Opinion
CIVIL NO. 3-96-CV-10165, CIVIL NO. 96-1038 (NHP)
July 27, 2000
ORDER
The above-captioned action is before the Court for its findings of fact and conclusions of law following a bench trial held January 10 to 19, 2000. The parties filed proposed findings of fact and final argument on March 10, 2000, and the matter is now considered fully submitted.
The Court notes that David Suh is a named plaintiff in the counterclaims filed against Ssangyong and Shim in the New Jersey action. Because the parties have not attempted to distinguish Suh from IGL with regard to the right to recover on various counts, the Court will not distinguish between the two in entering judgment. All references to IGL can be assumed to include David Suh, where appropriate. Similarly, although Shim has been named personally as a defendant, Ssangyong has made no attempt to separate itself from Shim with regard to the libel/slander counterclaim in which he has been named jointly as a defendant. As with David Suh and IGL, all references to Ssangyong with regard to this counterclaim can be assumed to include Shim personally.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Stipulated and Introductory Facts1. Plaintiff Ssangyong (U.S.A.), Inc. (" Ssangyong"), is a corporation organized pursuant to the laws of the State of New York, and has its principal place of business in Bergen County, New Jersey. (Pretrial Order, Stipulated Facts (" PTO Stip") ¶ 1)
2. Defendant Innovation Group, Inc. (" IGI") is a corporation organized pursuant to the laws of the State of Iowa on or about March 30, 1994, and has its principal place of business in Scott County, Iowa. (PTO Stip ¶ 2)
3. Defendant Innovation Enterprises, L.C. (" IELC") is a limited liability company organized pursuant to the laws of the State of Iowa, and has its principal place of business in Scott County, Iowa. (PTO Stip ¶ 3)
4. Defendant Innova, Inc. (" Innova") is a corporation organized pursuant to the laws of the State of Iowa on or about February 6, 1996, and has its principal place of business in Scott County, Iowa. (PTO Stip ¶ 4)
5. Defendant Midland Metal, Co. (" MMC") is a corporation organized pursuant to the laws of the State of Iowa on or about May 11, 1993, and has its principal place of business in Scott County, Iowa. (PTO Stip ¶ 5)
6. Midland Metal, Co. (" MMC II") is a corporation organized pursuant to the laws of the State of Illinois on or about February 14, 1996, and has its principal place of business in Barrington, Illinois. (PTO Stip ¶ 6)
"II" distinguishes this MMC from another, similarly-named corporation.
7. Innovation Group, Ltd. (" IGL") is a corporation organized pursuant to the laws of the State of Iowa on or about March 4, 1993, and has its principal place of business in Scott County, Iowa. (PTO Stip ¶ 7)
8. David Suh (" David") is and was an officer of IGI, IGL, and MMC, and is and was a resident of Scott County, Iowa. David is and was a shareholder in IGI and holds a 2% interest in IELC. (PTO Stip ¶ 8)
9. S.W. Shim (" Shim") is and was a resident of Bergen County, New Jersey, and has been a Vice President of Ssangyong, stationed in New Jersey, circa January 1, 1994. (PTO Stip ¶ 9)
10. Y.W. Chung was a resident of East Hanover, New Jersey, and was the President of Ssangyong, stationed in New Jersey, from April 1992 through December 1997. He now resides in The Republic of Korea. (PTO Stip ¶ 10)
