., 475 U.S. 574, 586 (1986). Instead, the non-moving party
must present "specific facts showing that there is a genuine issue for
trial." Id. at 587. In deciding a motion for summary judgment,
the Court will construe all the evidence in the light most favorable to
the non-moving party and draw all reasonable inferences in its favor.
See Kerzer v. Kingly Mfg., 156 F.3d 396, 400 (2d Cir. 1998). Nevertheless,
"[c]onclusory allegations, conjecture, and speculation" cannot
establish a genuine issue of fact for trial. Id.
B. ACCOUNT STATED
EMI brings a claim for account stated against Avatar. Under New York
State law, which the Distribution Agreement establishes as
controlling,*fn1 an account stated "is an account, balanced and
rendered, with an assent to the balance either express or implied."
Abbott, Duncan & Wiener v. Ragusa, 625 N.Y.S.2d 178 (App.
Div. 1st Dep't 1995). If a party receives a statement of balance owed and
does not object within a reasonable time, then that party is bound by
that account "unless fraud, mistake or other equitable considerations
were shown." Rosenman Colin Freund Lewis & Cohen v. Neuman,
461 N.Y.S.2d 297, 299 (App. Div. 1st Dep't 1983); Lankier Siffert
& Wohl LLP v. Rossi, 287 F. Supp.2d 398, 407 (S.D.N.Y. 2003);
Kramer, Levin, Nessen, Kamin & Frankel v. Aronoff,
638 F. Supp. 714 (S.D.N.Y. 1986).
It is undisputed that Avatar received monthly account statements from
EMI from February 2000 through July 2003, and that Robinson or another
individual reviewed the statements on Avatar's behalf when they were received. Avatar never objected to
the accuracy of any statement. To the contrary, Avatar repeatedly
acknowledged the amount it owed EMI and reported that it intended to pay
the full amount. The December 4 Letter to EMI stated that "Avatar has
never wavered in its willingness to fulfill its financial obligations to
EMI. . . . Avatar continues to be very excited about its 2003 release
schedule and is very much desirous of moving . . . forward with EMI
and making EMI whole." (Dec. 4 Letter.)
Summary judgment for EMI will therefore be appropriate unless Avatar
can establish a genuine issue of material fact as to the existence of
fraud, mistake or other equitable considerations.
Avatar's filings, read liberally, appear to argue that equitable
considerations should prevent summary judgment on EMI's account stated
claim. Avatar argues that Mike Mack ("Mack"), EMI's vice president of
urban sales and marketing over the duration of the Distribution Agreement
until early 2002, instructed EMI's sales and marketing staff to stop
providing support for the Oz Album. Robinson stated in his deposition
[T]here was a general rumor in the industry that
[EMI] was not working on [Avatar's] behalf on the
Oz record and that . . . because Mike Mack was
mad at me, he had instructed his staff to not work
on the record and then discussed the Oz project
with other senior [EMI] executives and the general
viewpoint of these executives was not to work on the Oz record. That was a
(Deposition of Larry Robinson, September 17, 2003, at 97-98,
attached as Exh. E to Calkins Dec.)
Robinson argues that, on behalf of Avatar, he did not object to the
monthly account statements when Avatar received them because at that
time, he "had no idea that EMI had breached the [Distribution] Agreement
by sabotaging the Oz Album. Had I known this, I would have voiced my
objection to being charged for services that were not performed."
(Robinson Dec. ¶ 31.)
Avatar provides no evidence whatsoever to support this allegation
against EMI. Absent any other supporting evidence, Robinson's statement
about a general rumor cannot suffice to avoid summary judgment on EMI's
account stated claim. Throughout the duration of the Distribution
Agreement and over the course of negotiations to extend it, Avatar
repeatedly indicated both its intent to pay EMI its full balance owed and
to continue a working relationship with EMI. At no time over the life of
the Distribution Agreement and the negotiations to extend it, which
continued until April 2003, just weeks before the initiation of this
litigation, did Avatar make any objections to the accuracy or validity of
the account statements it received from EMI. Not until the initiation of
this litigation did Avatar suddenly argue that it should not have to pay EMI because of EMI's alleged failures to fulfill its
contractual obligations. In ordinary business practice, breaches of
contract are not discovered for the first time in response to the
initiation of litigation. On the record before it, the Court finds no
evidence of fraud, mistake, or equitable considerations sufficient to
avoid an award of summary judgment to EMI on its claim for account stated
in the amount of $1,136,160.71.
