Opinion
No. 03 Civ. 6185 (HB).
January 31, 2005
OPINION ORDER
Plaintiffs, Valjean Manufacturing, Inc. ("Valjean") and Martin Gruber, filed this action on August 18, 2003 and claimed Michael Werdiger, Inc. ("MWI") breached the Master Sales Agreement ("MSA") entered into between the parties on October 3, 1994. (Oct. 25, 2004, Joint Stip. at ¶ 12 (herein, "Stip.")). MWI counterclaimed that Valjean was liable for (1) breach of contract, (2) conversion, (3) replevin, (4) unjust enrichment, (5) failure to maintain financial records, and (6) fraud. Valjean seeks $41,128,420 including prejudgment interest and MWI seeks damages to be determined at trial. A bench trial commenced on October 25, 2004 and concluded on October 28, 2004. The lawsuit was sub judice following the receipt of post-trial memorandum on December 9, 2004.
On September 2, 2004, this Court dismissed Valjean's Second (Breach of Fiduciary Duty), Third (Fraudulent Misrepresentation), and Fourth (Artisan's Lien) claims. Valjean Mfg., Inc. v. Michael Werdiger, Inc., No. 03 Civ. 6185, 2004 WL 1948752 (S.D.N.Y. Sept. 2, 2004).
In accordance with Mr. Christmas's December 15, 2004 letter and Richard Keenan's December 17, 2004 letters to Chambers, MWI and Valjean agreed that MWI's Second (Tortious Interference), Third (Conversion) (as against Fred Gruber only), Fifth (Conspiracy to Injure Business), Sixth (Breach of Fiduciary Duty), and Eighth (Breach of Contract) (Fred Gruber's private sales) counterclaims were withdrawn. In addition, the MWI's Seventh counterclaim (breach of contract) (Martin Gruber's private sales) was resolved by the stipulation entered into by the parties. (Stip. at ¶ 20).
While this opinion tries to itemize and resolve the many areas of disagreement between the parties, it does not pretend to have scrutinized the mass of material to the extent that would permit a determination down to the last penny. In part, this is as a consequence of the parties' inability to agree on much of anything, and there intransigence with respect to a special master, which the Court suggested, and the parties rejected in lieu of an accountant whom they chose and then fired in mid-stream.
Credibility was a vital consideration for me and since this was a bench trial, credibility determinations were mine to make. Donato v. Plainview-Old Bethpage Cent. Sch. Dist., 96 F.3d 623, 634 (2d Cir. 1996) (holding that credibility determinations are within the trial judge's purview in bench trials "because the trial judge is in the best position to evaluate a witness's demeanor and tone of voice as well as other mannerisms that bear heavily on one's belief in what the witness says"); see also 9A Fed. Proc. Proc. Civ. 2d § 2586 (2004); 75B Am. Jur. 2d Trial § 1962 (2004). In particular, the trial court, sitting as the trier of fact, has both the right and the responsibility to weigh the evidence and to draw reasonable inferences and deductions. See Am. Valmar Int'l Ltd., Inc. v. Comm'n of Intern. Rev., 229 F.3d 98, 101 (2d Cir. 2000) ("[P]articularly strong deference is owed where the trial court bases its findings upon its determination of witnesses' credibility") (citation omitted). Indeed, the Supreme Court has held that, in a bench trial, the judge is free to make all reasonable and rational inferences under the facts in evidence, including circumstantial evidence. See Anderson v. City of Bessemer, 470 U.S. 564, 575 (1985) ("[W]hen a trial judge's finding is based on his decision to credit the testimony of one of two or more witnesses, each of whom has told a coherent and facially plausible story that is not contradicted by extrinsic evidence, that finding, if not internally inconsistent, can virtually never be clear error.") My findings are indeed filtered through a credibility glass.
I. FINDINGS OF FACT
A. MWI — Valjean RelationshipValjean is a California corporation formed by jewelry designer Martin Gruber in 1994. Michael Werdiger ("Werdiger") is the owner and chief executive officer of MWI (Werdiger Decl. at ¶ 1), a New York corporation that manufactures and acquires diamonds for use in jewelry. (Stip. at ¶ 1).
Prior to his relationship with Werdiger, Martin Gruber owned and operated Nova Stylings, Inc. ("Nova Stylings"), which designed, manufactured, and sold jewelry. (Stip. at ¶ 4). Under the name Van Lightner, Nova Stylings sold jewelry through "trunk shows," "sales events where the salesperson travels to retailers with a trunk of jewelry that the retailer normally does not stock," and "remount events," "where a salesperson travels with a jeweler and sells mountings into which a customer can have their own stones set." (Stip. at ¶¶ 5-7). Nova Stylings also sold jewelry directly to retailers. (Stip. at ¶ 5).
In April 1993, "MWI paid Nova Stylings' lending banks to acquire Nova Stylings inventory and accounts receivable in settlement of Nova Stylings' debt." (Stip. at ¶ 8). The deal included an agreement that provided, among other things, that MWI was to have a security interest in certain assets, e.g., all of Nova Stylings's trademarks including, but not limited to, "Eloquence," "Van Lightner," and "Nova." (Stip. at ¶¶ 8, 10).
Later, in 1994, "Nova continued to be under pressure from several creditors who predated the 1993 [A]greement with MWI," and Martin Gruber was forced to "foreclose on Nova's assets." (M. Gruber Decl. at ¶ 18). "Notwithstanding the failure of Nova Stylings, MWI agreed to sponsor another attempt [to operate a successful jewelry making business] by Martin Gruber," now under the name Valjean. (Werdiger Decl. at ¶ 20). Accordingly, "on October 3, 1994, MWI and Valjean entered into the [MSA]." (Stip. at ¶ 12). Under the terms of the MSA, Valjean would manufacture the jewelry, MWI would provide the financing, Martin Gruber would receive a yearly salary and, once operations began, Valjean would manage the sales force, design the jewelry and produce the product for market. (Ex. G, MSA).
MWI and Valjean also executed two consignment agreements, one for diamonds, and one for gold and other precious metals. (collectively, the "Consignment Agreements") (Stip. at ¶ 13; Ex. H, I).
The parties, working under the MSA, manufactured and sold jewelry for nearly ten years. (Stip. at ¶ 14). In early 2003, Valjean complained it was being short changed, MWI denied it owed any money to Valjean, but rather, that Valjean owed it money. Discussions between the parties broke down and on June 30, 2003 MWI notified Valjean it was terminating the MSA. (Stip. at ¶ 14).
The distribution of proceeds is the focus of the current dispute. Without itemizing the multitude of accusations and recriminations hurled by the parties at one another, suffice it to say, each party contends that it has provided a proper accounting, with proper allocation of assets, and each claims it was hoodwinked by the other.
B. The MSA
In general, the MSA defines the terms of the relationship between Valjean and MWI. Under the MSA, Valjean would manufacture jewelry designed by Martin Gruber, MWI would supply the materials, and the jewelry would be sold under the name "Nova/MWI." (Ex. G at 1). The terms of the MSA defined MWI as the exclusive diamond supplier for the jewelry Valjean manufactured. (Ex. G at 1). Valjean would pay for the diamonds pursuant to a complex formula that factored in the diamond's carat weight, shape, color, size, and quality. (Ex. G at 2). MWI was to receive a "credit" for the price paid for diamonds on the open market plus a 15% profit. (Ex. G at 2). In addition, MWI would be the exclusive marketer and seller of Valjean's jewelry. (Ex. G).
In accordance with the terms of the MSA, MWI would receive a "credit" or deduction for costs against its obligation to pay Valjean for each piece of Jewelry and each Nova/MWI Diamond for which final Sales Proceeds were received. (Ex. G at 9). See infra at 5 ("Valjean Payments"); infra at 19 ("MWI Credits Against Amounts Due Valjean").
