Opinion
Civil Action No. 97-B-1554
May 19, 2000
Jerry N. Jones, Esq., Kevin E. Burr, Esq., Moye, Giles, O'Keefe, Vermeire Gorrell LLP, Denver, CO, for Intelligent Electronics.
Bruce A. Featherstone, Esq., William Gagnon, Esq., Jill Ferguson, Esq., Featherston DeSisto LLP, Denver, CO, for Radius.
William W. Maywbort, Esq., C. William Groscup, Esq., Holland Hart LLP, Englewood, CO, for Deutsche.
FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER
This case, involving contract claims in the franchise and financing context, was tried to the Court from April 24, 2000 through May 5, 2000. Jurisdiction is proper pursuant to 28 U.S.C. § 1332, diversity jurisdiction. The parties have agreed that Colorado law applies to all claims for relief.
Intelligent Electronics, Inc., Intelligent Advanced Systems, Inc., and R.N.D., Inc. (collectively "IE"), filed this action on July 18, 1997, alleging the following four claims against Digital Origin, Inc., f/k/a Radius, Inc. ("Radius"):
(1) breach of contract;
(2) promissory estoppel;
(3) unjust enrichment; and
(4) declaratory judgment.
Radius then filed the following counterclaims against IE:
(1) breach of contract; and
(2) unjust enrichment.
Radius also counterclaims against Deutsche Financial Services Corporation, formerly known as ITT ("DFS"):
(1) breach of contract (involving IE financed account); and
(2) breach of contract (involving other financed accounts).
Counterclaim defendant DFS counterclaims against Radius:
(1) breach of contract.
Finally, DFS cross-claims against IE for indemnification.
I. Factual Background
I make the following findings of fact after carefully assessing the credibility of each witness, both by live testimony and deposition, and the probative value of the exhibits. The weight I give the testimony and exhibits is wholly a result of this assessment.
A. The Parties
Radius was a manufacturer and vendor of computer related equipment for Apple Macintosh. Between 1987 and 1995, Radius grew rapidly, selling its products to a number of distributors across the country. In 1995, Radius experienced severe setbacks as the popularity of Apple declined and Microsoft became dominant in this field.
Plaintiffs, IE, are affiliated corporations engaged in the distribution of computer products to resellers. IE purchased such goods from manufacturers, including Radius, and opened distribution warehouses for these goods in various locations in the United States. IE purchased goods from Radius using both direct and indirect/financed accounts. Direct accounts allowed IE to purchase products directly from Radius, without the use of a third party financer. The indirect or financed account involved purchases financed by DFS.
DFS provides commercial financing to assist distributors, such as IE, in purchasing consumer products, including computer products, for resale. At all relevant times, DFS provided accounts receivable and inventory financing to such entities. DFS provided financing to IE and Merisel, both distributors of computer products who purchased goods from Radius. For purposes of this Order, I consider DFS and ITT as one entity.
B. Contractual Relations Between the Parties
1. Contracts Between Radius and DFS
In May 1987, Radius and DFS entered into a written Floorplan Repurchase Agreement (Tr. Exh. R-8), in which DFS agreed to provide financing to dealers and distributors of Radius products. This Agreement defined certain rights and obligations generally applicable to any financing provider for Radius' sales. The Floorplan Repurchase Agreement remained in effect until it was terminated by DFS in March 1996, when DFS ceased financing Radius. (Tr. Exh. R-190).
Radius and DFS also entered into a written letter agreement dated January 9, 1995 (Tr. Exh. R-9) ("Letter Agreement"), which sets forth specific terms and conditions for financing provided by DFS to Radius in connection with the sale of goods by Radius to three distributors, including IE and Merisel. The January Letter Agreement also remained in effect until March 1996. (Tr. Exh. R-190). This Agreement provided that DFS "may make deductions on behalf of [IE and Merisel] from payments due Radius, with supporting documentation attached to the remittance advice, provided that Radius has notified ITT That Radius has approved such deductions." (Tr. Exh. R-9, emphasis added). Radius and DFS later entered into a second letter agreement applying to DFS' financing of sales of goods by Radius to a fourth distributor. (Tr. Exh. R-9A).
2. Contracts Between Radius and IE
In September 1993, Radius and IE entered into an agreement known as the Master Reseller and National Distributor Pricing and Funding Agreement ("Funding Agreement"). (Tr. Exh. P-235). This set forth specific terms relating to the creation of a Marketing Development Fund from which Radius would reimburse IE for obligations incurred by IE's marketing of Radius products.
In October 1994, IE entered into a National Chain Agreement with Radius concerning the sale of Radius computer products to IE. (Tr. Exh. P-218). This agreement controlled prices and payment for Radius products and provided how (i) Radius would adjust IE's prices and cost for Radius products, (ii) product returns would be handled as between the parties, and (iii) Radius would reimburse IE for any Radius products that were reduced in price by Radius, also known as "price protection."
3. Contract Between IE and DFS
DFS provided inventory financing to IE for products that IE purchased from Radius pursuant to an Agreement for Wholesale Financing entered into in November 1990. (Tr. Exhs. P-221-230). This Agreement states the terms and conditions between IE and DFS for the financing of IE's purchases from Radius. In November 1995, IE terminated its agreement with DFS for financing its purchases of Radius products. (Tr. Exh. R-28).
4. Merisel Contracts
Merisel, like IE, was also a distributor of computer and electronic products. Merisel purchased products from various vendors and manufacturers, including Radius, and distributed products to resellers. In April 1992, Radius and Merisel entered into a National Distribution Agreement. (Tr. Exh. R-700). DFS provided inventory financing to Merisel pursuant to a separate Agreement for Wholesale Financing dated July 1994. (Tr. Exh. R-79).
