(Hypebot) — Earlier this week, Hypebot published an important Music Biz Weekly podcast interview with Attorney Chris Castle delving into the demise of PledgeMusic and its legal ramifications for artists, vendors and the music industry. Because of the importance of this topic, we’ve had the full interview transcribed.
This transcription of the Music Biz Weekly Podcast has been lightly edited and may contain errors.
Jay Gilbert: This week, we welcome Chris Castle. He specializes in the music industry, digital media, public policy. We’re thrilled to have him here. Welcome, Chris. Thanks for joining us.
Michael Brandvold: Welcome back.
Attorney Chris Castle: Thank you guys. Good to be back.
Michael: So Chris, let’s just dive right into what we really kind of want to get your take on is the PledgeMusic world? What happened? Where do things stand, and mainly from your legal standpoint. Because Jay and I did an episode on PledgeMusic, I don’t know, what Jay? two months ago?
And it got a lot of great response, because we weren’t really doing anything other than saying, well, this is kind of where it’s at, but understand, nothing’s been said nothing’s been confirmed, not much has changed. We chatted an email yesterday that a one-line statement was released by PledgeMusic yesterday, which paraphrasing basically said, we’re still pursuing one sale, and that was the end of it. So, to artists out there, to anybody who has been impacted by PledgeMusic, and this could even be the fans. What’s your take on all this?
Chris: Well, if you go back and look at the timeline, and I actually did that around 2017, mid-2017. They released a statement, and this is just basically looking at the public statements of the company.
Not anecdotal information, because there’s plenty of that once you start talking to artists, but let’s go with what we know. They brought in new investors in mid-2017 and that was offered up as sort of an excuse for why things were getting slow. That was the very earliest, I think that people can feel that there was something not quite right. It wasn’t the avalanche yet, but it was starting to feel…
“as we look back,
we can see these little signs that things were happening”
Michael: You know, I would add comments that back in 2017. Because yes, now as we look back, we can see these little signs that things were happening. I’m just speaking for myself, but back in 2017, I was using it as a fan and I was using it with clients, I really hadn’t gotten any… There hadn’t been payment issues, let’s put it that way. That’s where you would start seeing a little bit of pain of going, hey, you guys are a week late on your payment.
That hadn’t happened, you know, shipments weren’t being screwed up or anything along those lines. Maybe there was a little bit of, oh, I’ve got a new rep that I’m talking to. Or, you took a week longer to reply to this email than I thought it should take.
At least for me, I didn’t feel like in 2017 that there was, I was starting to go, I’m a little concerned here.
Michael: I think they probably masked it very well.
Jay: But that sounds like Chris. That’s when the cracks started to slowly appear. Right?
Chris: Well, yeah. And the first thing I thought when I saw this about new investors was why do they need new investors if they’re just collecting money for other people and paying it out?
They shouldn’t need new investors in order to do that. They might need new investors for other aspects of their business, and they might be trying to do other things, but in terms of the payments, they should need new investors for that.
So, if you move ahead now to January of 2018, that’s the earliest date that I could find that PledgeMusic acknowledged that they were publicly that they were behind on payments. And these are important dates for one particular reason from a legal point of view. Right? Which is that what we know from the outside is not as relevant as what they know on the inside, right? Because if you’re an officer and director of a company, and you become aware that that company is insolvent, let’s just say that means a current obligation when dealing. There are a few different interpretations of what that means, but that’s a common one, right? then your fiduciary duty as an officer and director arises as to the creditors. Normally, most people think that the officers and directors have a duty to the stockholders, which they do. But once they become aware that the company is insolvent than the people who are relying on them to be forthcoming and transparent about whether they’re going to be able to meet the obligations to the vendors, let’s say, and in this case to the artist, the count rises, it can rise to the level of a fiduciary duty. And when you think about it, that’s logical, because if you’re at an early point where you’re insolvent but you’re not bankrupt, right? you’re just insolvent, you’re struggling. Usually, the only people who know that are the people who know that first, are the officers and directors of the company.
So, that’s why we put that under the law. We put that additional burden on them at that point in time. So, there’s a question in my mind as to what evidence there might be inside PledgeMusic around this time period, and that’s quite a while ago.
