The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge
This is a case about a business relationship gone bad. Plaintiffs Atateks Foreign Trade Ltd., Jordan, and Atateks Dis Ticaret A.S. (collectively, "Atateks"), foreign companies in the garment manufacturing business, assert claims of breach of contract, account stated, and fraudulent conveyance against their former purchasing agent, Defendant Private Label Sourcing, LLC ("Private Label"), and an alleged alter ego Second Skin, LLC ("Second Skin"). Defendants assert counterclaims for breach of contract. This Opinion follows a one-day bench trial and post-trial briefing submitted by the parties.
Plaintiffs Atateks Foreign Trade, Ltd., Jordan ("Atateks Jordan") and Atateks Dis Ticaret A.S., ("Atateks Turkey") are related foreign companies that manufacture women's apparel in Jordan and Turkey respectively. (Trial Decl. of Ilhan Arslan ("Arslan Decl.") ¶ 1, 6, 7). Of relevance to this case, Atateks Turkey produced seamless garments in Turkey and also knitted and dyed fabrics that were sent to Jordan to be cut and assembled into garments by Atateks Jordan. (Id. ¶ 6, 7). Atateks is owned by Ihsan Arslan. (Trial Transcript ("Tr.") 81-82.) His younger brother, Ilhan Arslan ("Arslan"), was the general manager of Atateks Jordan until 2007 and the only witness to testify on Atateks' behalf at the trial.
Private Label is a New York-based limited liability company that, during the relevant time periods acted as a purchasing agent of women's apparel for Target Stores. (Trial Decl. of Christine Dente ("Dente Decl.") ¶1, 3, 4). At root, Private Label's role was that of a middleman. The company would either purchase garments from Atateks and other manufacturers for resale to Target or facilitate transactions pursuant to which the manufacturers sold garments directly to Target, and Private Label earned a profit that was paid by Target. (Tr. 32; 46.) Private Label was formed by Christine Dente and Bruce Allen in 2001, and until 2006 each were co-owners of equal shares. (Id. ¶4.) In January 2006, Allen sold his fifty percent interest in Private Label to a Hong Kong-based company named Jetwell Garments Ltd. (Id. ¶5.)
Second Skin is a New Jersey limited liability company that was formed in 2005 and is owned entirely by Dente. (Id. ¶ 45.) Dente testified that she formed Second Skin in order to focus on the seamless garment business. (Tr. 34.) In 2005 and 2006, one-hundred percent of Second Skin's income came from commission payments paid directly to Second Skin from Private Label's customers including Atateks. (Tr. 36-37.) Dente and Nilda Corchado, a former employee of Private Label and then-current employee of Second Skin, were the only other witnesses to testify live at the trial.*fn1
B. The Business Relationship
In 2002, Atateks and Private Label were introduced to one another by Imer Basul, whose company, Basul Texkstil Ltd. ("Basul"), is a Turkish sourcing agent. (Dente Decl. ¶ 9; Arslan Decl. 9.) Basul served as Private Label's agent in Turkey and as the day-to-day intermediary between Private Label and Atateks. From 2002 until the latter half of 2006, the parties conducted business without significant problems. (Tr. 33.)
The business relationship between Atateks and Private Label was not documented in a master written contract. (Pretrial Order, Stipulations, No. 1.) Rather, the parties conducted business pursuant to a system of purchase orders and invoices. To initiate an order for garments, Private Label would send Atateks a purchase order that specified the style, color, quantity and per-unit price of the goods to be manufactured.*fn2 (Dente Decl. ¶ 10; Arslan Decl. ¶ 10; Tr. 46.)
When the goods were manufactured and shipped, Atateks would send Private Label an invoice for the agreed-upon price of the goods.
