TV Tokyo Corp. v. 4Kids Entm't, Inc. (In re 4Kids Entm't, Inc.)

• Decision Date: 29 December 2011
• Docket Number: Adversary No. 11–02225 (SCC).,Bankruptcy No. 10–11607 (SCC).
• Parties: In re 4KIDS ENTERTAINMENT, INC., et al.,1 Debtors.TV Tokyo Corporation and Nihon Ad Systems, Inc., Plaintiffs, v. 4Kids Entertainment, Inc., Defendant and Counterclaim–Plaintiff, v. ASATSU–DK Inc., Nihon Ad Systems, Inc., Television Tokyo Channel 12, Ltd and TV Tokyo Corporation, Counterclaim–Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

463 B.R. 610

In re 4KIDS ENTERTAINMENT, INC., et al.,1 Debtors.TV Tokyo Corporation and Nihon Ad Systems, Inc., Plaintiffs,

v.4Kids Entertainment, Inc., Defendant and Counterclaim–Plaintiff,

v.ASATSU–DK Inc., Nihon Ad Systems, Inc., Television Tokyo Channel 12, Ltd and TV Tokyo Corporation, Counterclaim–Defendants.

Bankruptcy No. 10–11607 (SCC).

Adversary No. 11–02225 (SCC).

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

Dec. 29, 2011.

Olshan Grundman Frome Rosenzweig & Wolosky LLP, By: Kyle C. Bisceglie, Esq., Michael S. Fox, Esq., Ellen V. Holloman, Esq., Mason Barney, Esq., New York, NY, for Plaintiffs and Counterclaim–Defendants.

Kaye Scholer LLP, By: Michael B. Solow, Esq., Frederic W. Yerman, Esq., Paul C. Llewellyn, Esq., Jessica A. Malkin, Esq., New York, NY, for Debtor/Defendant and Counterclaim–Plaintiff.

POST–TRIAL FINDINGS OF FACT AND CONCLUSIONS OF LAW

SHELLEY C. CHAPMAN, Bankruptcy Judge.

+-------------------+
                ¦TABLE OF CONTENTS  ¦
                +-------------------+
                

                PARTIES AND PROCEDURAL HISTORY                                          619
                FINDINGS OF FACT                                                        621
                

                I.  Background                                                          622
                

    A.   The Licensor Parties and the Yu–Gi–Oh! Brand                   622
                    B.   The Yu–Gi–Oh! License Agreements                               622
                

         1.  The Short Form Agreement                                   622
                         2.  The 2001 Agreement                                         623
                         3.  The 2008 Agreement                                         623
                         4.  The Gross Income Provision                                 623
                

                II.  4Kids' Activities Under the Yu–Gi–Oh! License Agreements           625
                III. ADK's Royalty Audit of 4Kids                                       625
                IV.  ADK's Plan to Start its Own U.S. Home Video Business               627
                V.   The Final Audit Findings                                           628
                

    A.   Finding No. 1: Funimation Service Fees                         628
                

         1.  4Kids' Decision to Start 4Kids Home Video                  628
                             The Negotiation of the Home Video Rights in the 2001
                         2.  Agreement                                                  629
                             The Parties' Understanding of Paragraph 1(b) of the 2001
                         3.  Agreement                                                  630
                         4.  The 4Kids–Funimation Agreements                            630
                

             a.  The Funimation Distribution Agreement                  630
                             b.  The Funimation Services Agreement                      632
                             c.  Execution of the Funimation Agreements                 634
                

             d.  Disclosure of the Funimation Services Agreement and    635
                                 Fees
                

         5.  4Kids' Home Video Subsidiary                               637
                         6.  The Revision of Paragraph 1(b)(iii) in the 2008 Agreement  638
                

    B.   Finding No. 2: Majesco Service Fees                            638
                

         1.  Background of the 4Kids–Majesco Relationship               639
                         2.  The Majesco Services Agreement                             639
                

    C.   Finding No. 3: International Withholding Taxes                 640
                

         1.  Withholding Taxes Generally                                640
                             Treatment of Withholding Taxes under the License
                         2.  Agreements                                                 641
                         3.  Mr. Elliott's Audit Finding                                644
                         4.  Expert Testimony Regarding Japanese Tax Law                647
                             There Is No Credible Evidence That ADK Ever Requested
                         5.  Foreign Tax Withholding Certificates from 4Kids Prior to   650
                             the Audit
                         6.  There Is No Evidence That ADK Suffered Any Tax Related     652
                             Injury
                

    D.   Finding No. 4: Post–June 2008 Home Video Revenue               654
                    E.   Finding No. 5: Costs of Third–Party Audits                     655
                    F.   Finding No. 6: Errors & Omissions Insurance Allocation         659
                

         1.  4Kids' Methods                                             660
                         2.  Mr. Elliott's Method                                       660
                

    G.   Finding No. 7: Bank Charges                                    661
                    H.   Finding No. 8: Miscellaneous Costs                             661
                    I.   Finding No. 9: Material & Courier Costs                        661
                

