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Valjean Manufacturing Inc. v. Michael Werdiger

May 18, 2006


The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge:



In a Summary Order issued December 6, 2005, the Second Circuit Court of Appeals affirmed in part and vacated in part this Court's February 10, 2005 Amended Opinion and Order. The case was remanded primarily for further clarification with regard to the reasoning in connection with eight discrete issues. The parties submitted additional briefing on these issues and the court held oral argument on March 29, 2006. My original Opinion is clarified as follows.


The facts as determined by this Court after a four-day bench trial are set forth in detail in the September 2, 2004 Opinion & Order, familiarity with which is presumed. Valjean Mfg. Inc. v. Werdiger, 2004 WL 1948752 (S.D.N.Y. Sept. 2, 2004) (Baer, J.). In short, Valjean Manufacturing, Inc. ("Valjean") and Michael Werdiger, Inc. ("MWI") entered into a Manufacturing and Security Agreement ("MSA") on October 3, 1994. Pursuant to the terms of the MSA, Valjean would manufacture, design, and sell jewelry while MWI provided the finances. In early 2003, both parties complained that the other side owed them money. After failed negotiations, MWI terminated the MSA on June 30, 2003.

This Court found in its original decision that MWI breached the agreement by its failure to provide an accounting of the relationship as required by the MSA. After an extensive analysis of over 20 specific areas governing this complex relationship between the parties, the matter was divided into five discrete mega-topics,*fn1 and in the end, MWI was directed to pay Valjean $6,612,486 in damages plus prejudgment interest calculated from the date the complaint was filed, August 18, 2003.


Although the parties vacillated as to whether it would be preferable to proceed pursuant to the oral modifications made during the ten-year term of their relationship, they eventually stipulated that it was the MSA which would control. Consequently, any accounting analysis was done pursuant to principles enunciated in the MSA.

A. Remanded Issues

Both parties appealed the Amended Order & Opinion. The Second Circuit remanded the case for this Court to clarify the following eight issues: 1) whether and on what basis the Court awarded damages based on the post-termination sales of Indian product, 2) whether conduct by MWI reflected their agreement to pay some or all trade show expenses after December 1995, 3) the Court's basis for deducting a 4% charge from the sales proceeds on Indian-manufactured product, 4) the amount, if any, of sales commissions credited to MWI and the Court's basis for awarding these damages, 5) clarification of the Court's valuation of the costs of loose diamonds, 6) the Court's rationale for acceptance of Valjean expert Regan's assessment of the amount of charges and adjustments due to Valjean, 7) the Court's rationale for the interest award to MWI, and 8) the Court's rationale for the award of prejudgment interest to Valjean starting from the date the complaint was filed, rather than the date MWI breached the contract.

1. Post-Termination Sales

The Court of Appeals wrote that this Court did not explicitly address whether post-termination sales of Indian products were included in the damage award and if they were, what the basis was for the award. This Court credited the accounting testimony of Valjean's expert, D. Paul Regan ("Regan"), a Certified Public Accountant and Certified Fraud Examiner, over the testimony of the Owner and CEO of MWI, Richard Werdiger ("Werdiger"). Regan's accounting included credit to Valjean for post-termination sales of Indian product,*fn2 and, both parties correctly note that my opinion included post-termination sales of Indian product. See MWI Memorandum of Law on Remand ("Werdiger Remand Brief") at 7; Valjean Memorandum of Law on Remand ("Valjean Remand Brief") at 3. On remand, MWI argues that there is no basis in the MSA for such a credit. MWI is incorrect.

This Court awarded Valjean the credit for post-termination sales of Indian product pursuant to MSA § 5.1. Section 5.1 recites the method by which MWI would pay Valjean for jewelry sold. MSA § 5.1, Valjean Payments, provides, in relevant part, that:

Not later than the fifteenth day of each month, commencing November 15, 1994, 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. The Valjean Payment otherwise then payable shall be reduced by the following items, applied in the following order:

(1) first, the amount of any Credit Adjustments and Customer Support Adjustments outstanding on such date;

(2) second, interest due and payable on such date on Cash Advances as provided in Section 2.4;

(3) third, the outstanding principal balance of any Cash Advances; and

(4) fourth, the amount of any Diamond Value or Precious Metal Value then owed to MWI in accordance with the last sentence of Section 3.3.

At the outset of trial, it was unclear whether the Indian-manufactured goods would be considered product that was manufactured by Valjean or a Valjean subcontractor. This distinction was critical as it determined whether the goods would qualify as Jewelry*fn3 or Nova/MWI Diamonds*fn4 under the MSA. But, regardless of its eventual classification as Jewelry or Nova/MWI Diamonds, it was undisputed that the MSA entitled Valjean to a share of the proceeds that resulted from the sale of Indian-made goods.*fn5

Having credited Regan's calculations, I awarded Valjean damages on post-termination sales of Indian product. Regan included these sales in his calculations pursuant to Section 5.1 of the MSA. MWI argues this was error because § 5.1, on its face, does not impose any obligation on MWI to continue payments to Valjean following termination of the contract. Werdiger Remand Brief at 10-11. Further, it does not appear that § 5.1 survives termination because it was not included in the MSA's survivability clause. Id. at 10. Section 13.12, "Survival of Representations, Warranties, Covenants, and Agreements" provides that: All representations, warranties, covenants and agreements made by or on behalf of Valjean herein, or in any certificate, financial statement or other document or instrument delivered by or on behalf of Valjean pursuant to this Agreement, shall survive the execution and delivery of this Agreement and any investigation by MWI.

