Opinion
No. 03 Civ. 0517 (GBD).
February 28, 2005
MEMORANDUM OPINION AND ORDER
Plaintiff TMS Entertainment Ltd. ("TMS") brings this action against Madison Green Entertainment Sales, Inc. (f/k/a BKN Entertainment, Inc.), BKN Studios, Inc. (f/k/a BKN Entertainment, Inc.), BKN International AG and Allen Bohbot, alleging various contract and fraud claims. Defendants BKN Studios, BKN International and Allen Bohbot ("defendants") move for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. For the reasons stated below, defendants' motion is denied in part and granted in part.
Defendant BKN Entertainment, a New York corporation, is not represented in this matter. BKN Entertainment became Madison Green Entertainment Sales, Inc., on or about July 15, 2002. Defendant Madison Green did not answer or otherwise move with respect to the Summons and Complaint, and the Amended Summons and Complaint, as served on May 23, 2003. Because the time for answering, appearing or moving had expired, this Court ordered a default judgment against Madison Green on September 2, 2003.
BACKGROUND
Plaintiff TMS is a Japanese corporation that creates, produces, and licenses animated films. TMS entered into three distribution agreements with BKN Entertainment ("Entertainment") that granted Entertainment exclusive rights to distribute the animated series Monster Rancher in certain international territories. The distribution agreements, dated June 1, 1999 ("First Distribution Agreement"), April 10, 2000 ("Second Distribution Agreement"), and November 1, 2000 ("Third Distribution Agreement"), provide for the distribution of different episodes of the series, but were otherwise identical in all material respects. Each agreement included an assignment clause that permitted Entertainment to assign the rights to the animated series. In exchange for the distribution rights, Entertainment agreed to make installment payments to TMS as licensing fees. Defendant Bohbot executed all three agreements on behalf of Entertainment.
The First Distribution Agreement covers episodes 1-26. The Second Distribution Agreement covers episodes 27-48. The Third Distribution Agreement covers episodes 49-73.
The assignment clause provides:
12. [Entertainment] may license, assign or transfer this Agreement or any or all rights granted to [Entertainment] hereunder, to any person, firm or corporation, [Entertainment] may delegate production, animation and post-production or parties therof to such subcontractors as [Entertainment] deems appropriate and may sub-distribute any or all of the rights licenses or granted to it hereunder. (i) Despite the assignment of [Entertainment's] rights to third parties, [Entertainment] shall not be relieved of its obligations under the Agreement, and further more (ii) [Entertainment] shall cause the assignee to assume any and all obligations of [Entertainment] under Agreement as if it were a party to the Agreement, and (iii) [Entertainment] shall be also liable for any conduct of such assignee in relation to this Agreement. Licensor may not assign this contract or any portion thereof.
Bohbot Aff., Exhs. C, D, E, Section 12. (Emphasis added). In addition, each Distribution Agreement provided that "[t]he terms of this Agreement shall be binding upon and inure to the benefit of the respective parties' successors, assigns, executors and administrators; provided, however, that such parties shall thereafter be bound by the provisions of this Agreement." Id., Section 15.
Pursuant to the assignment clause, Entertainment assigned its rights under the Distribution Agreements to BKN International AG ("International"). Specifically, in December 1999, Entertainment and its parent company, BKN Inc., entered into a License and Development Agreement with International, where BKN Inc. and Entertainment assigned their current and future international intellectual property rights to International, including the right to distribute the Monster Rancher series. In consideration for these assets, International assumed a $15 million third-party promissory note, and BKN Inc. acquired 87.5% of the outstanding shares of International. The parties structured the assignment whereby International gained the distribution rights without assuming Entertainment's obligations under the Distribution Agreements.
On January 5, 2001, International executed a Film Asset Purchase Agreement with BKN Inc. and Entertainment, acquiring their U.S. owned and licensed rights in television programs and series. This purchase included all U.S. rights in the Monster Rancher series. International assumed $25,578,357 of Entertainment's liabilities and paid $100 as the purchase price. International had previously acquired all non-U.S. rights through the License and Development Agreements executed in 1999. On the same day, Entertainment sold its entire production studio to BKN Studios, Inc. ("Studios"), for $2.5 million in cash pursuant to a Studio Asset Purchase Agreement.