Once the relationship terminated, MWI and Valjean each attempted to prepare an accounting. At trial, Valjean and MWI articulated competing theories as to the best method to estimate costs and payments pursuant to the terms of the MSA. Paul Regan ("Regan"), a Certified Public Accountant, Certified Fraud Examiner, and Valjean's expert witness, prepared Valjean's accounting. (Regan Decl. Ex. 1). Owner and CEO of MWI, Werdiger, prepared MWI's accounting in conjunction with MWI employees. (Werdiger Decl. at ¶ 1; Skibenes Decl. at ¶ 13; Schissel Decl. at ¶ 2). Valjean and MWI recognized that any accounting necessitated, among other things, that "MWI collect ten years of data concerning sales, cash receipts, purchases, expenses, costs of diamonds, jewelry style cards, all concerning approximately 400,000 transactions." (Werdiger Decl. at ¶¶ 101; 107; Tr. 310:16 — 314:8; Regan Ex. 4).
At trial, Valjean and MWI both recognized that the MSA controlled and, therefore, any accounting analysis was to be conducted in conjunction with and pursuant to those principles. (Bressler Tr. 17:17 — 19) ("Valjean is seeking damages for amounts that it should have been paid under the parties' manufacturing and security agreement"); (Keenan Tr. 26:5 — 6) ("Mr. Regan's analysis strictly follows the terms of the MSA and used contemporaneous cost records wherever available"). The accounting analysis may be divided into six separate, but interrelated, segments: (1) proceeds due Valjean pursuant to Section 5.1 of the MSA or "Valjean Payments"; (2) "Contract Labor" billing; (3) "Expense Reimbursements"; (4) duty rebate on import jewelry; and, (5) "Credits" due MWI.
1. "Valjean Payments" Under MSA § 5.1
MSA § 5.1 controls the calculation of "MWI Payments to Valjean" and provides:
. . . . MWI shall pay to Valjean, for each piece of Jewelry and each Nova/MWI Diamond for which final Sales Proceeds were received in the preceding month (the sum of these payments, a `Valjean Payment') the Sales proceeds for such Jewelry or Nova/MWI Diamonds minus the MWI Costs associated therewith.
(Ex. G. at 9). In other words, Valjean Payments are "to be calculated monthly by deducting MWI Costs from Sales Proceeds." (Regan Decl. at ¶¶ 2 — 3; Werdiger Decl. at ¶¶ 48 — 49).
Valjean and MWI accountings differed by approximately $25 million, which included a $20 million gap between Valjean and MWI's estimates under § 5.1 of the MSA. The "Valjean Payment" differential of some $20 million, calculated pursuant to MSA § 5.1 is a consequence of three factors: (a) the "Valjean Payment" calculation; (b) the Diamond and Metal Values for Valjean manufactured products; and, (c) sales commissions and advertising costs.
The remaining difference of $5 million is the result of divergent "MWI Cost" calculations. See infra at 19-21.
a. "VALJEAN PAYMENTS"
In accordance with MSA § 5.1, the "Valjean Payments," which MWI was to make to Valjean on a monthly basis, began on November 15, 1994. (Regan Decl. at 1 ¶¶ 2, 3). The MSA controls the calculation of "Valjean Payments" and details (i) what constitutes "Sales Proceeds"; (ii) how to calculate the proceeds from Fred Claar Jewelry; and, (iii) how to treat the Indian labor force.
Designed and manufactured for lower price points than the Eloquence line of jewelry, Fred Claar Jewelry is designed by Fred Claar, an MWI employee, and manufactured in India. (Werdiger Decl. at ¶ 67).
"MWI Costs" is also a defined term and includes diamond value, precious metal value, sales commissions, benefits and mandated employee taxes set at 12% of sales commissions, and MWI charges at either 4% or 8% of Sales Proceeds depending on the product. (Ex. G. at 2-3). See infra at 19.
Sales Proceeds are a defined term in the MSA and:
[M]eans with respect to any Jewelry or Nova/MWI Diamonds, the net amount, after deducting any customer discounts, of the cash payment actually received by MWI from customers in connection with the sales thereof by Nova/MWI.
(Ex. G. MSA at 3). In addition, the MSA ensures that "Sales Proceeds . . . shall not be reduced below zero by the MWI Costs associated therewith." (Ex. G. at 9).
"Sales Proceeds" are not inclusive of all sales or transactions. For a transaction to be considered "Sales Proceeds," there had to be "full payment on — in an item, in an invoice, at the date at which there {sic} had been received by MWI full payment." (Regan Tr. 415:21 — 23). However, certain purchases took place over time. In such cases, a portion of the total cost was paid at the time of the sale and the remainder was paid over time. When such purchases were paid over time, the "Sales Proceeds" calculation needed to recognize net proceeds and include the amount that was actually received by the seller, not the total purchase price. (Regan Tr. 419:24 — 420:3).
Known as ad allowances, if there was a $100 invoice and the amount paid was $80, the "Sales Proceeds" should only calculate the net. In such circumstances, it would be inappropriate under those circumstances to deduct the $20 "the second time . . . because that would result in a second reduction for the same ad allowance." (Regan Tr. 420:1 — 7).
In accordance with the MSA, "Sales Proceeds" reflected the actual costs for colored stones and generic jewelry, and not "base price" deductions. (Werdiger Tr. 245:2 — 6). A "Sales Proceeds" calculation that included "base prices," rather than actual costs, undervalued import jewelry transactions, and provided MWI with a greater deduction from "Sales Proceeds" than the MSA permitted. (Regan Decl. at ¶¶ 9-10; 14-15).
Similarly, sales to customers not covered by the MSA are not "Sales Proceeds." (Regan Tr. 418:16 — 419:5). The sale of jewelry, for example, which occurred prior to the parties agreeing to the terms of the MSA, should not be included as "Sales Proceeds" (Regan Tr. 418:22 — 23; 419:16 — 18).
Pursuant to Section 5.1 of the MSA, Valjean claims millions of dollars, before deduction of Sales Commissions, and the following pages analyze its claims and those of MWI.
"Sales Commissions" is an element of "MWI Costs" and includes "the full amount of commissions paid on the sale of diamonds and jewelry along with mandated taxes and benefits for the sales force." (Werdiger at ¶ 49(c)).
ii. Fred Claar Jewelex
Almost 18 months after the parties entered into the MSA, Martin Gruber began preliminary conversations with the Kothari family in India, owners of Jewelex, regarding a possible position as a consultant. Jewelex was an Indian company that Martin Gruber used to produce Eloquence related products for MWI. The Kothari family was interested in the American market and invited Martin Gruber's expertise before they began direct sales. (M. Gruber Decl. at ¶ 36). As time progressed, the discussions between Jewelex and Martin Gruber evolved and the parties discussed a potential arrangement between the Kothari family and Martin Gruber that would include both a yearly fee and commissions which Martin Gruber estimated at $300,000 per annum. (M. Gruber Decl. at ¶ 37).
Sometime after the negotiations began and around the time that Kothari "had drafted a letter to announce to customers that [Kothari] had formed an association with Gruber and that Gruber was coming to help market Jewelex products in the United States" (Kothari Dep. at 50:2 — 23), Martin Gruber determined to share these negotiations and proposed agreement with Werdiger. (M. Gruber Decl. at ¶ 37). According to Martin Gruber, he informed Werdiger about his conversations with Jewelex and Werdiger "did not object." (M. Gruber Decl. at ¶ 37).
A year later, Martin Gruber and Werdiger met to discuss a number of concerns. As Werdiger tells the story, they were on Central Park South when Martin Gruber complained that the Fred Claar Jewelry business was undermining the success of Gruber's bridal products and it was at this time that "[Martin] Gruber told [Werdiger] about his $300,000 guarantee." (Werdiger Tr. 313:21 — 25). Specifically, according to Werdiger, Martin Gruber told him:
Jewelex offered him a consulting job to help Jewelex manufacture and market jewelry in the U.S. I do not recall the exact amount Marty told me that he was guaranteed, but I remember that it was a fixed amount between $200,000 and $300,000 per year.