MSA, § 13.12. MWI also points out that MSA § 12, the only provision that explicitly addresses termination, is restricted to consequences that result from the sale of "Jewelry" and thus, does not apply to Indian goods which this Court found were not "Jewelry."*fn6

I am of the same mind, i.e. MSA § 12 would appear to be inapplicable. But here, both parties agreed and an Order was entered on consent that the MSA would apply to all unsold inventory pending trial. As such, it was proper for Regan to conduct an accounting pursuant to MSA § 5.1 that included post-termination sales of Indian product. That Order provided in relevant part that:

MWI and Valjean, consult and agree, no later than 10/31/03, on an accountant, to be paid in equal shares by the parties, to conduct an accounting beginning from 7/1/03, and covering all sales by Valjean until the termination of this arrangement on 4/30/04, or until further order of this Court.

Order (Oct. 27, 2003). The accountant, Kenneth Biddick, nominated and agreed to by both parties, was unable to complete his accounting under the MSA, pursuant to the above Order, because after six months, both parties fired him.

The "Biddick fiasco" aside, both parties' agreed that the MSA would be the sole vehicle, or put another way, the bible, at trial. Defendant MWI stated in a pre-trial brief that "[b]ecause MWI and Valjean could not agree on what oral modifications were mutually agreed to with respect to the MSA, the parties agreed to operate exclusively pursuant to the written terms of the MSA, without reference to any alleged modifications or amendments thereto." Werdiger Decl. in Opposition to Motion by Plaintiffs for Leave to Amend ¶ 2. Counsel for MWI reiterated that sentiment at trial. Bressler Opening Argument, Trial Tr. at 30:7-9 ("Now, the parties have agreed that we are operating under the MSA."). All this further supports Regan's accounting for post-termination sales pursuant to MSA § 5.1.

Lastly, in addition to those statements about the parties intent to be governed by the MSA, both parties also stated that their accounting was done pursuant to the MSA. Valjean said in their pre-trial brief that they would "prove its damage under the payment provisions of Section 5.1 of the MSA." Plaintiffs' Statement of Claims and Defenses at 8, n. 1 (Oct. 12, 2004). And MWI testified that "[w]hile there have been modifications to the MSA that the parties operated under, MWI's Accounting has been prepared under the express terms of the Manufacturing and Security Agreement ("MSA") entered into between the parties on October 3, 1994." Werdiger Decl. ¶ 3. There is no reason for me to believe either party did not do just that.

This Court is bound by the stipulated language and the parties cannot now revisit this issue and add a new twist. Having found that § 5.1 governs this issue and having credited Regan's analysis, I was bound to and did award Valjean damages based on post-termination sales of Indian goods.

2. Trade Show Expenses

This Court awarded Valjean trade show expenses in the amount of $1,306,123 because

I found that it was reasonable for Valjean to presume, under the circumstances of this case, that MWI would cover someof the marketing cost. The Court of Appeals requested clarification of the Court's reasoning.

Marketing costs are addressed in MSA § 3.4. That provision provides that "MWI shall pay for advertising, trade shows 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." (emphasis added). Pretty clearly this required an affirmative act by MWI after December 1995 in order for MWI to be liable for trade show expenses incurred by Valjean. The record demonstrates that such action was taken.

MWI never established a computerized accounting system to calculate payments pursuant to the method set out in the MSA. Martin Gruber, Owner, Chairman of the Board, and Chief Financial Officer of Valjean, testified that MWI stated they "did not have [a] computerized accounting system to calculate the payments in the way provided by the MSA, but they were working on it. . . . This practice continued into 1998, as I kept being told MWI was not yet prepared to calculate the payments per the MSA." M. Gruber Decl. ¶ 21. In fact, according to Valjean's expert, Regan, MWI never put a system in place to capture the information necessary to calculate payments owed Valjean under the contract and that this "system could have been put in place in 1994 when the MSA was signed." Regan Decl. ¶ F(1) -- (2). This is all uncontested by MWI.

In an attempt to conduct an accounting of monies owed during the relationship, Werdiger sent an email to Fred Gruber, President of Valjean, on June 10, 2002. This email confirmed an agreement by MWI to cover 100% of the Basel trade show expenses and 50% of the expenses incurred at the Las Vegas and Orlando trade shows until February 28, 2000. The email provided as follows:


CHARGES: . . .

50% of Las Vegas and Orlando trade show expenses ...

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