11. C.W. Chung is and was a resident of Fort Lee, New Jersey, and has been the President of Ssangyong, stationed in New Jersey, since January 1998. (PTO Stip ¶ 11)
12. J.K. Choi (" Choi") is and was a resident of Wyckoff, New Jersey, and was the Deputy General Manager of Ssangyong, stationed in New Jersey, from December 13, 1991 through March 1997. (PTO Stip ¶ 12)
13. Bonnie Bryant is and was a resident of Carroll County, Illinois, and is and was an employee of IGL and IGI. (PTO Stip ¶ 13)
14. Karen Suh (" Karen") is and was the spouse of David, and is and was a resident of Scott County, Iowa, as well as an officer of IGL and MMC. Karen is and was a shareholder in IGL and MMC. (PTO Stip ¶ 14)
15. Glenn Suh is and was a resident of Barrington, Illinois, and is the brother of David, and is and was an officer, director and the sole shareholder of MMC II. (PTO Stip ¶ 15)
16. Kyu Gon Cho (" Cho") is and was a citizen and resident of The Republic of Korea, and has been a shareholder of Innova since March 4, 1998. (PTO Stip ¶ 16)
17. Arthur Krull is and was a resident of Eau Claire, Wisconsin, and is and was an officer and shareholder of Innova. (PTO Stip ¶ 17)
18. Phillip Ryan is and was a resident of Naperville, Illinois, and is and was an officer and shareholder of Innova. (PTO Stip ¶ 18)
19. ANL Trust holds a 98% interest in IELC. (PTO Slip ¶ 19)
20. ANL Trust is a trust organized pursuant to the laws of the State of Iowa, and there are and were three beneficiaries of the Trust, viz., Aaron Suh, Nathan Suh, and Laura Suh. All three are minor children of Karen and David. (PTO Stip ¶ 20)
Evolution of the IGL/Ssangyong Relationship
21. Between 1986 and 1989, David Suh brokered Korean stainless steel industrial and cookware products between Korean manufacturers and United States retailers. During this time period, he operated under the company names of Midko International and Nanam, Inc. Nanani and Midko at first used ordinary bank financing for their sales of products. (Tr. 322-25)
22. Until 1992, Ssangyong's primary business was the import and export of footwear, clothing, jet fuel oil, chemical products, steel products and cookware. (Tr. 125-26)
23. In early 1992, David met with Y. W. Chung, then president of Ssangyong, and arranged for Ssangyong to become the primary lender for Nanam/Midko sales. Essentially, the Nanam/Midko agreements represented a straight financing arrangement. In exchange for a security interest in the goods, Ssangyong arranged for financing to enable Nanam/Midko to purchase inventory, which they then sold to customers. As the official borrowers, Nanam/Midko had sole responsibility to repay to Ssangyong the amounts financed. The 1992 agreements had fixed credit limits. (Tr. 69-70, 326, 329-33, 336, 140-46; Exs. 271 and 272).
24. Nanam and Midko ceased operations in early 1993 following the bankruptcy of a major Korean supplier. Ssangyong and David negotiated a reorganization of the business involving the formation of a new corporation, IGL. (Tr. 334-36)
The 1993 Sales Agent Agreement
25. Also in 1993, Ssangyong established the "G.M." Division to carry out its operations with IGL. On or around March 8, 1993, IGL and Ssangyong, through its G.M. Division, entered into a Sales Agent Agreement (" the 1993 Agreement" or "the Agreement"). (PTO Stip ¶ 21)
26. During these negotiations, both sides were represented by competent counsel. Although the 1993 Agreement was drafted by counsel for Ssangyong, David Suh and counsel for IGL participated actively in the contract development process.
