February 5, 1996

Does Going 'Broke' Mean Artist Really Doesn't Have Any Money?

By ANITA M. SAMUELS
and DIANA B. HENRIQUES

Success, as abrupt and electric as a summer thunderstorm, enveloped the music group TLC five years ago and shows no sign of ending. The three-woman group based in Atlanta -- its music is a blend of rhythm and blues and hip-hop -- has two "multi-platinum" albums and a half-dozen top singles. So the music industry was somewhat taken aback last year when the three women all filed for bankruptcy court protection, telling whoever would listen that they were "broke."

Their manager, Pebbitone Inc., and their record-label, LaFace Records, don't believe it. Both have protested in court that the women are simply misusing federal bankruptcy law to pressure them into renegotiating TLC's contract and to shortchange the people who helped create their glittering success. LaFace is a unit of Bertelsmann.

Wherever the truth lies -- and barring a last-minute settlement, the court will ultimately decide that -- the TLC case has mesmerized the record industry. Smaller independent labels fear that their hottest stars will see "going broke" as a quick and efficient way to break their contracts. And partisans of young artists see a new way to give artists leverage at the bargaining table and redress what they feel is an imbalance of economic power in the industry.

Whether by accident or design, bankruptcy filings recently have gone hand in hand with contract renegotiations. In the last 18 months, at least two other hot groups have filed for bankruptcy amid bitter contract disputes and quickly emerged with better deals. But neither drew the attention that the TLC case has, perhaps because of the sheer scale of the group's success: The first album, "Ooooooohhh ... on the TLC tip," which came out in 1992, sold nearly 3 million copies and its second, "Crazysexycool," has sold 5 million so far.

"The record industry is concerned about this case, because it has serious implications," said Dennis Hall, a bankruptcy lawyer in Atlanta who represents one large creditor in the case. If TLC gets a new deal, "then anybody else who has a bad contract and hits it big might want to do the same thing," Hall said.

David G. Bisbee, the lawyer for the singers, insisted that his clients filed for bankruptcy solely because "they cannot pay their bills," in part because their contract gives them so small a share of the rewards of their success.

TLC's contract with Pebbitone gives the group 7 percent of the revenues from the sale of the first 500,000 copies of the debut and second albums. That increases to 8 percent on sales over a million copies -- a "platinum" seller. Even if the group stays hot long enough to justify an eighth album -- a rarity in the genre -- the members' percentage increases to just 9.5 percent on sales of more than a million copies. The royalty range in the industry varies from TLC's rate at the low end to up to 13 percent at the high end.

Bisbee agreed that record labels are alarmed about the case: "I think their concern is that their stable of stars is going to hear about it, read about it, think about it and say, 'I may not be TLC, but I'm doing a whole lot better than they thought I would.' They are concerned about an onslaught of similar filings.' "

That certainly worries Bill Stephney, chairman of Stepsun Records, an independent label in New York. "You literally can invest all your time, sweat equity and finances into an act or an artist," he said, "only to find that they can pretty much go on their own and declare bankruptcy to discharge their contract. Then, these contracts basically will have all the weight of a roll of paper towels."

But Michael Lehman, a Livingston, N.J., lawyer who has represented dozens of entertainment figures in bankruptcy cases, countered that the record industry has an easy option for avoiding the pitfalls posed by the case: "Offer the artists fairer contracts."

The Math: Apportioning The Costs

Although giants dominate the record distribution channels, young start-up artists are more likely to be discovered by smaller independent labels, such as Stepsun, LaFace Records, and Cold Chillin' Records. But even though big items like distribution costs are often shared with a larger partner -- LaFace has several deals with Bertelsmann's Arista label -- most of what these small labels spend to nurture a new artist is money down the drain: Most new artists do not take off, or they fizzle out after one or two modestly successful albums.

To balance the financial risks they take in cultivating new artists, the recording labels fashion "new-kid" contracts that are heavily lopsided in the company's favor -- too lopsided, in the view of the artists' lawyers. Among other things, the labels have the unilateral right to drop an artist at any time, but the artist has no freedom to walk away from a contract.

At the height of his career in 1992, the pop star George Michael began an unsuccessful battle to persuade British courts to release him from his 8-album contract with Sony. But not until last year, months after the courts rejected his request, did he end his relationship with Sony after the Dreamworks SKG studio and Virgin Records bought out his contract for more than $40 million.