                VI. ADK's Purported Termination of the 2008 Agreement                   664
                

    A.   The 2008 Agreement's Termination Provision                     664
                    B.   Mr. Elliott's Preliminary Audit Findings                       664
                    C.   The Parties' June 2010 Correspondence                          665
                

         1.  ADK's June 17, 2010 Letter                                 665
                         2.  ADK's June 25, 2010 Letter                                 666
                         3.  4Kids' June 29, 2010 Response                              666
                

    D.   The Parties' December 2010 Correspondence                      667
                

         1.  ADK's December 20, 2010 Letters                            667
                         2.  4Kids' December 29, 2010 Responses                         668
                

    E.   The Parties' 2011 Negotiations                                 669
                

         1.  Adaptation Agreement                                       670
                         2.  Mr. Sugimoto's “Inadvertent” March 9, 2011 Email           672
                         3.  4Kids' $1 Million Good–Faith Payment                       673
                         4.  The March 18, 2011 Meeting                                 673
                         5.  4Kids' Efforts to Continue Negotiations to Resolve the     674
                             Audit Claims
                

    F.   The March 25, 2011 Purported Termination                       675
                    G.   Balance Owed to 4Kids at the Time of Termination               676
                

EVIDENTIARY MATTERS                                                     676
                

                I.  Admissibility of Expert Testimony                                   676
                

         Plaintiffs' Motion in Limine   to Exclude the Expert Report
                    A.   and Testimony of Takaaki Tokuhiro                              677
                    B.   4Kids' Motion in Limine   to Exclude the Testimony of Robert   678
                         Freedman and Arthur Erk
                

                II.  Evidentiary Issues Regarding the Translation of Documents          679
                III. Other Evidentiary Objections                                       681
                

DISCUSSION                                                              681
                

I.  Applicable Law                                                      681
                    Licensor's Purported Termination of the 2008 Agreement was
                II. Ineffective Because Licensor Failed to Provide 4Kids with Adequate  683
                    Formal Written Notice of Breach
                

    A.   ADK's June 17, 2010 Letter                                     685
                    B.   ADK's June 25, 2010 Letter                                     685
                    C.   ADK's December 20, 2010 Letters                                685
                    D.   ADK's March 4, 2011 Letter                                     687
                    E.   Mr. Sugimoto's “Inadvertent” March 9, 2011 Email               688
                    F.   Ongoing Negotiations Continued Between the Parties Without a   688
                         Final Opportunity to Cure
                

                     The Amount Owed by 4Kids, if Any, Was Not the $4.8 Million Claimed
                III. in the Purported Notice of Breach, Which Renders the Notice         689
                     Materially Defective and Renders the Termination Ineffective
                

    A.   Finding No. 9: Material & Courier Costs—$247,771.88            691
                    B.   Finding No. 8: Miscellaneous Costs—$43,554.59                  692
                    C.   Finding No. 7: Bank Charges—$4,270.58                          692
                         Finding No. 6: Errors & Omissions Insurance
                    D.   Allocation—$67,328.45                                          692
                    E.   Finding No. 5: Unauthorized Audit Fee Deduction—$105,111.20    693
                         Finding No. 4: Unreported Post–June 2008 Home Video
                    F.   Revenue—$26,894.27                                             694
                    G.   Finding No. 3: Unsubstantiated International Withholding       695
                         Taxes—$2,265,767.16
                

             4Kids Provided Evidence of Withholding Tax Deductions
                         1.  Required by the License Agreements                         695
                         2.  Licensor Has Demonstrated No Tax Injury                    698
                         3.  Even If ADK Suffered a Tax Injury, It Cannot Recover From  699
                             4Kids Due to Its Own Inaction
                

         Findings No. 1 and No. 2: Unreported Funimation Home Video
                    H.   Revenue-$1,967,000.00 and Unreported Majesco Home Video        700
                         Revenue-$91,666.50
                

             4Kids Exercised the Home Video Rights Itself Pursuant to
                         1.  Paragraph 1(b)(iii) of the License Agreements and Earned   701
                             Service Fees from its Distributors for Separate Services
                             Rendered
                

                 Licensor's Mischaracterization of 4Kids' Duties under
                             a.  the License Agreements                                 702
                                 Licensor's Arguments that Funimation Was the Licensee
                                 Because It (i) Was Manufacturing, Distributing, and
                             b.  Selling Home Videos and (ii) Bore the “Inventory Risk” 702
                                 Do Not Withstand Scrutiny
                             c.  Licensor's “Secrecy Clause” Argument Has No Basis      704
                

         2.  Paragraph 1(b)(iii) of the License Agreements and the      705
                             Misunderstanding Regarding Such Provision
                

                IV. Other Arguments Presented by Plaintiffs                             707
                

CONCLUSION                                                              708
                

Since 2001, defendant 4Kids Entertainment, Inc. (“4Kids” or the “Debtor”) has brought the immensely popular Yu–Gi–Oh! anime series to children of all ages in the United States and abroad. As licensee of the brand from plaintiffs NAS, TV Tokyo, and ADK (each as defined below), the Japanese...