27. The business relationship between Ssangyong and David Suh's companies changed significantly in 1993 (the 1993 Sales Agent Agreement), and again in 1995 (the 1995 Sales Agent Agreement and the 1995 Financing and Security Agreement). The key terms of the Nanam/Midko agreements, the 1993 Agreement and the 1995 Agreement (actually two simultaneous 1995 agreements) were summarized at trial in Table form as follows:
CONTRACT 1992 1993 IGL 1995 FINANCING TERM SALES AGENT SECURITY AGREEMENT/ MIDKO/NANAM AGREEMENT 1995 SALES AGENT FINANCING AGREEMENT AND SECURITY AGREEMENTS PARTIES' Lender/ Principal/ Type 1: Lender/Borrower ROLES Borrower Sales Agent Type 2: Principal/Sales Agent GUARANTY Yes No Type 1: Yes OF Type 2: No CUSTOMER REPAYMENT CREDIT Yes No Type 1: Yes LIMITS Type 2: No EXCLUSIVITY No Yes Type 1: Yes Type 2: Yes DISCRETION Yes No Type 1: Yes TO END L/C Type 2: No BEC. OF RISK TIME PERIOD 4 Years None Type 1:5 Years Type 2: None SSANGYONG Interest Interest Type 1: Interest Commission PROFIT Commission Commission Type 2: Interest Commission (No Share In (Share In Margin) (Share In Margin) Margin) RESPONS. Nanam Ssangyong Type 1: IGL FOR Type 2: Ssangyong COLLECTION CUSTOMER Nanam Ssangyong Type 1: Ssangyong APPROVAL Type 2: Ssangyong NOTICE OF 180 Days 180 Days 180 Days TERM. (Ex.DA-1)Ssangyong's risk under the Nanam/Midko agreements was minimal; (1) Nanam/Midko expressly guaranteed customer payment; (2) there were express credit limits on how much Ssangyong was obligated to finance; and (3) Ssangyong had a security interest in the products sold to the customers. The 1993 Agreement represented a more entrepreneurial partnership, in which Ssangyong expressly assumed the risks and responsibilities associated with extending credit directly to the customers for their purchases of goods, while IGL obtained purchase orders only as a sales agent of Ssangyong. Under the 1993 Agreement; (1) IGL did not guarantee customer repayment; (2) there were no credit limits on the amount of Ssangyong's obligation to finance; and (3) Ssangyong did not have a security interest in the goods sold to customers. In exchange for its assumption of greater risk under the 1993 Agreement, Ssangyong shared directly in the profit margin from customer sales (at a rate of 33%), as compared to its fixed interest payment and commission under the Nanam/Midko agreements.
28. As indicated above, the 1993 Agreement provided that all orders "shall be subject to approval as to all terms by G.M., including but not limited to price and payment terms." (Ex. 1 ¶ 4.4)
29. The 1993 Agreement further provided that: "As security for any Obligations, IGL hereby grants to Ssangyong a first lien upon a security interest in all of IGL's equipment, receivables, instruments, contract rights and general intangibles including any tradenames and trademarks." (Ex. 1 ¶ 7.3)
30. Under the Agreement, IGL was to "hold any collections of any sale of Products in trust for Ssangyong," with "no right to make any set-off of any collections against any claims for compensation from Ssangyong." (Ex. 1 ¶ 10.2)
32. The Agreement provided for termination without cause upon 180 days' notice to the other party. (Ex. 1 ¶ 6.1)
33. The 1993 Agreement also contained a default provision, which provided that upon the happening of certain events of default, "Ssangyong shall have the right to terminate this Agreement, at its sole option, without further notice or demand: (a) If payment is not received on any of the Obligations within thirty (30) days after demand." (Ex. 1 ¶ 11.1)
34. Another significant provision stated: "Ssangyong and IGL shall in no event be liable or responsible to the other for any loss of profits, special damages, punitive damages or any other similar type damages arising from any breach of obligation by Ssangyong or IGL under this Agreement." (Ex. 1 ¶ 13.4)
35. Scott Peltz, Ssangyong's expert witness, testified that:
A typical transaction would be that IGL would, after locating a customer, make a sale. The sale would then be documented. A request for a letter of credit would be sent to Ssangyong. Originally and early in the agreement, I believe it was intended that Ssangyong would do more of the business activity of the sale, that they would invoice the customers, they would account for the accounts receivable and collections, and IGL would actually assist it. In reality, what ultimately occurred was after the letter of credit request was made and the letter of credit was issued, IGL actually invoiced the customer on Ssangyong' s behalf, tracked the accounts receivable, and was the principal collector of the accounts receivable, with Ssangyong performing their own analysis and interfacing with IGL in the process. (Tr 22-23)
36. Under the 1993 Agreement, from March 1993 to June 1995, Ssangyong caused its banks to open more than 400 letters of credit requested by IGL. (Ex. 19)
37. Although the parties intended that payments for product be sent directly to Ssangyong from IGL-generated customers, the majority of customer payments were sent to IGL. David testified that any payments from customers that came to IGL would be put immediately in a Federal Express envelope and sent to Ssangyong on a daily basis. (Tr. 373)
Breakdown of the Relationship
38. S.W. Shim was named vice president of Ssangyong in early 1994, with responsibility for overseeing Ssangyong's contractual relationship with IGL. (Tr. 126, 159-62, 168)
39. Although both Shim, as vice president, and Chung, as president, had authority to authorize the opening of letters of credit, (Tr. 253), Shim effectively controlled the process.
