Calhoun v. Baylor, 79-1472

• Decision Date: 08 April 1981
• Docket Number: No. 79-1472,79-1472
• Citation: 646 F.2d 1158
• Parties: A. J. CALHOUN, Successor Trustee of Stax Records, Inc., Plaintiff-Appellee, v. Johnny BAYLOR and Koko Records, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1158

646 F.2d 1158

A. J. CALHOUN, Successor Trustee of Stax Records, Inc. Plaintiff-Appellee, v. Johnny BAYLOR and Koko Records, Inc., Defendants-Appellants.

No. 79-1472.

United States Court of Appeals Sixth Circuit.

Argued April 16, 1980.

Decided April 8, 1981.

Arnold Davis, New York City, for defendants-appellants.

William R. Bruce, David J. Cocke, Rosenfield, Borod, Bogatin & Kremer, G. Wynn Smith, Mary L. Wolff, Wildman, Harrold, Allen, Dixon & McDonnell, Memphis, Tenn., Robert M. Johnson, Memphis, Tenn., for plaintiff-appellee.

Before EDWARDS, Chief Judge, WEICK and MERRITT, Circuit Judges.

MERRITT, Circuit Judge.

Defendants, Johnny Baylor and KoKo Records, Inc., appeal a jury verdict that would require them to return.$2.5 million received as royalties and promotional fees from Stax Records, Inc., a company now bankrupt. The bankrupt's trustee brought suit under section 70(e) of the Bankruptcy Act, now 11 U.S.C. § 544(b), claiming that under the Tennessee law incorporated by the federal statute, the.$2.5 million constituted a fraudulent conveyance recoverable by the trustee. Defendants claim the evidence is insufficient to support a finding of fraud and make other claims of error in evidentiary rulings and instructions. We affirm.

Defendant Baylor was employed by Stax from 1968 to 1973 as a promoter of record sales. He also owned and operated defendant KoKo Records, Inc., a company that recorded and distributed music and used Stax production facilities. Both companies concentrated on the distribution of recordings by black musicians to predominantly black consumers. Either on his own label or on that of Stax, Baylor distributed recordings by such successful performers as Isaac Hayes, Luther Ingram, Johnnie Taylor, and the Staple Singers. Beginning in late 1972, Baylor received several large lump sum payments totalling over.$2.5 million from Stax. The payments were received under what Baylor alleged to be retroactive oral modifications of an earlier agreement. The oral agreements were negotiated on behalf of Stax by Al Bell, by late 1972 the president and sole shareholder of Stax and a close friend of Baylor's. They provided that Baylor would receive (1) all income generated through sales of KoKo label products after Stax's costs of producing KoKo records had been met; (2) specified royalties for each distributed Stax products; and (3) a flat $1 million for promotional services. ¹

These agreements preceded a period of declining economic fortune for Stax. After 1971, its record sales fell. As early as 1970, according to testimony by plaintiff's expert, Stax's debt exceeded its assets. By 1973, the year in which Baylor received most of his money, debt was nearly twice the value of assets, exceeding them by more than $10 million (Tr. 371). In 1972 CBS loaned Stax $6 million in return for a distribution agreement, and it was only that infusion of cash that provided the company with the means to pay Baylor the.$2.5 million.

A petition for involuntary bankruptcy was filed December 19, 1975. The trustee in bankruptcy, holding less than $1 million in assets subject to approximately $25 million in claims by more than 200 general creditors, filed this suit against Baylor and KoKo on January 27, 1977. He claimed that the payments to Baylor constituted fraud or constructive fraud under applicable Tennessee law, Tenn.Code Ann. §§ 64-312 to 64-315. The case was tried to a jury, and it found that Baylor had engaged in actual fraud under Tenn.Code Ann. § 64-315 and therefore did not reach the question of constructive fraud. ² It awarded to the trustee the $2,541,409.54 he sought. Judgment was entered October 25, 1978. The district court denied post-trial motions, and defendants filed a timely appeal.

I.

In reviewing civil jury verdicts to determine whether the evidence is sufficient to support the judgment, we follow the traditional rule of viewing the evidence in the light most favorable to the prevailing party. The question on appeal is whether there is room for reasonable minds to differ on the question of whether Baylor knew of or participated in a scheme to defraud Stax creditors. See, e. g., Thompson v. Illinois Central Railroad, 423 F.2d 1257 (6th Cir. 1970). Viewed in that light, the evidence in this case provides ample support for the jury verdict.

