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AINGER v. MICHIGAN GEN. CORP.

August 28, 1979

ARTHUR W. AINGER, GEORGE B. DAVIS, DAVID ZENTNER, WALTER WEIDENBAUM, EDWARD SILVEY and SAMUEL J. CAMPBELL, Plaintiffs,
v.
MICHIGAN GENERAL CORPORATION, Defendant.



The opinion of the court was delivered by: CANNELLA

After a bench trial, the Court finds defendant liable to plaintiffs on their complaint for breach of contract, and plaintiffs liable to defendant on its counterclaims for breach of warranty and fraud.

FACTS

This lawsuit, between the sellers and the purchaser of a paperback book publishing company, actually centers on a controversy between the publisher and the author of a series of paperback books. The events giving rise to liability occurred between January 1972 and November 1973, but the history of the relationship between the author and the publisher is necessary to an understanding of the significance of those events. The facts are largely undisputed, reflected in the numerous documents introduced at the trial. Facts pertinent only to damages are incorporated into the discussion of that issue. Jurisdiction is based on diversity of citizenship.

 In 1965, plaintiff David Zentner was the publisher of a "sophisticated" men's magazine which was distributed by the Kable News Company ("Kable"). In the summer of that year Zentner entered into an agreement with the co-plaintiffs Samuel Campbell, George Davis, Arthur Ainger, Edward Silvey, and Walter Weidenbaum who were then stockholders, officers, or employees of Kable. *fn1" Under the agreement, the plaintiffs became the sole stockholders of Bee-Line Books, Inc. ("Bee-Line"), a corporation formed to publish erotic paperback books. Zentner was the president and chief operating officer of Bee-Line. The other plaintiffs were, for the most part, "silent partners" in the business, and Weidenbaum, an attorney, functioned as the liaison between Zentner and the other stockholders. Kable distributed the books published by Bee-Line, and its promotion likely contributed to Bee-Line's early success. Among the authors writing for Bee-Line was Donald Pendleton, who wrote six or seven erotic books which were published by Bee-Line in 1966 and 1967. *fn2"

 By 1968, Bee-Line had published, in addition to its erotic books, a number of titles directed to a wider audience. In the early summer of that year, Zentner and Weidenbaum were exploring the possibility of Bee-Line's entering the "mass market" paperback business. To this end, they had several meetings in May and June with Lyle Engel, another publisher, who had had great success with "series" paperbacks. (Although there are other types of series, for purposes of this case, a series may be defined as a number of books with a common main character; examples include Tarzan, Fu Manchu, and, more recently, James Bond.) Zentner and Weidenbaum were not particularly inspired by any of Engel's suggestions for a series, and they believed that they could develop a better concept themselves.

 According to Zentner and Weidenbaum, they were walking on Third Avenue in midtown Manhattan, after a luncheon meeting with Engel, when the following conversation took place:

 
Mr. Weidenbaum said to me (Zentner), "What do you think of an idea that just occurred to me? Suppose we use a man, an anti-hero type, who is a trained jungle fighter in Vietnam, and whose life is destroyed because his family has been damaged irrevocably by the Mafia, and who gets a leave of absence due to hardship from the Army, . . . comes home, finds these terrible conditions, and tries to go on a one-man crusade to eliminate this evil from the face of the earth?" And spontaneously he said, "Let's call him "The Executioner'."
 
I thought it was a tremendous title, tremendous name, for such an individual, and in further discussion Mr. Weidenbaum said to me, "Why not have him then, this Executioner, go from city to city, find the strong holders of the Mafia in each city, and destroy them in this single one-man campaign to eliminate the Mafia?" *fn3"
 
In further discussion, Weidenbaum and Zentner named their character "Matt Bolan," and decided to approach Don Pendleton to see if he would be willing to write the books.
 
During a telephone conversation in mid-July 1968, Zentner outlined the Executioner concept to Pendleton. *fn4" On or about August 19, 1968, Pendleton submitted a synopsis of the proposed book to Zentner, *fn5" and in October, Pendleton signed a contract to write the book. *fn6" The Executioner books, along with other mass market paperbacks, were published under the "Pinnacle" imprint or trade name, to avoid the taint of Bee-Line's reputation.
 