40. Upon assuming his role as vice president, Shim reviewed the 1993 Agreement between Ssangyong and IGL and familiarized himself with the mode of operation between the two companies. (Tr. 127)
41. Between July and December 1994, Shim noticed what he considered to be a dramatic increase in amounts owed Ssangyong by IGL-procured clients, and believed it was up to Ssangyong to "manage" or decrease the unpaid balance. (Tr. 129)
42. He was also skeptical of David Suh's business projections for IGL, finding them "excessively optimistic" and "really unrealistic." (Tr. 161) Although Shim refused to concede the issue during trial, the Court agrees with IGL's allegation that in essence, Shim felt the joint venture involved too much risk for Ssangyong. (Tr. 161)
43. Accordingly, Shim took steps to renegotiate the contractual relationship between Ssangyong and IGL. (Tr. 129-130)
44. On or about February 15, 1995, IGL and Ssangyong signed a term sheet, which contained, among other things, the concept of credit limits. The term sheet explicitly provided that the parties would work out final agreements by the end of February. (Exs. 260, 235 [English translation])
45. The Court rejects the testimony of Shim that the February 15, 1995 term sheet was a binding contract as contrary to the express language of the document, as well as other evidence in the record.
46. During the same time period, in December 1994 and early 1995, Shim, who by his testimony, was the primary person authorized by Ssangyong at the time to approve funding letters of credit, directed that the process be slowed. (Tr. 138 ); see also September 6, 1995 Dep. of J.K. Choi at 59 (indicates Shim must approve each letter or credit request)
47. Although Shim denied that the delays were purposeful, (Tr. 212), such denials are not credible in light of the other evidence in the record. For example, Ssangyong's own expert, Scott Peltz, testified that the "slow-down" in processing letters of credit "correlated with the slow-down in collections" of receivables, and that he believed Ssangyong purposely initiated the slow-down. (Tr. 82)
48. Peltz also analyzed the period of delay from the submission of IGL's request or worksheet to the funding of the letter of credit by Ssangyong's bank (the issuance delay"). (Ex 237; Tr. 54-59)
49. For each month from March 1993 through December 1994, the average issuance delay was under seven days, only once climbing to 9 days, in June 1994. (Ex. 237)
50. Starting after December 1994, the issuance delay increased drastically. By June 1995, the monthly average issuance delay peaked at approximately 26-27 days. (Tr. 51, 56-58)
51. Ssangyong's delays in processing the letter of credit applications resulted in losses on the part of the Korean manufacturers who supplied products to IGL/Ssangyong customers. (Cho Dep. At 76). In addition, the Court finds that at least two IGL/Ssangyong customers, Julie Pomerantz, Inc. and Natural Science, went out of business as a direct result of Ssangyong's delays in issuing letter of credit financing. (Tr. 408, 660).
