Septembertide Pub., B.V. v. Stein and Day, Inc.

• Decision Date: 01 September 1989
• Docket Number: 604,Nos. 401,D,s. 401
• Citation: 884 F.2d 675
• Parties: 9 UCC Rep.Serv.2d 817 SEPTEMBERTIDE PUBLISHING, B.V., Plaintiff-Appellee, Cross-Appellant, v. STEIN AND DAY, INC. and New American Library, Defendant-Appellee, Bookcrafters U.S.A., Inc., Counter-Claim Defendant-Appellant, Cross-Appellee. ockets 88-7664, 88-7694.
• Court: U.S. Court of Appeals — Second Circuit

Page 675

884 F.2d 675

9 UCC Rep.Serv.2d 817

SEPTEMBERTIDE PUBLISHING, B.V., Plaintiff-Appellee, Cross-Appellant, v. STEIN AND DAY, INC. and New American Library, Defendant-Appellee Bookcrafters U.S.A., Inc., Counter-Claim Defendant-Appellant, Cross-Appellee.

Nos. 401, 604, Dockets 88-7664, 88-7694.

United States Court of Appeals Second Circuit.

Argued Dec. 6, 1988.

Decided Sept. 1, 1989.

William Perry, New York City (Charles K. O'Neill, Charles F. Lacina, Chadbourne & Parke, New York City, of counsel), for counter-claim defendant-appellant, cross-appellee Bookcrafters.

Marcia B. Paul, New York City (J. Jared Snyder, Kay Collyer & Boose, New York City, of counsel), for plaintiff-appellee, cross-appellant Septembertide Pub.

Roger L. Zissu, New York City (Shira Perlmutter, Cowan, Liebowitz & Latman, New York City, of counsel), for defendant-appellee New American Library.

Before OAKES, Chief Judge, and LUMBARD and CARDAMONE, Circuit Judges.

CARDAMONE, Circuit Judge:

On this appeal from the United States District Court for the Southern District of New York, Richard Owen, Judge, we are required to resolve a difficult and close question involving third-party beneficiary and commercial law principles which in this case suggest different results. The author and a trade creditor each claim to be entitled to the proceeds flowing from the paperback publication of a novel. The author, an intended third-party beneficiary, claims superior rights to the funds because so often a writer has all his or her financial eggs in one basket. The secured creditor asserts that as a financier of the commercial side of publishing, it should be accorded all those rights to which a secured creditor is entitled. Yet, the resolution of this question does not rest entirely on the parties' rights, but rather on which of them has priority. The issue for us is to determine, and properly observe, priority to the disputed proceeds between the claimant parties.

FACTS AND PROCEEDINGS BELOW

Septembertide Publishing, B.V. (Septembertide or author), a corporation organized and existing under the laws of the Netherlands, is owned and controlled by one Harry Patterson, a resident of the Isle of Jersey in the Channel Islands, which are a part of the United Kingdom. S & L Enterprises (S & L), Septembertide's predecessor-in-interest, also is owned by Patterson who is the author of numerous literary works, usually under pseudonyms. He wrote the novel "Confessional" (the Work) under the pseudonym "Jack Higgins." The rights to the funds derived from the paperback edition of "Confessional" is the subject of the instant litigation.

S & L granted exclusive licensing rights to Stein & Day, a publishing house incorporated in New York with headquarters in New York City, to publish a hardcover At the same time (actually one day earlier, December 11, 1984) that it entered into the Hardcover Agreement with Septembertide, Stein & Day entered into a contract with New American Library (New Library), giving New Library the rights to publish the paperback edition of "Confessional" (Paperback Agreement). New Library agreed to advance Stein & Day $750,000 in five installments, of which, prior to the institution of this suit on July 14, 1986, Stein & Day had received $385,500. Meanwhile, on November 20, 1985 Stein & Day had entered into a security agreement with Bookcrafters U.S.A., Inc. (Bookcrafters), assigning all its contract rights and accounts to Bookcrafters, including the paperback rights it had with New Library. Bookcrafters' search of UCC filings uncovered no evidence of Septembertide's interest in payments from New Library to Stein & Day. In a March 6, 1986 letter Septembertide terminated Stein & Day's rights in the Hardcover Agreement because the final $125,000 payment due in January had not been made. Septembertide then requested in May 1986 that New Library--as a result of Stein & Day recouping its advances--forward directly to it all future payments due Stein & Day under the Paperback Agreement. When New Library refused, Septembertide initiated this lawsuit against Stein & Day and New Library.

