For those unfamiliar with what today’s young kids are listening to, Aubrey “Drake” Graham is one of the most commercially-successful recording artists of all time, with multiple multiple-platinum records to his credit. For frame of reference, Drake’s recent album “Scorpion,” on its first day of release, was streamed over 300 million times on Apple Music and Spotify alone. In other words, Drake generates enough revenue to rap about his taxes: “Nowadays it’s six-figures when they tax me/ Oh well, guess you lose some and win some, long as the outcome is income.”
Aspire Music Group (“Aspire”) was the fortunate record label with the foresight to enter into an Exclusive Recording Artist Agreement with Drake in 2008, when he was still relatively unknown. In 2009, Aspire provided Drake’s services to a joint venture between Cash Money Records (“Cash Money”) and Dwayne Carter’s (aka rapper “Lil Wayne”) company Young Money Entertainment (“Young Money”), in exchange for a third of net profits from Drake’s albums and a third of the copyrights, and for monthly accounting statements.
The sordid history between Cash Money and Lil Wayne is a story for another blog, but suffice it to say that by 2015, Cash Money’s principals were short on both cash and money. Lil Wayne sued Cash Money and its principals for $51 million in January 2015. Universal Music Group (“Universal”) stepped in. Since its inception in 1998, Universal Music Group (“Universal”) had served as Cash Money’s music distributor. However, as alleged by Aspire, in 2015 Universal advanced large sums of money to Cash Money and agreed to take on certain of Cash Money’s liabilities in exchange for unfettered control over a significant portion of Cash Money’s business operations.
Aspire filed a lawsuit in New York County Supreme Court in April 2017 against Cash Money and its principals, Young Money, and Universal. According to Aspire, Cash Money and Young Money had failed to pay Enough Money to Aspire for Drake-related profits, and Universal was liable as Cash Money’s alter ego.
Universal moved to dismiss, arguing that (i) Universal did not own Cash Money, so could not be its alter ego; (ii) Universal was not alleged to be the alter ego of Young Money and therefore not responsible for Young Money’s actions; (iii) Aspire’s rights are governed by a contract to which Universal was not a party; and (iv) Aspire’s allegations of domination and control are conclusory.
In an Order entered on July 3, 2018, Justice Barry R. Ostrager denied Universal’s motion to dismiss. Although recognizing that New York courts do not apply alter-ego liability on non-owners, the court found that Aspire had sufficiently alleged facts suggesting that Universal had obtained “equitable ownership” over Cash Money. Aspire had alleged that, pursuant to contracts, Universal shared offices with Cash Money, operated its website, intermingled its business affairs, and kept Cash Money undercapitalized and entirely dependent on advances and direct payments from Universal. Citing the First Department’s 2000 decision in Trans. International Corp. v. Clear View Technologies, Ltd., the court found that such allegations were sufficient to confer equitable ownership, and thus alter-ego liability, on a non-owner.
It is not clear that the Clear View Technologies decision involved a non-owner, non-director defendant. In its reply brief, Universal cited allegations in the complaint that “each invidividual defendant is and at all relevant times, was an officer, director and shareholder of Clear View.” After acknowledging a long line of New York decisions declining to impose alter ego liability against non-owners, Justice Ostrager concluded that such liability was nonetheless permitted under New York law. However, the court cited only federal cases from the Second Circuit in support.
As for Universal’s other arguments, the court held that Cash Money was liable for Young Money’s acts in furtherance of their joint venture partnership, and therefore Universal need not be alleged to be Young Money’s alter-ego. And Universal’s absence from Aspire’s contract with the joint venture was irrelevant, because Universal did not become Cash Money’s alter ego until 2015. Aspire did not know of Universal’s role at the time it entered the contract with Cash Money.
It remains to be seen whether sufficient evidence exists of Universal’s alleged control over Cash Money. Either way, be forewarned: too much contractual control over a borrower can potentially give rise to liability for that borrower’s obligations.
*** UPDATE ***
By Decision and Order entered February 7, 2019, the Court’s order was reversed by the First Department:
Nevertheless, the court erred in sustaining the claims against Universal on the basis of the alter ego theory. Even assuming Universal was an “equitable owner” of Cash Money (see Freeman v Complex Computing Co., Inc., 119 F3d 1044, 1051 [2d Cir 1997]), the complaint fails to allege that Universal’s domination of Cash Money was used to commit a wrong against plaintiff (see Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 141 ). The complaint essentially alleges that Universal took advantage of Cash Money’s cash flow problems by helping to satisfy millions of dollars of Cash Money’s debts in exchange for control of Cash Money, and then, through such control, paid itself higher distribution fees, thereby reducing the net profits that plaintiff was entitled to receive under the Aspire/YME Agreement. These allegations describe legitimate business conduct; there is no indication that Universal engaged in this conduct for the purpose of harming plaintiff (see JTS Trading Ltd. v Trinity White City Ventures Ltd., 139 AD3d 630 [1st Dept 2016]; TNS Holdings v MKI Sec. Corp., 92 NY2d 335, 339-340 ).