Matter of Taylor

• Decision Date: 14 September 1988
• Docket Number: No. 88-03507.,88-03507.
• Parties: In the Matter of James TAYLOR, Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

91 B.R. 302 (1988)

In the Matter of James TAYLOR, Debtor.

No. 88-03507.

United States Bankruptcy Court, D. New Jersey.

September 14, 1988.

Okin, Cohen & Hollander by Paul S. Hollander, Fort Lee, N.J., for debtor.

Stark and Stark by Richard N. Shaine, Princeton, N.J., for PolyGram Records, Inc. and PolyGram Songs, Inc.

Weltman & Moskowitz by Richard E. Weltman, New York City, for Delightful Music Ltd.

OPINION

WILLIAM F. TUOHEY, Bankruptcy Judge.

This matter comes before the Court based upon four motions. The initial motion was filed by the debtor and seeks to reject certain executory contracts and agreements between the debtor and PolyGram Records, Inc. and other entertainment-related corporations. In addition, the debtor has moved to reject an executory contract and management agreement between the debtor and World-Wide Entertainment Complex, Inc. For their part PolyGram Records, Inc. and PolyGram Songs, Inc. have cross-moved seeking to dismiss the debtor's Chapter 11 petition or, in the alternative, to have this Court abstain from hearing motions for the rejection of executory contracts. Delightful Music Ltd., one of the contracting parties whose agreement the debtor seeks to reject, cross-moves along with PolyGram for a dismissal of the Chapter 11 petition, or in the alternative, abstention.

The parties have submitted over 154 exhibits comprising several thousand pages. In addition, the Court has listened to extensive oral argument of counsel over a two-day period.

FINDINGS OF FACT

Based upon the record submitted by the parties, the Court makes the following findings of fact.

1. On May 24, 1988, James Taylor filed a voluntary Chapter 11 bankruptcy petition before this Court.

2. The debtor is a well-known recording artist who is a professional singer, composer and entertainer. From 1979 through February, 1988, Mr. Taylor had been engaged as the lead singer and a principal member of the rock music group professionally known as "Kool And The Gang."

3. In his bankruptcy petition Mr. Taylor asserts debts totalling $4,518,701.50 and assets scheduled at $734,215.00.

4. The parties are all in agreement that Mr. Taylor joined the Kool And The Gang singing group in 1979. It is further undisputed that at that time the singing group was contractually obligated to furnish its recording services to De-Lite Recorded Sound Corp. ("De-Lite"). The individual singers in the group had formed a corporation that was known as Quintet Associates, Inc. ("Quintet"). It was the Quintet corporation that entered into a record contract with De-Lite. De-Lite was and is an independent manufacturer and distributor of phonograph records.

5. Kool And The Gang operated through what were called "furnishing companies." These corporations were the actual contracting entities for the services of the artistic performers. "Kool And The Gang" was a name only; all contracts and legal relationships were arranged through one of the three basic furnishing companies. Quintet referred to above was the vehicle primarily used for Kool And The Gang's recorded performances.

6. A second furnishing company known as Fresh Start Music, Inc. ("Fresh Start") was a corporation formed by the group as the vehicle through which song publishing was conducted. Another corporation variously called Road Gang Enterprises, Inc. and/or Road Gang Associates Ltd. ("Road Gang") was formed to furnish the group's services in connection with concerts and tours.

7. During the years when Mr. Taylor was a member of the group the business and financial affairs of Quintet, Fresh Start and Road Gang, as well as the individual business affairs of Mr. Taylor and other members of the singing group, were managed by T.W.M. Management Services Ltd. ("TWM"). TWM was responsible for receiving all of the income of the Kool And The Gang entities and managing and controlling the disbursement of said funds. TWM paid the business as well as the personal living expenses of the individual members of the singing group. It was the responsibility of TWM to maintain all of the books and other business records that pertain to the financial affairs of Kool And The Gang and the various entities described above.

8. In January, 1984, the individual members of the group entered into a management agreement with World-Wide Entertainment Complex, Inc. ("World-Wide"). This corporation was an affiliate of TWM and pursuant to the January, 1984 agreement, World-Wide was engaged to manage the careers of the individual members of the group as professional entertainers. Thus, for the past four years all of the business and personal management of Kool And The Gang entities, as well as those of the debtor, were under the joint control of TWM and World-Wide.