In support of his claim that he is entitled to the.$2.5 million Stax gave him in an eight-month period beginning in late 1972, Baylor relies on two oral novations, one retroactive, of a written agreement made in 1968, when he first began to work for Stax. Aside from royalty statements, there is no documentation of the agreement. Plaintiff's expert testified that he had never before heard of a similar unwritten agreement in the music industry (Tr. 392). One novation, made in late 1971 or early 1972, allegedly adjusted the rates for royalty payments to Baylor for sales of Stax records. The second novation, made in March or April 1972, allegedly provided for $1 million in promotional fees, fees to be paid above travel and other business expenses and independent of the number of records actually sold. The novations replaced an agreement typical of agreements in the record industry, putting in its place conditions that were by industry standards extraordinarily generous. Baylor was to receive royalties on seven-inch records (singles) of .22 to .26 per record and on twelve-inch records (LPs) of $1.62 to $1.85 per record (Tr. 148-59), as compared to industry norms of .08 to .13 on singles and .30 to .60 on LPs (Tr. 397). Baylor himself testified that a royalty rate of .25 per single would be "out of reality" (Tr. 1333). Those rates applied, moreover, to returns and free goods as well as records sold, another feature unusual in the industry. ³ The rates were to be retroactive to the first record Baylor sold for Stax, approximately three years earlier. Baylor's flat $1 million promotional fee compares to industry norms of $60,000 to $70,000 per year (Tr. 471). Baylor argues that his unique talents justified those extraordinary terms, but he conceded that nothing he has done before or after his association with Stax would indicate that he possesses unusual money-making talents (Tr. 534). He took over full responsibility for Stax distribution in late 1971 and gave it up in late 1972, when CBS took over distribution rights. Sales fell from $17.1 million in 1971 to $13 million in 1972 (Tr. 1465).

Baylor and Bell testified inconsistently on the timing and terms of the claimed novations. Bell insisted that there were two separate novations, the second prompted by Baylor's complaints to him. Baylor could not remember two separate agreements. He asserted, moreover, that his understanding was that he was to get nothing if he did not sell records and make money for Stax. That understanding, however, is inconsistent with his receipt of $1 million for promotional services. A Stax lawyer, Craig Benson, stated in a deposition read at trial that Bell asked him in April 1973 to prepare a contract embodying the terms allegedly a part of the oral novations and to backdate it to October 15, 1968 (Tr. 699). The first payment to Baylor made under the terms of the novation, a $500,000 check dated November 30, 1972, was first entered in the Stax books as a loan. That description was changed to royalty payment, and then to promotional fee. The chief financial officer at Stax testified that Bell told him to make the alterations (Tr. 168). Baylor testified that the $500,000 check represented payment of royalties.

Neither Baylor nor Bell denies that they were good friends who talked and met with each other regularly. Bell testified that Baylor "was very familiar with the inner workings of the company" (Tr. 635). Bell testified that Baylor knew the company was nearly bankrupt. He knew that had Stax not received a $6 million loan from CBS, he could not have been paid the money due him under the alleged agreement.

The tax treatment of the arrangement by both Stax and Baylor was unusual. Stax took no deductions for the payments to Baylor, though it was entitled to, and Baylor took no deductions aside from attorneys' fees for any expenses incurred in his work no expenses for traveling, for other employees, or for any other outlays.

Baylor's credibility was a central issue at trial, and he provided ample evidence by which the jury might have concluded that he was not a credible witness. He frequently avoided giving direct responses to questions and regularly provided testimony inconsistent with his own and others' testimony. His testimony about how he came to possess the more than $129,000 cash found by federal agents along with a $500,000 check from Stax at the Birmingham airport in late 1972 was particularly unpersuasive. He could not remember where all the cash had come from. He testified that he had carried thousands of dollars with him from city to city since the beginning of 1972 and that he had won $50,000 in three days betting on horses (Tr. 1347-59).

Whether or not the transfer of.$2.5 million from Stax to Baylor can only be explained as a deliberate fraud on Stax...