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Metro-goldwyn-mayer v. Antioch Theatre Co.





APPEAL from the Circuit Court of Cook County; the Hon. WALTER P. DAHL, Judge, presiding.


This suit was brought by nine motion picture distributors, each with a branch office in the city of Chicago, for an accounting to recover additional percentage license fees from defendants for underreporting the gross admission receipts of the latters' movie theaters. After determining that the plaintiffs were entitled to an accounting, the trial court heard evidence as to damages. On November 6, 1974, the court entered judgment in favor of plaintiffs and against defendants in the sum of $79,290.63 in additional license fees and $12,372.72 in interest, a total of $91,663.35. Subsequently the court entered an additional order against defendants awarding fees and costs to the various plaintiffs in the amount of $19,500.00 for false pleadings under Section 41 of the Civil Practice Act. (Ill. Rev. Stat. 1971, ch. 110, par. 41.) Defendants appeal from all orders while plaintiffs cross-appeal only the amount of the principal judgment and interest.

Defendants are comprised of one individual, Henry C. Rhyan and four corporations, all located in Illinois: the Antioch Theatre in Antioch; the Liberty Theatre in Libertyville; the McHenry Theatre in McHenry; and the Family Outdoor Theatre in Grayslake. Rhyan operated the four motion picture theaters as an individual proprietor prior to January 1, 1967, up until August 1, 1968. From that time through November 30, 1973, Rhyan operated the theaters as corporate entities, with himself as president and managing agent. Rhyan thus was the controlling force behind each of the theaters throughout the period covered by this litigation, January 1, 1967, to November 30, 1973. During this time period, defendants leased numerous pictures from plaintiffs to be shown in the theaters.

When Rhyan contracted to license a motion picture from an individual distributor, he used an agent, Della M. Gallo, to make the preliminary contracts with the distributor and to negotiate the terms of the agreements. Gallo, working under the name of Independent Theatre Service, represented between 30 to 40 other exhibitor accounts besides Rhyan's. Each of Rhyan's theaters paid her 25 to 35 dollars per week to take care of their bookings. Gallo's authority did not include agreeing to any specific film rental terms without obtaining the prior approval of Rhyan.

During the period of this litigation, over 700 films were exhibited in the four theaters. Separate booking arrangements and rental terms were negotiated for each film. Defendants admitted to having shown these films on the dates listed. For the full understanding of this litigation, we must provide an explanation of the intricate process through which the theater operators and picture distributors reach a final contractual accord.

Defendants participated in three types of licensing arrangements with plaintiffs. The simplest license was the "flat rental" arrangement wherein a specified amount was agreed upon between the parties as a fee prior to the film's showing. These films generally were used as second features and are not at issue in this case. In the second type, a "firm percentage" arrangement, the percentage of gross receipts to be received by the distributor was agreed upon in advance. Only 34 such contracts are here involved. Thus the bulk of the licenses involved in this suit are of the third type, the "reviewable percentage film license." This type is the most common arrangement in the industry as well as the most indefinite regarding the terms of the agreement itself. A range between two percentage figures generally is determined before the film is shown. Sometimes only one figure is given, but in either instance the contract is marked as reviewable. After the film has run at a specific theater, the final percentage is determined through negotiations between the operator's agent and the distributor's branch manager. It is this latter negotiation phase which constitutes the crux of the damage portion of this lawsuit. While many factors unrelated to gross intake contribute to the resolution of the eventual terms, it is apparent that the determination of the final percentage rests primarily upon an accurate box office report of gross admission receipts.

After denying defendants' motion to strike and dismiss the complaint, the trial court stayed discovery in the case until the right to an accounting was resolved at trial.

