Law Research Service, Inc. v. Crook

• Decision Date: 21 July 1975
• Docket Number: D,No. 435,435
• Citation: 524 F.2d 301
• Parties: In the Matter of LAW RESEARCH SERVICE, INC., Appellant, v. John Herbert CROOK, Appellee. ocket 74-2073.
• Court: U.S. Court of Appeals — Second Circuit

Page 301

524 F.2d 301

In the Matter of LAW RESEARCH SERVICE, INC., Appellant, v. John Herbert CROOK, Appellee.

No. 435, Docket 74-2073.

United States Court of Appeals, Second Circuit.

Argued March 7, 1975.

Decided July 21, 1975.

Ellias C. Hoppenfeld, New York City (Krause, Hirsch & Gross, New York City, of counsel), for appellant.

Richard L. Aronstein, New York City, for appellee.

Before FRIENDLY and GURFEIN, Circuit Judges, and BARTELS, ^* District Judge.

FRIENDLY, Circuit Judge:

This appeal arises as a consequence of the financial embarrassment of Law Research Service, Inc. (LRS), which has generated a considerable volume of litigation. ¹ LRS, for a time debtor in possession in a Chapter XI arrangement proceeding, is appealing from an order of Judge Motley in the District Court for the Southern District of New York, affirming an order of Bankruptcy Judge Asa S. Herzog which, over the objection of LRS, allowed the claim of John Herbert Crook for $25,923.65, plus interest at 8 per cent since November 28, 1969, as a secured claim and refused to rule that such allowance would preclude Crook from pursuing a related claim against the reorganized company, and also denied LRS' motion for reargument. The most serious problem is a jurisdictional point advanced by LRS on appeal for the first time. Because of the inadequacy of the portions of the record of the bankruptcy court that were transmitted to us to enable us to pass upon this and the equally inadequate briefing, we have been obliged to engage in more than the ordinary amount of research both to dig out the facts and to determine the applicable rule of law.

I. The Facts and the Proceedings Below

LRS is a New York corporation which offered computerized legal research services to attorneys. Certain legal materials, notably court decisions, were to be stored in a computer owned and operated by Western Union in New York and be retrieved by inquiries through teletype machines over Western Union communication facilities. LRS' services were to be offered throughout the nation by means of a network of franchises. Claimant Crook signed a franchise agreement on March 29, 1966, which entitled him to act as "Director" with exclusive rights to promote the service in the areas surrounding Austin and San Antonio and to share in the profits arising from his sales efforts. He paid a total of $15,500 for the franchise. LRS promised to use its best efforts to develop and make available its computer library within six months of the date of the agreement.

When a dispute arose between LRS and Western Union concerning the use of Western Union facilities and LRS was unable to meet its obligations to Crook, he filed suit in a Texas court against LRS, Ellias C. Hoppenfeld, its majority stockholder and president, and one Thatcher, whose fraudulent misrepresentations allegedly induced Crook to purchase the franchise. Making a variety of contract and tort claims, ² Crook sought some $94,900 for damages suffered during the period June 1, 1966, through May 31, 1967, when he ceased incurring expenses. ³

Meanwhile LRS had commenced an action for breach of contract in the Supreme Court of New York, New York County, against Western Union, which had withdrawn use of the computer and thereby rendered LRS unable to meet its service obligations to its franchisees. The Supreme Court found in favor of LRS on May 27, 1968, Law Research Service, Inc. v. Western Union Telegraph Co., No. 20092 (Sup.Ct., N.Y.Co.), on the issue of liability, and appointed a special referee to determine the damages sustained. Six months later, on November 28, 1969, Crook and LRS signed the agreement and assignment which gave rise to this appeal.

The agreement noted that Crook had commenced his Texas court action against defendants and that "defendants are desirous of adjourning the trial of the said suit until May 31, 1970, and making certain other provisions in regard thereto" and provided that LRS agreed to execute an assignment, in the amount of $25,923.65, with interest of 8 per cent from the date of the agreement until the date of payment, of its claim against Western Union and any sums recovered in connection with that claim. ⁴ In return, Crook agreed to adjourn the Texas trial "to May 31, 1970, at which time, if the aforesaid assignment has not been paid in full, the plaintiff may proceed to trial . . . (in Texas) as if this Agreement had not been executed." The assignment was to be "without prejudice to the rights of the parties in the suit now pending" in Texas. If the assignment was not paid in full by the specified deadline, the trial would proceed at Crook's instance without either party being able to assert the assignment or agreement from which it arises as an admission by the other. On the other hand, "(u)pon full satisfaction and payment of the said assignment before May 31, 1970," Crook was to discontinue the Texas action and return the franchise papers and other materials and both sides were to execute general releases. The defendants in the Texas action warranted, inter alia, that the claim of LRS against Western Union had not been assigned or encumbered in excess of $200,000, aside from attorneys' fees.

