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AMERICAN EAST INDIA CORP. v. IDEAL SHOE CO.

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


July 16, 1975

AMERICAN EAST INDIA CORPORATION
v.
IDEAL SHOE COMPANY

Green, J.

The opinion of the court was delivered by: GREEN

MEMORANDUM AND ORDER

GREEN, J.

 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 above. *fn1"

 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 Commercial. *fn2" 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 rights. *fn3" 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, 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 hereto. *fn4"

 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 surprising in light of the fact that, at that time, the entire Walker operation was comprised of Mr. Lynn and one secretary. Bernard Reicher had pulled out of Walker; Walker's books were so far behind that Commercial could not properly audit; and, Lynn had gone through personal bankruptcy, approximately two years previously. Although Mr. Grossman offered to put Lynn in touch with some people who might help Lynn raise the margin, Lynn never availed himself of this opportunity.

 Clearly, Gerald Grossman was aware of the rather perilous position of Walker at the time and, in fact, this situation was, according to Mr. Grossman's own testimony, instrumental in his decision. Commercial performed periodic audits of Walker. Moreover, Gerald Grossman knew other people who were in the Walker organization. Both Mr. Reicher and Mr. Patrusky knew people at Commercial and at least Mr. Patrusky knew Gerald Grossman. In fact it was these contacts which had produced the financial link between the two companies. Moreover, by this time, both Reicher and Patrusky were no longer connected with Walker.

 D.

 The above sequence of events sets the stage for the entrance of American into the picture.

 In 1955, American, incorporated as early as 1951, began active operations with Connelly as its president. It acted as an import agent until 1959, when it also took on exports. The export business expanded, and in approximately 1960-61, American dropped its import business in burlap and tea. The growth of the export business continued and, in 1966, Connelly decided to try imports again and further decided that footwear would be a good item. Pursuing this general objective, American took on, as a selling agent, an outside company, by the name of Woodbine. The Woodbine Company was brought to the attention of Connelly by his administrative assistant, Fleming.

 Woodbine obtained orders for American. If American deemed the orders satisfactory, American would obtain an overseas manufacturer, establish a letter of credit, have the material shipped to American, and deliver the goods to the buyer. Woodbine was selling for American in the New York and New England areas. When Woodbine went to work for American, it brought with it, at least, two contracts with customers for footwear. These contracts were assigned to American and it imported the footwear under its own letters of credit.

 In December of 1967, the export business was still growing and Connelly wanted to broaden his import business, specifically in footwear. It was this desire that led to the transactions which prompted the present dispute. The chain of events leading directly to the present imbroglio are as follows.

 Aside from its principal offices, American had an office in the Marbridge Building in New York City, an office building occupied by "shoe people". In September of 1968, Fleming had run into one Nat Fisher, while in the Marbridge Building, and they had coffee together. Fleming knew Fisher through his dealings with Woodbine. Fisher inquired as to whether American might be interested in developing a relationship with Walker similar to that which it had with Woodbine. On that same day, Fleming, along with Fisher, met with Lynn in the Walker offices in the Marbridge Building. Fleming had further meetings with Lynn and Fisher; at one of which Baccash was introduced to Lynn and Fisher. During all these meetings, no mention was made of Commercial or any other factor. The arrangement sought was that of a sales agency. Neither Fleming nor Baccash ever thoroughly checked Walker out financially, relying solely on general business information that Walker was in the business of selling shoes with its principal strength west of the Mississippi; except for the Ideal account. Neither Baccash nor Fleming thought it necessary to check Walker further for they saw no danger to American based on the nature of the contemplated relationship with American. Fleming was led to believe that Walker sought a connection with American because the volume of orders coming to Walker had grown beyond Walker's ability to handle them. Moreover, Fleming assumed that Walker had financed its particular transactions the way that American did.

 Sometime after Fleming initially met with Fisher and Lynn, he brought the situation to the attention of Connelly who naturally, in light of his objective noted above, was interested.

 A meeting was eventually held on December 18, 1967, at the offices of American. At this meeting, Messrs. Connelly, Baccash, Fleming, Lynn, and Fisher were present. Connelly told Lynn that American wanted a sales agent but that there could be no competition with American's existing agent -- Woodbine. Connelly set out the specific terms and conditions of the relationship as follows: all orders were to be taken in the name of American and sold for the account of American; if American approved an order, it would place the contracts with a manufacturer of choice; American would establish its own letters of credit, import the goods in question and deliver the goods to the buyers. The financial terms were set so that initially Walker's compensation would be the excess of price over cost plus ten percent thereof. After gross sales had reached $250,000 volume and it appeared that a good working relationship had been established, American would lower its percentage to seven and one-half percent of all cost. Lynn stated that they had some orders which he wanted to apply to the $250,000 figure immediately. Connelly, who had to attend another meeting, told Lynn to work out the details with Fleming and Baccash.

 After Connelly left the meeting of December 18, Fleming and Baccash reviewed the details of the purchase orders Lynn already had. Fleming checked Dunn and Bradstreet on Ideal and Anthony and learned they were both A-1 accounts. The purchase order of Ideal was dated July 22, 1967 with due dates on some having already passed. Fleming was concerned about the due date but the day after December 18, Lynn assured Fleming that the merchandise manager at Ideal had approved a late delivery. On that same day, Fleming started preparing to apply for a letter of credit which was signed by a Mr. Fudell, who, aside from Mr. Connelly, was the only one with signing power for American. Moreover, Baccash told Lynn to get purchase orders in the name of American. Lynn, however, never did so and American, as late as February 28, 1969, planned to bill Ideal with Walker invoices with a stamp directing payment to American.