“they’re probably not going to have
any money 90 days from now”
I mean, really, I think when you start talking about what their obligations were, what they should have done, and when they should have done it, you’re usually talking about a 90 dayish time frame. Right? So, this is fairly short and it’s short for a reason, which is that if they don’t have any money today, unless something unusual happens, they’re probably not going to have any money 90 days from now, and they’re probably going to have even less than they have today. Right?
Chris: So, we want to kind of move things along to solve the part or to the bankrupt part, right?
Chris: The reorganization part. So, that’s why dates are important, right?
Jay: Yeah. It’s interesting because I could see things happening. All these red flags started popping up when, for example, people started losing their jobs. Right? I had a product manager up, they were gone, I was to another one, and it seemed this happened almost every month. And I would go higher up the food chain, meaning that instead of having just a product manager, next thing, you know, I’m like, one of the co-founders is now managing my campaign. I’m like, this doesn’t seem right. So, I knew they were trying to cut some costs, but it didn’t really rear its ugly head with me until I did. I did a campaign in 2018, and it was going well. And when it came time to payout, there was just a delay. It got paid, but I remember the manager of this artist, let him up, called him and said, you said by this date, it would be here. It’s not. This is unacceptable. Boom, that got paid. Again, a little red flag like well, that’s kind of weird. They said it was like a new bookkeeping system. Like, okay, and then leading up into, 2019. I think… what was it? Was it February when they kind of…
Michael: Yeah, I was kind of February when broke loose.
Jay: Yeah. And right before that I had a client who had already… you know, Chris, for those who don’t know, what is it like, 50, 60%, you pay out kind of when the thing goes live, and then when everything’s kind of settled up at the end if the rest of it is paid off, give or take, right? So, my client had been paid the first part, and of course, PledgeMusic got their 15% at that point, right? that was an…
Chris: They got 15% on a 100%.
Jay: Thank you very much. And that was paid off at that point, but then that second quote, unquote half never got paid. And what I found interesting looking through the deck that you put together, Chris, and looking at the timeline in the rearview mirror, I’m like, Ah, man, of course, that makes sense now, but when we were going through it, we’re just kind of scratching our heads gone, huh, that’s odd. And then we just keep going…
Michael: It was sort of like, oh, it’s just a little hiccup. But I’m the same as you Jay. It’s like now that I look back, and I’m like, yeah, if you started adding all of those little signs up, it painted to a bigger picture. And maybe because it didn’t all happen within 30 days…
Jay: It was over time.
Michael: It was over time. It was over years basically, that this happened.
Chris: Well, but to your point, Jay, them paying the manager who made the most noise, right? this has come up. This is a recurring theme with these guys as well, although now that they’ve quit paying people at all. But in that late 2018, through about mid-2019 period, they were or excuse me, a mid-2017 through about the late 2018 period, they were doing this, right? you would hear this all the time, rhinestone. You know, various people would say, Yeah, I lit them up and I got my money. Well, we in the law, we call that a preference, right?
“two kinds of creditors”
Chris: And a principle of bankruptcy law in the UK or here doesn’t matter, because remember, they’re taking the position that UK law applies here. You know, that’s a deeper conversation. But there’s a core principle of what they call Perry pest soon, which is that all creditors are treated equally. Certainly, all unsecured… Let me rephrase that. What they call unsecured creditors are treated equally. So, there’s two kinds of creditors. Essentially, there’s more, but for our purposes, there’s two, there’s secured creditors, and there’s unsecured creditors.
Jay: What’s the difference?
Chris: So, the difference is, if you’re a secured creditor, you have like a bank, let’s say a bank would almost always be a secured creditor that they loaned money and lyric financial loan than mine. There’s a couple of banks that are in the mix on this that appear to have one than money. When a bank loans money, what they do is they take collateral, right? for the loan. Or it may not be… If it’s a bank where they’re making like a credit line available to a company, that isn’t going to be limited the way a car would be, right?
So, if you borrow money to buy a car, car company has a security interest in the car. They don’t have a security interest in your business and the car, right? But if you make a loan, that’s going to be used for general funds for a company, but that is usually secured by everything. And in this case, there’s a question as to what is everything? Because everything include money that they own, that they never really took possession of. Right? that was not their money, was never their money, should include that or not, which is an important issue now. Because what happens is the secured creditors, goes through a process, which the law recognizes as giving them the best possible position in a bankruptcy, what they call a first position, right? So, they stand basically behind the IRS, you know. It was funny at first. Everybody else is probably an unsecured creditor. And that’s where you get into the pennies on the dollar if you’re lucky group.