For most artists, things don't turn out so well. The standard contract, for example, allows the label to cancel the deal unilaterally at any time, but ties the performer for the duration. And that can be a long time. TLC's contract with Pebbitone requires the group to make eight albums. Since albums are rarely produced more frequently than once every one to two years, the group could be tied to the contract for as long as 16 years.

Even an artist whose first album "goes gold" -- that is, sells 500,000 copies -- can wind up working for as little as $12 an hour, said Wendy Day of the Rap Coalition, a Brooklyn-based organization that educates rap-music performers about industry basics.

The arithmetic is simple and sobering for aspiring stars: The average wholesale price of compact discs and cassettes is about $8 a unit. Thus, an artist with a 12 percent royalty rate, which is typical, gets about 96 cents per unit, or $480,000 on a "gold" record. From that, the record label recoups a portion of its advances to the artist for recording costs, music video production, tour support, independent promotional efforts, limousine services and so forth -- often as much as $170,000.

Half of the remaining $310,000 will go into a "reserve" account to cover any unsold units that are returned by the stores. Thus, an artist's initial income from a gold record can be as little as $105,000, which may have to be shared among several group members.

Still, record labels get few arguments from unknown artists, who are often young, unsophisticated and unwilling to look too closely at the fine print when stardom beckons. If they hit the big time, however, industry insiders say it is industry practice to revise the original terms to give the stars a better deal. But that renegotiation process can often degenerate into creative and financial disputes that drag on for months.

It is at this stage that several solidly successful recording groups have found that the route to a fresh start is one that big American corporations have used for years to get out of contracts that were a burden on their operations: a federal bankruptcy filing.

The Law: Can You Win By Losing?

Section 365 of the federal bankruptcy code allows the court to free debtors from burdensome or onerous contracts that impair their ability to make a fresh financial start, if the court deems it fair to do so. Thus, the LTV Corp. was able to revise its pension obligations and the New York Daily News was able to win new terms from its unions through the bankruptcy process.

But to seek that escape hatch, a debtor must be insolvent under the terms of the law, since the courts can toss out bankruptcy filings that are made for the sole purpose of breaking a contract.

Profile Records argued that was exactly the goal of three members of the rap group RUN-DMC, who filed for bankruptcy in August 1993. But the performers insisted they were broke and asked the court to cancel their Profile contract. Within months, the group stepped out of court with a better contract.

Similarly, by last spring, the five members of Silk, a rhythm and blues group, had been haggling for months with their label, Keia Records. On March 14, Silk's members filed for bankruptcy in Atlanta, and immediately asked to be freed of their Keia contract. On Oct. 11, the court approved a settlement that gave the group a new, more advantageous contract with Elektra Entertainment Group, a unit of Time Warner.

And right now, Stepsun Records is in Federal Bankrupty Court in Brooklyn, protesting a filing by Tarsha N. Jones, who performs on the Stepsun label under the name missjones. That case is being negotiated, lawyers said, but Stepsun too has charged that the filing was made solely to force a better contract, a charge Ms. Jones denies.

Why not just challenge bad contracts in civil court, where most business disputes are thrashed out? According to Lehman, who worked on both the Stepsun case and the RUN-DMC case, the bankruptcy courts are much faster than the civil courts. And while stars like Whitney Houston and Janet Jackson have shone brightly for a decade or more, for many other pop music stars fame has a short half-life. "In civil court, you could be sitting there for three to four years waiting for your contract dispute to go forward, and meanwhile your career would be over," Lehman said.

The Group: Who's Who In TLC

The three young singers at the center of this controversy are Tionne Watkins, known as "T-Boz," who has a deep, gritty voice and tomboy demeanor; the volatile Ms. Lopes, whose nickname is "Left-Eye," who used to sport a colorful wrapped condom in lieu of the left lens of her eye-glasses; and Rozonda "Chilli" Thomas, who projects a sultry grace.

None of the three women returned telephone calls over the last two weeks seeking comment on recent events and on their rise to stardom. All three are from modest backgrounds, according to Contemporary Musicians, a record industry publication that profiled the stars last November. Ms. Lopes, 24, a self-taught musician, was raised in Philadelphia but moved to Atlanta at age 17. Ms. Watkins, 25, gravitated to Atlanta from Des Moines, and worked in beauty salons before turning to music. And Ms. Thomas, 24, is from Atlanta and studied for a fashion industry career before shifting into hip-hop, the magazine reported.