C. Mechanics of DFS' Financing of Radius Products
For sales to be financed through DFS on a distributor's financed account, a distributor, such as IE, would initiate the transaction with a purchase order sent to Radius ordering products. Radius would then seek approval from DFS that the transaction was within the established credit limit for that distributor. Upon DFS' approval, Radius would then ship the order to the distributor, such as IE. An invoice would also be generated and sent to DFS for payment. The Letter Agreements provide that DFS would pay Radius within 10 days of the invoice date, at the invoice amount less a variable financing discount.
DFS would then collect the actual invoice amount from IE, or other distributors, after a subsidized flooring period of 60 to 90 days. DFS prepared and sent to the distributor a written Statement of Transaction as DFS' invoice to the distributor. (Tr. Exh. R-272A). According to the Wholesale Financing Agreement, if the distributor did not object to the terms of a statement, its terms were deemed final and binding and the distributor was obligated to pay the terms of the statement without any defense it may have against third parties. Distributors such as IE would make payments to DFS two to three times per month. At times, and relevant to this action, distributors would make deductions from their payments to DFS to reflect credits allegedly due from Radius. The Letter Agreements allowed DFS to pass through these claimed deductions by distributors in subsequent payments due Radius, if it attached supporting documentation and provided that Radius has notified ITT that Radius approved such deductions." (Tr. Exh. R-9).
II. TenBrook's Reconstruction of the Accounts
With the assistance of former Radius employee Lynn Cox, and Radius' expert Mr. James TenBrook, Radius reconstructed its accounting for the financed transactions with IE, Merisel, and DFS. Mr. TenBrook's reconstruction concludes that $2,051,622.00 is owed to Radius by IE and DFS on IE's financed account. IE and DFS use Mr. TenBrook's numbers and reconstruction results as a starting point from which to deduct moneys allegedly due and owing from Radius. IE and DFS, with the help of their expert Mr. Zeeb, have allocated the $2,051,622.00 between separate IE and DFS "buckets." They then go on to make "additional adjustments" to Mr. TenBrook's analysis, adjusting for the amounts they believe are owed by Radius for things such as product returns and Merisel inter-office transfers. Because the parties have agreed to start with Mr. TenBrook's initial sum, and because both he and Ms. Cox were credible in their testimony regarding their arrival at this amount, I also start with $2,051,622.00.
III. Claims Between the Various Parties and Conclusions of Law
At the outset, it is helpful to place the parties' claims and disputes in context. Mass. confusion provides a backdrop for each such claim and dispute. During the relevant time, IE was growing by leaps and bounds. Meanwhile, in 1995, Radius was undergoing severe financial stress resulting in the downsizing of its staff and threats of bankruptcy. To make matters worse, Radius' computer system, Oracle, suffered from bugs now recognized by all sides to this action. None of the parties followed the exact terms of any of the contracts involved. Thousands of documents, evidenced by the numerous trial exhibits, were passing hands and desks. Personnel changes were frequent. Neither side was totally aware of the various transactions taking place between IE, DFS, and Radius. The same holds true as to the Merisel accounts. As acknowledged by all, this has always been a case of who owes whom what. Indeed, the numbers claimed by each side continued to change before suit was filed, throughout the course of this action, and even during the entire course of the eight day trial as the parties themselves became more aware of the facts and evidentiary support for each claim. As will be seen, this same chronic uncertainty also permeated the Merisel accounts.
A. Claims Between IE and Radius
1. Overview of Claims
This action began with IE's allegation that it was due credits and thus was owed $760,000.00 by Radius, after allowing an offset of $446,000.00 for sums admittedly due Radius. By the time of trial, however, IE conceded that Radius did not owe them any money, and that their claims would only reduce the sums admittedly due Radius. The question for me is, by how much. The amounts in dispute between IE and Radius relate to various credits and deductions taken by IE on its direct and financed accounts in late 1994 through 1995. While IE was purchasing products from Radius, IE would claim "debits" for (i) product returns, (ii) price protection, (iii) vendor rebates, (iv) marketing development funds ("MDF"), and (v) products ordered but not received. Radius frequently would issue a "credit memo" for these amounts, posted to IE's account, recognizing IE's claimed debit. However, the debits were not always recognized.
In practice, DFS would pay Radius the full invoice amount. When it came time for IE to pay DFS, IE would take deductions from its payments to DFS to reflect product returns, claims for price protection, vendor rebates, MDF, and products not received. When IE claimed these deductions, it would send Remittance Advices to DFS setting forth the various deductions claimed, including that the products had not been received from Radius as of the date the underlying invoice was due. DFS would "pass through" these debits to Radius in the form of a reduced payment on the next invoice. For each deduction for which there was no Radius-issued credit memo, DFS would send Radius an "in-transit letter," notifying Radius of the particular deduction claimed by IE. The in-transit letters expressly instructed Radius to call DFS if it needed further information. DFS also sent Radius notice of deductions being claimed by IE (and passed through by DFS) through a "Volume of New Inventory Financed Statement" or "VNIF." These VNIFs were created by DFS' accounting department to inform Radius of the invoices which were being paid and the deductions which were being claimed against amounts due and owing.
Radius never objected, in response to these DFS initiated in-transit letters or VNIFs, to DFS or IE about the various debits taken by IE and passed through by DFS. (Fosco Tr. Testimony; Tomlinson Tr. Testimony). Ms. Cox, from Radius, testified that Radius' internal practice was to post a "placeholder" in its accounts receivable for the amount that IE claimed as a debit. (Cox Tr. Testimony). Radius would then investigate the amount and the claimed debit in an attempt to determine whether a credit should issue in favor of IE. Only if a credit was issued would the amount in the accounts receivable become an amount in the accounts payable. Until this time, in Radius' books, this was a collectible amount due and owing to Radius. Ms. Creasey and Mr. Bean testified that IE had no knowledge of this practice and was not aware that the debits were not automatically deducted until long after the fact and in preparation for litigation.
