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Diesel Props S.r.l. v. Greystone Business Credit II LLC

August 18, 2009

DIESEL PROPS S.R.L. AND DIESEL KID S.R.L., PLAINTIFFS / COUNTERCLAIM DEFENDANTS,
v.
GREYSTONE BUSINESS CREDIT II LLC AND GLOBAL BRAND MARKETING INC., DEFENDANTS / COUNTERCLAIM PLAINTIFFS.



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

OPINION & ORDER

This case involves a contractual relationship among two shoe companies, their United States distributor, and the distributor's secured lender that, in part because of its novelty, turned out to be more complicated than any of the parties envisioned. Italian shoe companies Diesel Props S.r.l. ("Props") and Diesel Kid S.r.l. ("Kid") (collectively "Diesel") sued their distributor Global Brand Marketing Inc. ("GBMI") and GBMI's secured lender Greystone Business Credit II LLC ("Greystone") for, inter alia, breach of contract, unjust enrichment and account stated.*fn1

Greystone asserted a counterclaim against Props for unjust enrichment. This opinion follows a host of pretrial motions, athree-day bench trial and the submission of post-trial briefs.

FINDINGS OF FACT

I. THE RELATIONSHIPS AMONG THE PARTIES

The relationship between Diesel and GBMI began as licensor-licensee in 1997, when GBMI and Diesel S.p.A. ("S.p.A."), the parent company of Props and Kid and theowner of certain Diesel trademarks, first entered into a licensing agreement under which GBMI would design, manufacture and sell Diesel-branded adult and children's footwear in areas around the world. See Declaration of Sudeepto Datta ("Datta Decl.") ¶ 5; Joint Pretrial Order ("JPTO") ¶ 1, 10. On November 30, 2001, S.p.A. and GBMI entered into a second Licensing Agreement; Kid entered into a substantially identical Licensing Agreement with GBMI on June 3, 2002 (the "Licensing Agreements"). See Datta Decl. ¶ 5; Declaration of Luigi Mezzasoma ("Mezzasoma Decl.") ¶ 7; P-14; P-15. Each of the Licensing Agreements was to expire at the end of 2006.

Datta Decl. ¶¶ 5-6. Under the Licensing Agreements, GBMI designed, developed and manufactured Diesel-branded adult and children's footwear and sold it through GBMI's global sales network, which consisted largely of high-end retail stores and international distributors; in exchange, GBMI paidDiesel royalty fees on the footwear sales. Id. ¶¶ 7.

In late 2005, the relationship between Diesel and GBMI changed. Diesel informed GBMI that it would not be renewing the Licensing Agreements;*fn2 rather, Diesel intended to take over the production and design of its branded footwear itself, with GBMI acting as its exclusive distributor in the United States. See Datta Decl. ¶ 10. On November 4, 2005, Props and Kid each signed a Distribution Agreement with GBMI. See P-1; P-16. Under the Distribution Agreements, Diesel took responsibility for designing, manufacturing and shipping the footwear to the United States from Asia; GBMI would buy the footwear from Diesel and resell it to retail store customers. See id. § 2.1; Datta Decl. ¶¶ 10-11; Mezzasoma Decl. ¶ 8. The Distribution Agreements had specific terms which delineated GBMI's payment obligations (§ 5.3) and the circumstances under which Diesel's right to terminate arose (§ 11.2). The Distribution Agreements also provided that "[a]t the end of each sales campaign [GBMI] shall provide [Diesel] with the updated list of all its retailers with their addresses including the quantity and value of the amount of the Products sold for each single retailer listed therein . . . ." P-1 § 4.3; P-16, § 4.3. The term "sales campaign" is a term of art that refers to the time period from when a collection was presented to when the orders were collected. Mezzasoma Decl. ¶ 10. For example, for a Spring/Summer collection, the sales campaign began in early July of the previous year and ended in October; similarly, for a Fall/Winter collection, the sales campaign began in December of the previous year and ended in early March. Id. Most relevant to this case, the sales campaign for the Spring/Summer 2008 ("SS08") collection began in mid-July 2007 and ended on October 3, 2007 for Kid and October 12 for Props. See P-163; Mezzasoma Decl. ¶ 10. The Distribution Agreements contained a forum selection clause that required all disputes that arose out of the Agreements be litigated in the Court of Milan, Italy. P-1 § 21; P-16 § 21.