edition of the Work in the United States. These rights were embodied in a written contract dated December 12, 1984 (Hardcover Agreement). In October 1985 Septembertide took over as successor-in-interest to S & L's rights in that contract. Under the contract's terms Stein & Day was obligated to pay an advance against future royalties of $375,000 in three equal installments of $125,000. Stein & Day was also obliged to account semi-annually, to pay royalties, and to pay its share of sublicensing income, after recouping its advances. With respect to the sublicensing income, these proceeds "from the sale or license of reprint rights" in media other than hardcover publication were to be divided two-thirds to the author Septembertide, and one-third to the publisher, Stein & Day. The first two advances were made, but the third one, due on January 15, 1986, was not paid. As of December 31, 1985 Stein & Day owed Septembertide $152,030.31. Stein & Day subsequently became insolvent and, though acknowledging its debt, was unable to make payments to Septembertide.

Septembertide's suit sought: (1) damages of $125,000 against Stein & Day plus interest for breach of contract; (2) a declaratory judgment that Stein & Day's rights under its contract with Septembertide have been terminated and ordering all those who take any interest through Stein & Day to pay all advances due or to become due directly to Septembertide; (3) an injunction against New Library due to its alleged anticipatory breach, compelling direct payment to Septembertide of all amounts due under the Paperback Agreement or, in the alternative, damages of $364,500 plus interest; and (4) two-thirds of the proceeds of the remaining payments of the Paperback Agreement as a third-party beneficiary to that Agreement, if it was determined that the Hardcover Agreement had not been terminated.

Bookcrafters then intervened, alleging that it had prior and superior right to the proceeds of the Paperback Agreement by virtue of its security agreement with Stein & Day. New Library was then faced with a situation in which several parties had laid claim to monies it concededly owed. It filed an interpleader by way of counterclaim naming all claimants--Stein & Day, Bookcrafters and Septembertide--and asked the court to determine the proper allocation of the funds it held. The monies were deposited into court sometime in December of 1987 by court order.

In an order and opinion dated October 7, 1987 Judge Owen stayed Septembertide's claim for the missing final $125,000 payment because of Stein & Day's bankruptcy. The district court denied Septembertide's claims that the Hardcover Agreement had been terminated by Stein & Day's failure to pay, and that New Library had anticipatorily breached its obligation under the Paperback Agreement. It held Septembertide to be a third-party beneficiary of the Paperback The district court referred the recoupment issue to a magistrate, who found $3,303.59 had not been recouped. On January 26, 1988 Judge Owen adopted the magistrate's report and, based on the October 1987 opinion, divided the New Library payments two-thirds to Septembertide and one-third to Bookcrafters together with five percent interest on their respective portions. Stein & Day was awarded $3,303.59 from the New Library payments in order to recoup fully its advance. New Library was awarded its costs and attorney's fees amounting to $1,125.08 and $14,092 respectively. Final judgment embodying the above-recited dispositions was entered July 8, 1988.

Agreement between Stein & Day and New Library. As such, the district court ruled that Septembertide's rights to two-thirds of New Library payments under that agreement were superior to Bookcrafters' secured creditor rights, subject only to a determination that Stein & Day had in fact recouped its advance. Bookcrafters was awarded the remaining one-third of the payments.

Bookcrafters appeals from that judgment seeking all of the New Library payments and the unrecouped advance monies together with interest at nine percent. Septembertide cross-appeals also claiming that it is entitled to all of the New Library payments, and that New Library is not entitled to costs and attorney's fees against it. For the reasons that follow, we modify as to the $3,303.59 awarded Stein & Day, which belongs instead to Bookcrafters, and otherwise affirm.

DISCUSSION

I Materiality of Stein & Day's Breach

One of Septembertide's principal arguments is that Stein & Day's failure to make the final $125,000 installment payment to it was so material a breach of the Hardcover Agreement as to permit rescission. Septembertide urges that when Stein & Day experienced financial difficulties, it deliberately withheld funds from the Author--either to save itself or to favor its creditor, Bookcrafters--despite having structured its transaction with New Library so that the Paperback funds would enable it to pay Septembertide. These facts, Septembertide asserts, demonstrate not only that Stein & Day's breach was intentional, but that it was also material. Septembertide accordingly believes it is entitled to rescind the contract and succeed to all rights held by Stein & Day, particularly Stein & Day's right to direct payment to it of all of the funds in New Library's hands.

The classic expression of law governing this diversity case is found in Callaman v. Powers, 199 N.Y. 268, 92 N.E. 747 (1910). There New York's highest court explained that before rescission will be permitted the breach must be "material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract." Id. 199 N.Y. at 284, 92 N.E. 747. As an extraordinary remedy, rescission is appropriate only when a breach may be said to go to the root of the agreement between the...