1. Direct Letter of Credit and Warehouse Transactions
The parties' transactions took two forms: transactions conducted on a "direct letter of credit" basis and those conducted on a "warehouse" basis. Transactions conducted on a direct letter of credit basis constituted the vast majority of the parties' business. (Dente Decl. ¶11.) Under this system, Target paid Atateks directly via a line of credit and Atateks was responsible for shipping its garments directly to Target's appointed forwarder. (Id. at ¶15.) If Target approved the goods, the freight forwarder would send Atateks a stamped bill of lading, which Atateks used to collect payment on the invoice from the bank that administered the letter of credit. (Id. at ¶16.) Private Label was then separately remunerated by Target.
For the smaller number of transactions conducted on a warehouse basis, Private Label paid Atateks directly for the garments and Private Label took possession of the garments, storing them in its own warehouse before they were shipped to Target. (Dente Decl. ¶ 11; Tr. 42.) Private Label generally arranged for shipping through its appointed freight forwarder and took possession of the goods at the port of departure. Dente testified that all of the shipments at issue in this case were warehouse shipments, although the evidence establishes that some of the disputed transactions began as direct line of credit transactions and were converted to a warehouse basis to facilitate timely delivery to Target. (Tr. 42.) Private Label earned a profit on warehouse goods that averaged 10% of the sales price. (Tr. 48-49.)
Another relevant feature of the parties' business relationship are "charge-backs" pursuant to which certain costs incurred by Private Label were charged back to Atateks. (Arslan Decl. ¶28; Dente Decl. ¶26.) The parties agree that charge-backs were standard protocol in the garment manufacturing business and in their course of dealing in particular. (Tr. 97.) In large measure, the charge-backs originated with Target, which invoiced Private Label for certain costs, some of which Private Label then charged back to Atateks. For example, Target invoiced Private Label for merchandise returned to the retailer by customers and for "new store discounts," the discounted rates for which goods in a newly opened store were sold. (Dente Decl. ¶26-29.) According to Dente, it was common practice for Target to take between six months and one year to generate charge-backs. As discussed below, the evidence shows that while Atateks routinely accepted smaller charge-backs, responsibility for larger charge-backs was negotiated between the parties.
Although it was Basul who introduced Private Label and Atateks in 2002 and commissions had not been previously paid, Arslan testified that in mid-2005 Dente requested that "commissions" be paid to her through Second Skin because she was having trouble with Bruce Allen, the other owner of Private Label, and wanted funds to be diverted to her without passing through Private Label. (Arslan Decl. ¶43). Althouth Dente acknowledged that the relationship between Private Label and Atateks was "pretty well developed" by 2005, she testified that thecommissions were earned for the "service that [she] provided in expanding the seamless business with Target and Atateks," and denied that the prices Atateks charged to Private Label were increased in order to pay the commissions. (Tr. 89.)
C. Deterioration of Business Relationship
The parties' business relationship broke down in the latter half of 2006, ultimately leading to this litigation. Plaintiffs allege generally that Target breached or rescinded its contracts to purchase certain garments from Private Label, but that Private Label improperly tried to pass the losses off on Atateks. Private Label, for its part, contends that Atateks was responsible for production delays and quality control issues that led Target to cancel the orders and that Atateks agreed at a meeting in New York in October 2006 to bear some of the losses, but later reneged. Private Label further contends that substandard labor conditions at Atateks' Jordanian factory caused Atateks to fail audits conducted by Target, which resulted in Atateks Jordan being placed on "probation" such that Target would not accept future orders manufactured by the Jordanian plant.
1. Cancelled Orders and Alleged October 2006 Agreement
On September 28, 2006, Target cancelled two large orders for garments in the "rouched" and "racerback" styles. Target contended that the racerback garments, which had already been shipped from the Middle East, were late and that delays in earlier shipments of rouched garments required cancellation of additional orders for garments in that style that were to be delivered in November. The next day, Dente sent an email to Basul informing her of the cancelled orders and attempting to shift the burden of loss to Atateks. Dente stated that Target would allow the rouched garments to be converted to a warehouse basis "at factory liability" and that Private Label would either return the boat shipments of the racerback garments or sell off the goods on consignment for Atateks, but that Private Label would "not be making payment on these units." (PX-35.) In an email to Dente dated October 3, 2006, Arslan objected to Dente's statement that the shipments were late and noted that the racerback garments had already been approved and shipped. (PX-52.)