By the summer of 2006, GBMI was in dire financial straits and informed Diesel that it had begun to seek a solution by obtaining financing or an outside investorto keep its business afloat. Mezzasoma Decl. ¶ 16. During the fall of 2006, GBMI approached Greystone for loan financing to alleviate its cash flow problems. Datta Decl. ¶ 20; see Declaration of Guy Smith ("Smith Decl.") ¶ 3. On December 4, 2006, GBMI and Greystone executed a Loan and Security Agreement ("LSA"), which provided GBMI with a $25 million revolving credit facility. P-39; Smith Decl. ¶ 4. As security, Greystone took a senior security interest in GBMI's assets (including customer lists and books and records), inventory and accounts receivable, among other collateral. P-39, § 3.1-3.3. If GBMI defaulted under the LSA, Greystone was not required to fund any loan requests under the LSA. P-39 § 8; see also Tr. 134:1-20 (Sarrica), 208:4-8 (Mezzasoma).

The LSA was structured and executed in contemplation of the concurrent execution of an agreement among Diesel, GBMI and Greystone whereby Diesel would be paid for shoes ordered by GBMI directly through loan disbursements from Greystone. This "Tripartite Agreement," or TPA, was executed in the form of a document entitled "Instructions for Supplier Payment" on the same day as the LSA was executed. See P-4; P-19.*fn3 The LSA and TPA made express reference to one another, and the terms of each was conditioned on the performance and fulfillment of conditions of the other. Thus, the LSA authorized Greystone to wire GBMI's funds directly to Diesel "pursuant to the terms of the [TPA]." P-39, § 1.6. Likewise, Greystone's payment obligations under the TPA was expressly "[s]ubject to the terms and conditions of the [LSA]." P-4 at 2; P-19 at 2. Thus, the standing instructions from GBMI to Greystone to advance revolver proceeds directly to Diesel applied only if the TPA applied to the particular orders for which payment was requested and all conditions under the TPA were met. Declaration of Santino F. Sarrica ("Sarrica Decl.") ¶ 4. That is, if the terms of the TPA did not apply to a particular order for which payment was requested (i.e., the order was "outside" the structure set forth in the TPA), Greystone had no authority under the LSA to wire GBMI's revolver proceeds directly to Diesel; rather, GBMI, as the borrower under the LSA, would be required to send Greystone a separate instruction to disburse loan proceeds to Diesel as a third-party. See id.

The TPA contained three primary independent provisions. First, GBMI was required to obtain a purchase order from a bona fide customer ("Customer Purchase Order") before placing an order for shoes with Diesel. P-4 at 1; P-19 at 1. A copy of the Customer Purchase Order was to be delivered to both Diesel and Greystone. Id. Second, the TPA provided that at any time before shipping the shoes, Diesel had the right to request written notice from Greystone as towhether at the time of such request there were(a) sufficient fundsto permit paymentin the amount requested inthe Diesel Invoice, (b) if not, GBMI would beprevented from requesting aloan under the LSA, or (c) if GBMI wasnot in compliance with any of the covenants and/or warranties under the LSA, or is in default under the LSA, irrespective of whether that non-compliance or default has been waived by Greystone. Id. at 1-2 (the "Notice Provision"). Third, pursuant to the TPA, GBMI was required to deliver to Diesel and Greystone a copy of any invoices to customers ("Customer Invoice"), which weredeemed an irrevocable request for disbursement of a revolving loan in the amount of the corresponding Diesel Invoice. Id. at 2 (the "Payment Provision"). In accordance with the terms and conditions of the LSA, within two days of its receipt of a Customer Invoice, Greystone was required to wire the proceeds of thenew loan in the amount of the corresponding Diesel Invoice. Id. The only express conditions priorto payment was a receipt of a Customer Invoice and availability of fundsunder the LSA. Mezzasoma Decl. ¶ 26. The TPA also required thatany modification of its terms wereto be made in writing and signed by all three parties. Id. Finally, notices underthe TPA were to be made in writing and sent to the addresses or fax numbers of the respective parties as set forth in Exhibit B to the TPA, or to any other address or fax numbers that were providedin writing. P-4 at 3; P-19 at 3. Greystone considered the TPA to be a "unique" agreement, because it had never before entered into a three-party contract that created direct obligations for Greystone to pay loan proceeds to a third-party. See Tr. 64:3-10 (Sarrica), 280:8-18 (Neidorf).

