Arista Records LLC et al v. Lime Wire LLC et al

Filing 700

OPINION AND ORDER: #100245 In conclusion, Plaintiffs shall be permitted to introduce evidence and argument concerning Gortons transfer of assets into all six family limited partnerships, and the value of those assets transferred, including those assets currently being held by Gorton himself, and the interest of Gortons family members in the family limited partnerships. However, this evidence is relevant only (1) to Plaintiffs' fraudulent conveyance claim; and (2) if and when there has been a determination by the jury that punitive damages are warranted. Accordingly, the parties shall be prepared to discuss with the Court-at the pretrial conference on April 25, 2011 how evidence of Gorton's transfers into family limited partnerships should be presented to the jury in light of the Court's opinion. (Signed by Judge Kimba M. Wood on 4/21/2011) (jpo) Modified on 4/27/2011 (ajc).

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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ARISTA RECORDS LLC; ATLANTIC RECORDING
CORPORATION; ARISTA MUSIC, fka BMG
MUSIC; CAPITOL RECORDS, INC; ELEKTRA
ENTERTAINMENT GROUP INC; INTERSCOPE
RECORDS; LAFACE RECORDS LLC; MOTOWN
RECORD COMPANY, L.P.; PRIORITY RECORDS
LLC; SONY MUSIC ENTERTAINMENT, fka SONY
BMG MUSIC ENTERTAINMENT; UMG RECORDINGS,
INC; VIRGIN RECORDS AMERICA, INC.; and
WARNER BROS. RECORDS INC.,

06 CV 5936 (KMW)
OPINION AND ORDER

Plaintiffs,
-againstLIME GROUP LLC; LIME WIRE LLC; MARK
GORTON; GREG BILDSON; and M.J.G. LIME WIRE
FAMILY LIMITED PARTNERSHIP,
Defendants.
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KIMBA M. WOOD, U.S.D.J.:
I.

Introduction
On May 11, 2010, this Court granted summary judgment in favor of Plaintiffs on their

claims against Defendants LimeWire LLC (“LW”), Lime Group LLC (“Lime Group”), and Mark
Gorton (collectively, “Defendants”) for secondary copyright infringement. The Court found that
Defendants had induced multiple users of the LimeWire online file-sharing program
(“LimeWire”) to infringe Plaintiffs’ copyrights. In the Court’s Opinion and Order (as amended
on May 25, 2010), the Court detailed this case’s procedural and factual background, familiarity
with which is assumed. (See Dkt. Entry No. 223.)
A trial on damages for copyright infringement, and on Plaintiffs’ remaining claims, is
scheduled for May 3, 2011. Specifically, Plaintiffs will try their claims for (1) vicarious
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copyright infringement; (2) fraudulent conveyance; and (3) unjust enrichment; as well as for (4)
statutory damage awards with respect to post-1972 works; and (5) actual damages, punitive
damages, and equitable relief under common law copyright infringement and unfair competition,
with respect to pre-1972 works.1 (See Dkt. Entry No. 411-1.)
Defendants have moved in limine to preclude Plaintiffs from offering any argument or
evidence at trial regarding Defendant Mark Gorton’s net worth, or sources of income and
financial condition unrelated to LimeWire, unless and until there has been a determination by the
jury that punitive damages are awardable. For the reasons that follow, Defendants’ motion is
DENIED.
II.

Analysis
In their instant motion, Defendants concede that financial information relating to

LimeWire may be relevant to the determination of statutory damage awards, with respect to “the
expenses saved, and profits earned, by the infringer” factor listed in Bryant v. Media Rights
Productions, Inc., 603 F.3d 135 (2d Cir. 2010). Defendants also concede that they are not
seeking to preclude evidence concerning the single transfer of assets which is the subject of
Plaintiffs’ fraudulent conveyance claim. Notwithstanding these two concessions, Defendants
contend that all other information pertaining to Gorton’s net worth is relevant only to Plaintiffs’
common law claim for punitive damages, and that therefore, that evidence should be excluded
unless and until the jury determines that punitive damages should be awarded to Plaintiffs for
their common law copyright claims. (Def. Mem. at 1.)
Plaintiffs have identified approximately 11,205 sound recordings that have allegedly been
infringed through the LimeWire system. Of those, approximately 9,715 are sound recordings as
to which Plaintiffs have elected to seek statutory damages under Section 504(c)(1) of the
Copyright Act. See 17 U.S.C. § 504(c)(1). Plaintiffs are also seeking to recover actual damages
for approximately 1,490 sound recordings from the pre-1972 period, for which statutory damages
under the Copyright Act are concededly not available.

