Ostano Commerzanstalt v. Telewide Systems, Inc., 633

• Decision Date: 23 June 1986
• Docket Number: No. 633,D,633
• Citation: 794 F.2d 763
• Parties: OSTANO COMMERZANSTALT and Dr. Herbert Jovy, Plaintiffs-Appellees, v. TELEWIDE SYSTEMS, INC. and Bernard L. Schubert, Defendants-Appellants. ocket 85-7415.
• Court: U.S. Court of Appeals — Second Circuit

Page 763

794 F.2d 763

OSTANO COMMERZANSTALT and Dr. Herbert Jovy, Plaintiffs-Appellees, v. TELEWIDE SYSTEMS, INC. and Bernard L. Schubert, Defendants-Appellants.

No. 633, Docket 85-7415.

United States Court of Appeals Second Circuit.

Argued Dec. 16, 1985.

Decided June 23, 1986.

Thomas R. Newman, New York City (Siff & Newman, P.C., Joann R. Blasberg, of counsel), for defendants-appellants.

William M. Barron, New York City (Walter, Conston & Schurtman, P.C., Jeff V. Nelson, Nathaniel D. Chapman, of counsel), for plaintiffs-appellees.

Before OAKES, KEARSE, and PIERCE, Circuit Judges

OAKES, Circuit Judge:

This diversity case involving licensing of the right to exhibit films concerns the propriety of benefit-of-the-bargain damages for fraud, the sufficiency of the evidence relating to damages for breach of contract and warranty, and the permissibility of an award of punitive damages. The United States District Court for the Southern District of New York, Robert L. Carter, Judge, after a bench trial, held that defendant Telewide Systems, Inc. ("Telewide"), and its president and sole shareholder, Bernard L. Schubert, had committed fraud, false representation, and fraudulent breach of warranty and that defendant Telewide had committed breach of warranty and breach of contract by entering into an exclusive contract granting distribution rights to twenty-six films when Telewide lacked authority to grant rights to eleven of those films. The court awarded damages for the three types of fraud claims established against Telewide and Schubert jointly and severally in the amount of $4,262,021.75. It held defendant Telewide liable for a similar sum for breach of contract and breach of warranty. The court also ordered $500,000 in punitive damages, for which Schubert and Telewide were to be jointly and severally liable, by virtue of the deliberate and willful nature of the fraud, Schubert's misrepresentations on the witness stand, and the introduction of fabricated evidence. The court's final order gave prejudgment interest in the amount of $1,751,165.48, plus interest to accumulate from the date of judgment. An award of attorneys' fees under consideration by the district court at the time of the appeal is not involved here. We affirm as to liability and reverse and remand as to damages.

Judge Carter's published opinion, Ostano Commerzanstalt v. Telewide Systems, Inc., 608 F.Supp. 1359 (S.D.N.Y.1985), sets forth the facts in depth and familiarity with it will be presumed. For our purposes it is sufficient to say that Telewide entered a licensing agreement with Video Communications, Inc. ("VCI"), giving VCI exclusive rights to show twenty-six feature films in eight European countries. This license was dated May 13, 1980, and ran for a period of twelve years at a total price of $442,000. The agreement provided that it would be interpreted in accordance with the laws of New York. ¹ By agreement dated May 20, 1980, VCI sublicensed the package of films to appellee Dr. Herbert Jovy, the chief stockholder of Ostano, at a contract price of $702,000. This sublicense to Jovy was superseded by an agreement dated November 26, 1980, in which VCI sublicensed the Telewide films to Ostano. The Ostano sublicense purported to transfer exclusive rights to distribute the twenty-six films not only in the eight European countries in the original license but also in additional territories: Liechtenstein, Morocco, Zaire, Monaco, and the Congo. The price of the sublicense remained the same. Plaintiffs brought suit against VCI in September 1981, alleging that VCI lacked distribution rights to some of the films. That action was settled; as part of the settlement, VCI assigned its rights in its contract with Telewide to Ostano.

Judge Carter made the finding, challenged here, that plaintiffs entered the sublicense agreement in reliance on Telewide's purported valid and exclusive ownership of the rights to the twenty-six films and on its purported authority to license, distribute, and exploit those films in the territory in question. 608 F.Supp. at 1365-66.