Arslan, Dente, and Private Label employee Nilda Corchado met in New York City in October 2006 to discuss the cancelled orders, but their accounts of the agreement reached at that meeting vary significantly. (Tr. 133: 16-17; Dente Decl. ¶ 74; Tr. 50.) Defendants contend that at the meeting the parties agreed that (i) Atateks would keep the racerback garments and sell them in the secondary market, therebyreleasing Private Label's obligation to pay the contract price; (ii) Private Label would sell the rouched garments and whatever price wasobtained would satisfy Private Label's liability to Atateks for those goods; and (iii) liability for the amount due under an invoice for rouched garments dated March 22, 2006, would be split equally between Private Label, Atateks, and Basul. Atateks, for its part, acknowledges the meeting but disputes Private Label's account-particularly the alleged term that permitted Private Label to satisfy its obligation to pay for the rouched goods with whatever price it secured for those goods in the resale market.
2. Labor Problems at the Jordanian Factory
In her trial declaration, Dente stated that in April or May of 2006, Target conducted an audit of the Jordanian factory and found problems in "payroll, safety, and with forced labor." (Dente Decl. ¶66.) On cross examination, Dente acknowledged that she had characterized Atateks' failure to pay proper overtime as "forced labor." (Tr. 23.) In her written declaration, Dente also testified that Target cancelled its orders for certain goods "after the Jordan factory was suspended/deactivated," but on the stand she acknowledged that the suspension/deactivation of the Jordanian factory was not the cause of the cancelled orders. Rather, Dente testified that the invoices were cancelled due to "late delivery and quality problems" not the labor problems at Atateks' Jordanian factory. (Dente Decl. ¶¶ 70, 73; Tr. 22-25.) Target's audits did identify certain features of the Jordanian factory that "need[ed] improvement" and after a third audit Target placed the Jordanian factory on "probation." This meant that Target would not accept future orders fulfilled with goods manufactured there. As discussed below, whether Atateks "failed" the Target audits is immaterial to resolution of the parties' competing claims.
The New York Uniform Commercial Code governs the parties' dispute. The parties' briefs assume that New York substantive law governs and such implied consent is sufficient to establish the applicable choice of law. Golden Pacific Bancorp v. F.D.I.C., 273 F.3d 509, 514 (2d Cir. 2001) (citing Krumme v. WestPoint Stevens Inc., 238 F.3d 133, 138 (2d Cir. 2000)). The Uniform Commercial Code ("UCC") applies because the garments at issue are "goods" within the meaning of U.C.C. § 2-105. N.Y. U.C.C. § 2-105.
B. Breach of Contract Claims
"Two elements give rise to a breach of contract claim: (i) a contract between the parties and (ii) an act allegedly in violation of that agreement. Both are necessary elements of the claim; neither is sufficient by itself." Agency Rent A Car System, Inc. v. Grand Rent A Car Corp. 98 F.3d 25, 31 (2d Cir. 1996). The parties' business relationship was conducted on a purchase order basis: no master contract governed the relationship of the parties. Consequently, each purchase order issued by Private Label and accepted by Atateks represents a distinct contractual obligation and must be analyzed separately. Because Private Label acknowledges that it has not paid Atateks for the transactions in dispute, Private Label's liability for breach of contract will turn on the existence of a contractual obligation and the terms thereof.