Pendleton's version of the inception of the series differs. Pendleton testified, at his deposition, that, during the July telephone conversation, Zentner said that he was interested in manuscripts suitable for mass market publication. Pendleton acknowledged that Zentner had suggested the name "The Executioner" as an anti-hero protagonist at war with the underworld. *fn7" Pendleton testified, however, that he told Zentner during the telephone conversation that he had "been developing a theme for over a year regarding a Viet Nam trained soldier who returns to this country and declares a holy war on organized crime." *fn8" This was a result of a series of conversations that Pendleton had with third parties over a year before his conversation with Zentner. Additionally, Pendleton drew on his own military experience in developing this idea. Pendleton also claimed to have developed the name "Mack Bolan." *fn9"
 
In any event, Pendleton began writing the series and it became a great success. Bee-Line published the first two books in 1969, two more in 1970, and five in 1971. *fn10" By January 1972 more than four million copies of these nine books were in print.
 
Zentner believed there was more money to be made if a way could be found to get Pendleton to produce more manuscripts, perhaps as many as nine each year. Following a conversation with Andrew Ettinger, who had been editing the series, Zentner decided to invite Pendleton to New York to discuss the situation. Pendleton arrived in mid-January 1972 for a three-day visit. This was the first face-to-face meeting between Pendleton and Zentner and it marks the beginning of the dispute that is the gravamen of this lawsuit.
 
On the last day of Pendleton's visit, just before he was to depart for the airport, he met with Zentner and Ettinger in Zentner's office. At that time, Zentner told Pendleton that the series could be an even greater success than it already was if Pendleton would write more books each year. Pendleton did not believe this was possible. Zentner then suggested the possibility of Bee-Line's hiring other writers to assist Pendleton in the preparation of manuscripts. Pendleton stated he did not think that other writers would be able to maintain the artistic quality of the series. Zentner then stated that his suggestion was not entirely up to Pendleton because the series belonged to the publisher which could assign authors to write the books as it saw fit. This infuriated Pendleton, who proclaimed "Nobody else is going to write my books." After further heated discussion along these lines, Pendleton stormed out of the Bee-Line offices, into a waiting taxicab.
 
Upon Pendleton's return home, he wrote a letter to Zentner, dated January 21, 1972, reading in part:
 
Regarding our point of disagreement, just one postscript please. I will take whatever steps are necessary to insure a steady flow of Executioner books, of the quality and quantity desired, but this is and must be my personal responsibility. . . .
 
I am not a Pinnacle hired hand.
 
I do not rent myself (or my name) to anyone.
 
I do not write "on assignment."
 
Let's keep those ideas visible in our association. Otherwise, I will be compelled to assert my legal position and I doubt that either of us wish to begin hurling legalities at each other. . . .
 
Mack Bolan is my creation. All of the characters, incidents, plots, situations, and every word of dialogue used in each of the books are my creations. In a strictly legal sense, even "the Executioner" is my creation but I stand more on ethics than on legalities, and I would not contest your independent use of the Executioner tag. I would, however, descend with all the fury of an outraged plagiarism victim if any attempt was made to steal Mack Bolan and/or any of his attendant creations. It is important that you understand that implicitly. *fn11"
 
On receipt of this letter, Zentner convened a meeting of his staff, sending them a memorandum dated January 24, 1972, reading in part:
 
I think, at this stage, that if anything were done about another author he (Pendleton) might panic and either break down completely or force some unreasonable action in view of his basic emotional insecurities.
 
He made it unmistakable to me that he thinks he "owns" the series. Somehow, he believes that he even originated if not the idea itself just about everything else. *fn12"
 
Zentner, Ettinger and Weidenbaum met in late January or early February to discuss the Pendleton situation. After Zentner and Weidenbaum recounted their version of the creation of the series, Weidenbaum suggested that a letter be sent to Pendleton. He prepared a handwritten draft of a letter for Zentner's signature that set out the development of the series and the position that the publisher was taking, namely, that the publisher created and owned the series and that while Bee-Line would be most pleased to have Pendleton continue to write, it would make other arrangements if necessary. After further discussion, it was decided that the letter might provoke Pendleton and could delay the receipt and publication of future books. Accordingly, it was decided that Zentner would telephone Pendleton in an attempt to bring him back into the fold. As to what next occurred, there are conflicting versions.
 
