Squirrel Nut Zippers royalties case goes forward |

North Caroline Weekly Staff, BridgeTower Media Newswires//August 6, 2007//

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Two former band members can sue the Squirrel Nut Zippers and their former management to recover royalties and other money they claim is owed to them, a federal district court ruled July 25.
The latest legal dispute to arise among the original members of the popular Chapel Hill “hot jazz” band will move into the discovery phase after the ruling on several motions to dismiss by Judge William L. Osteen in the Middle District of North Carolina.
Attorney Anthony Biller of Cary said his clients, Tom Maxwell and Ken Mosher, were disappointed to see their RICO and Unfair and Deceptive Trade Practices claims thrown out. Still, they are eager to see their remaining claims go to trial — possibly by the start of next year.
Osteen denied the defendants’ motions to dismiss claims for breach of contract, breach of fiduciary duty, conversion and fraud.
Those motions were filed by current band members Christopher Phillips and James Mathus and the band’s former management, Erik Selz and Red Ryder Entertainment, Inc.
“We have to decide whether the royalties were paid and, if so, to whom and when,” Biller said. “We also want to confirm what the defendants knew regarding royalties prior to my clients’ settlement of the first arbitration award.”

Meteoric rise
Mathus and his former wife, singer Katherine Whalen, formed the Squirrel Nut Zippers in 1993 along with Mosher, Phillips and others after throwing a series of house parties in which friends brought along instruments to play old-time jazz.
Maxwell joined the band later on.
The Zippers’ unique sound made the band a hit in the Triangle, and it released its first album in 1995.
In 1996, three days before the release of its second album, Hot, the band entered a partnership agreement in which members agreed to share profits and losses equally and to settle disputes through arbitration.
The band’s popularity skyrocketed over the next three years. Hot reached platinum status. The song “Hell” went as high as No. 13 on music charts. Another song, “Put a Lid On It,” was featured in a 1999 Intel Super Bowl commercial.
The band also made several high-profile appearances, including a show at the 1996 Summer Olympics in Atlanta and President Bill Clinton’s 1997 inaugural ball.
Legal crash
In the midst of its success, the band had to settle lawsuits with another former manager, Mike Renault, and with the company whose peanut and caramel candy the band took its name from.
Then, in 1999, band members besides Maxwell and Mosher entered into a management agreement with Selz and Red Ryder Entertainment. The agreement gave Red Ryder a 15 percent commission on the band’s income in exchange for promotion, administration and distribution of the band’s revenue.
Maxwell and Mosher left the band in 1999 and sought past-due royalties and commissions from Red Ryder. When those efforts failed, they entered arbitration.
Arbitration and allegations
The arbitrator awarded Maxwell and Mosher $345,000 in October 2002 as well as publishing rights to songs they had written for the band.
During arbitration, Disney (which bought Chapel Hill record label Mammoth Records) and Bug Music, the band’s publishing administrator, complied with subpoenas for financial records. Selz and Red Ryder did not comply.
Before a state court confirmed the arbitrator’s award, Maxwell and Mosher settled with the rest of the band in April 2003 for a reported $155,000.
The settlement released the remaining band members from any existing claims, known or unknown.
Maxwell and Mosher allege that neither the band members nor Red Ryder lived up to the settlement in the years that followed, which led to their filing a complaint in federal court in 2006.
The plaintiffs claim that, during arbitration, the defendants produced fraudulent and intentionally inaccurate documents relating to the amount of royalties they were owed.
Biller said that amount should emerge during the discovery process.
The plaintiffs also allege that the defendants have continued to conceal the true amount of royalties and mechanicals owed to them by diverting income through Red Ryder’s accounts. Mechanicals are royalties due for copies of songs made for reproduction by mechanical means.
“We think they’re significant,” Biller told Lawyers Weekly.

Holding
The defendants answered the lawsuit by arguing that a release clause in the settlement barred the plaintiffs’ claims and that, even if it didn’t, the plaintiffs had failed to plead facts to support their claims.
Osteen disagreed.
First, the release clause would not apply if the settlement agreement was induced by fraud, Osteen said.
Osteen gave the plaintiffs the green light on three other claims:

Breach of fiduciary duty: If Red Ryder received, managed and exerted control over payments from third parties to the plaintiffs, then the company owed the same fiduciary duty to the plaintiffs as it did all band members, according to the opinion.
Mathus and Phillips also owed a duty, which did not terminate upon the plaintiffs’ initiation of legal action.
“Even assuming that any fiduciary duties had dissolved on account of the legal proceedings, Mr. Phillips still owed a duty not to engage in unconscionable behavior alleged by Plaintiffs, specifically fraud,” Osteen wrote.

Conversion: Although the plaintiffs did not specify the exact amount of money allegedly converted by the defendants, a description of “royalties” served as sufficient identification to survive the motion-to-dismiss stage, the opinion said.

Breach of contract: The settlement did not place on Mathus and Phillips the duty of furnishing accounting statements. It did contain a provision requiring the two defendants to “perform in good faith all actions necessary to give full force and effect to this agreement.”
If the defendants fraudulently diverted and obtained royalties that belonged to the plaintiffs, the opinion said, then that would constitute a breach of the settlement.
The court rejected the RICO claim on grounds that allegations of fraudulently withholding royalty payments in violation of a fiduciary duty and contract “is no more than an ordinary business dispute.”
The judge dismissed the Unfair and Deceptive Trade Practices claim because the plaintiffs had failed to show how the defendants’ allegedly deceptive acts made “an impact on the market place.”
Osteen also ruled on a cross-claim filed by Mathus against Red Ryder, seeking contribution or indemnification. Such relief was not available for intentional torts, Osteen said.
Maxwell and Mosher have been busy working on projects since the lawsuit was filed, Biller said.
Mathus and Phillips, meanwhile, have reunited with other band members and are touring the country for the first time in nearly six years.
— Questions or comments may be directed to [email protected].