Evidence of the parties' course of dealing over the course of their business relationship may be used to assist the Court's interpretation of the contracts where they are ambiguous. N.Y. U.C.C. § 2-205(4); Travellers Intern. AG v. Trans World Airlines, Inc., 722 F.Supp. 1087, 1102 (S.D.N.Y. 1989) (past performance of the parties under the contract and previous agreements which incorporated identical provisions "supply more than adequate context for the Court to determine the meaning the parties intended to ascribe to [a contractual term.") Industry custom and trade usage may also be considered to assist the Court in determining the intent of the parties. However, the parties' course of dealing controls over evidence of commercial custom, and the written terms of the purchase orders and invoices generally control over both forms of extrinsic evidence. See Christiania General Ins. Corp. of New York v. Great American Ins. Co., 979 F.2d 268, 274 (2d Cir. 1992).
1. Accounting Issues and Summary of Breach of Contract Claims
Quite regrettably, two distinguishing features of this litigation are the parties' inability to produce a comprehensive, accurate, and mutually acceptable accounting and their vituperative disagreements before, during, and after the trial as to who is to blame. Ultimately, and I believe correctly, Plaintiffs conceded that Defendants' accounting, submitted shortly before the trial, is far more comprehensive, and at trial and in their post trial briefs they work from that "premise." (Tr. 7:1-3.) Although this is fatal to their account stated claims*fn3 it is the only viable means to resolve the parties' disputes.*fn4 Unfortunately, the Court has been forced to piece together documentation of the transactions at issue, an arduous task not made any easier by the disorganized volumes of trial exhibits and the parties' shoddy bookkeeping practices.
As a starting point, according to their own accounting and exclusive of their counterclaims, Defendants acknowledge that they owe Atateks $562,091.77.*fn5 Because Defendants' obligation to pay Atateks this sum stems from their contractual obligations under the purchase orders, this is the "starting point" forDefendants' breach of contract liability. From this "premise" Atateks contends that five categories of "adjustments" must be made to Defendants' accounting which together increase the amount owed to Atateks by $868,917.27, to a total of $1,377,955.67.
Specifically, Atateks contends that Defendants' accounting should be revised to include (i) $153,774.86 for charge-backs that Defendants asserted against Atateks after November 1, 2006 (the "Charge-Back Claims"); (ii) $205,921.80 in unpaid invoices for an order of "racerback" style garments that Private Label contends was validly cancelled and covered by the October 2006 Agreement (the "Racerback Claims"); (iii) $280,836 in unpaid invoices for an order of "rouched" style garments that Private Label contends was validly cancelled and also covered by the October 2006 Agreement (the "Rouched Goods Claims"); (iv) $93,090.20 in unpaid invoices for a purchase order dated March 22, 2006 (the "March 2006 Invoice Claims"); and (v) $116,940.00 for payments that were allegedly made by Private Label to Basul (the "Basul Claims"). Because distinct contractual obligations serve as their predicates, each of the Plaintiffs' proposed "adjustments" to Defendants' accounting must be analyzed as a separate breach of contract claim. These separate claims are addressed seriatim.
The parties agree that charge-backs were part of the ordinary course of their business relationship, and that after November 2006 Atateks refused to accept any of the charge-backs issued by Private Label. Atateks contends that Private Label's financial difficulties in 2006 led the company to break from past practice and issue unfounded charge-backs without justification and without first obtaining Atateks' agreement as to their amount. (Arslan Decl. ¶29.) Atateks contends that because large charge-backs were negotiated and Atateks did not agree to any charge-backs after November 2006, all charge-backs issued after that date should be rejected. Private Label, for its part, contends that charge-backs were "readily accepted by Plaintiffs throughout the course of [the parties'] business dealings, until sometime in 2006" and that Atateks' unilateral decision to reject charge-backs triggered the disputes that led to the dissolution of the business relationship. (Dente Decl. ¶25.) Private Label argues that Atateks' refusal to agree to the charge-backs was inconsistent with their prior course of dealing and "a complete departure from industry wide business procedures." (Dente Decl. ¶56.)
