In re Simitar Entertainment, Inc.

275 B.R. 331

In re SIMITAR ENTERTAINMENT, INC., Debtor Simitar Entertainment, Inc., Plaintiff, v. UAV Corporation, Defendant.

Bankruptcy No. 00-31810.

Adversary No. 00-3174.

United States Bankruptcy Court, D. Minnesota, Third Division.

March 21, 2002.

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Michael L. Meyer, Minneapolis, MN, for Plaintiff.

Matthew R. Burton, St. Paul, MN, for Defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT

GREGORY F. KISHEL, Chief Judge.

This adversary proceeding came on before the Court for trial. The Plaintiff appeared by its attorney, Michael L. Meyer. The Defendant appeared by its attorney, Matthew R. Burton. Upon the evidence received at trial and the arguments and memoranda submitted by counsel, the Court memorializes the following decision.

INTRODUCTION

Parties

The Plaintiff is a Minnesota business corporation. At all relevant times, it was engaged in the production and marketing of recorded video and music at its principal place of business in Maple Plain, Minnesota. The Plaintiff filed a voluntary petition under Chapter 11 on April 19, 2000. After selling certain of its assets with court approval during the pendency of its case, the Plaintiff obtained confirmation of a liquidating plan on June 7, 2001. Under the plan, a "Post-Confirmation Estate" was created. That entity received all rights to payment that had accrued to the Plaintiff pre-confirmation, the value of which was to be administered for the benefit of the creditors named in the plan.

The Defendant is a business corporation headquartered in Fort Mill, South Carolina. The acronym in its business name stands for "United American Video Corporation." At all relevant times it was engaged in the distribution of recorded video and audio products to supermarkets, drugstores, discount department stores, and similar retail merchants.

Claims and Counterclaims Herein

The Plaintiff commenced this adversary proceeding while it was still a debtor in possession under Chapter 11. Its complaint makes a simple claim for collection on an account stated: it alleges that it sold and delivered goods of a value of $95,908.25 to the Defendant; that the Defendant has not responded to its demand for payment; and that the Plaintiff, therefore, is entitled to a money judgment against the Defendant.

In its answer, the Defendant raises eight tersely-identified affirmative defenses: failure to state a claim, waiver, payment, accord and satisfaction, estoppel, equitable estoppel, laches, and general bad faith under Minnesota's enactment of the Uniform Commercial Code ("UCC"). More specifically, it pleads that the product in question was so defective as to breach the UCC's warranties of merchantability and fitness for a particular purpose; that it seasonably revoked acceptance and rejected the goods; and that it is entitled to a setoff against the amount of the Plaintiff's claim for the value of the defective product.

The Defendant also raises a multi-count counterclaim, based on its allegation that the Plaintiff misrepresented the nature and quality of the goods that it was offering to the Defendant. It seeks affirmative relief under counts framed as follows:

1. For breach of contract and breach of an implied duty of good faith, it seeks offset and an award of incidental and consequential damages;

2. For a violation of Minnesota's Uniform Deceptive Trade Practices Act, it seeks injunctive relief and an award of costs and attorney fees; and

3. For a violation of Minnesota's Prevention of Consumer Fraud Act, it seeks an award of damages, costs, disbursements, and attorney fees.

In its reply to the counterclaim, the Plaintiff alleges that the parties' contract specifically overrode the UCC's implied warranties; that in any event the Plaintiff's conduct did not amount to a breach of such warranties; and that the Defendant was aware of the product's content from an actual inspection, and hence may not complain of misrepresentation or nonconformity.

FINDINGS OF FACT

Both parties participated in various sectors of the popular music business. The situs of their participation that is relevant to the present dispute might be termed the "midstream" of the industry — that is, the packaging of existing sound recordings, including multi-artist compilations, and the marketing and distribution of such products to retailers.¹ In this activity, neither party would have been considered a "major label." Both have dealt in collections of older recordings in the form recorded by the original artists. Both also have issued compilations of two forms in which established popular songs are rerecorded by persons other than the original artist, "covers" and "sound-alikes."²