Studios is a New York corporation established in July 2000. International is its sole shareholder.
During all of these transactions, Defendant Bohbot was Chairman of the supervisory board of International, CEO and board member of Entertainment, CEO and board member of BKN Inc., and board member of Studios. He was the sole decision-maker on behalf of all parties to the agreements. See Craig Dep. 23-24, 30-31. International and Entertainment were both wholly-owned subsidiaries of BKN Inc., of which Bohbot was the majority shareholder. By February 2001, Bohbot became CEO and Chairman of the Board of International. International was the sole shareholder of Studios.
Once Bohbot became CEO and Chairman of the Board of International, he executed a Stock Purchase Agreement, taking BKN Inc.'s remaining assets, its shares of International stock, as repayment for a $5 million loan that he had previously made to the company. Thereafter, Bohbot resigned from BKN Inc.
As a result of all of the transactions, Entertainment had no management, no employees, no assets, and no ongoing business.See Bohbot Dep. 134-38; Craig Dep. 24-25. It only had outstanding debt in the millions, including owing Plaintiff $1,040,000 under the Second and Third Distribution Agreements. BKN Inc. had no assets remaining. Neither company was operating as a business. International had acquired all international and domestic intellectual property rights from BKN Inc. and Entertainment, including distribution rights of Plaintiff's Monster Rancher series through 2009, and personnel from Entertainment.
Plaintiff brought suit alleging six claims. Claim one was for breach of contract against Defendants Entertainment and Studios. Claim two was for breach of assignment against International. Claim three was for breach of contract for the benefit of a third party against Entertainment, Studios, and International. Claim four was for breach of an implied in fact contract against International. Claim five was for termination of the license agreements against Entertainment and Studios. Claim six was for unjust enrichment against International. Claim seven was for fraud against Entertainment, Studios, and Bohbot.
Defendants' motion is designated as a motion "dismissing the entire Amended Complaint, pursuant to Fed.R.Civ.P. 56." Defendants' Notice of Motion for Summary Judgment. However, defendants have made no argument for dismissal of plaintiff's sixth claim for unjust enrichment against defendant International. Therefore any motion for summary judgment on that claim is denied because no factual or legal basis has been provided warranting dismissal.
DISCUSSION
Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Nebraska v. Wyoming, 507 U.S. 584, 590, 113 S.Ct. 1689, 123 L.Ed.2d 317 (1993). The burden of demonstrating that no factual dispute exists is on the moving party. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party has met this burden, the nonmoving party "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). In deciding a motion for summary judgment, a court must resolve all ambiguities and draw all reasonable inferences in favor of the party opposing the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.3d.2d 202 (1986). Summary judgment should be granted only when no reasonable trier of fact could find in favor of the nonmoving party. Gallo v. Prudential Residential Services, 22 F.3d 1219, 1224 (2d Cir. 1994).
A. Breach of Contract Claims
1. Breach of Contract Claim against BKN Studios
Plaintiff TMS asserts that BKN Studios failed to make payments of licensing fees to TMS under the Second and Third Distribution Agreements. Although BKN Studios was not a party to the Distribution Agreements, plaintiff argues that Studios is the corporate successor to Entertainment under a de facto merger theory. Because Studios acquired substantially all of Entertainment's assets and certain liabilities pursuant to the Studio Asset Purchase Agreement, and Entertainment ceased operations, Plaintiff argues that they are the same entity. Thus, Studios's failure to make payments pursuant to the Distribution Agreements constituted a breach of contract. Defendant Studios claims that it was not a party to the Distribution Agreements, and did not undertake any obligations.
