JON LOVITZ: Taking the ‘Business’ of Comedy to the Courthouse

jon_lovitz_photoWith comedy as big as it is these days there is no better time than now for anyone on the business side of the industry to make a ton of money, especially those who know the industry pretty well or should. Folks like comedian Jon Lovitz. Needless to say, when rough times hit, the gravy train can also simply get derailed and spill a lot of money down the drain. Sometimes, a lot of money, as Lovitz, a former SNL star, claims in his lawsuit against the former manager of his comedy club. Here’s what happened:

In 2009 Lovitz went into the comedy club business with a partner named Frank Kelley. Together, they set up the Jon Lovitz Comedy Club in Universal City, California, with Kelley acting as the manager of the club. A few years later, after losing a lot of money, the business eventually failed; then the blame game erupted. Typical scenario! Lovitz claims he had invested more than $1.5 million dollars in the failed business and he blames Kelley for running the business into the ground. He also accuses Kelley of embezzling at least $100,000 of the club’s money and he’s mad as hell. Not letting matters slide, Lovitz filed a lawsuit against Kelley seeking huge money damages from the former manager for fraud, conversion and breach of fiduciary duty.

Lovitz’ lawsuit is one of those situations where someone might wonder why the district attorney’s office isn’t involved at all, considering all the fraud allegations that seem to suggest a pattern of criminal behavior on the part of Kelley, including the allegation that Kelley falsified books and accounts. Well, the short answer for those who might be wondering about this situation is that much of these events occurred among business partners in the running of their business and the DA’s offices usually have bigger fishes to fry in chasing down violent criminals or more serious financial crimes rather than spending taxpayers’ money on some garden-variety accusations of betrayals among business partners and associates. Such cases are usually left to the civil courts and so Lovitz’ case is taking place in just the proper venue. Yet the Lovitz case is important in today’s comedy industry where comedy clubs are on the rise again after declining in the 1990s. The outcome of this case would at least help both comedy club managers and the club owners who hire them to run the clubs to know, for example, where the lines are drawn in their relationship with each other and when club managers can get in trouble for the way they’re doing their jobs.

But can Lovitz win his claims based on fraud, conversion or breach of fiduciary duty? Well, let’s look at the law. For starters, this is a case about business partners who trusted each other so much that one partner literally handed the keys to the lock box to the other partner for him to run their common enterprise honestly and profitably. In such a situation, the trusted guy running the business owes more than just a ‘thank you’ to the guy who’s coming up with the money. Folks like the guy running the business are regarded in law as “fiduciaries” of the other person. The law imposes the status of fiduciary in most transactions where there is a relationship of “trust and confidence” existing between two people. Typically, in such situations, one person often knows so much about what’s going on in the transaction and is so much in control of the situation that unless the confidence and trust is maintained, the other person who is in a weaker position could get hurt.

So, in order to protect the other person involved, the law obliges the “fiduciary” to act in a trustworthy and transparent manner. One of the biggest requirements imposed upon a fiduciary is that he not put himself in any position where there is a conflict of interest between himself and the other person. In short, a fiduciary is not allowed to benefit himself either at the expense of the work he is hired to do and that of the person who hired him or her to do the work. Aside from business managers, the typical situations where we’ll find fiduciary relationships are the situation between a lawyer and his or her client or a doctor and his or her patient.

Considering what being a fiduciary is all about, there is little doubt that Kelley’s work as a fiduciary of Lovitz is the issue that dominates all others in this case. All the other claims in this case are not nearly as important as the question of whether Kelley’s actions amount to a violation of his fiduciary duties of good faith and fair dealing with Lovitz in the way he handled the affairs of the club. (By the way, given the actual claims that Lovitz is making in this case, some of the allegations in his lawsuit seem sort of idle and unnecessary. For example, since Lovitz is not trying to cancel or “rescind” the agreement on the basis of ‘fraud in the inducement,’ all the talk about Kelley hyping his qualifications and track record as a comedy club manager in the Los Angeles area just to get Lovitz to hire him as club manager aren’t really helpful in supporting any claim stated in the lawsuit. To be sure, this case is well past the ‘rescission’ stage at this time.)

