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In re United Network Inc.

decided: May 8, 1972.


Murrah,*fn* Kaufman and Oakes, Circuit Judges.

Author: Murrah

MURRAH, Circuit Judge:

The claim and counterclaim in this Chapter XI reorganization proceeding arise out of a complicated contract between the debtor corporation and one of its creditors. The case ultimately turns on the interpretation of this contract and the applicability of § 7-101 of the New York General Obligations Law, McKinney's Consol.Laws, c. 24-a. Both the bankruptcy referee and the District Court gave controlling effect to the statute and granted judgment for the debtor corporation on the counterclaim. 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 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 night clubs. Overmyer arranged to rent the necessary color television cameras and related equipment from LewRon Television, Inc. (LewRon), and the parties entered into a written 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 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 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; otherwise, 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 recive from renting the equipment to another party.

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 contracts. 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 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 days' 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 thirteenweek 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 additional 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 specifically provided that "in no event shall LewRon be required to refund any payments theretofore made to LewRon."

Subsequent to 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. 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 payments granted -- were also changed accordingly. Additionally, 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 payment 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 Overmyer 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 XI of the Bankruptcy Act, 11 U.S.C. § 701 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 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 primarily of overtime and living expenses for technical supervisors 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*fn1 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 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 findings of fact and conclusions of law disallowing all of LewRon's claim except for the two weeks' rental 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 LewRon's approved claim of $33,593.34*fn2 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.

Upon review by the District Court, the referee's order was affirmed with a modification eliminating use of LewRon's approved claim as a set-off.*fn3

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 payments on a contract for the use or rental of personal property 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 ...

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