C. ROBINSON'S PERSONAL GUARANTY
EMI argues that pursuant to the Distribution Agreement, Robinson is
personally liable for any amounts that Avatar owes EMI. Assuming that the
principal debtor is liable, a guaranty is enforceable if it is
unconditional and written in clear and unambiguous terms. See Bank
of New York v. Tri Polyta Fin. B. V., No. 01 Civ. 9104, 2003 WL
1960587 (S.D.N.Y. Apr. 25, 2003); URSA Minor Ltd. v. AON Fin.
Prods., Inc., No. 00 Civ. 2474, 2000 WL 1010278 (S.D.N.Y. July 21,
2000). Moreover, the Distribution Agreement was negotiated at arms-length
by sophisticated parties represented by counsel, which further supports
its enforceability. See URSA Minor Ltd., 2000 WL 1010278, at
*8. New York State courts consistently enforce unconditional guarantees
in these circumstances. See First New York Bank for Business v.
DeMarco, 130 B.R. 650, 654 (S.D.N.Y. 1991) (collecting cases from
New York State courts). Robinson argues that because the guaranty in the Distribution Agreement
does not contain language expressly waiving any defenses, setoffs or
counterclaims, he is not prevented from raising defenses. Robinson notes
that the cases on which EMI relies to buttress the enforceability of the
guaranty all contained more elaborate guarantees and waivers of defenses
than Robinson's guaranty in the Distribution Agreement. The guaranty at
issue in Crossland Fed. Say. Bank v. A. Suna & Co. Inc.,
935 F. Supp. 184, 192-93 (E.D.N.Y. 1996), for example, provided that it
was enforceable "without regard to the legality, validity, regularity, or
enforceability [of the underlying agreement] and without regard to any
other circumstances whatsoever which might otherwise constitute a legal
or equitable discharge of a surety or guarantor, including, without
limitation, any right of setoff or counterclaim." By contrast, the
guaranty in the Distribution Agreement merely provides that Robinson
`irrevocably and unconditionally guarantees the full payment and
performance of all obligations of Avatar Records under this Agreement."
(Distribution Agreement at § 22(i).)
But Robinson cites no authority, nor has the Court discovered any, for
his assertion that the language in his guaranty is insufficient to be
enforceable, or that any particular magic words must appear. The guaranty
is plain and easy to understand. Robinson is bound to cover any obligation of
D. BREACH OF CONTRACT CLAIMS
EMI and Avatar both bring breach of contract claims. Because the claims
and defenses overlap to some extent, the Court addresses the contract
EMI argues that Avatar breached the Distribution Agreement and the
Amendment by failing to pay EMI after EMI performed its obligations under
those agreements. As defenses and counterclaims, Avatar argues that EMI
failed to perform its duties under the Distribution Agreement by
undermining sales of the Oz Album and not releasing the NVA Album, and
that EMI breached the oral contract extending the Distribution Agreement
to December 31, 2003 by not releasing the NVA Album and by terminating
the Distribution Agreement on April 9, 2003. EMI replies that it
performed all of its obligations and that it never extended the
Distribution Agreement beyond December 31, 2002.
The Court has already addressed Avatar's allegations regarding EMI's
sabotage of the Oz Album in 2001 and concluded that Avatar has produced
no evidence sufficient to create a genuine dispute of material fact about
The principal dispute in the contract claims is whether the
Distribution Agreement was orally extended for one year, or whether it expired on December 31, 2002. Avatar argues that
Proietto informed Robinson that EMI's president had approved a one-year
extension of the Distribution Agreement, and therefore not only is Avatar
not liable to EMI for breach of contract, but EMI is liable to Avatar for
ceasing distribution of all Avatar Records in April 2003. EMI argues that
the Distribution Agreement expressly prohibits oral modifications and
requires that all alterations to the contract be made in writing.
A plaintiff seeking to recover for breach of contract under New York
State law must prove "`(1 a contract; (2) performance of the contract by
one party; (3) breach by the other party; and (4) damages.'"
Terwilliger, 206 F.3d at 246 (quoting First Investors
Corp. v. Liberty Mut. Ins. Co., 152 F.3d 162, 168 (2d Cir. 1998)).
