In re Inc.

• Decision Date: 25 January 2011
• Docket Number: 08–12294.Adversary No. 09–01010–CAG.,Bankruptcy Nos. 08–12292–CAG,08–12293
• Citation: 445 B.R. 758
• Parties: In re ANTONE'S RECORDS, INC., Debtor.Texas Clef Entertainment Group, Inc., Debtor.Texas Music Group, Inc., Debtor.Allen Ray Walser, et al., Plaintiff,v.Texas Music Group, Inc., Antone's Records, Inc., Randolph W. Clendenen, Heinz Geissler, James W. Heldt and Texas Clef Entertainment Group, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Western District of Texas

445 B.R. 758

In re ANTONE'S RECORDS, INC., Debtor.Texas Clef Entertainment Group, Inc., Debtor.Texas Music Group, Inc., Debtor.Allen Ray Walser, et al., Plaintiff,

v.Texas Music Group, Inc., Antone's Records, Inc., Randolph W. Clendenen, Heinz Geissler, James W. Heldt and Texas Clef Entertainment Group, Inc., Defendants.

Bankruptcy Nos. 08–12292–CAG

08–12293

08–12294.Adversary No. 09–01010–CAG.

United States Bankruptcy Court, W.D. Texas, Austin Division.

Jan. 25, 2011.

Craig Barker, Austin, TX, John W. Alvis, San Marcos, TX, for Plaintiff.Stephen W. Sather, Barron & Newburger, P.C., G. James Landon, Richard Dietrich Villa, Streusand & Landon, LLP, William C. Davidson, Jr., David M. Ward, Austin, TX, for Defendants.

Memorandum Opinion

CRAIG A. GARGOTTA, Bankruptcy Judge.

Background

Plaintiffs ¹ in this adversary proceeding are the family and estate of musician, Don Walser. (December 20, 2009 Report and Recommendation Regarding Plaintiffs' Motion to Withdraw the Reference at p. 2, Docket No. 18.) ² This action was initially filed in Texas state district court but was removed to this Court on February 17, 2009, following Debtors' ³ bankruptcy. Id. at p. 3. Plaintiffs contend that Debtors failed to pay Don Walser certain royalties under a Recording Agreement executed in 1994 between Don Walser and Watermelon Records, Inc. Plaintiffs' First Supplemental Petition (“Petition”) at ¶ 4.9, Docket # 6–3.

Don Walser was a country singer known for his distinctive yodeling and singing voice. He composed and recorded albums pursuant to a recording contract with a record label, Watermelon Records (“Watermelon”), which was owned by Heinz Geissler (“Geissler”). After Watermelon filed Chapter 11 bankruptcy in 1998, Watermelon sold its interest in the Walser master recordings through a bankruptcy sale to Debtor Defendants who are the subject of this adversary action, and who employ Geissler as their label group manager. 1:137, 155. ⁴

Antone's Records, Inc., Texas Music Group, Inc., and Texas Clef Entertainment Group, Inc. are three Austin-based record labels in the business of recording and selling music created primarily by Texas and Austin musicians. On November 18, 2008, Antone's Records, TMG, and Texas Clef filed their voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Debtors' cases are being jointly administered.

Defendant James W. Heldt (“Heldt”) is a benefactor of Antone's Records, TMG, and Texas Clef. Heldt was not involved in the day-to-day operations of the Debtors. 2:202:23–25; 203:8–12. Randolph Clendenen (“Clendenen”) served as President of the Debtors. 2:229:8–9.

Despite not being involved in day-to-day management of the Debtors, Heldt was committed to Debtors' success and wanted them to survive, loaning them millions of dollars, which remain unpaid. 2:203:19–21; 226:17–22; 227:10–20. According to Debtors' Statements and Schedules, Heldt is owed $440,400 by Antone's Records, Inc., which was an amount documented in promissory notes and acknowledged by the Debtors. D Ex. 52.⁵ Heldt was also owed approximately $135,000 by Texas Clef. D Ex. 54. According to Antone's Records' internal accounting, Heldt loaned it approximately $3,000,000. D Ex. 56; 2:203:19–21; 226: 17–22. In addition, the tax returns for Bamba, Inc., the parent company of Antone's Records, reflect loans of approximately $3 million. D Ex. 44. Plaintiffs agree that Heldt provided approximately $3,000,000 of funding to the Debtors. Plaintiffs' Pre–Trial Order, p. 11.

Heldt was never repaid these loans and at no point did he require Debtors to make loan payments. 2:227:10–24. Also, he never drew a salary and was not paid dividends or any distribution. 2:181:15–18; 3:65:12–22.

This adversary proceeding involves Plaintiffs' attempt to rescind the contract regarding Walser's albums Rolling Stone from Texas and Texas Top Hand. Plaintiffs also seek a claim for breach of contract, and breach of fiduciary duty on the part of the Defendants. Additionally, Plaintiffs assert that the corporate veil should be pierced with respect to Defendants Geissler, Clendenen, and Heldt, and that they should be held liable for Plaintiffs' claims against Debtors. Finally, Defendants object to the proofs of claim filed by the Plaintiffs, asserting that $28,161.41 plus pre-judgment interest in the amount of $1,025.15, rather than over $300,000 (as stated in Plaintiff's Proof of Claim) is owed Plaintiffs. This adversary proceeding was consolidated with the Debtors' objection to the Plaintiffs' proof of claims. (Doc. # 65.) ⁶ Debtors' Post–Trial Brief, P. 2, 10. In addition, Plaintiffs' expert witness, George Berry, valued Plaintiffs' opportunity loss at $182,646.05. 2:173; P Ex. 75B.