Zentner testified that shortly after the staff meeting he telephoned Pendleton, reminded him of the history of their relationship, and of how Pendleton's success was largely owing to Zentner's efforts. As a result of Zentner's comments, Pendleton became very contrite, apologized profusely for creating the incident, acknowledged the publisher's ownership of the series, and said that he was just upset about the idea of other authors. He told Zentner to tear up the original of the letter of January 21, and said that he withdrew the statements it contained, and was tearing up his own copy. Zentner then asked Pendleton to send a telegram withdrawing the letter, which Pendleton subsequently did.
 
Pendleton testified, at his deposition, that he never spoke to Zentner, or to anyone from Bee-Line, concerning the contents of his January 21 letter. He specifically denied telling Zentner to tear up the letter and stated that he did not send a telegram to Zentner.
 
Weidenbaum testified that Zentner told him, shortly after the meeting, that he had spoken with Pendleton and that Pendleton acknowledged that the publisher owned the series and had withdrawn his comments of January 21. Although Weidenbaum had requested that Zentner get something in writing from Pendleton which acknowledged the publisher's ownership of the series, he never saw the telegram from Pendleton, or any other writing to that effect.
 
Ettinger testified that he had no conversation with either Pendleton or Zentner regarding Zentner's alleged telephone call to Pendleton. Ettinger did not recall whether Zentner told him about Pendleton's instructions to tear up the letter. Nor, did Ettinger ever see the telegram. Nonetheless, Ettinger believed there had been a discussion between Pendleton and Zentner because "certain operating decisions were made shortly thereafter which seemed to calm the stormy waters." *fn13" Specifically,
 
we began paying Mr. Pendleton more money and on a regular basis and one of the sources of his problem was that he was always in financially dire straits and the fact that we were paying him more money seemed to solve the problem, and I had assumed, although I was not told, we settled the problems. *fn14"
 
In early March, Pendleton wrote to Ettinger regarding the delay on the part of the publisher in executing the contract for the 12th book in the series. Pendleton was concerned because contract execution triggered an advance payment, which he had not received. With regard to the ownership question, the letter states:
 
Perhaps I should remind you that common-law protection of the non-copyrighted portions (sequels) of my series is all in my favor in the event of a break in continuity of our publishing agreements. . . . An inordinate delay in contractual acceptance (already a fact) could be viewed as a rejection, in which case I may place the manuscript for publication with whomever I please. *fn15"
 
The contracts Pendleton referred to were eventually sent to him. He sent the signed copies back to Pinnacle covered by a letter to Ettinger, dated March 10, 1972, reading in part:
 
(I)n the matter of future contracts, I can understand Mr. Zentner's reasoning regarding carrying the copyrights in the name of the house. To keep everybody happy, though, let's add to future contracts, Clause 5, the following wordage:
 
"In the event that copyright is registered in the name of the Publisher, such copyright is to be held in trust for the Author. The Publisher agrees to promptly re-convey copyright to the Author upon the Author's written request." *fn16"
 
At about this time, Bee-Line was negotiating the sale of the motion picture rights to the Executioner to Avco Embassy Pictures. Pendleton learned of these negotiations, and in a letter to Zentner dated March 13, 1972, he revoked a power of attorney he had granted to Zentner to negotiate and execute such contracts on his behalf. *fn17" Zentner telephoned Pendleton on March 17 and told him that the motion picture contract could make them both rich men, and that Pendleton's conduct was jeopardizing the deal. Pendleton evidently agreed, and in separate letters to Zentner, both dated March 20, Pendleton reinstated Zentner's power of attorney, *fn18" and covered a signed copy of the motion picture contract with a letter to Zentner, reading in part:
 
My wife told me, David, nearly four years ago, that David Zentner was going to make me rich one day.
 
