By Joseph C. Self
(Editor’s
note: The author, a practicing attorney in Arkansas, is also the author of essays on this site analyzing the George Harrison "My Sweet Lord" suit and the John Lennon "Roots" album lawsuit.)
Much
has been written over the years regarding the circumstances
that
caused Paul McCartney to sue his former bandmates on the
last
day of December, 1970. His action began
a series of court
battles
between the Beatles and the various companies associated
with
them that continued for the biggest part of the next two
decades. This article will focus solely on the
initial action
filed
by McCartney and examine precisely what he sought from the
English
court that heard his case. In focusing
on the factors
cited
to the court that drove McCartney to seek the aid of the
legal
system, this article will not review the arguments made by
the
opposing parties or the order of the court beyond stating that
the
relief requested (appointment of a receiver and an accounting)
was
granted. Except for the background
information at the
beginning
and the author's observations at the conclusion, this
piece
is based solely on arguments made by McCartney's counsel in
open
court on March 1 and 2, 1971.
BACKGROUND
To understand why McCartney took such
drastic action as suing
his
friends and airing the Beatles' business affairs for the world
to
see, a brief summary of those various dealings would likely be
helpful.
Prior to April,1967, George Harrison,
John Lennon, Paul
McCartney,
and Richard Starkey aka Ringo Starr were partners at
will. As Pete Best could tell you, this meant the
agreement to
work
together could be terminated by any of them at any time.
However,
on April 19, 1967, a partnership deed was entered into
in
which the Beatles agreed that their partnership would continue
for
a period of ten years, with the name of the firm being "The
Beatles
& Co." Apple Corps Limited was
also brought into the
partnership
with an eighty percent interest in the capital and
profits
of the partnership, with Apple agreeing to pay the sum of
£800,000
to be a partner. As corporations are
treated as separate
legal
entities, the Beatles were in partnership with their own
company. The partnership agreement gave the company
the right to
manage
the business of the partnership and exploit the assets of
the
partnership as profitably as possible.
The agreement further
provided
that "proper books of accounts shall be kept by the
partnership"
and that on the 31st of each year a balance sheet and
profit
and loss statement for the year ending was due to each
partner.
It was contemplated by the Beatles that
their long-time
manager,
Brian Epstein, would still be in charge of their affairs
for
the implementation and execution of this new agreement.
However,
in August, 1967, Epstein died and the Beatles' financial
affairs
became even more complex. Apple became
a fully operational
company,
and proceeded to lose money at an alarming rate. In early
1969,
John Lennon remarked to Ray Coleman of Disc magazine that if
things
continued with their financial affairs as they had been
going,
the Beatles would be broke within six months.
This statement caught the eye of Allen
Klein, an American who
was
involved in music publishing and artist management in New York
who
had also served as an agent for some British musical acts, most
notably
the Rolling Stones. Klein, who
controlled an American
company
called ABKCO, ingratiated himself to Lennon, Harrison, and
Starr
in the late winter and early spring of 1969.
McCartney,
however,
was not enamored by Klein, in part because he wanted his
brother-in-law,
John Eastman, to be the manager of the Beatles.
Despite
the lack of unanimity within the band, on May 8, 1969, a
contract
was entered into between ABKCO and Apple, executed by
Lennon
and Harrison as directors of Apple, as well as the three
Beatles
who wanted Klein in charge of their affairs.
McCartney
never
signed the contract with Klein.
Over the course of the next year and a
half, Klein met with
mixed
success as the Beatles' manager. He
renegotiated the
existing
recording agreement with Capitol records for the United
States,
Canada, and Mexico in which the Beatles' royalty increased
from
seventeen and a half percent to twenty five percent. He was
involved
in the negotiations to free the Beatles of Nems, the
company
formed by the late Brian Epstein. He
also was able to get
the
film "Let It Be" into the hands of the distributors and the
album
of the same name into stores. On the
other hand, the Beatles
failed
to acquire control of their publishing rights from Northern
Songs,
as that company was sold to ATV (a failure that, in fairness,
cannot
be completely blamed on Klein). He
alienated McCartney
even
further by attempting to delay the release of his self-titled
solo
album and by releasing LET IT BE after it had been reworked by
Phil
Spector.