Jay: Right, right.
“picking and choosing who was going to get paid”
Chris: But there’s a fundamental threshold question here, which is, they had a fiduciary duty to the bands, and they knew that they were going under, and they started doing this preference, these preferential treatments for people who make the most noise. One might argue, I don’t know this, but one might argue for the purpose of keeping it quiet. So, they could continue to do this and take in money. There’ll be a period there before they stop accepting PledgeMusics…
Chris: …where their money, then they were not only picking and choosing who was going to get paid and giving a preference, which is by the way you really want to go after it. Probably avoidable. What they call avoidable preference, which means someone who comes in later who didn’t get a chance to participate in the preference can go back and try to claw back that money and put it back in the pot. They don’t get it quiet for themselves when they are quiet into the pot, and then the pot is divided, right? So, there’s a lot to this.
Jay: Yeah, no doubt.
Chris: It’s a whole… I’m not a bankruptcy lawyer, right? but we did this. The thing I sent you, the deadline was a panel that we did in Austin, where we had two of the top bankruptcy lawyers, and also who gave us kind of the 411 on all this stuff. And this is one of those issues. There’s a bunch of issues that need to get resolved.
Jay: Are you going to make that public like via your website or anything? I know we’re referencing it and it’s not really out in the public, right?
Chris: Yeah. Let me…
Jay: I’m not saying that you should or shouldn’t. I’m just curious.
Chris: Let me just check and see if that’s an okay thing to do. And if it is, I’ll let you know.
Chris: And we can post it. I mean, certainly, it was a public meeting, but the slides were not.
Jay: Yeah, not to put you on the spot or anything, I just thought it was so clear and well done. You don’t have to be an attorney to understand that timeline. It’s in layman’s terms. The one question I wanted to ask you that’s really kind of bothered me and kind of keeps me up at night is, PledgeMusic had other partners that would create some of these products for them for these campaigns. One of them is bandware, for example. Well, they didn’t pay bandware. So, I got a call from bandware that really freaked me out at first, partially because I misunderstood the nature of the call. But basically, they’re saying there’s this amount of money for these products that we made on behalf of your client we didn’t get paid for. And it was a substantial amount of money. Now, they weren’t threatening me. And they weren’t saying you’re going to have to pay this or anything. They were basically saying, look, we took one for the team too so maybe we can partner together. And so it all worked out, and they’re a fine company. It’s nothing against them. But it’s not just the artists that kind of got screwed, there’s a whole…
Michael: Yeah, there’s a whole world of people around PledgeMusic.
Chris: Yeah. Right. So, I mean, when you start putting it into those buckets, right? you have the vendors who from what I understand or recommended by PledgeMusic but who were actually hired by the artists.
Jay: That’s correct.
Chris: So, the payment obligation to the vendor is with the artist.
Jay: In contract, actually.
Chris: Yeah. That’s Right. And so, what you now have is not only does the artists not have the money that they were supposed to have, but they’re actually in debt. They owe these vendors, right? And the vendors are out. We have a couple of people here. I mean, one of the reasons why we were interested in it is because we have vendors here in Austin who are just out of pocket. And nobody is probably out of pocket more than about 10 grand, but you know, when you’re a business, small business, you know, 10 grand…
Jay: That’s substantial
Michael: That’s substantial. That’s payroll
Chris: Yeah, that’s right. And so, you know, people are concerned, right? but I don’t think anyone is going under because of it, but there, I don’t really know, but I haven’t heard. So, when you look at the mess that this has created, you’ve got, PledgeMusic employees, let’s say, you’ve got the artists, you’ve got the vendors, and there’s probably of couple other…
“Let’s not forget fans.”
Michael: Let’s not forget fans.
Chris: And then the fans, yes. Sorry. So, the fan is out the money. Well, I think of the fan is being sort of in a different category, right? The fan is out of the money, and the fan in a way definitely has some remedies available to them potentially that the others don’t, right? So, the fan depending on the particular facts could probably make a consumer protection argument against PledgeMusic. In other words, if they knew when they took in the money, if that money was unlikely to ever get to the band, and they took it anyway. You know, I don’t know if it rises to what we call crimes, but it’s headed that way, you know.
Jay: It doesn’t look good.