Only "when two corporations merge to become a single entity, is the successor corporation automatically liable for the debts of both predecessors; it is both predecessors." Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 45 (2d Cir. 2003). A de facto merger occurs when a transaction, not in form but in substance, is "`a consolidation or merger of seller and purchaser.'" Id. (citing Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 245 (1983)); see Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc., 775 F.2d 38, 42 (2d Cir. 1985) (stating that a de facto merger occurs when one corporation is absorbed by another without complying with statutory merger requirements). Under New York law, the following elements serve as "the hallmarks of a de facto merger": continuity of ownership; cessation of ordinary business and dissolution of the acquired corporation as soon as possible; assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and, continuity of management, personnel, physical location, assets and general business operation. Cargo Partner, 352 F.3d at 46 (citations omitted). However, "[n]ot all of these elements are necessary to find a de facto merger." Id. (citing Fitzgerald v. Fahnestock Co., 286 A.D.2d 573, 574-75 (1st Dep't 2001)). Moreover, "[t]he doctrine of de facto merger in New York does not make a corporation that purchases assets liable for the seller's contract debts absent continuity of ownership." Cargo Partner, 352 F.3d at 46.
According to the Studio Asset Purchase Agreement at issue, Studios did not assume Entertainment's liabilities, except those arising from the real property, personal property, and employment contracts acquired. See Bohbot Aff., Exh. H, at 2. While the evidence supports the presence of some of the factors, such as the continuity of personnel, physical location, and assets, TMS has presented no evidence to support a finding that there has been a continuity of ownership between Entertainment and Studios. Accordingly, plaintiff's breach of contract claim against defendant Studios is dismissed.
In the Fifth Count of plaintiff's complaint, plaintiff seeks to terminate their contract as to Entertainment and Studios. It is undisputed, however, that plaintiff was not in privity of contract with Studios. Absent a finding that a de facto merger occurred between Entertainment, with whom plaintiff was in privity of contract, and Studios, plaintiff's termination claim against Studios is dismissed.
2. Breach of Assignment against International
In its second claim for breach of contract, TMS argues that International breached its contractual obligations to TMS by accepting the assignment of the licensing rights contained in the Distribution Agreements, pursuant to the License and Development Agreement with Entertainment and BKN Inc., and failing to pay licensing fees in exchange for rights to distribute Monster Rancher. Plaintiff highlights the assignment clause of the Distribution Agreements, which provides, in relevant part: "(ii) [Entertainment] shall cause the assignee to assume any and all obligations of [Entertainment] under Agreement as if it were a party to the Agreement, and (iii) [Entertainment] shall be also liable for any conduct of such assignee in relation to this Agreement." Bohbot Aff., Exhs. C, D, and E, Section 15. Defendant International claims that it had no contractual obligation to pay TMS licensing fees, and that the License and Development Agreement and Film Asset Purchase Agreement expressly stated that International did not assume any such liabilities and obligations of Entertainment.
"The mere assignment of a bilateral executory contract may not be interpreted as a promise by the assignee to assignor to assume the performance of the assignor's duties, so as to have the effect of creating a new liability on the part of the assignee to the other party to the contract assigned." J. Kagan et al. v. K-Tel Entertainment, Inc., 172 A.D.2d 375, 377 (1st Dep't 1991). In the absence of express assumption of duties, the assignee incurs no obligation. See id. Moreover, "[a]n assignment involves the transfer of rights. A delegation involves the appointment of another to perform one's duties." Contemporary Mission, Inc. v. Famous Music Corporation, 557 F.2d 918, 924 (2d Cir. 1977) (citing J. Calamari J. Perillo, Contract § 254 (1970)).
Plaintiff has provided no evidence to support a finding that International assumed Entertainment's obligations. The Film Asset Purchase Agreement between Entertainment and International specifically provided that International "is not assuming any liabilities whatsoever relating to Program Assets [including Monster Rancher rights]. . . ." Bohbot Aff., Exh. G, at 254-55. The clear terms of this agreement shows that defendant International did not expressly assume the duties and obligations of Entertainment when executing the assignment agreement. TMS offers no evidence to the contrary. Therefore, defendant BKN International's motion for summary judgment on plaintiff's second claim is granted. Plaintiff's breach of contract claim against International is dismissed.
3. Breach of Contract for the Benefit of a Third Party Against Studios and International
Plaintiff TMS argues that it is an intended third party beneficiary of the agreements between Entertainment and International concerning the Monster Rancher distribution rights. TMS claims that Entertainment assigned such rights to International for the purpose of benefitting TMS, and therefore, International is obligated to pay for its exploitation rights.
