In re Rmm Records & Video Corp.

• Decision Date: 07 June 2007
• Docket Number: Adversary No. 06-01351.,Bankruptcy No. 00-15350 (AJG).
• Citation: 372 B.R. 603
• Parties: In re RMM RECORDS & VIDEO CORP., Debtor. RMM Records & Video Corp., Plaintiff, v. Universal Music & Video Distribution Co., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

372 B.R. 603

In re RMM RECORDS & VIDEO CORP., Debtor.

RMM Records & Video Corp., Plaintiff, v. Universal Music & Video Distribution Co., Defendant.

Bankruptcy No. 00-15350 (AJG).

Adversary No. 06-01351.

United States Bankruptcy Court, S.D. New York.

June 7, 2007.

COPYRIGHT MATERIAL OMITTED

Labaton Sucharow & Rudoff LLP, Brian D. Caplan, Esq., Jonathon J. Ross, Esq., Of Counsel, New York, NY, Attorneys for Plaintiff.

McKenna, Long & Aldridge LLP, Barry J. Armstrong, Esq., Robert A. Bartlett, Esq., Of Counsel, Atlanta, GA, and James S. Cochran, Esq., Of Counsel, Los Angeles, CA, Attorneys for Defendant.

OPINION GRANTING MOTION FOR SUMMARY JUDGMENT AND ADRESSING MOTION FOR FINAL ENTRY OF JUDGMENT UNDER FED.R.CIV.P. 54(b)

ARTHUR J. GONZALEZ, Bankruptcy Judge.

I. INTRODUCTION

This adversary proceeding arises from the non-payment of money due under a promissory note issued by defendant Universal Music and Video Distribution Corporation ("Universal" or "Defendant") to plaintiff RMM Records and Video Corporation ("RMM" or "Plaintiff'). RMM filed for bankruptcy in November 2000, and subsequently sold its assets to Universal in exchange, in part, for money due under the promissory note (the "Note"). Universal refused to pay RMM pursuant to the Note by its maturity date, and RMM brought an action to compel payment. Universal responded with affirmative defenses and counterclaims for breaches of the asset sale. The subject of this opinion concerns RMM's motion for summary judgment on its claim for breach of the Note and for entry of a final judgment under FED.R.Civ.P. 54(b). For the reasons stated below, the Court grants RMM's motion for summary judgment on its Note claim and grants RMM's motion for entry of a final judgment under Rule 54(b) but stays enforcement of that judgment pending resolution of Universal's counterclaims.

II. BACKGROUND

Summarized below are the facts, drawn from both the pleadings and evidentiary materials in the records. The facts are construed in the light most favorable to Universal, as the party opposing the motion for summary judgment.

RMM was a "pioneering record company in the salsa and Latino music markets" before entering bankruptcy in November 2000 as a result of a civil judgment against it. (Plaintiffs Memorandum of Law in Support of Motion for Summary Judgment on the Promissory Note, Claim ("RMM's Memo.") at 2). To satisfy that civil judgment and its creditors, RMM entered into an Asset Purchase Agreement (the "APA") with Universal, in which RMM agreed to sell its catalog of master recordings and artist agreements to Universal in exchange for cash, Universal's forgiveness of debt, and a Promissory Note (the "Note") by Universal to RMM. (Id. at 2). The APA was entered into on April 30, 2001 and closed on August 16, 2001. (Lehman Aff. ¶¶ 3, 8).¹

The APA contains the following clause, Section 11(d), addressing Universal's offset rights

Buyer's Offset Rights. At Buyer's option, Buyer may, at any time and from time to time on or before the Maturity Date of the Note, offset any amount due to it from Seller pursuant to Section 11(c) by reduction of the then outstanding amount of the Note, including the principal thereof and any accrued and unpaid interest thereon....

Section 11(c) contains an indemnification clause.²

In connection with the APA's closing, on August 16, 2001, Universal issued to RMM the Note in the principal amount of $1,300,000 and containing an interest rate of 5% and a maturity date of August 16, 2002. The Note contains a choice of law provision at paragraph 8, stating that New York law governs its construction. The Note, at paragraphs 3-4, confirms that it is subject to all terms of the APA and to Universal's right of offset pursuant to Section 11(d) of the APA.³

On March 29, 2002, this Court entered its order confirming the Debtor's Chapter 11 plan of liquidation, pursuant to which all of RMM's creditors were paid in full. (Order Confirming Joint Plan Chapter 11 Plan of Liquidation, 00-15350(AJG), Doc. # 184).

