Opinion
No. 98 Civ. 4083 (JFK).
March 5, 2004
TEICH, GROH, FROST AND ZINDLER, Barry W. Frost, Esq., Mercerville, Trenton, NJ, for Plaintiff D. Klein Son, Inc.
HENRY K. HUI ASSOCIATES, Ken MacDonald, Esq., Bank of East Asia Building, Richmond Hill, Ontario L4B, for Defendants Good Decision, Inc., and Good Decision, Ltd.
FINDINGS of FACT CONCLUSIONS of LAW
I. INTRODUCTION
Plaintiff D. Klein Sons, Inc., ("D. Klein") brings this breach of contract claim against Good Decision, Inc., ("GDI") and Good Decision, Ltd. ("GDL"). D. Klein alleges that GDI and GDL breached a contract to buy and sell goods by delivering several shipments of goods late, in defective condition, or not at all, and seeks damages of over five million dollars.
GDI and GDL assert several defenses. First, GDL claims that this Court has no jurisdiction over GDL because GDL is a Hong Kong corporation with no contacts in New York that would subject it to personal jurisdiction in New York. Also, according to defendants, D. Klein has received several shipments of goods for which it has never paid, or has paid only in part. The agreed-upon purchase price of these goods, defendants say, should be applied as a set-off against any damages that may be awarded to plaintiff.
A trial was held before this court on April 30 and May 1, 2, 5, 6, 8, 12, and 13, 2003. Post-trial submissions were received on or around June 23, 2003. Counsel for both parties delivered their summations on July 17, 2003. Testifying at trial for plaintiff was Nathan Rothschild ("Rothschild"), the former corporate officer of D. Klein. See Tr. at 26. For the defendants, Theresa Che ("Che") and Jeffery Chafetz ("Chafetz") testified. Che is a former administrator for GDI, Tr. at 359, and is also the niece of Dominic Chu ("Chu"), the owner of both GDI and GDL. May 12 Tr. at 69; Defendant's Post-Trial Submission ("DPTS") ¶ 12. Chafetz is a former operations manager of D. Klein, who handled customer service, inventory, tracking of shipments, intake of goods, quality control, and other everyday tasks at D. Klein. May 8 Tr. at 2-3.
The abbreviation "Tr." refers to the page of the typed transcript of testimony in the case. For the transcripts that do not follow the system of consecutive pagination, the date will be added to the citation.
II. FINDINGS of FACT
Until its liquidation in bankruptcy, D. Klein imported and distributed consumer goods including luggage, briefcases, toiletry bags, computer bags, umbrellas, and similar items. See Tr. at 15, 23-24. D. Klein had offices in New York and in New Jersey. See Tr. at 21-22. Rothschild bought D. Klein in late 1995 or early 1996, eventually became the sole stockholder of D. Klein, and was president of the business until its bankruptcy.See Tr. at 16. Some of D. Klein's clients included the London Fog brand of luggage, the London Fog outlet stores, and the Stern's, Steinmart, Wegman's, and Winners department stores. Tr. at 26-27, 32, 34, 50, 55.
GDI is a Canadian corporation that imports and distributes luggage and promotional consumer goods. Tr. at 360-61. GDL is a corporation located in Hong Kong that manufactures, Tr. at 361, and exports luggage and other goods. DPTS ¶ 1. Because the interdependency of GDI and GDL is an issue in this case, the Court refers to GDI and GDL collectively, where appropriate, as "Good Decision."
D. Klein and Good Decision began working together as early as winter 1996-97. See Tr. at 18. A client of D. Klein sought a quantity of business card holders for use as a party favor. See Tr. at 17. Rothschild found an advertisement for Good Decision in a trade magazine. See Tr. at 17. The advertisement indicated that Good Decision could supply the card holders that the client wanted. See Tr. at 17. Rothschild sent a fax to the Hong Kong address given in the advertisement. See Tr. at 19. The Good Decision representative who responded to the fax told Rothschild that Good Decision had inventory of the item in Canada. See Tr. at 17. In January 1997, D. Klein ordered 3300 business card holders and picked the items up at Good Decision's Canadian warehouse. See Tr. at 17; Exh. A.
The abbreviation "Exh." refers to an exhibit at trial. Numbered exhibits are plaintiff's and lettered exhibits are defendants'.