Although the parties characterize the dispute as one over performance and
breach, the principal area of disagreement is more properly framed as one
over the existence of a contract, or more accurately whether the contract
was renewed for an additional year beyond December 31, 2002. If the
Distribution Agreement was not extended, then EMI was not obligated to
distribute any Avatar Records in 2003 and Avatar's defenses and
counterclaims are meritless. By contrast, if the Distribution Agreement
was extended, then EMI would have been required to continue to distribute Avatar's Records in 2003.
It is undisputed that there is no written agreement extending the
Distribution Agreement beyond its natural expiration date of December 31,
2002. Avatar claims that in July 2002, Robinson proposed restructuring
and extending the Distribution Agreement to enable Avatar to pay off its
balance to EMI. Avatar asserts that in September 2002, Proietto notified
Robinson via telephone that EMI's president had approved the deal.
Significantly, EMI does not deny that this conversation occurred.
Instead, it states that Proietto was merely a financial officer who Mid
not possess the position or authority to make deals on EMI's behalf."
(Plaintiff's Counterstatement to Defendants' Local Rule 56.1 Separate
Statement, dated April 16, 2004 ("EMI Counter."), at ¶ 5.) But Avatar
does not claim that Proietto acted on his own when he informed Robinson
that the Distribution Agreement was extended. Instead, Avatar asserts
that Proietto told Robinson that EMI's president had approved the new
EMI's primary argument is that anything Proietto may have told Robinson
is irrelevant because the parties never reduced any terms to writing, as
the Distribution Agreement required. As a general rule, under New York
law "[a] written agreement or other written instrument which contains a
provision to the effect that it cannot be changed orally, cannot be changed by an
executory agreement unless such executory agreement is in writing and
signed by the party against whom enforcement of the change is sought or
by his agent." N.Y. Gen. Oblig. Law § 15-301; see also,
National Westminster Bank, U.S.A. v. Ross, 130 B.R. 656, 676
(S.D.N.Y. 1991) ("An alleged oral agreement subsequent to, and in
derogation of, an agreement containing such a `no oral modification'
clause can neither modify, nor create a triable issue of fact with
respect to, the written agreement.").
A party may be permitted to establish proof of and enforce an oral
agreement modifying a preexisting written contract despite a "no written
modifications" clause, however, if there has been partial performance of
the oral agreement and if that performance is "unequivocally referable to
the oral modification." Rose v. Spa Realty Assocs.,
366 N.E.2d 1279, 1283 (N.Y. 1977). Additionally, New York law provides for an
equitable estoppel exception to § 15-301 if one party to the written
contract "has induced another's significant and substantial reliance upon
an oral modification," and if the conduct relied upon is "not otherwise
. . . compatible with the agreement as written." Rose, 366
N.E.2d at 1283; see also, L&B 57th St., Inc. v. E.M.
Blanchard, Inc., 143 F.3d 88, 93 (2d Cir. 1998); Club Haven
Inv. Co., LLC v. Capital Co. of Am., LLC, 160 F. Supp.2d 590, 592 (S.D.N.Y. 2001);
Joseph P. Day Realty Corp. v. Jeffrey Lawrence Assocs., Inc.,
704 N.Y.S.2d 587 (App. Div. 1st Dep't 2000).
Avatar argues that under these principles of equitable estoppel, EMI's
conduct in the fall of 2002 creates at least a genuine issue of fact as
to whether the Distribution Agreement was extended orally. In September
2002, Proietto notified Robinson that EMI's president had approved an
extension of the Distibution Agreement. EMI initiated postponing the
release date of the NVA Album from October 2002 to January 2003. EMI
marketing executives and staff worked with Avatar throughout the fall of
2002 to plan early 2003 marketing campaigns for the NVA and Oz Albums.
Moreover, although EMI did not release the NVA Album in January 2003, it
apparently continued to distribute other Avatar records and perform its
duties under the Distribution Agreement through early April 2003. These
actions are inconsistent with the text of the Distribution Agreement,
which as written was set to expire, on December 31, 2002.
It is true that the parties exchanged a series of correspondence in
late 2002 discussing terms for Avatar to pay off its debt to EMI and for
an extension of the Distribution Agreement, and that EMI's legal counsel
notified Avatar on November 26, 2002 that the Distribution Agreement had
not yet been extended beyond December 31, 2002. But in light of the mixed
signals that EMI was sending Avatar, a reasonable jury could conclude
that the Distribution Agreement was extended. The Court therefore finds
that a genuine issue of material fact exists as to whether there was an
oral agreement to extend the Distribution Agreement, and accordingly
denies EMI's motion seeking summary judgment on its breach of contract
claim and dismissal of Avatar's breach of contract counterclaims.
