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December 9, 1974

In the Matter of LAW RESEARCH SERVICES, INC., Debtor-Appellant, Lawrence Bengert, Claimant-Appellant

Werker, District Judge.

The opinion of the court was delivered by: WERKER

WERKER, District Judge.

The debtor in this case, Law Research Service, Inc. (LRS), a New York corporation, filed a petition for an arrangement with its unsecured creditors pursuant to Chapter XI of the Bankruptcy Act on June 18, 1971. By order dated June 20, 1972, as amended on July 6, 1972, Bankruptcy Judge Asa Herzog confirmed the debtor's plan of arrangement, and provided for a subsequent hearing of all "objections to claims which have been proved and filed but not allowed or disallowed herein prior to the date hereof." One of the objections raised by debtor pursuant to Judge Herzog's order was directed to Appellant Bengert's claim, which had been filed with the Bankruptcy Court on February 18, 1972.

 The grounds for objection were stated in debtor's Motion to Reduce or Expunge Claims as follows:

Claimant asserted a lien against the proceeds of the suit by debtor against Western Union Telegraph Company in the amount of $36,691.77. A default judgment was obtained by claimant against the debtor prior to filing of the petition for Chapter XI. Said default judgment was obtained in the State of Connecticut.
The basis of objections is: Said claim should be set aside for the reason that no process, summons or notice of any kind of the commencement of a suit was served by the claimant on the debtor or anyone on behalf of the debtor.

 As a result of debtor's motion, which raised objection to a large group of claims, the controversy as to Mr. Bengert's claim was examined at a plenary hearing on April 9, 1973. *fn1" This is an appeal from the order of Bankruptcy Judge Herzog, dated January 9, 1974, sustaining Mr. Bengert's claim against the debtor's objection, but granting it unsecured status only. Each side is appealing from that part of the order which it finds adverse.

 A Bankruptcy Judge's findings of fact must be accepted by the District Judge on appeal unless clearly erroneous. Rule 810, Rules of Bankruptcy Procedure. Judge Herzog's findings, which are not clearly erroneous, are as follows:

The debtor's business was the marketing of computerized legal services using a New York computer and the nationwide communication lines of Western Union Telegraph Company of New York. By advertising in the New York Times the debtor solicited franchisees to sell its services in designated territories.
Mr. Bengert, a resident of Connecticut, read the advertisement in a Sunday edition of the Times and as a result, entered into an agreement with debtor to sell its services in Fairchild County, Connecticut on a commission basis. Similar franchises were granted to two other persons in Connecticut.
The franchise agreement provided that the debtor receive all prospective inquiries from franchise advertising and publicity, that it service all inquiries of Fairchild County "subscribers' by using its computer retrieval system, that it handle all billing and accounting, paying a commission to Mr. Bengert on a monthly basis, and that it control all promotion of the Bengert franchise; claimant Bengert was merely a sales agent for debtor. Pursuant to the agreement, debtor mailed letters to attorneys in Fairchild County advertising its services. As a result thereof Mr. Bengert received responses from two or three attorneys and paid sales calls to them. He sold a Thesaurus (index to LRS services by subject and code number) to one attorney, who received it by mail from debtor, and was billed for it by debtor. He sold another LRS service referred to as "a special inquiry" to "someone in Connecticut," who was also billed by debtor from New York. The debtor corresponded with Mr. Bengert about arranging to furnish its services to law libraries in Connecticut, but nothing was done to implement this idea.
When debtor breached its contracts with its franchisees, as a result of Western Union's failure to allow the use of its computer, Mr. Bengert had the Sheriff garnish the Western Union debt to LRS by serving copies of a writ, summons and complaint for breach of contract on the Connecticut Secretary of State as agent designated for that purpose by Western Union. The Secretary of State mailed a copy to Western Union.
Mr. Bengert also sought in personam jurisdiction over the debtor by serving two other copies of the writ, summons and complaint on the Connecticut Secretary of State pursuant to the Connecticut long-arm statute. The Secretary mailed a copy to the debtor, but the mail was returned marked "Not Accepted."
Debtor's president was aware of the suit and the garnishment in January 1970. Debtor deliberately ...

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