As 1970 unfolded, it became apparent that
the Beatles were not
going
to be recording again, at least for the foreseeable future.
Starr
had turned his attention to solo projects such as SENTIMENTAL
JOURNEY
and BEAUCOUPS OF BLUES and had continued his film career.
Both
Lennon and Harrison were recording solo albums which were
being
produced by Phil Spector. McCartney seemed reluctant to do
anything
following the release of MCCARTNEY, at least in part
because
it was not clear whether revenues from solo recordings were
to
be divided as per the temrs of the partnership agreement.
While McCartney upbraided Ray Coleman for
reporting John's
remarks
to the world, he too had been concerned about the Beatles'
financial
affairs for some time. McCartney had appointed
some
accountants
to work for him in May, 1969, and as of December 10,
1970,
the accountants for the Beatles Company had been unable to
produce
any account for a period subsequent to March 31, 1968. One
of
the duties that Apple had to the individual Beatles was to take
care
of their accounting, and the state of their financial records
led
McCartney to question whether enough money was available in the
Apple
accounts to pay the taxes due. It
wasn't until an appeal by
the
Beatles against a provisional income tax assessment on profits
for
the firm was scheduled for a hearing in December, 1970 that
McCartney
and his advisors found it necessary to file an action.
McCartney files suit against Lennon,
Harrison, Starr and Apple
In his action filed before the High Court
of Justice, Chancery
Division
in London, McCartney had to name as defendants the other
partners
in his business. Even though the named
defendants were
John,
George and Ringo, it was clear that the real target of his
suit
was Allen Klein.
McCartney sought two basic remedies. First, he asked that a
receiver
be appointed to act as a caretaker of properties and
interests
in which the Beatles were involved. Second, he asked that
an
accounting of the Beatles financial condition be made by someone
hired
by the receiver. According to Black's
Law Dictionary, a
receiver
is
"an indifferent person between the
parties to a cause,
appointed by the court to receive and
preserve the
property or fund in litigation, and
receive its rents,
issues and profits, and apply or dispose
them at the
direction of the court when it does not
seem reasonable
that either party should hold
them."
The
aim was to have someone other than the current staff at Apple
(which
was working under ABKCO supervision) run the affairs of
Apple
and get the financial records in order.
It was clearly
McCartney's
position that the Beatles were no longer a functioning
band,
and a receiver would have the primary duty of collecting
payments
from various sources based on the work the Beatles had
produced
up to that time.
Because Paul was the moving party, he
bore the "burden of
proof"
that such an extreme step was necessary.
After all, he was
asking
a judge to intervene in business contracts that had been
entered
into voluntarily by all involved, and wrest the control of
the
company away from the majority of the parties to the contract,
namely
John, George and Ringo. Paul reportedly
had to be pushed
into
this action by his advisers, but when he and his legal staff
went
to court, they seemingly brought every complaint they had
without
any hesitation.
McCartney's attorney, Mr. David Hirst,
did all the talking for
Paul
during the summation, and outlined the case against the three
Beatles,
Apple and by extention, Allen Klein, in an orderly and
detailed
fashion. He claimed that without a
trustworthy receiver
in
charge, the assets of the Beatles were in jeopardy. There were
seven
areas McCartney felt demonstrated the partnership assets were
being
misused or improperly accounted for.
These were: (1) that
Allen
Klein billed more money for his commissions than he was
entitled
to take pursuant to the agreement that the majority of
Beatles
executed with him; (2) the Defendants had entered into
contracts
which affected the property of the partnership without
McCartney's
knowledge or consent; (3) the abysmal state of the
bookkeeping
and accounting; (4) grouped with the next two items,
the
financial situation of the partnership; (5) the tax situation
of
the partners; and (6) the partner's excess drawing upon
partnership
assets. Finally, the seventh factor was
a very general
allegation
that Allen Klein had engaged in misconduct as the
manager
for the Beatles, and based on his character, the court
could
assume it likely that the wrongdoing believed to have occured
to
that point would continue if he were allowed to continue in his
capacity
as Beatles manager.
It was also incumbent on McCartney to
show it was likely that
a
court hearing the full case would agree that a dissolution of the
partnership
was appropriate. In addition to the
factors set out
above,
Paul claimed his artistic freedom was being curtailed by his
partners
to such an extent it amounted to "unfair dealing" between
the
partners.
