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Buffalo Printers Supply, Inc., and v. # 1 Network

March 29, 2012

BUFFALO PRINTERS SUPPLY, INC., AND PLAINTIFF AND COUNTER-DEFENDANT,
v.
# 1 NETWORK, INC.,
DEFENDANT AND COUNTER-CLAIMANT.



The opinion of the court was delivered by: Leslie G. Foschio United States Magistrate Judge

ORDER

DECISION and REPORT RECOMMENDATION

JURISDICTION

This action was referred to the undersigned by Honorable Richard J. Arcara on November 9, 2010, for all pretrial matters including preparation of a report and recommendation on dispositive motions. The matter is presently before the court on Plaintiff's motion for summary judgment (Doc. No. 25), filed April 8, 2011, and Defendant's cross-motion for sanctions (Doc. No. 37), filed May 6, 2011.*fn1

BACKGROUND

Plaintiff Buffalo Printers Supply, Inc. ("Plaintiff" or "BPS"), a New York corporation with its principal place of business in Erie County, New York, is a shareholder in Defendant #1 Network, Inc. ("Defendant" or "Network"), an Illinois corporation with its principal place of business in Effingham, Illinois. Defendant is a buying co-operative entity ("the co-op") whose members ("co-op members") are shareholders and are able to purchase certain products at prices arrived at through Defendant's negotiations with the products' vendors ("the Network products"), for resale into each co-op member's assigned sales territory exclusively defined by Defendant.

Upon learning that another co-op member shareholder was operating within Plaintiff's defined sales territory, Plaintiff commenced the instant contract action on July 13, 2010 in New York Supreme Court, Erie County, alleging breach of contract by Defendant, asserting six claims for relief, all based on alleged violations of either the By-Laws or Rules of Engagement, including breach of contract (First and Third Claims), unjust enrichment (Second Claim), tortious interference with business relationships (Fourth Claim), wrongful use of confidential information (Fifth Claim), and breach of fiduciary duty (Sixth Claim). Along with the Complaint, Plaintiff also filed in New York Supreme Court an Order to Show Cause demanding a preliminary injunction. Defendant filed papers opposing the issuance of a preliminary injunction on the basis that Plaintiff's own admissions established Plaintiff was unlikely to succeed on the merits of the action. On July 22, 2010, Defendant removed the action to this court alleging subject matter jurisdiction based on diversity of citizenship pursuant to 28 U.S.C. § 1332(a). Removal Notice (Doc. No. 1).*fn2 At oral argument scheduled on Plaintiff's request for a preliminary injunction, Plaintiff withdrew the motion. October 29, 2010 Minute Entry.

In its answer, filed November 22, 2010, Defendant asserted three counterclaims, including (1) breach of fiduciary duty; (2) breach of contract, and (3) account stated. In its defense, Defendant essentially maintains Plaintiff breached its commitments to the co-op under the By-Laws and Rules of Engagement, by unilaterally shutting down its business, discharging all its salespeople, and ceasing to serve its customers, leaving Defendant no alterative but to discontinue shipments of product to Plaintiff protect the other co-op members. Plaintiff's answer to the counterclaim was filed December 10, 2010 (Doc. No. 19).

On April 8, 2011, Plaintiff filed the instant motion for summary judgment (Doc. No. 25) ("Plaintiff's motion"), supported by the attached Plaintiff's ("BPS") Movant's Statement ("Plaintiff's Statement of Facts"), and Plaintiff's Memorandum of Law in Support of Motion for Summary Judgment (Doc. No. 25-1) ("Plaintiff's Memorandum"), and the separately filed Affidavit of Thomas Nelson, Jr. in Support of Plaintiff's Motion (Doc. No. 26) ("Nelson Affidavit"), with attached exhibits 1 through 7 (Doc. Nos. 26-2 -26-10) ("Plaintiff's Exh(s). __"), the Affidavit of Michael R. Shannon, Esq. in Support of Plaintiff's Motion (Doc. No. 27) ("Shannon Affidavit"), with attached exhibits 1 and 2 (Doc. Nos. 27-2 - 26-10), and exhibits 3 through 6 (Doc. Nos. 28 - 32) ("Shannon Affidavit Exh(s). __").

On May 6, 2011, Defendant filed a cross-motion (Doc. No. 37) ("Plaintiff's motion") seeking sanctions pursuant to 28 U.S.C. § 1927, asserting Plaintiff's motion is based on fraudulent statements made by Nelson. Plaintiff's motion is supported by the attached Affidavit of Network president Michael O'Neal (Doc. No. 37-2) ("May 3, 2011 O'Neal Affidavit"), Affirmation of Linda H. Joseph, Esq. (Doc. No. 37-3) ("Joseph Affirmation"), exhibits A through I to the Joseph Affirmation (Doc. Nos. 4 and 5) ("Joseph Affirmation Exh(s). __"), Defendant's Memorandum of Law in Opposition to Plaintiff's Motion for Summary Judgment and in Support of Its Cross-Motion for Sanctions Pursuant to 28 U.S.C. § 1927 (Doc. No. 37-6) ("Defendant's Memorandum"), and Defendant's Response to Plaintiff's Statement of Undisputed Facts and Statement of Disputed Facts (Doc. No. 37-7) ("Defendant's Statement of Facts").

