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React Presents, Inc. v. Eagle Theater Entertainment, LLC

United States District Court, E.D. Michigan, Southern Division

August 23, 2017

REACT PRESENTS, INC., Plaintiff,
v.
EAGLE THEATER ENTERTAINMENT, LLC, BLAIR MCGOWAN, AMIR DAIZA, MATTHEW FARRIS Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' AMENDED MOTION FOR JUDGMENT ON THE PLEADINGS [#22]

          Denise Page Hood, Chief Judge.

         I. BACKGROUND

         A. 16-13288, Procedural Background

         On September 12, 2016, Plaintiff React Presents, Inc. (“React”) filed a Complaint against Defendants Eagle Theater Entertainment, LLC (“Eagle”), Blair McGowan (“McGowan”), Amir Daiza (“Daiza”), and Matthew Farris (“Farris”) (collectively, “Defendants”) alleging breach of contract (Count I), fraud (Count II), breach of fiduciary duty (Count III), violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) (Count IV), and unjust enrichment (Count V). (Doc # 1) This matter is presently before the Court on Defendants' Amended Motion for Judgment on the Pleadings, filed on May 17, 2017. (Doc # 22) React filed a Response on June 7, 2017. (Doc # 24) Defendants filed a Reply on June 26, 2017. (Doc # 25)

         B. 16-13311 (Related Case), Procedural Background

         On September 13, 2016, Plaintiff SFX-React Operating LLC (“SFX”) filed a Complaint against Defendants Eagle Theater Entertainment, LLC (“Eagle”), Blair McGowan (“McGowan”), Amir Daiza (“Daiza”), and Matthew Farris (“Farris”) (collectively, “Defendants”) alleging breach of contract (Count I), fraud (Count II), breach of fiduciary duty (Count III), violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) (Count IV), and unjust enrichment (Count V). (Doc # 1) Defendants filed a Motion for Judgment on the Pleadings on May 17, 2017. (Doc # 25) SFX filed a Response on June 7, 2017. (Doc # 27) Defendants filed a Reply on June 26, 2017. (Doc # 28)

         C. Factual Background

         Plaintiff React was a club, concert, and festival promotion company in the Midwest with its base of operations in Illinois. In 2014, Plaintiff SFX acquired at least some of React's assets. SFX is also in the business of promoting clubs, concerts, and festivals in the Midwest with its base of operations in Illinois. Defendants own and operate several concert venues in the Metro Detroit area including Elektricity, a nightclub in Pontiac, Michigan. Elektricity serves as a concert venue allegedly exclusively for electronic musicians, DJs, and other artists who perform electronic dance music (“EDM”). Defendant McGowan owns Defendant Eagle and is its managing member. Defendant Daiza is responsible for overseeing Eagle's operations and overseeing the bookkeeping. Defendant Farris is Eagle's bookkeeper.

         In late 2012, React and Defendants began putting on EDM concerts together at Eagle. At first, React and Eagle allegedly orally agreed to split the profits (or losses) 50-50. React was responsible for negotiating and contracting with artists, advertising, marketing, and promoting the concerts. Eagle was responsible for operating the venue and selling tickets at the box office. In November 2013, the parties memorialized their agreement and practices in a written co-promotion agreement. According to React, React and Eagle co-promoted approximately 100 concerts from 2012 until React's assets were acquired by SFX in April 2014 under the terms of the co-promotion agreement. After each concert, Eagle would provide React with a “settlement” document via e-mail purporting to indicate the profits generated. The settlements were allegedly prepared by Defendant Farris, overseen and approved by Defendant Daiza, and approved by Defendant McGowan. React would review the settlements, and Eagle would send a check to React via the United States mail for React's share of the profits.

         In April 2014, SFX and Eagle began co-promoting concerts under the same terms as the prior agreement between React and Eagle. According to SFX, the transition was seamless because SFX was operated by the principals of React. On or around May 1, 2014, SFX and Eagle entered into a written co-promotion agreement, the material terms of which were identical to the agreement between React and Eagle. SFX and Eagle have co-promoted at least 83 EDM concerts from April 2014 through 2016. After each concert, Eagle provides SFX with a settlement document via e-mail purporting to indicate the profits generated. The settlements have been allegedly prepared by Defendant Farris, overseen and approved by Defendant Daiza, and approved by Defendant McGowan. SFX reviews the settlements, and Eagle then sends a check to SFX via the United States mail for SFX's share of the profits.

         According to Plaintiffs, in January 2016, a disgruntled Eagle employee provided React and SFX with what Plaintiffs allege to be true and accurate accounting records disclosing that Eagle kept two sets of books showing receipts from the concerts. Plaintiffs allege that Eagle's settlements systematically and fraudulently underreported the true profits from almost every single one of the co-promoted concerts.

         According to React, it was paid approximately $82, 400.00 less than what it should have received under the co-promotion agreement. React further alleges that Defendants' scheme resulted in a $400, 000.00 reduction in React's “Earn-Out Payment” (a multiplier on profits) under an Asset Membership Interest and Contribution Agreement between SFX Entertainment, Inc. and SFX-React Operating, LLC (the terms of which Defendants were allegedly aware) when SFX acquired React assets in 2014.

