Wednesday, January 26, 2011

Antone's Records: A Tragedy in Three Acts and 46 Pages

Austin prides itself on being the Live Music Capital of the World. While many musicians travel to Austin with stars in their eyes, the reality is that it is difficult to earn a living in the music business, either as an artist or an independent record label. For the past eighteen months Bankruptcy Judge Craig Gargotta has received an extensive education on what can go wrong in relationships between record labels and their artists. This education was on full display in a 46 page opinion he wrote in Walser v. Antone’s Records, et al, Adv. No. 09-1010 (Bankr. W.D. Tex. 1/24/11). You can find the opinion here.

However, Judge Gargotta was not the only one receiving an education. I represented the debtors and the case was a real eye opener for me. This is the story of Antone’s Records, a tragedy in three acts.

Act I: Watermelon Records

During the 1980s and 1990s, Antone’s Records and Watermelon Records were hometown competitors in the music business. Watermelon was founded by Heinz Geissler, a German immigrant. Its catalog focused on Americana music. Antone’s Records was founded by nightclub owner Clifford Antone and focused on blues music. At some point during the 1990s, Dallas investor and music lover James Heldt acquired a majority stake in Antone’s.

Watermelon Records was the first to fall. Watermelon Records filed for chapter 11 relief in 1998. At the time, many of its artists were unhappy with the label. After a contentious three year case involving competing plans and shifting alliances, Watermelon confirmed a plan in which its assets were sold to Texas Clef Entertainment Group, Inc. Texas Clef was an affiliate of Antone’s Records which was formed to make the acquisition.

Few of the artists filed claims in the Watermelon Records bankruptcy case. A group of artists was very active in the case and succeeded in having their records carved out of the sale. The plan of reorganization confusingly provided that artists who filed proofs of claim would be treated as parties to executory contracts and would receive a cure offer. Since most of the artists did not file claims, this provision applied to only a few parties. However, the artists did not receive cure offers. Instead, they received a pro rata share of the funds available to unsecured creditors.

Even though the plan was not followed, none of the parties seemed to take notice. Texas Clef re-released many of the Watermelon titles.

Act II: The Walser Suit

Antone’s, Texas Clef and sister label, Texas Music Group, drew the ire of many of their artists and publishers when they were slow to issue royalty statements and pay royalties.

In 2004, Texas yodeler Don Walser, known as the Pavarotti of the Plains, hired a lawyer and demanded that the label provide him with his royalty statements. After three tries, the label rendered an accurate statement and paid most of the royalties. However, this occurred after the expiration of a deadline to cure defaults. Nonetheless, Mr. Walser accepted the payments. Nothing more occurred until March 2005, when Mr. Walser filed a suit against the label timed to coincide with the South by Southwest Music Festival.

While many of the artists would dispute this, my belief is that the Antone’s labels were guilty not of malice, but failure to keep up with rapidly changing technology. During the 2000s, the sale of music began to shift from cassettes and compact discs to digital downloads. This new distribution channel multiplied the label’s reporting requirements exponentially. Compact discs are sold as a unit containing all the tracks. The record label generally used one domestic distributor and one or more foreign distributors. With digital downloads, consumers could purchase individual tracks or albums. In the early days of digital downloads, there were many competing digital download sites who often provided their reporting in inconsistent formats. It required many man hours to assemble all of this data into a statement. Having downsized its operation to save costs after Mr. Heldt was unwilling to continue subsidizing the labels’ losses, the labels were simply unable to keep up with reporting for over 100 releases. It was not until 2009, after chapter 11 had been filed, that in-house computer wiz Tristan Ader developed an automated database which synthesized the information received into a statement.

Meanwhile, the Walser lawsuit rocked along in Texas state court. The suit metastasized to include six defendants, including the three record labels, James Heldt, Heinz Geissler (now an Antone’s employee) and label president, Randolph Clendenen.

Act III: The Antone’s Bankruptcy

On November 18, 2008, on the eve of trial in the state court action, the three labels filed for chapter 11 relief. Ironically, it was during the bankruptcy case that the labels first began to generate timely statements and make timely royalty payments.

The Walser case was removed to bankruptcy court. The suit remained on hold for a lengthy period while the U.S. District Court considered a Motion to Withdraw Reference.

History repeated itself as competing plans were once again filed. The debtors filed a plan based on payments from cash flow and a new capital contribution from James Heldt. The Official Creditors’ Committee filed a plan proposing to sell the debtor’s assets to a new label for $125,000. At the last moment, the Creditors’ Committee sought to move up the auction from after confirmation to the confirmation hearing itself. An auction was held at the confirmation hearing with James Heldt making the high bid. However, the court rejected his bid and accepted the next highest bid, which came from New West Records. During the bidding process, the sale price doubled from the original offer.

In a mediated settlement, the Debtors, the Official Creditors’ Committee and James Heldt agreed to allow the New West sale to go forward at a slightly higher price with several other concessions. At this point, it became clear that Antone’s would not continue as an independent label. However, there was still the Walser suit to try. This trial was held in bankruptcy court over three days in May 2010. Although Mr. Walser’s estate had filed a proof of claim for $300,000, the estate’s attorney asked for damages of $1 million in closing argument.

On January 24, 2011, the Bankruptcy Court rendered its opinion denying substantially all of the relief requested by the Walser estate.

The Court’s opinion methodically analyzed and rejected the claimant’s theories. Among other findings:

· The Walser estate could not claim the masters embodying his recordings. When a record company pays for the recording of a musical performance, that recording belongs to the record company. The Court found that any claim for rescission of the recording agreement was pre-empted by the Copyright Act and that the Walsers had failed to meet the high standard for imposing a constructive trust under Texas law.

· The record company did not owe a fiduciary duty to the artist. Where Mr. Walser had representation from both an agent and an attorney, he did not rely on the record company to act on his behalf. There was not a relationship of trust and confidence under state law where he affirmatively distrusted the record company. In its ruling, the Court distinguished a case involving Apple Records and the Beatles.

· The record company did not commit fraud when it failed to provide royalty statements in a timely manner. As the Court stated, “No evidence exists that demonstrates actual fraud.”

· The Walsers could not recover damages for emotional distress or punitive damages on a breach of contract claim.

· The Walsers could not pierce the corporate veil to impose liability on the individuals associated with the record labels. Under Texas law, mere failure to observe corporate formalities was not a ground for piercing the corporate veil. On a contract claim, it was necessary to show actual fraud rather than merely constructive fraud to pierce the corporate veil. Where James Heldt had loaned millions of dollars to the company and had never taken a salary, there were no grounds for piercing the corporate veil.

The Court’s opinion is a valuable resource for cases involving constructive trusts, rescission, breach of fiduciary duty and piercing the corporate veil. Many of these issues involve routine Texas state law questions. However, there are so many questions addressed in this opinion that there is something for many people.

In the end, the Walser estate was awarded an unsecured claim for $28,161.41, an amount conceded by the Debtors and which had been tendered prior to bankruptcy, together with pre-judgment interest of $1,025.15, which was the amount the Debtors conceded was owed. The Court also allowed the Walser estate to apply for an award of attorney’s fees, but cautioned that it must segregate out the time spent on relief which was not granted.

This is a case brimming with ironies. The suit which pushed the debtors into bankruptcy was ultimately rebuffed. However, because the artist and publisher creditors did not support the plan proposed by the Debtors, the assets of the Debtors were sold to a new label. Hopefully for the artists, the third time will be the charm.

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