Afterward, between February 1997 and December 1997, D. Klein and Good Decision entered into more than fifty agreements to buy and sell goods such as computer bags, luggage sets, toiletry kits, and document bags. See Exhs. B-BA. Difficulties arose at the beginning. The second shipment of goods, which was scheduled for delivery on May 30, 1997, was not delivered until between September 15 and December 29, 1997. See Exhs. C, 442A. Succeeding shipments followed the same pattern of missed deadlines, with eight shipments arriving after the scheduled delivery date. See Exh. 442A. Some shipments arrived as late as four months after the agreed date. See Exhs. U, 442A. Rothschild, who had placed orders with Good Decision in response to specific orders and commitments from D. Klein's customers, Tr. at 49, inquired as to upcoming deliveries and expressed his concerns regarding timeliness, but Good Decision did little to expedite the delivery process. See Exhs. HA, HB, HL. According to the exhibits presented at trial, seven orders were never delivered, two orders were delivered only in part, and eight were at least twenty days late. See Exh. 442A.
At certain times in the parties' relationship, Good Decision sent summaries of outstanding orders to D. Klein. These charts indicate that some of the delays were a result of D. Klein's failure to give approval to pre-production samples, a necessary step in the manufacturing process. See Exhs. GN, HH.
One of the problems that arose was Good Decision's inability to obtain quota, a condition that prevented goods from passing through U.S. Customs efficiently. The parties stipulated in part to the following definition of quota:
A permit issued by the government of the People's Republic of China ("PRC"), and obtained from a PRC governmental entity or purchased from an authorized private enterprise or individual, allowing its holder to export to the United States a specified quantity of specified goods for which the United States has imposed a cap on the overall quantity that may be imported into the United States from the PRC in a given year. Such goods cannot be legally imported into the United States without such a permit.
The parties could not agree on the final sentence of this definition: D. Klein wanted to include it and Good Decision wished to omit it. I have included it because it is in logical conformity with the rest of the definition.
While it was the responsibility of Good Decision to obtain quota, Tr. at 27-30, 407, Good Decision experienced extreme difficulties in securing it. See Exh. KR. At several points in their correspondence, Good Decision indicated to D. Klein that shipment would be delayed because Good Decision was looking for quota or because quota was not available. See Exh. HN, KR. At other times, goods were held upon entry into the United States because the goods had been shipped without proper quota papers, or the quota papers had been lost in shipment. Tr. at 27-30. Still other shipments were "embargoed" because of inaccurate labels: One shipment bore "Made in Sri Lanka" labels when the goods had in fact been manufactured in China, and purported to be made of a PVC material when the actual material was not a PVC product. See Tr. at 38, Exh. GZ.
Although not defined by the parties, "PVC" appears to be a type of material from which luggage can be made.
As early as July 1997, D. Klein expressed concern about the quality of the goods that Good Decision manufactured. For example, at least one sample piece from the production line had defects in materials, in sewing and in construction of the handle. See Exh. GH, GK. A facsimile dated September 18, 1997, indicated that certain products had faulty linings, inadequate sewing, and unacceptable PVC trim and handles. See Exh. JJ. An inspection report of the same date showed defects including warped bags, faulty zippers, loose rivets on handles, wrinkling of fabric on sides of bags, visible top stitching, misalignment of outside compartments, and incorrect thread color. See Exh. JI.
D. Klein had to make in-house repairs to many defective items. Tr. at 33-34. In October 1997, D. Klein notified Good Decision that a shipment of goods that D. Klein ordered for Wegman's department store had broken or missing locks. See Exh. KG. Good Decision agreed to send replacement locks to D. Klein's New Jersey office. See Exh. KH. Good Decision also agreed, in February 1998, to send "750 sets of wheels for repairing" to D. Klein. Exh. RU.
Seven orders of goods never reached D. Klein. See. Exh. 442A. At least four of those orders were held for over three months by the Royal Canadian Mounted Police ("RCMP"). Tr. at 53-61. The RCMP seized these shipments of goods because of inaccurate labels: The labels indicated that the country of origin of the goods was Canada when in fact the goods came from China with only minimal assembly performed in Canada. See Tr. at 59-60, 177.
The seizure of goods led to the arrest of Rothschild and employees of Good Decision for attempting to evade United States and Canadian customs laws. Tr. at 55-58. The charges against Nathan Rothschild and the Good Decision employees, however, have been set aside at this time, see Tr. at 58, 188, and there is no indication that the RCMP intends to reinstate the charges.See Tr. at 276.
Despite these myriad problems with shipment, delivery and quality, D. Klein continued to try to work out its differences with Good Decision. In late 1997, D. Klein proposed a joint venture between D. Klein and Good Decision, and promised Good Decision all its 1998 orders. See Exh. JS. D. Klein also made Good Decision its exclusive sales representative for Hong Kong.See Exh. OK. In January and February 1999, D. Klein and Good Decision, through their respective attorneys, attempted to negotiate the purchase of the products that had been held by the RCMP. See Exh. XZ. This purchase never took place because the parties could not agree on a price or on the delivery of the quota papers. See Exh. TT. In the meantime, several of Good Decision's invoices to D. Klein went unpaid. Tr. at 392-94; May 6 Tr. at 54-62; Exh. YH, 446.