IE claims in this action that it deserves numerous set-offs from the amount it owes to Radius. Radius, on the other hand, disputes the debits as being improperly made without prior Radius authorization, as required by the contract, through the form of a Radius Return Material Authorization number ("RMA"). Radius further claims that IE is not due any credit as the debits were taken in breach of the express terms of the contract. As noted, the numbers claimed by each side have shifted dramatically since the time of filing. For example, Sandra Creasey, an IE employee, originally wrote a letter to Radius in January 1997 in an attempt to settle the total amount that IE believed it was due from Radius. In this letter, Ms. Creasey made a demand for $760,837.50. By the end of trial, IE claimed that it owed Radius $105,744.05.
Radius, on the other hand, argues that it is owed approximately $1,234,656.00 from IE. At issue are five distinct categories of debits claimed by IE (i) credits for returns, (ii) credits for price protection, (iii) vendor rebates, (iv) MDF, and (v) credit for items not shipped. I will address all five categories in my analysis. IE does not attempt to base its claims on an express contract theory, but instead concedes that it is limited to the equitable theory of unjust enrichment. (May 5, 2000 Tr.). Therefore, in my legal analysis of IE's claims, I need not determine whether IE met the terms of the contract. Instead, I must determine only whether and to what extent Radius is unjustly enriched as a result of disallowing the at-issue credits.
2. Product Returns
Product returns from IE to Radius are allowed pursuant to the National Chain Agreement for a variety of reasons: defective products that are received by IE "dead on arrival"; quarterly stock balancing returns; and discontinued Radius products. (Tr. Exh. P-218). At trial, Radius, through its expert Mr. TenBrook, divided the contested returns into five categories to demonstrate why Radius did not give IE credit for the returns: (i) Radius RMA not given; (ii) defective products allegedly replaced by Radius; (iii) products not listed on an RMA; (iv) price discrepancy; and (v) no evidence of products returned to Radius. I conclude that, under an equitable theory of unjust enrichment, IE is due credit on most of the contested returns. Radius argues against crediting IE for these returns, pointing to the language of the National Chain Agreement requiring an RMA number for each return. (Tr. Exh. P-218). Although IE may not have obtained RMA numbers for each return, IE proved to my satisfaction that, with two exceptions (Tr. Exhs. 13 14), each contested product was in fact returned to Radius. Delivery receipts, signed by Radius, were introduced for each returned product. (Tr. Exhs. 13-24). I am persuaded, by both the submitted documentation and by credible testimony, that Radius received both the returned products and the money for the returned products. (Zeeb Testimony).
Unjust enrichment is a theory of implied contract recognized in Colorado. Under Colorado law, where "an express contract exists and an asserted implied contract is alleged to co-exist and relate to the same subject matter, there can be no implied contract between the parties because the provisions of the express contract supersede those of the implied contract." See Alien, Inc. v. Futterman, 924 P.2d 1063, 1069 (Colo.App. 1995) (citing Scott Co. of California v. MK-Ferguson Co., 832 P.2d 1000, 1002 (Cobo.App. 1991)). It follows that when the express contract does not cover the precise conduct of the parties, a theory of unjust enrichment can be asserted. See Scott Co., 832 P.2d at 1002 (citing Schuck Corp. v. Sorkowitz, 686 P.2d 1366 (Colo.App. 1984); In re Estate of Murphy, 134 P.2d 199 (1943)).
The express contract in this case, the National Chain Agreement, does not address the facts of this case: payments on products were made and accepted by Radius and returns of these same products were later made and accepted by Radius. Although the contract requires that RMA numbers be issued for product returns, the contract goes on to state that if RMA numbers are not obtained, "Radius may reject any DOA product that is returned". (Tr. Exh. P-218, emphasis added). The agreement further states that Radius agreed to accept product returns only if IE complied with additional stated conditions. However, IE has proved to my satisfaction that Radius accepted the product returns and did not reject the returns or send them back to IE as the contract provides. Therefore, the theory of unjust enrichment is appropriately applied here. See Scott Co., 832 P.2d at 1002-1003 ("Quantum meruit [or unjust enrichment] is an appropriate basis for recovery when substantial changes occur which are not covered by the contract and are not within the contemplation of the parties").
Under Colorado law, the theory of unjust enrichment assumes that a benefit of some nature has been conferred by the party seeking recovery. See Alien, Inc., 924 P.2d at 1069 (citing Cablevision of Breckenridge, Inc. v. Tannhauser Condominium Ass'n, 649 P.2d 1093 (Colo. 1982)). Unjust enrichment is based on the general principle that one should not be permitted to keep that which "in equity and good conscience" should be restored to another. See Berger v. Dixon Snow, P.C., 868 P.2d 1149, 1152 (Colo.App. 1993). To recover for unjust enrichment in Colorado, a plaintiff must show "(1) that a benefit was conferred on the defendant by the plaintiff (2) that the benefit was appreciated by the defendant, and (3) that the benefit was accepted by the defendant under such circumstances that it would be inequitable for it to be retained without payment of its value." Johnson v. Studholme, 619 F. Supp. 1347 (D.Colo. 1985) (citing Cablevision of Breckenridge, 649 P.2d at 1097).
IE having satisfied each of these elements, I conclude that the product returns are appropriately remedied under a theory of unjust enrichment. Therefore, I allow credits against IE's obligation to pay Radius in the full amount of the price of the products paid to Radius.