Chris: That they did it at you know. So, we’ll see how that all ends up.
Michael: Well, let’s finish your train of thought here Chris, because I want to then kind of go into that crimes comment a little bit.
Chris: So, basically, what you’ve got here is you’ve got a company that knew it was insolvent from everything I can tell at some point in time before they stopped taking PledgeMusics. Continued to take in PledgeMusics was deciding who to pay based on who made the least noise, was telling people if you make noise, you won’t get any money, right? that kind of thing. So, from what I’ve heard anecdotally, some proof maybe never happened, but I did hear from a number of people. And then you’ve got them talking about… You know, you got people lending the money apparently who should have diligence the opportunity, right? When we think for them not to know, because I can almost guarantee you that in any loan document, there is an event of the quote paragraph. And in that paragraph, there is something like, if you’re insolvent, whether we know it or not, then you’re deemed to be in default, that we can call him a note, right? right away.
And sometimes, if it’s a big enough loan, there’s some disclosure obligations that you have on an ongoing basis. Certainly, if you’re asked, but you know, the band has the right to get insurances that you’re able to grow obligations. So, I would say that there’s a point when they go into bankruptcy, they’re bringing in a host of issues with them that are not really the norm for what the [Inaudible 25:35] not necessarily what bankruptcy is designed to do. Although, you know, common to have some of these things, and that’s why they have laws. [Inaudible 25:46]
Jay: Sure. And you just mentioned bankruptcy. They haven’t filed for bankruptcy yet, right? I mean, do we know what the status is of the receivership or insolvency. And for layman, these all kind of seem a little nebulous. Do we even know what’s really going on with our them?
Michael: Let’s be clear here, because again, this is in based in the UK.
Michael: They refer to it as administration rather than bankruptcy. Is that correct?
Chris: That’s right.
Jay: And are they two separate different things, or are they the same thing?
Chris: They’re a little bit of the same. So, remember, we have a few different flavors of bankruptcy in America. We have chapter eleven and chapter seven. And the big difference between the two is the chapter eleven is a reorganization where the same people who drove the company into the ground get the run it again.
Michael: Exactly. Given a second chance to do it again.
Jay: Your honesty is refreshing.
Chris: Yeah. The bankruptcy judge said, we were trying to take some… There’s this one company that had never paid your artists or other songwriters for like 10 years and we were trying to basically take the company away from them in chapter eleven, which is not an easy thing to do, and I kept hammering and hammering and hammering. And the judge then one day said, the law in other countries is that if you drive the company into the ground, you don’t get to run. And again, that’s not the law in the United States, but today, it’s going to be different. So, he had an auction essentially in chapter eleven and forced them to sell off the assets, which is what we want. But anyways, so what they call administration in the UK is very much very similar in many ways to that chapter eleven reorganization. Chapter seven is what we would call liquidation bankruptcy. It’s where they sell off the typewriters and every company stops operating, right?
“once you filed, you can’t be sued why you’re in bankruptcy”
Now, the other thing to remember is that if the company is truly insolvent, it has a lot of problems, right? The other thing that you get by going into bankruptcy or administration in the UK, I’m pretty sure this is right in the UK, there’s a state of litigation. So, once you filed, you can’t be sued why you’re in bankruptcy.
Chris: When you come out of bankruptcy, all the claims, or if your assets were sold out of bankruptcy or administration in this case, all the claims attached to the company before it went into bankruptcy are resolved and dismissed, right? which allows a buyer of those assets to take the asset at discounted price and not fear that they’re going to be sued, they’re going to inherit the fleas from the law.
Chris: And very often when you have situations where companies are just not going to make it, and you’re going to sell off the assets, the buyers will say, let’s have a prepackaged, what they call a prepackaged bankruptcy, where we all go into the court and we say, this is what they did, this is who they owe, all the creditors agree, the buyer of the asset agrees, we’re going to go through bankruptcy, wash out the liabilities, they’ll take whatever they get from the sale, the asset as satisfaction of their debts and then or their loans depending on what it is. Depending on interest, and then the guy can buy the asset out of bankruptcy without fear, right? So good for everybody to generate some money. That will be fine except that those artists and those fans, you know, the artists or the fan is 100% on the dollar, right? and it’s not their money, and it shouldn’t really be treated as a debt because it was never alone. Never a law, right?