Based on the foregoing, the Court finds that Good Decision did breach several of its contracts with D. Klein, and that D. Klein failed to pay for a portion of the goods it did receive.
In the sections that follow, I discuss the propriety of asserting jurisdiction over GDL and GDI, as well as the propriety of holding both GDL and GDI liable for the breach, D. Klein's fraudulent misrepresentation claim, and the damages to be awarded. Before I reach those issues, however, I turn to the interrelationship of GDI and GDL, which is a pivotal factual issue in this case. Defendant GDL argues that it is a separate entity from GDI. Therefore, GDL urges, it is neither subject to the jurisdiction of this Court under New York's Civil Practice Law and Rules ("C.P.L.R."), nor is service of process on GDI sufficient to confer jurisdiction on GDL.
In its post-trial submission, defendants conceded that the same shareholders own both GDI and GDL. DPTS ¶ 12. Chu is the "boss" of both corporations, with employees from both businesses reporting to him, Tr. at 359, 362; May 12 Tr. at 69, 71; May 13 Tr. at 151. He has the authority to sign correspondence for both corporations. Exhs. HF-2, WT.
From the beginning of plaintiff's business relationship with defendants, Chu, Che, and Spencer Luk ("Luk"), acting as representatives of GDI, indicated to Rothschild that GDI and GDL were the same business. Rothschild first learned of Good Decision through an advertisement in a trade magazine. Tr. at 17. When he contacted the Hong Kong address listed in the advertisement, Rothschild was informed that the Good Decision office in Canada could process his request, and the transaction did, indeed, go forward. Tr. at 17-18. Some time later, Rothschild attended a trade show in Hong Kong, where Good Decision had a booth. Tr. at 21. Thereafter, Chu, Che, and Luk visited D. Klein's office in New Jersey. Tr. at 17, 21. Rothschild understood GDI to be a Canadian office of GDL, and no one from GDI or GDL explained the relationship between the two companies to him. Tr. at 25-26. Instead, all three of the Good Decision employees with whom Rothschild had contact referred to the Good Decision factory in China as "our factory." Tr. at 31.
When D. Klein ordered goods from GDI, D. Klein received invoices from both GDI and GDL. See exhs. BL-EG. The GDI invoices and the corresponding GDL invoices demanded identical payment amounts, and did not reflect a mark-up between GDL as manufacturer and GDI as distributor or "middle man." See exhs. BL-EG. In most cases, payment was to be remitted to GDL, even though D. Klein had placed the order with GDI. See exhs. BL-EG. D. Klein, however, usually made payments to GDI, by way of checks made payable to "Good Decision." Tr. at 400; Exhs. UJ-UX. GDI did not return the checks to D. Klein, but rather accepted those payments and deposited them in GDI's own bank account. Tr. at 401-02; May 12 Tr. at 103.
III. CONCLUSIONS of LAW
Personal Jurisdiction
At trial, the plaintiff bears the burden of demonstrating the existence of personal jurisdiction by a preponderance of the evidence. Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120 (2d Cir. 1984) (citing Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 904 (2d Cir. 1981));Dorfman v. Marriott Int'l Hotels, Inc., No. 99 Civ. 10496 (CSH), 2002 WL 14363 at *1, 2002 U.S. Dist. LEXIS 72 at *3-4 (S.D.N.Y. Jan. 3, 2002) (citing Ball v. Metallurgie Hoboken-Overpelt, S.A., 902 F.2d 194, 197 (2d Cir. 1990));Andros Compania Maritima, S.A. v. Intertanker Ltd., 714 F. Supp. 669, 673 (S.D.N.Y. 1989). The law of the forum state determines the exercise of personal jurisdiction in a diversity case such as this. Volkswagenwerk, 751 F.2d at 120 (citingArrowsmith v. United Press Int'l, 320 F.2d 219, 223 (2d Cir. 1963)); see Dorfman, 2002 WL 14363 at *2, 2002 U.S. Dist. LEXIS 72 at *4-5 (citing, inter alia, Whitaker v. American Telecasting, Inc., 261 F.3d 196, 208 (2d Cir. 2001)). Specifically, New York C.P.L.R. §§ 301-02 govern the exercise of personal jurisdiction. N.Y.C.P.L.R. 301-02 (McKinney 2001);Dorfman, 2002 WL 14363 at *2, 2002 U.S. Dist. LEXIS 72 at *5;Andros, 714 F. Supp. at 674. Furthermore, personal jurisdiction must satisfy the constitutional constraints of due process.Dorfman, 2002 WL 14363 at *2, 2002 U.S. Dist. LEXIS 72 at *4 (citations omitted); Andros, 714 F. Supp. at 674.