Mr. Philip Kornfeld, an auditor for plaintiffs' law firms for 20 years, testified for plaintiffs that he had been involved in over a thousand audits of theaters and was well acquainted with the procedures involved. On June 11, 1969, plaintiffs' law firm wrote Rhyan requesting that it be permitted to inspect the box office reports and other books and records pertaining to the exhibitions, tickets, admissions and income of each of the defendant theaters. Defendants' counsel replied that the records would be available for inspection in his office. On September 16, 1969, Kornfeld appeared at the office per mutual assent. The only records produced were purported to be the cashiers' daily box office statements on all percentage pictures shown between 1964 and May 1969. These statements included the date, the title of the picture, the opening and closing ticket numbers for that day, each price class, and the receipts as computed from the ticket numbers and price class. Kornfeld accepted these records without prejudice, but informed defense counsel that additional records would be needed. On September 19, 1969, Kornfeld reached the conclusion that the distributors had been defrauded. He noted that the box office records from October 1967 to March 1969 did not appear to be authentic as they showed no signs of wear and seemed to have been prepared recently. He also noted that the handwriting on the records appeared to be identical even though different cashiers located in several locations supposedly had supplied them. Kornfeld observed that the records of the ticket numbers reflected gaps in the continuity between the closing day of an engagement and the opening day of the next engagement, an indication of unrecorded ticket sales. This occurred only during the period from October 1967 to March 1969 (referred to throughout the testimony as "the bad period"). Such a gap, according to Kornfeld, "is a very strong reflection on the reliability of the records." Kornfeld also noted that only during the "bad period" were there no check marks on the statements indicating the verification of the computations by someone other than the cashier. Kornfeld informed defense counsel of the results of his examination and stated that a proper audit would require the original cashier's box office statements, plus bank statements, duplicate deposit tickets, a cash journal and a general ledger. A few days later, defense counsel informed Kornfeld that Rhyan had recopied the box office statements since the originals had become water soaked and were no longer available.

Shortly thereafter, defense counsel produced bank statements for the four theaters. These statements reflected the daily deposits which each theater made into their separate accounts. The Grayslake Drive-In slips consisted of admissions only, but the other slips contained both admissions and concessions receipts. Kornfeld was shown photostated copies of duplicate deposit tickets from the Liberty Theatre on which certain notations had been blocked out. He was told that these notations pertained to the admissions and concessions and only the total deposit was showing. Kornfeld was given the original duplicate deposit slips for the Drive-In. For the other theaters, he was shown a machine receipt from the bank which showed only the total deposit. Kornfeld observed that something previously had been stapled to each of these receipts, but had since been torn off. On November 25, 1969, Kornfeld notified defense counsel that the ticket breaks occurred between almost every engagement except when the same distributor played two pictures or the same picture two weeks in succession. Kornfeld stated that representatives of the distributors had been sent to the theaters during this time period to buy tickets as a spot check. These tickets did not appear in the box office statements, but instead, their number fell within the unaccounted for gaps. This indicated the sale of unrecorded tickets. Kornfeld also stated that certain performances were entirely unreported.

Pursuant to stipulation of the parties, numerous license agreements for exhibiting films between the various plaintiff distributors and the defendants, along with contracts and business records of plaintiffs were introduced into evidence. The parties further stipulated to the authenticity of the stamp or signature of Ms. Gallo and that of any of plaintiffs' agents which appeared on the contracts.

Rhyan testified that Gallo negotiated directly with the distributors' agents concerning the reviewable contracts after the film had been shown and the box office reports had been sent to the distributors. Rhyan admitted that he reviewed and signed these box office reports which were based on the cashier's daily box office reports, and contained the admission receipts figures and the opening and closing ticket numbers. Gallo then sent an invoice to Rhyan which contained the amount due in dollar terms for a percentage picture. The percentage figures included on these invoices had no meaning for Rhyan. Rhyan also admitted to have recopied, with the help of his wife, the daily box office reports for the three indoor theaters. The original records had become water-soaked in storage. They recopied the records after receiving the letter in June 1969 from plaintiffs' counsel requesting an inspection. The wet originals subsequently were destroyed. After Rhyan received the recopied work back from Kornfeld, they were disposed of during his move to new offices. Rhyan testified that prior to 1970 the admission receipts and the concession receipts had been lumped together in the daily deposits. A notation was made of each figure on the deposit slip. These figures were masked over and photostated before being shown to Kornfeld. The original records showing this breakdown, along with the cash journals, were among the records destroyed during the move.