Chris: Now, my feeling about this is that it’s going to be pretty tricky stuff to go in there and do what they call argue in the alternative where you say, Well, this was never alone. But if you decide that it was alone, your Honor, just treat me this way, right? I don’t know. There’s…
Michael: That’s what it seemed to hit me when I this came out into the open earlier this year was, this isn’t a clean and simple bankruptcy like we’re most people would either be used to or hearing about. These are fans who gave money that was supposed to go right to the artist, the artist didn’t get the money. You know, I’m sitting here going this is a whole different world of claims and bankruptcy. What’s my fear was like, what does all that mean? And you know, even to the extent my one client was like, Okay, we got paid our first 25% from PledgeMusic, what if we kill our PledgeMusic agreement now, cancel this. But then PledgeMusic comes out of this, at the end somehow saved. Are we going to be held liable to pay back the 25%? because some previous our terms of service? And, you know, there’s a whole lot of these little questions that for the most part, I think a lot of bands aren’t even thinking about. They’re just saying, dammit, I’m short $10,000 here and I got fans that are angry and are expecting something when the reality is the legalities behind this whole thing are, as you said, a mess.
Chris: There are mess. And it’s also probably the first time that some company like this has tried to go through administration. And based on what the board is saying, my personal curve stone point of view, but about the way I interpret what they’re saying is, don’t to look over here, look over here.
Jay: Nothing to see here.
Chris: Yeah, nothing to see here. You’re going to lose this and go right into bankruptcy. You know what? [Inaudible 33:30] No, no, no, we’re going to sale all the assets. Yeah. No. No, it’s not.
Jay: What kind of assets do they have, Chris? I mean, it’s a such an interesting and unusual business. It’s not like they have tons of products, because those products were coming from a third-party vendor. I mean, do they have typewriters and desk chairs in an office? I mean, do you have any sense of what kind of assets a company like that would even have, if any?
Chris: Well, interestingly, they sold off noise trade, right?
Jay: Right? But that was only like what? $75,000?
Chris: Right. Except that I talked to one of the guys from noise trade. I only inside secret. I mean, he said he had tweeted about it. But when they bought noise trade, it was X upfront in payments, and they never made the payments, or they didn’t make all the payments. I think I tell you that but they didn’t make the last payment. So, they sold something that they hadn’t completely paid for, right?
Jay: What could go wrong?
Chris: According to this plot, oh, my God, I don’t know what thickens, but I have no reason to think he’s deceiving me. So, here’s another thing, right? So, the way you sold something, you were in breach of your purchase agreement? I mean, for the like the last minute, so you almost did it right, but not quite
Jay: Oh, my God.
Chris: And this is sort of the story. This is what happens in these situations because they’re cascading. But what we do know is they sold it. So, if I’m the noise trade sellers, right? the original sellers, I’m saying well, yeah, that’s nice you sold it, but where is mine?
Michael: Like where is our cut? We’re supposed to make money off of this.
Chris: Right. So what are they now? Are they now another unsecured creditor?
Michael: Yeah. You know, are they noise trade owners, the original owners able to go back and say, well, that 75,000 you got for selling the company should go to us?
Chris: Well, they’re probably may see what this all requires. All of this requires is or, you know, his lawyers,
Michael: A lot of them.
Chris: A lot of lawyers in the UK.
Chris: So, it raises a lot of policy questions. And I know that you can’t use it, and the musician’s union over there, and some other people had been taking a look at this in terms of whether the government should get involved, right?
Jay: The UK government?
Chris: The UK Government, yeah. And…
Michael: As in a formal investigation, sort of thing?
Chris: Yeah. They would be lucky if that was all it was. Yeah.
Michael: Right. I mean, if any of our listeners have been following the news, I mean, the UK is not afraid to take on the likes of Google, so and we win.
“a lot of questions I have about exactly how clean are their hands”
Chris: Yeah, Right. So to me, there’s a question as to where they shouldn’t be allowed to go into administration because it doesn’t seem like they got it… Bankruptcy is sort of like an equitable remedy, right? and there’s an old Maxim of equity, which is if you want to receive equity, you must do equity. So, you can’t come and ask for relief with dirt, with unclean hands, right? So, there’s a lot of questions I have about exactly how clean are their hands.