Both parties distributed large lots of their own compilations of recordings, and those of other producers. Their customer bases were somewhat different. The Defendant distributed to general retailers — supermarkets, drug stores, discount department stores, and truck stops' retail centers — mainly in the southeastern part of the United States. The Plaintiff's retail distribution focused on specialized music store chains such as Best Buy and Musicland, and retailers with large music departments like Target; it also sold product to other intermediate distributors like the Defendant. The Defendant viewed its target end-customer demographic as culturally conservative and family-oriented; in the words of Frank Robertson, its director of audio and video, the typical retail buyer of the Defendant's offerings would be "35 and up" in age, "a mom pushing a cart through a grocery store or picking up a prescription in a pharmacy." On the other hand, the Plaintiff marketed to a broader end-audience; it handled recordings of more "mature subject matter" as well as middle-of-the-road popular listening fare.

To assemble product inventory for resale to retailers, the Defendant purchased from mainstream major record labels and studios, as well as jobbers of overstock and closeout merchandise. The Defendant's distribution business was highly seasonal, catering toward retail purchases connected with the various holidays of the fourth quarter of the year. Thus, its inventory cycle ran from evaluation of future tastes and trends in the first quarter, through locating suitable product in the second, receipt of inventory in the second and third, to assembly and shipment to its customers in the early fall. There is no evidence in the record that anyone from the Defendant ever communicated the specifics of its sales cycle to anyone at the Plaintiff, however.

At the times relevant to this adversary proceeding, Jerry Pettus, Sr. was a working principal of the Defendant and the chair of its board, and Mickey Elfenbein was the Plaintiff's chief executive officer. Pettus and Mickey Elfenbein had met in the mid-1990s; the Defendant had purchased inventory from the plaintiff's video division in 1998-1999. As noted earlier, Frank Robertson was the Defendant's director of audio and video. In that capacity, he was responsible for passing on the content of all of the Defendant's offerings to its retailer-customers. Mark Elfenbein³ was a vice-president of the Plaintiff. At all relevant times, Robertson knew both Elfenbeins, being "casually acquainted" with Mickey and communicating more frequently with Mark.

During discussion at industry shows in late 1990 and very early 2000, Mickey Elfenbein told Pettus that the Plaintiff had inventory of original-artist recordings available on a closeout basis. Under cover of a letter dated January 11, 2000, Mickey Elfenbein sent Pettus lists of overstock inventory in compact disc ("CD") and cassette format that the Plaintiff was offering. These lists included stock numbers, brief titles, and the available unit quantities for each item.

The January 11, 2000 list included titles that featured the names of established artists popular between the 1940s and the 1970s.⁴ It also encompassed a large number of more generally-worded titles — clearly compilations or anthologies — many of them including the words "DJ Mix," "The Number Ones," "# 1 Hits," and "80's Country." Finally, the list had entries worded as follows, for several items dwelt on at length in the trial testimony:

DJ EROTIC MIX

BIG BALLERS — EXPLICIT

Big Ballers — (Non-Explicit)

Feel the Buzz: Spacin'

Feel the Buzz: No Pain'

Feel the Buzz: Hit Time

There were three components to the list: a four-page segment that had no heading, including both CDs and cassettes; two pages entitled "PICKWICK CLOSEOUT (CASSETTES)"; and a single page of CDs and cassettes entitled "SIMITAR PRODUCTS LISTING." With the list, Elfenbein sent a copy of a Christmas-song compilation and several hundred samples of more general material from the lists.

Around this time, during a meeting at the MITA⁵ festival in Cannes, Frances, Robertson and Mark Elfenbein "talked about the mechanics of a deal" on the Plaintiff's overstock offer. At that time, Robertson told Mark Elfenbein about the Defendant's standards for the artistic content and cover art of music products that it placed — i.e., that the Defendant was "highly conservative in [its] purchasing style." There is no evidence in the record that Robertson told Mark Elfenbein that the Defendant would not accept and resell sound-alike recordings, at this time or any other.

After receiving a follow-up inquiry from Elfenbein via fax transmission on January 17, 2000, Pettus "just glanced at" the samples and their packaging. From this review, he concluded that "a majority that came in were original artists." The samples did not include copies of the Feel the Buzz titles, though they did include the Big Baller items. Robertson also reviewed the list and the samples in more detail than Pettus had. Noting that the "large" grouping of samples contained "lots of original-artist recordings ... not commonly seen as overstock previously," he decided that...