Petition for Writ of Certiorari — LewRon Television, Inc. v. United Network, Inc.

LEWRON TELEVISION, INC.,

A BODY CORPORATE OF THE STATE OF MARYLAND,

Petitioner,

Vv.

UNITED NETWORK, INC., (FroRMERLY CALLED JAYMAC,

INC. ), DEBTOR, INDIVIDUALLY AND AS GENERAL PARTNER OF

UNITED NETWORK COMPANY, A LIMITED PARTNERSHIP, AND

UNITED NETWORK COMPANY, A LIMITED PARTNERSHIP,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

’ Epwarp L. Branton, Jr.,

.10 Light Street,

Baltimore, Maryland 21202

Counsel for Petitioner.

The Daily Record Co., Baltimore, Md. 21203

TABLE OF CONTENTS

PRAYER FOR WRIT

CITATION TO OPINIONS BELOW

JURISDICTION

QUFSTIONS PRESENTED

STATUTE JNVOLVED

STATEMENT OF THE CASE

REASONS FOR GRANTING THE WRIT:

1. There is a direct conflict between the Fourth

and Second Circuits as to the application and

construction of an important New York “se-

curity deposit” statute. which has not vet been

judicially construed in any reported opinion

2. There is a conflict of opinion between the

Fourth and Second Circuits as to the degree of

New York contact required to render N. Y.

Gen. Obligations Law, §7-101 (McKinney.

1962) applicable to a contract for the use or

rental of personal property

CONCLUSION

TABLE OF CITATIONS

Cases

LewRon Television, Inc. v. D. H. Overmyer Leasing

Company, Inc., 401 F.2d 689, cert. den. 393 U.S.

1083

Mallory Associates v. Barving Realty Co., 300 N.Y.

297, 90 N.E.2d 468

PAGE

10

13

Oe

12

ii

Statutes

PAGE

N. Y. Gen. Obligations Law:

§7-101 (McKinney 1962) 2, 3, 5, 7, 10, 12, 13

$7-103 (McKinney 1962) 11,12

CONTENTS OF APPENDIX

Opinion and Order of the United States Court of =

peals for the Second Circuit 15

Se IGE RST EU eS ee

—

In THE

Supreme Court of the United States

OcTOBER TERM, 1972

No. ____--

LEWRON TELEVISION, INC.,

A BODY CORPORATE OF THE STATE OF MARYLAND,

Petitioner,

Vv.

UNITED NETWORK, INC.. (FroRMERLY CALLED JAYMAC,

INC.), DEBTOR, INDIVIDUALLY AND AS GENERAL PARTNER OF

UNITED NETWORK COMPANY, A LIMITED PARTNERSHIP, AND

UNITED NETWORK COMPANY, A LIMITED PARTNERSHIP,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

PRAYER FOR WRIT

Petitioner prays that a writ of certiorari be issued to

review the judgment of the United States Court of Appeals

for the Second Circuit, entered in the above titled case on

8 May 1972, which is in conflict with the judgment of the

United States Court of Appeals for the Fourth Circuit,

entered in the case of LewRon Television, Inc. v. D. H.

Overmyer Leasing Company, Inc. on 24 September 1968,

401 F.2d 689, cert. den. 393 U.S. 1083; a case involving the

same facts and parties as the instant case, on the proper

Y a

- ;

Sean

7

2

construction and application of N.Y. Gen. Obligations Law,

§ 7-101 (McKinney, 1962), a vitally important “security

deposit” statute which has not yet been judicially construed

in any reported opinion.

CITATION TO OPINIONS BELOW

The opinion of the United States Court of Appeals for the

Second Circuit is apparently unreported, as of 27 July 1972,

and is printed at App. 15. The opinion of the United

States Court of Appeals for the Fourth Circuit is reported

at 401 F.2d 689, cert. den. 393 U.S. 1083.

JURISDICTION

The judgment of the United States Court of Appeals for

the Second Circuit sought to be reviewed was entered on

8 May 1972. The judgment of the United States Court of

Appeals for the Fourth Circuit was entered on 24 Septem-

ber 1968. The jurisdiction of this Court is invoked under

28 U.S.C., Sec. 1254 (1).

QUESTIONS PRESENTED

1. Does the applicability of the N.Y. Gen. Obligations

Law, § 7-101 (McKinney, 1962) depend upon the intent of

the parties as to the nature of the payments involved in

a contract for the use of personal property. as suggested by

the Fourth Circuit, or does its applicability depend upon

the mere fact that a refundable payment was made in

connection with a contract for the use of personal property,

as asserted by the Second Circuit?

2. The Fourth Circuit has suggested, by parity of rea-

soning to New York cases involving statutes similar to

the N.Y. Gen. Obligations Law, § 7-101 (McKinney, 1962),

that absent sufficient New York contact, a forum selection

clause will not operate to invoke the public policy of New

ee

3

York, as expressed by § 7-101 to govern a contract between

two corporations foreign to the State of New York. to be

performed in Nevada. The Second Circuit, however, has

asserted that despite the resulting distortions of the agree-

ment between the parties, the applicability of 7-101 may

be dictated by a forum selection clause, notwithstanding

the fact that the only significant New York contact was

the execution of a single rider to the contract in New York.