Two days prior to executing the TPA, Diesel signed a letter agreement (the "December 2 Letter") delineating a number of terms upon which Diesel was willing to enter into the TPA. See P-3. The December 2 Letter expressly stated that "the [TPA] should only be applied to orders placed by GBMI upon receipt of a purchase order for product from a bona fide customer of Diesel Products." Id. at ¶ 4. Although Greystone did not sign the December 2 Letter, it is undisputed that it would not have closed on the LSA if Diesel had not signed the December 2 Letter, and that Greystone agreed to the terms of the December 2 Letter by accepting the TPA and closing on the LSA. JPTO ¶ 16.

Under the LSA, GBMI was required to engage Greystone Commercial Services ("GCS") as a third-party credit and collections service provider. P-39; Tr. 284:2-8 (Neidorf). On January 26, 2007, GBMI and GCS entered into a Servicing Agreement under which GCS would provide factoring services, back-office support and credit collection services to GBMI. P-68; Tr. 141:6-12 (Sarrica), 460:9-21 (Smith). Specifically, GCS was to receive and track invoices, and ensure that invoices were collected and paid. See P-68; Tr. 289:4-14 (Neidorf). Although Greystone and GCS are technically separate corporate entities, see Declaration of James O'Connell ¶ 7, Greystone required GBMI to engage GCS to provide the factoring services because it "thought it would be nice if [GBMI] used somebody within the Greystone family for no other reason than it could [provide]brownie points for [Greystone], that we could refer a piece of the business to another company that's indirectly or directly owned by" the same individual. Tr. 284:13-23 (Neidorf). The GCS Servicing Agreement expressly provided that all notices, including Customer Invoices, were to be sent to GCS at its address in Dallas, Texas. P-68 at 4-5.

II. GREYSTONE'S PERFORMANCE UNDER THE NOTICE PROVISION

Pursuant to the TPA, prior to each shipment of shoes to GBMI, Props and Kid were to send a letter to Greystone requesting notice if any of the TPA requirements had not been met at the time of the contemplated shipment (the "Notice Letters"); through the life of the relationship among the parties, Props sent Greystone forty-five Notice Letters, and Kid sent twelve Notice Letters. See P-5; P-20; JPTO ¶ 22. While each of these 57 Notice Letters requested a response from Greystone within two business days of receipt, no such time requirement existed in the TPA. See P-4; P-19; Tr. 140:2-18 (Sarrica). Diesel's purpose in sending these 57 Notice Letters was to manage and lessen the risk of accepting orders from GBMI before GBMIhad obtained customer orders. Declaration of Rosanna Sartori ("Sartori Decl.") ¶ 61.

A. GBMI's Defaults and Covenant Breaches Under the LSA

The parties do not dispute that GBMI was in default under the LSA on multiple occasions throughout the life of the TPA. JPTO ¶ 24. The first of such defaults becameknown to Greystone by mid-January 2007. Id. ¶ 25; Smith Decl. ¶ 12. On January 29, 2007, Guy Smith of Greystone wrote to Luigi Mezzasoma of Props to notify him that GBMI had failed to satisfy minimum revenue covenants under the LSA for December and January. See P-6. In that notice, Greystone advised Props that it was working with GBMI to be able to waive the default, and that it hoped to have a deal completed within one week. Id. In its January 29 notice, Smith asked Mezzasoma whether it was "necessary to repeat this fact in each separate notification or [was he] okay with simply one notice, such as this?" Id. Mezzasoma agreed there was no reason to repeatedly advise Props that Global was in a state of default due to the December/January covenant breach. See Smith Decl. ¶ 12.

Although it was anticipated that a waiver of GBMI's default would be effected within one week of the January 29 notice, the waiver was not finalized until April 26, 2007. Id. ¶ 13; Tr. 423:21-24 (Smith). Between the January 29 notice and the April waiver, Greystone was aware that GBMI had breached at least three different LSA covenants. See P-35. Greystone knew that the covenant breaches were significant but failed to notify Diesel. Tr. 298:11-299:7 (Neidorf). Moreover, by the end of February 2007, Greystone was sufficiently concerned regarding severalof the covenant breaches that it sent a Reservation of Rights letter to Martin McDermut, CFO of GBMI, describing the serious nature of the breaches and Greystone's intent to pursue remedies. P-185. During the time period between the January 29 notice and the April 26 waiver, Props and Kid had sent a combined 27 Notice Letters, but Greystone did not notify Diesel of any additional covenant breaches. See JPTO ¶ 23.

