Vista Co. v. Columbia Pictures Industries, Inc.

• Decision Date: 06 December 1989
• Docket Number: No. 89 CIV 2813 (LBS).,89 CIV 2813 (LBS).
• Parties: VISTA COMPANY, a New York Limited Partnership; Persky-Bright Associates, a New York Limited Partnership; Bright-Persky Associates, a New York Limited Partnership; Barclay Associates, a New York Limited Partnership, Reno Associates, a New York Limited Partnership; Claridge Associates, a New York Limited Partnership; Devon Company, a New York Limited Partnership, Lester Persky, an individual; and Richard S. Bright, an individual, Plaintiffs, v. COLUMBIA PICTURES INDUSTRIES, INC., a Delaware Corporation; Columbia Pictures Entertainment, Inc., a Delaware Corporation; and Does 1 through 100, inclusive, Defendants.
• Court: U.S. District Court — Southern District of New York

725 F. Supp. 1286

VISTA COMPANY, a New York Limited Partnership; Persky-Bright Associates, a New York Limited Partnership; Bright-Persky Associates, a New York Limited Partnership; Barclay Associates, a New York Limited Partnership, Reno Associates, a New York Limited Partnership; Claridge Associates, a New York Limited Partnership; Devon Company, a New York Limited Partnership, Lester Persky, an individual; and Richard S. Bright, an individual, Plaintiffs, v. COLUMBIA PICTURES INDUSTRIES, INC., a Delaware Corporation; Columbia Pictures Entertainment, Inc., a Delaware Corporation; and Does 1 through 100, inclusive, Defendants.

No. 89 CIV 2813 (LBS).

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

November 20, 1989.

As Amended December 6, 1989.

COPYRIGHT MATERIAL OMITTED

Kaye, Scholer, Fierman, Hays & Handler, New York City (Pierce O'Donnell, James E. Doroshow, Michael Malina, Peter A. Walker, Martha D. Lemer, Richard J. Halloran, of counsel), for plaintiffs.

Weil, Gotshal & Manges, New York City (James W. Quinn, Kenneth L. Steinthal, Karen E. Donald, Ann E. Dibble, Bruce S. Meyer, of counsel), for defendants.

SAND, District Judge.

This action arises from the acquisition and ownership of various films by plaintiffs, seven New York limited partnerships and two individuals, and the marketing and licensing of these films by defendants, Columbia Pictures Industries, Inc. and Columbia Pictures Entertainment, Inc. Defendants move to dismiss plaintiffs' claims for recovery of certain tax losses on the grounds of lack of standing, prematurity, and lack of causation; for summary judgment on these same claims on the ground of judicial estoppel; and to dismiss plaintiffs' civil RICO claims, the third party beneficiary claims of two general partners, the claim of these two general partners for interference with prospective economic advantage, and plaintiffs' claims for common law and constructive fraud, negligence, rescission, and copyright infringement. Defendants also move for sanctions pursuant to Fed.R.Civ.P. 11.

I. BACKGROUND

During the period from 1973-75, because of financial difficulties, Columbia Pictures Industries, Inc. and Columbia Pictures Entertainment, Inc. (hereinafter "Columbia") sold a number of motion pictures (hereinafter "the films") to plaintiffs, seven New York Limited partnerships (hereinafter "the Partnerships"). These partnerships were formed by plaintiffs Lester Persky and Richard Bright, who also became the general partners. The films were the principal business of the Partnerships and their sole income producing assets. Plaintiffs paid for these films with a combination of cash and promissory notes secured by the films. Pursuant to the acquisition contracts (hereinafter "the contracts"), Columbia was to market and distribute the films on plaintiffs' behalf. A percentage of the earnings from the films was to go toward repayment of the promissory notes.

Plaintiffs allege that after signing the contracts, defendants engaged in a variety of acts, some of which were illegal and some of which breached the contracts. Specifically, plaintiffs allege that Columbia engaged in various practices which had the effect of reducing competition in the market for the licensing of plaintiffs' films. Plaintiffs also maintain that Columbia materially breached its contractual and fiduciary duties by delaying or failing to report revenues earned by the films, charging improper costs and fees, failing to credit plaintiffs for revenues earned by the films, failing to exploit the films in all available markets and media, failing to exploit the films competently, failing to refund prepaid monies unearned and not due Columbia, engaging in extortion, and improperly declaring the exercise of a purported option to continue distributing the films. Plaintiffs also allege that Columbia, by claiming both investment tax credit and depreciation allowance for the films on its tax returns, breached its contractual warranty that it would "do nothing for tax purposes to derogate" plaintiffs' ownership of the films.