(Werdiger Decl. at ¶ 85). In response, according to Gruber, and because Werdiger wanted to ensure that Martin Gruber remained with MWI, Werdiger made a reluctant counteroffer:
[Werdiger] told me that he wanted me to continue working with his company to build our India business together. To deal with [my] objections about the Fred Claar and Eloquence business overlapping, he proposed that Valjean would get sales credit for the Fred Claar bridal jewelry imported from India and that Fred Claar would not compete with Eloquence in this product category. [Werdiger] also told [me] that he did not feel comfortable with me working with Jewelex to help them with U.S. Sales.
(M. Gruber Decl. at ¶ 39). According to Werdiger, the purpose of the counteroffer was simple: to ensure that Martin Gruber's loyalties remained with MWI and not to the Kothari family:
I was not happy with Martin Gruber working for Jewelex because Jewelex competes with MWI . . . [and] as a means of getting him to forego the opportunity to work for Jewelex, which based on what he told me I believed was a firm offer, I agreed to pay him a percentage of the sales of Claar FC Jewelry sold to all customers, not just Division V Customers.
(Werdiger Decl. at ¶ 86). Again, if we believe Gruber, he accepted Werdiger's offer and "told Bobbie Kothari at Jewelex that he would not be able to go forward with a contract with Jewelex" and, indeed, that is what happened. (M. Gruber Decl. at ¶ 39). Werdiger acknowledges that he intended:
To provide Martin Gruber with roughly $300,000 per year to offset amounts he claimed to have been guaranteed from Jewelex. We did not, however, specifically agree on a formula for determining the basis of such payments.
(Werdiger Decl. at ¶ 86); ( See also May 29, 2003 Ltr. from Attorney for Valjean, Howard L. Rosoff ("Rosoff"), to Attorney for MWI, Robert Christmas ("Christmas")) (Ex. SSSSS) (emphasis added).
However, according to Werdiger, he was unaware of certain aspects of the Kothari offer that would have altered his counteroffer or negated it in its entirety:
When I agreed to make payments to Valjean for all sales of Claar FC Jewelry, I did not know the following facts . . . [1] Jewelex believed that the agreement was being negotiated with Martin Gruber on behalf of MWI's Nova/MWI division, not Martin Gruber personally; [and,] [2] Jewelex never offered Martin Gruber a guarantee of $300,000 per year.
Had I known that the deal being negotiated was with NOVA/MWI, not Martin Gruber, and that Jewelex never agreed to pay Martin Gruber $300,000 per year, I never would have agreed to pay Martin Gruber on sales of Claar FC Jewelry beyond what the existing compensation for Division V sales of Claar product.
(Werdiger Decl. at ¶¶ 88 — 89). Considering the communications between Werdiger and Martin Gruber, in particular the 1998 Central Park South conversion and the May 2003 letter from Rosoff to Christmas, the evidence strongly suggests that Werdiger intended, and Gruber understood, that Werdiger offered to pay Gruber approximately $200,000 to $300,000 per year. While the conversations are not clear and convincing evidence and, therefore, do not meet the standard for fraud, the Jewelex offer does not, and likely did not, include a limitless return on "excess payments for Claar Sales." Accordingly, the difference between Valjean and MWI's accounting estimates will reflect that Valjean, before the deduction of Sales Commissions for Claar FC Jewelry, is entitled to approximately $1.5 million, not $7 million. The $5.5 million difference is attributable, for the most part, to the parties' perception of the agreement and, more particularly, whether there was a `cap' on Werdiger's payments to Martin Gruber or were they to go on and on. I find that there was a cap and, accordingly, Valjean is not entitled to $7,080,643 but, rather, to $1,542,129.
iii. Indian Labor Cash Advance
According to MWI, Valjean is responsible for the manufacturing of jewelry and, therefore, Valjean is responsible for paying the Indian labor force. (Werdiger Decl. at ¶ 116). However, pursuant to the terms of the MSA, MWI is not entitled to a credit for "Indian Labor Cash Advances" because the advances were never paid directly to Valjean but, rather, to the Indian jewelry manufacturers themselves. (Werdiger Decl. at ¶ 116). Despite MWI's claims, Valjean was not responsible for the manufacturers in India. (M. Gruber Decl. at ¶¶ 28 — 32). The Indian manufactures were not subcontractors of Valjean: MWI approved all orders, bought materials, received the goods, and advanced the labor costs. (M. Gruber Decl. at ¶¶ 28, 32). Indeed, even the contracts were between the Indian companies and MWI. (M. Gruber Decl. ¶¶ 30 — 33). I credit Gruber's testimony and corroborative evidence here and MWI is NOT entitled to an $8,792,014 credit for advances on Indian labor.
b. DIAMOND AND METAL VALUES
Similar to the calculation of "Sale Proceeds," the MSA controls the calculation of diamond and metal values. Overall, the calculation should have relied, as best as possible, on actual costs, actual expenses and recognized the fluctuations in the gem and stone markets. An accounting of diamond and metal values under the MSA may be conducted in four-parts: (i) diamond value and generic jewelry; (ii) colored stones; (iii) charges and adjustments; and, (iv) sales of inventory after August 31, 2004.
i. Diamond Value Generic Jewelry
Pursuant to MSA § 2.1, MWI agreed to supply diamonds to Valjean to manufacture jewelry. (Ex. G at 4). The MSA also provides that MWI shall receive a contractually delineated mark-up on the diamonds it supplied to Valjean. (Ex. G at 2). MWI would recover the costs of the diamonds plus a profit on the diamonds from the proceeds of the sale of the jewelry. (Ex. G. at 2; 9). In particular, the MSA grants MWI an 8% charge on sales of jewelry designed by Valjean ("MWI Charge") and 4% on the sale of loose diamonds and generic jewelry. (Ex. G. at 2).
The MSA distinguishes between two different types of jewelry: "Jewelry" and "Nova/Diamonds." "Jewelry" is defined as "jewelry manufactured by Valjean or its subcontractors" and as "not includ[ing] jewelry . . . which is manufactured by Persons other than Valjean." (Ex. G. at 2).
The profit MWI was entitled to receive for the diamonds was based upon "shape, size, color, quality," and "MWI would receive the same price that it normally would receive from a bona fide third party customer." (Werdiger Decl. at ¶ 27). For those diamonds that MWI did "not regularly inventory," MWI was "to purchase those goods on the open market and establish a Diamond Value based on its cost for each category after assortment plus a profit margin averaging 15%." (Werdiger Decl. at ¶ 27).
MWI's "Diamond Value" calculation failed to recognize the actual purchase price for each category of diamond and, instead, employed a stagnant "cost table" prepared by Werdiger in 2003 and updated in 2004 (Werdiger Tr. 227:8 — 16), which averaged actual acquisition costs over a 10-year period. (Regan Decl. at ¶ 4(iii)). MWI's acquisition cost table inflated the cost of diamonds by failing to recognize the deflation of diamonds over the past decade. (Regan Decl. at ¶ 5). Using limited available purchase records and historical style cards, Valjean employed a Diamond Value that, so far as I could determine, more accurately reflected the charge in the MSA, to wit, unlike Werdiger's numbers, Valjean's Diamond Values deflated, as is the fact, the cost of diamonds over time and, as opposed to MWI, established different values as averse to MWI's single diamond value over the ten-year period. (Regan Tr. 426:24 — 427:2; 427:19 — 431:17).
"[T]o operate a jewelry business and maintain accurate and useful records, a "style card," or bill of materials, is required for each style of jewelry manufactured and sold. The style cards contain the following information: (a) a unique reference number; (b) description of the item; (c) a description of all diamonds and other stones in the item, including shape, size, color, quality, weight, and price per carat; (d) the precious metal weight and value; (e) labor value in the piece; (f) standard cost, or arithmetic cost, which is the cost basis for determining a selling price, (g) actual cost, or average cost, which reflects the actual cost paid for each style; and (h) the projected selling price." (Werdiger Decl. at ¶ 41) ( See also, Ex. L.)
Accordingly, I find Valjean is entitled, before the deduction of sales commissions, to $3,553,470 for sale of "loose diamonds" and $1,611,637 for the sale of "MWI Generic Jewelry."
ii. Colored Stones
Absent any clause in the MSA, MWI is not entitled to any mark-up on colored stones and is only entitled to recover the amount it paid for such stones. (Regan Decl. at ¶ 7). Accordingly, the evidence presented by Regan is credible and that Valjean is entitled, before the deduction of sales commissions to $632,500 for sales of "colored stones."