Unrefuted testimony in this case establishes that Radius was paid for each of the products subsequently returned. (Zeeb Testimony). Furthermore, the evidence and testimony proves to me that most of these products were returned to Radius. Plaintiffs Exhibits 15, 16, 17, 18, 19, 20, 21, 22, 23, 24 were testified to by Ms. Creasey and each contains a signed delivery receipt for the returned products, signed by Radius. However, two of these returns were made not to Radius, but to Portrait Display Labs in Pleasanton, California. (Tr. Exhs. 13 14). IE is not entitled to credit for these two returns because IE did not meet its burden to prove that Radius and Portrait were one and the same entity. Instead, I find and conclude that Radius and Portrait were parties to a licensing agreement and, although Radius held a minority equity interest in Portrait, Portrait was a separately incorporated company. (Fosco Tr. Testimony). Portrait maintained its own customer relationships with buyers and sellers, its own books and records, its own sales and financial transactions, and, perhaps most significantly in this case, its own returns of products. (Fosco Tr. Testimony). IE should not get credit from Radius for returns made to Portrait. (Tr. Exhs. 13, 14). (Fosco Tr. Testimony). As for the remaining ten product returns, IE has established its claim for unjust enrichment, showing that a double benefit was conferred on Radius through payment for the products and the subsequent return of the products. IE has further shown that both benefits were appreciated by Radius and the products were not returned to IE for failure to comply with the contract. I conclude that it would be inequitable for Radius to retain both the benefit of the returned products and the payment. Therefore, for product returns, I conclude that Radius must disgorge the payments made for the products and I accordingly award IE $464,766.30.
As part of the above amount, I have awarded IE credit for the amount evidenced by the Exhibit 24 return delivery receipt signed by the mysterious Mr. Silva. In so doing, I assessed the credibility of the testimony and the weight of the documents and was persuaded that the products were in fact returned to Radius. Although Ms. Rosario credibly testified that Mr. Silva was not an employee of Radius, she did not know whether he was employed by Skyway, Radius' agent. I find from the circumstantial evidence in this case that Mr. Silva was an employee of Skyway and properly accepted this return on behalf of Radius. Therefore, Radius bears this loss.
3. Credits for Price Protection, Vendor Rebates, MDF
Unlike IE's claims on product returns, the theory of unjust enrichment does not fit with its claim for credits for price protection, vendor rebates, and MDF. Radius has not been unjustly enriched by any tangible benefits in these categories. As for intangible enrichments, IE presented no evidence on the value of such benefits to Radius. Because IE has limited itself to an equitable theory of unjust enrichment, I cannot award it credits in this regard. No quantifiable value has been conferred on Radius which it can be ordered to disgorge.
4. Credits for Items not Shipped
IE seeks credits for four items that it claims were paid for, but never shipped to IE from Radius. Because tangible benefits are conferred upon Radius under these circumstances, and because it is inequitable to allow Radius to retain the benefit of both the payment and the never-shipped products, I determine that unjust enrichment applies to this claim. Furthermore, like product returns, the express terms of the contract do not contemplate a remedy for this situation. See Scott Co., 832 P.2d at 1002-1003 ("Quantum meruit [or unjust enrichment] is an appropriate basis for recovery when substantial changes occur which are not covered by the contract and are not within the contemplation of the parties"). However, I find and conclude that Radius has proved shipment to IE of some of these products.
IE has four claims for items not shipped. (Tr. Exh. R-1008A). Ms. Rosario testified at length about the items claimed by IE and summarized these items in Exhibit R-1008A-1, which in turn summarizes the documents in Exhibit R-457A. For two of the four items, she testified that she could find no proof of delivery and no bill of lading to show that these products were ever shipped from Radius' warehouse. Yet, for these same items, payment was made to Radius upon Invoice Nos. 1016814 (in the amount of $44,860.00) and 1018639 (in the amount of $27,195.00). (Tr. Exh. R-460A). I find and conclude that IE has established that it ordered and paid for these products that Radius failed to ship to IE. Therefore, it would be inequitable to allow Radius to keep both the products and the money. I award these total credits of $72,055.00 to IE.
As for the remaining two items, Invoice Nos. 1039076 (in the amount of $8,495.00) and 1045906 (in the amount of $3,261.00), I find and conclude that through credible testimony of Ms. Rosario with sufficient supporting documentation, the products identified in these invoices were shipped to IE. (Tr. Exhs. R-460A, R-457A) (TenBrook Testimony). Therefore I do not award these amounts to IE under a theory of unjust enrichment as it has not proven to my satisfaction that Radius was unjustly enriched by these amounts.
5. Miscellaneous Credits
The final two credits claimed by IE are for Radius issued credit memos that Radius failed to credit to IE's account. (Tr. Exhs. D-600 D913). Mr. TenBrook testified that these were in fact Radius issued credit memos and that they should have been given to IE. Because it would be unjust to allow Radius to retain the benefit of properly issued credit memos, I award these amounts to IE. The first credit memo was in the amount of $325.00 (Tr. Exh. D-600) and the second in the amount of $384.00 (Tr. Exh. D-913), therefore I award IE $709.00 for these uncredited credit memos.
6. Amounts Conceded by the Parties
IE and Radius have agreed on several figures that are due and payable between them. I also take these into account when reconciling the amount that IE owes Radius. The balance concededly due to IE on its Direct Account totals $440,216.00. IE is owed credits on vendor rebates totaling $3,094.00. (Tr. Exh. R-254GG). An unpaid invoice due from DFS paid by IE totals $74,840.00. (Tr. Exh. R-1008A). Finally, IE concedes that it owes Radius $134,819.00 in Supermac liability. Again, all of these amounts are undisputed, so I award IE a net total of $383,331.00.
