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KRINSLEY v. UNITED ARTISTS CORP.

March 17, 1954

KRINSLEY
v.
UNITED ARTISTS CORP. ET AL.



The opinion of the court was delivered by: Campbell, District Judge.

This dispute began as an action in interpleader brought by Lazarus Krinsley, who, as escrowee, was beset by conflicting directions given by two parties to an escrow agreement. The agreement was executed by C.J. Papas, United Artists Corporation, and Krinsley on September 17, 1946, and provided that three other agreements relating to the ownership, management, and operation of the Towne Theatre in Milwaukee, Wisconsin were to be retained in escrow by Krinsley, subject to the following condition:

    "In the event a final decree is entered in any
  court of competent jurisdiction against the United
  Artists Corporation declaring that the three
  agreements * * * are unlawful, the escrowee shall
  tear off the signatures on the aforesaid agreements,
  mark each said agreement `void' and shall mail one
  set of said agreements to United * * * and shall mail
  the other set of said agreements to Papas * * *. If,
  however, no such decree is entered within two years
  from June 11, 1946, then the escrowee shall mail one
  set of said agreements to United * * * and said
  agreements shall thereupon become effective as of
  their respective dates, to-wit, June 11, 1946."

In 1948, Papas and other parties to the agreements in escrow informed Krinsley that the three agreements were unlawful, and directed him to tear off the signatures on each of the agreements. United Artists disagreed, and directed Krinsley not to tear off the signatures, but to deliver the agreements. Krinsley then brought this action in interpleader, and asked the court to construe the escrow agreement.

This disputed construction of the escrow agreement was obscured by broader issues when Milwaukee Towne Corporation and each individual defendant filed a cross-claim against United Artists. The cross-claim alleged that United Artists has conspired to monopolize the exhibition of motion pictures in the City of Milwaukee, and that benefits obtained by United Artists through the agreements in escrow, particularly certain stock in Milwaukee Towne Corporation, represent "the fruits of monopolistic practices or restraints of trade." The cross-claim further alleged that the issuance of Milwaukee Towne stock to United Artists was accomplished solely by business duress and coercion due to the unlawful conspiracy. The cross-claimants therefore asked for rescission of the agreements and the return and cancellation of all Milwaukee Towne stock issued to United Artists. Substantially all of the allegations contained in the cross-claim were denied by United Artists.

Milwaukee Towne Corporation was named a defendant by Krinsley, and joined in the cross-claim which was filed by the individual defendants. However, the cross-claim does not state a corporate cause of action, and the individual cross-claimants do not purport to sue derivatively in the name of the corporation. This is primarily a dispute between shareholders of Milwaukee Towne Corporation, which will neither lose nor gain by an adjudication of the dispute. In short, the corporation is not a real party in interest, and therefore should not bear any of the expenses of this litigation.

The issues raised by the cross-claim and United Artists' answer were referred to a Master for hearing. A protracted hearing was held, and the Master submitted a lengthy report, wherein he resolved all issues in favor of the cross-claimants. The Master concluded that United Artists has participated in an unlawful conspiracy to monopolize the exhibition of motion pictures in Milwaukee, and that stock issued to United Artists pursuant to the agreements in escrow was procured as a result of the conspiracy. The Master further concluded that the stock was issued under duress and coercion. On the basis of his conclusions, the Master recommended that the agreements in escrow be declared unlawful, and that United Artists be required to return its Milwaukee Towne stock for cancellation. United Artists now objects to practically all findings of fact and conclusions of law made by the Master, and urges me to reject most, if not all of the Master's report.

For the sake of clarity, the contents of the report will be considered after a discussion of two vital issues which in my opinion were not clearly resolved in the report. These issues relate to the construction of the disputed clause in the escrow agreement, and the legality of the three agreements in escrow standing alone. The Master concluded that the agreements are unlawful, but the conclusion is predicated entirely upon the existence of the conspiracy alleged in the cross-claim.

The Escrow Agreement.

The cross-claimants have at times argued that a proper construction of the escrow agreement will in itself necessitate cancellation of the three agreements in escrow. The argument has never been abandoned; it has instead been confused with arguments relating to the validity of the three agreements standing alone. It need only be noted that the escrow agreement itself provides for cancellation of the three basic agreements on the happening of one event. That event is the entry of a final decree in any court of competent jurisdiction against United Artists Corporation declaring that the three agreements in escrow are unlawful. If, as the Master found, the parties intended that "final decree" should refer to the decree in United States v. Paramount Pictures, D.C., 70 F. Supp. 53, Id., 334 U.S. 131, 68 S.Ct. 915, 92 L.Ed. 1260, and D.C., 85 F. Supp. 881, the agreements were certainly not declared unlawful. The three agreements in escrow pertain to the relationship between United Artists and an independent exhibitor of motion pictures, and that relationship was not considered by any court in the Paramount Case. Even if the escrow agreement were construed more liberally, in a manner most favorable to the cross-claimants, the result would not be different. That is, if the escrow agreement were construed to mean that the escrowee should cancel the three agreements if they were declared invalid by a decree entered by any court, cross-claimants would not be entitled to an order of cancellation, for the three agreements were never declared unlawful by any court.