STATUTE INVOLVED

N.Y. Gen. Obligations Law § 7-101 (McKinney, 1962):

§ 7-101. Money deposited or advanced for use or rental

of personal property; waiver void

1. Whenever money shall be deposited or advanced

on a contract for the use or rental of personal property

as security for performance of the contract or to be

applied to payments upon such contract when due,

such money, with interest accruing thereon, if any,

until repaid or so applied, shail continue to be the

money of the person making such deposit or advance

and shall be a trust fund in the possession of the per-

son with whom such deposit or advance shall be made

and shall be deposited in a bank or trust company and

shall not be mingled with other funds or become an

asset of such trustee.

2. Any provision of a contract whereby a person

who has deposited or advanced money on a contract

for the use or rental of personal property as security

for the performance of the contract waives any pro

vision of this section is absolutely void.

STATEMENT OF THE CASE

In the fall of 1966, D. H. Overmyer Leasing Company,

Inc. (“Overmyer”) was planning to set up a fourth na-

tional television network. The network’s first regular

—

program was to be a two hour variety show emanating

from Las Vegas and featuring entertainers appearing in

that city’s nightclubs. Overmyer arranged to rent the

necessary color television cameras and related equipment

from LewRon Television, Inc. (‘“LewRon”), and the par-

ties entered into a written contract to that effect. The

contract also provided for reimbursements of salaries and

expenses for technicians which LewRon was to supply for

operation and maintenance of the equipment. LewRon

agreed to deliver the equipment to Las Vegas in time for

the network’s scheduled starting date. Overmyer agreed

to pay a fee of $17,000 for each week of a thirteen week

program cycle, amounting to a total contract price of

$221,000. A deposit of $11,050 was paid to LewRon at the

time the contract was signed and was to be applied to the

last weekly payment when due. Overmyer had the right

to delay the network's starting date for up to six months,

provided it notified LewRon of its election prior to Febru-

ary 15; otherwise, the weekly payments were due on the

dates set forth in the original agreement. If the network

should fail completely to go on the air, Overmyer was

obligated to LewRon for the total $221,000.

4

As the February 15 deadline approached, Overmyer

realized that it would be unable to meet the scheduled

starting date and began to have serious doubts as to the

feasibility of the entire project. It entered into negotiations

with United Network, Inc (“United”) for a sale of the

network concept and existing contract. United, however,

was unwilling to risk as much as $221,000 on the possible

failure of the network to go on the air. In order to facilitate

the sale to United, Overmyer asked LewRon for altera-

tions on the terms of its contract. Lengthy negotiations

resulted in a rider significantly amending the original

agreement.

—_—

5

According to the terms of the rider, Overmyer was given

the right to terminate the contract upon seven days’ notice,

thus reducing its liability upon termination from the bal-

ance due on the remainder of the entire term, to payments

made or due on the effective date of termination. As con-

sideration of this significant concession and limitation of

Overmyer’s liability, LewRon was to receive payment of

$60,000. The rider specified that said payment was the

consideration for the rider, and that the rider would be

null and void if such consideration were not paid.

Overmyer, however, pointed out that if the television

unit were actually leased for thirteen weeks at $17,000

per week, as originally agreed, then under the terms of

the new rider LewRon would receive not only the con-

tract price $221,000 but also an additional $60,000 under

the rider. Therefore, LewRon, in an effort to protect itself

in case of termination but not to gain any greater benefit

than originally agreed upon, agreed to credit the $60,000

to the final weekly payments in the event that the thirteen

week term should be completed. Furthermore, as pointed

out by the United States Court of Appeals for the Second

Circuit in its opinion, neither party knew of the existence

of the N.Y. Gen. Obligations Law § 7-101 (McKinney,

1962) at the time of the execution of the rider.

The rider, therefore, provided for a credit to Overmyer

of $9,000 on the payment due during the tenth week of the

thirteen week cycle, and credits of $17,000 for each of the

payments due during the final three weeks of that cycle.

It is evident that these credits were designed to equal the

$60,000 consideration which Overmyer paid for the rider,

thereby preventing the unjust enrichment of LewRon in

the event that the thirteen week term was completed. The

$11,050 deposit paid by Overmyer in October, 1966 was to

be “retained by LewRon for its own account, unless this

ie.

6

agreement is extended for an additional thirteen week

period, in which event said amount shall be credited

against the $17,000 payment due for the first week of the

second thirteen week period.” Finally, the agreement spe-

cifically provided that “in no event shall LewRon be re-

quired to refund any payments theretofore made to Lew-

Ron.”