52. Throughout the spring of 1995, IGL repeatedly warned Ssangyong that certain customer accounts were being jeopardized by Ssangyong's delayed funding. IGL identified specific letters of credit and the number of days pending, and urgently requested that Ssangyong take action. (Choi Dep. Tr. Vol. III at 186-89, 3 10-13, Exs. 55-61; Tr. 218-23; 408-14)
53. Despite these urgings from IGL, from late 1994 through late May, 1995, Ssangyong neither approved nor rejected the letter of credit applications pending, nor did it attempt to explain or justify its delays. (Tr. 83-84, 224-24, 415; Ex. 66)
54. There is no evidence Ssangyong used the periods of delay for a bonafide purpose, i.e. to perform credit checks or arrange for security interests in the goods sold. In fact, Ssangyong never formally rejected more than one or two letter of credit application for any reason. (Tr. 121-23, 213)
55. The Court finds Ssangyong, through Shim, used the delays in an attempt to coerce IGL into signing the 1995 Agreements, which contained credit limits. (Tr. 235-36)
56. The Court finds credible the testimony of IGL's expert, Professor James B. Byrne, that there is an expectation in the commercial world that applications for letters of credit will be processed within ten days, and that any length of time in excess often days is commercially unreasonable. (Tr. 7 12-719, 750; Ex. 131)
57. Accordingly, because the particular requests for letter of credit funding involved in the present case did not require any complex handling or decision-making by Ssangyong or the banks, the Court finds Ssangyong acted in a commercially unreasonable manner when it slowed down the process for considering letters of credit applications in December 1994, and failed to respond one way or another to IGL's specific inquiries.
58. Ssangyong's conduct in this regard amounted to a breach of the covenant of good faith and fair dealing.
IGL's Decision to Retain Ssangyong Receivables
59. In May 1995, due to the default of a major client, the Sam Brown companies, and other struggling customers such as Julie Pomerantz, Inc. and Natural Sciences, IGL was in a "survival mode." (Tr. 430-32)
The Court has discussed in detail the pending litigation involving the Sam Brown companies in prior orders. Because the Sam Brown saga has no independent relevance to the present litigation, the Court sees no need to revisit these facts in the present ruling.
60. In late May, 1995, David Suh directed IGL staff to withhold customer payments on Ssangyong's invoices that were sent to IGL, deposit and "recycle" these payments as loan advances to customers to ensure products could be ordered in time for the upcoming Christmas season. (Tr. 473-76)
61. Following instructions from IGL's accountants, McGladrey Pullen, IGL created a liability to Ssangyong on its books in order to track the "recycled" funds. (Tr. 476)
62. Although David asserts that then Ssangyong Deputy General Manager J.K. Choi authorized the recycling, the Court declines to make such a finding.
63. Even if Choi directed IGL to recycle the funds, however, he lacked both the express and the apparent authority to do so.
64. The Court finds David did not seriously consider Choi to be a decision-maker with regard to the 1993 Agreement. David testified at trial that although he initially told Choi of his concerns about delays in financing approvals, he hoped the message would get "relayed to the management of Ssangyong." (Tr. 431)
65. David also testified he knew at the time he allegedly spoke with Choi about recycling that "it would be very difficult for [Choi] to make that official saying IGL knew to recycle." This statement indicates David's awareness that Chung or Shim had ultimate authority over such matters as credit approvals. (Tr. 601)
66. The record indicates David and other IGL personnel wrote directly to Chung and Shim when IGL's financial situation worsened. (Exs. 55-60)
Facts Regarding Ssangyong's Claim of Conversion Against IGL
67. Ssangyong had a vested interest in receivables forwarded from Ssangyong/IGL clients to IGL, on or after June 1, 1995, as well as all inventory financed by Ssangyong before June 1, 1995.