From the bottom of my heart, Dave, thank you. *fn19"
 
At about the same time, the spring of 1972, defendant Michigan General Corporation ("Michigan General") was in the business of acquiring other companies. To this end, Michigan General utilized the services of various "finders" to alert it to potential acquisitions. Through Dave Daynard, Michigan General learned that the stockholders of Bee-Line were interested in selling that company. *fn20" The match was made and the betrothal is memorialized in an agreement dated May 29, 1972, executed by all plaintiffs, and providing in pertinent part:
 
Seller and Shareholders shall further warrant . . . that Seller is not involved in litigation and has not been notified of any claims which could give rise to litigation . . .. *fn21"
 
At about this time, Bee-Line changed its corporate name to Carlyle Communications, Inc. ("Carlyle"), which continued to use the Bee-Line name as an imprint or trade name for its erotic paperbacks, and the name "Pinnacle" for its mass market paperbacks. As it turned out, Michigan General was unable to obtain financing for the purchase of the erotic book portion of Carlyle's business. Consequently, the deal was restructured to allow Michigan General to "spin off" the Bee-Line division by having Carlyle convey all of its assets to a subsidiary of Educasting Systems, Inc. (not a party to this lawsuit), which would then convey all the assets, except the Bee-Line division, to Michigan General's subsidiary. *fn22"
 
After a number of subsequent agreements, *fn23" the acquisition was consummated on January 12, 1973. Michigan General purchased the assets of Carlyle, not including the Bee-Line division, for $ 2,573,115. Additionally, Carlyle retained $ 390,373 against potential tax liabilities, on condition that these funds would be distributed to the selling stockholders if not required for payment of taxes. There is no dispute that the various warranties made by the plaintiffs, as stockholders of Bee-Line and later as stockholders of Carlyle, run to Michigan General. Defendant incorporated the newly acquired business under the name Pinnacle Books Inc. ("Pinnacle").
 
The Executioner series was a topic of much discussion during the acquisition negotiations. The person negotiating on behalf of Michigan General was Stanley Springer, defendant's vice-president and general counsel. Zentner spoke for Carlyle and the stockholders concerning the Executioner series. In a letter to Michigan General dated May 29, 1972, the same date as the original agreement between the parties, Zentner warranted "that no single author and no single series, such as the Executioner series, accounts for more than 30% Of the sales volume of the Company or of the Pinnacle Line." *fn24"
 
During the course of the acquisition negotiations, Springer had occasion to examine some of the books Bee-Line had published. In one of the series paperbacks, not the Executioner, Springer came across a book where the copyright had not been registered in the name of the publisher. Springer decided to explore the matter further.
 
On or about November 6, 1972, Springer visited Carlyle's offices in New York. At that time Springer received a list of the series works that had been published along with excerpts from the authors' contracts concerning these books. *fn25" Springer also asked to see a copy of the last contract with Pendleton and any correspondence with the author, and received a copy of the contract for Executioner No. 15, *fn26" a letter from Pendleton, dated July 29, 1970, which enclosed a copy of an agreement, dated July 17, 1970, and a letter from Zentner to Pendleton dated March 20, 1972.
 
Springer reviewed these documents, and on his return to Michigan General's Dallas offices the following day, he reported to defendant's other officers "that Carlyle does not have any specific contract which says that it owns all rights to any particular Series." *fn27" Michigan General decided to seek outside legal advice.
 
That same day, November 7, 1972, Springer wrote to a New York City law firm said to be well versed in copyright matters and other legal problems of the publishing industry. He enclosed copies of the documents received from Carlyle and advised the lawyers that Michigan General wanted "to make sure that Carlyle owns . . . the basic rights to the concept and characters in each Series." *fn28" In an opinion letter, dated November 11, 1972, the lawyers stated, in part:
 
After reviewing the various contracts and letters that exist by and between Pinnacle (Carlyle) and Don Pendleton, the author of The Executioner series, it is our opinion that, except for the limited rights specified in the papers, Pinnacle does not have any right or claim of right with respect to the character Mack Bolan, the central figure in the series, as against Pendleton's subsequent use thereof.
 
As between Pinnacle and Pendleton, the whole question of scope of copyright protection is slightly irrelevant because Pinnacle has simply failed to tie up all of the rights in and to the series as well as the character portrayed.
 
