Summary
rejecting summary judgment to defendant buyer where defendant buyer, under requirements contact, obligated defendant to buy and resell plaintiff's sunglasses, failed to include the supply contract in asset sale agreement of defendant's assets and, after the purchase of defendant's assets, defendant continued to sell same products supplied by different producers
Summary of this case from Steuben Foods, Inc. v. Country Gourmet Foods, LLCOpinion
99-CV-0457E(P)
June 6, 2001
Attorneys for the plaintiff: Mitchell J. Banas, Jr., Esq. and Jennifer M. Demert, Esq., c/o Jaeckle Fleischmann Mugel, Buffalo, NY.
Attorneys for the Defendant: Kevin M. Kearney, Esq., c/o Hodgson Russ, Buffalo, NY.
MEMORANDUM and ORDER
Plaintiff Diversified Products, Inc. d/b/a Select-A-Vision ("Diversified") filed this action against Tops Markets, Inc. d/b/a Vix ("Tops") July 6, 1999 raising three causes of action — viz., (1) and (2) for breach of contract and (3) for breach of the implied covenant of good faith and fair dealing. This Court has jurisdiction over this case pursuant to 28 U.S.C. § 1332 because plaintiff is a citizen of Pennsylvania, defendant is a citizen of New York and the amount in controversy exceeds $75,000. Defendant filed a motion for summary judgment May 22, 2000 and such is presently before this Court for disposition. Rule 56(c) of the Federal Rules of Civil Procedure("FRCvP") requires that summary judgment "be rendered forthwith if * * *there is no genuine issue as to any material fact and * * * the moving party is entitled to judgment as a matter of law." The party seeking summary judgment must establish the "lack of a genuine, triable issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986). A fact is material and genuine if it "might affect the outcome the suit under the governing law" and "is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, 477 U.S. 242, 247-248 (1986). In deciding a motion for summary judgment, the court must construe the facts in the "light most favorable to the opposing party." Adickes v. H.S. Kress Co., 398 U.S. 144, 157 (1970). Summary judgment is particularly inappropriate when a substantial issue to be determined is a party's good faith vel non. Leberman v. John Blair Company, 880 F.2d 1555, 1560 (2d Cir. 1989). However, the party opposing summary judgment may not rest upon conclusory statements in its pleadings but "must set forth specific facts showing that there is a genuine issue for trial" — FRCvP 56(e) — because "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment ***." Anderson, at 247-248. The following facts are taken from the parties' submissions and are construed in the light most favorable to plaintiff — i.e., the party opposing summary judgment.
Diversified is a Pennsylvania corporation engaged in the business of selling sunglasses, reading glasses and related optical accessories at wholesale. Def.'s Statement of Undisputed Facts ("Statement") ¶ 1. Tops is a New York corporation which owns and operates grocery stores throughout Western New York. Prior to January 1999, Tops owned and operated eleven drug stores under the name of Vix. Statement ¶¶ 3-4. Vix was a division of Tops which had no separate legal identity; however, the Vix stores functioned independently of Tops's grocery stores. Statement ¶¶ 4-5. In the Fall of 1997 Ron Landy, Diversified's National Sales Manager, contacted Marcia Walker, a merchandiser for Vix, in an effort to secure a requirements contract whereby Diversified would supply Vix with sunglasses, reading glasses and related optical accessories for resale in Vix stores. Statement ¶ 6; Landy Aff. ¶¶ 1-2. Diversified has low profit margins and significant up-front costs comprised of merchandise buy-backs, free promotional products and free merchandise displays. Landy Aff. ¶ 4. Diversified normally utilizes a three-year requirements contract, but Vix requested a two-year contract. Landy Aff. ¶¶ 5-6. During negotiations, Landy informed Walker that it would be difficult for Diversified to make any profit during the first year of the proposed contract due to its two-year duration combined with its low profit margins and significant up-front costs. Landy Aff. ¶¶ 4-6. On November 12, 1997, Landy sent two copies of the proposed requirements contract along with the standard price schedules therein-referenced to Walker. Landy Aff. ¶ 7. On December 15, 1997 Diversified, through its President and Chief Executive Officer, Steven B. Liebers, and Viz, through its Director of Procurement and Merchandising, James Garbarino, entered into a Requirements Contract which stated that
Diversified states that it invested over $95,000 in "up-front and other out-of-pocket costs" under the Requirements Contract that it made with Tops. Compi. ¶ 12.
Vix had also successfully negotiated for additional free display cases. Pl.'s Statement of Disputed Facts ("Response") ¶ 7; Garbarino Dep. at 42.
