Opinion
3015-00.
Decided May 2, 2006.
Neufeld O'Leary, By: Denis P. O'Leary, Esq., Tamar Finkelstein, Esq., New York, New York, Attorneys for Plaintiff and Counterclaim Defendants.
Ackerman, Levine, Cullen, Brickman Limmer, LLP, By: John Brickman, Great Neck, New York, Attorneys for Defendants, Counterclaimants.
Cameron Hornbostel, LLP, New York, New York, Attorneys for Defendants, Counterclaimants.
The trial of this action commenced on January 16, 2003. At that time, the parties were proceeding under the terms of the Order of Hon. Roy Mahon, Justice of this Court, dated May 2, 2002 which, inter alia, struck Plaintiff's jury demand. By Order dated March 31, 2003, the Appellate Division, Second Department reversed and remitted the matter for a joint trial, pursuant to 22 NYCRR 202.40, before a jury on the issue of legal and equitable issues with the jury deciding the legal issues and the court deciding the equitable issues ( 303 AD2d 749).
Inasmuch as the trial of the matter had commenced, albeit not on a day-to-day basis, the parties entered into a Stipulation which this Court "so ordered" on April 8, 2003 whereby the parties agreed to an accounting by a court appointed neutral and that they would fully cooperate therewith. In addition, they stipulated the Plaintiff's claims and the legal counterclaims would be heard before a jury after this Court's determination on the trial of the counterclaims and determination of the accounting. In so doing, the parties obviated the need to restart the trial of the matter before a jury. head FINDINGS OF FACT
Defendant, Indo-Med Commodities, Inc. ("IMUSA"), is a domestic corporation which is wholly owned by Indo-Mediterranean Commodities, Ltd. ("IMUK"), a corporation existing pursuant to the laws of the United Kingdom. IMUK is a family business presently controlled by Shabbir Abidali ("Abidali"). It has been his family's business for three generations dating back to the late 1800's.
Initially, IMUSA was owned by an entity known as Al-Anbar Establishment which transferred its interest to Philmanex AS not associated with Defendant Philmanex, Inc. Thereafter, the interest of Philmanex AS, a Lichtenstein entity, was transferred by IMUSA to IMUK for the sum of $1.00 in 1995. Plaintiff, John T. Wisell, Sr. ("Wisell") was apparently aware of this transaction.
Although IMUSA had been doing business in the United States as a food broker for many years, an oral joint venture agreement was entered into among Wisell, Counterclaim Defendant, Scala Wisell Co., Inc. ("Scala Wisell"), and IMUSA in August 1995. The joint venture commenced on January 1, 1996.
IMUSA dealt with commodities such as hazelnuts, macadamia nuts, dried fruits and candy sprinkles.
Scala Wisell is the successor to Charles Scala Inc. It is owned by Wisell and his wife, Carol Scala Wisell. Prior to the joint venture agreement, Scala Wisell was a broker for IMUSA whereby it sold product on a commission basis but did not take title to it.
Prior to the joint venture, IMUSA lost a good deal of money developing the business and identifying the customers. By 1989, the individual who was responsible for running IMUSA, Sunil Gersappe ("Gersappe"), had to leave the United States due to the expiration of his visa. Thereafter, a series of principals and officers followed with the business essentially being run long distance from London. Although IMUSA enjoyed some success with certain customers, such as Kraft Foods, with which it was a "preferred vendor", efforts to expand the United States market were extremely limited in the absence of a local manager/representative to run it. However, in 1994-95, the business did start to increase.
Thus, Abidali was receptive to Wisell's suggestion of developing a closer relationship. Wisell, who was then working as an independent broker for IMUSA, would become its president under the joint venture discussed and negotiated. Since Wisell was in this business and was known, a substantial opportunity was presented to expand IMUSA's market by having someone local to pay attention to opportunities and further develop the business.
Under the terms of the oral joint venture agreement, Wisell was to have a one-third share of all profits and bear a one-third responsibility for all losses and IMUK would have a two-thirds share. Wisell was to receive no compensation of any kind except his share of the profits of new business. Scala Wisell was to receive commissions on its brokered sales of existing business with existing customers. In addition, the warehouse facility owned by Wisell and his wife, Carol, Bolton Distribution Center, Inc. ("Bolton") was to handle the receiving, handling and delivery of the product which was subject to the joint venture agreement.
This agreement also contemplated regular financial accountings by Wisell so that profits and losses could be timely calculated.
Wisell's responsibilities under the joint venture agreement were to develop IMUSA's business and sell its products. The source of the products to be sold and the financing for it was to be exclusively through IMUK. The understanding was that Wisell was not to have direct contact with the suppliers. All shipping documents of the products purchased and shipped were to be handled by IMUK. Indeed, almost all other aspects of the business were to be solely within the province and control of IMUK. Wisell agreed to this.
As a result of the joint venture agreement, Wisell was deemed to be the president of IMUSA from about August 1995, although he did not fully function in that capacity until January 1996. Gersappe, who had been acting as the president from London, resigned in favor of Wisell. IMUSA's office was moved to New York and the process of introducing Wisell to the suppliers commenced. Wisell traveled at IMUSA's expense to meet suppliers in such places as the Philipines, Sri Lanka, Turkey, Greece, Italy, Singapore and Indonesia. Since IMUSA had been a broker for IMUK before the joint venture agreement, it was understood that after January 1, 1996, IMUK would continue to do business with its customers and suppliers in the United States.
After Gersappe returned to London, it was understood that IMUK continued to pay his monthly salary of $2,200. However, to the chagrin of Abidali, IMUSA paid him a monthly salary of $2,600 which IMUK points to as additional evidence of Wisell's lack of fidelity in their relationship.
The New York office was that of Scala Wisell and Bolton which was renovated and refurbished to accommodate IMUSA's office.
From the beginning, certain fundamental points were made clear to Wisell with regard to his relationship to IMUK. These points were part of the oral joint venture agreement. First, it was understood that, since he was not a member of the religious community to which the Abidali family and their close associates belonged, he could never be a shareholder, director or officer of the enterprise, except in name. In addition, Wisell could only do business with Habib American Bank ("Habib") which, through its Swiss parent, had a long standing relationship with IMUK and knew that it could not, for religious reasons, charge or receive interest. Nevertheless, arrangements were made for Wisell to be a signatory on the IMUSA account ("Habib I") maintained at Habib Bank so long as it was countersigned by Abidali, his brother or Zoeb Raniwala ("Raniwala"), a chartered accountant who served as a consultant for IMUK in London. Thus, a check had to be signed by Wisell and then sent to the London office to be reviewed, countersigned and returned. This proved to be a cumbersome and inefficient procedure.
Abidali is a member of the Muslim sect known as Dawoodi Bohra.
Raniwala's first involvement in IMUSA came in August 1995 when, along with Gersappe, he prepared IMUSA's year end 1995 account which reflected a loss of approximately $40,000.00.
Philmanex AS remained as the financing arm of IMUK after Wisell became the president of IMUSA in January 1, 1996. As of that date, IMUK determined that IMUSA owed Philmanex AS approximately $1,000,000.00 for the existing inventory, accounts receivables and cash on hand. Notwithstanding this debt, upon the sale of inventory, new product was purchased without removing any money from IMUSA on account of Philmanex AS.
A full discussion of the damage claims of the parties will be set forth in a decision to follow.
Although a final version of the joint venture agreement was drafted by IMUK's London based solicitor and circulated, it was never executed. The unsigned draft would later be a source of friction among the parties.
Various disagreements occurred between Abidali and Wisell. Among them were Wisell's contacting suppliers without prior consultation with London, even though purchases, shipping and payment were to be accomplished through IMUK. In this regard, it was the view of IMUK that those purchases which were being made by Wisell were above market price. In addition, Wisell hired staff for the New York office without the knowledge or consent of IMUK. Abidali later accepted some of the hiring on the basis that there had to be some office staff to help Wisell.
In 1996, there were few sales. Most of Wisell's time was spent traveling. Abidali addressed this with Wisell in late 1996 and urged a greater effort to sell.
In January 1997, Raniwala visited IMUSA and learned that Wisell felt the need to be able to write checks more quickly than having to await the return of a countersigned check from London for everything. It was thus agreed that a second Habib American Bank account would be opened wherein Wisell was the sole signatory but he could write checks for no more than $5,000 each. It was also agreed that this account ("Habib II") would not be utilized for inventory purchases. The Habib II account was opened in mid-1997.