Michael: Well, you know, and then that gets to what I wanted to ask you about. You mentioned the word crimes. In your personal opinion, is this a case of just a whole bunch of bad business decisions or is there some crimes going on? Was…
Chris: potential crimes
Michael: Potential crimes. I mean, this is leading out of the fact as you said, this musician’s union over in the UK is champion to do an investigation into this. Was there something, some wrongdoing going on here? Not just bad business, but actual wrongdoing?
Chris: Well, that’s impossible to say for sure without really looking into it, but I think the behavior that you see on the outside is enough to wear… Somebody, I think should look into it. You know, I’m not sure exactly how it would work in the UK, but here, there’s something called a civil investigative demand, which is kind of like an interlocutory, or a subpoena that they said the prosecutor would send before filing a case to get more information. So, it does seem like it’s a sort of thing that people ought to be taking a close look at….
Chris: Because everyone involved is a relatively small actor, right? Sometimes, I think there are very few major labels that are involved in this, right? So, almost everybody involved is an independent, or an individual in the case of the fans, or small business in the case of the vendors, right? And who was going to look out for them if the government doesn’t? They can’t afford that. This is a messy thing.
Chris: This is one of those things where the legal fees involved with trying to figure it out in bankruptcy, which is a cumbersome place. You know, to do all this in are going to be out of this world.
Michael: Just remember that this is all in the UK. It’s not going to be in a court of law, a court here in California or New York, it’s the UK.
Chris: And don’t forget administration. One of the big differences between the administration as I understand it, one of the big differences between administration in the UK and bankruptcy in the US, is that administration is not necessarily held in front of a judge, right?
Jay: Really? Is it like arbitration, is it…?
Chris: Kind of, yeah. That’s something that an expert should really comment on. But I think [Inaudible 40:26] non-judicial proceeding that has legal effect.
Jay: Got you. What’s your sense of the timeline, Chris? You know, could this drag out for years? Or does the UK have a reputation for getting in there and getting things done in a timely fashion? What’s your gut on that?
Chris: Well, the time period to propose a plan for administration in the UK administration is pretty short. Yeah, I think it’s eight weeks. But that’s once they file, once they actually go into administration and they haven’t done that yet. So, they’ve managed to delay this again, you know,
Michael: At what point does someone, some entity force them into administration and say, well, you can’t keep doing this?
Chris: Well, in our country, we have something called involuntary bankruptcy, right? where that very thing can happen. I’m not familiar with involuntary that equivalent in the UK. I would imagine that there probably is something right, because it’s logical and a lot of our bankruptcy law comes from me. So, I would imagine that there’s probably some way to do that. But that, I think would be better handled by the authorities.
Michael: We’ve got so many bands and fans that are sort of just like, somebody tell us what we’re supposed to do?
Michael: They’re just like, I know I haven’t gotten my money. Tell me, am I supposed to go to this website and file a claim that says this is how much they own me so I can get my pennies on the dollar? And somebody is going to just say, sorry. Bad luck, you’re getting zero? Move on with your life, nobody is going to come knocking on your door for anything you said, you would do, or agreed to in a term of service. There’s just a lot of people, and as you mentioned earlier, that aren’t in a position to have a lawyer to consult with and go with what should we do here? They’re sitting here going, at what point do I pull the trigger and tell my fans, call your credit card company and see if you can save yourself.
Chris: So, that’s an angle. I don’t know how the credit card companies is going to react to that, but they’re actually another potential source of health care in a way. Because when they get enough of these calls, you know…
Chris: …they may want to do something about it. The UK has a layer of transparency that we don’t really have here through a website there, which is called corporate… I think it’s called Corporation house or corporations house. Let me see if I can just pull it up while we’re talking here. And they keep track of filings of various kinds for private companies in the UK. And I would keep an eye on that.
Chris: Here it is. It’s a Companies House
Michael: Companies House?
Chris: Yeah, Companies House. Just Google companies house and then we’ll get you started. But I think if you want to try to get money out of the bankruptcy, I think you’re going to have to play the game of filing of what they call a proof of debt in the UK, or we would call a proof of claim here. And in acknowledging for that purpose, at least that it is a debt.
And even though I personally don’t think it is, but I think, procedurally, that’s probably what you’d have to call it. You may want to attach a letter to and say, you know, I’m filing this, but I don’t really believe that this is an actual debt and I reserve the right to argue that it isn’t, or something like that. But you want to obviously want to talk to the lower. right?