The price schedules have been provided to this Court along with a cover letter from Landy to Walker dated November 12, 1997. Landy Aff. Ex. B.
Garbarino had the authority to enter into contracts on behalf of Tops. Deese Dep. at 6, 8.
This contract is based on a form requirements contract drafted by Diversified's attorney. Liebers Dep. at 26-27. Liebers modified the form requirements contract for use as the contract with Vix. Id. at 27-28. Liebers erroneously described Vix as a New York corporation in this contract because he believed it to be so, although he did not conduct an investigation to determine if such was correct. Id. at 29-30.
"[Vix], desiring to purchase products, shall purchase within two (2) years from the date hereof sunglasses, reading glasses, assorted optical accessories, hand-held magnifiers and eyeglass cases of the sizes, types, and magnifications listed in the annexed *** prices [sic] schedules, in such quantity as shall satisfy [Vix's] requirements for resale during the term of this Agreement. At all times it is understood that [Vix's] requirements for Products shall be such that [Vix] shall carry an inventory in each of its retail locations of such quantity as is reasonably designed to produce a maximum return to [Vix] using reasonable business judgment. [Vix] hereby agrees that [Diversified] shall be [Vix's] exclusive supplier of Products during the term of this Agreement." Kearney May 22, 2000 Aff. Ex. A (Requirements Contract ¶ 1).
Although the price schedules referenced as being annexed to the Requirements Contract were not actually annexed thereto — Statement ¶ 11; Response ¶¶ 12-13, Landy had given them to Walker in November 1997, there was never any confusion over the products or prices and Vix submitted purchase orders to Diversified in conformance with the price schedules. Landy Aff. ¶¶ 7-10; Response ¶¶ 12-13.
The Requirements Contract contained a provision stating that "[Diversified] expressly reserves the right to change the annexed schedules, including the list prices, extra charges, and to modify or eliminate sizes, types and classes of Products, as it shall see fit, and the schedules in their amended form shall be pare of this Agreement. Changes in the schedules may be made by [Diversified] with 90 days notice to [Vix]. The new schedules shall become effective after the 90 day period." Requirements Contract ¶ 5 (emphasis added).
Defendant states that "according to Diversified's President the [price] schedules were never prepared." Mem. of Law in Supp. of Tops' Mot. for Summ. J. at 13. As authority for this statement, defendant cites pages 24-35 of Liebers' Deposition. Therein Liebers was asked if the referenced price schedules were "annexed to the [Requirements Contract] at the time it was executed?" to which he responded "No." Liebers was then asked "Were there other schedules or other documents that were exchanged or provided by [plaintiff] to Vix that outlined what the price [schedules'] extra charges would be for products?" to which he responded "No." Finally Liebers was asked "Was that [ i.e. the extra charges] something that was, to your knowledge, discussed between Mr. Broncato and Mr. Landy and representatives of Vix orally and not in writing?" to which he replied "I'm sure that term [ i.e. the extra charges] wasn't discussed." Liebers Dep. at 34-35. Accordingly, all Liebers stated was that extra charges were not discussed and were not contained in "other schedules or other documents" provided to Vix. However, Landy specifically states that, in November 1997, he provided Vix with "schedules including product lists with the UPC codes and pricing." Landers Aff. ¶ 7. Accordingly defendant's allegation that Liebers stated that the price schedules referenced in the Requirements Contract were never prepared is not supported by the facts.
On January 13, 1998 Tops engaged an investment banking firm, Furman Selz, LLC, to locate a buyer for the assets of Vix. Statement ¶ 18; Demert Aff. Ex. F (Gottdiener January 13, 1998 Letter); Deese Dep. at 12-13. Tops subsequently sold Vix to Drug Emporium, Inc. pursuant to an Asset Sale Agreement dated December 31, 1998. Statement ¶ 17; Kearney All. Ex. D (Asset Sale Agreement). Although the Requirements Contract between Vix and Diversified contained a clause which stated that "[t]his Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the respective parties" — Requirements Contract ¶ 11 —, Tops failed to address the Requirements Contract in the Asset Sale Agreement with Drug Emporium. Deese Aff. ¶ 5. Diversified states that Tops never notified it that Vix had been sold to Drug Emporium. The Vix stores ceased purchasing products from Diversified in February 1999. Liebers Dep. at 63-65. Liebers spoke to Randy Tracy, a buyer for Drug Emporium regarding the Requirements Contract and subsequently attended a meeting at Drug Emporium's headquarters where he was ultimately advised that Drug Emporium already had a supplier for eyeglasses and related accessories, that it had never been informed of the Requirements Contract that Diversified had with Vix and that, because it had only purchased the assets of Vix, it would not be honoring the Requirements Contract. Liebers Dep. at 66-69. Plaintiff subsequently commenced the present action raising three interrelated causes of action, the first two of which are for breach of contract and the third of which is for breach of the implied covenant of good faith and fair dealing.
