Proteus Books Ltd. v. Cherry Lane Music Co., Inc.

• Decision Date: 27 March 1989
• Docket Number: 404,D,Nos. 314,s. 314
• Citation: 873 F.2d 502
• Parties: 27 Fed. R. Evid. Serv. 891 PROTEUS BOOKS LIMITED, Plaintiff-Appellant, Cross-Appellee, v. CHERRY LANE MUSIC COMPANY, INCORPORATED, Defendant-Appellee, Cross-Appellant. ockets 88-7555, 88-7609.
• Court: U.S. Court of Appeals — Second Circuit

Page 502

873 F.2d 502

27 Fed. R. Evid. Serv. 891

PROTEUS BOOKS LIMITED, Plaintiff-Appellant, Cross-Appellee, v. CHERRY LANE MUSIC COMPANY, INCORPORATED, Defendant-Appellee,

Cross-Appellant.

Nos. 314, 404, Dockets 88-7555, 88-7609.

United States Court of Appeals, Second Circuit.

Argued Nov. 17, 1988.

Decided March 27, 1989.

Karen Shatzkin (Bernard Ouziel, Shatzkin & Reiss, New York City, of counsel), for plaintiff-appellant, cross-appellee.

Gideon Cashman (Philip R. Hoffman, Pryor, Cashman, Sherman & Flynn, New York City, of counsel), for defendant-appellee, cross-appellant.

Before LUMBARD, MESKILL and KEARSE, Circuit Judges.

MESKILL, Circuit Judge:

This is an appeal and cross-appeal from a judgment of the United States District Court for the Southern District of New York, Carter, J., in an action based on a contract executed in 1983 by plaintiff-appellant-cross-appellee Proteus Books Limited (Proteus) and defendant-appellee-cross-appellant Cherry Lane Music Co. (Cherry Lane). Under the contract, Cherry Lane was to distribute Proteus' books to music, book and record stores. Jurisdiction is premised on diversity; the parties agree that the contract is governed by New York law. The decision of the district court is published at 688 F.Supp. 877 (S.D.N.Y.1988).

Proteus filed suit against Cherry Lane in 1985, alleging ten counts, four of which are We affirm in part, vacate in part, and remand.

at issue on appeal. The four counts, in the order in which they were presented to the jury, are: first, that Cherry Lane breached its contractual standard of care; second, that Cherry Lane breached an oral agreement to pay Proteus by bills of exchange; third, that Cherry Lane breached a minimum sales agreement; and fourth, that Cherry Lane converted Proteus' inventory. The jury returned a verdict for Proteus on each of these claims, awarding $2,851,411 damages on the first, $317,731 on the second, $120,000 on the third, and $177,000 on the fourth; the total award on these claims was thus close to $3.5 million. Cherry Lane moved for judgment notwithstanding the verdict on each claim; the district court granted the motion as to the first two counts, and denied it as to the second two. Proteus appeals the grant of judgments n.o.v. and Cherry Lane appeals the denial of judgments n.o.v. In addition, Proteus urges that, in the event of a remand, various evidentiary rulings made by the district court be overturned.

BACKGROUND

A. The Parties

In January 1977, Michael Brecher founded a British company called Proteus (Publishing) Limited (PPL). PPL published books, at first in no one particular subject matter, but later, primarily in the film and rock and roll music fields. After six years in business, PPL went into receivership and folded. Brecher, however, believed a new company could be successful if it concentrated solely on publishing books about film stars and rock and roll music. To assist him in developing his new venture, Brecher contacted Michael Shatzkin, who had worked with PPL, and who Brecher believed could help with North American distribution and financial support. It was Shatzkin who introduced Brecher to Cherry Lane.

Brecher's new company, Proteus, was developed in 1983, from the remains of PPL. Proteus acquired the rights to the books that had been published by PPL. However, these books had never sold well in America. Even with an inventory of these books and the new ones that it developed, the new Proteus was not able to survive. It filed for liquidation in 1985.

Cherry Lane was an established operation in 1983, when the contract at issue was signed. Its parent company, Cherry Lane Music Publishing Co. (Cherry Lane Music) had been founded twenty-five years earlier; Cherry Lane itself had been started in 1976. Cherry Lane Music owned music copyrights; Cherry Lane published sheet music and collections of music. In 1981, Cherry Lane published its first music trade book. By the time Cherry Lane signed the contract with Proteus, it had published several other trade books as well. Lauren Keiser, Cherry Lane's president, led the drive to expand Cherry Lane's business into trade books. By 1985, Cherry Lane's Marketing and Sales Director, Ed Cimino, claimed that Cherry Lane was "the largest rock book publisher and distributor in the world." Nevertheless, Cherry Lane's experience in this type of distribution was limited; it had been distributing such books for only a few years--about the same amount of time Proteus had been publishing them.