9. The performing talent in the Kool And The Gang group met with management periodically to review the group's finances. Group members borrowed from the various corporations owned by the group for their living expenses. In the period July 1, 1983 to July 31, 1985, excluding salaries, the members of the singing group had internal loans of $2,138,947.00 which they owed back to the business entities. (Exhibit # 5).¹ The only member of the group as of July 18, 1986 not indebted to the group for these internal advances was the debtor herein, James Taylor.

10. In November of 1985, De-Lite assigned its rights under the Quintet recording agreement to PolyGram Records, Inc. ("PolyGram"). The De-Lite contract was thereupon terminated and a new agreement for the exclusive recording services of Kool was executed between PolyGram and Quintet.

11. At the time of the new PolyGram recording contract Quintet executed a music-publishing agreement with De-Lite's affiliate, Delightful Music Ltd.

12. In the management report for October 22, 1986, the members of the Kool And The Gang group were advised that the fixed costs of the group were up to $339,000.00 per month. The group on said date was advised by its manager: "Because of our increased fixed expenses we need to net from all income approximately $4,000,000 per year." (Exhibit # 5).

13. In the management meeting held on December 3, 1987, the group was told their recent road trip was not successful. "Album sales hurt us, we have serious problems. Must cut all expenses. This has been stated many times. . . ." (Exhibit # 5).

14. The cash flow problems of the Kool And The Gang group had started in 1986. In October, 1986, the Kool And The Gang entities had accumulated debts in excess of $1,719,000, exclusive of any borrowings from PolyGram. (October 22, 1986 Management Report, Exhibit # 5).

15. During the course of 1986, the Kool And The Gang subsidiary Quintet borrowed a total of $665,000 from PolyGram. (Exhibit # 80).

16. With their financial problems continuing into 1987, the musical group entered into a loan and security agreement with PolyGram by which, pursuant to a check dated March 3, 1987, PolyGram advanced an additional $500,000 to Quintet. (Exhibit # 148).

17. It is interesting to note that after receipt of the March, 1987, $500,000 check, the group's financial condition was still in such desperate straits that on April 20, 1987, Gerald Delet, manager of the group wrote to PolyGram:

At the present time there are some serious financial and emotional problems. . . . On the financial side, we desperately need some assistance.

. . . . .

We have just started our tour, and by around the middle of May we should be self-sufficient until the tour ends, which will be at the end of this year. To go on tour we had to write a lot of post-dated checks for the pre-tour costs plus our fixed overhead which we cannot cover at this time. . . . We also have not paid certain pretour costs which are due right now — and just as an example, the lighting people and the sound people could very easily have pulled their equipment off the tour.

We need approximately $500,000. . . .

(Exhibit # 146).

18. When Delet's letter of April 20, 1987 pressing for an additional $500,000 advance did not achieve results, a second, April 29, 1987, letter was hand delivered by Delet to PolyGram Records. Said letter contains the following language:

I, and Kool and the Gang, are under extreme pressure. . . .

In asking for the half million dollars as per my letter to Dick, and saying that we would not come back to you for the remainder of the year, which I have never said to anybody before, is extremely important and factual. . . . Once the tour is in full swing, we will be able to meet our monthly bills, but until that point I really have checks that will be returned and open bills that must be paid or there will be suits against us. I really understand your position but without sounding dramatic, this is probably the most important advance for us.

(Exhibit # 147).

19. At the management meeting held on December 3, 1987, the group was presented with a list of its outstanding bills as of November 30, 1987. This list reflects outstanding loans and accounts payable owed by the group of $3,352,109. The report is careful to note that said sum does not include PolyGram advances which at that time were approximately $950,000. The PolyGram advances were to be repaid from royalties which included artistic royalties, publishing royalties and BMI royalties involved with the radio and television playing of the group's music. (Exhibit # 5).

20. Because the management group was not able to pay the personal living expenses of the group members, Mr. Delet, in a letter of January 15, 1988 to PolyGram (exhibit # 128), notes that the group had an immediate cash requirement and need of $121,407.00. This sum included $26,690.06 necessary to stop a mortgage foreclosure about to be filed against a group member's residence, and in addition to make mortgage arrears payments on the personal homes of other group members.

21. Of said debts owed by the various Kool And The Gang entities, certain debts had been personally guaranteed by Mr. Taylor, the debtor herein....