Allegations of Excess Payment from
Apple to Klein
Hirst began his presentation on what was
probably his
strongest
argument: that Allen Klein had received
excess payment
of
commissions on royalties from various sources.
His first
example
involved the McCARTNEY album. Klein
claimed a commission
on
the royalties earned by MCCARTNEY even though it was clear that
he
had no management contract with McCartney.
A point in
contention
during the litigation was whether solo albums were
partnership
assets, i.e. were to be divided among the partners
according
to the partnership agreement. Not
surprising, Klein (and
the
other Beatles) took the position that the solo records were to
be
so divided (and in the case of Starr, Harrison, and Lennon, it
did
not matter to Klein since he had a contract with those three
Beatles). McCartney was adamant in his position that
solo projects
were
not covered by the partnership agreement.
At one point, John Eastman wrote to EMI
Records on Paul's
behalf
and asked that the royalties from MCCARTNEY be held by EMI
rather
than paid to Apple, a request that EMI granted. However,
EMI
continued to supply to Apple (and thus Klein) the sales figures
for
MCCARTNEY. Upon seeing what MCCARTNEY
had earned, Klein
deducted
his commission for those sales from existing Apple assets.
Klein
therefore was paid L72,000 pounds on royalties that had not
yet
been turned over to Apple, but were still being held by EMI.
Because
EMI was holding the money, McCartney had received nothing
from
the sales of his record.
Mr. Hirst then moved to his second
example of overpayment to
Klein
in looking at the commissions charged on what were
unquestionably
Beatles records covered by the partnership
agreement,
that is releases under the name "Beatles". Klein had
negotiated
an increase in royalty payments with Capitol Records
(which
controlled the United States, Canada and Mexico, the single
largest
market for Beatles records) in which the royalty increased
from
17 1/2% to 25% of the wholesale price.
Even McCartney himself
approved
of this renegotiation and signed the documents that put
the
new rate into effect. However, the
agreement that Klein had
entered
into with Starr, Harrison, and Lennon called for a
commission
of 20 percent of any increase in royalties Klein was
able
to secure. When the financial records
were disclosed, it was
learned
that Klein was taking 20 percent of the entire royalty. On
the
sums of money the Beatles earned during 1969 and 1970, the
total
Klein claimed for his management fee was L851,000.00, and
over
L600,000 had already been paid to Klein; McCartney claimed
that
the commission on those Capitol Records royalties should have
been
no more than L250,000.00.
(To demonstrate the effect of what Klein
had done, assume the
Beatles
had sales of $100,000.00 in records on a wholesale basis.
On
that sum, the band would have received $17,500.00 under the old
contract,
but under Klein's renegotiated contract, that sum went up
to
$25,000.00. Thus, Klein would have been
entitled to a fee of
$1,500.00--20
percent of $7,500.00, representing the amount of
royalty
due solely to Klein's negotiating skills.
Instead, Klein
collected
20 percent of the entire sum, or a commission of $5,000.00.)
Klein had also claimed a commission of
EMI royalties, meaning
Beatles
records apart from the United States, Canada, and Mexico,
of
L123,000.00, L114,000 of which had already been paid to ABKCO.
McCartney's
position was that there had been no increase in those
royalty
payments from the EMI sales, and therefore no commission
was
due to Klein on the sale of those records.
Various Breaches in the Partnership
Agreement
Hirst then turned to the numerous claims
of breaches in the
partnership
agreement. As noted earlier, the
original contract
with
Klein was presented to Paul McCartney for his consideration
and
signature and under basic partnership law, could be considered
valid
as ratified by the majority of the partners.
In short, Paul
got
to vote along with the others, he was outvoted, and as happens
in
life, was likely stuck with the decision of the majority.
However,
subsequent to the execution of the contract that McCartney
refused
to sign, there were a series of additional agreements
between
Apple and Klein.
To begin with, there was no dispute that
in September, 1969,
Apple
Records, Inc. sent a letter to Capitol directed that Klein's
commission
be paid to Klein directly, stating that ABKCO was to
receive
20 percent of all sums accruing from Capitol Records, Inc.
This
letter was signed on behalf of Apple Records, Inc., by Lennon,
on
behalf of the partnership by Starkey and Lennon, and on behalf
of
the company Apple Corp. Limited by Harrison and Lennon.