Colored stone transactions should be determined by "dividing the value shown for the stones in the DEPRIN field of MWI's sales order file by 1.2, based on my [Regan's] understanding that the amount recorded in the DEPRIN field represents 120% of the actual costs." (Regan Decl. at 7).
iii. Charges and Adjustments
Both MWI and Valjean reviewed all the charges and adjustments to insure that Valjean received what they were due. MWI estimated "Adjustment and Charges" at $2,084,385, while Valjean estimated the "Adjustment and Charges" at $2,393,082. Valjean's calculations were based upon the estimation of their expert, Regan, who reached his adjustment estimates "based upon samples of what we were able to do with the documents that we did get." (Regan Tr. 368:17 — 23). Despite MWI's arguments to the contrary, I am convinced that the testimony of Regan demonstrated that, using a preponderance of the evidence test, "Adjustment and Charges" totaled $2,393,082. (Regan Ex. 3).
iv. "Valjean Payments" on Sales of Inventory after August 31, 2004
Both Valjean and MWI recognize that Valjean is entitled to the proceeds earned pursuant to the terms of the MSA after July 31, 2004. However, Valjean's $7,000,000 estimate is too speculative. Accordingly, MWI will be obligated to pay Valjean its portion as sales occur or at the latest within [30] thirty days thereafter. c. HEPCO EXPENSES
As discussed infra at 14 — 15, Van Lightner is an agent of MWI and, accordingly, any expenses incurred by MWI for sales of Valjean designs by Van Lightner after September 30, 2003 is MWI's responsibility.
The purpose of HEPCO was simple:
MWI engaged the services of HEPCO, a payroll services company, to administer the payroll, expenses, commissions and benefits for Martin Gruber, Fred Gruber, and the Van Lightner Sales Force from 1994 through 2003, excluding 1996. During 1996, MWI assumed the responsibilities from HEPCO.
(Skibenes Decl. at ¶ 11). Dictated by the terms of the MSA, HEPCO employee expenses included items such as mandatory taxes and medical benefits. Pursuant to the MSA, "mandated employee taxes and benefits paid or payable to or for the salesmen shall be set at 12 percent of sales commissions and shall be reset annually by mutual agreement of the parties." (Ex. G at 2).
Despite the lack of formal negotiations, Valjean's actions spelled out an understanding to the effect that Valjean was responsible for sales force compensation. (F. Gruber Tr. 59:16 — 17). For example, while the parties never discussed the HEPCO payments, and over the years, never reached new agreements to increase the 12 percent (Werdiger Tr. 248:8 — 10), both parties were aware of the additional expenses, including "reciev[ing] payment instructions relating to the Van Lighter employees and other employees in California directly from Fred Gruber or one of his assistants at Valjean." (Pape Decl. at ¶¶ 4 — 6). In addition, "both Fred Gruber and Martin Gruber were paid by HEPCO" (Pape Decl. at ¶ 8), and HEPCO "provided [Valjean] the information so [Valjean] knew what MWI was spending." (F. Gruber Tr. 57:22 — 25). In fact, Fred Gruber acknowledged that Valjean was responsible for the HEPCO associated costs and MWI should be credited for HEPCO payments:
Since we ultimately pay for the compensation to the sales force and Marty, adding me should not be a problem. I am sure you were only surprised by it, and again[,] I am sorry that I did not make you aware of it before hand.
Should you wish to discuss this with me, please feel free to call.
(Ex. KK — Feb. 10, 2001 Email from F. Gruber to Kleinberg). As a result, HEPCO covered Martin Gruber's motorcycle accident injuries and, continued to do so, even when the premiums for the insurance grew. (M. Gruber Tr. 140:6 — 8). To be sure, Martin Gruber also recognized that MWI should be credited for the HEPCO costs:
It would be my expense in our joint venture. . . . I understood that it would be something that MWI was paying for and it would be deducted as one of their charges and that it was capped at 12 percent, the fringe part of the compensation, whatever that includes.
(M. Gruber Tr. 142:20 — 144:5).
Accordingly, MWI is entitled to be credited $23,963,368 for all amounts it paid for taxes and expenses relating to HEPCO.
2. Contract Labor Billings
Pursuant to the MSA § 3.2, Valjean contracted to manufacture certain products for MWI. (Ex. G. at 6). Known as "Contract Labor," MWI would place "purchase orders" with Valjean to manufacture and repair jewelry. (F. Gruber Decl. at ¶ 22). It is uncontested that MWI is obligated to reimburse Valjean for labor performed to manufacture MWI generic products. (Werdiger Decl. at ¶ 121).
The other charges claimed by Valjean are "for production, prototypes and repairs for Eloquence (Valjean Design) products." (Werdiger Decl. at ¶ 122). Valjean is required, pursuant to the MSA § 3.4, to "arrange for the repair of such Jewelry returned for repair by any third parties and shall address any third party inquiries which Nova/MWI requests be addressed." (Ex. G at 7). "Jewelry," a defined term in the MSA, connotes those products manufactured by Valjean or its subcontracts.
Valjean did not manufacture the Eloquence product line that it repaired and included in its contract labor figures. Rather, Valjean designed the product and it was manufactured elsewhere. (F. Gruber Tr. 47:19 — 48:10). MSA § 3.2(d) permits Valjean to recover contract labor costs associated with the repairing of a product that it did not manufacture. (Ex. G at 7). Accordingly, pursuant to § 3.2(d), Valjean is entitled to reimbursement of the full amount, $2,569,991, for the contract labor it preformed on behalf of MWI during the life of the MSA.
3. Expense Reimbursements a. FREIGHT COSTS
According to Fred Gruber, Valjean incurred significant freight costs during the life of the MSA:
The total freight expenses incurred by Valjean since 1995 are $782,634. Of this amount, Valjean is only seeking reimbursement for $247,256. Under the MSA, the definition of "MWI Charges" states that MWI is responsible for paying for all product shipments. There are four categories of costs incurred by Valjean for product shipments: (1) product shipped to Van Lightner salespeople, (2) product shipped on memo to MWI, (3) product shipped on memo to customer and (4) product shipped directly to customers by Valjean. I believe that these four categories make up a significant amount of the $782,634. . . . Since these sales records exist in an electronic format, I was able to extract the shipping price field from all the sales records for the period and determine a total amount for product shipments to customers of $247,256. . . . Thus, the $247,256 amount reflects only a minimum of what Valjean incurred for shipping product under the MSA. However, since I was unable to isolate the other types of product shipment costs, Valjean only seek reimbursement in the amount of $247,256.
(F. Gruber Decl. at ¶ 63).
Pursuant to the definition of "MWI Charges," MWI is obligated to reimburse Valjean for "expenses incident to performing this Agreement [MSA], including administration, shipping and insurance." (Ex. G at 2) (emphasis added). Therefore, as recognized by Werdiger, freight costs were MWI's responsibility and, as such, Valjean should be reimbursed $247,256 for those costs.
b. SECURITY EXPENSES
"From 1996 through 1999, Valjean suffered a number of thefts and robberies, which greatly impacted the insured's ability to secure insurance." (Herzog Decl. at ¶ 6). According to Werdiger, the security costs involved with the Van Lightner business became prohibitive. In particular, between 1998 and 2003, Van Lightner security constituted a third of Valjean's total revenue. ( See Werdiger Tr. 245:20 — 22; 246:3 — 8).
The increase in security was the result of two events:
The first came in 1996 after we suffered a line loss in California which prompted us to utilize security guards to protect the teams and lines when they were moving between locations. In 1995[,] we had only a few teams traveling to do sales. But in 1996, after we picked up the Sterling Account, we added at least 7 teams of traveling sales people for Van Lightner. Providing the security necessary for these additional sales people greatly increased our costs in 1996. The second major jump occurred in 1999. From 1997 to 1999, we were subject to a number of robberies. These robberies caused us to adjust our approach to security. Prior to 1999, we controlled costs by adjusting the level of security based on what we thought was the risk for certain times and places. The losses in 1997 and 1998 caused us to apply a more uniform approach.
