Walgreen Co. v. Nxxi Inc. (In re Nxxi, Inc.)
| Decision Date | 02 July 2014 |
| Docket Number | Case No. 11-23712 (RDD),Adv. Pro. No. 11-08367 (RDD) |
| Parties | In re: NXXI, Inc., f/k/a Nutrition 21, Inc., et al., Debtors. Walgreen Co., Plaintiff v. NXXI Inc., f/k/a Nutrition 21, Inc., and Nature's Products, Inc., Defendants |
| Court | U.S. Bankruptcy Court — Southern District of New York |
In re: NXXI, Inc., f/k/a Nutrition 21, Inc., et al., Debtors.
Walgreen Co., Plaintiff
v.
NXXI Inc., f/k/a Nutrition 21, Inc., and Nature's Products, Inc., Defendants
Case No. 11-23712 (RDD)
Adv. Pro. No. 11-08367 (RDD)
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
Dated: July 2, 2014
Appearances:
Lowenstein Sandler, LLP, by John K. Sherwood and Frank T. M. Catalina, for Walgreen Co.
Heller, Horowitz & Feit, P.C., by Martin Stein, for NXXI, Inc.,
Carlton Fields, P.A. by Alan Rosenthal and Natalie J. Carlos for Nature's Products, Inc.
Robert D. Drain, United States Bankruptcy Judge
In this adversary proceeding, plaintiff Walgreen Co. ("Walgreen") asserts chargeback claims against two of its former vendors, defendants NXXI, Inc., f/k/a Nutrition 21, Inc., the debtor herein ("NXXI") and Nature's Products, Inc. ("NPI") for outdated, defective and
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otherwise unsalable products, as well as for merchandise it claims an absolute right to return, and based on specific deals, such as discounts, coupons and promotional allowances. In turn, NXXI and NPI seek to collect invoices owed them by Walgreen, the amount of which, Walgreen contends, is exceeded by its claimed chargebacks. In addition, NXXI seeks to enforce NPI's assumption, under an asset purchase agreement between NXXI and NPI, dated December 29, 2009 (the "APA"), of NXXI's obligations, if any, to Walgreen for chargebacks, and NPI asserts a claim against NXXI for breach of the APA.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(a) and (b)(1) and 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). Given that this adversary proceeding was necessary to decide the claims of Walgreen and NPI asserted against the chapter 11 estate of NXXI, the debtor herein, which on their face exceed the amount of NXXI's claims against them, the Court has the power to enter a final order resolving this adversary proceeding. Stern v. Marshall, 131 S. Ct. 2594, 2617 (2011); Langenkamp v. Culp, 498 U.S. 42, 44 (1990). In any event, the parties have consented to this Court's entry of such an order. Dynegy Danskammer, LLC v. Peabody COALTRADE Int'l Ltd., 905 F. Supp. 2d 526, 530 (S.D.N.Y. 2012); Executive Sounding Bd. Assocs. v. Advanced Mach. & Eng'g Co. (In re Oldco M Corp.), 484 B.R. 598, 606-08, 614 (Bankr. S.D.N.Y. 2012) (Congress has not precluded the Article III, district courts' determination of any class of cases, proceedings and matters referred by the district courts to the Article I, bankruptcy courts; therefore, the bankruptcy courts' exercise of jurisdiction on consent does not implicate a non-waivable, structural constitutional right.).
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This Memorandum of Decision sets forth the Court's findings of fact, conclusions of law and rulings on the remaining issues in this adversary proceeding after a three-day trial and reflects the Court's review of the trial record2 as well as the parties' post-trial proposed findings of fact and conclusions of law.
Certain issues were resolved before the start of the trial.
By Order dated November 26, 2012 [Doc. 134], the Court granted partial summary judgment, for the reasons stated by the Court in its bench ruling, on the parties' partial summary judgment motions3 (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 $1,179,559.02, 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.
The Court also concluded when deciding Walgreen's motion for partial summary judgment that Ill. Comp. Stat. 5/2-210(5)4 does not give Walgreen the right to demand, on a delegation theory, NPI's performance of Walgreen's chargebacks to NXXI based on NPI's undertaking to NXXI in the APA to assume such obligations. Rule 56 Tr. at 82-3. That is because the APA is, on its face, not merely or primarily a sale of goods transaction and, therefore, is outside the scope of Article 2 of the UCC. Id. This conclusion is also the law of the
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case for any other arguments premised on Article 2 of the UCC applying to claims based on the APA.
