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In re Literary Digest Inc.

January 15, 1940


Appeal from the District Court of the United States for the Southern District of New York.

Author: Chase

Before SWAN, CHASE, and CLARK, Circuit Judges.

CHASE, Circuit Judge.

On March 16, 1938, the Literary Digest, Inc., filed a voluntary petition for reorganization under the provisions of Sec. 77B, of the Bankruptcy Act, 11 U.S.C.A. ยง 207, in the District Court for the Southern District of New York. The petition was approved the next day and on the following May 24th an order providing for the liquidation of the debtor was entered.

On September 3, 1938, Publishers Guild, Inc., filed a claim in the proceedings and amended its claim on November 4, 1938 by increasing it to the sum of $40,743.69 as its damages resulting from an alleged breach by the debtor of a contract it had with the claimant. The matter was referred to a referee who heard the parties on the question of breach of contract before going into the matter of damages and who sustained the trustee's objection to the claim and made an order disallowing it. The district court reversed the order of the referee; reinstated the claim; and ordered the matter returned to the referee to take further testimony and assess the damages. This appeal followed.

On August 13, 1937 the debtor, then the publisher of a weekly magazine known as The Digest, made a contract with the claimant, an organization which sold books and other articles in combination with subscriptions to magazines, in which the debtor agreed to accept, at prices stated, subscriptions for The Digest for one, two, or three years and to allow the claimant certain amounts for expenses incidental to obtaining the subscriptions. In consideration for that the claimant agreed to secure an average of one thousand subscriptions a week for The Digest commencing December 1, 1937 and to obtain them by offers which would conform to certain standards not now important.

Both parties carried out the contract until the debtor suspended publication of The Digest on February 19, 1938; a little less than a month before it filed its petition for reorganization. Publication of The Digest was not resumed and the debtor has since been unable to fill subscriptions for it.

For a time thereafter the claimant was led to believe that publication might be resumed and continued to sell some of its merchandise in combination with subscriptions to The digest. As a result, it had in May 1938 a good many subscriptions to The Digest which the debtor was bound to accept under the contract of August 13, 1937 but which the debtor could not fill because The Digest was not being published.

On May 11, 1938, the debtor made an arrangement with Time, Incorporated, whereby the latter agreed to supply its magazine Time to all subscribers of The Digest who would accept it. The claimant then undertook to get its customers to agree to the substitution of Time for The Digest and succeeded in some twenty-six thousand instances. No claim is now made for damages as to that many subscriptions.

About one thousand of the claimant's customers refused to receive Time in lieu of The Digest and on each such subscription Time, Incorporated, later paid the claimant sixty cents to secure a cancellation of those subscriptions.

Negotiations between the debtor and the claimant were carried to the point where the debtor wrote the claimant on May 12, 1938 in a letter as follows: - "This is to confirm our mutual agreement to terminate as of the commencement of business May 12, 1938, our memorandum of agreement dated August 13, 1937, and to waive and release all further rights and obligations arising thereunder after said date. It is expressly understood, however, that this shall not affect or modify any existing rights and obligations in respect of subscriptions which were secured by your agents and accepted by you on or before May 11, 1938 and your orders for which were delivered to us prior to the date hereof".

At the foot of this letter was the following confirmation signed by the claimant; "We hereby confirm the foregoing agreement this 12th day of May 1938."

The trustee of the debtor insists that theer was no breach of the August 13th contract which would give rise to a claim by this claimant since the entire obligation thereunder of the debtor to the claimant was to accept subscriptions; that if, after such acceptance, the subscriptions were not filled by the debtor the only claims allowable would be to those to whom the claimant had sold the subscriptions and to whom the magazine was to be delivered.But we cannot agree that that contract is to be so construed. The parties were independent contractors. The debtor knew that its magazine was being sold in combination with others and with merchandise and that the only contracts with the persons who were to receive The Digest were those made with them by the claimant. There was no contract made, or agreed to be made, by the debtor with those to whom The Digest was to be sent. The precise agreement of the debtor was "to accept subscriptions for The Digest from" the claimant. The claimant was the subscriber and became entitled to have the magazine sent to its customers who were merely its nominees to receive it. So the failure of the debtor either to accept the subscriptions tendered by the claimant or to send the magazine to its nominees after acceptance was a breach of the contract of August 13, 1937 for which the claimant may prove such damages as it sustained provided subsequent arrangements are no bar.

However, as to the subscriptions which were cancelled upon the payment to the claimant by Time, Incorporated of sixty cents each the referee found that there was an accord and satisfaction which left the claimant no provable damages. While the evidence is not very full upon that point and the district judge was doubtful of its sufficiency, we agree with the referee that any claim on that score has been met by proof of an accord and satisfaction. When claimant cancelled the subscriptions in return for the payments it received it no longer was a subscriber to The Digest and without showing that the payment was received only to lessen the damages with some reservation of its right to seek further redress from the debtor the claimant deprived itself of any basis for a claim based on cancelled subscriptions. See, Paine v. Standard Plunger Elevator Co., C.C., 192 F. 75; affirmed, 3 Cir., 203 F. 242. The payment it received for each cancellation is also to be treated as the consideration for its release of the obligation of further performance in respect to those subscriptions. Coletti v. Knox Hat Company, 252 N.Y. 468, 169 N.E. 648. Though the payments were not made by the debtor, they were made by one under contract with the debtor to fill ...

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