Della Gallo testified and described the procedure she used in obtaining the films, which began when a distributor would send her an availability notice concerning a film. She would discuss the feature with Rhyan, and if he requested, would contact the distributor's booking agent or branch manager. Although her testimony is somewhat unclear on this point, it appears that the distributors informed her of the range of the percentage regarding the terms of the picture being discussed. Thus no negotiations concerning terms of the license were entered into at this time. The contract application was then mailed to her containing the percentage range. This form eventually was signed by both parties.

Subsequent to the showing of the film, Gallo negotiated the final terms with the distributors' agents using the profit-loss statements, based on gross admissions, as recorded in the box office statements. While the upward limit of the percentage range was never exceeded, the final figure often was below the lower number initially listed on the contract application. Although the main concern in the negotiations was the gross admissions figure, many other considerations were involved in determining the final terms. These included the performance of that film in other locations, the number of the particular distributor's films which the theater had exhibited recently, expenses, adjustments because of prior features, and favors between the distributors and Gallo. Invoices were sent to Rhyan depicting the final terms in dollar amounts along with notations as to percentages.

Following the filing of memoranda by both sides, the court, on June 28, 1973, entered an interlocutory order acknowledging plaintiffs' right to an accounting. After a delay caused primarily by defendants' unsuccessful attempt to appeal the trial court's interlocutory order and also to give Kornfeld an opportunity to examine defendants' books of account, the hearing to determine distributors' damages for fraudulent underreporting of defendants' gross admission receipts began on July 22, 1974.

Kornfeld testified about the various exhibits which he had prepared from defendants' own records. They had produced all requested records pertaining to the period of August 1968 to August 1973 including cash journals, ledgers, and other books of account. As revealed at the earlier hearing, the records for October 1967 through July 1968 had been recopied by Rhyan and then destroyed. Kornfeld's exhibits attempted to ascertain: the gross receipts reported to the distributors; the actual amount taken in by the theaters; and the resultant unreported difference. Kornfeld attempted to calculate the unreported difference during the period without records by formulating an average of admission receipts compared to total receipts over an extended period of time. This ratio was verified by checking its accuracy when applied to periods where the full records were available. When that ratio was multiplied times the total bank deposits, a fair estimation of admission receipts should have resulted. Kornfeld also illustrated underreporting at the drive-in theater through use of unreported "passes." Adding the above unreported grosses should present the total of unreported gross admission receipts from the four theaters for the entire period of the litigation.

Kornfeld explained his exhibits column by column. The first column contained the gross box office receipts as reported to the distributors, and defendants stipulated that these figures were accurate. To arrive at the calculation of the unreported gross in the third column, he subtracted the amount in the first column from the audited or "true" gross receipts listed in the second column. Kornfeld used three methods in determining the actual daily cash box office receipts. The first was to extract the proper figures from defendants' own books. The cash journals of the three indoor theaters reflected approximately 100 instances of underreporting. As to the period for which defendants' books had been destroyed, Kornfeld determined an average between admissions and concessions receipts based on a 10-month sample period in 1967. He found that the average ratio of theater admissions to bank deposits amounted to 80.5% at the Antioch Theatre, 81% at the McHenry Theatre, and 81.6% at the Liberty Theatre. Kornfeld then multiplied these ratios times the respective daily bank deposits of each theater to ascertain the gross admission receipts. These ratios had been tested during periods which could be verified using the cash journals. A close correlation was shown to exist. The third method involved only the drive-in theater from 1970 to the date of the trial. ...

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