Since IMUSA was not generating any profit from which Wisell could draw, he unilaterally determined to draw the weekly sum of $1,000 against his share of the profits. This was ultimately and reluctantly agreed to by IMUK in November 1997.
At that time, Abidali noted certain problems with IMUSA's operation. It had a large amount of inventory in the warehouse which created cash flow problems for IMUK. Such inventory also resulted in increased storage charges and perishable food items being lost due to spoiling. In 1996, IMUSA's inventory was valued at $675,000 and its receivables were $466,000. By 1997, it rose to $900,000 and $758,000, respectively. By 1998, the inventory value was down as more product was being sold.
At various points, other issues arose which strained the relationship of the parties. When a coconut supplier was delayed in shipping an order, Wisell never cancelled it. Instead, he purchased replacement product domestically and shipped it to the IMUSA customers who ordered it. However, the market declined and IMUSA, which accepted the late shipment from the first supplier, suffered a loss. Likewise, IMUK was very displeased that Wisell, contrary to the joint venture agreement, was dealing directly with suppliers.
Other sources of disagreement arose over further hirings by Wisell without Abidali's approval; Wisell writing a check on the Habib II account for a sum greater than $5,000 to a supplier; and Wisell writing multiple $5,000 checks to suppliers to circumvent the joint venture agreement and the understanding which allowed the opening of the Habib II account.
The issue of Wisell's avoiding the agreement with regard to banking came to a head when, in August 1998, Abidali learned for the first time that, in March 1998, Wisell had opened a new, unauthorized bank account at European American Bank ("EAB") in the name of IMUSA. In September 1998, Wisell apologized and agreed to make Abidali and Raniwala signatories on the EAB account. This never occurred. Indeed, the EAB bank resolution opening the account reflected that the officers of IMUSA were Wisell, as president, and his wife, Carol Wisell, as secretary, Wisell's daughter-in-law, Elizabeth Wisell, was an authorized signatory. Wisell claimed that the reason for doing this was the policy of IMUK to "sweep" the Habib II account and move the moneys into IMUK's Swiss account. This negatively impacted IMUSA's cash flow and, more importantly, prevented the prompt payment of expenses. This was especially true during that time when IMUK was experiencing severe cash flow problems due to its large exposure in its Eastern European business to the point of adversely impacting IMUSA's ability to secure and pay for product. Indeed, a coconut supplier in the Philipines, Fiesta, was very unhappy with the lack of payment by IMUSA on a letter of credit through Philmanex AS. Fiesta suggested that Habib's handling of the letter of credit was "criminal" and urged the use of a different bank. Abidali rejected this out of hand. Ultimately, in February 1998, Wisell assured payment of this obligation to keep the supplier happy.
This caused great consternation to Abidali for several reasons. First, it showed a further lack of fidelity on Wisell's part. Second, it further removed control of IMUSA's operation from IMUK. Third, and most importantly, the EAB account bore interest which was an affront to Abidali's religious scruples.
Abidali blamed the cash flow difficulty on Wisell's maintenance of too much inventory, the failure to collect account receivables and Wisell's failure to focus on sales but this was not entirely the case.
By late 1997, Abidali claimed that IMUK's cash flow problem had no serious impact on IMUSA's operation. Yet, in 1997, Wisell began purchasing product without input or approval from London, despite the joint venture agreement, in order to circumvent the problem.
It is significant that the agreed accountings between the parties never occurred. Abidali complained that Wisell was never available to finalize the accountings so that profits and losses could be established and shared pursuant to the joint venture agreement, even though IMUSA utilized an accountant of Wisell's choosing, Steven Ross, CPA ("Ross") commencing in the Spring of 1997.
During the course of Wisell's tenure as IMUSA's president, problems also arose with regard to inventory purchased from various suppliers. Among the problems were the failure of IMUSA to properly reflect the inventory on its books. This was indicative of the problem of communications between the parties. Indeed, even though Raniwala and Ross were supposed to communicate with respect to the financial reports of IMUSA, Wisell persisted in claiming that the reports in his possession were incorrect and could not serve as the basis for the reconciliation of profits and losses of IMUSA. Yet, neither Ross nor he never seriously cooperated with Raniwala to rectify the discrepancies he noted.
By January 1999, the parties had what Abidali described as an emotional meeting where Wisell and he expressed their respective views. Abidali claims that Wisell again apologized for opening the EAB account and that he would add Abidali and his brother as signatories. They also discussed improving the exchange of financial information. Wisell agreed that Ross would prepare and send a report. Additionally, Wisell accepted responsibility for the overpayment of moneys to Gersappe and the misuse of the Habib II account.
Significantly, Wisell did not mention, at that meeting or at any other time, that he had formed a new, competing business called Indo-Med North America ("IMNA") in January 1998, although the actual incorporation did not occur until July 31, 1998. Neither Abidali nor IMUK were involved in IMNA in any way or even aware of its existence. Despite the creation of IMNA, Wisell continued to attend food conventions and meet suppliers around the world at IMUSA's expense.
Although IMNA was formed in January, 1998 and IMNA obtained its employers identification number in March 1998, Wisell claimed that IMNA did not commence doing business until January 1999. Such contention is belied by correspondence to an IMUSA supplier, Agramac, dated August 29, 1998 wherein Wisell instructed that a delivery due in October 1998 was to be delivered to IMNA. Likewise, Wisell wrote to other suppliers such as Fiesta (IMUK's largest coconut supplier) and Baskan (IMUK's largest hazelnut supplier) indicating that they should be doing business with IMNA. In addition, Wisell changed the corporate name on the IMUSA American Express account to IMNA. He signed the American Express change form as president, chairman and owner of IMNA. Wisell also caused IMNA to use IMUSA'S importer bond. Throughout 1998, Wisell continued to travel and attend trade shows in the name of IMNA even though IMUSA paid for it. Worst of all, Wisell tried to trademark the Indo-Med logo in January 2000 falsely stating that it first had been used in 1999.
After January 1, 1999, Wisell disingenuously claimed that he used the Indo-Med branding on the products he sold although he did not think it was advantageous or valuable.
To avoid detection, Wisell's communications to Abidali and the London office after January 1, 1999 were on IMUSA stationery. In March, 1999, Wisell used Scala Wisell stationery with the unmistakable purpose of fooling Abidali because he had run out of IMUSA stationery.
Wisell and Abidali met in New York in late February 1999. The financial reports were still not available for Abidali's review. Wisell did not mention IMNA.
On July 11, 1999, Paul Nielsen, a saleman, resigned from IMUSA. Nielsen's resignation was in the form of an e-mail which was addressed "Attn.: Jack Wisell, Indo-Med NA, NY." It stated, in part, "Effective this dated email, please accept my resignation from Indomed North America." (Emphasis added) Abidali received a copy of this email. It was the first time he learned of the existence of IMNA.
In fact, Wisell had been using IMNA letterhead and had been conducting business as IMNA since before January 1999. The IMNA letterhead contained IMUSA/IMUK's logo, its slogan, IMUSA's phone and fax numbers and addresses. On product purchased and shipped by IMNA, Wisell continued to use the logo and mark of Indo-Med. The only difference in the operation was the corporate name Indo-Med North America and, of course, its owners. Nevertheless, Wisell continued to travel to meet suppliers all over the world at IMUSA's expense.
Since the formation of IMNA, IMUK contends that it no longer had information about the conduct of the business, the disposition of inventory, the status of accounts receivable and the status of IMUSA bank accounts. In addition, IMUK claims that there was great confusion on the part of the IMUSA customers and suppliers since they believed they were doing business with IMUSA when, in reality, they were doing business with IMNA.
Despite the continuous disagreements and failures of communication, IMUK continued to work with Wisell believing that their relationship would ultimately turn the corner and be successful. This is true even though there had been no final accounting for the years 1996, 1997 and 1998. Whenever a proposed accounting was presented by Ramiwala based on the information available to him from Wisell and/or Ross, it was rejected by Wisell who claimed that figures were inaccurate. However, neither Ross nor Wisell ever corrected and finalized the accounting for any year. They kept IMUK in limbo and in the dark while Wisell pursued IMUSA, and later IMNA, business in his own way and in contravention of the joint venture agreement until the commencement of this action.
