Rollin’ In My Six-Fo: Dr. Dre’s Claim to ‘Chronic’ Royalties From Death Row Bankruptcy Estate Rejected

ChronicIt was part of my black 1993 Eagle Talon’s cassette player’s (and later my 2005 Chevy Cobalt’s CD player’s) rotation for well over a decade.

It also introduced me to a new and dangerous vocabulary.  Growing up in the somewhat sheltered confines of Wichita,  I’d never heard of nor seen a “Gat” a “tech 9 tronic”, a “Six-Fo”, “hollow points”, a “swap meet” or a “Desert Eagle”.  I’d never visited the “LBC”, made a “187” call, imbibed a “Remy Martin and Soda Pop” concoction and never ingested “Indo-nesia” (cough). 

‘It’, of course, is The Chronic, Dr. Dre’s (a/k/a Andre Young) 1992 Gangster Rap masterpiece that is rightly viewed as a watershed in the annals of hip-hop.

Dropping in the wake of the Rodney King tumult, Chronic’s musical, social and cultural influence can’t be overstated – especially for those of us in our early 20s in the early 90s.

Widely regarded as “the album that brought hardcore hip-hop to the Suburbs”, the Chronic put future hip-hop deities Snoop Dog, (the late) Nate Dogg and Warren G on the hardcore rap map as well as lesser-known acts Daz, Bushwick Bill, Kurupt, RBX and Lady of Rage.  More importantly, Chronic ushered in a new sensibility of incendiary rap complete with blisteringly graphic portrayals of the drugs, nihilism, violence, desperation and unadulterated Rage of the South Central (L.A.) cityscape – the setting for the album’s rabbit-punch lyrics and hypnotic, Parliament-infused grooves.

It’s for these reasons that I find post-worthy the recent California bankruptcy decision in In re Death Row Records, Inc. (May 9, 2014).  In Death Row, the U.S. Bankruptcy Court for the Central District of California (where else?) denied the hip-hop impresario Andre Young’s (“Dr. Dre” or “Dre”) administrative expense claim of over $3M in producer and artist royalties related to Chronic on-line sales.

Dre’s administrative claim was premised on several written and verbal agreements between him, Death Row Records (DRR) and Interscope – a key Chronic distributor – going back more than two decades. 

The agreements gave Dre artist, publishing and producer royalties totaling over 20% of the record’s total sales.  The agreements were silent on Internet sales of the record since digital music didn’t yet exist.                                                                         

Several years of acrimonious litigation ensued when DRR bought and sold the Chronic’s digital rights to another music company without Dre’s consent.

After DRR filed for bankruptcy protection, Dre filed an adversary claim and a separate state court suit alleging illegal digital distribution of The Chronic.  

Dre’s bankruptcy claim sought about 18 years worth of Chronic royalties from Internet sales, totaling over $3M.  The Trustee moved to dismiss Dre’s claim.

Held: motion granted.  Dre’s claim fails. 

Q: Why?

A: An administrative expense claimant (like Dre) must establish that (1) he entered into a transaction with or gave consideration to the debtor; and (2) that he conferred a substantial benefit on the estate.  Death Row, p. 10.

The bankruptcy court found Dre’s claim defective under Federal notice pleading rules.  Dre failed to allege the terms of any contract with DRR that entitled DRE to payments and he failed to sufficiently plead measurable money damages he suffered from the lost royalties.

The Bankruptcy Court also dismissed Dre’s royalties claim under res judicata and statute of limitations principles.  The court found that the court’s previous litigation of Dre’s adversary claim and state court action (which was partially successful) were conclusive on the issues raised in Dre’s administrative claim.                                                                                                                                                              

The Court also dismissed Dre’s claims on statute of limitations grounds.  Dre didn’t file his administrative expense claim until 2013 – long after the limitations periods expired for breach of contract under California law (4 years written; two for oral).

Afterwords: Despite the case’s dizzyingly convoluted facts and procedural history, its issues are pretty basic.  The case demonstrates how important it is under Federal pleading rules for an administrative expense claimant to sufficiently allege contractual specifics and to show that he did in fact benefit the bankruptcy estate.  Death Row also shows the gravity of a claimant offering damages evidence that has an adequate foundation and isn’t based on speculation.  Finally, Death Row signals that claim preclusion and issue preclusion apply with equal force in bankruptcy administrative expense proceedings.

