The following article ran in the July 2001 issue of Beatlefan magazine, and is reproduced here with the kind permission of Beatlefan and its author, Joseph C. Self. All rights are reserved in this copyrighted article. In other words, no "Napstering" this one!(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, the Star Club tapes 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.
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 £72,000 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 £851,000.00, and over £600,000 had already been paid to Klein; McCartney claimed that the commission on those Capitol Records royalties should have been no more than £250,000.00.
(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 £123,000.00, £114,000 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 £208,000.00. Not a bad sum, to be sure, but there was an estimated income tax bill of £341,000.00 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 £76,000, Starr £68,000, Harrison £20,000 and McCartney £18,000. >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 £1,300,000 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.
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.
Copyright 2001 by Joseph C. Self. Used by permission.
Copyright © 2001
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