There is no question that Wisell dealt with, and endured, what he perceived to be various slights and misdeeds on the part of IMUK and Abidali which hampered IMUSA's profitability and his credibility in the business. In some cases, he was not wrong. Among these were the failure to keep sufficient funds in the Habib accounts so as to enable him to function efficiently; deteriorating finances of IMUK which made paying suppliers difficult and thereby threatened the availability of supply; and alienated companies which did business with both IMUK and IMUSA; and the failure to finalize the books for any year in which the joint venture was in existence which did not allow him to draw a salary until later when he took matters into his own hands. IMUK tried to address some of these concerns by giving Wisell greater latitude in check writing by opening the Habib II account and ratifying his drawing of $1,000.00 per week against his anticipated distribution even though IMUSA business information was not reported by Wisell or Ross.
The Habib account was regularly "swept" so that the moneys therein were transferred into an IMUK account; unavailable to IMUSA for its business.
By way of example, the initial figures for the year ending December 31, 1996, showed a gross profit of $737,882.00 was realized on sales of $3.5 million. Yet, the adjustments presented to Wisell by Raniwala resulted in a net profit of $6,249.04. When the accounting was "finalized", Raniwala determined that IMUSA lost $44,841.00.
The financial records kept by IMUSA, under the control of Wisell and as maintained by Ross, were inadequate and incomplete. For example, a $75,000 payment to Kraft was never reflected in any reports prepared by Ross.
In addition, Ross' trial balance for the year ending on December 31, 1998 reflected accounts payable as $1.9 million. However, the backup documents showed $3.2 million. It also showed inventory at $1,172,000 which was inflated by the inclusion of macadamia nuts taken on a consignment basis. IMUK's major complaint was that costs and inventory were never broken down or accurately provided to allow an analysis by Raniwala in London.
Wisell's accountant, Ross, was deeply involved with the curious financial reporting and misreporting to IMUK. While Ross was responsible for the general ledger, trial balances, preparation of tax returns, the testimony established that Ross did not fully and accurately report to London. Indeed, Ross never told Raniwala or anyone at IMUK that the asset value of IMUSA, as of the close of business on December 31, 1998 $1,034,809.14 was the selfsame opening balance of IMNA as of January 1, 1999. Ross testified that such transfer was his idea but Wisell authorized it. Wisell also told him not to tell IMUK about the formation and existence of IMNA or meet with Raniwala in March, 1999.
While serving as IMUSA's President, Wisell authorized the expenditure of corporate moneys for personal expenses and salaries to his family. Wisell approved of purchases of baby clothing and toys, his own legal fees (using IMNA checks after January 1999), salaries and bonuses for his wife and children, improvements to Bolton's facility, family travel and deposited 1998 payments to IMUSA into IMNA's account. While Wisell claimed that his family members earned commissions, the evidence did not establish more than isolated instances of such efforts.
CONCLUSIONS OF LAW
A. Liability
1. Breach of Fiduciary Duties/Business Corporation Law § 715
As the president of IMUSA, Wisell owed a fiduciary duty to the corporation. In re Hyman, 320 B.R. 493, 505 (SDNY 2005) and as such owed a duty of undivided and unqualified loyalty to it so as to prevent actions which cripple or injure the corporation. Howard v. Carr, 222 AD2d 842, 845 (3rd Dept. 1995). See also, Blank v. Blank, 256 AD2d 688 (3rd Dept. 1998). In taking and utilizing the assets of IMUSA including its inventory, customer contacts and relationships and converting them to his sole advantage and to the detriment and derogation of the corporation of which he was president warrants a finding of a breach of Wisell's fiduciary duty to IMUSA. See, American Federal Grp., Ltd. v. Rotherberg, 2003 WL 22349673 *10 (SDNY 2003) (soliciting customers to a competing business or for personal gain by a corporate officer constitutes a breach of fiduciary duty); and Alexander Alexander of New York, Inc. v. Fritzen, 147 AD2d 241, 249-50 (1st Dept. 1989) (diversion of plaintiff's insurance business to a competing brokerage agency constituted a diversion of corporate opportunity and a breach of fiduciary duty). See also, Gomez v. Bicknell, 302 AD2d 107, 113 (2nd Dept. 2002); and Duane Jones Co. v. Burke, 306 NY 172 (1954).
As a joint venturer with IMUK/IMUSA, Wisell owed a duty of fidelity and good faith. See, Meinhard v. Salmon, 249 NY 458, 463-4 (1928), where the Court of Appeals held:
"A trustee is held to something stiffer than the morales of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior."
See also, Lawrence v. Cohn, 197 F. Supp. 2d 16, 33 (SDNY 2002); NLRB v. Amax Coal Co., a div. of Amax, Inc., 453 U.S. 322, 330 (1981).
In Birnbaum v. Birnbaum, 73 NY2d 461 (1989), the Court of Appeals addressed a circumstance similar to that presented here. The Birnbaum Court held that a partner's favoring his spouse to the detriment of his partners caused the invocation of the Meinhard v. Slamon rule with regard to fidelity on the part of fiduciary, holding:
This is a sensitive and "inflexible" rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary's personal interest possibly conflicts with the interest of those owed a fiduciary duty ( Matter of Ryan, 291 NY 376, 407 52 N.E.2d 909). Included within this rule's broad scope is every situation in which a fiduciary, who is bound to single-mindedly pursue the interests of those to whom a duty of loyalty is owed, deals with a person "in such close relation [to the fiduciary] * * * that possible advantage to such other person might * * * consciously or unconsciously" influence the fiduciary's judgment ( Albright v. Jefferson County Natl. Bank, 292 NY 31, 39, 53 N.E.2d 753). In this case, Saul's financial relationship with his wife conflicted with his duty to Jay and Ilene and therefore violated the precept of undiluted trust at the core of his responsibilities as a fiduciary. Id. at 466.
See also, Reiff v. Shifrel, 268 AD2d 514, 515 (2nd Dept. 2000); and Drucker v. Mige Assocs., 225 AD2d 427, 428 (1st Dept. 1996).
In this matter, Defendants have well established that Wisell breached his fiduciary duty in many ways. Among them are:
— Incorporating IMNA in July 1998;
The incorporation of a competing business, per se, is not the issue. Wallack Freight Lines, Inc. v. Next Day Express Inc., 273 AD2d 462, 463 (2nd Dept. 2000) ("an employee may incorporate a business prior to leaving his employer without breaching any fiduciary duty unless the employee makes improper use of the employer's time, facilities, or proprietary secrets in doing so"). See also, Howard v. Carr, supra at 845.
— Doing business as IMNA since before January 1, 1999 without the knowledge or consent of IMUK;
— Opening and utilizing the EAB accounts;
— Misusing the Habib II account;
— Transferring the inventory and assets of IMUSA to IMNA as of January 1, 1999;
— Masking the creation of IMNA by continuing to utilize IMUSA stationery and communicating with IMUK;
— Diverting moneys from IMUSA to Scala Wisell for undocumented expenses, modifications and renovations at the Scala Wisell facility; and
— Hiring his wife and relatives and giving them unauthorized salaries and benefits.
By hiring his wife and children, Wisell also breached his fiduciary obligation to IMUSA. That is, by putting his wife and family's financial interests and those of her family's business ahead of those of the business in which he is the coventurer also constitutes a breach of fiduciary duty. See, Birnbaum v. Birnbaum, supra at 466; and Reiff v. Shifrel, supra.
Accordingly, this Court finds that Wisell breached his fiduciary duty to IMUSA and IMUK.
2. Breach of Contract
In order to establish this counterclaim, Defendants need to have established that a valid contract existed between IMUSA and Wisell and Scala Wisell, that Wisell, via IMNA, intentionally and improperly breached of such contract and that, as a result, Defendants suffered damage. See, Kronos, Inc. v. ADX, 81 NY2d 90, 94 (1993). There is no question but that IMNA, through Wisell, undertook and performed IMUSA contracts that existed during the conversion period from IMUSA to IMNA by Wisell. Thus, this cause of action is sustained as well.
3. Violation of the Lanham Act
The Lanham Act prohibits the use of "any reproduction, counterfeit, copy or colorable imitation of a registered mark" where "such use is likely to cause confusion or to cause mistake or to deceive." 15 U.S.C. § 1114(1)(a). Mobil Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254, 256 (2nd Cir. 1987). The Lanham Act also provides protection to unregistered marks. Time, Inc. v. Petersen Publishing Co., L.L.C., 173 F.3d 113 (2nd Cir. 1999); Hasbro, Inc. v. Lanard Toys, Ltd., 858 F.2d 70 (2nd Cir. 1988); and 15 U.S.C. § 1125(a)(1).
