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

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

March 29, 2018

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

          ORDER DENYING DEFENDANTS' MOTION FOR SANCTIONS [#26] AGAINST PLAINTIFF REACT, AND DENYING DEFENDANTS' MOTION FOR SANCTIONS [#29] AGAINST PLAINTIFF SFX REACT

          HON. DENISE PAGE HOOD, J.

         I. BACKGROUND

         A. 16-13288, Procedural Background

         On September 12, 2016, Plaintiff React Presents, Inc. (“React”) filed a Complaint in the United States District Court for the Eastern District of Michigan against Defendants Eagle Theater Entertainment, LLC (“ETE”), Blair McGowan (“McGowan”), Amir Daiza (“Daiza”), and Matthew Farris (“Farris”) (collectively, “Defendants”). The Complaint alleges 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 a More Definite Statement on November 21, 2016 (Doc # 5), which was subsequently denied by Magistrate Judge David R. Grand. (Doc # 10) Defendants filed a responsive pleading on February 7, 2017. (Doc # 11) The responsive pleading includes Counterclaims against React, alleging Conspiracy and Agreements in violation of § 1 of the Sherman Act (Count I), violation of the Michigan Antitrust Reform Act (“MARA”) (Count II), and unjust enrichment (Count III) (Id.). On February 28, 2017, React filed a Motion to Dismiss Defendants Counterclaims. (Doc # 13) The Court dismissed Defendants' unjust enrichment (Count III) claim against React, but denied the Motion on the antitrust and MARA counterclaims. (Doc # 30) Defendants filed an Amended Motion for Judgment on the Pleadings on May 17, 2017. (Doc # 22) The Court granted Defendants' Motion (Doc #22) as to the unjust enrichment and breach of fiduciary duty claim, and denied the Motion as to the breach of contract claim, fraud claim, and RICO claim. (Doc # 31) This matter is presently before the Court on Defendants' Motion for Sanctions filed on July 7, 2017. (Doc # 26) Defendants request the Court dismiss Plaintiff's claims with prejudice as a sanction for Plaintiff's bad faith pre-litigation conduct. (Id.) Plaintiff filed a Response on August 4, 2017. (Doc # 28) Defendants' Reply was filed on August 31, 2017. (Doc # 33)

         B. 16-13311, Procedural Background

         On September 13, 2016, Plaintiff SFX React-Operating LLC (“SFX”) filed a Complaint in the United States District Court for the Eastern District of Michigan against Defendants Eagle Theater Entertainment, LLC (“ETE”), Blair McGowan (“McGowan”), Amir Daiza (“Daiza”), and Matthew Farris (“Farris”) (collectively, “Defendants”). The Complaint alleges 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 a More Definite Statement on November 21, 2016 (Doc # 6), which was subsequently denied by Magistrate Judge David R. Grand. (Doc # 12) Defendants filed an Amended Answer on February 7, 2017. (Doc # 16) The Amended Answer includes Counterclaims against SFX, alleging Conspiracy and Agreements in violation of § 1 of the Sherman Act (Count I), violation of the Michigan Antitrust Reform Act (Count II), and unjust enrichment (Count III) (Id.). On February 28, 2017, SFX filed a Motion to Dismiss Defendants' Counterclaims. (Doc # 18) The Court dismissed Defendants' Counterclaims against SFX. (Doc # 33) Defendants filed a Motion for Judgment on the Pleadings on May 17, 2016. (Doc # 25) The Court granted Defendants' Motion (Doc # 25) as to the unjust enrichment and breach of fiduciary duty claim, and denied the Motion as to the breach of contract claim, fraud claim, and RICO claim. (Doc # 31)

         This matter is presently before the Court on Defendants' Motion for Sanctions filed on July 7, 2017. (Doc # 29) Defendants request the Court dismiss Plaintiff's claims with prejudice as a sanction for Plaintiff's bad faith pre-litigation conduct. (Id.) Plaintiff filed a Response on August 4, 2017. (Doc # 31) Defendants' Reply was filed on August 31, 2017. (Doc # 36)

         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 (the “Agreement”). React and ETE co-promoted dozens of concerts in 2013 and 2014 under the terms of the 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 Agreement. After each concert, Eagle would provide React with a “settlement” document via e-mail purporting to indicate the profits generated. The Agreement provided the parties complete access to each other's books and records, and the right to inspect, copy, or conduct audit reviews of the other party's books, for one year following the last performance date of each co-promoted event. (Doc # 1-1, ¶ 22) 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 Plaintiff, in January 2016, a disgruntled Eagle employee, Nicholas Doty (“Doty”), provided React and SFX with what Plaintiff alleges to be true and accurate accounting records disclosing that Eagle kept two sets of books showing receipts from the concerts. (Doc # 28-1; Doc # 31-1) Plaintiff alleges that Eagle's settlements systematically and fraudulently underreported the true profits from almost every single one of the co-promoted concerts. Plaintiff asserts that neither React nor SFX asked Doty to obtain the records. Plaintiff adds that neither React nor SFX had any knowledge of ETE's underreporting of revenue, and neither party was contemplating litigation against ETE prior to receiving the records.

         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 ...


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