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A.

Evidence of a Defendants’ Net Worth Generally

To advance their argument, Defendants cite to several decisions from this Circuit, finding
that evidence of a defendant’s net worth is highly prejudicial, and relevant only if there has been
a finding that punitive damages should be awarded. See e.g., Tyco Int’l Ltd. v. Walsh, No. 02
Civ. 4633, 2010 WL 3000179, at *1 (S.D.N.Y. July 30, 2010) (“A defendant’s net worth is only
relevant if there is a finding that punitive damages should be awarded.”); Reilly v. Natwest Mkts.
Grp. Inc., 181 F.3d 253, 266 (2d Cir. 1999) (“Evidence of wealth . . . is generally inadmissible in
trials not involving punitive damages.” (citation omitted)). As the Second Circuit has noted:
Since it often would be prejudicial to a defendant to attempt to litigate its financial
condition during the trial on the issues of liability and compensatory damages, the
preferred method of accommodating the various interests is to delay trial as to the amount
of an award of punitive damages until the usual issues of liability and compensatory
damages have been tried, along with the matter of whether the defendant's conduct
warrants any award of punitive damages at all.
Smith v. Lightning Bolt Prods., Inc., 861 F.2d 363, 373-74 (2d Cir.1988).
Defendants are correct that courts have typically found that evidence of a defendant’s net
worth is too prejudicial to allow for its introduction during the liability phase of a trial, or with
respect to the issue of compensatory damages. However, in none of those cases was the
defendant’s overall financial condition relevant to a liability issue.
Here, however, certain evidence pertaining to Gorton’s financial condition is relevant to
Plaintiffs’ effort to prove, by clear and convincing evidence, their fraudulent conveyance claim.
B.

Plaintiffs’ Fraudulent Conveyance Claim

Plaintiffs’ fraudulent conveyance claim, brought under New York Debtor and Creditor
Law Section 276, is admittedly based only on a transfer made in June of 2005: Gorton’s transfer
of Lime Group’s interest in LimeWire (and any distributions that would have flowed from
LimeWire to Lime Group) into M.J.G. LimeWire Family Limited Partnership (hereinafter
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“LimeWire FLP”). See Pl. Opp. at 9 (stating that “Plaintiffs’ fraudulent conveyance claim
alleges only transfers related to LimeWire and Lime Group’s interest in LimeWire into the
LimeWire FLP” ).
However, even though Plaintiffs’ fraudulent conveyance claim is based only on this
transfer, Gorton transferred assets from other entities into five other family limited partnerships
at the same time that he made his transfer into LimeWire FLP. Moreover, all of these transfers
were made just days after the Supreme Court’s decision in Metro-Goldwyn Mayer Studios, Inc.
v. Grokster Ltd., 545 U.S. 913 (2005).
Gorton’s multiple transfers of assets into multiple family limited partnerships—including
the value of those assets—are relevant to Plaintiffs’ fraudulent conveyance claim, because they
may provide evidence that the conveyance at issue “was part of a comprehensive scheme” to
divest Gorton of assets reachable by future creditors. Wittemann Bros. v. Forman Bottling Co.,
178 A.D. 674, 675 (N.Y. App. Div. 1917).
Indeed, numerous courts have observed that a plaintiff seeking to prove fraudulent
conveyance may have no way to prove the requisite fraudulent intent without circumstantial
evidence from which intent to hinder, delay or defraud may be inferred (referred to as “badges of
fraud”). As one court has observed, “[d]irect evidence of fraudulent intent is often elusive.
Therefore, courts will consider ‘badges of fraud,’ which are circumstances that accompany
fraudulent transfers so commonly that their presence gives rise to an inference of intent.” Pen
Pak Corp. v. LaSalle Nat’l Bank of Chicago, 240 A.D.2d 384, 386 (N.Y. App. Div. 1997)
(citations and quotations omitted). See also In re Kaiser, 722 F.2d 1574, 1582 (2d Cir. 1983)
(“Fraudulent intent is rarely susceptible to direct proof . . . [and so t]herefore, courts have