To prevail on either a common law or registered mark claim, the plaintiff must establish ". . . that it has a valid mark entitled to protection and that defendant's use of it is likely to cause confusion." Gruner + Jahr USA Publishing v. Meredith Corp., 991 F.2d 1072, 1075 (2nd Cir. 1993). See also, Time, Inc. v. Petersen Publishing Co., L.L.C., supra.
"The strength of a trademark in the marketplace and the degree of protection it is entitled to are categorized by the degree of the mark's distinctiveness in the following ascending order: generic, descriptive, suggestive and arbitrary or fanciful." Gruner + Jahr USA Publishing v. Meredith Corp., supra at 1075. See also, Sports Authority, Inc. v. Prime Hospitality Corp., 89 F.3d 955 (2nd Cir. 1996); and Abercrombie Fitch Co. v. Hunting Work, Inc., 537 F.2d 4 (2nd Cir. 1976).
A mark is generic when it provides a general description of the goods. W.W.W. Pharmaceutical Co. v. Gillette Co., 984 F.2d 567 (2nd Cir. 1993). However, "[a] term is suggestive if it requires imagination, thought and perception to reach a conclusion as to the nature of the goods. A term is descriptive if it forthwith conveys an immediate idea of the ingredients, qualities or characteristics of the goods." Abercrombie Fitch Co. v. Hunting World, Inc., supra at 11.
A mark is arbitrary or fanciful when it is not a real word, but was invented for use as a mark. Lane Capital Management, Inc. v. Lane Capital Management, Inc., 192 F. 3d 337 (2nd Cir. 1999); Genesee Brewing Co., Inc. v. Stroh Brewing Co., 124 F. 3d 137 (2nd Cir. 1997); and Abercrombie Fitch Co. v. Hunting World, Inc., supra. Marks which are arbitrary or fanciful or suggestive are entitled to protection without proof of secondary meaning. Playtex Corp. v. Georgia-Pacific Corp., 390 F.3d 158 (2nd Cir. 2004); and Hasbro, Inc. v. Lanard Toys, Ltd., supra.
The classification of a mark is a factual question. Lane Capital Management, Inc. v. Lane Capital Management, Inc., supra and Bristol-Myers Squibb Co. v. McNeill, P.P.C., Inc., 993 F.2d 1033 (2nd Cir. 1992). The mark used by Indo-Med is a fanciful mark entitled to full protection. Indo-Med is a made up word and is used as a stylized logo in the United States, and throughout the world, to identify its products; to wit: macadamia nuts, desiccated coconut, sprinkles, dried fruit and hazelnuts Both the name and the logo were specifically created for, identified with and used in Indo-Med's business for many years preceding its relationship with Wisell.
Having concluded that the mark is fanciful and entitled to full protection, the Court must determine whether ". . . an appreciable number of ordinarily prudent purchasers are likely to be misled, or indeed simply confused, as to the source of the goods in question." Mushroom Makers, Inc. v. R.G. Barry Corp., 580 F.2d 44, 47 (2nd Cir. 1978), cert. den., 439 U.S. 1116 (1979).
To determine whether confusion will occur, the courts consider eight factors discussed in Polaroid Corp. v. Polarad Electronics Corp., 287 F. 2d 492, 495 (2nd Cir. 1961) and enumerated in Playtex Products, Inc. v. Georgia-Pacific Corp., supra at 162, which are: (1) the strength of the mark; (2) the similarity between the two marks; (3) the proximity of the products in the marketplace; (4) the likelihood that the plaintiff will sell goods in the same market in which the defendant sells its product; (5) evidence of actual confusion; (6) defendant's bad faith; (7) the quality of defendant's product; and (8) the sophistication of the consumers. See also, Natural Organics, Inc. v. Nutraceutical Corp., 426 F. 3d 576, 578 (2nd Cir 2005).
The court must balance these factors and should not treat any factor as dispositive. Id. at 579. Ultimately, the court must determine whether the customers are likely to be confused. Id. at 580.
The Indo-Med mark used by IMUSA is a strong mark. It is a fanciful mark which has been used worldwide since 1986.
The marks used by IMUSA and IMNA are very similar. Both marks use the word "Indo-Med" in large type surrounded by a rectangularized oval. Both use the words "Ingredients Marketing Group."
IMUSA and IMNA sell identical products in the same market and purchase from the same suppliers. IMNA carried on the business that had previously been done by IMUSA. IMNA began purchasing products from IMUSA's suppliers and began selling to IMUSA's customers.
The likelihood of confusion is great and was promoted by Wisell. Wisell contacted IMUSA's suppliers and told them in the future to ship and invoice goods to IMNA. Wisell characterized the change as a name change. Since the mark renamed the same, neither the customers nor the suppliers had any way of knowing that where no longer dealing with IMUSA and were actually doing or transacting new business with a new entity that was not related to and had no affiliation with IMUSA.
Wisell clearly acted in bad faith when adopting the IMUSA mark from IMNA. Wisell adopted and used the Indo-Med name and mark in his new business to permit him to maintain the business relationships that IMUSA had with its suppliers and customers. For example, some customers, such as Kraft, have a preferred supplier list. IMUSA through Abidali and IMUK worked diligently to get on that list. IMNA took advantage of the confusion created by using IMUSA's work in dealing with Kraft. IMNA continued to use IMUSA's telephone and fax number, stationery and office address. In essence, Wisell was intentionally misleading both the suppliers and customers by continuing to used the Indo-Med name and mark.
The quality of the product is not at issue since IMUSA and IMNA sold the same product. However, IMUSA asserts that it had problems with its customers once it learned of IMNA because IMNA did not properly service those clients.
While the sophistication of the customers should favor IMNA and Wisell, this is not the case because Wisell and IMNA actively engaged in deception. Wisell and IMNA did almost everything possible to lead suppliers and customers to believe that the only difference between IMUSA and IMNA was the name of the business. Wisell continued to travel and advertise the business as IMUSA even after he had begun doing business exclusively through IMNA.
There can be no question that IMUSA is entitled to monetary damages under the Lanham Act. In addition, IMUSA seeks attorneys fees and treble damages on the grounds that this is an exceptional case. 15 U.S.C. § 1117(a).
The court may not award punitive damages for violation of the Lanham Act even if the infringement is willful, malicious, deliberate or fraudulent. Getty Petroleum Corp. v. Bartco Petroleum Corp., 858 F.2d 103 (2nd Cir. 1988). In order to recover enhanced damages in excess of compensatory damages, plaintiff must establish that it will not be fully compensated by actual compensatory damages or that compensatory damages cannot be accurately calculated due to the infringer's conduct. Ramada Franchise System, Inc. v. Boychuk, 283 F.Supp2d 777 (NDNY 2003), aff'd., 124 Fed Appx. 28 (2nd Cir. 2005). See also, Taco Cabana Int'l, Inc. v. Two Pesos, Inc., 932 F.2d 1113 (5th Cir 1991). Neither of these circumstances exist in this case. Thus, enhanced damages cannot be awarded in this case.
Exceptional cases in which legal fees may be awarded are cases in which the infringing party acts in a malicious, fraudulent, deliberate or willful manner. See, Burger King Corp. v. Pilgrim's Pride Corp., 15 F3d 166 (11th Cir. 1994). The court must find that the infringer's conduct was truly egregious or purposeful wrongdoing. See, Badger Meter, Inc. v. Grinnell Corp., 13 F.3d 1145 (7th Cir. 1994). Even in exceptional cases, the decision to award legal fees is one addressed to the discretion of the trial court. Id. See also, Dieter v. B H Industries of S.W. Fla., 880 F2d 322 (11th Cir. 1989), cert. den., 498 U.S. 111 (1990).
This action arises from a failed joint venture arrangement. There were problems with the arrangement almost from the outset. Although Defendants-Counterclaimants were aware of Wisell's actions by July 1999, they took no action to enforce their claims until after Wisell had commenced the within action in February 2000. If the actions or Wisell and/or IMNA were so outrageous or so harmful to the Defendants-Counterclaimants, they could and should have sought immediate relief including a preliminary injunction preventing Wisell and IMNA from using the infringed mark. Wisell's conduct was not sufficiently outrageous so as to compel the Defendants-Counterclaimants to take immediate action or, for that matter, any affirmative action.