Under C.P.L.R. § 301, "[a] court may exercise such jurisdiction over persons . . . as might have been exercised heretofore." A foreign corporation, therefore, falls within a court's general jurisdiction when it engages "in such a continuous and systematic course of 'doing business' [in New York] as to warrant a finding of its presence." Koehler v. Bank of Bermuda Ltd., 101 F.3d 863, 865 (2d Cir. 1996) (internal quotations and citation omitted); see Andros, 714 F. Supp. at 675 (referring to the "'doing business' standard" of C.P.L.R. § 301). Section 302 of the C.P.L.R., New York's longarm statute, recognizes jurisdiction in New York over a non-domiciliary if the non-domiciliary "transacts any business within the state or contracts anywhere to supply goods or services in the state" when the cause of action arises from such transaction of business or from such contract. N.Y.C.P.L.R. 302 (a) (1). "Transacting business requires less substantial activity than the general doing business test, but requires a nexus between the activity and the claim." Andros, 714 F. Supp. at 675; see McGowan v. Smith, 52 N.Y.2d 268, 272, 437 N.Y.S.2d 643, 645, 419 N.E.2d 321, 323 (1981) ("[S]ome articulable nexus between the business transacted and the cause of action sued upon [must exist].") Normally, a foreign corporation would not fall within the reach of C.P.L.R. § 301 or § 302 when its only contact with New York is the presence of a related corporation — a parent or a subsidiary — in New York. Volkswagenwerk, 751 F.2d at 120 (citation omitted); Dorfman, 2002 WL 14363 at *2, 2002 U.S. Dist. LEXIS 72 at *6 (citing, inter alia, Jazini v. Nissan Motor Co., 148 F.3d 181, 184 (2d Cir. 1998)). However, in certain instances, "the presence or activities of a subsidiary in New York may be attributed to its parent corporation." Dorfman, 2002 WL 14363 at *2, 2002 U.S. Dist. LEXIS 72 at *6 (citations omitted). If one corporation functions as a "mere department" of a related corporation in New York, then the out-of-state corporation may be subject to jurisdiction in New York. See Volkswagenwerk, 751 F.2d at 120; Dorfman, 2002 WL 14363 at *2, 2002 U.S. Dist. LEXIS 72 at *6.
Courts have held that a balancing of four factors — one essential, three important — establishes whether a given corporation is a "mere department" of another such that a foreign corporation may be subject to jurisdiction on the basis of its subsidiary's doing business in New York. Volkswagenwerk, 751 F.2d at 120. The essential factor is common ownership: The two corporations must have "nearly identical ownership interests."Id. The remaining three factors — financial dependency, the degree of interference in selection and assignment of executive personnel and failure to observe corporate formalities, and the degree of control over the marketing and operational policies of the subsidiary exercised by the parent — while important, need not all weigh in one party's favor. See id. at 120-22; ESI, Inc. v. Coastal Corp., 61 F. Supp. 2d 35, 51-52 (S.D.N.Y. 1999) (citation omitted). Nor is any single factor required. Dorfman, 2002 WL 14363 at *7, 2002 U.S. Dist. LEXIS 72 at *22.
In this case, the first factor has been satisfied. GDI and GDL are both owned by the same shareholders, DPTS ¶ 12, so identical ownership interests are present. As regards the second factor, financial dependency, plaintiff has demonstrated that GDI and GDL were casual at best in their handling of finances. While D. Klein placed orders with GDI, GDL would send two invoices — one from GDI and one from GDL — in the same dollar amount, with payment to be made to GDL. However, D. Klein consistently remitted to GDI checks payable to "Good Decision," and GDI accepted those checks, depositing them in GDI's Canadian bank account.
GDI and GDL also failed to observe corporate formalities. Dominic Chu acted as the "boss" of both corporations: the person to whom all departments in both corporations answered, and one who had authority to sign correspondence for both corporations. Moreover, when D. Klein contacted GDL — by telephone or by a visit to GDL's booth at a Hong Kong trade exhibition — representatives of GDI made follow-up visits to D. Klein's office in New Jersey.
Finally, GDI and GDL exercised a degree of control over the marketing and operational policies of one another sufficient to subject both to the jurisdiction of this Court. GDI and GDL acted as one entity. As noted above, GDI representatives did follow-up work with potential GDL clients. In addition, Chu, Che, and Luk, acting as representatives of GDI, told D. Klein that "their factories" in China would supply the products that D. Klein ordered. For these reasons, the Court holds that GDI and GDL are "mere departments" of one another and, subject to constitutional constraints, both are amenable to this Court's jurisdiction.