Tops had engaged in negotiations with Furman Selz prior to January 13, 1998; however information pertaining to such was disposed of in the ordinary course of business. Deese Dep. at 14-16.
The Asset Sale Agreement contains a clause stating that the Vix assets purchased by Drug Emporium include "all the contracts, agreements and leases used in connection with the Business as set forth on Schedule 2.1(g)" however Schedule 2.1(g) has not been provided to this Court. Asset Sale Agreement ¶ 2.1(g).
Tops states that the executives who decided to sell Vix had been unaware of the Requirements Contract with Diversified — Statement ¶ 22 — and that the Tops employees who ran Vix were unaware that Tops was seeking to sell it during the time the Requirements Contract and the Asset Sale Agreement were being negotiated. Deese Aff. ¶ 4; Deese Dep. at 35. However, Tops admits that its executives did become aware of the Requirements Contract before the Asset Sale Agreement was signed. Garbarino Dep. at 13-15; Deese Dep. at 26-28.
Neither party addresses the issue of choice of law, although both assume that New York law governs. In diversity actions, Federal courts apply the substantive law of the forum state including its choice-of-law rules. Klaxon Co. v. Stentor, 313 U.S. 487, 496 (1941); Day Zimmerman, Inc. v. Challoner, 423 U.S. 3, 4 (1975). Accordingly, this Court will apply New York's choice-of-law rules. New York utilizes the "center of gravity" or "grouping of contacts" choice-of-law rule in contract cases. In re Allstate ins. Co. and Stolarz, 81 N.Y.2d 219, 226 (1993); Brink's Limited v. South African Airways, 93 F.3d 1022, 1030-1031 (2d Cir. 1996) cert. denied 519 U.S. 1116 (1997). Under this rule the pertinent factors to be considered are "the place of contracting, negotiation and performance; the location of the subject matter of the contract; and the domicile of the contracting parties." Allstate, at 227. (Internal citation omitted). Based on these factors, this Court will apply New York law.
Plaintiff frames its three causes of action as follows — viz., (1) that, "[i]n failing to purchase Products from Diversified for the remainder of the Agreement's term, Tops presently and anticipatorily breached the requirements clause of the Agreement and violated Uniform Commercial Code ("U.C.C.") §§ 2-306(1) and (2), " (2) that, "[i]n failing to make provision for the Agreement and its obligations thereunder in connection with its sale of Vix to Drug Emporium, Tops breached the successors and assigns clause of the Agreement" and (3) that, "[i]n failing to purchase products from Diversified for the remainder of the Agreement's term and to make provision for the Agreement and its obligations thereunder in connection with its sale of Vix to Drug Emporium, Tops breached the covenant of good faith and fair dealing inherent in the Agreement by virtue of Uniform Commercial Code § 1-203 and otherwise." Compl. ¶¶ 13, 16, 19. Defendant seeks summary judgment on three grounds — viz., (1) that Tops did not breach the contract because it could reduce its requirements to zero in good faith for legitimate business reasons independent of the contract itself, (2) that the contract was unenforceable because it was indefinite due to the failure to specify specific products and prices and (3) that Tops had no obligation to assign the contract under the successors and assigns clause.
A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. "A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to supply the goods and by the buyer to use best efforts to promote their sale." U.C.C. § 2-306(1) and (2).
Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement." U.C.C. § 1-203.