Given the circumstances, the Court believes an award of attorney's fees would not be appropriate.
General Business Law § 133 prohibits an individual, firm or corporation from using a name "with intent to deceive and mislead the public." See, Edward F. Hallanan, Inc. v. Hallanan, McGuinness Lorys, Ltd., 275 AD2d 691 (2nd Dept. 2000). Simply adopting and using a similar name is not sufficient. Id., See also, Sung v. Paolucci, 170 AD2d 596 (2nd Dept. 1991).
The party seeking relief under this statute must establish that the use of the mark is intentional and is likely to cause confusion, mistake or deception. Frank's Rest., Inc. v. Lauramar Enterprises, Inc., 273 AD2d 349 (2nd Dept. 2000).
IMUSA has established these elements. IMNA knowingly and intentionally adopted a mark similar, if not identical, to that of IMUSA/IMUK. IMNA adopted and used the mark specifically to mislead or deceive suppliers and customers into believing that they were still dealing with IMUSA. Wisell did not advise either the customers or the suppliers that IMNA was unrelated to IMUSA. Wisell clearly intended to have both the customers and the suppliers believe that IMUSA had simply changed its name to IMNA and that they were still dealing with same people.
Accordingly, Wisell and IMNA, as well as any entity controlled by Wisell, should be permanently enjoined from using that name and mark. See, Wydham Co. v. Wyndham Hotel Corp., 261 AD2d 242 (1st Dept. 1999).
5. Business Corporation Law § 360-l
To establish a claim under Business Corporation Law § 360-l, a plaintiff ". . . must prove (1) that the trademark is truly distinctive or had acquired secondary meaning, and (2) a likelihood of dilution either as a result of blurring' or tarnishment'." U — Neek, Inc. v. Wal-Mart Stores, Inc., 147 F.Supp2d 158, 175 (S.D.NY 2001). The holder of the mark must establish that the mark or the name has a truly distinctive quality or has a secondary meaning in the mind of the public. Scholastic, Inc. v. Stouffer, 221 F.Supp.2d 425 (SDNY 2002). See also, Alexander Avenue Kosher Restaurant Corp. v. Dragoon, 306 AD2d 298, 300 (2nd Dept. 2003). Only extremely strong marks will be afforded statutory protection. Sally Gee, Inc. v. Myra Hogan, Inc., 669 F.2d 621 (2nd Cir. 1983); and Welch Allyn, Inc. v. Tyco International Services, 200 F.Supp2d 130 (NDNY 2002).
In determining the distinctiveness of the mark, the court should consider the same factors as are used in determining the strength of a mark under the Lanham Act.
Strange Music, Inc. v. Strange Music, Inc., 326 F.Supp.2d 481 (SDNY 2004).
Blurring occurs when the infringer uses or modifies the mark to identify its products with those of the holder of the mark creating a possibility that the mark will lose no longer be uniquely identified with the mark holder's product. Hormel Foods Corp. v. Jim Henson Productions, Inc., 73 F.3d 497 (2nd Cir. 1996); and Katz v. Modiri, 283 F.Supp.2d 883 (SDNY 2003).
Tarnishment occurs when the mark is linked to a product of inferior quality or is portrayed in an unsavory or unwholesome manner. Deere Company v. MTD Products, Inc., 41 F.3d 39 (2nd Cir 1994).
Indo-Med's mark was unquestionably blurred by IMNA's use of it. IMUSA has established that it used this mark in connection with its business since 1986. The adoption of the mark by IMNA was clearly to create the illusion that IMNA and IMUSA were the same business entity. See, Beverage Marketing USA, Inc. v. South Beach Beverage Co., Inc., 20 AD3d 439 (2nd Dept. 2005). Wisell clearly intended suppliers and customers to associate his new IMNA business with IMUSA.
Therefore, IMUSA is entitled to injunctive relief enjoining IMNA from using the mark pursuant to General Business Law § 360-l. See, Scholastic, Inc. v. Stouffer, supra.
6. Punitive Damages
To establish a claim for punitive damages in tort, plaintiff must establish that the defendant engaged in intentional or deliberate wrongdoing, the conduct includes aggravating or outrageous circumstances, the defendant had a fraudulent or evil motive or evidenced willful or wanton disregard for the rights of others. Don Buchwald Assoc., Inc. v. Rich, 281 AD2d 329 (2nd Dept. 2001); and Swersky v. Dreyer Traub, 219 AD2d 321 (1st Dept. 1996).
Punitive damages may be awarded in an action for breach of fiduciary duty. See, Sherry Assocs. v. Sherry-Netherlands, Inc. 273 AD2d 14 (1st Dept. 2000); U.S. Trust Corp. v. Newbridge Partners, L.L.C., 278 AD2d 172 (1st Dept. 2003); and Swersky v. Dreyer Traub, supra.
In this case, there is no question in this Court's mind but that an award of punitive damages against Wisell is appropriate. An award of punitive damages in the sum of $150,000.00 to Defendants-Counterclaimants is adequate and fair under the circumstances.
B. Defenses Asserted
1. Unclean Hands
Wisell's affirmative defense of unclean hands is premised upon four separate bases; to wit: (1) illegality in IMUK's filing of statements with U.S. Customs which misstated the cost of certain items being imported and misstatements on IMUSA's income tax return; (2) IMUK's failure to provide adequate funding to the joint venture; (3) diversion of funds from IMUSA's bank account by sweeping to Habib 1 account; and (4) failure to compensate Wisell for services rendered.
Unclean hands is available ". . . when the conduct relied on is directly related to the subject matter in litigation and the party seeking to invoke the doctrine was injured by such conduct. (Citations omitted)" Weiss v. Mayflower Donut Corp., 1 NY2d 310, 316 (1956). See also, Unger v. Leviton, 25 AD3d 689 (2nd Dept. 2006); and Fade v. Pugliana/Fade, 8 AD3d 612 (2nd Dept. 2004).
Acts of unrelated or collateral wrongdoing or acts which do not cause harm to the party asserting the defense cannot serve as the basis for the defense of unclean hands. Dinnerstein v. Dinnerstein, 32 AD2d 750 (1st Dept. 1969); and TNT Communications Inc. v. Management Televisions Systems, Inc., 32 AD2d 55 (1st Dept. 1969), aff'd., 26 NY2d 639 (1970).
None of the allegedly improper or illegal acts of IMUK or Abidali are related to the subject matter of the litigation or caused harm to Wisell.
The inaccurate information regarding the cost of the desiccated coconut contained on the U.S. Customs forms proffered by Wisell is irrelevant to this litigation. Abidali testified without refutation that the cost figure stated on the customs statement was less than the actual amount paid for the coconut. This was done so that IMUK and IMUSA's competitors would not know the cost actually paid for this item. This statement may be a technical violation of U.S. Customs law. However, this misrepresentation did not cause damage to Wisell since the desiccated coconut being imported was not subject to an import duty. His claimed profit was not affected by such erroneous filings.
IMUSA's federal income tax return failed to indicate that IMUK was IMUSA's parent. There was no evidence adduced at trial which indicated that this affected IMUSA's tax liability or its profitability.
Wisell further asserts that IMUK failed to provide adequate start-up financing and periodically denuded IMUSA of funds by sweeping funds from the IMUSA bank account and using those funds for purposes other than the business of IMUSA. Despite these assertions, there is no evidence that IMUSA was unable to obtain product or fill orders because it lacked the financial wherewithal to obtain product. Thus, the claimed failure to provide financing did not affect IMUSA's business or financial success. In fact, IMUSA's operations where characterized by excess inventory and significant accounts receivable. Thus, this problem appears to have been attributable, at least, in part to Wisell's ordering too much product and failing to collect amounts due. Wisell's mismanagement cannot form the basis of establishing wrongdoing on IMUK's part.
Wisell's claim that funds were taken from the IMUSA bank account and used to finance other Indo-Med entities is also not supported by the evidence. The evidence established that the money taken from the IMUSA bank account by IMUK was used to pay for the product purchased by IMUK for IMUSA or to pay other expenses incurred in IMUSA's operation. While such sweeps of the Habib I account were troubling and disruptive, it was not clear that, except in isolated instances, Wisell's ability to do business under IMUSA was not seriously impeded.
Wisell claims that IMUK engaged in activities designed to deprive him of compensation for his services. However, under the terms of joint venture agreement, Wisell was to receive one-third of the profits generated by the operation of the joint venture as his compensation. This figure could never be calculated because accountings were never prepared. Wisell and his accountant Ross are, at least, partially to blame for the failure to prepare the accountings which contributed to Wisell's dissatisfaction with the accounts prepared by Raniwala.