McCartney
maintained that he had never been shown those documents
prior
to litigation. The Partnership Act in
England provided at
that
time that a majority of partners can govern in certain cases,
but
only after a full consultation with all partners. McCartney's
position
was that assuming, without conceding, the original
contract
with Klein had been legal at the time, the variation on
that
contract as it was related to Capitol Records had to be
discussed
with him in order to be valid, and it had not been so
discussed.
A similar event took place in 1970, when
a letter was sent to
EMI
in which Apple authorized that 10 percent of sums due to Apple
were
to be paid to ABKCO, thus granting Klein a commission on sales
outside
of the US market that he would not have received under the
May
1969 agreement. Once again, these
documents were executed by
Harrison,
Lennon and Starkey, and as before, McCartney professed no
knowledge
of such.
The Financial Records of
Apple
Hirst then went into great detail
regarding the abysmal state
of
the accounts of Apple. He pointed out
that after Klein assumed
the
manager's position of the Beatles, there had been no one in
charge
of accounting between August 1969 and January 1970. There
was
a gentleman who was in and out of England between January and
June
of 1970 and then no other accountant in charge from June
through
December 1970. Not only were the state
of the accounts a
problem
for McCartney in determining what monies had been
erroneously
paid from Apple to Klein, but there was a looming tax
problem. In a letter to Klein in April of 1970, one
of the
accountants
wrote that his three previous letters regarding the
accounts
had not been answered and mentioned the inland revenues
interest
in the Beatles accounts. In
correspondence before the
court,
the accountants were screaming that they needed full
cooperation
of Klein and Apple, but were receiving no help.
The Financial State of Apple
McCartney's lawyer then turned to the
financial state of the
partnership
itself. Without going into mind-numbing details in this
article,
the sketchy information the accountants were able to
provide
showed that Apple's net worth, excluding good will, was
L208,000.00. Not a bad sum, to be sure, but there was an
estimated
income
tax bill of L341,000.00 coming due.
There were additional
questions
about sur-tax liability. To make
matters worse,
individual
Beatles had withdrawn money from the partnership
account,
leaving in its place an IOU. Lennon had
withdrawn
L76,000,
Starr L68,000, Harrison L20,000 and McCartney L18,000.
>From
the state of their records, it did not appear that the Beatles
would
be able to meet their tax obligations.
Objections to Klein's Suitability as
Manager
Mr. Hirst then moved to his final point
regarding the jeopardy
to
the assets and launched an attack on Allen Klein's character in
order
to demonstrate that Klein could not be trusted. In
addition
to the matters that he had already mentioned at length
(excess
commission, secret variations to the original management
agreement
and accounting shortcomings), Mr. Hirst set forth how
Klein
had been involved in the affairs of Maclen, a publishing
company
owned by Lennon and McCartney. Maclen
was under contract
with
Northern Songs to deliver a certain number of McCartney and/or
Lennon
compositions each year, and in 1969, Maclen brought an
action
against Northern Songs for an accounting.
However, in the
autumn
of 1970, the action changed from one of an accounting to
one
in which Maclen sought to repudiate the contract with
Northern. McCartney claimed that this change in the
relief
sought
from Northern was done without his knowledge and consent
and
that Klein was a part of it. Further,
McCartney alleged that
Klein
had attempted to claim a commission for some of Maclen's
earnings
back to 1967 but was prevented from the accountant from
doing
so.
Hirst then pointed out that the practice
of trying to charge
a
commission for earnings prior to the management contract was
not
unique in the Maclen matter. Before the
management contract
with
Klein was signed with three of the Beatles in May of 1969,
there
had been a rather unpleasant dissolution of the previous
management
contract with Nems Enterprises. Because
of the
squabble
between the Beatles and their management company, EMI
held
L1,300,000 pounds until the dispute could be resolved. It
was
finally settled by July, 1969, and EMI released the money it
was
holding pursuant to the agreement.
Klein charged a commission
on
money that EMI paid in July, 1969, but was clearly marked as
money
that was owed on March 1, 1969, some two months before any
agreement
with Klein was signed.