7. Final Calculations Between IE and Radius
Beginning with the agreed upon starting point provided by Mr. TenBrook, of $2,051,622.00 due and owing to Radius, I subtract $464,766.30 for product returns, $72,055.00 for products not shipped, $709.00 for the never applied credit memos, and $383,331.00 in conceded Radius liability. Further, I subtract $687,386.00 from the amount Radius claims to be due and owing by IE because, as I will explain below, I find and conclude that this amount belongs on DFS' side of the ledger to account for inter-office transfers. Finally, I subtract $129,579.00 because DFS concedes that this amount belongs in its portion of the original $2,051,622.00 bucket. Therefore, IE owes Radius a total of $313,795.70.
B. Claims Between DFS and Radius
1. Overview of Claims
Merisel, like IE, was a distributor of electronic parts to nationwide resellers. Merisel had a contract to purchase goods from Radius, among other manufacturers. (Tr. Exh. R-700). Also like IE, Merisel purchased goods from Radius on both a direct account and an account financed with DFS. The January 9, 1995 letter agreement between Radius and DFS concerned DFS' financing of both IE and Merisel. (Tr. Exh. R-9). This agreement set forth specific terms and conditions for financing provided by DFS to Radius in connection with the sale of goods by Radius. It provided that DFS "may make deductions on behalf of [IE and Merisel] from payments due Radius, with supporting documentation attached to the remittance advice, provided that Radius has notified ITT That Radius has approved such deductions." (Tr. Exh. R-9, emphasis added). DFS financed Merisel's purchases from Radius in much the same way it did for IE.
Also like IE, DFS begins its proposed reconciliation of the amounts it owes Radius with reference to Mr. TenBrook's starting point of $2,051,622.00 owed to Radius. (Tr. Exh. R-1009). DFS seeks additional adjustments to this amount. The major issue on the DFS/Radius side of this case concerns inter-office transfers made by DFS to reconcile the Merisel Account.
Merisel's financing arrangements with DFS were administered by DFS' Los Angeles office. Mr. Schmitt, appearing only by deposition, was DFS' account executive responsible for the Merisel account. The evidence and testimony establish that in the Summer of 1995, Merisel began taking large amounts of unprecedented debits from their payments to DFS which DFS attempted to pass through to Radius. (Tr. Exhs. R-1012, R-1004). In total, Merisel deducted $1,215,291.76 from its payments to DFS during the Spring and Summer of 1995. DFS concedes that ordinarily it would have passed these deductions straight through to Radius by offsetting them against subsequent payments for Radius invoices. However, DFS was unable to do this because it did not have enough Radius invoices against which to offset the incoming debit memos. In fact, by September 1995, Merisel had stopped purchasing Radius products through DFS. Consequently, by the time of the termination of the DFS/Merisel financing arrangement, DFS was carrying $1,215,291.00 worth of Merisel debit memos in its books which could not be applied against any open Radius invoices. This left DFS' Los Angeles office unable to collect outstanding debt relating to these deductions.
DFS submits deposition testimony by John Schmitt of DFS to the effect that in the Fall of 1995, in view of this accrued debit memo balance, Mr. Schmitt spoke with Mr. Jim Gordon, Senior Credit Analyst at Radius, to request payment of the $1,215,291.76 debt. Mr. Gordon allegedly responded that Radius did not intend to issue a check to DFS but that DFS could offset the Merisel-related debt against amounts owed to Radius in other accounts at DFS other branch offices. (Schmitt Depo., March 23, 1999, pp. 160-170) (Schmitt Depo., October 13, 1999, pp. 29-30). DFS engaged in a series of inter-office transfers to eliminate the outstanding debt to DFS' Los Angeles office. These transfers involved issuing separate "credits" from five other DFS branch offices — Denver, Los Angeles, Chicago, Baltimore, and St. Louis — to offset the debt. DFS attempted to offset the entire amount of Radius' debt in this fashion, but was able to offset only $1,062,185.00 of Radius volume from its other branches: $687,386.00 was taken from the Denver branch in the IE account; $328,037.00 was taken from the St. Louis branch on the SMR Enterprises account; $30,491.00 was taken from the Boston branch on the Custom Computers account; $14,695.00 was taken from the Baltimore branch of the Government Micro account; and $1,576.00 was taken from the Chicago branch of the EBB, Inc. account. (Tr. Exh. D-1146B). Each credit or transfer from the branches was listed separately on the respective branch's VNIFs and copies were provided to Radius.
Radius, on the other hand, through the deposition of Mr. Gordon, denies ever having authorized such an inter-office transfer to offset the amounts due and owing to Radius by Merisel. (Gordon Depo. pp. 69-71). Indeed, DFS submits no supporting documentation, no testimony other than Mr. Schmitt's, and no other evidence regarding the alleged authorization to corroborate Mr. Schmitt's testimony. Furthermore, although he had several earlier opportunities to do so, Mr. Schmitt failed to disclose this alleged authorization until 1998, late into the discovery process. For example, in his deposition, Mr. Schmitt describes trial exhibit R-54 as the "best and most accurate information as it relates to the so-called interbranch transfers." (Schmitt Deposition, October 13, 1999, p. 71). However, no where in Exhibit R-54, a September 1997 memo written by Mr. Schmitt to Ms. Roberta Burns, does Mr. Schmitt mention Mr. Gordon's alleged authorization. Instead, he merely states the following reason for the transfer: "Since the L.A. Branch did not have enough Radius volume to book the credits, volume from other DFS offices was used." (Tr. Exh. R-54). Likewise, exhibit R-803 contains contemporaneous notes by Mr. Schmitt in which he recorded his view on what happened to the at-issue accounts. He never mentions the alleged authorization. (Tr. Exh. R-803). Because there is no written documentation or memorialization of this alleged authorization, and because I do not find the testimony of Mr. Schmitt credible in light of the other evidence and testimony, I find that DFS was not expressly authorized by Mr. Gordon or Radius to effect the inter-office transfers. Therefore, I must determine whether these transfers were barred by the contract between DFS and Radius and whether DFS established any of its affirmative defenses.