After a period during which Wisell did not receive compensation because IMUSA was not generating any profit, he unilaterally decided to pay himself a salary of $1,000 per week. Abidali reluctantly agreed to this arrangement as a draw against Wisell's share of the profits. Wisell did not present any evidence that he did not or was unable to draw his weekly salary.
Wisell voluntarily entered into a joint venture in which his compensation was dependent upon the financial success of the joint venture. The agreement provided that Wisell was to receive one-third of the profits or bear one-third of the losses. If Wisell was dissatisfied with this arrangement, his remedy was to terminate the agreement and reconcile with IMUK. He did not chose this option.
Wisell's reliance upon Nameh v. Muratex Corp., 34 Fed. Appx. 808 (2nd Cir 2002) and National Petrochemical Co. of Iran v. The M/T Stolt Sheaf, 930 F.2d 240 (2nd Cir. 1991) is misplaced. These cases deal with issues involving the enforceability of illegal contracts; not unclean hands.
In Nameh, the court denied equitable relief to both parties beyond an accounting because the entire joint venture agreement was predicated upon an illegal agreement under which the joint venture's profitability was directly related to bribery of Polish customs officials. The joint venture agreement underlying the claim in this action is not so tainted. To the extent that IMUK engaged in any illegal actions, those actions were not directly related to the claims herein and did not affect the joint ventures profitability.
In National Petrochemicals, the court found that the entire transaction which gave rise to the litigation was in violation of the United States trade embargo on Iran. Thus, the illegality was directly related to the transaction involved in the litigation.
None of the transactions involved in this litigation involve alleged illegality caused any harm or damage to Wisell.
2. Laches
Laches is "such neglect or omission to assert a right as, taken in conjunction with the lapse of time, more or less great, and other circumstances causing prejudice to an adverse party, operates as a bar in a court of equity. (Citations omitted)." Matter of Barabash, 31 NY2d 76, 81 (1972). The essential element of this defense is delay causing prejudice to the opposing party. Id. See also, Saratoga County Chamber of Commerce v. Pataki, 100 NY2d 801 (2003). Prejudice is established by demonstrating an injury, change in position, loss of evidence or some disadvantage resulting from the delay. In re Linker, 23 AD3d 186 (1st Dept. 2005); Resk v. City of New York, 293 AD2d 661 (2nd Dept. 2002); and Skrodelis v. Norbergs, 272 AD2d 316 (2nd Dept. 2000).
The evidence established that Wisell did not sustain any injury, change in position or disadvantage as a result of IMUK's failure to promptly press its claim. Wisell did not establish that any evidence relevant to this claim was lost or destroyed as a result of the delay. Therefore, laches does not bar IMUK's claim.
3. Business Judgment Rule
Citing the business judgment rule, Wisell contends that, as president of IMUSA he had control of the corporation's affairs and could find it in the ordinary course of business. While this is generally true, the corporate officer or director, or partner/joint venturer whose business related decisions, is protected by the rule, it cannot be vouchsaid that the rule was intended to insulate an officer or director from his/her fraud, self-dealing, breach of fiduciary duty or decisions affected by an inherent conflict of interest. Wolf v. Rand, 258 AD2d 401 (1st 1999); and Simpon v. Berkley Owner's Corp., 213 AD2d (1st Dept. 1995). See also, Shapiro v. Rockville Country Club, Inc., 22 AD3d 657 (2nd Dept. 2005).
Here, Wisell's conflict of interest, wrongdoing and self-dealing, as found by this Court, negates the application of the business judgment rule. Certainly, Wisell's conduct was neither authorized nor "in furtherance of the legitimate interests" of IMUSA. See, Gillman v. Pebble Cove Home Owners Assn., 154 AD2d 508, 509 (2nd Dept. 1989).
Thus, Wisell's interposition of the business judgment rule as a defense must be rejected. emph type='bf'B. Accounting/Damages
1. General
In order to evaluate the financial dealings between the parties, the Court appointed James T. Ashe, CPA of Marcum Kliegman, LLP as a neutral forensic evaluator. The parties agreed to submit all financial records to Mr. Ashe and respond to his inquiries with regard to their business dealings. In November 2003, Mr. Ashe issued his findings. Thereafter, an updated report was issued in January 2004. Based on the Ashe report, the trial of this matter resumed in February 2004.
From the report and Mr. Ashe's testimony, it is clear that contemporaneous records of transactions were rarely kept. Thus, Mr. Ashe and his staff were forced to evaluate not only the material they did receive but also the statements of Wisell, Ross, Abidali and Raniwala, among others.
The result was a detailed analysis and some reasonable conclusions drawn from the available information. For the most part, that approach resulted in the financial analysis presented. However, there were many determinations about which Mr. Ashe could not, in good faith, opine. As to those items, Mr. Ashe invited the Court to exercise its discretion in deciding which competing version to accept.
2. Cutoff of Profit/Loss
The testimony during the trial demonstrated that, by the end of 2001, IMNA had transferred its business to Scala Wisell. Thus, this Courts' analysis of profit and loss of the joint venture will extend to 2001.
3. Miscellaneous Adjustments
a. AT T Payments The parties have agreed that the sum of $6,965.00 of the $30,754 in charges should be disallowed. The disallowed figure represents 35% of all charges which were of a personal, non-business or unascertainable purpose.
b. Auto Expenses The parties have agreed to automobile expenses as proper as follows:
1997 — $ 4,460.00 1998 — $27,573.00 1999 — $28,982.00 2000 — $25,257.00 2001 — $11,456.00
c. Bolton Distribution, Inc. Expenses — These expenses as taken by Wisell are claimed to be for rent, "on account" and miscellaneous. The rent, in the sum of $3,000.00, although not established as fair and reasonable in the marketplace, is nevertheless approved. It is clear that IMUSA needed to have an office from which to operate. Over the course of the relationship, the monthly rental changed ($1,500.00 per month from January to August 1999 and $2,000.00 per month thereafter until August 2001) is reasonable and should be allowed. However, the other unexplained payments totaling $34,604.00 shall not be permitted. The rental adjustment shall be:
1999 — $17,000.00 2000 — $20,000.00 2001 — $ 6,000.00
d. Brooklyn Facility Improvements — Wisell contends that all of the expenses at the facility were business related and should therefore be applied. The Ashe report accounts for $99,741.00 of these expenses. An additional $29,844.80 was marked by Mr. Ashe as "½ DISALLOWED". The balance of $14,992.40 should be allowed despite IMUK's claim that, if such allowances were permitted at all, it should be allocated one-third each to IMUSA, Scala Wisell and Bolton.
e. Carol Wisell — While Wisell argues that the perquisites paid to Carol Wisell were justified based upon her uncompensated clerical and accounting — related services to IMUSA this Court disagrees. There is no doubt but that Carol Wisell was entitled to be reasonably compensated for services rendered. However, payments totaling $75,390.89 for Christmas, her son, etc. fall well outside the ambit of reasonableness and must be disallowed.
In addition, the Ashe report left open, for this Courts' determination, the sum of $13,409.00. The parties agree that Carol Wisell did provide office services to IMUSA. Thus, allowing the sum of $13,409.00 for the six years of her service which amounts to an average of $2,234.83 per year is not unreasonable.
f. Cash Payments — The parties agree that the cash payments disallowed by Mr. Ashe should remain as applied.
g. Charles Scala — From 1997 to 2001, Charles Scala received payments for salary, bonuses and reimbursements totaling $147,937.00 as follows:
1997 — $ 1,000.00 1998 — $ 1,800.00 1999 — $26,442.00 2000 — $62,349.00 2001 — $53,262.00
Charles worked for Scala Wisell during that period even though it is claimed he did some work for IMUSA as well. There is no demonstrated basis for any salary to have been paid by IMUSA. Thus, all moneys paid are disallowed.
h. Commissions — The parties agree that the adjustments for commissions set forth in the Ashe report should be approved.
i. Credit Cards — The IMUSA credit cards were utilized for a variety of purposes including clearly business items, clearly non-business items and those which were allocable between IMUSA and Scala Wisell.
The credit card charges total $359,446.95. They include expenditures by Wisell, Elizabeth Wisell, John T. Wisell, Jr., Carol Wisell, Tracey Ann McKay and Charles Scala. Of these charges, Mr. Ashe disallowed $74,290.76 or 20.6%.