E. FORECLOSURE OF SECURITY INTEREST
EMI argues that because Avatar has defaulted on its obligations to pay
amounts due to EMI, EMI is entitled to foreclose on the security interest
as set forth in the Distribution Agreement. Under the Uniform Commercial
Code, a security interest exists and becomes enforceable in the presence
of "value . . ., rights or power to transfer rights in collateral
. . ., and agreement plus satisfaction of an evidentiary requirement."
U.C.C. § 9-203 (cmt. 2)(2002).
It is undisputed that Avatar granted EMI a security interest in certain
Avatar property and that Avatar had the rights to that property. The
Distribution Agreement authorizes EMI to foreclose on the security
interest upon Avatar's "failure to pay when due any obligations" of
Avatar to EMI. (Distribution Agreement at § 21(c).) EMI perfected its security interest in the collateral by filing a UCC Financing
Statement dated January 16, 2001. Avatar disputes EMI's claim that it is
in first position as to the collateral and thus senior to any of Avatar's
other creditors, but provides no evidence to support this assertion. The
Court has already determined above that Avatar failed to pay EMI for
EMI's performance under the Distribution Agreement.
Accordingly, the Court grants EMI's motion for summary judgment on its
claim for foreclosure of security interest. In light of the Court's
resolution of the other claims in this litigation, however, EMI may not
yet pursue the collateral. Instead, EMI's actual foreclosure on the
collateral must await the resolution of liability and damages on the
breach of contract claims and counterclaims, because the outcome of those
claims may affect the amount of Avatar's liability to EMI.
F. IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
Avatar brings a counterclaim against EMI for breach of the implied
covenant of good faith and fair dealing. Avatar alleges that EMI breached
this covenant through Mack's actions involving threats of violence
against Robinson; Mack's instructions to the EMI sales staff to stop
marketing the Oz Album; EMI's demand that Avatar pay consultants to
create fraudulent marketing reports; and EMI's refusal to release the NVA Album.
New York State law "does not recognize a separate cause of action for
breach of the implied covenant of good faith and fair dealing when a
breach of contract claim, based upon the same facts, is also pled."
Harris v. Provident Life & Accident Ins. Co., 310 F.3d 73,
81 (2d Cir. 2002); see also, Bates Adver. USA, Inc. v.
McGregor, 282 F. Supp.2d 209, 219 (S.D.N.Y. 2003).
Avatar's good faith and fair dealing claim is based on essentially the
same facts as the breach of contract claims. Mack's behavior as to the Oz
Album and EMI's actions as to the NVA Album have already been addressed
in the breach of contract claims and therefore cannot support an
independent claim for breach of the implied covenant of good faith and
Avatar also claims that EMI forced it to pay $10,000 for a marketing
consultant who bribed retail music stores to report inflated record sales
and thereby present an appearance that the store sold more copies of that
record than it actually did. Although the allegations of fraudulent
marketing practices were not raised in the breach of contract claims,
Avatar fails to put forward sufficient evidence to support that charge.
Avatar has not introduced any evidence whatsoever to indicate that the
marketing consultant engaged in this fraudulent practice in connection with any Avatar Record.
Instead, Avatar relies on deposition testimony by EMI executives who
indicated a general awareness that the type of fraudulent practice at
issue is carried out by some companies in the music industry and that the
marketing consultant in question is the subject of rumors regarding
engaging in that fraudulent business practice. Avatar presents no
documentation of actual sales of Avatar Records or the allegedly inflated
sales, nor does Avatar present evidence from any individual who was asked
by the particular marketing consultant to produce an inflated sales
report. Accordingly, the Court grants EMI's motion for summary judgment
dismissing Avatar's claim of breach of the implied covenant of good faith
and fair dealing.
G. UNFAIR COMPETITION
Avatar's fourth counterclaim against EMI is for unfair competition. New
York State unfair competition law "has been broadly described as
encompassing any form of commercial immorality, or simply as endeavoring
to reap where one has not sown; it is taking the skill, expenditures and
labors of a competitor, and misappropriati(ng) for the
commercial advantage of one person . . . a benefit or property right
belonging to another." Telecom Int'l Am., Ltd. v. AT&T
Corp., 280 F.3d 175, 197-98 (2d Cir. 2001) (quoting Roy Export
Co. Establishment of Valduz, Liechtenstein v. Columbia Broad.