Beginning in 1977, the IRS began auditing the tax returns of certain of the individual partners in the various Partnerships. Several of these partners were served with deficiency notices and filed petitions for redetermination in the United States Tax Court. These partners also engaged in settlement discussions with the IRS. A number of the partners in two of the seven partnerships were eventually able to achieve settlements. Plaintiffs allege that during the time when these audits were taking place, the IRS conducted an audit of Columbia and discovered that Columbia was claiming investment tax credit and depreciation for the films. Plaintiffs also believe that this discovery adversely affected the settlement negotiations. Eventually, the IRS disallowed various tax benefits claimed by the partners, and plaintiffs proceeded to litigation before the Tax Court.

After a trial involving partners of two of the partnerships, the Tax Court entered an April 1988 judgment adverse to the Partnerships, resulting in what plaintiffs estimate was an increased tax liability for the partners of nearly $65 million. An extensive written opinion under the caption Bailey v. Commissioner of Internal Revenue preceded the judgment. At this time, plaintiffs' appeal of the Tax Court decision is pending before the United States Court of Appeals for the Second Circuit and none of the tax liabilities have been paid. Plaintiffs also maintain that they incurred in excess of $600,000 in attorney's fees in litigating before the Tax Court.

On November 16, 1988, Columbia filed an action seeking a declaratory judgment validating its extension in perpetuity of its distribution right in the films. Later that same day, plaintiffs filed an action in federal district court in California. It was thereafter resolved by consent of both parties that plaintiffs would bring all their non-antitrust claims against Columbia before this Court and that these actions would be consolidated with Columbia's declaratory judgment action. A letter "standstill agreement" extended Columbia's distribution rights in the films until thirty days after this Court enters a final judgment. Defendants now move to dismiss a number of plaintiffs' claims on a variety of grounds.¹ Defendants also move for summary judgment on the grounds of judicial estoppel on plaintiffs' claims to recover the tax losses and for sanctions under Fed.R.Civ.P. 11.

II. DISCUSSION

For the purposes of a motion to dismiss, the factual allegations of the Complaint must be accepted as true, Dwyer v. Regan, 777 F.2d 825, 828-29 (2d Cir.1985), modified, 793 F.2d 457 (1986), and a complaint must be construed favorably to the pleader. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). A complaint will not be dismissed for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. at 236, 94 S.Ct. at 1686 (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)).

A. "Tax Claims"

In their so-called "tax claims," plaintiffs seek recovery of the tax losses they incurred before the Tax Court. According to plaintiffs, these claims include the breach of contract claim (Claim One), the indemnity claim (Claim Fourteen), the claim for breach of the covenant of good faith and fair dealing (Claim Two), the claim for breach of fiduciary duty (Claim Three), the fraud claims (Claims Ten, Eleven and Twelve), and the rescission claim (Claim Eighteen). Defendants move to dismiss all these claims on four grounds: lack standing, prematurity, lack of causation, and judicial estoppel. Because the Court reaches a different result on the issue of prematurity for the indemnity claim (Claim Fourteen), that claim will be dealt with separately from the other claims in portions of the discussion that follows.

(1) Standing

Defendants argue that the "tax claims" are defective because plaintiffs lack standing to assert them and claim that only the individual partners can bring an action to recover the tax liabilities. It must be remembered, however, that plaintiffs' complaint asserts claims for breach of contract, indemnity, breaches of the covenant of good faith and fair dealing, breach of fiduciary duty, fraud, and rescission. Though the complaint does seek recovery for the tax liabilities of individual partners, all these claims derive from the contracts or dealings between the Partnerships and Columbia, not between the individual partners and Columbia. It goes without saying that these contracts, as with most if not all partnership contracts, were negotiated and executed for the benefit of the individual partners.

Fed.R.Civ.P. 17(a) provides that "... a party with whom or in whose name a contract has been made for the benefit of another ... may sue in that person's own name without joining the party for whose benefit the action is brought." Although the damages sought are tax liabilities incurred by individual partners, the Partnerships can properly bring an action to enforce rights deriving from the contracts it negotiated for the benefit of the individual partners. See Bache & Co. v. Int'l Controls Corp., 324 F.Supp. 998, 1004-05 (S.D. N.Y.1971), aff'd, 469 F.2d 696 (2d Cir.1972) (Broker in whose name contract was made could bring action on behalf of customers under Rule 17(a). "The law wisely does not require the inconvenience to the court and the expense to the parties of having the 145 of broker's customers made actual parties to this suit."). At oral argument, plaintiffs' counsel indicated that the individual partners were expected to provide their tax returns during discovery. Tr. at 35. On the basis of counsel's representations, the Court is convinced that defendants are unlikely to suffer any prejudice by this Court's decision on standing.

The case which d...