Opinion ID: 573138
Heading Depth: 2
Heading Rank: 3

Heading: Materiality and Severability of the Preminger Agreement

Text: 20 Severability is determined by the intent and actions of the contracting parties. As the New York Court of Appeals has observed: Whether a contract is entire or severable generally is a question of intention, to be determined from the language employed by the parties, viewed in the light of the circumstances surrounding them at the time they contracted. Christian v. Christian, 42 N.Y.2d 63, 73, 396 N.Y.S.2d 817, 365 N.E.2d 849 (1977); see also Rudman v. Cowles Comm., 30 N.Y.2d 1, 13, 330 N.Y.S.2d 33, 280 N.E.2d 867 (1972); Nat'l Union Fire Ins. Co. v. Turtur, 892 F.2d 199, 204-05 (2d Cir.1989). 21 The Preminger contract contains several clauses relating to severability: (1) Paragraph 3 provides a single expiration date of 2011 for the rights granted to Qintex for all four movies; (2) paragraph 5(c) authorizes Qintex to retain the first $2.3 million dollars of gross receipts from all pictures, future revenue from all pictures split 35% to Preminger and 65% to Qintex 2 ; and (3) paragraph 12 requires a distribution statement covering all pictures for each calendar quarter. The Preminger contract does appear to apportion the initial one million dollar payment by Qintex to Preminger between the five films. (Agreement 5(b), Preminger E.R. at 352) However, paragraph five also notes that this division of money is allocated for accounting purposes. Id. 22 The district court erred in finding that the Preminger agreement was severable. It cited no evidence to support its conclusion. In the absence of any facts in the record to support the district court's ruling, we must reverse.
23 We review applicable state law to help determine the status of a contract. State law controls both the question of breach and construction of a contract. In re Aslan, 909 F.2d 367, 369 (9th Cir.1990). Whether one party's actions constitute a material breach must be determined by applicable state contract law. Wegner, 839 F.2d at 536. 24 Under New York law, a breach of a contract is material if it is so substantial as to defeat the purpose of the transaction or so severe as to justify the other party's suspension of performance. Lipsky v. Com. United Corp., 551 F.2d 887, 895 (2d Cir.1976). The Lipsky court stated the test: Would the innocent party have agreed to enter the contract without the inclusion of the disputed clause? Id. 25 An essential term of the contract was the colorization of the four films. Qintex was also required to make accountings of all income derived from the agreement and to make royalty payments. Qintex admits that it has not colorized two of the four films. Qintex has also failed to provide Preminger with distribution statements for any period after October 19, 1989. These breaches of the contract are substantial and go to the heart of the agreement. 26 Qintex contends that the letter agreement does not contain termination provisions for the non-monetary defaults asserted by Preminger. While it is true that the agreement does not specifically cover non-monetary defaults, paragraph one of the letter agreement requires Qintex to colorize the second pair of pictures by June 14, 1990. Qintex has failed to do so. Qintex has materially breached the letter agreement. Qintex may, however, attempt to cure any defaults. We remand to the district court to allow Qintex to assume or reject the Preminger contract pursuant to the conditions specified in § 365(b)(1).