In deciding whether the exercise of personal jurisdiction comports with the requirements of due process, the Court must determine whether the defendant has "minimum contacts" with the forum state sufficient to justify the exercise of personal jurisdiction, and whether such exercise is reasonable.Metropolitan Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 567-68 (2d Cir. 1996). To satisfy the minimum contacts requirements for the exercise of general jurisdiction over a defendant, the plaintiff must show that the defendant has "continuous and systematic general business contacts" with the forum. Id. at 568 (quotations and citations omitted). A court's assessment of minimum contacts is "fact-specific and must necessarily be tailored to the circumstances of each case." Id. at 570. A finding of jurisdiction based on the Volkswagenwerk test normally leads to the conclusion that the foreign corporation "has continuous and systematic business contacts" with the forum state. Dorfman, 2002 WL 14363 at *12, 2002 U.S. Dist. LEXIS 72 at *38.
Having established the requisite minimum contacts, the court considers the following factors in determining whether assertion of jurisdiction is reasonable:
(1) the burden that the exercise of jurisdiction will impose on the defendant; (2) the interests of the forum state in adjudicating the case; (3) the plaintiff's interest in obtaining convenient and effective relief; (4) the interstate judicial system's interest in obtaining the most efficient resolution of the controversy; and (5) the shared interest of the states in furthering substantive social policies. Metropolitan Life, 84 F.3d at 568 (citations omitted). Once minimum contacts have been established, a court should be reluctant to find jurisdiction unreasonable: "[D]ismissals resulting from the application of the reasonableness test should be few and far between." Id. at 575.
The close relationship between GDI and GDL demonstrates that GDL has "continuous and systematic general business contacts" with New York sufficient to establish minimum contacts here. Furthermore, the assertion of jurisdiction over GDL is fair and reasonable. D. Klein, when it was operational, had an office in New York, and most of the goods D. Klein ordered from Good Decision — goods with a total value in the millions of dollars — were shipped from GDL in Hong Kong to New York. The plaintiff's and New York's interests in adjudicating the case in this forum thus outweigh the burden that adjudication here imposes on GDL.
For the foregoing reasons, this Court concludes that GDI and GDL operated as one company. Therefore, GDL is subject to personal jurisdiction in this Court.
Additionally, plaintiff's service of process on GDL is sufficient to establish jurisdiction over GDL. See Dorfman, 2002 WL 14363 at *11, 2002 U.S. Dist. LEXIS 72 at *37.
Piercing the Corporate Veil
Because this is a diversity case, the choice of law rules of the forum state, New York, apply. Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131, 137 (2d Cir. 1991). When the parties assume that New York law governs the case, however, a choice of law analysis becomes unnecessary and New York law may be applied. Id.; Walter E. Heller Co. v. Video Innovations, Inc., 730 F.2d 50, 52 (2d Cir. 1984) ("[I]n the absence of a strong countervailing public policy, the parties to litigation may consent by their conduct to the law to be applied."); Stahlex-Interhandel Tr., Reg. v. W. Union Fin. Servs. E. Eur. Ltd., No. 99 Civ. 2246 (RWS), 2002 WL 31359011, at *6, 2002 U.S. Dist. LEXIS 19854, at *15-17 (S.D.N.Y. Oct. 21, 2002) (applying New York law in a case involving Delaware corporations because a Consulting Agreement between the parties so provided and because Delaware law and New York law on the relevant issue were substantially similar). D. Klein and Good Decision, through their submissions, have demonstrated their reliance on New York law, and this Court will, therefore, apply New York law.
The Volkswagenwerk analysis is relevant to, but distinct from, an analysis of the propriety of piercing the corporate veil in order to hold a defendant liable for breach of contract.Dorfman, 2002 WL 14363 at *18, 2002 U.S. Dist. LEXIS 72 at *56 ("[T]he standards for jurisdiction and liability are not necessarily identical."); Andros, 714 F. Supp. at 676 n. 10 ("[Jurisdictional] inquiries are analytically and practically distinct from the merits of a piercing action, although the analysis is obviously related."). Instead, courts employ a
two-part test in determining whether to pierce the corporate veil for purposes of liability. Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997) (discussing the "two-part showing" required under New York law).
First, courts deciding whether to pierce the corporate veil for purposes of liability consider several factors to determine whether one corporation is the "alter ego" of another:
(1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, . . . (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with [each other] at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation . . ., and (10) whether the corporation in question had property that was used by other . . . corporations as if it were its own.Passalacqua, 933 F.2d at 138-39. These factors, again, look for a totality of the circumstances; no one factor is mandatory and no particular number or combination of factors is required to justify piercing the corporate veil. See id.