 On December 22, 1968, Connelly left on a trip which took him out of the country and eventually to the Far East. At the meeting of December 18, Connelly had offered to contact any Far East suppliers that Walker knew of during this trip. Upon his arrival in Taiwan, Connelly did so. In addition to meeting a manufacturer with whom American had previously dealt, Connelly met with representatives of Fu Yong Rubber Industrial Co., Ltd. (Fu Yong). Fu Yong had already received manufacturing instructions from Walker on the Ideal orders. Connelly told Fu Yong that those goods were to be shipped to American and that American would arrange the letters of credit. Connelly further told Fu Yong that American would be dealing with him and that Walker now was an agent for American similar to Woodbine, with which Fu Yong was familiar. Connelly was surprised to discover that Fu Yong, at the time of Connelly's arrival, had not been fully informed of the respective roles that American and Walker were to play. As a result, Connelly wrote a letter to Fleming which Fleming received on January 22, 1968 in which Connelly instructed Fleming to make sure the orders to Fu Yong were in the name of American, as American was the principal in the transaction. At this point, there was nothing further that Fleming could do in light of the fact that the shipment was on or almost on the water.

 On December 22, 1967, American had obtained a letter of credit for the orders received from Lynn, including the Ideal orders, in the amount of $35,849.04, in favor of Fu Yong. Fu Yong, before the letter of credit was obtained, had already manufactured against Walker's instructions without a letter of credit.

 In this case, the documents required under the letter of credit were invoices, a customs invoice 5523 -- material breakdown, and ocean bill of lading with notification to American.

 On or about January 24, 1968, these documents were delivered to American by Bank of America, along with its debit advice charging American $15,552.54, reflecting the $15,533.12 drawing against the letter of credit by Fu Yong and a commission of $19.42. The documents delivered were the ocean bill of lading of the shipper States Marine Lines; the invoice of Fu Yong, the Fu Yong packing list; United States customs material breakdown invoice, form 5523, entitled Invoice Details for Footwear; Fu Yong's weight breakdown of all components; and the Special Customs Invoice.

 In exchange, since American did not immediately pay the Bank of America, Mr. Rudell executed a Trust Receipt to Bank of America that, until payment, it would hold the documents in trust for Bank of America. On March 25, 1968, American paid the $15,533.12, received back the original Trust Receipt marked paid, and was charged interest for the amount from January 24, to March 25, of $177.66, making the total cost to American for the goods from Fu Yong plus bank charges (excluding shipping, customs, and insurance and overhead) $15,710.78.

 Previously, by check dated February 8, 1968, American had paid its insurance agent $122.28 for insurance on the Ideal goods for the trip.

 On a customs entry form, noting a duty of $3,106.60, dated February 21, 1968, American declared that it was the importer of record and was importing for its own account.

 On February 26, 1968, States Marine, the company bringing the footwear by steamer from Taiwan notified American as "consignee" that the steamer was expected to dock on March 3, 1968 and that the cost of shipping from Taiwan to Philadelphia was $1,494.59.

 On February 27, 1968, American sent to its forwarding company, Allen Forwarding Company, in Philadelphia, a check for $4,601.19, covering the shipping of $1,494.59, and $3,106.60 for estimated duty. Allen's subsequent bill of March 8, 1968 included other miscellaneous charges for services in forwarding the goods of $36.75 which was paid immediately.

 At about this time, Commercial re-entered the picture. On February 14, 1968, Commercial wired Ideal that:

 

"All payments for merchandise received from Walker . . . are to be made only to [Commercial] . . . Payments to any other party may subject you to liability for double payments."

 Commercial sent letters to Ideal, confirming this telegram on February 29, 1968 and March 4, 1968.

 No one at American was aware of Commercial or its claim until February 28, 1968. On that day, Lynn called Baccash and informed him of the Commercial telegram. Baccash immediately brought the matter to Connelly's attention, and Connelly told his people not to let go of the goods until they received assurance that they would be paid.

 At that time, Baccash informed Connelly that he had received assurance. On February 19, Baccash had spoken to a Miss Volpe, an accounts payable clerk at Ideal. Lynn had suggested the call when Baccash, knowing the goods were soon to arrive, expressed concern that Lynn had not procured purchase orders in the name of American. Baccash told Miss Volpe that American was going to deliver against the Walker purchase orders and asked her to remit to American against Walker invoices, and Miss Volpe said that Ideal would do so. *fn5" Moreover, Connelly relied on the fact that all the documents were in the name of American. *fn6"

 On this same day, February 28, 1968, American sent twenty of its own invoices to Ideal, totalling $27,542.40. On February 29, 1968, American issued new instructions to its forwarder, Allen Forwarding Company, revoking its prior instructions consigning the shipment to Walker.

 On March 7, States Marine Lines notified American that the steamer had completed its discharge at the pier in Philadelphia. Upon the authorization of American, on that same date, Allen Forwarding Company directed release of the footwear to Stanley Salkowitz Trucking, for delivery to Ideal. Salkowitz's overland bill of lading originally contained Walker's name, which was crossed out and American's name entered.

 On March 12, 1968, Ideal received 1465 cartons and on March 14, 1968, Ideal received the one carton which had been retained for checking by customs. Summarizing, all the documents involved in the transaction indicated American as the importer for its own account. Two documents had Walker's name crossed out: (1) The packing list, for obvious reasons; and (2) the Salkowitz bill of lading which is clearly a standard preprinted form generated by past Walker and Salkowitz dealings. Of course, it is equally correct that the designation of American on all these documents is based on information supplied by American officers. Financially, American's total cost of the Ideal shipment, excluding overhead, were: Cost of goods with charges by Bank of America $15,710.78 Duty, ocean shipping and forwarding 4,637.94 Insurance 122.28 Total $20,471.00

19750716

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