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EMI MUSIC MARKETING v. AVATAR RECORDS

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." (Id.)

  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 Amendment.

  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 2003.

  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 2003.

  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.)

  II. DISCUSSION

 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 ...


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