Attorneys for Plaintiffs
NURIA SCHOENBERG NONO, RONALD R. SCHOENBERG, and LAWRENCE A. SCHOENBERG

SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF LOS ANGELES

NURIA SCHOENBERG NONO, RONALD R. SCHOENBERG, LAWRENCE A. SCHOENBERG, individuals, Plaintiffs,

vs.

UNIVERSITY OF SOUTHERN CALIFORNIA, a nonprofit corporation; and DOES 1 through 10, inclusive, Defendants.

CASE NO: BC131528
(Assigned to Hon. William C. Beverly, Jr. - Department 46)

PLAINTIFFS' REPLY MEMORANDUM IN SUPPORT OF DEMURRERS TO THE SECOND CAUSE OF ACTION IN CROSS-COMPLAINT FILED BY DEFENDANT AND CROSS-COMPLAINANT UNIVERSITY OF SOUTHERN CALIFORNIA

Date: April 15, 1996
Time: 8:30 a.m.
Dept.: 46
Trial Date: None
Motion Cutoff: None
Discovery Cutoff: None
 

MEMORANDUM OF POINTS AND AUTHORITIES

I. INTRODUCTION.

The University has not pled any facts (or cited any case law or statutory authority) that would support its cause of action for breach of trust. The University's arguments are so self- contradictory that they are nearly impossible to understand. The simple fact is that 23 years ago, the Schoenbergs and the University entered into an Agreement, which the University has now breached. The Agreement explicitly states that the Schoenbergs retained their copyrights and a few other limited rights with regard to the donated materials. The University cannot plead around the express terms of the Agreement under an unprecedented theory of liability based on an extrapolation from the purported tax consequences of the Agreement. The demurrer should be sustained without leave to amend.

II. THE UNIVERSITY CANNOT PLEAD AROUND THE 1973 AGREEMENT.

The University's second cause of action clearly violates Evidence Code section 622, which states that "[t]he facts recited in a written instrument are conclusively presumed to be true as between the parties thereto." The University completely ignores this point even though it is the very first argument in plaintiffs' demurrer. Under the rule laid down in the case cited in plaintiffs' demurrer (and ignored by the University), Fundin v. Chicago Pneumatic Tool Co., 152 Cal.App.3d 951 (1984): While allegations of the complaint are deemed to be true in ruling on demurrers, where an allegations is contrary to law or to a fact of which a court may take judicial notice, it is to be treated as a nullity. Any allegations in the complaint which are inconsistent with facts set out in an unambiguous written instrument, incorporated by reference, may be stricken. In other words, if there are inconsistencies between the complaint and the written instrument, the written instrument controls. Id. at 955 (citations omitted) (sustaining demurrers without leave to amend based on interpretation of agreement). The Agreement contradicts the University's allegations in the second cause of action, and the Agreement is controlling. The University cannot state a cause of action based on allegations that are contradicted by the express terms of the Agreement.

A. No Express Trust Was Created By The 1973 Agreement.

The 1973 Agreement did not expressly create a trust governing the Schoenbergs' copyrights. The University admits: It is clear from the 1973 Agreement that the Schoenbergs transferred the Archives to USC while retaining the copyrights to the physical materials transferred, and thus retained the right to exploit those materials commercially. (Opp., p. 10:18-20; see Agreement, Plaintiffs' Ex. 1, Ex. A, Article 1.7.) The University even admits "USC is not arguing that the Schoenbergs transferred the copyright to USC." (Opp., p. 10, fn. 2.) Indeed, the University concedes that federal law requires a transfer of copyrights to be expressly set forth in writing. 17 U.S.C. ¤ 28 (former law). Any ambiguity is resolved in favor of the retention of copyrights by the owner. Civ. Code ¤ 988(b). Yet the University alleges that the Schoenbergs, "as fiduciaries of the charitable trust created by the 1973 Agreement, should be required to account for, and return to USC for charitable purposes, all payments and proceeds they have received since December 11, 1973 arising out of the copyrights and publication rights in the Archives." (Cross-Complaint, Ex. 3, | 37.) This "allegation" is clearly in conflict with the law and with the express terms of the Agreement and must be stricken. There is no trust created in the 1973 Agreement that would entitle the University to the proceeds from the Schoenbergs' copyrights.

B. No Involuntary Trust Was Created By The Schoenbergs' Retention of the Copyrights Or Other Rights Under The Agreement.

The University also alleges that an involuntary constructive trust should be imposed on the Schoenbergs' copyrights, despite the fact that such an involuntary equitable transfer is prohibited under the Copyright Act. See Pamfiloff v. Giant Records, Inc. 794 F.Supp. 933, 937 (N.D.Cal. 1992) (requirement of written transfer bars application of equitable estoppel to transfer copyrights). An involuntary trust operates to compel the equitable transfer of property to its rightful owner. Communist Party v. 522 Valencia, Inc., 35 Cal.App.4th 980, 990 (1995). Under Civil Code sections 2223 and 2224, an involuntary trust is created when a person "wrongfully detains a thing" or "gains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act, unless he or she has some other and better right thereto." It makes absolutely no sense for the University to allege that a constructive trust must be created over the Schoenbergs' copyrights because the Schoenbergs have "wrongfully detained" or "gained" their own copyrights, when the University admits that it expressly agreed in 1973 that the Schoenbergs retained the copyrights.