B. The Relationship Between Proteus and Cherry Lane

Through Shatzkin, Cherry Lane and PPL reached an agreement in September 1982 for Cherry Lane to distribute Proteus' books to music and record stores. This agreement was to last for one year, and is not at issue. On its heels, however, came the first of the agreements that are at issue: the contract signed September 30, 1983 between Proteus (by Brecher) and Cherry Lane (by Keiser), which was to take effect January 1, 1984.

1. The September 1983 Contract

This contract was negotiated in the summer of 1983, primarily by Brecher, who had been trained as an attorney in England, and Keiser, a layman who apparently did not consult an attorney on Cherry Lane's behalf. Although the contract provided The contract provided, inter alia, that Cherry Lane was to perform distribution services for Proteus to American book, music and record stores and was to do so with "due professional skill and competence." The term of the agreement was three years, with a one or two year option for renewal. If, however, Cherry Lane were to achieve an average of 3,500 copies sold per Proteus book, the agreement would be automatically extended. Cherry Lane's basic commission was to be twenty-four percent.

that it could be re-drafted by an attorney, this was never done. The first draft of the contract was prepared by Brecher, but the final version was a product of give and take between the parties.

The contract also called for Cherry Lane to assist Proteus in its start-up financing. Although Cherry Lane's services to Proteus were not to begin until January 1, 1984, on November 1, 1983 it was to begin issuing "guarantees to Proteus' production suppliers or firm purchase orders for [Proteus'] inventory" at Proteus' request. While Cherry Lane would be the maker of these guarantees or purchase orders, it was Proteus' responsibility to see that its production bills were paid, thereby discharging Cherry Lane's guarantees. If Proteus failed to pay its bills, or to make adequate assurances to Cherry Lane that its bills would be paid, Cherry Lane could withhold from Proteus money from sales in any month an unpaid guarantee fell due. In that event, Cherry Lane would also have a lien on money owed to Proteus. Furthermore, although Cherry Lane was under no obligation to issue purchase orders to Proteus beyond October 31, 1984, it would continue to maintain its right to deduct money owing on purchase orders from money it otherwise owed Proteus. Similarly, as long as any Cherry Lane guarantee was outstanding, Cherry Lane had a lien on inventory covered by the guarantee. Finally, the parties provided that if the agreement were ever terminated, Proteus would have to "settle" all outstanding purchase orders, and that Cherry Lane would have a lien on money due Proteus until such purchase orders were settled.

2. The Amendments: Alternate Financing Provisions

Proteus soon found that Cherry Lane's guarantees and purchase orders were not adequate for it to raise sufficient capital to begin production. Therefore, on May 3, 1984, Cherry Lane and Proteus amended the contract to provide that Cherry Lane would issue purchase orders directly to Proteus' printers in the United Kingdom. Cherry Lane would thus be bound by a contract to the printer to pay the purchase order when it came due. Cherry Lane and Proteus agreed that Cherry Lane would pay these purchase orders within 120 days of delivery of the books to Cherry Lane, but that Proteus' deadline for paying Cherry Lane for the purchase orders was thirty days earlier, i.e., within ninety days of delivery. If Proteus failed to pay an invoice pertaining to a Cherry Lane purchase order, Cherry Lane could withhold from Proteus any money it owed Proteus, until it had recovered an amount sufficient to pay the purchase order.

Apparently, at about the time the parties signed this amendment, Cherry Lane orally agreed to make some payments to Proteus by bills of exchange. The bills of exchange could be converted into ready cash by Proteus through a factoring company, International Factors Limited (IFL). In August 1984, Proteus returned three purchase orders to Cherry Lane in exchange for bills of exchange issued by Cherry Lane for $26,000.

Cherry Lane issued purchase orders under the May 3 agreement to Blantyre Printing & Binding Co. Ltd. (Blantyre), Proteus' printer in Scotland, but Proteus did not pay Cherry Lane for the invoices, and Blantyre billed Cherry Lane directly. Cherry Lane re-directed the invoices to Proteus, but Blantyre informed Cherry Lane that it expected payment from Cherry Lane, as it was Cherry Lane, and not Proteus, which had entered the purchase order contract with Blantyre. Cherry Lane once again directed Blantyre to Proteus, but Blantyre sued Cherry Lane for payment. Cherry As Cherry Lane was encountering these difficulties, it received a letter from Brecher announcing that he was unhappy with Cherry Lane's sales, but that he was "optimistic" about Cherry Lane's future performance. Despite Cherry Lane's problems with Blantyre and Proteus' displeasure with Cherry Lane, the parties extended their contract for one year on March 29, 1985. They also agreed that from April 1, 1985 to October 1, 1985, Cherry Lane would guarantee to Proteus gross sales of $85,000 per month, and that Proteus would guarantee delivery of four new titles in the first half of each month to Cherry Lane.

Lane eventually wired more than...