 

The Statute of Frauds ‘One-Year Rule’ (IL Law Basics)

SOFThe Statute of Frauds (SOF) requires certain contracts to be in writing to be enforceable.  (See earlier post here).  740 ILCS 80/1; 810 ILCS 5/2-201 (UCC analog).

The SOF’s “one-year rule” posits that any contract that can’t possibly be performed within the span of one year from the date of making must be in writing.  The purpose of the one-year rule is to protect against stale memories and evidence.

Typical settings for the one-year rule defense include multi-year leases and “lifetime” employment contracts (i.e., plaintiff sues an employer claiming breach of a promise to employ the plaintiff for life).

In Chiappe-Kay v. Barthel, 2013 IL App (2d) 120975-U, the plaintiff sued the defendant after the defendant failed to transfer a Personal Seat License that allowed the defendant (and would now allow the plaintiff) to buy Chicago Bears season tickets for life.

The plaintiff sued for specific performance and defendant moved for summary judgment based on the one-year rule: the oral football tickets agreement was defeated because  it couldn’t be performed within the space of a year.

Siding with the defendant, the Court described the one-year rule’s purpose as barring actions “based upon nothing more than loose verbal statements.”  It held that the parties’ agreement couldn’t be performed within the space of a year since the agreement was that the plaintiff would receive season tickets for life based on defendant’s PSL. (¶ 16).

The Court also found that the one-year rule barred plaintiff’s claim because the Bears instituted a one-year ban on the transfer of PSLs when the Bears first issued the PSL to the defendant.  As a result, there was no way for the defendant to perform – by transferring the PSL – to the plaintiff within a one-year time span.  (¶¶ 19-21).

Farmers and Merchants v. Hulett, 2012 IL App (3d) 120022-U, involves an oral agreement between a former land trustee and the beneficiary for that beneficiary to rent a house (owned by the land trust) for the beneficiary’s lifetime.

When the successor trustee assumed control of the trust, it sent a notice terminating the tenancy and sued to evict the beneficiary tenant.  The tenant opposed the eviction suit and argued that he was allowed to live in the house for his lifetime.  The Court entered summary judgment for the successor trustee and found that the defendant’s claim to a lifetime tenancy was unenforceable since it wasn’t in writing.

The Court noted that the written land trust agreement was silent on the defendant’s right to occupy the house.  Because of this, the tenant had, at most, an oral lease agreement with the prior trustee.

In Illinois, an oral lease for a period exceeding a year – such as a lifetime lease – is treated as a year-to-year lease.  A year-to-year lease can be terminated on a landlord’s sixty-day written notice.  735 ILCS 5/9-205 (year-to-year lease is terminable on 60 days’ notice).

The Court found the successor timely terminated the oral lease under the Illinois forcible detainer statute.

Hulett also provides good reading on the topics of promissory estoppel (which usually is not an exception to the SOF) and equitable estoppel (which is). (¶¶ 14-15).

Promissory estoppel applies where someone takes action in reliance on a verbal promise by the defendant.  Equitable estoppel involves some element of calculated misconduct or deception by the defendant.

Student Loan Discharge In Bankruptcy: How Hard Is It?

In Steven Harper’s The Lawyer Bubble: A Profession In Crisis, the author (quoting a newspaper article) describes Federally guaranteed student loans as the closest thing to a debtor prison in existence.  Lawyer Bubble, p. 11.  This statement, while jarring, has some empirical support.  In the book, Harper cites bankruptcy code changes that have made it virtually impossible to get student loan debt relief in all but the most extreme (and trying) circumstances.  He also provides anecdotes, documented examples and profuse research to back up his arguments.

Hard data aside, the “knowledge” that student loans can’t be discharged in bankruptcy has permeated the collective consciousness.  Indeed, the difficulties a bankrupt debtor must surmount to get a discharge from student loan debt have assumed near-mythic proportions.  The popular narrative is that student loan relief is given in only the most severe (think physical and mental infirmities coupled with fiscal calamity) circumstances and that it’s basically not even worth trying to get a discharge.  And in many cases, the belief is accurate: it is nearly impossible to convince a bankruptcy judge to grant a student loan discharge.  

This extreme difficulty in securing a discharge is graphically illustrated by the depressing fact patterns that underlie many student loan discharge cases where relief is granted only under the sadness-tinged “certainty of hopelessness” standard.  In many of these cases – in which the court does grant discharge relief – the court chronicles the lives of borrowers who live in abject poverty and in desperate conditions, all the while trying to support themselves and their dependents.  Yet, for other student borrowers whose circumstances aren’t as severe, the courts often refuse their discharge requests.  