(F. Gruber Decl. at ¶ 68). Werdiger recognized that "Valjean was incurring these costs," and that absent the security expenditure, "MWI was at risk of losing its insurance coverage." (Werdiger Tr. 245:16 — 19). The Van Lightner Sales Force, acknowledged by Werdiger as an agent of MWI (Werdiger Tr. 262:10 — 263:3), was responsible in large part for the increased security expenditures.
Pursuant to MSA § 3.1, MWI is responsible for the security of its agents and, therefore, because Van Lightner is a recognized agent of MWI, MWI is responsible for their security. Accordingly, Valjean is entitled to reimbursement for the security expenses incurred. Utilizing Regan's analysis, Valjean is entitled to $3,265,568 in reimbursements for security expenses.
c. ADVERTISEMENTS AND TRADE SHOWS
Marketing retail jewelry includes direct advertising, customer marketing programs, and attending industry tradeshows:
The advertising that Valjean conducted over the years specifically promoted Nova and Designs by Gruber, but also provided an entrance for the Eloquence, Van Lightner and to some extent in later years Claar. Our advertising did not just promote the Nova name, it also promoted the superior design, and marketing capability that Valjean and MWI offered to our customers.
I would typically send Richard Werdiger copies of the ads that we ran for Nova. He and I would discuss ads and he would offer his opinion on what he thought about an advertisement and how he would change it. After Richard expressed an interest in our advertisements, I directed my staff to send him copies of all our print advertising and any customer advertising of Nova product.
(M. Gruber Decl. at ¶ 63 — 64). As Werdiger acknowledged at trial, MWI was aware of the fact that Valjean was participating in the layouts for and paying for advertising and trade show expenses, according to Werdiger:
It was always understood that for Valjean[,] its advertising and trade show costs were its own costs . . . [t]o the extent that they selected to place advertisements or attend trade shows in their own name.
(Werdiger Tr. 246:14 — 22). Moreover, MWI engaged in a limited amount of advertising on behalf of Valjean:
As the profits MWI was to receive was limited, I would only agree to commit a certain amount to marketing for the launch of the business. Under Section 3.4 of the MSA, MWI agreed to spend $200,000 from the date of the MSA through the end of 1995. Thereafter, MWI would determine how much to spend.
In fact, MWI spent $194,021 on advertising, trade shows, and customer support programs from October 1994 through 1995. From 1996 through 2003, MWI spent an average per year of $233,887 on advertising, trade shows, and customer support programs.
(Werdiger Decl. at ¶ 54 — 55). MWI's participation took on a variety of forms:
. . . with respect to the Basel Fair, MWI for several years prepared and handled the Carnet (or government documentation) for delivering the jewelry line to Basel. MWI also paid the cost to get the jewelry line to Basel.
(M. Gruber Decl. at ¶ 66). Werdiger and his company were aware of the advertising that Valjean ran for Nova or that were linked to MWI products:
I don't remember exactly the specific date, but at some early stage, Richard expressed interest in some of the advertising just to show some of the people in the New York office and maybe for design ideas or direction. And then sometimes after he had gotten some, he commented also about whether he liked them, or he did not. I remember his comment about me changing the colors of the ads, and he didn't like my signature because it looked like "Gumby" instead of "Gruber" and things like that. We had dialogue about it and I told the people inside Valjean to send him copies — actually, I think I told him to send them more than one, two copies, because people in the office there wanted to see them also, of everything that we were doing plus any of the ads that customers would be running on some kind of co-op basis that we would get to go forward with host.
(M. Gruber Tr. 200:12 — 201:1). Valjean incurred substantial tradeshow costs over the ten-year period between the end of the first year of the MSA and the termination of the MSA:
The total trade show expense Valjean incurred during the ten-year period was $1,306,122.87. . . . The total advertising expenses we incurred during this period was $1,484,933.62.
(F. Gruber Decl. at ¶¶ 65, 67). The testimony makes it clear, however, that after the initial contribution, MWI never agreed to additional dollars for advertising. Trade show expenses were a little different in that MWI actively participated in them:
At the same time, Valjean was conducting its own advertising and attending trade shows separately from MWI, primarily for the Nova line of jewelry. While we were aware of these activities, they were always understood to be Valjean's cost. Neither Martin Gruber nor anyone else at Valjean sought MWI's permission to engage in these activities and prior to this lawsuit Valjean never sought reimbursement from MWI for the trade shows and advertising expenses listed in their schedules.
(Werdiger Decl. at ¶ 56). At trial, Fred Gruber recognized that MWI was not responsible for advertising costs associated with the Kathy Ireland World Wide. (F. Gruber Tr. 53:12 — 14) ("Q: You don't think that MWI is responsible for advertising costs in relation to Kathy Ireland, do you? A: No."). In addition:
It was always agreed that Valjean would pay for whatever advertising and trade show expenses it incurred. In recognition of this, Valjean only asked MWI on one occasion to pay for advertising and that was in connection with a charity event . . .
(Werdiger Decl. at ¶ 56).
MSA § 3.4 governs marketing, advertising, and pricing of jewelry manufactured by Valjean. In particular, "MWI shall pay for advertising, tradeshows and customer marketing programs in an amount, for the period from the date of this agreement through December 31, 1995, of not less than $200,000 and thereafter, as determined by Nova/MWI." (Ex. G. at 7). However, after December 31, 1995, Valjean and MWI never negotiated new budget amounts for advertising and tradeshows. As such, Valjean failed to pursue reimbursements and continued to spend its own money.
Accordingly, after the first year of the MSA, MWI never agreed to subsidize Valjean's advertising expenditures. Pursuant to the terms of the MSA, Valjean is not entitled to any reimbursement for advertising expenditures. However, because MWI actually participated in the trade shows with Valjean, it was reasonable for Valjean to presume that MWI would subsidize some of the expense and, therefore, Valjean is entitled to $1,306,123 in reimbursements for trade show expenditures made on behalf of MWI but none for advertisements.
d. MATERIAL PURCHASES
MWI supplied "precious metal to Valjean to manufacture jewelry." (Werdiger Decl. at ¶ 29; Ex. G. at 4). Under the MSA, MWI was not entitled to any profit, mark-up or interest on the precious metals it provided Valjean. (Werdiger Decl. at ¶ 29). Rather, "MWI merely recouped its investment in precious metal from the proceeds of the sale of jewelry." (Werdiger Decl. at ¶ 29; Regan Decl. at ¶ 2; Ex. G at 9).
Pursuant to MSA § 2.1(b), MWI was to consign precious metal to Valjean to manufacture jewelry. (Ex. G at 4). MWI and Valjean entered into two separate Consignment Agreements, whereby MWI maintained a security interest in all Diamonds (Ex. H), Gold and Other Precious Metals (Ex. I). The Consignment Agreements made clear that all diamonds, gold and other precious metals delivered to Valjean were the property of MWI and, more specifically, title did not pass to Valjean. (Ex. H. at 2; Ex. I at 2) ("Title to all Consigned Merchandise delivered to the Customer hereunder shall remain in MWI"). The Consignment Agreements and the MSA required Valjean to return all consigned materials to MWI upon termination:
Upon termination of this agreement for any reason, the Customer shall within twenty-four (24) hours return to MWI or to such other location as MWI may direct any Consigned Merchandise. Such return shall be at the Customer's expense and risk.
(Ex. H at 3; I at 3).
Accordingly, Valjean is not entitled to $120,318 credit for diamonds, gold or other precious metals purchased by Valjean for MSA sales because the diamonds, gold, and other precious metals were on consignment and title never passed to Valjean.
e. IMPORT PRODUCTS PURCHASED BY VALJEAN
MWI, and its affiliate Atamas, placed orders for jewelry to be made in India, the Indian companies manufactured the jewelry, the items were placed in the MWI system, MWI paid for the jewelry manufactured in India and Martin Gruber was never made aware of any of the orders. (M. Gruber Tr. 203:15 — 207:15). Werdiger made clear to Martin Gruber that MWI would control the Indian product orders, Werdiger would approve all orders, MWI would purchase the goods made by the Indian companies, and the Indian Jewelry was sold to Van Lightner and Eloquence. (M. Gruber Decl. at ¶¶ 28 — 29).