68. David testified at trial he understood paragraph 10.2 of the 1993 Agreement required IGL to hold all collections in trust for Ssangyong. (Tr. 510)
69. By the end of June 1995, an accounts clerk at Ssangyong informed Shim that she could not reconcile the accounts receivable in IGL's payback in June 1995. (Tr. 133; Ex. 294)
70. On July 5, 1995, Shim sent a letter to David noting that the amount actually paid to Ssangyong on the accounts receivable during June 1995 was much less than the collection schedule for that month. (Ex. 98)
71. On July 14, 1995, Shim issued a "default letter" in which he demanded that IGL forward all retained receivables immediately. (Ex. 245)
72. IGL's failure to comply with this request amounted to willful conversion.
IGL's Claim of fraudulent Conveyance
73. Meanwhile, during the spring of 1995, the three principals of IGL, David, Arthur Krull and Phillip Ryan, were not very hopeful about the future of IGL. David believed the fact Ssangyong retained a security interest in all IGL assets prevented IGL from using its current inventory and from making direct loans from the deposited Ssangyong receivables. (Tr. 483, 487)
74. At some point after June 1, 1995, David and/or IGL transferred a significant portion of the retained Ssangyong receivables to a newly formed corporation, IGI, in order to process future loans through this new corporation.
75. In early 1996, a decision was made to form a new corporation, Innova, Inc. (Tr. 487) Before Innova was formed, David, Ryan and Krull informally agreed the three would split the profits of Innova equally. (Tr. 703)
76. The actual shareholders of Innova are Ryan, Krull and K.G. Cho. David was left out as a shareholder because he was thought to be a "potential liability." (Tr. 696)
77. On February 7, 1996, IGL entered into a loan agreement with Innova authorizing up to $3 million in transfers to Innova. Pursuant to the agreement, IGL sold $1.7 million worth of Ssangyong-financed inventory to Innova, and loaned almost $500,000 in cash. (Tr. 485-88; Partial Fact Stipulation at Exhibit H)
78. At all times relevant to this matter, David and IGL managed the daily business affairs and income for Innova: running the computer system, performing bookkeeping, payroll and shipping functions, and storing and purchasing necessary inventory. (Tr. 489)
79. At some point in time, David considered himself a vice-president of Innova. (Tr. 637-39.
80. David has been compensated by Innova, or at least entitled to take compensation, at levels virtually equivalent to Innova's named principals, Krull and Ryan. (Dep. of Arthur Krull, at 79; Tr. 704)
81. On February 14, 1996, IGL entered into a loan agreement with MMC authorizing up to $3 million in loans to MMC. (Tr. 49 1-92) Pursuant to the agreement, IGL transferred $894,983.37 to MMC. (Partial Fact Stipulation at Exhibit K)
82. MMC subsequently was liquidated leaving a debt to IGL of approximately $200,000. (Tr. 493-94)
83. IGL transferred $1,340,932.10 to IELC. (Partial Fact Stipulation at Exhibit J)
84. Despite a historical pattern of sharing all business dealings and corporate structuring with Ssangyong, David concealed from Ssangyong the fact he intended to transfer retained Ssangyong receivables to newly formed corporations, which would then loan money to customers.
85. IGL made its first transfer to IGI sometime after the Sam Brown companies filed suit against it in April 1995. (Exs. 285-86)
86. IGL showed a negative net worth for all months between January 1, 1995 and December 31, 1997, other than the months of August through November 1995, in which it showed a "positive 3 Hundred and some-odd thousand dollars net worth." (Tr. 44-45)
87. IGL transferred more than $5,474,000 to Innova, MMC, IGI and IELC between June 1, 1995 and April 29, 1996. (PTO Stip., Ex. G)
88. IGL made the above transfers with intent to defraud Ssangyong.
89. The Court finds Shim, on behalf of Ssangyong, purposely delayed processing letters of credit with full knowledge he was placing many of IGL's business dealings at risk. (Exs. 55-62).
90. Ssangyong's conduct in this regard was both intentional, and without justification or excuse, amounting to tortious interference with a current or prospective business advantage.
