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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1972
- **Citation:** 409 U.S. 916

## Text

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, “

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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

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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

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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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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1186%3A1. Public record. Not legal advice.