By Order dated January 18, 2012 [Doc. 137], the Court granted partial summary judgment in favor of NXXI dismissing Walgreen's claim against it for the $1,179,559.02 "authorized return" and the related $80,950 agreed price reduction. The Court concluded, for the reasons stated in its bench ruling on the parties' summary judgment motions,5 that the "authorized return" and agreed price reduction were separately bargained between Walgreen and NPI and that the "authorized return" was made to NPI, not to NXXI; therefore, only NPI, and not NXXI, is liable to Walgreen for these claims.
In addition, after Walgreen closed its case on its claims, the Court granted NXXI's motion under Fed. R. Bankr. P. 7052, which incorporates Fed. R. Civ. P. 52(c), on another category of Walgreen's claims against NXXI, the so-called "expired/out-of-date" chargebacks. The Court concluded, for the reasons stated in its bench ruling on NXXI's Rule 52(c) motion,6 that Walgreen could not establish a claim against NXXI for the chargebacks recorded by its store personnel based on allegedly expired/out-of-date inventory. Although the Court gave a lengthy bench ruling on this point, two fundamental considerations underlie the decision. First, Walgreen and NXXI had no meeting of the minds regarding the criteria to determine expired or out-of-date inventory that could be destroyed at the store level and charged back to NXXI. Indeed, not only did Walgreen never communicate the criteria for its "expired/out-of-date" policy to NXXI or NPI,7 but also Walgreen internally applied inconsistent and differing criteria for "expired/out-of-date" product, ranging from the actual expiration date to 30 days, 60 days
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and 90 days before the actual expiration date,8 with the distinct possibility of substantial product remaining on the shelves for substantial periods within 90 days of the expiration date;9 and Walgreen's written "unsaleables" policy specified no specific date. 10 Second, the sole basis at trial for Walgreen's assertion of "expired/out-of-date" chargebacks against NXXI was whether the item was listed by Walgreen store personnel as having been taken off the shelves and destroyed at the store level for being within 90 days of its expiration date (no lot numbers or actual expiration dates were ever recorded by Walgreen);11 thus, unless the Court accepted the 90-day rubric as reasonable and consistently applied, which the Court did not for the reasons stated in its bench ruling, Walgreen had not introduced evidence of any subset of such products that would fall within a reasonable and consistent "expired/out-of-date" policy. Thus, Walgreen failed to prove its damages beyond speculation for this category of chargebacks.
In its Rule 52(c) motion, NXXI also prevailed against Walgreen on Walgreen's claim for $47,507.74 of chargebacks for returned products or products shipped to and destroyed at Walgreen's distribution center. Id. at 420-21. Walgreen apparently conceded that it did not have a claim under its agreements with NXXI for all but roughly $6,00012 of this sum, but, in any event, neither the controlling letter agreements13 nor testimony regarding the business practices between Walgreen and NXXI showed an agreement permitting the return or the removal to and destruction of product at Walgreen's distribution center, as opposed to destruction at the store level under the so-called "1506 program." Tr. at 420-21.
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For the same reasons, NPI prevailed on its own Rule 52(c) motion with respect to Walgreen's (a) "expired/out-of-date" chargebacks and (b) the $47,507.74 claim. Walgreen based these claims against NPI on NPI's having assumed NXXI's obligations to Walgreen in some manner other than NPI's undertaking to NXXI in the APA, which, for these categories of chargebacks, was not established. Id. at 524-25, 536, 539.
Finally, the parties have waived certain claims.
Walgreen conceded that it could not establish whether $186,465 of its chargeback claims were for NXXI or NPI products, and, therefore, that it could not prove such claims against either NXXI or NPI (it appears that a substantial portion of these chargebacks also fall into the "expired/out-of date" category and, therefore, were not established, in any event, but this was a separate basis for granting both NXXI's and NPI's Rule 52(c) motions on these claims). Id. at 421-22, 524-25. Walgreen also conceded that it owes NXXI for unpaid invoices aggregating $504,323.51 before chargebacks ($714,041.39 minus $209,717.88 of Walgreen accounts receivable sold by NXXI to NPI under the APA)14 and that it owes NPI for unpaid invoices, before chargebacks, aggregating $908,763.96 ($699,046.08 of post-APA open invoices plus $209,717.88 of Walgreen accounts receivable purchased by NPI from NXXI under the APA).15
NXXI...
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