Counsel have cited but one decision which referred to any of the three agreements — Milwaukee Towne Corporation v. Loew's, Inc., decided by Chief Judge Barnes of this court and affirmed in part by the Court of Appeals 7 Cir., at 190 F.2d 561. That was a suit for damages under the Clayton Act, 15 U.S.C.A. §§ 1-7, 15 note, brought by the cross-claimants in this suit against certain distributors and exhibitors of motion pictures in the Milwaukee area. United Artists was not a party to that suit, so that a declaration that any of the three agreements was illegal could hardly be cause for cancellation under the escrow agreement. In any event, the findings of fact submitted to Judge Barnes by cross-claimants after trial provide little comfort to cross-claimants in this suit. The following finding, adopted by Judge Barnes and affirmed by the Court of Appeals, refers to one of the agreements in escrow:

    "64. Plaintiff [Milwaukee Towne Corporation]
  entered into a contract with United Artists
  Corporation for the licensing of first-run pictures
  in plaintiff's theatre with the intent and for the
  purpose of competing with defendants' monopoly of
  first-run exhibition in the City of Milwaukee, and
  such contract has been sanctioned as legal conduct by
  a statutory court in its opinion rendered July 25,
  1949, which was subsequent to the decision of the
  Supreme Court of the United States in the case of
  United States v. Paramount Pictures, Inc."

It is therefore clear beyond doubt that the escrowee was bound by the terms of the escrow agreement to deliver the three basic agreements to United Artists on June 11, 1948; and if the pleadings in this cause presented nothing more than this legal issue, an order requiring delivery of the agreements would have been entered without delay. However, the cross-claim affirmatively alleged that the three agreements were invalid under the antitrust laws, and, if that be true, this court could not enter any order of enforcement, notwithstanding the intent of the parties as expressed in their escrow agreement.

The Three Agreements in Escrow.

Each of the three agreements was executed on June 11, 1946. The first agreement was entered into by United Artists Corporation and the principal stockholders of the Miller Theatre Corporation * * * John S. Papas, C.J. Papas, Spiro J. Papas, Andrew M. Spheeris, Andrew J. Spheeris, and George J. Spheeris. The Miller Theatre Corporation, a Wisconsin corporation, was the lessee of certain premises in Milwaukee known as the Miller Theatre. The agreement recites that the principal stockholders owned or controlled all of the authorized and outstanding shares of capital stock of the Miller Theatre Corporation, and that United Artists desired to become a stockholder of said corporation. Accordingly, the principal stockholders agreed to change the name of the corporation from Miller Theatre Corporation to Towne Theatre Corporation, and to change the name of the theatre from Miller to Towne. The principal stockholders further agreed to increase the number of shares of the corporation from 500 shares of no par value to 600 shares of no par value, and to classify said 600 shares into 400 Class A shares and 200 Class B shares. The Class A and Class B shares were to have equal rights and privileges in all respects, except that the Class A shares would have the right to elect four directors, the President, one Vice-President, the Treasurer, and Assistant Secretary of the corporation, while the Class B shares would have the right to elect two directors, one Vice-President, the Secretary, and the Assistant Treasurer of the corporation.

The first agreement then recites that the principal stockholders have already paid $20,000 for the original issue of 500 shares of stock of the Miller Theatre Corporation; that the principal stockholders subscribe for 400 shares of Class A stock of Towne Theatre Corporation and agree to pay therefor $50 per share, or a total of $20,000; and that the amount paid for the original 500 shares shall be applied in full payment of their subscription for said 400 shares of Class A stock.

The agreement then recites that United Artists subscribes for 200 shares of Class B stock, and agrees to pay $50 per share or a total of $10,000 for said 200 shares. Further, the agreement recites that United Artists has paid the sum of $19,500 to the principal stockholders, which sum is one-third of a loan previously made to the corporation by the Principal stockholders. The agreement provides that the corporation shall issue notes bearing interest at 4% per year to the principal stockholders and United Artists to evidence the respective loans.

The first agreement also recites that United Artists and the principal stockholders shall loan funds to the corporation to finance the proposed remodeling of the Miller, now Towne Theatre, in the event the corporation does not have adequate funds available for that purpose. The agreement provides that if such loans are made, two-thirds of the amount loaned shall be paid by the principal stockholders, and the remaining one-third by United Artists.

The first agreement then contains a reference to the second agreement — between C.J. Papas and the corporation — and to the third agreement — between the corporation and United Artists. In this respect, it is well to note that the first agreement provides that any stock issued to United Artists pursuant thereto shall upon demand be returned to the principal stockholders if United Artists shall default under the provisions of its agreement (referred to in this memorandum as the "third agreement") with the Theatre Corporation.

The first agreement also provides that the principal stockholders and United Artists shall not engage in the motion picture theatre business either directly or indirectly in the downtown area of Milwaukee, and shall not enter into "first-run exhibition business" in Milwaukee County, without the written approval of the other party.

The second agreement in escrow, between the Theatre Corporation and C.J. Papas, provides that the corporation shall employ Papas as manager of the Towne Theatre for a period of fifteen years. The only provision of the second agreement which is material to the issue of validity is found in Paragraph 2, which provides that Papas shall, "as far as he is able so to do," obtain A feature motion pictures from United Artists for first-run exhibition in the Towne Theatre, and use said pictures for a minimum of 42 weeks in any 12-month period. If such pictures are not available, the agreement permits Papas to obtain a supply of motion pictures from any distributor other than United Artists.

The third agreement, between Miller Theatre Corporation and United Artists, binds United Artists to supply the Theatre Corporation with a certain number of motion pictures each year. The following two paragraphs of the ...


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