Subsequent to the execution of the rider, Overmyer

completed sale of the network to United and assigned all

of its rights and obligations under the contract to United,

without, however, relieving Overmyer from liability there-

under. The required $60,000 payment was made to LewRon

by United. LewRon and United, thereafter, agreed to a

month’s delay in the network’s starting date; the dates

when the weekly payments would be due — and the credits

upon those payments granted — were also changed ac-

cordingly. Additionally, United sought and received Lew-

Ron’s assistance in assembling a technical staff to operate

the facilities and agreed to the pay LewRon a ten per cent

override on the salaries of this staff.

LewRon delivered its equipment and technicians to Las

Vegas, and United began broadcasting the network show

on May 1, 1967 and continued until June 2, 1967. Payments

of $17,000 each were made to LewRon for the first three

weeks of this period. Payments due May 22 and May 29

were not made. On the latter date, LewRon sent telegrams

to United reiterating previous requests for payment ac-

cording to the terms of the contract and stating: “Since

we have had no response of any kind, our only alternative

is to deny you use of our facilities effective immediately.”

Despite this message, United continued to use the facilities

for three more days. On June 1, LewRon sent telegrams

to United and Overmyer requesting confirmation as to

whether they had, in fact, elected to terminate the con-

tract in accordance with its provisions. The following day,

me.

—_

7

Overmyer replied that it was exercising the right of ter-

mination which it retained under its assignment agreement

with United. This communication from Overmyer consti-

tuted the required seven days’ notice, thus making the

effective date of termination June 9.

In Spetember, 1967, LewRon filed suit in the Superior

Court of Baltimore City against D. H. Overmyer Leasing

Company, Inc. to collect amounts due under the agree-

ment and rider thereto. After filing a general issue plea.

Overmyer removed the action to the United States District

Court for the District of Maryland on the basis of diversity

of citizenship and controversy in excess of $10,000. There-

after, both parties moved for summary judgment.

The United States District Court for the District of

Maryland, Northrup, J., granted summary judgment for

LewRon, in LewRon v. Overmyer, 43 FRD 5. Overmyer

appealed this decision to the United States Court of Appeals

for the Fourth Circuit, asserting for the first time on

appeal, inter alia, that since the agreement provides that

it shall be interpreted under the laws of the State of

New York, when N.Y. Gen. Obligations Law, §$ 7-101

(McKinney, 1962), is considered, there is found, so the

argument runs, a legal consideration which requires that

summary judgment be awarded Overmyer. To summarize.

that statute provides that money deposited or advanced on

a contract for the use or rental of personal property to

be applied upon such contract when due shall continue to

be the money of the person making such deposit or ad-

vance “until repaid or so applied.” The statute renders

expressly void any contractual provision purporting to

waive any portion of the statute. Overmyer concluded that

if the $60,000 was security for or pre-payment of future

rent payments, New York law required that it remain the

property of Overmyer and be applied to its obligations.

° aii aati anal a BE a ae oe PPAR I PE Sr

—

The United States Court of Appeals for the Fourth Cir-

cuit reversed and remanded summary judgment granted

in favor of LewRon, on the grounds that there existed a

material issue of fact concerning the intent of the parties

as to the nature of the various payments made under the

contract in question. The Court further stated, at the end

of its opinion, that the applicability of the N.Y. Gen.

Obligations Law, § 7-101 (McKinney, 1962), would de-

pend upon the intent of the parties as to the nature of

any payments made pursuant to the agreement. The

Fourth Circuit opinion further suggested, by parody of

reasoning to New York cases involving statutes similar

to Section 7-101 that absence was sufficient in New

York contact, a forum selection clause will not operate to

invoke the public policy of New York as expressed by

Section 7-101 to control a contract between a Maryland

and a Delaware corporation, to be performed in Nevada.

United then filed a petition for reorganization pursuant

to Chapter XI of the Bankruptcy Act, 11 U.S.C. §501,

et seq., and LewRon filed a claim against United of

$64,326.89. The claim consists of: (a) $51,000 for three

weeks of rental peyments (including the week ending

June 9); and (b) $13,326.89 due LewRon for miscellaneous

services rendered and expenses incurred pursuant to the

various agreements between the parties (composed pri-

marily of overtime and living expenses for technical super-

visors and the 10% override on salaries of the technical

staff).

United denied owing anything other than two weeks’

rental to LewRon and also filed a counterclaim for $71,050

against LewRon. The counterclaim was based on Section

7-101 of the New York General Obligations Law which pro-

—_—

9

vides that deposits and advance payments on rentals of per-

sonal property are to remain money of the party making

such payment and must be held in trust for him by the

party to whom it is paid and not commingled with other

funds until such time as it is actually applied as payments

or returned. United contended that the $11.050 and $60,000

payments due LewRon come within the provisions of Sec-

tion 7-101, that LewRon, consequently, became trustee for

such funds, that those funds were commingled in violation

of the statute, and that LewRon was statutorily forbidden

to retain them under provisions of the contract allowing

it to do so.