This Court first addresses plaintiff's claim that defendant "breached the covenant of good faith and fair dealing inherent in the Agreement by virtue of Uniform Commercial Code § 1-203 and otherwise." There is an implied covenant of good faith and fair dealing in every contract — Travellers International, A.C. v. Trans World Airlines, Inc., 41 F.3d 1570, 1576 (2d Cir. 1994) — which "precludes each party from engaging in conduct that will deprive the other party of the benefits of the agreement." Filner v. Shapiro, 633 F.2d 139, 143 (2d Cir. 1980) citing Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 87 (1933). "A party may be in breach of its implied duty of good faith and fair dealing even if it is not in breach of its express contractual obligations" — Chase Manhattan Bank, N.A. v. Keystone Distributors, Inc., 873 F. Supp. 808, 815 (S.D.N.Y. 1994) — if it "acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other [party] of the right to receive the benefits under their agreement." Don King Productions, Inc. v. Douglas, 742 F. Supp. 741, 767 (S.D.N.Y. 1990). A plaintiff "may allege bad faith as part of its breach of contract claim, but bad faith does not provide an independent basis for recovery given that it is a disqualifying factor as distinguished from a liability-imposing factor." Quail Ridge Associates v. Chemical Bank, 558 N.Y.S.2d 655, 657 (App. Div.3d Dep't 1990). A "cause of action alleging a breach of good faith is duplicative of a cause of action alleging breach of contract, since every contract contains an implied covenant of good faith and fair dealing." Apfel v. Prudential-Bache Securities, Inc., 583 N.Y.S.2d 386 (App.Div. 1st Dep't 1992); see also Cary Oil v. Mg Refining and Marketing, Inc., 90 F. Supp.2d401, 419 (S.D.N.Y. 2000) ("[u]nder New York law, a claim for breach of the implied covenant will be dismissed as duplicative if the conduct allegedly violating the implied covenant is also the predicate for the breach of the underlying contract.").
Internal citations and quotation marks omitted.
"A plaintiff always can allege a violation of an express covenant. If there has been such a violation, of course, the court need not reach the question of whether or not an implied covenant has been violated. That inquiry surfaces where, while the express terms may not have been technically breached, one party has nonetheless effectively deprived the other of those express, explicitly bargained-for benefits. In such a case, a court will read an implied covenant of good faith and fair dealing into a contract to ensure that neither party deprives the other of the fruits of the agreement. Such a covenant is implied only where the implied term is consistent with other mutually agreed upon terms in the contract. In other words, the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation which would be inconsistent with other terms of the contractual relationship. Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract's performance or to withhold its benefits. As a result, it ensures that parties to a contract perform the substantive, bargained-for terms of their agreement." Metropolitan Life Insurance Company v. RJR Nabisco, Inc., 716 F. Supp. 1504, 1516-1617 (S.D.N.Y. 1989) (internal citations and quotation marks omitted).
Section 1-203 of the U.C.C. specifically states that "[e]very contract or duty within this Act imposes an obligation of good faith in its performance or enforcement." Under the U.C.C. the standard of good faith "between merchants includes "observance of reasonable commercial standards of fair dealing in the trade.'" J. Moreria, LDA v. Rio Rio, Inc., No. 91 CIV. 2462 (LJF), 1992 WL 395577, at * 6 (S.D.N.Y. Dec. 15, 1992). Accordingly section 1-203 of the U.C.C. also requires that "neither party to a contract do anything that will have the effect of injuring the right of the other party to receive all the benefits of the contract." Ibid. However, an "alleged breach of the covenant of good faith does not give rise to a cause of action" under the U.C.C. Caplan v.Unimax Holdings Corporation, 591 N.Y.S.2d 28, (App.Div. 1st Dep't 1992).
"It has been stated that when a party acts in bad faith, he will ordinarily be denied the benefit of any provision or concept which would improve his position. Acting in bad faith is thus a disqualifying factor as distinguished from a liability-imposing factor. In consequence, the Code does not permit recovery of money damages for not acting in good faith where no other basis of recovery is present." Super Glue Corp. v. Avis Rent a Car System, Inc., 517 N.Y.S.2d 764, 766 (App.Div.2d Dep't 1987). See also Marquette Company v. Norcem, Inc., 494 N.Y.S.2d 511, 512-513 (App.Div.3d Dep't 1985) (lack of good faith is a defense under U.C.C. 1-203).
Citation and internal punctuation omitted.
Accordingly plaintiff's claim for breach of the implied covenant of good faith and fair dealing is not properly a separate cause of action in and of itself, but is to be considered in relation to and in conjunction with plaintiff's breach of contract claims. Accordingly, with the above standards in mind, this Court will address the latter.
Plaintiff states that, "[i]n failing to purchase Products from Diversified for the remainder of the Agreement's term, Tops presently and anticipatorily breached the requirements clause of the Agreement and violated Uniform Commercial Code ("UCC") § 2-306(1) and (2)." Compl. ¶ 16. Defendant seeks summary judgment on this claim on two grounds — viz., (1) that it did not breach the contract because it could reduce its requirements to zero in good faith for legitimate business reasons independent of the contract itself and (2) that the contract was unenforceable because it was indefinite due to the failure to specify specific products and prices. This Court will first address defendant's second ground for summary judgment as it goes to the very issue of whether there was a binding contract between the parties.