Facts

Walser created several musical albums that were sold to Texas Music Group, Texas Clef Entertainment Group, Inc., and Antone's Records, Inc. through the Watermelon sale. One album, Rolling Stone from Texas, was created pursuant to a 1994 contract with Watermelon. 1:19; D Ex. 2. The second album in question, Texas Top Hand, was created in 1996 and Watermelon paid the recording expenses, released it and recouped money from it. 1:19. After creating albums for Debtors, Walser created work for two other companies who are not parties to this proceeding (including signing with London–Sire Records Inc. (“Sire”) in June 1997). Plaintiffs' Post–Trial Brief, P. 10; Plaintiffs' Pre–Trial Order, P. 5; P Ex. 29.

Pursuant to its recording contract with Walser, Watermelon (and its successors) were required to provide Walser with semi-annual royalty statements. The uncontroverted evidence demonstrated that royalty payments and statements from Watermelon were provided on a spotty basis at best, despite contractual requirements to provide regular statements every six months, “in no event less than twice per year.” 1:230; D Ex. 2, P. 13, para. 9.1. The Recording Contract provided that statements “shall be accompanied by the payment of the net amount of royalties, if any, earned by [Artist] hereunder during the accounting period to which the statement relates.” D Ex. 2, P. 13, para. 9.1. Royalties due to other artists similarly situated to Plaintiff, after advances and other expenses were recouped, would be about 83 cents a unit. 3:32, P Ex. 54, P. 1. When a record company pays for recording an album, it owns the master recordings. 1:56.⁷

Heinz Geissler once owned Watermelon Records, and he founded the company along with two others, Kunz and Keane. 1:62–64. During the period prior to filing bankruptcy, Walser indicated that he did not want to work with Geissler anymore. Geissler managed the day-to-day operations of Watermelon and looked for artists to sign. After the Watermelon bankruptcy concluded, Heinz Geissler, as label group manager for Debtors, worked for all the Debtor entities equally. 1:137, 155. Geissler is not a shareholder in any of the Debtors, simply an employee.

Watermelon Records filed for bankruptcy protection on December 31, 1998, D Ex. 22, P. 1, and its Plan was confirmed on April 23, 2001. D Ex. 22, P. 37. After the Watermelon bankruptcy was filed, Watermelon did not tender any more royalty statements during the bankruptcy. 1:135–36.

During Watermelon's bankruptcy, Walser did not make any claims for rescission or non-payment of royalty. 1:217; Debtors' Post–Trial Brief, P. 2, Plaintiffs' Pre–Trial Order, P. 7. Pursuant to the Plan, Watermelon's rights to Rolling Stone from Texas and Texas Top Hand were transferred to Debtors. 1:136; P Ex. 21; P Ex. 22, P. 1. Debtors and Texas Music Group reissued both works on August 21, 2001. Plaintiffs' Pre–Trial Order, P. 7. On October 30, 2001, TMG released Dare to Dream: The Best of Don Walser, which contained recordings from the two works and selected recordings of Don Walser that were licensed from Sire. Plaintiffs' Pre–Trial Order, P. 7; see also P Ex. 32, P. 4 (demonstrating in Watermelon's settlement agreement with Sire how Debtors acquired the rights to use Walser's Sire recordings).

It is undisputed that Debtors failed to provide timely royalty statements to Don Walser. 1:229; Debtors' Post–Trial Brief, P. 2. Walser and his manager, Nancy Fly Guenther (“Fly”), requested royalty statements from Debtors, Geissler, and Clendenen on several occasions, and these statements were not provided or they were provided months or years later. 1:230–31. Although Walser's works were reissued in August 2001, the first royalty statement Walser received from Debtors was in April 2004. Clendenen does not recall if Fly asked him for a royalty statement in 2004. 2:120; 1:230; see Plaintiffs' Pre–Trial Order P. 8. Defendants made several payments, unaccompanied by royalty statements, in November 2001 ($1,250) (D Ex. 27, P. 031931), December 2001 ($1,250) (D Ex. 27, P. 031930), December 2003 ($1,500) (D Ex. 27, P. 031929), and February 2004 ($1,500) (D Ex. 27, P. 031928); (Plaintiffs' Pre–Trial Order, P. 8).

Additionally, a movie starring Robert Duvall— Secondhand Lions—used two of Don Walser's songs and was released in 2003. The production company paid $32,370 in licensing fees for the recordings of Don Walser between July and October 2003. D Ex. 32, P. 3; See also P Ex. 37 (reflecting check payments for use of recordings in Secondhand Lions ).

Tristan Ader, an Antone's employee who provided testimony regarding the royalty accounting at Antone's remarked that most sales occur when an album is initially released and then sales activity declines over time. 3:26. Ninety percent of the sales for Texas Top Hand appear to have occurred in the first six months of its reissue. 3:29, 3:31; P Ex. 68, P. 1. However, Ader noted that distributors are permitted to return albums (3:29), and if Walser was in a “recoup position,” ⁸ he would not be owed a royalty until that recoup position was repaid, 3:31. Additionally, Ader claimed that Debtors gave Walser a $2,500 advance and until royalties due exceeded that amount, Debtors would not need to pay...