American East India Corp. v. Ideal Shoe Co.

• Decision Date: 16 July 1975
• Docket Number: Civ. A. No. 71-856.
• Citation: 400 F. Supp. 141
• Parties: AMERICAN EAST INDIA CORPORATION v. IDEAL SHOE COMPANY.
• Court: U.S. District Court — Eastern District of Pennsylvania

400 F. Supp. 141

AMERICAN EAST INDIA CORPORATION v. IDEAL SHOE COMPANY.

Civ. A. No. 71-856.

United States District Court, E. D. Pennsylvania.

July 16, 1975.

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Donald K. Joseph, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for plaintiff.

Richard M. Rosenbleeth, Blank, Rome, Klaus & Comisky, Philadelphia, Pa., for defendant.

MEMORANDUM AND ORDER

CLIFFORD SCOTT GREEN, District Judge.

I.

This is a contract action for goods sold and delivered. However, the action is considerably complicated by the involvement, in the transactions which are the basis of this lawsuit, of another company, which originally received the purchase order for goods sold and delivered and the factor of this latter company.

Plaintiff, American East India Corporation (American), delivered goods to the defendant, Ideal Shoe Company (Ideal), and defendant paid the monies due, minus a deduction for estimated damaged and/or inferior goods, to a third party factor, Commercial Trading Corporation (Commercial). Commercial was the factor for a fourth party, Walker Trading Corporation (Walker), which had originally received purchase orders for goods, identical to those delivered to the defendant by plaintiff.

We hold that American is entitled to judgment against Ideal for the invoice price, diminished by a subsequently specified amount, consisting of a charge back for damaged and/or inferior goods and an amount representing damages for conversion of the contract right in issue, comprised of the purchase orders referred to above¹.

II.

A.

The parties and other characters to the drama are as follows.

Plaintiff, American, is incorporated in the State of New York and has its principal office in New York City. Its president, at all times material hereto, was and is Eugene Connelly, who has been in the export-import business since 1938, except for a four and one-half year hiatus from 1940 to 1945, while he was in the Quartermaster Department of the United States Army. Mr. William Fleming was an administrative assistant to Connelly from 1963 to 1970 when he left American. Mr. Henry Baccash was, at the relevant times involved, the controller of American and is now its vice-president. Allan Fudell, another American officer, was the only person at American, other than Connelly, with signing power for the corporation.

Defendant, Ideal is a corporation organized under Pennsylvania Law, as a wholly-owned subsidiary of Food Fair Stores, Inc., with its principal office in Philadelphia, Pennsylvania.

Walker was formed in 1964 and was in the business of importing footwear from the Far East. From its inception, Walker was factored by Commercial. William Lynn was the principal in Walker and, during its entire period of operations, Walker was essentially a one-man sales operation. Lynn, himself, had been engaged in the import business prior to 1964 and previously had been the principal in an operation similar to that of Walker. At the time of trial, Lynn was a salesman for a corporation in the import business. Bernard Reicher was the secretary of Walker and, along with Lynn, the owner of Walker. Mr. Patrusky was Walker's accountant. Both Reicher and Patrusky knew people at Commercial and this relationship led Lynn and Walker to Commercial. Reicher had left Walker by approximately the beginning of 1967; Patrusky did not work for Walker from August, 1967 on. Nathan Fisher, a personal friend of Lynn's was instrumental in bringing Walker and American together; although Fisher himself had no formal connection with Walker. Mr. Fisher, at the time of trial, was a buyer in the Far East. He has been in the import business for about 15 years and associated with numerous companies during this time; including pertinently the Woodbine Company.

Commercial is a corporation in the business of commercial financing. Mr. Gerald J. Grossman, an attorney, is vice president, secretary and treasurer of Commercial. Mr. Grossman handled most or all of the transactions between Commercial and Walker and was a member of the committee which followed the Walker account.

B.

Commercial financed Walker continuously from February 19, 1964, when they entered into a financing agreement, until at least July, 1967. Walker ordered goods from overseas manufacturers in the Orient to fulfill orders it had received from domestic corporations. Commercial financed Walker's overseas purchases by taking out letters of credit to cover the manufacturing orders. Commercial also made advances to Walker to cover Walker's payroll and other expenses.