Once the April 26 waiver was effectuated, GBMI's slate was wiped clean of defaults. However, very soon thereafter, by the end of May 2007,*fn4 Greystone learned that GBMI had once again breached a covenant -- the May 31, 2007 EBITDA covenant -- and that GBMI was in default. See Sarrica Decl. ¶ 43. Diesel was not made aware of this covenant breach until July 18, 2007, when GBMI advised Diesel of the breach. See Smith Decl. ¶ 14. Greystone did not send an official notice under the TPA of the covenant breach until August 6, 2007. See P-7. Between the time Greystone learned of the covenant breach in May and when it sent the notice in August, Diesel shipped and invoiced more than $10 million in shoes to GBMI. See P-5; P-20; P-31; P-32; P-33; P-67; P-110; P-111. Over the period between December 2006 and May 2007, GBMI breached at least 24 LSA covenants, yet Greystone provided notice to Diesel of these breaches on only two occasions -- January 29 and August 6, 2007.

B. Availability under the LSA

The Notice Provision of the TPA also obligated Greystone to notify Plaintiffs if there was insufficient availability under the LSA for a revolving loan in the amount of a Diesel Invoice. There is a deep schism between the parties as to the appropriate method to determine availability. Both Diesel and Greystone agree that availability is determined based on certain figures as delineated in the weekly Borrowing Base Certificates ("BBC's"), but that is where the parties part company. Diesel contends that availability is determined by Line 28 of a BBC, which represents "total excess availability" after accounting for the GBMI loan request in that particular BBC plus the $3 million over-advance limit. Greystone, on the other hand, contends availability is determined by taking "total excess availability" from Line 28 and adding the amount in Line 23 (the amount of the new loan request). Sarrica Decl. ¶ 16. The reason for doing so, Greystone contends, is "because at the time [Greystone] would be making such a determination (of whether there was sufficient availability), [it] would not have already deducted the new loan request." Id. Alternatively, Sarrica's trial testimony concludedthat availability on a given date should have been determined by adding the value of the goods to be shipped (based on the Diesel Notice Letter), multiplied by 64%, to the availability reflectedon the most recent BBC, because Greystone would have loaned up to 64% of the inventory "in transit." See Sarrica Decl. ¶ 31; Tr. 50:14-51:2, 62:4-23 (Sarrica). However, this latter contention does not comport with the purpose of the Notice Provision, as Greystone's obligation was to determine availability under the LSA as of the date it received a Diesel Notice Letter. By definition, Diesel Notice Letters were sent before shipments were made; thus, the goods were not yet "in transit," and should not have been counted in the availability of fundsat the time of the particular Notice Letter. See Tr. 65:5-14 (Sarrica). Irrespective of which of these approaches Greystone embraced, it is clear that there was actually $1 million less available than Greystoneindicated, because Greystone failed to maintain the$1 million minimum availability requirement that it imposed on GBMI. See Tr. 67:24-74:16 (Sarrica); P-64 at GS113029, GS113017, GS113753, GS112877, GS112879; P-175. Ultimately, the testimony at trial revealed that Greystone did not, in fact, carefully calculate availability as of the date it received Diesel's Notice Letters; rather, Sarrica testified that he determined availability based on his "general understanding" and knowledge of the status of the GBMI loan in his head. See Sarrica Decl. ¶ 33; Tr. 52:19-53:14 (Sarrica).

I agree with Diesel that it does not make sense to include Line 23 (the amount of the new loan request) in the availability determination, because as of the date of a particular BBC, the amount reflected in Line 23 had alreadybeen requested, and Greystone was obligated to fund it; thus, it was no longer available for disbursement for other purposes. Thus it appears that the most appropriate value for availability is represented by the value of Line 28 (total excess availability) on the BBC immediately preceding the receipt ofa given Diesel Notice Letter. Using this method to determine availability, there were at least ten occasions where there was insufficient availability for the amount of the shipments that Diesel advised it was prepared to make in its Notice Letters.*fn5

Moreover, even under Greystone's view of the correct method to determine availability (i.e., Line 28 Line 23), Greystone acknowledges there was insufficient availability on at least one occasion, see Sarrica Decl. ¶ 27, line 4, and Plaintiffs demonstrated at trial thatthere were numerous other occasions where there were insufficient funds. See, e.g., Sarrica Decl. ¶ 27, lines 14-15, 27-28, 33-36, 37-39. It bears repetition that Greystone never sent a single notification of a lack of availability under ...


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