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May 26, 1966

JAYARK FILMS CORPORATION, Diamond Industries, Inc. and Medallion Pictures Corporation, Defendants. JAYARK FILMS CORPORATION, Third-Party Plaintiff, v. Nat GASSMANN and K. J. Schrift, Third-Party Defendants

The opinion of the court was delivered by: BONSAL

BONSAL, District Judge.

 This action for breach of contract was tried to the Court on March 22-23, 1966. At the conclusion of the trial the Court dismissed plaintiff's complaint against the defendant Medallion Pictures Corporation and the third party action instituted by the defendant Jayark Films Corporation (Jayark) against third party defendants Nat Gassmann and K. J. Schrift was discontinued by stipulation of the parties without costs. Therefore there remains for decision only the main action of Hoche Productions, S.A. (Hoche) against Jayark and Diamond Industries, Inc. (Diamond).

 On October 27, 1958, Hoche entered into a contract with Diamond providing for the distribution of Hoche's film "Monte Carlo Baby". The contract was amended by further agreement between the parties dated November 28, 1958. Under the contract as amended Diamond was to use its best efforts to distribute the film (primarily in the United States). The agreement provided that 50% of the gross revenues derived from the distribution of the film would be paid to Hoche, a French corporation, and the balance of the gross proceeds after deduction of all costs and expenses would be retained by Diamond. Diamond further agreed to furnish Hoche with regular, complete and accurate accounts, with corresponding remittances, quarterly, not later than the 20th day of the month following the termination of each quarterly period. Hoche was given the right to inspect the accounts and the contracts entered into by Diamond, and the agreement provided that all statements rendered by Diamond to Hoche would be deemed accurate unless objected to within one year after they were transmitted to Hoche. Diamond paid Hoche $14,000 as an advance on the amounts which would be due Hoche under the contract. The distribution rights acquired by Diamond under the contract were to run for seven years.

 Shortly before the 1958 contract, Diamond acquired the distribution rights to a film "African Manhunt" and, unlike its contract with Hoche, Diamond was to retain all the proceeds of distribution. Diamond distributed the two films to TV stations throughout the United States.

 In July of 1959, Jayark purchased all the outstanding stock of Diamond and on July 15, 1959 received from Diamond an assignment of the distribution rights to the two films, which rights were Diamond's sole assets. On April 11, 1961, Diamond filed a Certificate of Dissolution in Delaware, the State of its incorporation.

 Upon assignment to it of the two films, Jayark continued their distribution. In connection with the distribution of the two films and other films to which Jayark had distribution rights, Jayark issued on August 17, 1959, a price list to its salesmen in which all the films were rated. Those with the lowest license fee were rated "A", the next "AA", and the highest "AAA". In this price list "African Manhunt" was rated "AA", while "Monte Carlo Baby" was rated "AAA", indicating that at that time Jayark thought that "Monte Carlo Baby" rated a higher license fee than "African Manhunt".

 The gravamen of Hoche's complaint is that Diamond and Jayark breached the 1958 contract by willfully and fraudulently failing to properly account to Hoche for the proceeds derived from the distribution of "Monte Carlo Baby" and by willfully and fraudulently allocating proceeds of the distribution of "Monte Carlo Baby" to "African Manhunt", which in most instances were distributed together as a package. Hoche seeks an accounting to determine the amounts due it by reason of the breach of contract, and punitive damages by reason of the alleged fraud.

 Mr. Ploss, a Certified Public Accountant, testified on behalf of Hoche that in February, 1962, and July, 1962, he made an audit of the available books and records of Jayark and of the records of Diamond in the hands of Jayark for the purpose of determining whether Jayark had accounted to Hoche in accordance with the contract. He testified that he was not allowed to see all the records which he thought relevant and that he found numerous errors; evidence of deliberate changes of figures on contracts and on accounts receivable cards; and, in at least one case, evidence that part of a contract had been deliberately altered. *fn1"

 Mr. Bass testified that he was the Comptroller of Jayark from 1955 to 1962 and that he made the allocations of proceeds derived from the distribution of the two films. Mr. Bass said that in making the allocations between the two pictures he merely followed the instructions given to him by Mr. Kaufman, the President of Jayark, or of his wife, who was the Secretary. He recalled that at one time he was given a general instruction to allocate 25% of the proceeds received from the distribution of the two films to "Monte Carlo Baby" and 75% to "African Manhunt".

 At the trial there were introduced some 103 distribution contracts entered into by Diamond and Jayark with various TV stations. In most cases there are attached to the contracts Diamond's or Jayark's accounts receivable cards showing the proceeds received under the contract and the allocation of the proceeds between the two films.

 A careful examination of these contracts shows that in 93 of the contracts "Monte Carlo Baby" was block-booked with "African Manhunt". In one instance (WWL), however, "African Manhunt" is allotted $250.00 on the accounts receivable card and "Monte Carlo Baby" only $150.00 where "African Manhunt" was not booked under the contract.

 In 42 of the 93 contracts in which "Monte Carlo Baby" and "African Manhunt" were blocked-booked, a specific license fee for each of the films appears on the face of the contract or in the purchase order attached thereto. On 4 of these contracts the specific license fee is written in, and in 2 of the contracts the license fee is changed. In the absence of initials or other indication that the licensees consented to these changes, it is likely that they were made by the defendant after the contracts were entered into. In each case these changes favor "African Manhunt" by ratios of 1:3 or better.

 In another instance Jayark entered into a contract on October 27, 1959, with WCBS for the distribution of 19 films for a total fee of $285,000.00. The license fee per film was set forth in the schedule attached to the contract and provided a license fee for "Monte Carlo Baby" of $10,500.00 and a license fee for "African Manhunt" of $11,000.00. When Mr. Ploss sought to examine Jayark's records with respect to this contract he found that part of the schedule setting forth the license fees per picture had been cut off and that the accounts receivable card showed an allocation of $6,600.00 to "Monte Carlo Baby" and $14,900.00 to "African Manhunt". This fraud on Hoche was proven at trial when the plaintiff called a representative of WCBS who produced the original contract between it and Jayark, showing the license fees per film.

 In 25 of the 42 instances where specific license fees are indicated, the fees for each of the two films are equal or nearly so. Despite this fact, the accounts receivable cards show that in 8 of these instances, a higher allocation was made to "African Manhunt" than to "Monte Carlo Baby". For example, in the KFSD contract $350.00 was stated as the license fee for each film, but on the accounts receivable card "African Manhunt" was allocated $600.00 and "Monte Carlo Baby" only $100.00. In the WJW contract the license fee is $800.00 ...

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