. . . Thus, if Michigan General is set on acquiring character and series rights of substance, it is essential that Pendleton and Pinnacle enter into a new contract drafted properly to provide for same. *fn29"
 
Springer provided a copy of the opinion letter to the officers of Michigan General, covered by his own memorandum, reading in part:
 
It seems clear, however, that we (Michigan General) must ultimately secure something from Don Pendleton, and we should give consideration to whether it is politically better to contact him after our acquisition as opposed to doing so in the midst of it.
 
Our principal risk, I believe, is the possibility that Carlyle personnel may have exaggerated their contributions to the creation of the Executioner Series and Pendleton may, in fact, be the creator of the character. It may be appropriate, therefore, to secure a warranty from Carlyle as to those facts. *fn30"
 
In subsequent correspondence with Zentner, Springer requested "validation, in writing, of the representations made to us that Carlyle is the owner of all rights to the concept and characters embodied in the Executioner Series," *fn31" and "a signed memorandum setting forth the facts establishing your creation of the concept of the Executioner Series." *fn32"
 
Springer received two letters in response to these requests. The first, dated December 5, 1972, was from Weidenbaum. It recounted the version of the creation of the series to which he later testified and it expressly assigned to Carlyle any rights Weidenbaum had in and to the Executioner. The letter also stated:
 
Dave (Zentner) assured me that he met with Pendleton, gave him our ideas for plot, locale, and principal characters and that it was clearly understood between them that the series title "Executioner" series, the war with the Mafia concept, and characters, particularly Mack Bolan, would belong to our corporation.
 
It is, also, my understanding that the copyright in each published title in the series has been taken in the name of the publisher, rather than the author which is the custom in the industry because the author accepts the fact that all of the books in "The Executioner" series are the property of the publisher, and not the author. *fn33"
 
The second letter, dated December 6, 1972, was from Zentner. This letter also related Zentner's version of the creation of the series and concludes, in part:
 
(W)e have always approved, and still do before any book is written or contracted for the basic plot, the locale and a general outline of the story. Don Pendleton has publicly and in many conversations with both myself, my editor and other staff members, always willingly and gratefully acknowledged the fact that we created the EXECUTIONER idea and concept, and that he started working originally on an assignment basis. From Book # 1 through Book # 15 (now in progress) copyright for all EXECUTIONER books has been registered with the U.S. Copyright Office in the name of the publisher and NOT in the name of the author, as is customary. This is the distinction used in the publishing industry to indicate that the publisher basically owns the rights to the book and/or series. *fn34"
 
Springer forwarded these letters to his lawyers and requested their opinion regarding "the minimum language change which could be made in the standard contract with Pendleton so that when the next contract is executed it will confirm that the publisher has the rights to the series." *fn35" Springer further advised the lawyers that their proposed changes should "not be sufficiently startling to require any particular discussion or protracted negotiation with Pendleton." *fn36" The lawyers responded by letter dated December 26, 1972, proposing two avenues of approach: a rider to the existing contract or certain amendments on the standard contract form. *fn37"
 
Springer also had a number of conversations with Zentner during November and December. According to Springer, he told Zentner that the Executioner series was "the key to the whole transaction," and that Michigan General "had to have absolute assurance that Pinnacle or Bee-Line owned this series." *fn38" Zentner did not recall being told by Springer that there would be no deal without evidence of ownership. *fn39" There is no dispute, however, that Springer asked Zentner about the possibility of Springer's speaking with Pendleton prior to the closing. Zentner discouraged this approach saying that Pendleton was very temperamental and that any discussion with him concerning contract modifications could delay his production of manuscripts. In this regard, the parties have agreed "for the purposes of this case that Mr. Pendleton was totally unpredictable and everybody knowing him knew he was unpredictable." *fn40" Neither Springer nor any other representative of Michigan General spoke with Pendleton prior to the closing.
 
As mentioned earlier, the deal closed on January 12, 1973 and Michigan General formed a subsidiary named Pinnacle Books, Inc., to own and operate the newly acquired company. The acquisition did not change the day-to-day operations of the business. Zentner remained as president of the new corporation and most, if not all, of the staff continued to be employed in the same capacities as before the acquisition. Springer testified that this was standard acquisition policy for Michigan General:
 
We (Michigan General) specialize in acquiring small companies that have been successful and leaving (them) alone. We don't interfere in the management. . . . We don't know anything about the business to begin with and we are not going to run it ...

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