On May 20, 2011, Plaintiff filed Plaintiff's Reply Memorandum of Law in Support of Plaintiff's Motion for Summary Judgment (Doc. No. 49), Plaintiff's Memorandum of Law in Opposition to Defendant's Cross-Motion (Doc. No. 49-1), the Reply Affidavit of Thomas Nelson, Jr. (Doc. No. 49-2) ("Nelson Reply Affidavit"), the Affidavit of Michael R. Shannon, Esq. In Opposition to Defendant's Motion (Doc. No. 50) ("Shannon Response Affidavit"), Exhibits 1 and 2 (Doc. Nos. 50-1 and 50-2) ("Plaintiff's Reply Exh(s). __"), and Plaintiff's ("BPS") Response to: Defendant's Response to BPS' Movants Statement and Counter-Statement of Disputed Material Facts (Doc. No. 50-3) ("Plaintiff's Reply Statement of Facts"). Later that same date, Plaintiff filed Plaintiff's Reply Memorandum of Law in Support of Plaintiff's Motion for Summary Judgment -Corrected (Doc. No. 51) ("Plaintiff's Reply"), and Plaintiff's Memorandum of Law in Opposition to Defendant's Cross-Motion - Corrected (Doc. No. 51-1) ("Plaintiff's Response"). On May 26, 2011, Defendant filed Defendant's Reply Memorandum of Law in Further Support of Its Cross-Motion for Sanctions Pursuant to 28 U.S.C. § 1927 (Doc. No. 52) ("Defendant's Reply").

On November 28, 2011, Defendant, with leave of the court, filed the Amended Answer (Doc. No. 92), asserting as affirmative defenses that Plaintiff failed to perform fully under the contract upon which Plaintiff relies in support of its breach of contract claim and the business judgment rule shields Defendant from liability for its actions, alleging as a counterclaim that Plaintiff breached the Rules of Engagement and ByLaws, and withdrawing its counterclaims against Plaintiff for payment of past due invoices and an account stated. Oral argument on Defendant's and Plaintiff's motion was deemed unnecessary.

Based on the following, Plaintiff's motion for summary judgment should be DENIED; Defendant's motion for sanctions is GRANTED.

FACTS*fn3

Thomas Nelson, Jr. ("Nelson"), is president, sole shareholder, and a full-time salesman with Plaintiff Buffalo Printers Supply, Inc. ("Plaintiff" or "BPS"). Defendant #1 Network, Inc. ("Defendant" or "Network"), is a buying co-operative corporation ("the coop") whose shareholders, as co-op members ("members" or "shareholders") are able to purchase certain products at prices arrived at through the Defendant's negotiations with the products' vendors ("the Network products"). Defendant grants each co-op member an exclusive defined sales territory within which the member is permitted to sell Network products.

Although co-op members directly place orders for Network products with the Network's vendors, the vendors bill Defendant for all products ordered by the shareholders, and Defendant is responsible for paying the vendors' bills. Defendant, in turn, invoices each of its shareholders for all Network products ordered by such shareholders from the vendors. Further, because Network products ordered by shareholders are shipped by the vendors F.O.B. shipping to each ordering co-op member, Defendant assumes financial responsibility for the vendor each time a shipment leaves the vendor's dock. Accordingly, Defendant assumes the risk for all Network products ordered by the shareholders until Defendant, after paying vendor invoices, bills and receives payment from each shareholder. Plaintiff became a member of the co-op in 1999 and its exclusive territory in which to sell Network products as assigned by Defendant included western and central New York State, and a small portion of northwestern Pennsylvania; cities within Plaintiff's territory included Buffalo, Rochester, Syracuse and Binghamton New York, and Erie, Pennsylvania.

Participation in the co-op is governed by By-Laws*fn4 setting forth the general rules governing the co-op corporation's internal affairs. As relevant to this action, Art. III, § 1 provides that "[t]he business of the corporation shall be managed by its board of directors." Pursuant to Art. IV, § 4, "[t]he president shall be the principal executive officer of the corporation. Subject to the direction and control of the board of directors, he shall be in charge of the business of the corporation. . . ." Art. XII of the By-Laws provides a procedure for suspending or expelling a co-op member for cause.

It is undisputed that at all times relevant to this action, Michael O'Neal ("O'Neal") was Defendant's president. Nelson served on the Network's Board of Directors and as an officer of the Network from 2001 to 2008, serving as Chairman of the Board from 2005 to 2007.

The Rules of Engagement ("Rules")*fn5 provide the terms pursuant to which shareholders are granted exclusive sales territories, and are set forth in two memoranda dated May 5, 1994 ("1994 Rules"), and December 1, 1997 ("1997 Rules"). As pertinent to this case, the Rules state that each co-op member is required to provide a "full-time sales representative" to "cover," i.e., sell Network products, within its assigned sales territory, 1994 Rules, ¶ 2, and that any violation of the Rules of Engagement are referred to the "General Manager and the Board of Directors for review and appropriate action." 1997 Rules, ¶ 5.

In May 2010, Nelson learned his wife, a BPS officer, was seriously ill. By letter dated May 21, 2010, Nelson advised BPS sales manager Daniel J. Hughes ("Hughes") that his employment was terminated. Affidavit of Daniel Hughes ("Hughes Affidavit")*fn6 ΒΆΒΆ 2-3 and Exh. A. The only BPS employee not terminated on May ...


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