McDonald v. Brown: Remnants of Fraud Undone by Bona Fide Purchaser Status

Southern District Finds Screenwriter’s Claims Barred by Statute of Limitations and Subsequent Rightsholder’s BFP Status

The U.S. District Court for the Southern District of New York granted summary judgment in favor of a film financier based upon statute of frauds and bona fide purchase defenses in McDonald v. Brown. The Southern District’s decision provides reassurance to parties who obtain rights to creative projects without knowledge of prior legal claims, and also emphasizes the importance of fully understanding a project’s chain-of-title and the legal significance of documents prior to signing.

Background

Plaintiff Christian McDonald wrote a screenplay entitled “Remnants” (the “Screenplay”) that he hoped to produce as an independent film. After the Screenplay generated interest, McDonald executed two copyright assignments to transfer the Screenplay copyright to Remnants Productions, a special purpose entity created to produce the film. According to McDonald’s complaint, he signed the transfers because Barry Jay Reiss (“Reiss”), who was retained to arrange financing for the film, promised McDonald that he would direct the film and retain the Screenplay copyright until he completed his writing and directing services. According to McDonald, Reiss repeatedly told McDonald that the assignments were not yet effective and that his services as director were guaranteed.

Defendants Thomas Conigliaro (“Conigliaro”) and Verify LLC agreed to finance the film and pre-production commenced with McDonald serving as director. After a month of shooting, McDonald’s directing services terminated and another director supervised completion of the film. McDonald allegedly learned in December 2009 or January 2010 that the Screenplay copyright was no longer registered in his name.

In 2011, Conigliaro brought various claims for misrepresentation and breach of fiduciary duty against Brown, Remnants Productions and other entities involved in the film. In the settlement of the matter, Remnants Productions’ assets, including the Screenplay copyright, were transferred to Conigliaro without transferring Remnants Productions’ obligations. Conigliaro then transferred the copyright to Verify LLC, a limited liability company wholly owned by Conigliaro. During the settlement discussions, Reiss argued that any settlement could jeopardize the original copyright transfer to Remnants Productions.

McDonald never met or spoke with Conigliaro prior to filing his suit, although he tried to communicate to Conigliario through other parties. Among other claims, McDonald sued Conigliaro and Verify LLC for copyright infringement, unjust enrichment and quantum meruit. Conigliario and Verify LLC moved for summary judgment.

Bona Fide Purchaser

McDonald claimed that Conigliaro and Verify LLC infringed his copyright of the Screenplay, arguing that he still holds the Screenplay copyright because Reiss fraudulently induced the August 2006 assignments. Conigliaro argued in response that Conigliaro owns the Screenplay copyright as a bona fide purchaser because he obtained title for valuable consideration and lacked notice of the “fraudulent intent of his immediate grantor, or of the fraud rendering void the title of such grantor.”

The court rejected McDonald’s counter-argument that Conigliaro had notice of the alleged fraud. The court stated that Conigliaro’s knowledge of McDonald’s compensation under the Remnants Productions operating agreement, if any, did not constitute knowledge of the promises allegedly made by Reiss to fraudulently induce McDonald to assign the copyright. Moreover, the court held that there was valid consideration for the transfer of the Screenplay because, at the time of assignment, McDonald received a 49.5% interest in the production company.

McDonald also claimed that Conigliaro was not a bona fide purchaser because he did not purchase for value. However, Conigliaro waived his claims in exchange for receiving the rights to the Screenplay, which is sufficient to constitute “value” under New York law. Accordingly, the court held that Conigliaro was a valid bona fide purchaser.

Statute of Limitations

In addition to the bona fide purchaser defense, Conigliaro and Verify LLC alleged that McDonald’s claims were barred by statute of limitations. Fraud claims in New York are timely if filed within the “greater of six years from the date the cause of action accrued or two years from the time the plaintiff… discovered the fraud, or could with reasonable diligence have discovered it.” A cause of action for fraud in the inducement of a contract accrues at the time of the execution of the contract.

McDonald’s claim accrued in August 2006 when he executed the two assignments of the Screenplay copyright, allegedly relying on Reiss’s promise that the assignments would not become effective until the film was completed with McDonald serving as director. Because McDonald filed his complaint on September 6, 2012, his claim would only be timely if the two year discovery rule applied.

The court held that McDonald knew that the Screenplay copyright was no longer registered in his name and that someone else was serving as director of the film by January 2010, and this put him on notice of the alleged fraud. Accordingly, his fraud claim is barred by statute of limitations.

Unjust Enrichment and Quantum Meruit

McDonald claimed that Conigliario and Verify LLC were unjustly enriched by his writing, directorial and production services. However, there was no relationship between McDonald and Conigliaro (they never met nor spoke) before McDonald filed the lawsuit. Therefore McDonald could not have relied on any representation from Conigliaro when he performed his services. The court rejected McDonald’s argument that the association is sufficient because Conigliaro knew a payment to McDonald was due when he settled with the other parties, stating that “liability does not spring from mere awareness of a plaintiff’s existence” and “nor does it arise just because a defendant earned a profit from a plaintiff’s work.” The court stated that McDonald rendered services to Remnants Productions under its operating agreement and neither rendered services directly for, nor in reliance on, Conigliaro.

Takeaways

The Southern District’s decision provides some assurance to financiers, producers and distributors who become involved in an entertainment project late in its development. It is not unusual for underlying material such as book options, screenplays and treatments to change hands several times before a project is successfully financed and produced. This decision confirms that individuals and entities can continue to join projects relatively late in the game without risking liabilities to parties with whom they have no direct relationship and no knowledge of a claim.

The decision’s statute of frauds analysis also demonstrates the importance of reacting promptly upon discovering fraud. If McDonald’s other claims had been valid here, he still would have been barred because he did not file his claim without two years. Potential plaintiffs who believe they have been the victims of fraud should act diligently when protecting their rights and should not hesitate in exploring their options of legal recourse.

Additionally, the McDonald decision reinforces the importance of creative individuals – particularly writers and producers who control rights to underlying material – fully understanding a project’s corporate structure and chain-of-title documentation, in addition to appreciating the legal import of any documents that they may sign. Here, McDonald could have presumably circumvented a great deal of heartache by retaining an experienced independent film attorney to review and explain the assignments prior to execution, and also by ensuring that the terms of his directing and producing services were accurately represented and sufficiently protective in a signed agreement between himself and the production entity. A few thousand dollars in legal fees upfront could have saved McDonald tens or hundreds of thousands of dollars in subsequent fees and opportunity cost.