In accordance with the terms of the MSA, because Valjean did not `manufacture' the jewelry the MWI Charge on imported jewelry should have only been 4%. (Ex. G). Therefore, Valjean is entitled to a $718,427 reimbursement for import products purchased by Valjean on behalf of or for MWI.
f. FTS PAYROLL
Absent evidence to the contrary, MWI must credit Valjean with $345,724 for October 2003 and $71,000 for November and $71,000 for December 2003, for the months of the FTS payroll paid by Valjean. (Ex. A at MWI57539). In sum, Valjean is, therefore, entitled to a credit of $487,724 for FTS payroll.
4. Duty Rebate on Import Jewelry
As noted supra at 13-15, MWI is obligated to reimburse Valjean for "expenses incident to performing this Agreement [MSA], including administration, shipping and insurance." (Ex. G at 2). According to Regan, Valjean is entitled to $278,496 for "duty on Indian imports refunded to MWI by the United States government." (Regan Decl. at ¶ 14). The duty refunds reviewed by Regan considered expenses incident to shipping, an expense covered by the MSA. Accordingly, pursuant to the MSA, Valjean is entitled to a $278,496 reimbursement for such costs. 5. MWI Credits Against Amounts Due Valjean a. PAYMENTS TO VALJEAN
"During the period of the MSA, the percentage of duty charged by the United States government on Indian import jewelry was removed." (Joint Stip. at ¶ 15).
It is uncontested that MWI is entitled to credits for payments made to Valjean from January 1995 to June 30, 2003. (Stip. at ¶ 14). As the parties entered into the MSA on October 3, 1994 and MWI made payments from the beginning, the fact that the checks were made payable to Nova Stylings instead of Valjean is a distinction without difference. (M. Gruber Tr. 190:16 — 20; see also Regan Tr. 400:23 — 402:5; Ex. D at 2-3 — Collateral Surrender Agreement). Accordingly, MWI should be credited $43,305,592 for making payments to Valjean, even though the checks were written to Nova Stylings, from October 1994 to December 1994. b. INSURANCE
In addition, pursuant to the terms of the MSA, MWI was entitled to receive interest on the financing it provided Valjean. To ensure that MWI was made whole, and not earn a profit on the advances, the MSA provided that MWI would receive interest on "all outstanding Cash Advances [defined therein] at an annual rate equal to MWI's weighted average cost of funds borrowed from its principal bank lenders." (Ex. G at ¶ 2.4). Accordingly, the interest due on cash advances to Valjean to which MWI is entitled a credit totaled $4,850,149. (App. 1 — 3).
MSA § 3.1 governs insurance:
Each of MWI and Valjean shall, unless otherwise agreed, be responsible for any Jewelry, loose diamonds and precious metals while in the possession of such party or its agents. . . . Without limiting this responsibility, each party shall insure such Jewelry and precious metals. . . . Each of MWI and Valjean shall maintain the Jewelry, loose diamonds and precious metals in its possession strictly in accordance with all security measures required or recommended by the insurance carrier issuing any such policy . . .
(Ex. G at 6). MWI purchased jewelers block insurance that included "premises insurance, travel insurance and shipping, and other items." (F. Gruber Tr. 41:22 — 42:1). The parties have stipulated that the insurance costs were $1,755,063 for the Van Lightner sales force, $171,401 for the premises, and $597,337 for shipping and "other." (Stip at ¶ 18). The issue at trial was which party was responsible for those costs.
At trial, Fred Gruber conceded that MWI should be reimbursed for "the premises, which is $171,401, and the shipping and other, which is $597,337." Valjean did not stipulate to insurance that would cover the Van Lightner Sales Force.
The members of the Van Lightner Sales Force entered into "an employment agreement with MWI and HEPCO `as agent for [MWI]'." (Werdiger Decl. at ¶ 36). MWI was "responsible for any jewelry, loose diamonds, and precious metals while in the possession of such party or its agents." (Ex. G. at 6) (emphasis added). MWI is responsible for the insurance of its agents. Therefore, MWI is not entitled to a $1,755,063 credit for Van Lightner sales force insurance paid for by MWI. (Ex. G. at 6).
c. FINDINGS
"Findings" consist of "small gold and platinum components used in jewelry." (Skibenes Decl. at ¶ 24). MWI purchased $380,161.53 worth of "findings" for the Van Lightner Division. (Skibenes Decl. at ¶ 26). As MWI paid for these findings, MWI is entitled to a $380,162 credit.
d. DAMAGED DIAMONDS
Valjean is responsible for the cost of damaged diamonds. (Werdiger Decl. at ¶ 190). The damaged or altered diamond market is small and the prices paid for such diamonds are discounted. (Lew Decl. at ¶¶ 31 — 32). Martin Gruber acknowledged that MWI did not receive a credit for chipped or broken diamonds returned by Valjean, and that MWI was entitled to such a credit. (M. Gruber Tr. 175:15 — 24). As Valjean damaged the diamonds, Valjean is responsible for them, and, therefore, MWI is entitled to a $283,993 credit.
e. STIPULATIONS
Valjean and MWI stipulate to the following: MWI should not be credited for Diamond Reconciliation. MWI should be credited: $582,908 for import purchases included in MWI payments to Valjean; $330,259 for colored stone purchases included in MWI payments to Valjean; $50,000 for the Intergold settlement; $886,872 for metal scrap; $31,422 for LA Importing; $438,413 for Martin and Fred Gruber private sales; $270,000 for uninsured salesperson loses; $171,401 for Insurance on the Valjean premises; and, $597,337 for Valjean shipping insurance. (Joint Stip. at ¶¶ 15-20).
II. CONCLUSIONS OF LAW
A. Valjean's Claims 1. Breach of ContractUnder New York law, to establish a breach of contract, a plaintiff must demonstrate: (1) the existence of a valid contract; (2) performance of the contract by one party; (3) breach of the contract by the other party; and (4) damages sustained because of the breach. See Int'l Gateway Exch., LLC v. W. Union Fin., 333 F. Supp. 2d 131, 141 (S.D.N.Y. 2004). Here, the parties do not dispute that a valid contract existed between Valjean and MWI. (Stip. at ¶¶ 12-13). The evidence clearly demonstrates that Valjean adequately performed under that contract. Accordingly, the issue is (a) whether MWI breached the MSA and, if so, (b) what are the damages.
a. DEFENDANT BREACH
Clearly, MWI failed to pay Valjean in accordance with the MSA and "failure to tender payment is generally deemed a material breach of a contract." Wechsler v. Hunt Health Sys., Ltd., 330 F. Supp. 2d 383, 417 (S.D.N.Y. 2004); See ARP Films, Inc. v. Marvel Entm't Grp., Inc., 952 F.2d 643, 649 (2d Cir. 1991).
MWI also failed, pursuant to MSA § 4.1, to "maintain financial records necessary with respect to all matters relating to" the MSA, including a record showing "the amount of each Valjean payment." (Ex. G. at 8). See Rodgers v. Roulette Record's, Inc., No. 84 Civ. 8626, 1990 WL 17616, at *5 (S.D.N.Y. Feb. 23, 1990) (holding that failure to maintain accurate records, including semi-annual statements to plaintiff, was a breach of contract). During their ten-year relationship, MWI and Valjean never agreed to modify MWI's obligation to maintain accounting records, nor did Valjean excuse MWI from performing an accounting pursuant to the MSA. While MWI's chief financial officer, Alan Kleinberg ("Kleinberg"), and Werdiger walked the walk and talked the talk, when all is said and done, they failed to create an accounting system that would calculate the payments due under the MSA. ( See Werdiger Tr. 240:12 — 15; Kleinberg Tr. 328:6 — 10). This was a clear obligation and it was never fulfilled.
b. VALJEAN'S CLAIMS FOR LOST PROFITS
See Tr. 12:9 — 13:14; 16:14 — 18.