Sys., Inc., 672 F.2d 1095, 1105 (2d Cir. 1982)) (emphasis added). By
definition, competition is fundamental to any unfair competition claim.
Where there is no competition, there can be no unfair competition. Avatar
and EMI are not competitors in any sense of that word. EMI and Avatar
engage in different businesses. Avatar produces records and EMI
distributes them. Indeed, their relationship was symbiotic as regards the
products and services covered by the Distribution Agreement. Avatar's
financial success hinged at least in part on EMI's success in soliciting
sales of the Records; and EMI's financial success turned at least in part
on Avatar producing marketable Records. EMI could achieve no commercial
advantage under the Distribution Agreement by undermining sales of
Avatar's Records. Moreover, if EMI did undermine sales of Avatar's
Records, such action would be a breach of its obligations under the
Distribution Agreement, not unfair competition. Avatar simply has no
basis on which to maintain an unfair competition claim against EMI.
Accordingly, EMI's motion for summary judgment dismissing Avatar's
counterclaim for unfair competition is granted.
Avatar's final counterclaim is for rescission of the Distribution
Agreement. Rescission of a contract by a court is an extraordinary equitable remedy under New York State law, and
is appropriate only when the breach is `"material and willful, or, if not
willful, so substantial and fundamental as to strongly tend to defeat the
object of the parties in making the contract.'" Septembertide Publ'g
B.V. v. Stein & Day, Inc., 884 F.2d 675, 678 (2d Cir. 1989)
(quoting Callanan v. Powers, 92 N.E. 747 (N.Y. 1910));
see also Krumme v. Westpoint Stevens, Inc., 238 F.3d 133
(2000). Because rescission is a remedy for breach of contract and the
breach of contract claims and counterclaims remain pending, it is
premature to resolve Avatar's rescission counterclaim through these
motions. Accordingly, EMI's motion for summary judgment on Avatar's
rescission counterclaim is denied.
III. REMAINING PROCEEDINGS
A question remains as to how to proceed with the remaining claims and
counterclaims in this litigation. Even if an oral contract to extend the
Distribution Agreement existed, and even if EMI breached that oral
contract, Avatar and by extension Robinson are still liable on EMI's
account stated claim for $1,136,160.71, plus interest and attorneys'
fees. Should Avatar prevail at trial on its breach of oral contract
claim, it would be entitled to an offset from that judgment in the amount
of any damages it receives for EMI's breach. That there is a genuine dispute on one of Avatar's
counterclaims does not negate the absence of any dispute on EMI's account
stated claim. EMI's account stated claim is analytically distinct from
Avatar's breach of contract counterclaim.
Federal Rule of Civil Procedure 54(b) provides that whenever multiple
claims or counterclaims are involved in an action and a court has finally
resolved some but not all of the claims, "the court may direct the entry
of a final judgment as to one or more but fewer than all of the claims or
parties only upon an express determination that there is no just reason
for delay and upon an express direction for the entry of judgment." Fed.
R. Civ. P. 54(b); Ginett v. Computer Task Group, Inc.,
962 F.2d 1085, 1091 (2d Cir. 1992). A meritorious counterclaim in any
litigation will nearly always offset a defendant's liability on a
plaintiff's claim. With this in mind, the Supreme Court has held that the
"mere presence" of "nonfrivolous counterclaims" does not prevent an entry
of final judgment pursuant to Rule 54(b) on any claims that a court has
finally resolved. Curtiss-Wright Corp. v. General Elec. Co.,
446 U.S. 1, 9 (1980); see also, Siemens Westinghouse Power
Corp. v. Dick Corp., 220 F.R.D. 232, 234 (S.D.N.Y. 2004). A
Rule 54(b) certification of final judgment on any claim would be inappropriate
only if such claim is "inherently inseparable" or "inextricably interrelated" to
remaining claims. Ginett, 962 F.2d at 1096; Siemens
Westinghouse, 220 F.R.D. at 234.
As noted above, the Court finds that EMI's account stated claim is
analytically distinct from the breach of contract claims. EMI has already
waited several years to recover most of the amount that Avatar owes it,
and EMI should not have to experience what may be substantial further
delay until Avatar's counterclaims are finally resolved for it to have
legal assurance that it can collect from Defendants the amount to which
it is entitled.