Telewide and Schubert argue that the fraud judgment should be vacated because there was insufficient proof that either VCI or Ostano relied on any misrepresentations made by Telewide or Schubert. They argue that VCI cannot be found to have relied on the alleged misrepresentations because it knew that Telewide had problems with two of the films by June 1980, well before making final payment in March 1981, and because VCI's lawyer, prior to March 1981, had personally reviewed the documentation for certain of the films and had verified who had the rights to them so that, at least as to the March 1981 payment to VCI, there was no reliance on Telewide. And appellants point out that in the November 1980 sublicense to Ostano VCI granted rights in territories not even mentioned in its license from Telewide; in sublicensing rights to Ostano that it never obtained from Telewide, VCI could not have been relying on Schubert's or Telewide's representations.

Similarly, appellants argue that Ostano did not rely on their misrepresentations because in November 1980, when the Ostano sublicense was entered into, Jovy was well aware that Telewide lacked rights to some of the films. They also argue that Jovy was willing to accept and rely on VCI representations and warranties and was not looking to Schubert or Telewide, as evidenced by the fact that Jovy caused payment of $331,000 to be made to VCI in March 1981, after receiving the VCI lawyer's assurances that he had personally verified rights to several of the films.

We disagree with appellants' contentions. While VCI may have had some questions regarding Telewide's rights to particular films, this does not mean that as a matter of law VCI could not have relied on Telewide's representations that, individual problems aside, Telewide had the authority to license this package of films. The district court found that misrepresentations of Telewide and Schubert induced VCI to enter the contract, 608 F.Supp. at 1365-66; this determination is not clearly erroneous.

With respect to Ostano, the district court found that VCI's negotiations with Telewide resulted in a deal only when Blair, VCI's president, advised Schubert that there was potentially a buyer (Dr. Jovy) for the twenty-six films involved. Id. at 1366. VCI was in effect a middleman; indeed, Telewide paid Blair a $15,000 "brokerage commission" for the transaction. Thus, Schubert knew that Jovy and Ostano would be the ultimate recipients of the license and might rely on the representations he made. See Peerless Mills, Inc. v. AT & T Co., 527 F.2d 445, 450 & n. 2 (2d Cir.1975). Since the leading case of Ultramares Corp. v. Touche, 255 N.Y. 170, 179, 174 N.E. 441 444 (1931), a fraudulent misrepresentation made with "notice in the circumstances of its making" that the person to whom it was made would communicate it to third parties subjects the person making the misrepresentation to liability to the third party. See Restatement (Second) of Torts Sec. 533 (1976). Thus, Schubert and Telewide had a duty to Ostano. That duty was breached. As late as June 1981, Schubert indicated to Jovy himself that he could deliver all the films in the package. The district court correctly concluded that Jovy and Ostano were defrauded by Schubert and Telewide.

We disagree, however, with the district court's calculation of damages. In the first place, the law of New York is plain that out-of-pocket rather than benefit-of-the-bargain damages are awarded for fraud so that "all elements of profit are excluded." See AFA Protective Systems, Inc. v. AT & T Co., 57 N.Y.2d 912, 914, 442 N.E.2d 1268, 1269, 456 N.Y.S.2d 757, 758 (1982). See also Clearview Concrete Products Corp. v. S. Charles Gherardi, Inc., 88 A.D.2d 461, 467, 453 N.Y.S.2d 750, 755 (2d Dept.1982) ("The prime standard for measuring the actual pecuniary loss sustained as a direct result of fraud is the 'out of pocket' rule."). New York does not even follow the compromise position adopted by the Restatement (Second) of Torts Sec. 549(2) (1976), which gives the plaintiff out-of-pocket damages plus additional damages sufficient to give him the benefit of his bargain in any case in which the latter measure can be proved with reasonable certainty. Hotaling v. A.B. Leach & Co., 247 N.Y. 84, 88, 159 N.E. 870, 871 (1928), did suggest that some flexibility was appropriate with respect to the out-of-pocket rule, but it involved a situation in which the strict application of the out-of-pocket rule would have denied the plaintiff any remedy at all. Id. at 90, 159 N.E. at 872.

Ostano and Jovy claim that there is a distinction between fraud that induces a contract and fraud that constitutes an essential part or "core" of the contract. But, as Sager v. Friedman, 270 N.Y. 472, 481, 1 N.E.2d 971, 974 (1936), indicates, misrepresentations that form an essential part of the contract give rise not to a fraud claim, but...