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developed ‘badges of fraud’ to establish the requisite actual intent to defraud.”) (citations and
quotations omitted).
The Second Circuit has provided the following specific examples of “badges of fraud”
from which intent to hinder, delay, or defraud may be inferred by a jury:
(1) the lack or inadequacy of consideration;
(2) the family, friendship or close associate relationship between the parties;
(3) the retention of possession, benefit or use of the property in question;
(4) the financial condition of the party sought to be charged both before and after the
transaction in question;
(5) the existence or cumulative effect of a pattern or series of transactions or course of
conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of
suits by creditors; and
(6) the general chronology of the events and transactions under inquiry.
Id., 722 F.2d at 1582-83.
Citing to In re Kaiser, Plaintiffs assert that evidence of Gorton’s multiple transfers of his
assets will be relevant to three badges of fraud: Gorton’s (1) “financial condition . . . before and
after the transaction in question”; (2) “the existence or cumulative effect of a pattern or a series
of transactions or course of conduct after the pendency or threat of suits by creditors”; and (3)
“the general chronology of the events and transactions under inquiry.” (Pl. Opp. at 6-7.)
By permitting Plaintiffs to present evidence of Gorton’s multiple transfers of assets that
occurred at the same time as his transfer of Lime Group’s interest in LimeWire into the
LimeWire FLP, the Court is simply allowing Plaintiffs to present evidence that may be relevant
to the “badges of fraud” that have been identified by the Second Circuit. Indeed, one court has
found that “[p]roof of contemporaneous conveyances, no matter to whom made, is always

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relevant to the issue of a fraudulent conveyance.” Wittemann Bros., 178 A.D. at 676 (emphasis
added).
Accordingly, Plaintiffs are permitted to present evidence of Gorton’s contemporaneous
transfers of assets into six family limited partnerships, including the value of those assets
transferred, because that evidence may be relevant to badges of fraud from which a jury may
infer fraudulent intent.2
C.

Assets of Gorton’s Relatives

Along these same lines, evidence concerning the value of Gorton’s family members’
interest in these family limited partnerships is relevant. Plaintiffs cannot show Gorton’s financial
condition before and after the transfer in question—one of the badges of fraud—without
reference to the value of Gorton’s family members’ interest in the family limited partnerships,
which resulted from the June 2005 transfers.3
III.

Conclusion
In conclusion, Plaintiffs shall be permitted to introduce evidence and argument

concerning Gorton’s transfer of assets into all six family limited partnerships, and the value of
those assets transferred, including those assets currently being held by Gorton himself, and the
interest of Gorton’s family members in the family limited partnerships. However, this evidence
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For example, Gorton has argued that the $17 million in cash he holds outside of any family
limited partnership is evidence of his lack of intent to hide assets from creditors. (Klaus Decl.
Ex. 3.) It would be highly prejudicial to Plaintiffs if the Court were to allow Gorton to argue
lack of fraudulent intent by citing to this $17 million figure, and then at the same time, exclude
evidence that this $17 million is just a fraction of a larger amount of assets that Gorton has
transferred into different family limited partnerships.
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The Court notes, and the parties appear to agree, that Mark Gorton’s individual retirement
account (“IRA”) is immune under New York law from any damage award (compensatory or
punitive), and therefore, cannot be used in calculating Gorton’s net worth for damages purposes.
See N.Y. CPLR § 5205(c).
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is relevant only (1) to Plaintiffs' fraudulent conveyance claim; and (2) if and when there has been
a determination by the jury that punitive damages are warranted.

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Accordingly, the parties shall be prepared to discuss with the Court-at the pretrial
conference on April 25, 201

how evidence of Gorton's transfers into family limited

partnerships should be presented to the jury in light of the Court's opinion.
SO ORDERED.
Dated: New York, New York
2011
April

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Kimba M. Wood
United States District Judge

4 Plaintiffs argue that evidence of Gorton's net worth would not be prejudicial with respect to
their copyright infringement claims, because the Court has already found that Defendants
engaged in "intentional wrongdoing" and so therefore, punitive damages are warranted.
The Court rejects this argument outright. Only the jury can determine whether plaintiffs
are entitled to punitive damages. Plaintiffs do not cite to any authority suggesting that a finding
of intent at summary judgment mandates a punitive damages award. Indeed, Plaintiffs' own
proposed jury instructions recognize that it is up to the jury to determine whether punitive
damages are awardable.

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