Several issues arose post-APA between the parties that resulted in the parties entering into a stipulation modifying the APA on February 5, 2003 (the "Stipulation"). The Stipulation extended the maturity date of the Note⁴ and provided for Universal to make an immediate payment to RMM under the Note in the amount of $267,495.95 plus accrued interest. The Stipulation also provided for an offset that further reduced the outstanding principal of the Note by more than $700,000 to $401,500. The bulk of the reduction, $584,180, was for `returns liability" — stemming from the issuance of credits to customers by Universal for the customers' returns of records sold or distributed for sale prior to the closing of the APA (August 16, 2001) and returned through the first anniversary of the closing (August 16, 2002). (Defendant's Response to Plaintiff's Motion for Summary Judgment ("Defendant's Response Memo.") at 5; Lehman Aff. ¶ 14). The Stipulation also provided Universal with three additional set-offs relating to the then-unresolved claims, referred to by the parties as the "UMLA," "DAM," and "BMG Direct" claims. (Lehman Aff. ¶ 16). Only the BMG Direct setoff claim arose by the expiration date of the Note's Maturity. (Id. at ¶¶ 17-18). Regarding the BMG Direct claim, the Stipulation entitled Universal to offset up to $80,000 plus accrued interest due under the Note. The Stipulation stated

In lieu of [Universal] further reducing the outstanding amount of the Note by such amount as [Universal] deems appropriate under the provisions of Section 11 of the Asset Purchase Agreement in order to resolve some or all of the Unresolved Claims, the Debtor agrees that ... (iii) with respect to the BMG Direct Claims, [Universal] shall be entitled to offset up to $80,000.00 under the Note (plus accrued interest thereon) in order to recover that amount equal to the aggregate amount of royalties that would have been payable to [Universal] for the semiannual accounting periods [from December 2001 to June 2003] if there had been no unrecouped balance under the BMG Direct Agreement.

Stipulation (Defendant's Response to Plaintiffs Motion for Summary Judgment, Cochran Decl. part IV Exh. I).

On October 31, 2003, the Note's date of maturity, Universal notified RMM in a letter by its counsel, James S. Cochran, (the "Cochran Letter," attached to the Complaint as Exhibit E), that with respect to the BMG Direct claim Universal was offsetting the $80,000 plus accrued interest due under the Note, leaving a balance due under the Note at $332,841.80. (Lehman Aff., ¶ 19). In the Cochran Letter, Universal also notified RMM that because of RMM's breaches of the APA and related third-party claims against Universal, Universal could incur losses or damages "perhaps well in excess" of the amount due on the Note. (Cochran Letter, ¶ 4). Universal simultaneously advised RMM that, although $332,841.81 was otherwise payable under the Note, it would not make a payment of the balance due on the Note because of third-party claims by Celia Cruz's estate that reduced the amount due to zero dollars. (Cochran Letter, ¶ 5).

On March 15, 2006, RMM filed this complaint in the adversary proceeding, seeking primarily three claims for relief. First, RMM's complaint seeks payment on the Note. The other two claims are not subjects of RMM's motion for summary judgment and will not be addressed herein.⁵

Universal filed its answer and counterclaims on March 27, 2006. Universal contends that its counterclaims entitle it to setoff or recoupment and act as affirmative defenses to payment of the outstanding amount of the Note. The counterclaims allege that RMM has breached obligations under the APA. The four categories of counterclaims are (1) the Additional Returns Liability Amount claim, (2) the Celia Cruz claim, (3) the Malpractice claims, and (4) BMG Direct claims. (Defendant's Response Memo. at 5).

On May 15, 2006, RMM moved for summary judgment on its Promissory Note claim against Universal in the amount of $332,841.81 plus applicable interest from the Note's maturity date.

In response to RMM's motion for summary judgment, Universal contends that since the APA and the Note are inextricably intertwined, under New York law, its counterclaims act as defenses against, and preclude entry of, summary judgment. Universal contends that RMM's attempt to focus just on the Note is "designed to frustrate Universal in its efforts to recover damages" for its counterclaims regarding RMM's alleged breaches of the APA. Universal also urges the Court to look at the practicalities of the situation in that if RMM is granted judgment on the Note, it would "unlikely have any funds [later] to pay a judgment on the counterclaims." (Defendant's Response Memo. at 2).

RMM asserts that the Additional Returns Liability claim and Malpractice claims were not asserted prior to the maturity of the Note, and thus are barred by the express provisions of the APA. (Plaintiff's Reply Memorandum of Law In Support of Summary Judgment on the Promissory Note Claim ("Plaintiffs Reply Memo.") at 4 ("it is patently clear that the relevant agreements do contain specific express language restricting Universal's ability to claim offsets against the Note to those asserted prior to the Note's maturity")). RMM further asserts that "New York law does not permit contingent or speculative claims to be used to offset monies due under a Promissory Note," and thus that the "purely speculative" Celia Cruz, Malpractice, and Additional Returns Liability claims are barred. (RMM's Memo. at 11, 13). With respect to the BMG Direct claim, RMM argues that the Stipulation firmly resolved this claim. RMM characterizes the counterclaims in sum as "a transparent attempt to avoid having to pay the remainder of the Purchase Price for RMM's valuable catalog of recordings and artist agreements." (Id. at 7).

A hearing was held on July 26, 2006.

III. LEGAL STANDARDS

A. Summary...