Wisell argues that the Ashe Report fails to specify the reason why there were disallowances. On the contrary, the Ashe Report discusses disallowances based upon personal retail purposes such as veterinary services, groceries, children's clothing, maternity clothes, trips for Elizabeth Wisell, meals with people who were not related to IMUSA's business as well as other non-business related expenses. Indeed, Mr. Ashe took into account charges for supplies related to the work done at the Brooklyn office and apportioned those on a 50/50 basis with Scala Wisell.
IMUK urges that the abuse of the IMUSA credit cards warrants a greater disallowance than suggested in the Ashe Report. IMUK urges a blanket 40% disallowance of all credit card charges. The Court declines to do this. While misuse of the company credit cards may well exceed the $74,290.76 ascribed by Mr. Ashe. However, in the absence of any countervailing proof, the Court accepts the disallowance set by Mr. Ashe.
j. Due to IMUK — Adjustments — In his analysis, Mr. Ashe reviewed the Habib Bank transfers or "sweeps" and transfers to Philmanex/London.
IMUK swept the following from the Habib I account:
1996 — $2,317,000.00 1997 — $2,973,616.00 1998 — $1,035,000.00 _______________________ TOTAL $6,362,761.00
There were no transfers or sweeps from the Habib II account. In addition, further adjustments totaling $94,200.00 were identified. Thus, the total amount swept was $6,456,961.00.
During that same period, IMUK and Philmanex made purchases on behalf of IMUSA as follows:
1996 — $2,617,894.58 1997 — $3,756,555.06 1998 — $ 100,303.00 _______________________ TOTAL $6,474,752.64
In addition, IMUK incurred letter of credit fees totaling $15,350.73
Thus, IMUK/Philmanex' expenses on behalf of IMUSA was $33,142.56 more than the moneys swept from IMUSA's Habib I account. IMUK concedes that it received a credit of $26,775.00 on a contract it did not pay. The net credit to IMUK/Philmanex should be $6,367.56 through 1998.
Thereafter, additional adjustment were made:
Gersappe's salary-1999 $23,400.00 Fiesta invoice No. 3030 $ 5,719.96 Agrimac contract expenses $84,269.00
While the Fiesta invoice and Agrimac expenses are to be adjusted between the parties, there is a dispute as to responsibility for Gersappe's 1997 salary. Even though this item was a source of disagreement between the parties, the Court finds that this item should also be considered a permitted expense.
Thus, the total credit to IMUK is $6,367.56 with the various listed adjustments totaling $113,388.96 being applied to the profit and loss of IMUSA.
k. Due to IMUK — Initial Investment — IMUK claims that it gave start-up financing in the sum of $917,488.00 representing essentially accounts receivable and inventory. To this amount should be added the net adjustment of $6,367.56 for a total of $923,855.56 as of December 31, 1998.
Wisell urges that the investment made by IMUK/Philmanex was venture capital which was at risk when entering into the joint venture. There is no dispute, and there can be no doubt, that but for such investment, IMUSA could not have operated. However, the risk should have been an issue of prevailing market conditions, availability of product and salesmanship; not a lack of fidelity and self-dealing.
Thus, as adjusted, IMUK is entitled to its initial investment. This is especially true when it is remembered that Wisell ran the business and ultimately converted it to IMNA. To the extent that the profits of the venture do not exceed this sum, IMUK should recover the balance.
l. Elizabeth Wisell — Elizabeth Wisell, Wisell's daughter-in-law, ostensibly worked for Scala Wisell. However, she is credited with promoting the sale of Fiesta goods — South America. Thus, her salary for such service, ($4,235.00) should be viewed as a permissive expenditure by IMUSA. However, as indicated, her use of the IMUSA credit card must be disallowed as being for personal expenses and disproportionate to the services to the services she rendered.
m. Gayetri Sahedeo — There is no doubt that Ms. Sahadeo performed services for both Scala Wisell and IMUSA. She was paid a total of $33,970.66 of which Scala Wisell paid $5,481.31. Based upon the agreement between Wisell and Abidali, IMUSA was responsible for 80% of her salary since, proportionately, that was how her work was divided. Under the arrangement, IMUSA should have paid $27,176.53. In reality, IMUSA paid $28,489.35 or $1,312.82 more than it should have. IMUK is entitled to a credit for this amount.
n. Howard Gordy — Mr. Gordy performed a variety of tasks for IMUSA. Among them, he was a vendor. Undocumented payments in the sum of $46,420.00 should be disallowed. Wisell claims that all payments to Mr. Gordy were legitimate business expenses. Such a claim is difficult to fathom when Mr. Gordy's services extended to being what amounted to a check cashing service. In that capacity, Mr. Gordy became an extension of Wisell's inappropriate financial self-help which helped bring about this litigation. Thus, the remaining disputed $34,039.00 should also be disallowed. The total disallowed is $80,459.00.
o. Insurance Expenses — The Ashe Report disallowed life insurance payments in the sum of $5,515.00. This Court agrees. Such insurance was not part of the joint venture agreement.
p. John T. Wisell, Sr. — Wisell received a gross salary/draw for the years 1999 to 2001 in the sum of $143,050.00. In addition, he received the benefit of an additional $74,948.72 for which insufficient documentation was presented on which appeared to be personal/non-business related. This Court agrees that Wisell, as the president of a substantial business, should be reasonably compensated.
IMUK's argument that Wisell's disloyalty warrants disgorgement of all salary and expenses ( Western Electric Co. v. Brenner, 41 NY2d 291, 295; Loundin v. Broadway Surface Advertising Corp., 272 NY 133, 138) is unavailing. While Wisell's improper actions are well documented, IMUK needs to bear some responsibility for putting him in that position. Paying Wisell his salary and automobile expenses is not unanticipated or unreasonable, as conceded by Abidali. However, pursuant to the joint venture agreement, Wisell owes IMUK two-thirds of his draw or $95,366.67.
The salary he took along with automobile expenses (lease and insurance) totaling $5,670.00 should be viewed as legitimate expenses. Thus, $69,278.72 shall be disallowed.
q. Legal and Related Expenses — Wisel caused IMUSA and IMUK to pay counsel fees to his attorney in the sum of $197,562.00. This amount must be disallowed.
Wisell's defense of this action was necessitated by his own wrongdoing and acting beyond his corporate capacity and authority. Thus, since Wisell's incorporation of IMNA and diversion of IMUSA assets to it, it cannot be fairly said that his actions were in good faith. Business Corporation Law § 722(a). See, Donovan v. Rotham, 253 AD2d 627, 629 (1st Dept. 1998); and Booth Oil Site Administrative Grp. v. Safety-Kleen Corp., 137 F.Supp. 2d 228 (WDNY 2000).
r. Loans to Nagle — In 1999, IMNA wired funds, as a loan, to Nagle, a supplier of IMUK/IMUSA. The total loaned was $35,000.00 of which only $6,000.00 has been repaid. The $29,000.00 balance due on this loan should be adjusted in IMUK's favor.
s. Miscellaneous Payments — The Ashe Report identifies various payments totaling $104,405.40. Some of those payments were disallowed in whole or part. Most of such disallowed payments have been addressed in other parts of this decision.
t. IMUSA Opening Balance as of January 1, 1996 — The dispute between the parties is highlighted in this area of analysis. That is, Mr. Ashe received extensive document production from each side. The sense this Court has is that Mr. Ashe received more documents from the parties that they exchanged between each other. The result, of course, has been this litigation. It is frustrating, indeed, to have each party point an accusatory finger at the other with regard to gaps in the financial information available to Mr. Ashe. Thus, the reasonable assumption made by Mr. Ashe in the context of the intentional and/or haphazard record keeping are followed to the extent the evidence in this trial permits.
Based on the records available to Mr. Ashe, the following opening balance were found as of January 1, 1996:
Cash $ 5,616.00 Inventory $612,258.00 Accounts receivable $349,943.00 Less: pre — 1996 $967,187.00 accounts payable (50,329.00) Opening balance $917,488.00
This takes into account merchandise returned by Nazli.