Jay: Yeah. If you can,
Chris: You need to get a UK bankruptcy lawyer to advise.
Jay: Oh, my gosh.
Chris: If that’s not cheap, you know…
Michael: Chris, let me ask you. Is this something where we could see action lawsuits pop up?
Chris: Well, I think so. I mean, you’d have to identify the class. And when you look at these buckets, the artists pretty clearly all have a common set of facts. The fans all have a common set of facts. And vendors all have a common set of facts. They’re different functions, but they all relate to the same transaction in a lot of ways, right? So, you might be able to say, there is a class of all those people that narrow intersection, right? and you would sue for…you have to think of what your theory would be.
Michael: Right. Well, my question would be, if you’re suing, you know, as part of a class-action lawsuit, and PledgeMusic doesn’t even have the money to pay out, you know, the thousand few thousands of dollars they owe you, who’s going to pay out a settlement and a class-action lawsuit?
Chris: So who would be on the other side of the class action?
Chris: Well, if you go back to the breach of fiduciary duty, right? that is a beauty, which arguably, is owed personally by the officers and directors
Chris: And so, if at the end, and they have engaged in some sort of bad behavior, that’s outside the scope of their employment. That’s a lot of work legally, though.
Michael: That’s sounds like it. That’s okay.
Chris: But it’s not that hard. I mean, if it really comes down to this, and you might get a little help if they are prosecuted by… You can’t make that civil criminal. You know, you can’t use a criminal threat on criminal prosecution to win a civil advantage. But the fact is, if there’s a criminal prosecution, the standard of proof is higher in the criminal case than it is in civil court, and a lot of the same issues in a criminal case.
So, I don’t know if anybody is going to do any of those, but that’s one way you could go to recover. Again, that would be best handled by a class, because each individual was owed a small amount of money, you know. So, it’s kind of hard to recover five thousand dollars here, ten thousand dollars there, and a thousand dollar in the other one, you know. But if you said, in this class is over x million dollars, plus a penalty, that would be a point in which it can be distributed out. Could be paid in and distributed out. There are other potential ways, but it would be a Lyft and you might not win.
Michael: And Chris, at this point, for all of the unsecured creditors, the bands, the fans, the vendors that are out there, is there anything they should be doing right now? Or is this still pretty much you got to just sit and wait for something to happen? They got to make the first move.
Chris: I think that they need to get with a lawyer.
Jay: If they can.
Chris: If they can, yeah and decide what they need to do to preserve their position. And I think once the company goes into administration, I would not be at all surprised… you know, they’ll be some kind of instructions on the company website as to what to do, but you can unilaterally file, I have to believe you can unilaterally file this proof of that once they go into the inspiration, and they’ll be company house will probably be the focal point for that.
Michael: And I guess there’s so many questions, but we’ve got to wrap things up here. The final question would be, if they make a sale, like the last statements, and they’re hoping to do one last sale, is that really going to benefit all these unsecured creditors at the end of the day?
Chris: It depends on how much the sale is. And if they can find somebody who come in and say, we want to buy the company, and we want to continue running the company the way it was operating, and we’ll make good 100% on the dollar to all these people who owe money, great.
Michael: What’s the reality of that, though?
Chris: Well, I don’t know. I mean, I would tend to think that that’s probably not very likely. But then again, if they’re going to sell off their assets, I don’t know what they’re selling, right? So it’s kind of hard to…
Michael: That’s true. We don’t know what they’re selling. We don’t know what responsibilities might go along with that sale.
Jay: It can be as simple as their software.
Chris: Yeah, it’s probably if it’s sold through administration and the statement that the board made, the PledgeMusic board made prior to this last one indicated that there would be a connection between those two, which smacks to me of that pretty repackage bankruptcy that we talked about, right? and that would make sense. I mean, nobody in their right mind would buy anything from a company if there was even a possibility that there might be a fraudulent conveyance, right? or that the sale could be quite back on someone, or they could end up in hot water of another time, right? So, I think that if there’s a sale, it’s probably going not be very much money.
Jay: Got you.
Chris: And if it goes through administration, then they’re all going to pretend that all these people are creditors and unsecured creditors, and they’ll get either nothing or something kind of in a limit, not very much.
Jay: Got you.
Chris: But it’s sad. I mean, it is sad simply because you know PledgeMusic that they get 15% on 100% before they ever paid out any money.
