Nature's Prods., Inc. v. NXXI Inc. (In re NXXI Inc.), Case No. 14–CV–8082 (KMK)
| Decision Date | 25 October 2016 |
| Docket Number | Case No. 14–CV–8082 (KMK) |
| Citation | 216 F.Supp.3d 381 |
| Parties | IN RE: NXXI INC., f/k/a Nutrition 21, Inc., et al., Debtors. Nature's Products, Inc., Appellant/Cross–Appellee, v. NXXI Inc., f/k/a Nutrition 21, Inc., Appellee/Cross–Appellant. |
| Court | U.S. District Court — Southern District of New York |
Martin Stein, Esq., Heller, Horowitz & Feit, P.C., New York, NY, Counsel for Appellee/Cross–Appellant
Robert D. Peters, Esq., Gary Robinson, P.A., Miami, FL, Counsel for Appellant/Cross–Appellee
Anthony C. Robinson, Esq., Nature's Product, Inc., Sunrise, FL, Counsel for Appellant/Cross–Appellee
Nature's Products, Inc. ("NPI") and NXXI, Inc. ("NXXI" or "N21" or "Debtor"), each appeal from a final judgment entered by the bankruptcy court (Hon. Robert J. Drain) on July 2, 2014. For the reasons given herein, both appeals are denied and the judgment of the bankruptcy court is affirmed.
This adversary proceeding arose out of the business relationship between Walgreen Co. ("Walgreen") and two of its former vendors, N21 and NPI. Below are certain relevant facts that, unless qualified or otherwise noted, are not seriously in dispute among the Parties.
Beginning in May 2006, N21 sold two categories of dietary supplements to Walgreen, which Walgreen then resold to its customers. (Br. of NXXI, Inc. ("N21 Br.") 5 (Dkt. No. 26); Appellant's Initial Br. ("NPI Br.") 4 (Dkt. No. 23).) The first category, "Branded Products," were sold under N21 brand names, such as Iceland Health and Prescriptix. (N21 Br. 5; see also NPI Br. 4.) The second category, "Private Label Products," were sold under Walgreen brand names such as Finest Natural. (N21 Br. 5; see also NPI Br. 4.) Branded Products were sold to Walgreen on a guaranteed basis, meaning that Walgreen could return Branded Products at any time for a full refund. (Tr. Decl. of Scott Minger ("Minger Decl.") ¶ 9 (Dkt. No. 151, 11–AP–8367 Dkt.).) Although Private Label Products were not sold to Walgreen on a guaranteed basis, Walgreen regularly made claims and took deductions against N21's open invoices for damaged, defective, or expired Branded Products and Private Label Products. (N21 Br. 5 (citing Trial Exhibit ("TE") 1; TE 24).)
It is undisputed that, during the course of N21's and Walgreen's business relationship, N21 received complaints from vendors (including Walgreen) and consumers about various products provided by N21 to Walgreen, (see, e.g. , N21 Br. 5–6; NPI Br. 12–13), although the Parties disagree about the degree to which the product-related complaints resulted in the deterioration of the relationship between N21 and Walgreen.
In the fall of 2009, NPI and N21 began to negotiate for the purchase of N21's retail and direct response businesses, the former of which is involved in this Adversary Proceeding. (N21 Br. 6 & n.4.) NPI and N21 signed a non-binding letter of intent on October 14, 2009 for the purchase by NPI of N21's business. (TE 151.) The letter of intent stated that NPI would be provided with certain information about N21's business at NPI's request and that NPI would be permitted to speak to N21's clients, customers, and employees. (Id. ¶ 5.)1
Jose Minski, President of NPI ("Minski"), and Michael Zeher, President of N21, negotiated the ultimate Asset Purchase Agreement ("APA") that resulted in the sale of N21's retail business to NPI. (N21 Br. 6, 9.) The APA was signed on December 29, 2009, and the closing occurred on the same date. (Id. at 9; see TE 31 ("APA").)
Pursuant to the APA, NPI agreed to purchase all of N21's accounts receivable, excluding those listed on the Working Capital Adjustment Schedule attached to the APA as Exhibit 1.5. (APA § 1.1(b).) Exhibit 1.5 excluded from the assets being sold all accounts receivable that were outstanding for more than 90 days, and all accounts receivable for any customer whose invoices outstanding for more than 90 days represented more than 25% of the customer's total outstanding balance. (APA Ex. 1.5.) Although more than 25% of N21's accounts receivable from Walgreen were more than 90 days old, NPI agreed to purchase (as provided for in Exhibit 1.5) $209,717.88 in unspecified Walgreen accounts receivable. (Id. )
Pertinent to this proceeding, the APA contained a provision requiring NPI to assume certain liabilities post-closing. The provision reads, in pertinent part:
Assumption of Liabilities . The Buyer shall assume (i) the Seller's trade accounts payable for the Business as of the Closing, specifically excluding payables which are subject to litigation against the Seller, (ii) present and future obligations of Seller under the Assigned Contracts, (iii) and any existing or future claims by retailers for returns and allowances, charge backs, "unsalables" and promotional allowances, or equivalent deductions or charges however called, whether known on [sic] unknown and (iv) any future product liability claims in respect of any Product sold by Buyer after Closing excluding sale of Seller's existing Inventory sold and delivered to Buyer hereunder (collectively "Assumed Liabilities")....