There had been an earlier version of the act without Ms. Thomas. Its current incarnation, however, took shape in early 1991, when the trio signed with Pebbitone Inc., owned by Perri M. Reid, a recording artist in her own right, under the name "Pebbles." At the time, Ms. Reid was married to Antonio Reid, a co-owner of LaFace Records, which signed TLC for its first albums. (The Reids have since separated.)

Their success was immediate. Their first album sold nearly 3 million copies with three major hits: "Ain't 2 Proud 2 Beg," "What About Your Friends," and "Baby, Baby, Baby," all of which reached platinum status. After that, they popped up everywhere -- in a cameo for the film "House Party 3," on the soundtrack for the Janet Jackson film "Poetic Justice" and on tours with the likes of MC Hammer and Bobby Brown.

The group's second album, "Crazysexycool," in 1994, was even hotter. Enthusiasm from radio stations and MTV produced a groundswell of sales that pushed the album to the No.2 spot on Billboard's music chart for all of 1995. Four cuts from the album, including "Waterfall," won spots on Billboard's Top 100 singles.

Adding to the attention the group attracted was the volcanic personal life of Ms. Lopes, whose turbulent relationship with the professional football player Andre Rison hit the headlines in June 1994, when Rison's palatial home outside Atlanta burned to the ground.

Clayton Farnham, a lawyer for Lloyd's of London, which carried the insurance policy on the home, said that Ms. Lopes started the fire when she gathered Rison's athletic shoe collection together and set it ablaze. Toxic fumes, he said, hampered the efforts to save the house.

Ms. Lopes later pleaded guilty to one count of first-degree arson, and has been sued by Lloyd's. Ms. Lopes has denied that she intended to destroy the home, and is disputing Lloyd's efforts to recover $1.3 million from her.


Despite their obvious success, the women of TLC have spent money more like yuppies than like stars. They shopped at Rich's and The Limited, ordered jewelry from Zale's and bought Jeeps and BMWs, according to the list of debts each included with their personal bankruptcy filings.

But when they filed for bankruptcy protection in July, each woman listed debts far in excess of her assets. Ms. Lopes's largest debt was the $1.3 million being sought by Lloyd's, which the insurer insists cannot be erased through a bankruptcy filing. Aside from that, the largest debts were owed to Pebbitone and LaFace Records -- both of which deny that they are owed any money at all.

Bisbee, the lawyer for Ms. Watkins, Ms. Lopes and Ms. Thomas, insisted that his clients meet the legal test for seeking bankruptcy protection. "Sure we all have the ability to deliberately incur more debt than we are able to repay," he said. "But simply because an artist files should not lead to an automatic inference that that's what they did. That certainly is not what occurred in this instance."

But Pebbitone and LaFace Records insist that the women have exaggerated their debts and understated their assets so that they can use the bankruptcy process to break their contract.

Kenneth L. Kraus, a Nashville entertainment lawyer on the legal team opposing the bankruptcy, said the trio is facing at worst "a cash-flow problem." At least $2.2 million in royalties is "in the system" on its way to the group, he said. "We offered to give them substantial advances against that payment and they declined that; we offered to renegotiate and they refused that," he continued. "I think they wanted to be bankrupt because they think they can get out of their contract on the basis of bankruptcy."

Bisbee acknowledged that there is some dispute about some of his clients' debts, but he insisted their filing is valid. He added, "I know the record company would like to paint the picture that 'nobody pressured anybody,' but that isn't what the facts will show."

The Future: What's Fair, And Who Pays?

Federal Bankruptcy Judge Stacey W. Cotton ordered a trial for Feb. 12 to sort out who owes what to whom, but also urged the parties to bring in a professional mediator to seek a settlement in the case. That mediation conference scheduled for this past weekend was called off thanks to an ice storm in the Southeast, and rescheduled for this Saturday.

But the larger issue the TLC case raises for the recording industry will not be settled, even if the case itself is. Indeed, a speedy settlement that produced a new, more generous contract for TLC would simply prove the point that bankruptcy court can be an attractive venue for hot stars who want a speedy route to a better contract.

Lehman, the New Jersey lawyer who has handled dozens of bankruptcies for entertainment figures, said in a recent interview that he thought the record industry was now "fully aware of the fact that the future bankruptcies may be not the failed debut artists but their hottest and biggest stars."

But the way to avoid that outcome, added Bisbee, was to be sure that a hot star shared in the record company's success. "It is just a matter of being fair to the artist," he said. "Record companies have to keep in mind that, without artists, they don't have anything."

Copyright 1996 The New York Times Company