Second, the party seeking to pierce the corporate veil must demonstrate that such domination was used to commit a wrong, fraud, or breach of a legal duty. Id. at 138 (citing Elec. Switching Indus., Inc. v. Faradyne Elec. Corp., 883 F.2d 418, 424 (2d Cir. 1987)). Courts have held that misuse of the corporate form in an attempt to prevent a judgment creditor from reaching the assets of the corporation constitutes wrongdoing sufficient to satisfy this second requirement. See Thrift Drug v. Prescription Plan Serv. Corp., 1 F. Supp. 2d 387, 388 (S.D.N.Y. 1998) ("[Defendant's] sole reason for creating and maintaining these corporations was to enable him to conduct his personal business in such a manner that no assets used in the business could ever be reached by any creditor."); Freeman v. Complex Computing Co., 979 F. Supp. 257, 259-60 (S.D.N.Y. 1997) (finding wrongdoing where a corporation breached its contract with plaintiff, and then the corporation's equitable owner caused most of the corporate assets to be sold, leaving plaintiff with a claim against a non-functioning company).
The relationship between GDI and GDL exemplifies several of thePassalacqua factors. As noted above, GDI and GDL have been casual about the process of soliciting, shipping, and receiving payment for the orders that D. Klein has placed with them. Ownership completely overlaps, and at least one individual — Dominic Chu — has the same role in both corporations. While the two businesses have different mailing addresses, a telephone call placed to one business would suffice to reach both; indeed, a call to GDL would lead to solicitation by GDI personnel. The two businesses also functioned as one, as evidenced by references to "our factories in China" by GDI representatives. Finally, the laxity with which the two businesses handled billing and the payment of invoices indicates that they were not independent profit centers.
The evidence also demonstrates wrongdoing by defendants that satisfies the second requirement. Good Decision, through its employees (some of whom worked for both GDI and GDL), procured orders for goods from D. Klein. Good Decision then breached its contractual duties by delivering goods late, in poor condition, or not at all. Having caused, through its breach, significant disruptions in D. Klein's business, GDI and GDL then claimed to be related, but independent, corporations, and left D. Klein with a claim against the "middle man" — GDI. Good Decision's actions show an intent to impair D. Klein's ability to seek relief for Good Decision's breach, and, thus, constitute a use of control between related corporations that caused D. Klein's injury.
Allowing GDL to escape liability for its breach of contract would work a significant harm not only on the plaintiff, but on any purchaser who may wish to purchase goods from either business. Good Decision cannot have its cake and eat it, too: enjoying the efficiency of working as a single corporation while also enjoying the protection that the corporate veil affords. This Court concludes that GDI and GDL are one corporation for purposes of both jurisdiction and liability and both, therefore, are liable for the breaches of contract committed toward D. Klein.
Fraudulent Misrepresentation
D. Klein also brings a claim for fraudulent misrepresentation. Specifically, D. Klein alleges that Good Decision misrepresented their ownership of factories, their ability to supply merchandise, their ability to obtain quotas, their ability to timely deliver, their ability to deliver conforming merchandise, and their ability to deliver merchandise that complied with United States and Canadian customs laws. Good Decision argues that the claim for fraudulent misrepresentation is barred under the economic loss doctrine for being duplicative of the breach of contract claim.
"[A] simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated." Clark-Fitzpatrick, Inc. v. Long Island R.R., 70 N.Y.2d 382, 389, 521 N.Y.S.2d 653, 656, 516 N.E.2d 190, 193-94 (1987). Instead, a contracting party's means of redress for economic loss is an action for breach of contract. Shred-It USA Inc. v. Mobile Data Shred, 222 F. Supp. 2d 376, 379 (S.D.N.Y. 2002). For a plaintiff to prevail on a tort claim, therefore, the plaintiff "must allege a breach of a duty that 'spring[s] from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract.'" Carmania Corp. v. Hambrecht Terrell Int'l, 705 F. Supp. 936, 938 (S.D.N.Y. 1989) (quotingClark-Fitzpatrick, 70 N.Y.2d at 389, 521 N.Y.S.2d at 656-57, 516 N.E.2d at 193-94). Furthermore, the rule expressed inClark-Fitzpatrick is "only one of the dikes that New York courts have erected in their inevitable attempt to keep contract law 'from drown[ing] in a sea of tort.'" Carmania, 705 F. Supp. at 938 (quoting East River S.S. Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 866, 106 S. Ct. 2295, 2300, 90 L. Ed. 2d 865 (1986)). When a plaintiff's damages may be remedied under contract law, a remedy under tort law is not available. Id.