Nevertheless, all the claims and counterclaims in this litigation arise
from essentially the same set of underlying facts, and in particular from
interpretation and application of the Distribution Agreement and the
behavior of the parties in performing their duties under that contract.
Principles of judicial economy strongly discourage piecemeal appeals of
litigation, especially when multiple appeals in the same case may involve
the same set of facts. See O'Bert ex rel. Estate of O'Bert v.
Vargo, 331 F.3d 29, 40 (2d Cir. 2003); Unicredito Italiano SPA
v. JP Morgan Chase Bank, 288 F. Supp.2d 485, 506 (S.D.N.Y. 2003);
Burrell v. State Farm & Cas. Co., 226 F. Supp.2d 427,
432-33 (S.D.N.Y. 2002). Although there is no particular reason to delay
final judgment on EMI's account stated claim, there is also no indication that undue hardship or
injustice to EMI will result from a delay in the entry of final judgment
on its account stated claim, or that Defendants would face such hardships
if they are denied the chance to appeal immediately the Court's decision
on EMI's account stated claim. See L.B. Foster Co. v. America Piles.
Inc., 138 F.3d 81, 86 (2d Cir. 1998); Cullen v. Margiotta,
618 F.2d 226, 228 (2d Cir. 1980).
Given these policy considerations, and in view of the remaining
disputes still to be resolved and the prospects that EMI's judgment may
be reduced by offsets should Avatar prevail on its surviving
counterclaims, the Court is persuaded that the most prudent course is to
direct the entry of a final judgment on EMI's account stated claim in the
amount of $1,136,160.71, plus appropriate interest and attorney's fees
pursuant to Rule 54(b), but to stay enforcement of that judgment
pursuant to Fed.R.Civ.P. 62(h)*fn2 until the resolution of the
remaining breach of contract claims. See Curtis Publ'g Co. v.
Church, Rickards & Co., 58 F.R.D. 594 (E.D.Pa. 1973) (entering
final summary judgment pursuant to Fed.R.Civ.P. 54(b) on plaintiff's
claims for amount owed under contract but staying enforcement of judgment pursuant to Fed.
R. Civ. P. 62(h) pending resolution of counterclaims for breach of
contract, which would be resolved at trial); Estate of John Lennon,
by Lennon, v. Leggoons, Inc., No. 95 Civ. 8872, 1997 WL 346733
(S.D.N.Y. June 23, 1997); Orient Atlantic Parco, Inc. v. Maersk
Lines, 740 F. Supp. 1002 (S.D.N.Y. 1990).
For the reasons discussed above, it is hereby
ORDERED that the motion of plaintiff EMI Music Marketing
("EMI") for summary judgment is denied as to EMI's first claim for relief
for breach of contract against defendant Avatar Records, Inc. ("Avatar");
and it is further
ORDERED that the motion of EMI for summary judgment is
granted as to EMI's second claim for relief for breach of contract and
guaranty against defendant Larry Robinson ("Robinson"), and EMI's third
claim for relief for account stated against Avatar, and that pursuant to
these claims Avatar and Robinson shall be liable to EMI, jointly and
severally, and EMI shall be entitled to collect from Avatar and Robinson
damages in an amount of $1,136,160.71 plus appropriate interest and
attorney's fees; and it is further
ORDERED that the motion for summary judgment on EMI' s fourth claim for relief for foreclosure of security interest
against Avatar is granted; and it is further
ORDERED that the motion of EMI for summary judgment is denied
as to Avatar's first counterclaim for breach of written contract, second
counterclaim for breach of oral contract, and fifth counterclaim for
rescission; and it is further
ORDERED that the motion of EMI for summary judgment is
granted as to Avatar's third counterclaim for breach of the implied
covenant of good faith and fair dealing and Avatar's fourth counterclaim
for unfair competition; and it is further
ORDERED that execution is stayed on EMI's judgment authorized
herein and that EMI may not pursue foreclosure against Avatar pending
resolution of open claims remaining in this action; and it is further
ORDERED that the parties are directed to appear for a
conference before the Court on Friday, 14 May 2004 at 11:15 a.m. in
Courtroom 905 at 40 Centre Street, New York, N.Y. to discuss future
proceedings in this case.