After hearing extensive testimony pertaining to both the

claim and counterclaim, the bankruptcy referee made find-

ings of fact and conclusions of law disallowing all of

LewRon’s claim except for the two weeks’ rental ad-

mittedly unpaid and due. and sustaining United’s coun-

terclaim. The referee concluded that the contract was

terminated by LewRon on May 29, rather than by Over-

myer’s telegram of June 2, that the seven days’ advance

notice provision did not, therefore, come into play, and

that no rent was due for the week ending June 9. He

grounded his disallowance of the $13,326.89 in miscellane-

ous claims on a ruling that sufficient proof had not been

presented with regard to United's failure to pay charges

for the expenses incurred and services rendered. The

referee also ruled that LewRon’s approved claim of $33.-

593.34 could be used as a set-off against the trust funds

due United, and issued judgment in favor of United in the

sum of $37,456.66. Furthermore. LewRon was prevented

from pursuing its remedy against Overmeyer in the United

States District Court for Maryland due to the exclusive

jurisdiction assumed by the Referee and on one occasion

the Referee held a hearing to determine whether LewRon’s

/

counsel should be held in contempt of court for attending

a pre-trial conference ordered by the District Judge in

Maryland.

10

Upon review by the District Court, the referee’s order

was affirmed with a modification eliminating use of Lew-

Ron’s approved claim as a set-off.

LewRon then took an appeal from the judgment of the

U. S. District Court for the Southern District of New York

to the U. S. Court of Appeals for the Second Circuit on

the grounds that the District Court erred in upholding

the application by the Referee in Bankruptcy of Section

7-101, to the agreement in question. The Court of Ap-

peals for the Second Circuit held that the intent of the

parties as to the nature of the payments made pursuant

to the agreement was irrelevant in determining the ap-

plication of Section 7-101. By thus applying the public

policy of the State of New York as expressed by Section

7-101 to a contract between a Maryland and a Delaware

corporation to be performed in Nevada, the Court of Ap-

peals for the Second Circuit held, in essence, that the

applicability of Section 7-101 may be dictated by a forum

selection clause notwithstanding the fact that the only

significant New York contract was the execution of a single

rider to the agreement in the State of New York.

REASONS FOR GRANTING THE WRIT

1. THERE IS A DIRECT CONFLICT BETWEEN THE FOURTH

AND SECOND CIRCUITS AS TO THE APPLICATION AND CON.

STRUCTION OF AN IMPORTANT NEW YORK “SECURITY DE-

POSIT” STATUTE, WHICH HAS NOT YET BEEN JUDICIALLY

CONSTRUED IN ANY REPORTED OPINION.

N.Y. Gen. Obligations Law, § 7-101 (McKinney’s 1962);

is a statute, currently in force as of the date of this petition,

which governs the treatment of advanced payments and se-

e STA EA ES RS SLIT SO

_

11

curity deposits on contracts for the use or rental of per-

sonal property. In addition, as of the date of this petition,

Section 7-101 has not been judicially construed in any re-

ported opinion, other than the opinions of the Fourth and

Second Circuits Courts of Appeals referred to herein.

The importance of this statute lies both in the fact that

it governs all leases of personal property in the State of

New York and in that it is the companion statute to the

more extensively litigated Section 7-103, which governs

money deposited or advanced for the use or rental of real

property. Its companion status to Section 7-103 present

the real possibility that any construction of Section 7-101

may be applied by parody of reasoning to questions con-

cerning Section 7-103.

The Fourth Circuit in LewRon v. Overmyer, 401 F.2d

689, cert. den. 393 U.S. 1083; suggested that the application

of Section 7-101 “may depend in part on the intentions

of the parties as to the purpose of the payment.” In sup-

port of this statement, the Court emphasized, in a foot-

note, that the parties did not intend the $60,000 payment to

constitute the type of payment to which Section 7-101

applies. The Court thereby implied that to allow a party

to assert Section 7-101 to its advantage at such a late

date was to distort the intent of the parties. If such a

result were allowable, then Section 7-101 would be appli-

cable in spite of any contrary intent, but since the Court

suggested that such a result was not proper, it follows

that in the opinion of the Fourth Circuit, the intent of the

parties governs the application of Section 7-101.

The Second Circuit, however, In the Matter of United

Network, involving the assignee of the same contract be-

fore the Fourth Circuit, and on the same facts as LewRon

v, Overmyer, supra, held that the intent of the parties

a

. -.

to an agreement for the rental of real property had

nothing to do with the applicability of Section 7-101 re.

gardless of the resulting distortion of the intent of the

parties. The only factor which the Second Circuit seemed

to take into account is that a sum of money could be |

characterized as deposited or advanced for the use or

rental of personal property, and that factor obviated any |

inquiry into the intent of the parties.

This conflict between the Circuits can only serve to

create confusion in the minds of any parties contracting

for the use of personal or real property in, or connected

with, the State of New York, and justifies the grant of

certiorari to review the judgments below.

2. THERE IS A CONFLICT OF OPINION BETWEEN THE FOURTH

AND SECOND CIRCUITS AS TO THE DEGREE OF NEW YORK

CONTACT REQUIRED TO RENDER N.Y. GEN. OBLIGATIONS LAW,

§ 7-101 (McKINNEY, 1962) APPLICABLE TO A CONTRACT FOR

THE USE OR RENTAL OF PERSONAL PROPERTY.