Defendant argues that the Requirements Contract is unenforceably indefinite because the price schedules referred to in it were not annexed to it. An "agreement to agree, in which material terms are left for future negotiations, is unenforceable unless a methodology for determining the material terms can be found within the four corners of the agreement or the agreement refers to an objective extrinsic event, condition, or standard by which the material terms may be determined." Carmon v. Boneh, Ltd., 614 N.Y.S.2d 555, (App.Div.2d Dep't 1994) (citing Cobble Hill Nursing Home v. Henry Warren Corp., 74 N.Y.2d 475, 482-483 (1989), and Martin Delicatessen v. Schumacher, 52 N.Y.2d 105, 109 (1981). The U.C.C., however, allows parties to enter into a contract for the sale of goods even though the sales price is not yet settled, if the parties intend to do so and whether the parties intended to conclude a sales contract before setting on a price is usually an issue of fact to be decided by the jury. Marquette Company v. Norcem, Inc., 494 N.Y.S.2J. 511, 513 (App.Div. 3 d Dep't 1985). According to the evidence submitted by plaintiff, Landy had provided the referenced price schedules to Vix before the Requirements Contract was signed and Vix had placed purchase orders for goods in conformance with such price schedules for approximately a year without any confusion or ambiguity regarding which particular products were being purchased at what specific prices. Accordingly, in the present case, the parties had not left the prices of the goods to be negotiated in the future; they had agreed on them prior to entering into the Requirements Contract, but had inadvertently neglected to attach them to it. In light of the above evidence that plaintiff had provided Vix with the referenced price schedules prior to the signing of the Requirements Contract and the fact that the prices could be ascertained by reference to the price schedules referenced in the Requirements Contract, this Court will deny defendant's motion for summary judgment on the ground that the Requirements Contract was unenforceably indefinite due to the failure to annex the referenced price schedules to it.
Defendant also seeks summary judgment on the ground that it did not breach the Requirements Contract because it could reduce its requirements to zero in good faith for legitimate business reasons independent of the Requirements Contract itself. Under a requirements contract, the buyer may cease purchasing goods without being in breach if it decides — in good faith — to stop selling such goods. Cf. Feld v. Henry S. Levy Sons, Inc., 37 N.Y.2d 466 (1975) (cessation of production by seller in output contract). The seller in a requirements contract assumes the risk that the buyer will decide to discontinue business. Empire Gas Corp. v. American Bakeries Co. 840 F.2d 1333, 1337-1338 (7th Cir. 1988); NCC Sunday Inserts, Inc. v. World Color Press, Inc., 759 F. Supp. 1004, 1008 (S.D.N.Y. 1991); Brewster of Lynchburg, Inc. v. Dial Corp., 33 F.3d 355, 364 (4th Cir. 1994). There is no "implied obligation to continue in business." Dubotiv. Matam Corporation, 71 N.Y.S.2d 134, 136 (App.Div., ist Dep't 1947) citing In re United Cigar Stores Co. Of America, 72 F.2d 673, 675 (2d Cir.), cert. denied 293 U.S. 617 (1934)). However, the "party who will determine quantity is required to *** conduct his business in good faith and according to commercial standards of fair dealing in the trade so that his [requirements] will approximate a reasonably foreseeable figure." Feld, at 469. Plaintiff does not simply allege that defendant breached the Requirements Contract by ceasing to purchase goods after it so1d Vix to Drug Emporium; rather this claim must be read in conjunction with its claims that defendant (1) breached the covenant of good faith and fair dealing by entering into the Requirements Contract with Diversified — knowing that Diversified would not be profiting from such until the second year of the contract —, at or about the same time that it was seeking to sell Vix and (2) failed to provide for the Requirements Contract in the Asset Sale Agreement with Drug Emporium despite the assignment clause. See Pl.'s Mem. of Law in Opp'n to Def.'s Mot. for Summ. J. at 10. A jury could reasonably conclude that, although defendant would normally be free to terminate the Requirements Contract upon a decision to cease selling the covered goods, under the particular facts of this case defendant breached the duty of good faith by entering into a two-year contract knowing that plaintiff's profits would inure in the second year thereof, while simultaneously seeking to will Vix and ultimately failing to provide for the Requirements Contract in the Asset Sale Agreement — or even to notify Diversified that it had so1d Vix. Accordingly, because there is a genuine issue of material fact regarding whether, under the circumstances presented in this case, defendant entered into the Requirements Contract in good faith, summary judgement will be denied.
Accordingly, it is hereby ORDERED that defendant's motion for summary judgment is denied.