But in the Seventh Circuit, as shown by a recent decision, getting a discharge may not be as difficult as previously understood.  In Krieger v. Educational Credit Management Corp., 213 F.3d 882 (7th Cir. 2013), the Court seems to relax the austere requirements for a borrower who seeks to discharge student loan debt.  In that case, the Court discharged nearly $25,000 in student loans where the borrower was in good health, educated and had solid academic credentials.

Like other cases in the student loan discharge milieu, Krieger’s underlying facts aren’t sunny.  The debtor was in her fifties and lived with her elderly mother.  She was divorced and lived in a rural area where jobs are scarce.  She hadn’t worked in over twenty years, lacked income, assets and reliable transportation.  The debtor filed an adversary proceeding to discharge student loan debt which she acquired to attend paralegal school.  The lender objected and after a trial, the bankruptcy judge sided with the debtor and discharged the loans.  The lender appealed and the District Court (bankruptcy  orders are appealed to District court) reversed on the grounds that the debtor didn’t show undue hardship.  The Seventh Circuit reversed and found that the debtor was entitled to a discharge.

 Rules/Reasoning:

Section 523(a)(8) of the Bankruptcy Code provides that student loans are generally excepted from discharge unless “excepting such debt from discharge….would impose an undue hardship on the debtor.”  11 U.S.C. 523(a)(8).  Undue hardship isn’t defined in the Code but the standard’s content is instead established by the caselaw from various jurisdictions.

To analyze undue hardship (whether the borrower demonstrates undue hardship) 7th Circuit applies the three-part test espoused by the Second Circuit in In re Brunner (831 F.2d 395 (2nd Cir. 1987) – a seminal Second Circuit case from the late 1980s.  To establish undue hardship, the borrower must show, by a preponderance of the evidence that (1)  the debtor can’t maintain a “minimal standard of living” based on current income and expenses; (2) “additional circumstances” exist that show that the state of affairs is likely to persist for a significant portion of the repayment period of the loans (the so-called “persistence” element); and (3) that the debtor-borrower has made good faith efforts to repay the loans.

The Seventh Circuit found that all three undue hardship factors were met.  The debtor showed that she was destitute, lived in a remote area that was “out of the money economy”, and hadn’t worked in over two decades.  The Court also found that the debtor’s circumstances were likely to persist and unlikely to financially improve in the future.  On this second factor – the “persistence” factor – the court rejected other courts’ requirement of the debtor showing “certainty of hopelessness”, finding that the undue hardship standard is a more flexible test.

Noticeably absent from the analysis though, is any discussion of the debtor’s “good faith.”  Other cases look to whether the debtor took advantage of reduced-payment options as well as the debtor’s past payment efforts.  Here, though, the Court simply held that the good faith element of the undue hardship test involves a fact-specific analysis that requires “clear error” for reversal.  The Court also held that a debtor is not required to exhaust all reduced-payment options as a predicate for showing good faith.  In finding good faith, the Seventh Circuit found that the bankruptcy judge’s good faith determination based on the debtor’s 200 unsuccessful job applications over the years wasn’t clearly erroneous and should have been upheld.

Manion’s cautionary concurrence:

In his concurrence, Judge Manion notes that the debtor is physically healthy, intelligent and graduated from paralegal school with a high GPA.  Judge Manion didn’t think the debtor’s circumstances were egregious enough to merit a discharge and even wondered whether other student borrowers will use this case as an “excuse to avoid their own student loan obligations?”  He pointed out that debtor’s applying for 200 jobs over a 10-year period amounted to less than two applications per month.  Hardly a Herculean job search effort.

Take-aways: Compared to other student discharge decisions – where the debtor is either physically or mentally impaired or is responsible for  sick parents or children – Krieger arguably establishes a more lenient discharge standard.  Clearly, the debtor was insolvent, destitute and hadn’t worked in decades.  But she was also physically healthy and educated.  The debtor’s circumstances seem to be missing an element of “certainty of hopelessness” – the standard that governed Seventh Circuit  discharge cases before Krieger.  At any rate, it’s too early to tell if this case represents a sea-change in student loan discharge cases.  It’s also unclear whether this case will result in an uptick in student discharge attempts.  Still, the case is worth reading for its topical relevance as well as its statistical description of the Federal loan-student borrower bankruptcy crisis.