McCartney had several complaints with the
way the film "Let It
Be"
was handled. He maintained that the
contract he had signed
in
1965 with The Beatles Film Production Limited (which later
became
Apple Films Limited) had expired and therefore Klein had
no
authority to make a deal with United Artists for the release
of
a film in which he appear. Further,
there was a letter from
Ringo
Starr on behalf of Apple Films, Inc. (the American
distributing
Company) and George Harrison on behalf of Apple Films
Limited
on April 10, 1970 in which Apple agreed to give ABKCO. 20
percent
of the monies paid to Apple Films, Inc.
The significance
of
that assignment from Apple Films, Inc. was that Klein could be
paid
the money in dollars rather than pounds and would not have to
pay
taxes on it in England. The Beatles
share of the income earned
in
America, however, would be paid through their English company.
McCartney's
position was that Klein was first negotiating deals for
the
release of the film "Let It Be" that he had no right to do,
and
then was structuring the deal so as to avoid paying British
taxes
on his commission earned by the film.
To conclude the section on the mistrust
of Allen Klein, Hirst
brought
up that Klein had some legal problems in New York,
including
a criminal conviction and trouble with the Securities and
Exchange
Commission over some of his business dealings.
Hirst's
position
was clear: Klein was a person that could not be trusted
with
overseeing such enterprise as that of the Beatles. In order
to
drive that point home, there were several portions of the
Affidavit
Klein submitted to the Court in England that were called
into
question regarding his integrity.
The Certainty of Dissolution
McCartney then moved to the shorter
section of his argument,
that
the partnership was certain to be dissolved at a future date.
Many
of the factors that had been listed previously regarding the
business
relationship of the parties and the jeopardy to their
assets
also applied to the question as to whether this partnership
was
going to be dissolved. However, there
were a couple of factors
unique
to this issue.
McCartney's clearly did not like the fact
that Klein had been
forced
upon him as a manager by the other three. Even so, it was
primarily
the way things transpired after Klein was appointed as
manager
that McCartney cited as evidence that the partnership was
not
going to be able to continue. Whatever
Klein's misdeeds had
been,
it was the individual Defendants, namely, Starr, Lennon and
Harrison,
that appointed ABKCO as the manager. It
was the three
individual
partners that engaged in dealings with Klein that
affected
partnership assets without McCartney's knowledge. This
was
cited as evidence that not only did McCartney not want to do
business
with Klein any longer, he didn't want to be engaged in
transaction
with those that mistreated him in such a fashion.
Hirst then moved to his final area: that
the artistic
relationship
between the parties had broken down and was not likely
to
be patched up. Citing the effort to
delay the issue of the
MCCARTNEY
album and the changes on Paul's song "The Long and
Winding
Road" on LET IT BE, Hirst pointed out that McCartney's
artistic
freedom was being curtailed by his partners.
This,
coupled
with the previous point, amounted to "unfair dealings"
between
the partners, and such a finding by the court would be
sufficient
to justify dissolving this partnership.
Author's Observations
As mentioned in the introduction,
McCartney's motion for a
receiver
was granted. The judge did not have to
rule on all the
points
raised by McCartney to do so, and centered his decision,
which
was temporary in nature, on the alleged misconduct of Klein.
He
found there was a likelihood that the assets of the partnership
would
be jeopardized if the business continued to operate in the
manner
in which it had for the prior months, and found that the
partnership
would probably be dissolved due to the conduct of the
Defendants.
With the benefit of 30 years of
hindsight, McCartney's
decision,
from a purely business standpoint, was a "no-brainer".
While
some of Klein's actions as manager had been approved by
McCartney,
those had occurred during the initial stages of the
relationship
(the Nems settlement and the Capitol renegotations).
For
over a year, things had gone from marginally tolerable to
completely
insufferable from Paul's viewpoint. But
looking at the
prospects
of being the one to sue the others in order to rid
himself
of an unbearable situation had to have been gut-wrenching.
Paul
took enormous heat from his former bandmates, from the rock
press
that saw him as joining "the establishment", and from a
public
that viewed him as taking the initiative in breaking up the
Beatles. Those outside the band that criticized him did
not know
or
fully comprehend what he felt was wrong; those inside that
disparaged
him were the one that had caused much of the problems to
begin
with. The wonder of it all is not that
McCartney filed suit,
but
rather that it took him so long to do so.