The Court of Appeals for the Fourth Circuit, in LewRon

v. Overmyer, 401 F.2d 689, 694, cert. den., 393 U.S. 1083,

on the same facts as the instant case, recognized that the

agreement in question involved two parties which were

corporations foreign to the State of New York and was to

be performed in the State of Nevada. In light of these

facts, the Court of Appeals for the Fourth Circuit sug-

gested that Mallory Associates v. Barving Realty Co., 300

N.Y. 297, 90 N.E.2d 468, 15 A.L.R.2d 1193 (1949), might be

applicable. In Mallory Associates, supra, the New York

Court of Appeals held that N.Y. Gen. Obligations Law,

§ 7-103 (McKinney, 1962) was applicable to leases of

real property located outside of the State of New York

where there were significant New York contacts. The

Fourth Circuit therefore suggested that the Mallory case

implies that “absent significant New York contacts the

ee OE EMS LEME SEF eB, “

—

13

New York Personal property statute (Section 7-101) may

be inapplicable.” The Court of Appeals for the Fourth

Circuit recognized that this contract contained a forum

selection clause but suggested that though “the contract

provides that it shall be interpreted by the laws of the

State of New York. . . . [p|resumably, this means all of

the law of New York, including New York’s choice-of-law

rules.”

The Second Circuit Court of Appeals, In the Matter of

United Network, apparently found the forum selection

clause contained in the original agreement, combined with

the fact that only one of the various riders to that agree-

ment was executed in New York, as sufficient New York

contact for the application of Section 7-101. The result of

this conflict of opinion between the two circuits and be-

tween the Second Circuit and the New York Court of

Appeals in Mallory Associates, supra, can serve only to

cloud in complete confusion any agreement for the use or

rental of personal or real property which is any way con-

nected with the State of New York, as to the applicability

of Section 7-101 or Section 7-103 to any such agreement.

This conflict further justifies the grant of certiorari to

review the judgment below.

CONCLUSION

For these reasons we pray that the petition be granted

and that a writ of certiorari be directed to the United

States Court of Appeals for the Fourth Circuit.

Respectfully submitted,

Epwarp L. BLANTON, Jr.,

Counsel for Petitioner.

SR ake ae eS

oe

15

APPENDIX

Opinion and Order of United States Court of Appeals

For the Second Circuit

(Filed May 8, 1972)

No. 532 — September Term, 1971.

(Argued March 1, 1972 Decided May 8, 1972.)

Docket No. 71-1861

IN THE MATTER OF UNITED NEtTwork, INc. (formerly called

Jaymac, Inc.), Debtor, Individually and as General

Partner of United Network Company, a limited part-

nership, and United Network Company, a limited part-

nership,

Debtor.

Before:

MurraAH,* KAUFMAN and OAKES,

Circuit Judges.

Appeal from the United States District Court for the

Southern District of New York, at New York City, Charles

H. Metzner, Judge.

Affirmed as modified.

MurraH, Circuit Judge:

The claim and counterclaim in this Chapter XI reorgani-

zation proceeding arise out of a complicated contract be-

tween the debtor corporation and one of its creditors. The

* Senior Judge of the Tenth Circuit Court of Appeals, sitting by

designation.

4

16 |

case ultimately turns on the interpretation of this contract |

and the applicability of $7-101 of the New York General

Obligations Law. Both the bankruptcy referee and the Dis-

trict Court gave controlling effect to the statute and

granted judgment for the debtor corporation on the coun-

terclaim. We affirm that judgment and modify judgment

on the creditor’s approved claim to allow items to be noted, —!

In the fall of 1966, D. H. Overmyer Leasing Co., Inc.

(Overmyer), was planning to set up a fourth national tele- }

vision network. The network’s first regular program was

to be a two-story variety show emanating from Las Vegas

and featuring entertainers appearing in that city’s night

clubs. Overmyer arranged to rent the necessary color tele-

vision cameras and related equipment from LewRon Tele- _)}

vision, Inc. (LewRon), and the parties entered into a writ-

ten contract to that effect. The contract also provided for

the reimbursement of salaries and expenses for technicians

which LewRon was to supply for operation and mainte-

nance of the equipment. LewRon agreed to deliver the

equipment to Las Vegas in time for the network’s sched- ,

uled starting date. Overmyer agreed to pay a rental fee

of $17,000 for each week of a thirteen-week program cycle,

amounting to a total contract price of $221,000. A deposit

of $11,050 was paid to LewRon at the time the contract

was signed and was to be applied to the last weekly rent

payment when due. Overmyer had the right to delay the

network’s starting date for up to six months provided it

notified LewRon of its election prior to February 15; other-

wise, the weekly rental payments were due on the dates

set forth in the original agreement. If the network should

fail completely to go on the air, Overmyer was obligated

to LewRon for the total $221,000, subject, of course, to any

payments which LewRon might receive from renting the

equipment to another party.