The University's sole argument is that the purported income tax deduction taken by the Schoenbergs makes the express provisions of the Agreement regarding the Schoenbergs' retention of the copyrights illegal. This is contradicted by the University's statement that "the agreements were specifically set up so that the Schoenbergs could take certain tax deductions that they were seeking." (Opp., 1:21-22.) The University cites no case law or statutory authority for its novel proposition, namely, that the tax consequences of an Agreement define the rights of the parties thereto, can make the Agreement itself illegal and can authorize the re-writing of the Agreement to state the exact opposite of what it says. This is not the law. As plaintiffs have set forth -- in yet another case ignored by the University -- the terms of the Agreement determine the tax consequences, not the other way around. Weiss v. Stearn, 265 U.S. 242, 44 S.Ct. 490, 492 (1924). The University cites Civil Code section 1643, which actually supports the Schoenbergs' position because it prohibits an interpretation of the Agreement that violates the "intention of the parties."

The University cannot allege that the Schoenbergs intended to donate or transfer their copyrights to the University (or to a trust) because the Agreement explicitly provides that the copyrights were not included in the gift. (Agreement, | 1.7.) Even if it is arguable that the Schoenbergs' purported tax deduction perhaps could have been challenged by the IRS (under the University's reading of the partial interest rules), that is not a ground for ignoring the express intent of the parties not to include the copyrights in the gift. The University simply cannot extrapolate a cause of action from the tax consequences of the Agreement and cannot make allegations of the intent of the parties that are contrary to the express terms of the Agreement. Fundin, 152 Cal.App.3d at 955.

III. Although It Should Not Be Relevant, Copyrights Are Separate Property And Therefore Any Deduction Would Have Been Proper.

The meaning of Internal Revenue Code ¤ 170(f)(3) dealing with partial interests is obviously not well understood, especially with respect to the treatment of copyrights. fn.1 The Treasury Regulations (Treas. Reg ¤ 1.170A-7(b)(1)(i)) (adopted in 1972) and the General Explanation of the Tax Reform Act of 1969 (Def.'s App. No. 14) do not even mention the word "copyright." Neither side has found any case law interpreting the 1969 revision to section 170 or the related Treasury regulations in the context of copyrights. As the University points out, the only case law on the subject concerns donations before the Tax Reform Act of 1969 took affect. Interestingly, two of these cases involved donations of music manuscripts to USC with an express retention of copyrights and other rights, and an approval of a charitable deduction. See Jarre v. C.I.R., 64 T.C. 183 (1975); David v. C.I.R., 1976 WL 3496 (U.S. Tax Ct.) (see Supplemental Appendix).

The University admits that the Agreement with the Schoenbergs was designed to accomplish the same result: "All this was to ensure that the agreement was structured and performed so that [the] Schoenberg children would be entitled to an income tax charitable contribution deduction for the materials contributed to USC." (Opp., 10:1-3.) The statement concerning interpretation of the income tax rules found by the University in the discussion of changes to the gift and estate tax rules in the General Explanation of the Economic Recovery Act of 1981 seems to support the University's interpretation of the Treasury Regulations, but it was issued on December 29, 1981 (long after the 1973 Agreement and the gift of the materials to USC), and is oddly based on a completely incorrect assumption that the 1976 Copyright Act changed the rule regarding the separateness of copyrights. (See Def.'s Appendix No. 15 ("recent changes in copyright law treat the tangible object (i.e., the original art work) and the intangible copyright as separate items of property.")

In fact, that rule had never changed. Section 27 of the Copyright Act of 1909 states: "The copyright is distinct from the property in the material object copyrighted, and the sale or conveyance, by gift or otherwise, of the material object shall not of itself constitute a transfer of the copyright." See Supplemental Appendix, 17 U.S.C. ¤ 27 (1909 Act). Section 202 of the Copyright Act of 1976 is identical in this respect, with the only difference being a reversal of the presumption of transfer of common law literary property rights (as opposed to statutory copyrights) upon the sale of a literary manuscript. See Supplemental Appendix, 17 U.S.C. ¤ 202, Notes of Committee on the Judiciary, House Report No. 94-1476. fn.2

All of this might lead one to conclude that the language in Treas. Reg. ¤ 1.170A-7(b)(1)(i) applies only to the retention of common law publication rights, not statutory copyrights which were considered "entirely separate things" under the Copyright Act of 1909. Given the uncertainty as to the meaning of the Treasury Regulations, the retention of common law rights of publication in conjunction with the 1973 Agreement would not have prevented the Schoenbergs from taking a tax deduction. But whatever the proper interpretation of the Treasury Regulation is -- and obviously the University has a different view now than it did in 1973 -- it has absolutely no bearing on whether the University can state a cause of action that is contrary to the express terms of the Agreement.