The purchase orders themselves do suggest that Plaintiffs will be responsible for some types of charge-backs. The purchase orders provide that by accepting the order, "vendor [i.e. Atateks] assumes full responsibility for all resultant claim(s) from us and our customer(s) due to shipment delays, quality and workmanship of goods, and any causes pertaining to shipment(s) under this order." (See, e.g., DX-A, 1.B., 2.B., 3.B.) Private Label also places heavy reliance on industry custom, but the contracting parties' specific course of dealing takes precedence over such usage of trade evidence. U.C.C. §2-205(4). Here, the evidence is clear that large charge-backs were negotiated between the parties. (See, e.g.,Ilhan Decl. ¶29; Tr. 108.) Arslan testified that Atateks generally accepted smaller charge-backs because the company was "trying to accommodate our biggest client . . . to accommodate them for smaller amounts" but when it came to larger amounts Private Label needed its client's prior authorization.*fn6 (Tr. 157.) Dente testified similarly, that "charge-backs when issued were no mystery, especially large ones, because they were already discussed, negotiated and agreed upon before ever being issued." (Tr. 108.)
The purchase orders obligate Atateks to accept certain types of charge-backs where they are legitimately imposed, and the parties' course of dealing confirms this approach. Atateks could not then unilaterally reject all charge-backs issued by Private Label after November 2006. However, the evidence also makes clear that the parties' course of dealing would not allow Private Label to unilaterally assess Atateks with unsubstantiated, five-figure charge-backs. Consequently, each category of disputed charge-backs must be analyzed separately.
a. Charge-Backs for Defective Merchandise
Plaintiffs challenge fourteen charge-backs for allegedly defective merchandise which Private Label issued between April 12 and April 18, 2007 (the "Defective Merchandise Charge-Backs").*fn7 Plaintiffs contend that deductions for these charge-backs, which total $39,181.54, should be eliminated from Private Label's accounting. However, Private Label's purchase orders provide that as manufacturer, Atateks is liable for defective merchandise. (See, e.g., DXA-31-B.) Moreover, in his testimony Arslan acknowledged the propriety of charge-backs for defective merchandise. (Ilhan Decl. ¶28.) Therefore, to the extent supported by the evidence, these charge-backs will be assessed to Atateks.
Plaintiffs contend that Target's documentation, Debit Memo No. 90C605845, cannot support the Defective Merchandise Charge-Backs because the charge-backs summarized therein total only $33,268.54 whereas Private Label seeks $39,181.54.*fn8 However, once Target's document is compared with Private Label's charge-backs, it becomes clear that some, but not all of the Defective Merchandise Charge-Backs are substantiated. For example, Private Label's Invoice No. 1708 is a Defective Merchandise Charge-Back that bears a Reference No. 90C605845. Therein, Private Label charges Atateks a total of $11,821.54 for "customer returns due to defect style 016011024T Merona Seamless Vee." The invoice is itemized into six quantities of returned merchandise. The Target Debit Memo provides evidentiary support for charge-backs in the amount of $2,271.37 for 454 returned garments and $6,919.19 for 1,383 returned garments, at a charge-back rate of $5.03 per garment. However, the Target Debit Memo does not support a charge-back of $2,482.00 for 184 garments, at a charge-back rate of $13.48 per garment. Similarly, Private Label's Invoice No. 1710 purports to assess Plaintiffs with $19,142.79 in charge-backs for customer returns of the "Merona Seamless Crew." The Target Debit Memo supports itemized charge-backs at a rate of $4.98 per unit, but not a $3,247 charge-back for 260 returned garments at a rate of $12.49 per unit.
Upon review of the record, I find that $9,516.59 in purported charge-backs under invoice numbers 1684, 1707, 1708, 1709, 1710, 1713, 1715, 1716, 1717, 1718, 1719, 1720, 1721, and 1723 are not supported by documentary evidence. On the other hand,those charge-backs supported by the evidence, which total $29,664.95, will be credited against the amounts Private Label ...