         According to SFX, it was paid approximately $126, 200.00 less than what it should have received under the terms of the co-promotion agreement. SFX further alleges that Eagle has withheld payments totaling approximately $200, 000.00 for at least 16 concerts that SFX and Defendants have co-promoted since March 2016.

         In September 2016, React and SFX brought actions against Defendants alleging that they suffered hundreds of thousands of dollars in damages because, as a result of Defendants systematic and fraudulent underreporting, React and SFX almost always received less from the concerts than the 50 percent of the profits to which they were entitled under the co-promotion agreements.[1]

         Defendants now move for judgment on the pleadings and ask this Court to dismiss React's Complaint and SFX's Complaint in their entirety. Defendants argue that the breach of contract claims and unjust enrichment claims fail because the subject matter of the co-promotion agreements is illegal, rendering them unenforceable. Defendants further argue that because the co-promotion agreements are void, React and SFX had no property rights of which they could be defrauded, and their RICO claims fail. Defendants also argue that the fraud claims fail because, under Michigan law, they cannot survive on the basis of performance of contracts. Lastly, Defendants argue that the breach of fiduciary duty claims fail because there was no fiduciary relationship between the parties.

         II. ANALYSIS

         A. Standard of Review

         Federal Rule of Civil Procedure 12(c) authorizes parties to move for judgment on the pleadings “[a]fter the pleadings are closed-but early enough not to delay trial.” Fed.R.Civ.P. 12(c). Motions for judgement on the pleadings are analyzed under the same standard as motions to dismiss under Rule 12(b)(6). See Warrior Sports, Inc. v. Nat'l Collegiate Athletic Ass'n, 623 F.3d 281, 284 (6th Cir. 2010). “For purposes of a motion for judgment on the pleadings, all well-pleaded material allegations of the pleadings of the opposing party must be taken as true, and the motion may be granted only if the moving party is nevertheless clearly entitled to judgment.” Id.

         In Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the Supreme Court explained that “a plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level . . . .” Id. at 555. A plaintiff's factual allegations, while “assumed to be true, must do more than create speculation or suspicion of a legally cognizable cause of action; they must show entitlement to relief.” LULAC v. Bredesen, 500 F.3d 523, 527 (6th Cir. 2007) (emphasis in original) (citing Twombly, 550 U.S. at 555). “To state a valid claim, a complaint must contain either direct or inferential allegations respecting all the material elements to sustain recovery under some viable legal theory.” Bredesen, 500 F.3d at 527 (citing Twombly, 550 U.S. at 562).

         When deciding a 12(c) motion for judgment on the pleadings, as a general rule, matters outside the pleadings may not be considered unless the motion is converted to one for summary judgment under Fed.R.Civ.P. 56. See Weiner v. Klais & Co., 108 F.3d 86, 88 (6th Cir. 1997). The Court may, however, consider “the Complaint and any exhibits attached thereto, public records, items appearing in the record of the case, and exhibits attached to defendant's motion to dismiss so long as they are referred to in the Complaint and are central to the claims contained therein.” Id. at 89.

         B. Breach of Contract Claims

         Defendants argue that Plaintiffs' breach of contract claims fail because Plaintiffs are seeking damages for bar sales. Defendants argue that the sharing alcohol proceeds with a non-licensed person is illegal and any contract to do so is void. Defendants also argue that the co-promotion agreements are unenforceable because they violate public policy set forth in the administrative rules promulgated by the Michigan Liquor Control Commission.

         Plaintiffs respond that the co-promotion agreements are facially valid because their plain language does not violate Michigan's Liquor Control Code. Plaintiffs also argue that the co-promotion agreements are not void ab initio, and even if they were, the Court should sever any illegal portion to save the remainder. Plaintiffs further argue that the co-promotion agreements do not violate public policy because they provide that the parties were to share revenues from a host of revenue sources including ticket sales, merchandise commissions, and sponsorship revenue.

         In this case, Eagle holds a liquor license from the Michigan Liquor Control Commission, and the record shows that Defendant McGowan is the only person affiliated with this license. (Doc # 25-1) React and SFX are not mentioned. The Michigan Liquor Control Commission rules provide that “a licensee shall not allow a person whose name does not appear on the license to use or benefit from the license.” Mich. Admin. Code R. 436.1041(1). The Michigan Liquor Control Code, in turn, provides that “a person, other than a person required to be licensed under this act, who violates this act is guilty of a misdemeanor.” Mich. Comp. Laws § 436.1909(1). It further provides that “a licensee who violates this act, or a rule or regulation promulgated under this act, is guilty of a misdemeanor punishable by imprisonment for not more than 6 months or a fine of not more than $500.00, or both.” Id. at § 436.1909(2).

         Under the express terms of the co-promotion agreements at issue, the parties were to split net profits or net losses from all “adjusted gross receipts” less all “approved show costs.” “Adjusted gross receipts” was defined to include proceeds from the sales of admissions to the events, ticket service charges, net travel package income, refunds, rebates, merchandise commissions, concessions commissions, sponsorship revenue, and insurance ...


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