Opinion
Case No. C2-08-107.
March 31, 2009
OPINION AND ORDER
On April 22, 2008, the parties executed a document entitled "Material Terms of Agreement," and reported to the Court that they had reached a complete settlement. On April 24, 2008, the parties executed a final and formal agreement titled "Confidential Settlement Agreement and Mutual Release," which incorporated the Material Terms of Agreement. The parties now dispute certain matters relative to their settlement. They agree that the Court has jurisdiction in connection with disputes arising from their formal compromise and to enforce the Settlement Agreement.
See Agreed Entry Dismissing Case, 5/2/08 (Doc. 55) ("This Court shall maintain continuing jurisdiction over this matter to enforce the parties' settlement agreement.); see also Settlement Agreement, § II, ¶ 2) ("The PARTIES agree that this AGREEMENT shall be endorsed by an Order of the Southern District of Ohio, which shall have continuing jurisdiction in connection with any disputes arising from the AGREEMENT.)
I.
The relevant provisions of the Material Terms of Agreement are set forth below:
Within 30 days RAK will use its reasonable efforts to gather and pack in a container to turn over to Rocky at RAK's factory in China the materials and supplies RAK purchased in connection with orders Rocky placed for 17,652 Rocky Ride boots that Rocky cancelled. Rocky will be permitted to inspect these materials before shipment. The Defendants represent that the invested price for these materials was approximately $384,000.
(MTA, ¶ 6.)
Rocky will pay RAK $600,000, to be paid $300,000 within 10 days of the date of execution. The remainder, totaling $300,000, to be placed in escrow until RAK has shipped the final present outstanding orders FOB.
(MTA, ¶ 7.)
The parties will sign general releases releasing all claims known and unknown between the parties through the date of the execution of this document and through the date of the execution of the release.
(MTA, ¶ 11.)
Further, the Settlement Agreement and Mutual Release provides in relevant part:
ROCKY hereby releases any and all claims ROCKY asserted in the ACTION, or any and all claims known and unknown that ROCKY may have against BRATCHER, WESTWOOD and RAK, including claims for legal fees, expenses or costs, related to or arising from the filing and litigating of the ACTION. Nothing in this AGREEMENT shall be construed to release any claims or lawsuits to enforce this AGREEMENT.
The parties employed identical language for the releases executed by Bratcher, Westwood and RAK. (Settl. Agmt., § II, ¶¶ 3.b-d.) For purposes of this opinion, the Court refers to Plaintiffs in this case as "Rocky," and Defendants as "RAK."
RAK maintains that it had a $1.1 million dollar claims against Rocky. RAK asserts that it discounted that claim for purposes of settlement in exchange for Rocky's promise to pay $600,000. Following the settlement, Rocky apparently paid $300,000 within 10 days of the date of execution of the agreement, and placed the remaining $300,000 in escrow. In a July 21, 2008 letter to the Court, RAK requested that the Court compel Rocky to pay the remaining $300,000 in escrow. Since the Defendants' letter to the Court, Rocky released $180,000 of the $300,000 to the Defendants.
Rocky now maintains that RAK failed to comply with Paragraph 6 of the Material Terms of Agreement because RAK did not provide approximately $384,000 worth materials and supplies for Rocky Ride boots. Based on this alleged failure to comply with the terms of the Agreement, Rocky has withheld and asserts it is entitled to keep the remaining $120,000 of the escrow money. Defendants, on the other hand, contend that Plaintiffs' retention of the $120,000 violates Paragraph 7 and its obligation to pay a sum certain to RAK. Further, Defendants assert that Rocky has failed to comply with its obligation to release all claims because Rocky has taken credits on invoices RAK submitted after signing the Settlement Agreement.
As set forth more fully below, Rocky contends that RAK provided approximately $50,000 less than it agreed in raw materials and an additional $70,000 worth of the materials it did receive failed to conform to specifications. Thus, as Rocky computes it, the $50,000 shortfall in raw materials plus the $70,000 worth of defective outsoles equals the $120,000 by which RAK has breached the parties' agreement, and to which Rocky asserts it is entitled to keep.
II.