"A person who is not a party to the contract may bring an action for breach of contract if she or he is an intended beneficiary, and not merely an incidental beneficiary of the contract." Cauff, Lippman Co., v. Apogee Finance Group, Inc., 807 F. Supp. 1007, 1020 (S.D.N.Y. 1992). "Although a third party need not be specifically mentioned in the contact [sic] before third-party beneficiary status is found, New York law requires that the parties' intent to benefit a third party must be shown on the face of the agreement." In re Gulf Oil/Cities Serv. Tender Offer Litig., 725 F. Supp. 712, 733 (S.D.N.Y. 1989); see also Port Chester Electrical Constr. Corp. v. Atlas, 40 N.Y.2d 652, 389 N.Y.S.2d 327, 357, N.E.2d 983, 986 (N.Y. 1976). "Absent such intent, the third party is merely an incidental beneficiary with no right to enforce the contract." In re Gult Oil/Cities Serv. Tender Offer Litig., 725 F. Supp. at 733.
Plaintiff has provided no evidence to support his third party beneficiary claim. There is no evidence in the record that the various agreements between Entertainment and International included any provision that International assumed Entertainment's obligations to pay licensing fees to TMS. Rather, plaintiff relies on the confirmation of account letters, as well as Defendant Bohbot's knowledge of the assignment restrictions, in arguing the existence of a third-party beneficiary right. The face of the agreement itself must show the intent to benefit TMS.See In re Gulf Oil/Cities Serv. Tender Offer Litig., 725 F. Supp. 712. Plaintiff has offered no proof that the agreement itself indicates such an intent. In fact, the agreements clearly provided that International did not assume the liabilities of Entertainment. TMS, therefore, cannot be found to be an intended third-party beneficiary of the agreement. Defendants' motion for summary judgment dismissing claim three against Studios and International is granted.
4. Breach of Implied-In-Fact Contract Against International
Plaintiff also argues that International breached an implied-in-fact contract with TMS by accepting the rights under the Distribution agreement and then failing to make payments to TMS. For support, Plaintiff notes that International acknowledged its responsibility for payments under the Second and Third Distribution Agreements by confirming the amounts due in a series of responses to Plaintiff's "Request for Confirmation of Account" letters.
"A contract implied in fact may result as an inference from the facts and circumstances of the case although not formally stated in words . . . and is derived from the `presumed' intention of the parties as indicated by their conduct." Jemzura v. Jemzura, 369 N.Y.S.2d 400, 408 (N.Y. 1975). An implied in fact contract is equally binding as an expressed contract as the law does not distinguish between agreements made by words and those made by conduct. Jemzura, 369 N.Y.S.2d at 408. Nevertheless, like an express contract, a contract implied in fact requires mutual assent evincing the intention of the parties to be bound by specific contractual terms. See Nadel v. Play-By-Play Toys Novelties, Inc., 208 F.3d 368, 376 n. 5 (2d Cir. 2000). To determine the existence of a contract implied in fact, the focus rests upon the parties' conduct. Watts v. Columbia Artists Mgmt., Inc., 591 N.Y.S.2d 234, 236 (App.Div. 1992). Where the facts are inconsistent with a finding that the parties agreed to the specific terms of the contract to which they would be bound, no implied contract may be found to exist. Lubeck Realty, Inc. v. Flintkote Co., 565 N.Y.S.2d 922, 924 (App.Div. 1991).
The agreements between Entertainment and International contemplated the parties' liabilities, and expressly stated that International did not assume obligations arising from the Monster Rancher distribution rights. Further, Plaintiff's assertion concerning International's acknowledgment of its responsibility for payment obligations to TMS is not supported by the record. Entertainment representatives signed the letters confirming the account balances due to TMS. See Brown Aff., Exh. 16. Plaintiff fails to identify any conduct by International that evinces its intention to assume Entertainment's payment obligations to TMS. Plaintiff's fifth claim against International for breach of implied in fact contract is therefore dismissed.
