263 N.Y. 79, 87, 188 N.E. 163
Kirke La Shelle Co. obtained a judgment for $19,337.59 against playwright Paul Armstrong in 1918.1 Armstrong died just before the judgment was entered, leaving an insolvent estate after transferring his plays and property to Paul Armstrong Co. Kirke La Shelle Co. then sued Paul Armstrong Co. and Beale, Armstrong's attorney, to set aside the transfer as fraudulent.2 The parties settled the action on December 8, 1921.3
The settlement was documented in a letter from the appellant's attorneys, accepted by the respondents' attorney.4 Under its terms, Kirke La Shelle Co. was to receive one half of all moneys from any revivals of "Alias Jimmy Valentine," including stage productions in New York City, on the road, or in stock throughout the United States and Canada.5 The agreement also required that all future contracts affecting the title to the dramatic rights, exclusive of motion picture rights, or the production of the plays be submitted to the appellant for approval before execution.6 Because the appellant received only about $1,000 from a revival production at the Gaiety Theatre, the parties agreed to divide profits from "Salomy Jane" on the same basis.7
"Alias Jimmy Valentine" originated as a dramatization by Paul Armstrong of O. Henry's novel "A Retrieved Reformation."8 The play was produced on the stage in New York City and by road companies prior to 1914.9 It was later licensed to stock companies.10 Several years before 1928, the silent motion picture rights were assigned to Peerless Features Producing Company and eventually vested in Metro-Goldwyn Mayer Corporation, which exhibited silent films of the play.11
On September 21, 1928, Paul Armstrong Co. sold the exclusive talking motion picture rights in the play to Metro-Goldwyn Mayer Corporation for $15,000, less a $1,500 commission.12 Talking pictures were unknown commercially when the 1921 settlement was made.13 Kirke La Shelle Co. brought this action to recover one half of the net proceeds from that sale.14 The trial court dismissed the claim, and the Appellate Division affirmed.15
Whether the December 8, 1921 settlement agreement entitled Kirke La Shelle Co. to share in proceeds from the grant of talking motion picture rights to Alias Jimmy Valentine?16
In every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.17 This means that in every contract there exists an implied covenant of good faith and fair dealing.18
Yes. The December 8, 1921 settlement agreement granted Kirke La Shelle Co. one half of all moneys from any revivals of Alias Jimmy Valentine on the stage in New York City, on the road, or in stock throughout the United States and Canada.19 The agreement also contained an express covenant requiring submission for approval of all future contracts affecting the title to the dramatic rights exclusive of motion picture rights or the production of the plays.20 The September 21, 1928 grant of talkie rights affected the value of the stage productions granted to the appellant, as the parties conceded that talkie productions diminished the value of stage rights.21
By selling those rights without approval and retaining the proceeds, the respondents violated the implied covenant of good faith arising from the settlement agreement.22
The December 8, 1921 settlement agreement entitled Kirke La Shelle Co. to share in proceeds from the grant of talking motion picture rights to Alias Jimmy Valentine.23
Whether the September 21, 1928 grant of talkie rights to Metro-Goldwyn Mayer Corporation breached the respondents' covenant to submit contracts affecting dramatic rights for the appellant's approval before execution?24
The settlement agreement contained an express covenant requiring submission for approval of contracts affecting dramatic rights before execution.25 To say that such covenant might be violated by the respondents without resulting liability to account to appellant would clearly be to acknowledge a right in appellant without obligation on the part of respondents to respond in damages for a breach of that right.26
Yes. The December 8, 1921 settlement agreement expressly required that all contracts, sales, licenses, or other arrangements affecting the title to the dramatic rights exclusive of motion picture rights or the production of the plays in New York City, on the road, or in stock be submitted to Kirke La Shelle Co. for approval before execution or delivery.27 The September 21, 1928 grant of exclusive talkie rights to Metro-Goldwyn Mayer Corporation was a contract affecting the title to dramatic rights and the production of Alias Jimmy Valentine on the stage.28 The respondents executed and delivered that grant without submitting it for the appellant's approval, directly breaching the express covenant in the settlement agreement.29
The September 21, 1928 grant of talkie rights to Metro-Goldwyn Mayer Corporation breached the respondents' covenant to submit contracts affecting dramatic rights for the appellant's approval before execution.30
Whether an implied covenant arising from the settlement agreement required the respondents to account to Kirke La Shelle Co. for one-half of the net proceeds from the talkie rights sale?31
From the inclusion in a contract of an express agreement not to enter into any contract affecting title to dramatic rights without approval, an obligation may be implied to hold the profits resulting from breach of that agreement for the benefit of the parties according to their rights under the contract.32 A party assuming such a fiduciary relationship owes a duty of utmost good faith.33
Yes. The December 8, 1921 settlement agreement granted Kirke La Shelle Co. one half of the benefits from stage productions of Alias Jimmy Valentine and imposed an express covenant against entering contracts affecting dramatic rights without approval.34 By entering into the contract and accepting and retaining the consideration therefor, the respondents assumed a fiduciary relationship which had its origin in the contract, and which imposed upon them the duty of utmost good faith.35 The respondents cannot retain the full profits from their breach, and the implied obligation requires them to account to the appellant for one half of the net proceeds from the sale.36
An implied covenant arising from the settlement agreement required the respondents to account to Kirke La Shelle Co. for one-half of the net proceeds from the talkie rights sale.37