D. Klein has presented no evidence to show that its claims are anything other than "simple breach of contract," or that any independent legal duty that Good Decision may have owed D. Klein has been breached. Moreover, plaintiff does not demonstrate that it suffered any damages other than economic damages arising from the breach of contract, nor does plaintiff show that its damages cannot be remedied under contract law. Plaintiff's fraudulent misrepresentation claim is, therefore, dismissed.
Even if plaintiff's fraudulent misrepresentation claim were independent of plaintiff's contract claim, plaintiff has failed to show reliance on defendant's representations. Rothschild admitted that defendant's representations were "made by all people in the industry, otherwise you don't make orders." Tr. at 254-55. Plaintiff's own conduct confirms this view: To the extent that plaintiff largely ignored the claim in its presentation at trial and devoted only two conclusory statements to it in plaintiff's post-trial submissions, the Court concludes that plaintiff has, to a major degree, abandoned it.
Damages
D. Klein seeks damages for lost profits totaling $2,006,500 for the goods that were not delivered, for two years of lost revenue from clients who cancelled their orders, totaling $4,740,000, and for costs in the amount of $100,339.33. Exhs. 442A, 431. Plaintiff admits to owing defendant $1,063,243. Exh. 446. The total amount plaintiff seeks, therefore, is $5,983,596.33. Good Decision asks the Court for a set-off, totaling $3,388,735.40, against any amount that D. Klein may recover. This includes the $1,063,243 that plaintiff admits it owes to Good Decision.
Plaintiff also indicates that it is seeking $200,000 in expenses incurred because of defendant's breach. Exh. 431. However, the "Damages" section of Plaintiff's Post-Trial Submission ("PPTS") does not indicate such a claim for damages, and plaintiff's evidence, specifically exhibits 442A and 446, do not take into account such a claim. Therefore, the Court does not consider this claim.
As noted above, the Court does not consider plaintiff's claim for damages due to fraudulent misrepresentation because the claim is without merit and because plaintiff has largely abandoned the claim.
Under the Uniform Commercial Code of New York ("U.C.C."), a breach of a contract for the sale of goods may entitle the buyer to consequential damages. N.Y.U.C.C. § 2-713(1) (McKinney 2002). The U.C.C. defines consequential damages as follows:
any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise.
N.Y.U.C.C. § 2-715(2)(a). Generally, a buyer may recover lost profits as consequential damages under § 2-715. Coastal Aviation, Inc., v. Commander Aircraft Co., 937 F. Supp. 1051, 1063 (S.D.N.Y. 1996). However, for a buyer to recover lost profits as consequential damages, the buyer must show that the seller had reason to know that the buyer would lose profits and that the lost profits could not have been prevented by cover or otherwise. Happy Dack Trading Co. v. Agro-Industries, Inc., 602 F. Supp. 986, 994 (S.D.N.Y. 1984) (citing N.Y.U.C.C. § 2-715(a)(2)). In most cases where the buyer of goods is in the business of reselling them, resale is a requirement of which the original seller has reason to know. Id. at 994 (citing N.Y.U.C.C. § 2-715 cmt. 6); see John D. Calamari Joseph M. Perillo, Contracts, § 14.22 (4th ed. 1998).
The issue of whether the loss could have been prevented by cover or otherwise represents the embodiment in the U.C.C. of a mitigation principle: If the buyer could have avoided consequential damages by covering, then no consequential damages are allowed. N.Y.U.C.C. § 2-715; Hilord Chem. Corp. v. Ricoh Elecs. Inc., 875 F.2d 32, 38 (2d Cir. 1989) ("New York's Uniform Commercial Code requires a buyer to seek a covering contract as a predicate to recovering lost profits.") (citing Happy Dack, 602 F. Supp. at 994). Courts have held that non-conforming goods and goods that are delivered late or very close to a deadline may render cover impossible when confirmed customer orders exist.Texpor Traders, Inc. v. Trust Co. Bank, 720 F. Supp. 1100, 1114 (S.D.N.Y. 1989).
Under some circumstances, a party may recover for loss of business, loss of clients, or loss of future orders as consequential damages. For a buyer to recover, the seller must have reason to know that the sub-vendee will cancel its account with the buyer. Calamari Perillo, supra, at § 14.22; see Promovoyage, S.A.R.L. v. Bosco, 557 F. Supp. 1366, 1373 (S.D.N.Y. 1983) (noting that plaintiff's loss of an important client due to defendant's breach was reasonable and foreseeable; denying recovery because plaintiff did not show that it would not regain that client's patronage). Damages must not be speculative, and a basis for computing such damages also must exist. Texpor, 720 F. Supp. at 1114 (denying recovery because "no basis exists for computing the amount of damages"); Harbor Hill Lithographing Corp. v. Dittler Bros., Inc., 76 Misc. 2d 145, 148, 348 N.Y.S. 2d 920, 924 (Sup.Ct. Nassau Cty. 1973) (calling claim for loss of account "too speculative").