(APA § 1.3(a) (emphasis added).)
Following the closing of the APA, Walgreen dealt directly with NPI and began to purchase from NPI the same products it had previously purchased from N21. (N21 Br. 10; see also Minger Decl. ¶ 48.) In February 2010, Walgreen asked NPI to accept the return of five Branded Products that N21 had sold to Walgreen. (Trial Transcript ("Trial Tr.") 46–47.) As part of a pre-trial ruling on various motions for summary judgment, Judge Drain found that NPI had accepted the goods and was thus liable to Walgreen for the cost of the goods. (See Oct. 15, 2012 Hr'g Tr. 79–81 (Dkt. No. 133, No. 11–AP–8367 Dkt.).)
Around the same time, Walgreen received complaints from customers regarding a Private Label Product called Advance Joint Relief ("AJR"). (See N21 Br. 11; see also NPI Br. 13–14.) Walgreen demanded that NPI agree to a recall of AJR products, at NPI's expense. (See N21 Br. 11; Minger Decl. ¶¶ 56–58; NPI Br. 13–14.) According to Scott Minger ("Minger"), the Walgreen manager responsible for Walgreen's relationship with NPI, NPI "refused to accept responsibility for the recalled AJR," and "NPI's refusal to compensate Walgreen[ ] for the [ ] defective [AJR] led to the termination of NPI as a vendor." (See Minger Decl. ¶¶ 2, 57–58.)
On May 24, 2011, Walgreen filed suit against N21 and NPI in the United States District Court for the Northern District of Illinois, seeking to collect approximately $1.6 million allegedly owed to it for damaged, recalled, and out-of-date products sold by N21 and NPI. (See Compl. (Dkt. No. 1, No. 11–CV–3493 (N.D. Ill.) Dkt.).) On July 14, 2011, N21 answered and filed both a counterclaim against Walgreen and a cross-claim against NPI. (See Answer, Counterclaim, and Cross–Claim (Dkt. No. 14, No. 11–CV–3493 (N.D. Ill.) Dkt.).) N21's counterclaim sought payment from Walgreen for outstanding invoices, and its cross-claim sought indemnification from NPI pursuant to APA § 1.3(a). (Id. ¶¶ 43–51.) On August 31, 2011, NPI filed its own answer and counterclaim against Walgreen for unpaid invoices, (see Answer and Counterclaim (Dkt. No. 33, No. 11–CV–3493 (N.D. Ill.) Dkt.)), and on November 30, 2011, filed an answer and counterclaim against N21 alleging claims for fraud, rescission, breach of contract, indemnification, breach of the implied covenant of good faith and fair dealing, breach of the implied warranty of merchantability, violation of Florida's Deceptive and Unfair Trade Practices Act, and attorneys' fees, (see Answer and Counterclaim (Dkt. No. 5, No. 11–AP–8367 Dkt.)). Shortly thereafter, N21 filed an amended answer, counterclaim, and cross-claim on December 6, 2011, (see Am. Answer, Counterclaim, and Cross–Claim (Dkt. No. 11, No. 11–AP–8367 Dkt.)), and on December 20, 2011, NPI filed its own amended answer and counterclaims, (see Am. Answer and Counterclaim (Dkt. No. 14, No. 11–AP–8367 Dkt.)).
In the midst of the filing of these various pleadings, on August 26, 2011, N21 filed a voluntary petition pursuant to Chapter 11 in the Bankruptcy Court for the Southern District of New York. (See Voluntary Pet. (Dkt. No. 1, No. 11–BK–23712 Dkt.).) As a result, the existing suit between the Parties was transferred to Judge Drain. (See Stipulation and Order (Dkt. No. 1, No. 11–AP–8367 Dkt.).)2
By Order dated November 26, 2012, the bankruptcy court granted partial summary judgment on the Parties' summary judgment motions, for the reasons stated on the record at an October 15, 2012 hearing. (See Am. Mem. of Decision After Trial ("Order") 3 (Dkt. No. 204, 11–AP–8367 Dkt.).) Specifically, Judge Drain ruled "(1) in favor of Walgreen against NPI in the amount of $1,260,549.02, comprising (a) the so-called ‘authorized return’ of five ‘branded’ products by Walgreen to NPI in the amount of $1,179,5[9]9.02, and (b) a related authorized price reduction of $80,950, and (2) in favor of Walgreen against NXXI for chargebacks in the amount of $156,839.57 based on Walgreen's reason codes ‘DDLS, DCOU, PA, and SVCL’ (deals, coupons, price adjustments based on audit[,] and miscellaneous store claims), which were not contested by NXXI." (Id. ; see also Order on Walgreen Co.'s Mot. for Partial Summ. J. (Dkt. No. 134, No. 11–AP–8367 Dkt.).)3
After a bench trial, the bankruptcy court issued a Memorandum of Decision addressing the remaining claims on May 28, 2014. (See Order.)4 Relevant to this appeal, and as will be discussed in greater detail below, Judge Drain held that: (1) NPI was liable to N21 for $155,445.10 in chargebacks for which the bankruptcy court had held N21 liable to Walgreen, based on § 1.3(a) of the APA, (Order 17–18); (2) NPI's breach of contract claims failed because NPI did not establish that any damages were proximately caused by the alleged breaches and alternatively because NPI did...
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