ww ON TLTENT TINT RENN PATO EM TE TNL ATA ED LOIN oe anger Et ’ 7

——

17

As the February 15 deadline approached, Overmyer real-

ized that it would be unable to meet the scheduled starting

date and began to have serious doubts as to the feasibility

of the entire project. It entered into negotiations with

United Network, Inc. (United) for a sale of the network

concept and existing contracts. United, however, was un-

willing to risk as much as $221,000 on the possible failure

of the network to go on the air. In order to facilitate the

sale to United, Overmyer asked LewRon for alterations on

the terms of their contract. Lengthy negotiations resulted

in a rider significantly amending the original agreement.

According to the terms of the rider, Overmyer was given

the right to terminate the contract upon seven day’s notice,

and its liability was limited to payments made or due on

the effective date of termination. The rider was to become

effective upon Overmyer’s payment of $60,000 to LewRon,

“said payment being the consideration for this rider.” The

rider also provided for a credit to Overmyer of $9,000 on

the rental payment due during the tenth week of the

thirteen-week cycle, and credits of $17,000 for each of the

payments due during the final three weeks of that cycle.

It is evident that these credits were designed to equal the

$60,000 consideration which Overmyer became obligated to

pay for the rider. The $11,050 deposit made by Overmyer

in October, 1966, was to be “retained by LewRon for its

own account unless this agreement is extended for an addi-

tional 13 week period, in which event said amount shall be

credited against the $17,000 payment due for the first week

of the second 13 week period.” Finally, the agreement spe-

cifically provided that “in no event shall LewRon be re-

quired to refund any payments theretofore made to Lew-

Ron.”

Subsequent to execution of the rider, Overmyer completed

sale of the network to United and assigned all of its rights

a

18 | |

and obligations under the contract to United. The required

$60,000 payment was made to LewRon by United. LewRon |

and United, thereafter, agreed to a month’s delay in the

network’s starting date; the dates when the weekly rental

payments would be due — and the credits upon those pay-

ments granted — were also changed accordingly. Addition-

ally, United sought and received LewRon’s assistance in |

assembling a technical staff to operate the facilities and

agreed to pay LewRon a 10‘¢ override on the salaries of

this staff.

LewRon delivered its equipment and technicians to Las

Vegas and United began broadcasting the network show

on May 1, 1967, and continued until June 2, 1967. Rental

payments of $17,000 each were made to LewRon for the |

first three weeks of this period. Payments due May 22 and |

May 29 were not made. On the latter date LewRon sent

telegrams to United reiterating previous requests for pay-

ment according to terms of the contract and stating: “Since

we have had no response of any kind our only alternative

is to deny you use of our facilities effective immediately.”

Despite this message, United continued to use the facilities

for three more days. On June 1, LewRon sent telegrams

to United and Overmyer requesting confirmation as to

whether they had, in fact, elected to terminate the contract

in accordance with its provisions. The following day Over-

myer replied that it was exercising the right of termination

which it retained under its assignment agreement with

United. LewRon views this communication from Overmyer

as the required seven days’ advance notice, thus making the

effective date of termination June 9.

United subsequently filed its petition for reorganization

pursuant to Chapter VI of the Bankruptcy Act, 11 U.S.C.

$501, et seq., and LewRon filed a claim against United of

$64,326.89. The claim consists of: (a) $51,000 for three

—S—7__”_™

19

weeks of rental payments ‘including the week ending

June 9); and (b) $13,326.89 due LewRon for miscellaneous

services rendered and expenses incurred pursuant to the

various agreements between the parties (composed pri-

marily of overtime and living expenses for technical super-

visors and the 10‘« override on salaries of the technical

staff).

United denied owing anything other than two weeks’

rental to LewRon and also filed a counterclaim for $71,050

against LewRon. The counterclaim was based on $7-101

of the New York General Obligations Law! which provides

that deposits and advance payments on rentals of personal

property are to remain money of the party making such

payment and must be held in trust for him by the party

to whom it is paid and not commingled with other funds

until such time as it is actually applied as payments or

returned. United contends that the $11,050 and $60,000

payments due LewRon come within the provisions of $7-101,

that LewRon, consequently, became trustee for such funds,

that those funds were commingled in violation of the stat-

' The contract expressly stated that it was to be “interpreted under

the laws of the State of New York.”

The New York General Obligations Law $7-101 provides :

“1. Whenever money shall be deposited or advanced on a

contract for the use or rental of personal property as security for

performance of the contract or to be applied to payments upon

such contract when due, such money, with interest: accruing

thereon, if any, until repaid or so applied, shall continue to be the

money of the person making such deposit or advance and shall be

a trust fund in the possession of the person with whom such

deposit or advance shall be made and shall be deposited in a bank

or trust company and shall not be mingled with other funds or

become an asset of such trustee.