2. Liability for Inter-Office Transfers
a. Express Terms of Contract
The contract between Radius and DFS clearly states that DFS "may make deductions on behalf of [Merisel] from payments due Radius, with supporting documentation attached to the remittance advice, provided that Radius has notified ITT that Radius has approved such deductions." (Tr. Exh. R-9, emphasis added) (Fosco Tr. Testimony). The "provided that" language makes the taking of deductions expressly conditional upon two things, (i) that Radius has notified DFS and that (ii) Radius has approved such deductions. Both must occur before DFS may make deductions. There is no real dispute that Radius did not notify DFS that it had approved these deductions before they were taken. In fact, deposition testimony by Mr. Kulmacz and trial testimony by Mr. Mace shows that employees at DFS did not even know about these contractual requirements. (Kulmacz Deposition, p. 42-46).
I conclude that this contractual provision in Exhibit R-9 is unambiguous. Under Colorado law, an unambiguous contract must be enforced according to its express terms. See Branscum v. American Community Mut. Ins. Co., 984 P.2d 675, 678 (Colo.App. 1999); Kaiser v. Market Square Discount Liquors, Inc., 992 P.2d 636, 640 (Colo.App. 1999) (citing USI Properties East, Inc. v. Simpson, 938 P.2d 168 (Colo. 1997) ("When construing an unambiguous contract, the court may not rewrite its terms but must instead enforce it as written."); Fox v. 1-10, Ltd., 957 P.2d 1018, 1022 (Colo. 1998) ("where a contract is clear and unambiguous, courts must give effect to the plain and ordinary meaning of its terms."); Engineered Data Products, Inc. v. Nova Office Furniture, Inc., 849 F. Supp. 1412, 1417 (D.Colo. 1994) ("Construction of a contract should be reasonable and not lead to an absurd result."). Whether a contract is ambiguous is a question of law. See Branscum, 984 P.2d at 678. Extrinsic evidence is admissible only if there is ambiguity in the agreement's terms. See Matter of May, 756 P.2d 362, 369 (Colo. 1988).
Therefore, because the language requires affirmative notification from Radius to DFS that Radius approved these deductions, I disagree with DFS' contention that Radius' silence constituted approval under the terms of the contract. The contract does not state that silence is enough. Rather, the parties negotiated for the terms included in the contract which expressly require affirmative notification. (Fosco Tr. Testimony). Under the circumstances here, silence cannot constitute this required affirmative notification. DFS made no attempt to abide by the express terms of the contract. Instead, it admitted to automatically passing through all deductions taken by Merisel without awaiting Radius approval per the contract. (Mace Tr. Testimony) (Schmitt Depo p. 76, lines 7-18).
In Colorado, to prove breach of contract, a plaintiff must show: (1) the existence of a contract; (2) performance by the plaintiff or some justification for nonperformance; (3) failure to perform the contract by the defendant; and (4) resulting damages to the plaintiff. See Western Distributing Co. v. Diodosio, 841 P.2d 1053, 1058 (Colo. 1992) I find and conclude that DFS breached the express terms of the contract through the inter-office offsets without express notification from Radius that it had approved these transactions. I turn then to DFS' affirmative defenses of waiver, course of performance, equitable estoppel, and release of the claims through the debt for equity swap.
b. Waiver
I find and conclude that Radius did not waive these contractual requirements by its purported silence. "Waiver is the voluntary abandonment or surrender by competent persons of a right known by them to exist, with the intent that such right shall be surrendered and such persons be forever deprived of its benefits." See Colorado Bank Trust Co. v. Western Slope Investments, Inc., 539 P.2d 501, 503 (Colo.App. 1975). In Colorado, for a waiver to exist, there must be a clear, unequivocal, and decisive act of the party showing such a purpose. See id. A contracting party's silence is almost always insufficient to create a waiver of a contractual right. See, e.g., Universal Resources Corp. v. Ledford, 961 P.2d 593, 596 (Colo.App. 1998). Waiver of a contractual right also requires "full knowledge of all the relevant facts" and may be explicit, as when a party orally or in writing abandons an existing right or privilege, or it may be implied, as when a party engages in conduct which manifests an intent to relinquish the right or privilege or acts inconsistently with its assertion. See Johnson v. Industrial Commiss'n of the State of Colo., 761 P.2d 1140, 1147 (Colo. 1988). There is no argument by DFS that Radius explicitly waived its rights under the contract (Fosco Tr. Testimony). To the extent that there is any such assertion, I find no evidence of an express waiver.
I find and conclude that Radius did not impliedly waive its rights under this contract. Trial testimony demonstrates that Radius was not even simultaneously aware of the inter-office transfers. Radius' financial difficulties resulted in the restructuring of its business and personnel cutbacks during the time of the inter-office transfers. (Chow Depo. pp. 58-60). In the Fall of 1995, Merisel's account remained unreconciled on Radius' end and Radius was not aware of the VNIFs outlining the amounts transferred. (Chow Depo. pp. 58-60). Because waiver of a contractual right requires "full knowledge of all the relevant facts," I cannot find that Radius had the requisite knowledge. See Johnson, 761 P.2d at 1147.