The assignment accorded with the agreement. LRS assigned to Crook "the interest of the Assignor in said claim to the extent and amount of $25,923.65" plus interest as above and "irrevocably appoints the Assignee its attorney . . . to use all lawful means for the recovery of the amount of $25,923.65 with interest thereon . . . and upon payment to acknowledge satisfaction or to discharge such judgment to the extent of said sum of $25,923.65 with interest . . . ." The assignment itself did not mention any deadline for payment.

This assignment was served upon Western Union and was filed with the New York County Clerk's Office on June 22, 1970. On the following day, the New York Supreme Court entered a judgment against Western Union in the sum of $1,064,551.61. This judgment, however, was appealed.

LRS failed to make payment or satisfaction on the assignment to Crook before the deadline date of May 31, 1970, because, we are told, "Law Research did not receive the proceeds of its claim against Western Union until some time in 1972." However, it claims that in October or early November of 1970 Hoppenfeld offered to pay Crook the full amount of the assignment, including interest, but that Crook refused to accept payment and execute a general release as the agreement allegedly required. LRS therefore commenced an action against Crook for specific performance in December 1970 in the New York Supreme Court, which it says is still pending.

In the meantime, however, Crook continued to pursue his action in Texas. The Texas court declined to permit a special appearance by the defendants and a jury found for Crook on July 17, 1970. Crook v. Law Research Service, Inc., No. 161,798 (53d Dist., Travis Co., Texas). On defendant Hoppenfeld's motion, however, the court set aside the verdict in September 1970, after which there ensued, according to the Texas court that ultimately heard an appeal on the second trial there, "a great deal of legal skirmishing between the parties." Hoppenfeld v. Crook, No. 12,058 (Ct.Civ.App., 3d Dist., July 18, 1973), mem. op. at 3. ⁵

On June 18, 1971, LRS filed a petition for an arrangement under Chapter XI of the Bankruptcy Act in the District Court for the Southern District of New York. Crook soon thereafter filed an application to preserve the claim asserted in Texas against discharge, Bankruptcy Act § 17c(2), on the ground that it was based upon a liability for obtaining money or property by false pretenses or false representations. Bankruptcy Act § 17a(2). He asked for a determination of nondischargeability and a trial "of all the issues in this proceeding" for actual damages of $44,490.66 and exemplary damages of at least $50,000. On December 9, 1971, Bankruptcy Judge Herzog held that Crook was entitled to a jury trial, Bankruptcy Act § 17c(5), on the issues of liability and dischargeability, Bankruptcy Act § 17c(3). His opinion was concerned primarily with the question of jury trial; ⁶ apparently LRS did not then raise the point that Crook could not pursue his larger claim if he sought to realize on the assignment.

Pursuant to § 324 of the Bankruptcy Act, LRS included with its petition for an arrangement a list of its creditors. Crook was named as a creditor, but his status (secured or unsecured) was not noted, nor was the amount of indebtedness. Crook was also included in a list of franchisees who had sued LRS prior to the petition. This list stated that Crook sought $144,000 in the Texas court. In its formal Schedule of Creditors filed August 31, 1971, LRS named Crook as an unsecured creditor who held a "Franchisee Contingent Claim," liability as to which LRS disputed, in the sum of $15,500, the amount paid by him under the franchise contract.

While LRS' New York judgment against Western Union was on appeal, the parties compromised the judgment in the sum of $1,440,000 in a settlement agreement of considerable complexity. The agreement, dated December 29, 1971, recited that the parties believed it to be "in the best interests of the debtor's estate" and that it would "enable the rehabilitation of the debtor in accordance with the purposes and policies of Chapter XI of the Bankruptcy Act," and it prescribed in detail the provisions of the arrangement which LRS was to submit for approval. Specifically, it stated that the arrangement was to provide for the following: (a) the payment in full of administrative expenses; (b) the payment in full of priority claims; (c) "the payment of the claims of secured creditors in accordance with existing agreements or such terms as may be agreed upon between LRS and the secured creditor"; (d) the classification of unsecured creditors claiming on the basis of franchises acquired, directly or indirectly, from LRS in a separate class...