A. Paragraph 6
1. "Approximately $384,000" of Rocky Ride Materials
In Paragraph 6 of the Material Terms of Agreement, Defendant RAK agreed to provide Rocky with "approximately $384,000" worth of raw materials and supplies, which RAK purchased prior to the settlement and termination of the parties' business relationship to fulfill an order for 17,562 pairs of Rocky Ride boots. The parties agree that the value of the materials Rocky took from RAK in China is "either $334,000 or $336,000." According to the evidence of record, RAK provided Rocky with enough raw materials valued, at most, to make 15,270 pairs of shoes, or 2,292 pairs less than what the parties agreed.
According to an unauthenticated spreadsheet in the record, RAK valued the inventory Rocky took at $336,605.03. The "verified value," as captioned over the final column of the spreadsheet, is $334,839.35. (Docs. 69-6; 70-2.) In any event, the parties agree that the value of materials related to the Rocky Ride line of boots was either $334,000 or $336,000.
RAK counters that it complied with the Settlement Agreement by providing "approximately" $384,000 in inventory. It contends that it made all the materials available, and asserts, without evidentiary support, that the value of these materials was $411,000. RAK maintains that, when Rocky arrived, it took only what it deemed necessary-either $334,000 or $336,000 worth of goods-leaving $77,000 worth of raw materials with RAK.
RAK indicates in its Brief that Rocky and RAK "agreed" that the value of the raw materials they had available in China was approximately $411,000, but that Rocky determined that it only wanted to use $336,000 for the Rocky Ride line of boots. (Doc. 69, at p. 6, 7.) RAK, however, has provided no evidence to support these statements. Indeed, RAK concedes that, at most, only $336,000 worth of materials were related to Rocky Ride boots.
The "Material Terms of Agreement," which the parties incorporated into the Settlement Agreement, expressly provides that, RAK will gather and pack "materials and supplies RAK purchased in connection with orders Rocky placed for 17,562 Rocky Ride boots that Rocky cancelled," and RAK represented that "the invested price for these materials was approximately $384,000." (MAT, at ¶ 6.) Through this provision, Rocky was agreeing to compensate RAK for the raw materials RAK had previously purchased to fulfill an order for boots which Rocky subsequently cancelled. Rocky has demonstrated that RAK failed to provide materials and supplies valued at $384,000 for use in the production of 17,562 pairs of Rocky Ride boots. The parties agree that the value of the Rocky Ride materials was "either $334,000 or $336,000." Rocky is therefore entitled to deduct the amount still due on its contract resulting from this failure in the amount between $48,000 — $50,000.
Although RAK suggests that it made $411,000 worth of raw goods available to Rocky in China, it has neither provided evidence supporting that figure, nor demonstrated that it purchased all of these materials and supplies "in connection with orders Rocky placed" for Rocky Ride boots.
2. Non-Conforming Materials
Rocky tested the raw materials recovered from RAK, and discovered that a substantial amount of the outsoles did not meet specification. In particular, Rocky found that approximately $70,000 worth of the raw materials did not conform with Rocky's specifications and are not fit for use in the production of Rocky Ride boots.
According to Rocky, the parties understood that the raw materials, including the outsoles, were to be used in making Rocky Ride boots and should have been of the same or comparable quality as the outsoles Rocky specified in making Rocky Rides. Previously, Rocky had directed RAK to use outsoles manufactured by HoYu because their products properly fit Rocky Ride boots and are highly oil resistant, as required by Rocky specifications for boots used in a outside work-environment. When Rocky inspected the outsoles provided by RAK, it found that HoYu had not manufactured the goods, and $70,000 worth of the product had quality issues related to oil resistence. Rocky rejected these goods as unacceptable because the non-HoYu outsoles are not sized to fit correctly with the rest of the Rocky Ride boot and the outsoles lacked the requisite oil resistance to meet the specifications for the Rocky Ride style of boot.
Rocky has provided a report from Precision Testing Laboratories and an accompanying declaration from its Vice President of Operations, Suzanne Piispanen. Precision conducted testing on the oil resistence of both the HoYu and non-HoYu outsoles. According to this evidence, the non-HoYu outsoles performed below the relevant benchmarks for oil resistance and are not as oil resistant as the HoYu outsoles. (See Pls' Brief Regarding Settlement Issues, (Doc. 70), Exhs. B C.) The Court notes, however, that, according to the declaration of Ms. Piispanen, Precision received the outsole samples for testing on August 13, 2008, several weeks after Rocky refused to release the settlement funds from escrow to RAK on the ground that they did not meet specifications.
