Underwood v. Lastrada Entertainment Company, Ltd.

Background

The parties had a long-running dispute over music royalties. In 1982, William R. Underwood, Charles Carter, and Steven Arrington entered a shareholders agreement for Konglather Music Inc. Underwood and Arrington each owned 35% of Konglather, while Charles Carter owned 30%. Underwood was also named the corporation’s president.

That same year, Konglather entered a recording contract with several musicians, including Charles Carter, Steven Arrington, and Sam Carter. The contract gave Konglather ownership of the recordings known as the Konglather Masters. It provided that half of the royalties from those recordings would go to the musicians and that the remaining half would be divided among Konglather’s owners according to their ownership shares.

Konglather later agreed with Atlantic Recording Corporation that Atlantic would sell and license recordings from the Konglather Masters and pay the royalties to Konglather. Underwood asserted that Arrington and Charles Carter gave up their ownership shares in 1984, leaving Underwood as Konglather’s sole shareholder. The opinion states that Underwood could not produce the alleged written agreement documenting that transfer, but the court assumed for purposes of summary judgment that the shares had been relinquished.

Konglather was involuntarily dissolved on December 24, 1991, for failure to pay state taxes. In 2010, Arrington and Charles Carter directed Rhino Entertainment Company to pay royalties owed to Konglather to Lastrada Entertainment. Between 2010 and 2017, Rhino paid Lastrada $149,441.28. In 2018, Lastrada paid Underwood $26,152.23, which the opinion identifies as the amount due to him under the ownership percentages and the 1982 agreements.

Remaining Claim and Motions

Underwood’s remaining claim alleged conversion. Conversion is an intentional, unauthorized exercise of control over someone else’s property. For a conversion claim involving money, the claimant must have legal ownership or an immediate right to possess specifically identifiable funds.

Underwood sought the balance of the $149,441.28 in royalties for himself. The opinion notes that he did not dispute that the $26,152.23 payment represented the amount owed to him if he owned 35% of Konglather. The parties cross-moved for summary judgment on the sole remaining claim.

Court’s Analysis

The court held that the alleged injury was to Konglather, not to Underwood personally. Because Konglather allegedly owned the royalties and the defendants allegedly interfered with Konglather’s property, Konglather—not Underwood—had the right to seek relief. A shareholder generally cannot bring a claim based on injury to the corporation.

The court rejected Underwood’s argument that Konglather’s assets automatically passed to him when the corporation was dissolved. Applying New York law, the court explained that assets of a corporation dissolved under the relevant tax statute remain in the corporation until transferred in the corporation’s name, pending reinstatement or winding-up. The assets do not automatically pass to the shareholders, even when one shareholder owns all of the shares.

The court also stated that Underwood had not claimed that Konglather affirmatively transferred its rights to the Master Royalties to him after dissolution. It therefore concluded that Underwood lacked standing—the legal ability to bring this claim—because he was asserting rights belonging to Konglather.

Disposition

Because Underwood lacked standing to pursue the sole remaining claim, the defendants’ motion for summary judgment was granted. The Clerk of Court was directed to enter judgment for the defendants and close the case. The opinion does not expressly state a separate disposition of Underwood’s cross-motion.