NEW ORLEANS (CN) - The royalties of 1970s funk band the Ohio Players remain in limbo after improper asset distribution in bankruptcy court, the 5th Circuit ruled.
Inducted last year into Official R&B Music Hall of Fame, the Ohio Players had gold-certified hits in the 1970s with "Fire" and "Love Rollercoaster."
Music producer Julian Jackson formed Artist Rights Foundation with Raul Galaz, a former California attorney, in 1998 to collect royalties from the band's music.
"Raul and Julian secured all rights to the Ohio Players' music catalogue and exploited those rights, but from 1998 until 2005 the rights did not generate any revenue," Judge Edith Jones wrote for a three-member panel.
When Raul and his wife Lisa divorced in May 2002, Raul assigned half of his 50 percent interest in ARF to Lisa.
After it was found that the transfer occurred without Jackson's consent, however, Lisa's rights were reduced to 25 percent and she lost all management and voting rights.
Without the knowledge of either Lisa or Jackson, Raul assigned all of ARF's rights in June 2005 to an entity called Segundo Suenos. Though Segundo Suenos was not organized as a business entity under the laws of any state at the time, Raul and his father created Segundo Suenos LLC in Texas three months later.
"Shortly thereafter, the royalties for the Ohio Players' music began to generate a substantial amount of revenue," Jones wrote. "From the time of ARF's transfer in June 2005 until trial in February 2010, Segundo Suenos' gross revenue from the Ohio Players' royalties totaled nearly one million dollars. Neither Julian nor Lisa received any share of the profits despite their interests in ARF."
Lisa filed for Chapter 13 bankruptcy in 2007 and then filed an adversary proceeding against Raul, his father and Segundo Suenos in 2008, claiming violations of the Texas Uniform Fraudulent Transfer Act.
Jackson entered the fray, and a bankruptcy court invalidated the transfer of ARF to Segundo Suenos after a five-day trial. The court ordered Raul to pay Lisa $500,000 total in actual and exemplary damages, and to pay Jackson $1 million.
A federal judge in western Texas affirmed the findings but ordered the damages recalculated with attention to any expenses Segundo Suenos incurred.
The company's tax liabilities led to slight deductions from Lisa and Jackson's damages awards.
A subsequent appeal led the 5th Circuit to partially vacate the underlying rulings Monday.
Although Lisa's Texas Uniform Fraudulent Transfer Act claim is "related to" the bankruptcy, the District Court improperly held that the bankruptcy court had authority to enter final judgment due to her ex's "implied consent," the court found.
"Because Lisa's claim is 'related to a case under title 11,' 28 U.S.C. section 157(c)(1), the bankruptcy court may still hear it and 'submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment,'" the 12-page ruling states.