To recover damages for lost profits because of a contractual breach, a party must demonstrate:
[1] [T]hat such damages have been caused by the breach; [2] the alleged loss must be capable of proof with reasonable certainty; and, [3] there must be a showing that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made.Dupont Floor. Sys., Inc. v. Disc. Zone, Inc., No. 98 Civ. 5101, 2004 WL 1574629, at *5 (S.D.N.Y. Jul. 14, 2004) (internal citations omitted).
i. Van Lightner/Nova
Valjean is not entitled to $2,668,269 in lost profits because Valjean's projections were too speculative and, while MWI breached the MSA, the breach was not proven to have any impact on Valjean's profits. Fred Gruber's projections rested on the presumption that MWI would have sold Valjean, the Van Lightner, and Nova copyrights, trademarks, and associated assets. (F. Gruber Tr. 72:5 — 9). While Werdiger evidenced intent to purchase the Nova and Van Lightner trademarks as early as 1994, Valjean and Werdiger had not come to terms as late as 1998. (Ex. TTTTT, Jun. 12, 1998 email from DESIGNMGOO to SPI; Tr. 160:9 — 161:19). While MWI and Valjean may have both thought about a settlement of their contractual differences and to consummate the sale of the trademarks, the fact is that when Valjean delivered a draft agreement to MWI without a price, MWI offered $200,000 and Valjean never accepted the offer. Indeed, it never responded at all and no contract was ever consummated. (M. Gruber Tr. 165:5 — 7; 275:6 — 11; Exs. UUUUU, NNNNNN, OOOOOO).
ii. Kathy Ireland Worldwide
The MSA constitutes an agreement between MWI and Valjean. The MSA specifically states that the agreement was "not intended to create any rights in any third parties." (Ex. G at 17) (emphasis added). The MSA provided Martin Gruber, individually, no rights, obligations, or interest. (Ex. G at 17). Meanwhile, Martin Gruber and Kathy Ireland Worldwide, Inc. (KIWW) entered into an agreement to license her name, likeness, and visual representations. (M. Gruber Tr. 193:12 — 194:20; Ex. WWWWW (herein, the "License Agreement")). The MSA § 3.2 provided no such opportunity Ex. G at 6), and thus neither Martin Gruber nor Valjean may, on this claim, collect any lost profits from MWI. c. DAMAGES
While Valjean is not entitled to damages for lost profits, MWI's failure to pay Valjean the full amount due under the terms of the MSA and failure to provide an accounting constituted a material breach of the MSA and, therefore, once the debits are set off against the credits, MWI owes Valjean $5,813,015 in damages, plus prejudgment interest.
B. MWI's Counterclaims 1. Breach of Contract (failure to return goods)
Before trial, Valjean represented that MWI will be credited for any future proceeds from the sale of Consigned Materials. (Pl. St. of Cl. Defs. at 17). Accordingly, the issue is whether Valjean's alleged breach of contract triggered Section 8 of the Consignment Agreement — the attorneys' fees clause. (Ex. H at 4; I at 4).
On October 3, 1994, MWI and Valjean entered into the Diamond Consignment Agreement and Gold and other Precious Metals Consignment Agreement. (Ex. H;I). The Consignment Agreements required MWI to provide [90] ninety days written notice before termination and Valjean "to return any consigned merchandise" ("Consigned Merchandise") to MWI. (Ex. H at 3; I at 3).
On June 30, 2003, MWI provided Valjean with written notice of MWI's termination of the Consignment Agreements which, in pertinent part, reaffirmed MWI's right "to demand the return of all inventory immediately after the effective date of the termination, which [was] 90 days from [October 1, 2003]." (Ex. DD — Jun. 30, 2003 Ltr. from Kleinberg to M. Gruber).
A fundamental principal of contract law "excuses" the non-breaching party from performing its contractual obligations when there is a material breach. United States v. Abady, No. 03 Civ. 1683, 2004 WL 444081, at *6 (S.D.N.Y. Mar. 11, 2004). Cessation of performance is justified in certain circumstances:
See Rochdale Vill., Inc. v. Public Serv. Emp. Union, 605 F.2d 1290, 1297 (2d Cir. 1979); Branko Intl., Inc. v. Saudi Arabian Airlines, 704 F. Supp. 386, 390 (S.D.N.Y. 1989). See also 14 Williston on Contracts § 43:5.
Since performance of a contract is usually a constructive condition of each obligor's promise, lack of performance will relieve an obligor of his duty to honor the contract. If either party believes there has been a failure of the constructive condition of performance, he is entitled to cease performing, subject only to the duty to pay contractual damages if his belief is later adjudicated to be erroneous.Printers II, Inc. v. Prof'ls Pub. Inc., 784 F.2d 141, 148 (2d Cir. 1986).
While Fred Gruber recognized that Valjean was contractually obligated to return the Consigned Merchandise to MWI and that Valjean had failed to perform (F. Gruber Tr. 74:20 — 75:1), having determined that MWI breached the MSA, Valjean's refusal to remit the Consigned Materials was not improper. See Felix Frank Assocs., Ltd. v. Austin Drugs, Inc., 111 F.3d 284, 289 (2d Cir. 1997). MWI's failure to fully pay Valjean was a constructive condition of performance of the Consignment Agreements and, therefore, Valjean was reasonably entitled to cease performance.
On or before February 15, 2005, Valjean will return the Consigned Materials and MWI will be credited for sales of any consigned materials. Since the withholding of the consigned materials was not improper, Valjean is not required to pay contract damages, as MWI attempted to prove at trial. See Printers II, Inc., 784 F.2d at 148.
Accordingly, MWI's Second Counterclaim for breach of contract is DENIED and MWI is NOT entitled to any damages or attorneys' fees because Valjean's defiance was "excused" by MWI's failure to perform.
2. Conversion
Conversion is the "unauthorized assumption and exercise of the right of ownership over goods belonging to another to the exclusion of the owner's rights." Bank of America Corp. v. Lemgruber, No. 02 Civ. 1041, 2005 WL 19274, at * 15 (S.D.N.Y. Jan. 5, 2005) (internal citations omitted). To prevail on a conversion claim, the aggrieved must demonstrate both "legal ownership" in the property and the "unauthorized interference [with] ownership or possession of that property." Wechsler v. Hunt Health Sys., Ltd., 330 F. Supp. 2d 383, 431 (S.D.N.Y. 2004). However, "[a]n action for conversion cannot be validly maintained where damages are merely being sought for breach of contract." Moses v. Martin, No. 04 Civ. 1533, 2004 WL 2809198, at *4 (S.D.N.Y. Dec. 03, 2004); see Peters Griffin Woodward, Inc. v. WCSC, Inc., 452 N.Y.S.2d 599, 600 (1st Dep't. 1982) ("A plaintiff must allege acts that are unlawful or wrongful, rather than mere violations of contractual rights, to state a claim for conversion."). Where a breach of contract is alleged, a conversion claim must demonstrate that the potential damages "are beyond those for the alleged breach of contract claims were available." Pilliard v. Sotheby's, Inc., No. 95 Civ. 7775, 1997 WL 381795, at *8 (S.D.N.Y. Jul. 10, 1997).
While it is undisputed that Valjean is entitled to credit for jewelry sold and proceeds from scrap gold sales (J. Pretrial Or. at 13), there is no evidence that suggests Valjean ever claimed title to the property or denied MWI financial credit from its proceeds. MWI has merely dressed its contract claims in conversion clothing, while MWI is entitled, as noted above and pursuant to the Consignment Agreements, to the return of all Consigned Materials, its counter-claim for conversion fails. See Rella v. N. Atlantic Marine, Ltd., No. 02 Civ. 8573, 2004 WL 1418021, at *5 (S.D.N.Y. Jun. 23, 2004) (collecting cases).