The opening balance corresponds with IMUK's initial investment (subheadnote k, supra) as accepted herein.
u. Pat Ehli/Cascade Foods — Wisell, through IMNA, entered into a lease for warehouse space in Albany, Oregon. The monthly rental was the greater of $3,000 or 6.5 per pound of average weight of goods stored at the facility. Through the end of 2001, the sum of $87,000 was paid for this facility. No rational business basis or approval of IMUK was submitted to show how this is a legitimate expense of IMUSA. Thus, it must be disallowed.
v. Paul Nielsen/Pacific Landing — Paul Nielsen and his company, Pacific Landing, were paid $39,878 and $22,000 for the respective years of 1998 and 1999. The documentary evidence establishes that the expense of Nielsen's salary would be bourne equally by IMUK and Scala Wisell. No proof was submitted to establish the degree of effort expended and success enjoyed by Nielsen. Thus, his salary should be borne equally by Scala Wisell and IMUK or $30,939 each.
Raniwala's note to Mr. Ashe confirms that salary arrangement with the understanding that Nielsen's domestic sales were to the credit of Scala Wisell and his international sales were for IMUK.
w. Joint Venture Payment of Pre-1996 Expenses — The parties agree that the joint venture paid $50,328.69 in pre-1996 expenses. Thus, the opening balance must be adjusted accordingly.
x. Related Party Loans — Due to "haphazard at best" recordkeeping, Mr. Ashe was only able to conclude that there were $15,992 in unpaid related party loans. The testimony at trial, however, suggests that such loans were repaid. There shall be no adjustment therefor.
Issues relating to such recordkeeping were the subject of an accounting malpractice action against Ross — the Supreme Court, New York County.
y. Rent Expense — By agreement, IMUK and Scala Wisell are to share the rent for the Floral Park office. In 2001, the rent was $19,995.
z. Returned Merchandise — Nayli — The opening inventory as of January 1, 1996 included 7,056 pounds of golden sultanas value at $5,645. However, based upon a rejection of this product, a debit memo was issued by IMUK to Nazli in the sum of $6,004.24. Further, 26,684 pounds of apricots were returned for a credit of $21,347. The Ashe report, without objection, reflected these adjustments.
aa. Scala Wisell Payments — From 1996 to 2001, payments to Scala Wisell totaled $356,361. These payments were for commissions, miscellaneous business expenses, Can-Pan loans and health insurance reimbursement. IMUK contests the validity of items designated as overhead in the sum of $106,000 and Can-Pan loan payments totaling $29,420. In essence, the so-called overhead is a reiteration of Wisell's weekly draw of $1,000. Thus, it cannot be again permitted. However, the Court accepts the Can-Pan loans as evidencing an advance payment for merchandise purchased on behalf of the joint venture. Thus, the permitted payments to Scala Wisell total $250,361. The balance, $106,000, is disallowed.
bb. Post — 1998 Adjustments
(i) Wisell Advances
Wisell claims that he advanced $83,937 on behalf of IMUK. This sum is comprised of a payment of $8,1000 on a Fiesta Foods invoice; and $75,837 for a series of payments to Kraft Foods for IMUK.
With regard to the Fiesta Brands, Wisell has demonstrated that he is entitled to this credit. IMUK argues that Wisell should not receive any benefit for payments made after he commenced operating as IMUSA. Such an approach will only engender further litigation. Where it is clear that credits are due they shall be appropriately taken into account inasmuch as the claims of the parties were analyzed by Mr. Ashe through 2002 and by this Court, at IMUK's urging, through 2001.
As to the Kraft Foods advance, both sides argue that this adjustment should be allowed or not allowed in total because the other side has failed to provide adequate documentation. It is this Court's view that Wisell has demonstrated entitlement to the full credit of the moneys allocated to Kraft foods; not the $44,100 urged by IMUK.
(ii) Gersappe Payments
The payments to Gersappe should be allowed. Little credence can be given to IMUK's claim that these payments were made to create an aura of normalcy to prevent IMUK from understanding Wisell's scheme. The fact is that the $23,400 paid to Gersappe were contemplated and tacitly approved by IMUK.
(iii) Agrimac Accounting
The parties dispute when credits and expenses for sales to Agrimac should be posted and applied. That is, should the expense accrue in 1998 when the product was purchased and the profit accrue the product was sold or should the purchase and sale be ascribed to one year or the other?.
The amount at issue is irrelevant based upon the calculation of the aggregate loss or profit over the 1996 to 2001 years.
cc. Tylos Tea — The parties agree that due to substandard product, there was a $10,000 loss on this sale.
dd. 2000 Receivables — IMUK urges that Mr. Ashe should not have written off the receivables from 2000 totaling $202,580. The basis of this write-off is apparently the failure of either side to fully and adequately maintain receords. It is unlikely that none of the receivables was later realized by IMNA as it conducted business in 2001. It is Wisell who should have maintained such records but to assign a 50% collection rate, as suggested by IMUK, on this record, is rank speculation. Thus, the write-off shall stand.
5. Summary of Calculations emph type='if'In the Ashe Report, the following calculations have been submitted:
YEAR REPORTED ADJUSTMENTS (LOSS) INCOME AS ADJUSTED ORIGINALLY AS HE INCOME 1996 ($44,842) $ 52,901 $ 8,059 1997 166,929 (34,852) 132,077 1998 (56,687) (53,894) (110,581) 1999 (129,980) 163,113 33,133 2000 83,617 (259,403) (175,786) 2001 (38,066) 359,095 321,029 _________________________________________________________________________________ TOTAL ($19,029) $ 226,960 $ 207,931 The amounts subject to judicial review are:
1996 0 1997 $ 52,727 1998 72,950 1999 126,713 2000 220,248 2001 201,627 _________________ TOTAL $ 674,265
Under the terms of the joint venture agreement, the parties were to share profits and losses on an annual basis. That was never accomplished. Thus, such accounting and allocation of aggregate profit or loss, with adjustments as herein provided, can be accomplished on an aggregate basis. That is, for the period of 1996 to 2001, the aggregate profit is $207,931. It is from that figure that adjustments which are subject to judicial review shall be applied.
The following adjustments shall be made to the net profit which should be restored to IMUK's two-thirds share for which Wisell and/or IMNA and/or Scala Wisell are responsible:
Bolton Distribution Inc. expenses (3[c]) $34,604.00 Carol Wisell (3[e]) 75,390.89 Charles Scala (3[g]) 147,937.00 Gayetri Sabedeo (3[m]) 1,312.82 Howard Gordy (3[n]) 80,459.00 John T. Wisell Sr. (non-salary) (3[p]) 69,278.72 Legal and related expenses (3[q]) 197,562.00 Loan to Nagle (3[r]) 29,000.00 Pat Ehli/Cascade Foods (3[u]) 87,000.00 Paul Nielsen/Pacific Landing (3[v]) 30,939.00 Rent expense (3[y]) 9,997.50 Scala Wisell payments (3[aa]) 106,000.00 Wisell credits (3[bb][i]) (83,937.00) ______________________________________________________________ TOTAL $785,543.93
This citation refers to the paragraph and subparagraph of the Damages section of this decision supra.
In addition, the aggregate profit must be adjusted as follows:
Brooklyn facility improvements (3[d]) 14,992.40 Gersappe salary (3[i]) (23,400.00) Fiesta invoice # 3030 (3[j]) (5,719.96) Agrimac contract expenses (3[l]) (84,269.00) ______________________________________________________________ TOTAL ($98,396.56)
Thus, the aggregate profit is reduced to $109,534.44 of which Wisell is entitled to $36,511.48 and IMUK is entitled to $73,022.96.
The amount Wisell received must further be reduced by $6,367.56 (3[j]) and two-thirds of the $143,050.00 he drew against his share of the profits (3[p]) or $95,366.67. Thus, Wisell and the Counterclaim Defendants owe $65,222.75 in addition to the opening balance of $923,955.56 (3[k]) and two-thirds the adjustments due and owing hereunder in the sum of $523,695.94 for a total of $1,512,774.20 together with interest from December 31, 2001 and punitive damages as herein awarded.
6. Forensic Accountant Fees
The parties shared the cost of the forensic accountant's review and analysis of the financial records of the joint venture. Initially, pursuant to Stipulation, the Court directed that the cost could be adjusted at the conclusion of the action. Now, in the face of Wisell's acts individually and through Scala Wisell and IMNA, the Court directs that Wisell, Scala Wisell Co. Inc. and Indo-Med North America, Inc. shall be jointly and severally liable to reimburse Defendants-Counterclaimants for their share of the forensic accounting fees and pay all outstanding balances due to the forensic accountant.
Settle judgment on twenty (20) days notice.