But seriously, how will the court proceed to sort out the actual claims that have been made in the case? As already noted, all the above claims are closely related and ultimately revolve around the whole question of Kelley being a fiduciary. In layman’s language, the claim about fraud is really kind of like saying that somebody’s actions were deceitful (or dishonest) and misleading and that they caused a detriment or disadvantage to somebody else. With respect to “conversion,” we’re talking about the actions of someone who treats another person’s property as if the said property instead belonged to him and in so doing he deprived the true owner of the property of the benefit and use of that property. Typically, this occurs in ‘bailment’ situations where one person entrusts property to the custody of another person on a temporary basis. The claim of breach of fiduciary duty, as explained above, means that someone in a position of trust and confidence betrayed the trust placed in him by another person by taking unfair advantage of their position to the disadvantage of the other person. Of course, in each situation involved in these claims, the plaintiffs must allege that they suffered damage or loss as a result of the defendants’ actions. Without the damage factor, there will be no liability.

For someone trying to win money damages for his former partner’s breach of fiduciary duty, it sure looks like Lovitz is playing a winning hand with the kinds of allegations he has made in his lawsuit. For instance, he claims that Kelley used the comedy club’s checks and credit cards to pay for his own personal expenses and that in so doing he failed or neglected to use the club’s monies to meet the club’s obligations, such as paying both performers who did gigs at the club as well as the club’s own staffers. The allegations that someone in a fiduciary position like Kelley has used the assets of the business as his own ‘piggy bank’ and that he re-routed the company’s assets to his own personal benefit and use lie at the heart of a case based on the breach of fiduciary duty. Lovitz claims that Kelley swiped more than $100,000 in credit card expenses for which the club was ultimately held responsible.

Yet, as good as the allegations are, that is not the end of the matter. Not even close. For one thing, this is only one side of the story and surely the devil is in the details with this one: making the allegations is the easy part, proving up the allegations is the real heavy lifting here. In this case, Lovitz will likely need to prove that the expenses Kelley ran up had nothing at all to do with the business. It won’t be enough to show that he spent too much money on certain things or that he spent money on the wrong things. Or even that his failure to spend money on some things or in certain ways led to the failure of the business. That just won’t cut it in this kind of case, especially because people who manage stuff are allowed the discretion to choose their ways and means of operation. (In other contexts, they call this sort of idea the “business judgment rule.”)

And when there’s some doubt here, they will often award the benefit of the doubt to the guy making the business decision. So, in terms of his liability, it all pretty much comes down to whether Kelley intended to act in violation of his fiduciary duty or whether he was simply being a bad manager. In other words, was Kelley acting on purpose to rip off the business operation or was he just being a sloppy manager? To be sure, answering these kinds of questions aren’t the easiest things to do in the ‘cloud and dust’ of a full-dress courtroom trial. And defense lawyers more than plaintiffs’ lawyers simply enjoy the uncertainty of these answers.

In the end, running a comedy club, just like any business, isn’t easy; and winning a case like this one isn’t easy either. From all indications, a lot of money has apparently gone down the drain here and what we have here is a bad case of misplaced trust and confidence in the hiring of a business manager. Needless to say, it was Lovitz’ job to hire a good manager for his business. Yet, one can’t help but notice that it is in this particular context that Lovitz’ allegations of being misled about Kelley’s qualifications and background seem to make the most sense. The larger point here, though, is that as far as we’re dealing with financial loss or damage resulting from the actions of a business manager or decisions made by him, this kind of problem generally couldn’t have been prevented by a written contract or agreement, no matter how smartly crafted. Fact is, there is only so much anyone can write into an agreement today to control the turbulent waters of human events tomorrow, especially the uncertainties of the business world.

It is hard to predict the outcome of a case like this one and it would be interesting to see how it all shakes out in court, assuming of course that an out-of-court settlement isn’t hammered out between the parties. Yet, however it all winds down, for a guy like funnyman Lovitz, who apparently has lost a lot of money, this whole situation surely is no laughing matter.

 

Stay tuned for my upcoming book “Comedy Under Attack...” coming out soon.

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