“2. Any provision of a contract whereby a person who has

deposited or advanced money on a contract for the use or rental

of personal property as security for the performance of the con:

tract waives any provision of this section is absolutely void.”

20

ute, and that LewRon was statutorily forbidden to retain

them under provisions of the contract allowing it to do so.

After hearing extensive testimony pertaining to both the

claim and counterclaim, the bankruptcy referee made find-

ing of fact and conclusions of law disallowing all of

LewRon’s claim except for the two week’s rentai admittedly

unpaid and due, and sustaining United’s counterclaim. The

referee concluded that the contract was terminated by

LewRon on May 29, rather than by Overmyer’s telegram of

June 2, that the seven days’ advance notice provision did

not, therefore, come into play, and that no rent was due

for the week ending June 9. He grounded his disallowance

of the $13,326.89 in miscellaneous claims on a ruling that

sufficient proof had not been presented with regard to

United’s failure to pay charges for the expenses incurred

and services rendered. The referee also ruled that Lew-

Ron’s approved claim of $33,593.342 could be used as a

set-off against the trust funds due United, and issued judg-

ment in favor of United in the sum of $37,456.66.

Upon review by the District Court, the referee’s order

was affirmed with a modification eliminating use of Lew-

Ron’s approved claim as a set-off.3

United’s Counterclaim

Notwithstanding the rather involved factual background

of this case, the primary issue, as we have seen, is simply

whether the $11,050 and $60,000 payments to LewRon were

in the nature of either security deposits or advance pay-

* This sum consists of the two weeks’ rental payments of $17,000

each, or $34,000 in the aggregate, less a small offset of $406.66, cover-

ing a credit which LewRon was found to owe United.

* The District Court concluded that $68 of the Bankruptcy Act, 1!

U.S.C. §108, does not authorize the set-off of debts against funds

which are held in trust, such as the $71,050 involved here. LewRon

does not appeal the District Court's decision on this point.

7

)

—

21

ments on a contract for the use or rental of personal prop-

erty so as to bring them within the provisions of $7-101

of the New York General Obligations Law. If the payments

come within the statute’s intended coverage it is clear that

the trust funds were converted in violation of the statute

since they were admittedly commingled with LewRon’s

regular checking accounts.

For the first time on appeal LewRon asserts that this

contract is primarily one for services rather than for the

use or rental of personal property; hence, it is not within

the purview of §7-101. While a contract in which the supply

of services was a substantial element might very well not

come within the coverage of $7-101, we think the record

clearly indicates that the services provided for in this

agreement were merely incidental to its equipment rental

aspect. Although some minor services were performed —

primarily those of the two supervisory technicians — the

contract’s foremost concern was with the use of television

equipment costing approximately $1,250,000, and the bulk

of the $17,000 payments was for the purpose of obtaining

such use.

The more difficult question, of course, is whether the

funds in question were paid to LewRon as security deposits

or advance rental payments on the contract. The answer

is, perhaps, clearer with regard to the $11,050 payment

since it is specifically denominated a “deposit” in the origi-

nal contract. The terms of the rider make no significant

change in the character of this payment, but only provide

for LewRon’s right to retention of it unless the contract

Should be extended for a second thirteen-week cycle, in

which case it was to be credited against a future rental

installment. The $11,050 payment, therefore, clearly falls

within the coverage of §7-101, since the contract expressly

refers to it as both a deposit and an advance on a future

rental installment. |

one

“=

Although the language of the rider is not quite so spe

cific with regard to the $60,000 payment, there can be no

doubt that it, too, is an advance to be applied to future

rents due. After requiring payment of the $60,000 as con-

sideration, the rider provides for credits totaling $60,000

to be extended to the last four rental installments due un-

der the contract. To say that the $60,000 was not within |

the coverage of §7-101 because the rider failed to specifi-

cally so state, would unduly emphasize form over the sub-

stance of the contractual language. LewRon urges that 34

W. 34th St. Corp. v. Nehama Realty Corp., 153 N.Y.S.2d 427

(Sup. Ct. N.Y. Co. 1956), and In re Dilbert’s Leasing &

Development Corp., 345 F.2d 172 (2d Cir. 1965), compel

this result; but we cannot agree. The agreement in the

34 W. 34th St. case is certainly distinguishable from the

present one, inasmuch as it did not in any way provide

for the payment in question to be applied as credits on i}

particular rental payments otherwise due. The language

of In re Dilbert’s is not persuasive on the issue here, simply

because §7-101 was not invoked or relied upon by the par-

ties in that case.

22

We must also disagree with LewRon’s arguments that

other provisions of the rider overcome any references to

or representations of these funds as security deposits or

advance payments. Invoking language of the rider, Lew-

Ron says that the $60,000 payment is “consideration for

this rider” and, as such, could not be a security deposit or

advance payment which would have to be held in trust. By

entering into the rider LewRon, unquestionably, gave up

substantial benefits which had accrued under the original

contract, and the $60,000 was paid in consideration of its

relinquishment of those benefits. The rider did not stop

at describing the $60,000 payment as consideration, how-

ever, but went on to provide for its application to future

PEER ONTEE FORE FET

—

Sas So giana el EN Sic ce ts

—7—_™

rental installments. There is nothing to prevent a consid-

eration being paid in the form of a deposit or advance on

future liabilities so as to come under §7-101, and it is

clear to us that this is precisely what the parties intended

and what the rider provided for in this case.