IV. The Schoenbergs' "Reservation" of Certain Limited Rights Did Not Defeat The Gift Agreement.

The University also completely ignores the discussion in plaintiffs' demurrer regarding the legal retention of certain limited rights in the collection other than the copyrights, such as the right to remove the collection upon breach, the right to be members of the Institute Advisory Board (which the University has refused to convene) and the right to insist that the Institute building be used exclusively for the purposes of the Institute, as provided in the 1973 Agreement. Again, the University has not alleged a single act by the Schoenbergs that is inconsistent with the terms of the Agreement or the tax law, or that would amount to a breach of any alleged duties.

The only few specific acts the University alleges (Cross-Complaint, | 15, 30) are acts which the Schoenbergs were legally and contractually permitted to take and none of the alleged acts were in any way actionable or violated any duty to the University. For example, the fact that the Schoenbergs have "complained" that the University was not living up to its agreement and suggested ways to "improve" the Institute does not give rise to a cause of action. Further, the fact that the Schoenbergs objected to proposed unrelated uses of the Institute building and obtained two temporary restraining orders and two preliminary injunctions preventing the University from using the Institute contrary to the terms of the Agreement is absolutely not actionable in this case, under the litigation privilege of Civil Code section 47(b)(2).

Undaunted by the lack of authority for its position, the University's tactic again seems to be to cite irrelevant and unrelated post-hoc IRS rulings (regarding the retention of stock voting rights and a taxpayer who never transferred title to the property he purportedly donated) to suggest arguments the IRS could possibly have made (without success) to deny the Schoenbergs a tax deduction. But on the "dominion and control" issue, there was no change in the Tax Reform Act of 1969 and the partial interest regulations relied on in the copyright discussion do not apply. The limited rights of access and involvement retained by the Schoenbergs were no different from the rights retained in Jarre, David, Lawrence, and Transamerica. The University has no answer for this.

V. The University Cannot State A Claim Under California Probate Code Section 16440.

The University concedes that there is a four-year statute of limitations for actions on a breach of trust where there has been no report. Di Grazia v. Anderlini, 22 Cal.App.4th 1337 (1994). "A complaint showing on its face the cause of action is barred by the statute of limitation is subject to demurrer." Sirott v. Latts, 6 Cal.App.4th 923 (1992). The University's sole argument is that the Cross-Complaint does not "show actual knowledge by USC of a clear breach or repudiation of trust more than four years from the filing of the Cross-Complaint." (Opp., 6:13-15.) Of course, this is completely false. The University has alleged as follows: "Additionally, in Article 1.7 of the [1973] Agreement, Cross-Defendants purported to reserve to themselves, in their individual capacity, the copyrights and publication rights to all of the donated materials." (Cross-Complaint, | 30.)

In any case, the University has not pled (and cannot plead) delayed discovery. County of Alameda v. Superior Court, 195 Cal.App.3d 1283 (1987) (failure to plead delayed discovery supports sustaining demurrer without leave to amend). As discussed above, none of the other specifically alleged acts by the Schoenbergs constitute a new "breach of trust" giving rise to a new cause of action. The statute of limitations bars the University's second cause of action and there is no reason to grant it leave to amend to allege belated discovery. CAMSI IV v. Hunter Technology Corp., 230 Cal.App.3d 1525, 1540-41 (1991) (amendment to allege belated discovery is not permitted when facts alleged in the complaint show that it is barred).

Further, the University's claims are barred by laches. The cases relied on by the University involve actions by the Attorney General (which are not subject to laches) and concern express voluntary trusts, where the trustee had not repudiated the trust until many years after the trust was created. Obviously, those cannot help the University, because there is no express trust in this case, and by the terms of the 1973 Agreement the Schoenbergs from the very outset have repudiated any claim that the University might have to their copyright royalties, and asserted their contractual rights under the Agreement. The University does not contest and apparently concedes that its claim is barred because it expressly agreed to the conduct alleged to be a breach of trust. Cal. Probate Code ¤¤ 16463(a), 16464(a). There is no answer for this, or any of the legal and logical impediments to the University's second cause of action. The demurrers should be sustained without leave to amend.

Respectfully submitted,

KATTEN MUCHIN ZAVIS & WEITZMAN

By:  E. Randol Schoenberg
Attorneys for Plaintiffs

fn.1 With regard to the specific provision regarding historic films relied on by the University, the Revenue Procedure 72-45 (Def.'s Appendix No. 9) shows that the regulations "as finally adopted contain a rule that is the converse of that stated in the proposed regulation." The originally proposed regulation would have permitted a deduction where the donor retains the rights to reproduce and exploit the film! fn.2 "The principle restated in section 202 is a fundamental and important one: that copyright ownership and ownership of a material object in which the copyrighted work is embodied are entirely separate things. Thus, transfer of a material object does not of itself carry any rights under the copyright."