The Court concludes that, because Rocky cannot use the non-conforming outsoles for their intended purpose in the production of Rocky Ride boots, Rocky is entitled to deduct an additional $70,000 from the amount due on the settlement contract.
B. Release of Claims and "Credits" Against Invoices
After Rocky executed the Settlement Agreement, it took two credits against invoices RAK submitted for payment on prior orders. Rocky took one credit for $56,143.27 related to time and money Rocky spent to clean and repair moldy shoes that RAK manufactured and shipped to Sears. Rocky took a second credit for $68,022.32 as compensation for a mistaken double-payment Rocky made to RAK for certain footwear.
1. Mold on Shoes Shipped to Sears
On October 18, 2007, Rocky received notice that certain shoes that RAK made and shipped directly to a retailer, Sears, contained mold. In response, on October 18, 2007, Rocky notified RAK that Rocky would take a charge-back as credit for the damage caused by the moldy shoes once Rocky determined the extent of the problem. Rocky cleaned the moldy shoes between October 2007 and February 2008 at a cost of $56,142.27. On February 13, 2008, Rocky notified RAK of the total costs for cleaning the moldy shoes. On February 19, 2008, a representative from Rocky met with RAK's owner to discuss several issues, including matters related to the charge-back for the moldy shoes. Mr. Yang agreed that RAK was responsible for the mold problem. On April 24, 2008, Rocky executed the Settlement Agreement releasing all known and unknown claims. On June 3, 2008, Rocky forwarded the credit memo to RAK in the amount of $56,142.27 seeking the costs associated with cleaning the moldy shoes.
Although Rocky characterizes this credit as a simple "adjustment" to the on-going business dealings between Rocky and RAK, rather than a legal claim, the evidence of record, including the correspondence from Rocky agents, clearly demonstrates that the parties were aware of this on-going issue as they were involved in this litigation. The Court concludes that this claim was relinquished as part of the parties' agreement in Paragraph 7 of the Material Terms of Agreement, to release "all claims known and unknown between the parties through the date of the execution of this document and through the date of the execution of the release." Rocky agreed to release any and all claims it asserted in the action, as well as "any and all claims known and unknown" that Rocky had against RAK. RAK is therefore entitled to $56,142.27.
In his February 19, 2008 e-mail, Mr. Nix notes that "[t]here was [sic] initial discussions about not allowing me into the factory because of the lawsuit involving RAK." (Doc. 72., Exh. C.)
2. Double Payment
Rocky has a business partnership with a Canadian footwear company, Gredico Footwear Limited ("Gredico"). In the second of quarter 2007, Gredico, through Rocky, placed orders for a total of 7,082 pairs of shoes from RAK. Rocky paid RAK $68,022.32 for shoes as part of a payment it made on February 25, 2008. Later in 2007, Rocky learned that Gredico also paid RAK $68,022.32 for the same 7,082 pairs of shoes. On April 30, 2008, after it executed the settlement agreement, Rocky took a credit against an invoice in the amount of $61,061.34 (less than the $68,022.32 it asserted it was due).
The Court finds that this matter, too, is encompassed within the scope of the release. Rocky is barred from asserting its right to the $68,022.32. RAK is also entitled to the $61,061.34 credit that Rocky took against from a post-compromise invoice.
III.
Rocky is entitled to entitled to deduct between $48,000 and $50,000 as the amount still due on its contract resulting from RAK's failure to deliver approximately $384,000 of Rocky Ride materials. Rocky is also entitled to deduct an additional $70,000 from its amount due on the contract for non-conforming goods. These amounts are offset, however, by the sums RAK is entitled to recover: RAK is entitled to recoup $56,142.27 and $61,061.34 for the credits Rocky took for matters, i.e., claims it released under the terms of the Settlement Agreement. Rocky is therefore ORDERED to RELEASE $117,203.61 from escrow to RAK.