B. Fraud Claim against BKN Studios and Allen Bohbot
In his seventh cause of action, plaintiff alleges fraud based on Bohbot's knowledge of, and failure to disclose to TMS, Entertainment's assignment of Monster Rancher distribution rights to International. Plaintiff claims that Bohbot fraudulently concealed such information with the purpose of inducing Plaintiff to enter the Second and Third Distribution Agreements. Plaintiff asserts that it reasonably relied on the assumption that Entertainment had not assigned its rights to distribute the Monster Rancher series to International because it had not been notified of any assignment, and that had it been aware, it would not have entered into the Second and Third Distribution Agreements. Defendant argues generally that both parties were sophisticated businesses, and that Plaintiff was aware of the breadth of assignment powers granted to Entertainment.
In order to demonstrate fraud, four elements must be shown: (1) "a misrepresentation or a material omission of fact which was false and known to be false by [defendant], (2) made for the purpose of inducing the other party to rely on it, (3) justifiable reliance of the other party on the misrepresentation or material omission, and (4) injury." GR Moojestic Treats, Inc. et al. v. Maggiemoo's Int'l, No. 03CV10027, 2004 WL 1110423, *9 (S.D.N.Y. May 19, 2004) (quoting Flash Electronics, Inc. v. Universal Music Dist. Corp., 312 F. Supp. 2d 379, 420 (E.D.N.Y. 2004). "Fraudulent concealment requires knowledge, a relationship between the parties that creates a duty to disclose and intent to deceive and defraud by nondisclosure." Fidenas AG, et al. v. Honeywell and Honeywell Information Systems, Inc., 501 F. Supp. 1029, 1039 (S.D.N.Y. 1980). The "circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b).
It is undisputed that Bohbot knew of the assignment of Entertainment's rights under the First Distribution Agreement and that those rights to future episodes would belong to International. The record, however, is devoid of any evidence that Bohbot owed plaintiff a duty to disclose the assignment. There is no proof that a relationship between TMS and Bohbot existed which created a duty to disclose. Moreover, the assignment clause in the Distribution Agreement did not require International as assignee, nor Entertainment as assignor, to notify Plaintiff of the assignment. It permitted Entertainment to assign freely its distribution rights to third parties provided that "[Entertainment] shall cause the assignee to assume any and all obligations of [Entertainment] under Agreement as if it were a party to the Agreement, and (iii) [Entertainment] shall be also liable for any conduct of such assignee in relation to this Agreement." Bohbot Aff., Exhs. C, D, E, Section 12.
Plaintiff, furthermore, cannot argue such a duty was created in the Agreement. The language of the Distribution Agreements, and specifically the language contained in the assignment clause, was negotiated and agreed to by the parties. Plaintiff cannot claim that it was unaware of the breadth of the assignment power, which was devoid of notice or reporting requirements. Moreover, the Asset Transfer Agreement, in which Entertainment assigned the Monster Rancher distribution rights to International, expressly stated that International "shall not assume any obligations of [Entertainment], [Entertainment] shall remain solely responsible for and shall promptly pay, perform and discharge, all of the liabilities and obligations of [Entertainment]. . . ." Bohbot Aff., Exhibit F. Plaintiff, therefore, has offered no facts to support a finding that any defendant had a duty to disclose the assignment.
Further, plaintiff presents no evidence to support a finding that any failure to disclose the assignment was with the intent to defraud TMS. "Mere silence does not constitute fraud." See Fidenas, at 1039; see also Perin v. Mardine Realty Co., Inc., 5 A.D.2d 685, 168 N.Y.S.2d 647, 648 (2d Dept. 1957) (When parties deal "at arm's length," seller is under no duty to speak, and his "mere silence" does not constitute fraud.), aff'd, 6 N.Y.2d 920, 190 N.Y.S.2d 995, 161 N.E.2d 210 (1959). Plaintiff's fraud claims against Studios and Bohbot are therefore dismissed.
CONCLUSION
Defendant BKN Studios, BKN International and Allen Bohbot's motion for summary judgment on plaintiff's first, second, third, fourth, fifth and seventh claims is granted. Those claims are dismissed. Defendant BKN International's motion for summary judgment on plaintiff's sixth claim for unjust enrichment is denied.SO ORDERED.