LewRon also contends that the funds cannot be viewed

as advance rental payments within the statute’s coverage

because their application to future liabilities was subject

to the occurrence of a condition precedent; i.e., that the

lease not be terminated prior to the dates designated for

such application of the funds. But the fact that the funds

were not to be “applied” until occurrence of a condition

precedent does not affect their status as advance payments.

Any advance payment is, by its very nature, in some re-

spects subject to a condition precedent—usually the matur-

ing of an anticipated obligation. The manifest purpose of

$7-101 is to require that such funds be held in trust during

the interim between the initia] payment and their actual

application to liabilities. If the funds could be commingled

until occurrence of the condition procedent calling for their

application, this statutory purpose would be subverted.

Nor can the contract’s statement that “in no event shall

LewRon be required to refund any payments theretofore

made to LewRon,” be given the effect of removing the

$71,050 fund from the statute’s coverage; especially since

$7-101(2) voids any attempt to waive the statute’s provi-

sions. The parties’ intentions concerning disposition of the

funds in the event the contract was terminated are irrele

vant to the issue before us. What is relevant is that if the

contract had run its full course the funds were to be ap-

plied as advance payments, and the statute requires that

as advance payments they were to be held in trust in a

segregated account. United claims these funds under the

statute — not under the contract. By commingling the

iti oe Bi NOI SIO Ie CN LT Me IRN EIT OE NE EIT MF ARI HEC

24

$71,050, LewRon converted trust funds to its own use in

violation of the statute and is obligated to repay them to

United, regardless of any contractual language to the con-

trary.

Finding the contract to be clear and unambiguous in its

treatment of these funds as deposits or advance payments,

we need not resort to the parol evidence elicited in testi-

mony before the referee. Suffice it to say that a review of

that testimony merely substantiates what we find to be clear

on the face of the contract. It is enough that the parties

treated the $71,050 as advance rental payments on their

account books and in their business dealings with others.

Inasmuch as neither party had a full awareness of the

provisions of §7-101 during the life of the contract, such

treatment must be viewed as free of any ulterior motiva-

tion and as a valid indication of the parties’ intentions

with regard to these payments. The order granting the

counterclaim is accordingly affirmed.

Rental Payments

Due Under the Contract

The referee found that LewRon’s action in sending its

telegram of May 29 to United, and in removing its equip-

ment on June 2, constituted a termination of the rental

agreement effective as of June 2. The telegram’s state-

ment that LewRon intended to deny United the use of its

facilities “effective immediately,” and the subsequent re-

moval of those facilities, certainly afforded a reasonable

basis for the conclusion that the termination was by Lew-

Ron, rather than by Overmyer’s belated message of June 2.

United was, thus, under no obligation to pay rent after

the equipment was removed, and the determination that

only two weeks’ rent is owed by United must be affirmed.

—

25

The Miscellaneous Charges

In order to substantiate its claim for miscellaneous ex-

penses incurred and services rendered pursuant to the

contract, LewRon submitted several invoices which had

been presented to United between the dates of May 4 and

June 5. In contravention of this claim United submitted

several cancelled checks made payable to LewRon and vari-

out other parties, asserting that these constituted full pay-

ment of the invoiced charges. The referee held that Lew-

Ron had not presented sufficient evidence that payments

had not been made on these charges. We think that con-

clusion is erroneous.

The checks submitted by United were never connected

with the specific charges for which they purportedly con-

stituted payment. Indeed, it is doubtful that such connec-

tions could have been made since all but two of the checks

were dated prior to the earliest invoice. Of those two

checks, one, in the amount of $2,757.28, was dated May 5,

while the other, in the amount of $18,227.83, was dated

May 11. The record reveals that $17,000 of the latter

check was in payment of the weekly rental. It appears,

therefore, that of the amounts reflected by United’s checks

only $3,985.11 could possibly have been in payment of the

charges shown on the invoices, and even that amount has

not been connected as payment for any specific charges.

We think that LewRon has substantiated a claim of $13,-

326.89 for miscellaneous expenses incurred and services

rendered and that, notwithstanding ample opportunity, no

clear proof of payment for any of these charges was pre-

sented. LewRon’s approved claim should be increased in

the amount of $13,326.89.

We agree, however, with the referee’s ruling that United

incurred labor charges in the amount of $406.66 in con-

26

nection with a changeover in the cameras furnished by

LewRon and that this expense was chargeable to LewRon

under terms of the contract. This amount was properly

included as an offset against LewRon’s approved claim.

The order is accordingly modified to include miscellane-

ous charges in the sum of $13,326.89, and as so modified

affirmed.

a aS EERE Re AE ST EE IT A ESA pss

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