Chris: So, they were whole, or they just never paid you out.
Jay: Quite Right.
Michael: One final question. Looking back through all of this, and there are people that are out there that still do crowdfunding, and as Jay and I said, we’re big fans of crowdfunding. We like the concept…
Jay: The model.
Michael: The model, the whole thing. What are the lessons to be learned from PledgeMusic if you are somebody currently doing crowdfunding or thinking of starting your own crowdfunding platform?
Chris: Don’t commingle the money. You know, the fans money is the fans money, keep it in a separate account. And don’t hold on to the money, fight? In other words, what they did by the way they structure their model was what create the possibility for this problem. They created moral hazard situation right away because they’re holding the money and they decide when to pay it out.
Chris: Yeah. And they took the money. From everything we understand from the outside, they just deposited all the money into one big account, into their operating account, which they never should have done. That was a mistake if that’s what they did. So, for crowdfunding, I would say, the Kickstarter model is probably your best bet, which is not as flexible as the PledgeMusic model, but at least everybody got paid.
Jay: Sure. Sure.
Michael: This is so interesting, and so much yet to be said on this topic.
Chris: Yeah. And I think there needs to be some legislation about this.
Chris: And you can’t say that people going out there making it up, right.
Jay: Right. It’s got to be a watchdog.
Michael: It’s got to be watched. It’s got to be much greater transparency in a business, like an…
Michael: an accountability so that an artist knows the money is not commingled, the money is in separate accounts, that it’s protected, my fans are protected. Because at the end of the day, the fans could be holding the anger against the artist, even though the artist got screwed at a much greater level than any individual fan did.
Chris: Correct. And then there’s the vendors, too, right? I mean, absolutely the vendors feel like they’re going to get paid and they don’t have a problem with no shortage of funds.
Michael: That’s right.
Jay: Yeah. So, Chris, you know, I’ve read a lot of your writings, and I know you do speaking things. Where can people find you? Where can people learn more about what you do?
Chris: Well, my website is Christiancastle.com. And I have a couple of different blogs. But if you go there, all will be revealed.
Jay: Man, I can’t thank you enough for kind of walking through this. It’s a very complex situation, and you’ve simplified A lot of it for us. And yeah, there’s a lot of questions that are unanswered, but I feel at least I know a lot more than I did an hour ago. So, I thank you for that.
Michael: Yes. Thank you so much, Chris.
Chris: Alright. Thank you guys….
Michael: Jay, fascinating discussion. The whole PledgeMusic story is sad, amazing, continuing to unfold, but it was good to get the perspective of somebody like Chris, who’s got the legal understanding behind this. I mean, there was a lot of speculation on his part, of course, because we don’t know. But it sort of gave me a little more of a reassuring of, okay, I kind of understand what’s happening now out here.
Jay: I agree. I understand kind of, I have a better overall understanding of how things evolved, and kind of what the options are. And Chris is very good at explaining complex things like the law in simple terms, and knuckleheads like us can understand. And I really felt like I came away with an understanding of where this might go, and what some of the options are. We don’t know where it’s going. And as we talked about, the information coming out, is coming out in little tiny drips, every maybe month or two. We don’t know what’s going on right now.
Michael: Exactly. And at least for me personally, what I was hoping to help or were the artists out there that listen, or even small time managers who can’t afford a lawyer to sit down for an hour, two hours, and discuss what all of this means, educate them on what crowdfunding is to begin with, and then what is all of this mean? And by the way, this is all in a UK court, not in us courts. So, let’s add that additional…
Jay: Bit different law a little, bit different everything.
Michael: And many artists out there who can’t afford that. And just as I said to Chris, I was just wondering, what do I do now? What should I do? Do I just wait, do I tell my fans this, do I cancel my PledgeMusic? What happens? because again, legitimate concern. I cancel my PledgeMusic now, PledgeMusic gets purchased, for I have to give the money back? I don’t know.
Jay: Lots of questions.
Michael: Lots of questions. Lots of questions.
Jay: You know what? if people watching and listening to this podcast were continually check back, we will stay on top of this and we will kind of report and thing that we hear from our sources.
Michael: Yeah. Definitely. So, there you go. Music biz weekly podcast. Thank you for joining us this week as always. Head over to iTunes, leave us a review, leave us a rating and subscribe on YouTube so you never miss a weekly episode. That’s it. We’ll see everybody next week.