Cherniak v. Trans-High Corporation

Background

Laurence Cherniak and Robert Shelli alleged that they licensed photographs to Trans-High Corporation (THC) for limited use in a book and issues of High Times magazine. They claimed THC later reused the photographs without permission in additional magazine issues, an online gallery, and a book published by Powerhouse Cultural Entertainment, Inc. The plaintiffs sought damages under the Copyright Act. They had previously filed a substantially similar action, which ended when the parties voluntarily dismissed it without prejudice.

THC argued that the plaintiffs’ claims were barred by a settlement agreement resolving the earlier action. The agreement required THC to make an initial payment and later pay a balance. In exchange for full payment, the plaintiffs agreed to release their claims. The agreement also required the plaintiffs to file a dismissal without prejudice after the initial payment and to confirm that the dismissal became with prejudice after payment of the balance. The opinion does not state the settlement amounts.

Conversion of the Motion

THC moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the settlement agreement barred the plaintiffs’ claims. The plaintiffs argued that the court could not consider the agreement on a motion to dismiss because the complaint did not mention or incorporate it and because it was not a public record subject to judicial notice.

The court ruled that the agreement was outside the materials ordinarily considered on a motion to dismiss. The parties had also submitted evidence outside the complaint, including an affidavit and wire-transfer receipt from THC and a declaration and emails from the plaintiffs’ attorney. Because both sides had submitted evidence and had addressed the agreement, the court converted the motion to dismiss into a motion for summary judgment under Rules 12(d) and 56.

Settlement Agreement and Material Breach

The court determined that the settlement was an “executory accord” under New York law: an agreement in which one party promises future performance in exchange for the other party’s release of existing claims. Under the law discussed by the court, a party may pursue the original claims if the other party materially breaches the agreement. A material breach is one that defeats the agreement’s central purpose.

The court found that THC failed to pay the settlement balance by the deadline. The plaintiffs notified THC of the default, and THC did not cure the nonpayment within the agreement’s stated period. The court concluded that payment was the central part of the agreement and that THC’s failure to make timely payment was a material breach, not a minor technical default.

The court rejected THC’s argument that the plaintiffs’ notice was ineffective because it was sent by email rather than by both email and FedEx. It ruled that the plaintiffs’ method of notice did not substantially undermine the agreement’s purpose, unlike THC’s failure to pay.

Effect of Later Payment and Disposition

THC later wired the unpaid balance after the plaintiffs had started this action. The court ruled that this later payment did not cure the breach because the plaintiffs had elected to pursue their underlying copyright claims rather than seek payment under the settlement agreement. The court did not decide whether the later payment should offset a future recovery or whether THC had another way to recover that money.

The court held that the plaintiffs were entitled to pursue the copyright claims covered by the settlement. Because THC materially breached the agreement, the condition requiring the plaintiffs to confirm that the earlier dismissal had become with prejudice was never triggered. The court denied THC’s motion for summary judgment. The order states that the motion to dismiss was converted into a motion for summary judgment and denied, and directed the Clerk to terminate the motion at ECF No. 53.

Other Matter

The opinion noted that THC had submitted a hard copy of the settlement agreement without filing it on the docket, citing confidentiality. The court stated that a separate order would require the parties to show cause why the agreement should not be publicly filed. That separate proceeding was not decided in this order.