In late Fall of 1995, Ms. Monica Christie of Radius was eventually assigned to assist in straightening out the Merisel account because of the differences between the account balances of Radius and DFS. (Christie Depo. p. 12). Ms. Christie was to match up the debits claimed by Merisel and DFS with the credits actually issued by Radius. (Christie Depo. pp. 15-16). In this regard, Ms. Christie sent a fax on September 20, 1995, to John Schmitt of DFS regarding the unmatched debit memos, some of which represented the amounts eventually taken in the inter-office transfers. (Tr. Exh. R-68). She states: "A lot of the number [sic] they have listed do not come up in our system and really make no sense to me . . . . I will research the others a little bit longer and see if I can figure out what they are claiming." (Tr. Exh. R-68). Therefore, at this point in time, DFS was notified that Radius was in disagreement with or, at least, unaware of some of the amounts represented by the inter-office transfers and would not rubber-stamp the debit memos claimed by Merisel. On September 21, 1995, a day after her first fax, Ms. Christie faxed Mr. Schmitt copies of all of the credit memos she had found at that point in time. (Tr. Exh. R-69). On September 26, 1995, she notified Mr. Schmitt that she had found all of the relevant credit memos and she was putting together an account statement with Mr. Dick Terry. (Tr. Exh. R-70). Finally, Ms. Christie sent Mr. Terry an account balance from Radius' perspective (Tr. Exh. R-186) showing that Radius was owed over $1.107 million from DFS. Despite DFS' knowledge, the inter-office transfers for the total amount of the debit memos were completed in October through December of 1995.
Furthermore, in early November of 1995 Robert Chow of Radius communicated with Mr. Terry and Mr. Kulmacz of DFS and informed them that Radius was approving only $799,035.69 of the credits claimed by Merisel and passed through by DFS. (Tr. Exhs. R-72 R-73). In his fax to Mr. Terry and Mr. Kulmacz, Mr. Chow included a list of all applicable Radius credit memos. (Tr. Exh. R-73). Despite this information, DFS went ahead and applied, through the inter-office transfers, the entire $1,062,185.00 claimed by Merisel.
This evidence proves to me that Radius did not waive its rights under the contract and did not waive its rights to object to the inter-office transfers. It was not Radius' practice to accept all debit memos submitted by Merisel. Instead, Radius would accept only those debits that were matched with credits. The credit memos were sent, pursuant to the contract, as express notifications by Radius that it had approved the deductions proposed by DFS. Radius issued credit memos for only those amounts it could verify. These actions on behalf of Radius are sufficient to rebut DFS' affirmative defense of waiver and in no way manifest an intent by Radius to relinquish its rights or privileges under the contract. See, e.g., Johnson, 761 P.2d at 1147.
c. Course of Performance
Ordinarily, in order to determine whether a party can raise the defense of course of performance, I must determine whether the provisions of the Uniform Commercial Code apply to the case. However, I conclude that I need not undertake this analysis because, for the reasons stated in the previous section, I am not persuaded that Radius' course of performance is inconsistent with the contract, nor am I persuaded it demonstrates that in the absence of a Radius objection, DFS was entitled to pass through deductions claimed by distributors. Radius' internal procedure, upon receipt of a debit memo, was to designate this amount as a placeholder, an outstanding amount. (Cox Tr. Testimony). Communications between the parties show that Radius believed money was due and owing. (Tr. Exhs. R-68, R-69, R-70, R-186, R-72, R-73). As a rule, Radius did not allow the debits to be passed through automatically, only with corresponding credit memos. (Cox Tr. Testimony). Regardless whether the UCC correctly applies to the facts of this case, I cannot find that Radius' course of performance is sufficient to contradict or undermine the express terms of this contract.
d. Equitable Estoppel
Colorado's law on equitable estoppel is as follows:
There are four basic elements to a claim of an estoppel, all of which must be established by the party claiming the estoppel: the party to be estopped must know the relevant facts; the party to be estopped must also intend that its conduct be acted on or must so act that the party asserting the estoppel has a right to believe the other party's conduct is so intended; the party asserting the estoppel must be ignorant of the true facts; and the party asserting the estoppel must detrimentally rely on the other party's conduct. Department of Health v. Donahue, 690 P.2d 243, 247 (Colo. 1984).Johnson, 761 P.2d at 1146. A "clear showing" must be made as to each of the above elements. See Jefferson County School District v. Shorey, 826 P.2d 830, 841 (Colo. 1992).
As with its defense of waiver, DFS failed to prove that Radius should be equitably estopped from asserting the contract or objecting to the inter-office transfers. DFS has not proved that Radius was aware of all of the relevant facts. Further, Radius was not shown to have intended that its conduct be acted upon in the manner that DFS acted. Finally, the letters of Ms. Christie and Mr. Chow show that DFS was not ignorant of the true facts in this case.
e. Debt-for-Equity Swap
In the Summer of 1996, Radius and Merisel entered into negotiations to reconcile their accounts through what the parties refer to as the "debt for equity swap." (Tr. Exhs. R-91, R-91A, R-91B). This swap involved Radius' repayment to Merisel for outstanding credits owed to Merisel through the issuance of an equivalent amount of Radius' stock. DFS argues that it is a beneficiary of this agreement between Merisel and Radius, and that the debt for equity swap should have cleared all of its responsibility for the inter-office transfers.
The scope of a release or settlement is governed by the intent of the parties to the release. See Cruz v. Benine, 984 P.2d 1173, 1179-80 (Colo. 1999) (under the "intent rule," the scope of a general release is dependent upon the intent of the parties who negotiated the release."). If the parties did not intend for the release to extend to third parties, then no third party can claim the benefit of the release. See id. (holding that petitioners' claims were not precluded by the release because "there is no indication that the settlement was intended to release the respondents in the instant case from liability.").
In the debt for equity swap with Merisel, Radius satisfied certain debts allegedly owed to Merisel, and the parties exchanged mutual releases. (Tr. Exh. R-91). DFS was in no way a party to the debt for equity swap between Merisel and Radius. DFS has not shown that it was a third-party beneficiary of this contract or that it was intended to be benefitted in any way. The compromise and settlement between Radius and Merisel underlying the debt for equity swap did not release or settle Radius' claims against DFS. Therefore, I find and conclude that DFS cannot benefit from the debt for equity swap.
