Fair Use? Or Copyright infringement?

[Morrigoon]

Interesting post relating to a Fair Use case - guy creates an album based on "Kind of Blue" but re-interpreting the music in 8-bit digital videogame sound. Gets all the music permissions, etc. But runs into trouble relating to the cover art, which he perceived as "fair use" because of the way he had transformed the work. The original artist (and associated attorneys) disagreed.

What do you think? Is the 8-bit art transformative enough, or does one need to account for layout, framing, shadow, etc. as a significant enough contribution from the original artist's vision to say that the new cover is an infringement?

http://waxy.org/2011/06/kind_of_screwed/