D. Klein demonstrated lost profits in the amount of $2,006,500. Exh. 442A. Of the more than fifty orders placed, only nineteen are included on D. Klein's list of disputed orders. Exh. 442A. Of those nineteen, D. Klein only claims lost profits as to thirteen of the disputed orders, and for only six of those orders does D. Klein claim a total loss of profits. D. Klein's profit on a given disputed item ranged from $2 per item for a toiletry kit to $100 per set for luggage sets. Despite some typographical errors present in D. Klein's list (for example, order #810 shows 40,000 items missing at a profit of $2 per item yielding lost profits of $8,000), the Court finds Exhibit 442A to be a fair summary of D. Klein's lost profits. If D. Klein had wished to reach for more that it was due, it could have augmented its claim for lost profits by including a greater number of the orders that existed between the parties, or it could have exaggerated the profit per item.
D. Klein's list indicates that Order #824, while not resulting in a loss of profits, was never delivered, thus bringing the total number of undelivered orders to seven. Because the profit on different items varies, the Court will not speculate as to the lost profits, if any, that may have been occasioned by Order #824.
The parties do not dispute that D. Klein is a buyer in the business of re-selling goods. Therefore, resale is a requirement of which Good Decision had reason to know. Mitigation, or cover, was also impossible in this case. When Good Decision delivered goods late and D. Klein's deadlines with its sub-vendees, from whom D. Klein had specific orders, had passed, D. Klein could not reasonably mitigate damages by purchasing replacement goods as cover. Good Decision's mitigation claim is, therefore, denied. D. Klein is entitled to consequential damages of $2,006,500.
D. Klein's claim for loss of business due to clients cancelling their orders is, however, too speculative for this Court to grant relief. D. Klein has not shown that the problems with quality and delivery of Good Decision's products were the determinative factor in those clients' decision to cancel orders with D. Klein. To the extent that D. Klein supplied its clients with goods from other sources, Good Decision cannot be said to have had reason to know that, as a result of Good Decision's breach, a given sub-vendee would cancel its account with D. Klein. Furthermore, D. Klein offered no evidence to show that its sub-vendees were likely to place similar orders or orders in similar dollar amounts that would yield similar profits for D. Klein for the two years that comprise D. Klein's claim. Thus the claim for $4,740,000 due to loss of clients fails, and D. Klein may not recover on that claim.
Good Decision claims a set-off of $3,388,735.40 for D. Klein's unpaid accounts with Good Decision. Of that amount, however, only $2,431,439 has been substantiated through the evidence submitted at trial. See Exh. YH. Furthermore, of that $2,431,439, D. Klein admits to owing $1,063,243. See Exh. 446. D. Klein arrives at this figure by subtracting from the $3,596,585.40 billed to D. Klein $1,165,196 in payments, a $90,000 "DP payment" (to which Good Decision conceded, see DPTS ¶ 41), and $1,278,196 in deductions for goods that were seized, damaged, or otherwise unuseable plus duty and freight charges and handling costs for goods that were recalled or could not be used. With nearly $2.5 million in disputed orders, D. Klein could easily have over-reached and admitted to a much lower set-off than the $1,063,243 that it has conceded. The Court accepts this figure as a fair assessment of the amount D. Klein owes to Good Decision. Therefore, Good Decision is entitled to a set-off of $1,063,243 from D. Klein's damages award of $2,006,500.
IV. CONCLUSION
Good Decision Inc. and Good Decision Ltd. acted as one corporation, entered into contracts to sell goods with D. Klein, and then delivered those goods late, in defective condition, or not at all. D. Klein, as a buyer in the business of resale, suffered damages to its business as a result.
Therefore, D. Klein is entitled to recover $2,006,500 as consequential damages, less $1,063,243 as an offset for goods that Good Decision delivered to D. Klein but for which D. Klein has not paid, thus leaving D. Klein with a net award of $943,257, plus interest from September 1, 1997. See N.Y.C.P.L.R. 5001(b);Esquire Radio Elecs., Inc. v. Montgomery Ward Co., 804 F.2d 787, 796 (2d Cir. 1986) (holding that, when performance of a contract is due over a period of time, a court should choose a "reasonable intermediate date" from which pre-judgment interest should begin to run). Each party shall bear its own costs.
The foregoing constitutes the Court's findings of fact and conclusions of law as required by Federal Rule of Civil Procedure 52(a).