Source: https://www.pbwt.com/ny-commercial-division-blog/alter-ego-claim-survives-pre-answer-motion-to-dismiss-on-an-equitable-ownership-theory/
Timestamp: 2019-04-21 04:50:43+00:00

Document:
Aspire Music Group (“Aspire”), the record label that first signed hip-hop artist Aubrey Drake Graham (“Drake”), sued Cash Money Records (“Cash Money”) and Universal for unpaid royalties related to Drake’s record sales. In 2009, Aspire entered into an Agreement with Cash Money[iii] to furnish Drake’s services to Cash Money in exchange for one-third of the net profits from Drake’s record sales; record distribution fees would be deducted from the net profits. Under the Agreement, Cash Money was obligated to provide monthly accounting statements to Aspire. Aspire alleges that Cash Money provided sporadic, deceptive statements that reflected no monies were due, even though Drake had sold millions of records.
Initially, Universal had a contractual relationship with Cash Money to serve as the distributor of Drake’s records.[iv] However, as Cash Money developed a cash flow problem, Aspire alleges that around 2015, Universal paid off millions of dollars of Cash Money’s debt in exchange for a controlling interest in Cash Money.[v] This purported control allowed Universal to “renegotiate” its distribution agreement with Cash Money and provide itself with a higher distribution fee than what Cash Money had initially agreed.[vi] Therefore, Aspire alleges that Universal’s control of Cash Money resulted in a significant loss of revenue for Aspire. Aspire further asserts that Universal is the alter ego of Cash Money and is thus liable for Cash Money’s obligations under the Agreement.
Although New York courts are not in agreement as to whether to extend alter ego liability to a non-owner, non-director, or non-officer of a company, specific examples showing significant control over the company may be sufficient to establish a theory of equitable ownership and thereby survive a pre-answer motion to dismiss.
[i] Aspire Music Group, LLC v. Cash Money Records, Inc., No. 652029/2017, 2018 BL 241939 (Sup. Ct. July 2, 2018).
[iii] In this decision, Judge Ostrager largely denied Cash Money’s separate motion to dismiss, finding that they cannot benefit from the incontestability provision of the Agreement when they prevented the condition precedent from occurring. Id .at *4. The court only granted Cash Money’s motion to dismiss as to the claims that accrued on or before March 1, 2010 as they are time barred under the statute of limitations. Id. at *5.
[iv] Id. at *2; Aspire alleges that Universal only became the alter ego of Cash Money in or after 2015. Id. at *8.
[viii] Cash Money is alleged to be a Louisiana corporation. Id. at *6.
[x] Id. at *6 (quoting Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995)).
[xi] Aspire, 2018 BL 241939, at *6 (quoting Hayden Capital USA, LLC v. Northstar Agri Indus., LLC, No. 11-594, 2012 BL 447756, at *6 (S.D.N.Y. Apr. 23, 2012)).
[xii] Aspire, 2018 BL 241939, at *6.
[xiii] Id. at *7; “The Court of Appeals ‘found no definitive authority on the issue of whether a nonshareholder could be personally liable under a theory of piercing the corporate veil.’ Matter of Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 142 (1993). Other New York courts have generally declined to extend alter ego liability to a non-owner defendant. See Lantau Holdings, Ltd. v. Orient Equal Intl. Group, 2017 WL 914636, at *18 (N.Y. Sup. Ct. Mar. 8, 2017)[, aff’d, 161 A.D.3d 714 (1st Dep’t 2018)]” Id.
[xiv] Id. at *7 (quoting Freeman v. Complex Computing Co., 119 F.3d 1044, 1051 (2d Cir. 1997)).
[xv] Id. at *7 (quoting United Mizrahi Bank Ltd. v. Sullivan, No. 97-9282, 2000 WL 1678040, at *3 (S.D.N.Y. Nov. 6, 2000) (quoting Freeman, 119 F.3d at 1051)).

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