3. Replevin — Return of Goods
To establish a claim for replevin under New York law, the claimant must demonstrate ownership of the chattel, see Solomon R. Guggenheim Found. v. Lubell, 550 N.Y.S. 2d 618 (1st Dep't. 2001), and "that [it] has an immediate and superior right to possession of the [goods]." De Weerth v. Baldinger, 658 F. Supp. 688, 695 (S.D.N.Y. 1987) (emphasis added). In addition, when the respondent maintains legal possession of the property, the claimant must also demonstrate a demand and refusal for the return of the chattel. See Leadertex, Inc. v. Morganton Dyeing Finishing Corp., No. 93 Civ. 3755, 1994 WL 445618, at *5 (S.D.N.Y. Aug. 17, 1994).
See Aircraft Repair Services v. Stambaugh's Air Service, Inc., 175 F.3d 314, 319 (3rd Cir. 1999) ("The primary relief sought in a replevin action is the return of the property itself . . . Replevin may not be used as a substitute for an action to recover damages [for, example, breach of contract]"); see also Droge Elevator Co. v. Jackson, 185 N.W. 563, 564 (Iowa. 1921) (emphasis added) ("[A]lleging a cause of action for breach of the contract, entirely separate and distinct from a replevin action, and is not of the same kind.")
Since Valjean's reason for withholding MWI's property was MWI's breach, pursuant to the terms of the Consignment Agreement and the MSA, Valjean was not entitled to withhold the Consigned Materials as collateral for the payments due but, rather, was to return them on demand. See Dubied Mach. Co. v. Vt. Knitting Co., Inc., 739 F. Supp. 867 (S.D.N.Y. 1990). A party cannot simply seize or hold another's property and, when a return is demanded, assert that the property is security for other claims that the party has against the owner. See Honeywell Info. Sys., Inc. v. Demographic Sys., Inc. 396 F. Supp. 273 (D.C.N.Y. 1975). Absent a contractual agreement which permits Valjean to withhold the materials caused by the Consignment Agreement as security for its share of the jewelry sales, MWI, by virtue of its title over the materials, has the immediate and superior right to recover the Consigned Materials.
Therefore, MWI's Fourth Counterclaim for replevin is GRANTED and any Consigned Materials, jewelry, diamonds, and precious metals owned by MWI, but currently in the possession of Valjean, Martin Gruber, or Fred Gruber, must be documented, e.g. invoiced, and returned to MWI on or before February 15, 2005.
4. Unjust Enrichment
Under New York law, to establish a claim for unjust enrichment, a claimant must demonstrate defendant's enrichment at claimant's expense and that "equity and good conscience militate against permitting defendant to retain what [the claimant] is seeking to recover." Briarpatch Ltd., L.P v. Phoenix Pict., Inc., 373 F.3d 296, 306 (2d Cir. 2004). The "essence" of an unjust enrichment claim, "is that one party has received money or a benefit at the expense of another." Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000).
MWI's claim for unjust enrichment stands in stark contrast to its conduct under the MSA. Under the MSA, MWI was obligated to maintain financial records:
[A]n account record showing (i) the amount of each Valjean Payment and (ii) the amounts owing to MWI on account of interest payable and principal owed to MWI pursuant to any Cash Advances or Credit Adjustments . . . including without limitation any obligation from time to time, to make Cash Advances, Diamond Consignments or Precious Metal Consignments, shall be conditioned upon Valjean's prior satisfaction, subject to the reasonable acceptance thereof by MWI.
(Ex. G at 12). In addition, all "Sales Proceeds" were MWI's responsibilities and transferred from MWI to Valjean. (Ex. G at 3).
MWI was responsible for crediting Valjean, maintaining financial records and transferring payments to Valjean. MWI failed to demonstrate that Valjean committed any wrongdoing by accepting monies that both Valjean and MWI believed were rightfully Valjean's. MWI has failed to demonstrate that its claim for unjust enrichment can be considered viable no less successful and it must be DENIED. See Briarpatch Ltd., L.P, 373 F.3d at 306.
5. Failure to Maintain Financial Records
MWI's Tenth Counterclaim asserts that Valjean breached the MSA when it failed to maintain financial records and to provide MWI with reports of each shipment of jewelry. As already discussed, the MSA required MWI to tender payment and "maintain financial records necessary with respect to all maters relating to this agreement." (Ex. G at 8). While the best defense is oftimes a good offense, here it seems clear that it was MWI, not Valjean, that failed to maintain accurate and up-to-date accounting records of the relationship's financials. Therefore, MWI's tenth counterclaim is DENIED.
6. Fraud — Martin Gruber re: Jewelex
To establish a claim for fraud under New York law, the plaintiff must demonstrate: "(1) a material false representation or omission of an existing fact, (2) which defendants made with knowledge of its falsity and intent to defraud, and (3) which plaintiffs relied upon to their detriment." In re Vivendi Universal, S.A., No. 02 Civ. 5571, 2004 WL 876050, at *11 (S.D.N.Y. Apr. 22, 2004). Where the plaintiff does not allege a material misrepresentation but, rather, an omission of a material fact, the plaintiff must demonstrate that defendant's omission was intentional and designed to defraud the plaintiff. See In re Vivendi Universal, No. 02 Civ. 5571, 2004 WL 876050, at *11. To succeed on a fraudulent concealment claim, plaintiff must also demonstrate that the defendant maintained a duty to disclose or, if:
(1) [O]ne party makes a partial or ambiguous statement that requires additional disclosure to avoid misleading the other party or (2) one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge. In either case, a disclosure duty ripens only when it becomes apparent to the non-disclosing party that another party is operating under a mistaken perception of a material fact.Remington Rand Corp. v. Amsterdam-Rotterdam Bank, N.V., 68 F.3d 1478, 1484 (2d Cir. 1995) (citations omitted).
Here, the issue is whether Martin Gruber made materially false representations regarding the Jewelex offer to Werdiger. According to MWI, Martin Gruber's failure to inform Werdiger that the Jewelex offer was a proposal to work with Nova/MWI, and not Martin Gruber in his individual capacity was intentional, and designed to defraud MWI. However, as discussed supra at 6-9, Martin Gruber testified at trial that he knew the Jewelex deal was a "slam dunk" and that he would receive at least $300,000 from Jewelex. (M. Gruber Tr. 110:1 — 15).
MWI failed to demonstrate that Martin Gruber falsely represented the Jewelex offer. Martin Gruber testified, and was not contradicted, that the commitments from the Kothari family regarding the Jewelex deal were firm and would be beneficial to both parties. Accordingly, even if Martin Gruber exaggerated the financial implications of the Jewelex offer, those exaggerations cannot be found to be fraud with its requisite clear and convincing burden. See Canelle v. Russian Tea Room Realty LLC., No 01 CIV. 0616, 2002 WL 287750, at *5 (S.D.N.Y. Feb. 27, 2002); Sheth v. N.Y. Life Ins. Co., 709 N.Y.S.2d 74, 75 (1st Dep't. 2000).
MWI has failed to prove fraud and, therefore, MWI's Eleventh Counterclaim for Fraud are DENIED.
III. CONCLUSION
For the foregoing reasons, the Court finds that MWI breached the MSA and, with regard to MWI's counterclaims: (1) Valjean did not breach the MSA; (2) Valjean is not liable for conversion; (3) MWI successfully proved its claim for replevin; (4) Valjean was not unjustly enriched; (5) Valjean did not fail to maintain financial records; and, (6) Martin Gruber is not liable for fraud.
Accordingly, it is hereby, ordered that, (1) MWI pay Valjean $5,813,015 in damages, plus prejudgment interest from the date of filing, i.e. July 8, 2003 (Dckt. 1); (2) beginning on or before February 15, 2005, MWI will reimburse Valjean, pursuant to the terms of the MSA, its portion of the sales of inventory sold after August 31, 2004; (3) Valjean will deliver to MWI by February 15, 2005 all consigned materials currently in the possession of Valjean, Martin Gruber, Fred Gruber or any agent, party or interest thereto; and, (4) the Clerk of the Court is directed to close all pending motions and remove this case from my docket.
IT IS SO ORDERED.