A letter of credit is a financing device which permits parties separated by great distances to deal with one another with assurance. The financier opens a letter of credit with its bank which letter provides for payment upon receipt of documents. The foreign manufacturer draws on the letter of credit from a designated foreign bank, and at that time delivers documents as required by the letter of credit. These documents are forwarded to the bank issuing the letter of credit, which delivers them to the purchaser of the goods, upon payment of the amount drawn against the letter of credit.

The Walker-Commercial agreement is dated February 19, 1964 and is signed by Lynn for Walker and by Grossman for Commercial. Essentially, the basic document provides for the purchase of Walker accounts by Commercial². Stapled to the back of the first page of the basic document is a small piece of paper, an apparent zerox copy, which is dated 2-19-64, by hand. This paper is entitled, "Rider To Accounts Receivable Agreement", and states that as additional security for all advances made to and to be made, Walker grants to Commercial a security interest in all present and future accounts and contract rights³. A financing statement with respect to this agreement, was filed on September 16, 1964 and appropriately renewed. This statement tracks the language of the rider and the proceeds box thereon is checked. This statement is signed by Grossman for Commercial and Reicher for Walker. The financing statement was filed on the first day, after the enactment of the Uniform Commercial Code (Code) in New York, McKinney's Consol.Laws, c. 38, on which such statements could be filed and was appropriately renewed so that the financing statement was in compliance with Article 9 of the Code at all times pertinent hereto⁴.

The basic document reflecting the agreement between Walker and Commercial, was a form in existence prior to the adoption of the Code. After the Code was adopted in 1962, Commercial drafted the rider for attachment to its pre-Code document. The purpose of the rider is to obtain for the moneylender the maximum protection and interest permitted under Article 9 of the Code. Although Mr. Grossman's direct testimony did not, in any way, establish that the rider was attached by agreement, rather than independently by Commercial after the basic document was signed, his uncontroverted testimony on cross-examination makes it clear that the rider was attached to the basic document when the agreement was executed by Lynn for Walker.

The parties' course of dealing under their agreement can be summarized as follows. Lynn, on behalf of Walker, would obtain an order for goods from a domestic seller. Lynn would then send the details to an agent or factory overseas and he would receive the orders back with a price from the Orient, and he would submit these documents to Commercial with an application for a letter of credit. Grossman would review the application and determine whether or not they would finance the transaction. Grossman testified there generally was a varying margin requirement, although Lynn's memory was less than clear as to whether or not margin was required regularly. Margin is a portion of the face amount of the letter of credit that is used as a deposit. If Commercial approved the transaction, it would pledge its credit to the bank so that the bank would pay on the presentment of documents covering the goods. The receivables generated by delivery of the goods to the customer would be turned over to Commercial by Walker or paid directly to Commercial, in which case the Walker invoices would be marked payable to Commercial.

C.

On July 22, 1967, Walker received purchase orders for the footwear involved in this dispute from Ideal. The footwear, covered by the purchase orders, was to be imported from the Far East. At about the same time, Walker received another large order from C. R. Anthony. In sum, Walker needed a letter of credit in the amount of $54,000.

In August of 1967, Lynn first requested a letter of credit to cover these orders from Gerald Grossman of Commercial. There were several conversations between Lynn and Grossman concerning the request for a letter of credit. Grossman refused to provide a letter of credit without placement of additional margin by Walker. Specifically, Gerald Grossman, with whom Lynn negotiated, insisted upon a 50% margin — requiring in this instance $27,000. Moreover, this amount of margin was not the only condition. Grossman also required that the Walker account be brought "more properly in perspective". This comment is explained by Grossman's testimony that Walker was not operating as profitably as Commercial would have liked, the merchandise had not been of adequate quality, and some customers had not received merchandise. The evidence supports a finding that, at about this time, Walker was not paying the bills required to get the merchandise to customers, and that Commercial, itself, was taking an active role in arranging for the delivery of goods, etc.

Mr. Lynn's attempts to raise funds to meet the margin requirement failed, notwithstanding his misperception that the required margin was $10,000. The only real attempts to raise the money was through private channels which proved unavailing. This approach is not...