In this same vein, to the extent DFS argues that the debt for equity swap frees up $314,839.00 that should further benefit DFS (Zeeb Testimony) (Tr. Exh. D-1146D), I disagree and do not give DFS credit for this amount. At best, this argument is a weak attempt to give DFS the benefit of Merisel and Radius' bargain and, at worst, DFS' argument represents an egregious attempt at double-dipping.
2. Other Amounts Claimed by DFS
In his analysis, Mr. Zeeb breaks out two further amounts that DFS claims are due and owing to it. (Tr. Exh. D-1146D). Both fall under the SMR/Computize Account. The first is for $53,187.00 and represents an amount paid on an August 25, 1995 VNIF. The second is for $47,974.00 and represents an amount allegedly not approved by DFS for financing. I do not allow DFS credit for either amount.
During trial, Mr. Zeeb testified as to the $53,187.00, which is the sum of various amounts appearing on Attachment 14 to Mr. TenBrook's report and the August 25, 1995 VNIF. (Tr. Exh. R-254N) (Tr. Exh. D-151). Mr. Zeeb's stated theory of recovery for this amount is that in the absence of evidence showing the illegitimacy or invalidity of these debit memos they should be applied to reduce the amount shown due and owing to Radius. (Zeeb Testimony). However, DFS failed to introduce any evidence, through Mr. Zeeb or otherwise, to show debit memos or other documents supporting any of these debit deductions. Besides this lack of evidentiary support, DFS also fails to prove that these deductions met the contractual requirements. (Tr. Exh. R-9A). There has been no showing of any authorization or approval by Radius as required by the contract. For these reasons, I do not allow this deduction in DFS favor.
Mr. Zeeb also testified to the second amount of $47,974.00. This number is also the sum of various numbers appearing on Attachment 14 to Mr. TenBrook's report. (Tr. Exh. R-254N). Mr. Zeeb testified that he subtracted this amount from that due and owing to Radius because he found no evidence that those invoices were approved by DFS for financing. (Zeeb Testimony). However, Radius proved that each invoice making up the $47,974.00 was accompanied by a DFS approval number. (Tr. Exhs. R-54B-1, R-54B-2). Because each of these at-issue invoices was authorized by DFS, I do not allow DFS to take this deduction.
3. Amounts Conceded by DFS
Through Mr. Zeeb's analysis, DFS admits that it owes Radius $101,188.00 and $129,872.00 (transactions 1041614 and 1041615) for the MicroAge transaction and a reversal of double payments. (Tr. Exhs. D-1146D, D-154, D-131, D-141). Therefore, I add $231,060.00 to the amount that DFS owes Radius.
4. Final Calculations Between IE and Radius
Beginning with the agreed upon starting point provided by DFS' expert Mr. TenBrook, of $2,051,622.00 due and owing to Radius, I subtract $1,234,656.00 as that allocated to IE by Mr. Zeeb. (Tr. Exh. D-1146D). The $816,966.00 difference includes the $687,386.00 DFS inter-office transfer from IE's account. Next, I add to this amount $358,528.00 to account for the Merisel inter-office transfers involving the SMR/Computize and Custom Computer accounts as claimed by Radius. Also, I add $84,069.00 to account for amounts allocated to the DFS bucket in Mr. Zeeb's analysis. Finally, I add $231,060.00 as conceded by DFS. I do not grant any of DFS' contested deductions. Therefore, DFS owes Radius a total of $1,490,623.00.
C. Claims Between DFS and IE
To the extent that DFS continues to assert a cross-claim against IE for indemnification, I conclude that Mr. Zeeb, IE and DFS' shared expert, accounted for any such claim in his appropriations of the money claimed in his bucket-type analysis. (Tr. Exhs. D1146D, P400A). Mr. Zeeb's analysis renders this claim moot.
IV. Award of Prejudgment Interest to Radius
Colorado Revised Statute § 5-12-102 requires me to award prejudgment interest to Radius on the amounts due and owing to it as a result of this Order. This statute states that when money or property has been wrongfully withheld, interest shall be at the rate of eight percent per annum, compounded annually, for all moneys or the value of all property after they are wrongfully withheld to the date of judgment. C.R.S. § 5-12-102(1)(b).
I conclude that the dates that the contracts were terminated between the relevant parties are the dates from which prejudgment interest shall accrue. IE owes Radius a total of $313,795.70. Prejudgment interest shall accrue on this amount, at a rate of eight percent per annum, compounded annually, from the date that IE terminated their DFS financed purchase of goods from Radius, November 1995. (Tr. Exh. R-28). DFS owes Radius a total of $1,490,623.00. Prejudgment interest shall accrue on this amount, at a rate of eight percent per annum, compounded annually, from the date the Floorplan Repurchase Agreement was terminated by DFS in March 1996, when DFS ceased financing Radius. (Tr. Exh. R-190).
Accordingly, IT IS ORDERED that final judgment shall enter:
1. In favor of Radius and against IE upon Radius' counterclaim for breach of contract in the sum of $313,795.70, with prejudgment interest at 8% per annum compounded annually beginning December 1, 1995, which judgment accounts for IE's claim of unjust enrichment;
2. IE's remaining claims and Radius' counterclaim of unjust enrichment are DISMISSED;
3. In favor of Radius and against DFS upon Radius' counterclaims for breach of contract in the sum of $1,490,623.00, with prejudgment interest at 8% per annum compounded annually from April 1, 1996, and in favor of Radius as against DFS upon DFS' counterclaim for breach of contract which counterclaim is DISMISSED;
4. DFS' crossclaim against IE is DISMISSED as moot; and
5. Radius is awarded its costs.