91. On April 9, 1996, Shim, on behalf of Ssangyong, wrote a letter to one of IGL's principal banks, Brenton Bank, indicating Ssangyong had recently filed suit against IGL in New Jersey, "alleging among other things, that IGL converted and stole approximately $24,000,000 in monies due and owing to Ssangyong." (Ex. C to Trial Ex. 76)
92. The Court finds the above-referenced statement was false, and that it tended to harm IGL's reputation in the eyes of Brenton Bank.
93. Because IGL has no proof of damage from the statement, IGL's claim for simple defamation or trade libel must fail.
94. Nevertheless, the Court finds the defamatory statement imputed to IGL a criminal offense, and conduct that is incompatible with IGL's business. Accordingly, the statement amounts to slander per se.
Damages to IGL as a Result of Ssangyong's Conduct
95. The Court accepts the testimony of John Andrew Koch, IGL's accounting expert, who rendered an opinion as to the amount of damages suffered by IGL as a result of the delays in, and ultimate withdrawal of, letter of credit financing. Mr. Koch's overall conclusion was that IGL had suffered damages in the amount of $23.2 million. (Tr. 792; Ex. 127)
96. The $23.2 million is comprised of damages due to lost sales and profits, diminution in the going concern value of IGL and injury to customers that rendered accounts uncollectible. (Tr. 802-03)
97. IGL is entitled to an additional $1,000.00 in nominal damages due to Ssangyong's defamatory conduct.
98. Ssangyong did not act with malice when it tortiously interfered with IGL's business relationships, or when Shim sent the defamatory letter to Brenton Bank.
99. Punitive damages therefore are not appropriate on either of IGL's successful tort claims.
Damages to Ssangyong due to IGL's Conversion and Fraudulent Conveyances
100. The Court finds fully credible the December 7, 1999 report of Ssangyong's expert witness, Scott Peltz, with regard to the receivables withheld by IGL. (Ex. 24; Tr. 113-120)
101. Ssangyong, not IGL, is entitled to profits made by IGL on funds withheld from and owed to Ssangyong.
102. The amount owed Ssangyong by IGL for wrongful conversion is $15,722,758.00.
103. Although Ssangyong also succeeded on its common law and statutory claims of fraudulent conveyance, because it will be made whole by the amount awarded for wrongful conversion, there is no need to consider further equitable remedies to which it might ordinarily be entitled.
APPLICABLE LAW AND DISCUSSION
I. BREACH OF CONTRACT/DUTY OF GOOD FAITH AND FAIR DEALING
This discussion is intended to resolve Ssangyong's breach of contract claim against IGL, as well as IGL's first three counterclaims against Ssangyong for breach of contract, reformation and breach of the duty of good faith and fair dealing.
The overriding issues in this litigation are whether IGL and/or Ssangyong committed a material breach of the 1993 Agreement, and if so, what consequences flowed therefrom. Ssangyong claims IGL breached the Agreement in June 1995 when it began retaining and "recycling" receivables. In its primary counterclaims against Ssangyong, IGL asserts Ssangyong breached the 1993 Agreement and/or the inherent duty of good faith and fair dealing at some point between December 1994 and May 1995 when it delayed issuance of letters of credit. After reviewing the trial transcript, exhibits, pleadings and relevant case law, this Court finds Ssangyong's delays were commercially unreasonable. When viewed as a whole, these delays, coupled with Ssangyong' s failure to respond to IGL's inquiries, amount to a material breach of the implied covenant of good faith and fair dealing.
A. Facts Supporting Breach
This Court previously concluded that New Jersey law governs Ssangyong's claim for breach of contract and IGL's counterclaims. See August 17, 1999 Order ("Summary Judgment Order") at 19-23. New Jersey courts consistently have held that "'every contract in New Jersey contains an implied covenant of good faith and fair dealing.'" Island Realty v. Bibbo, 748 A.2d 620, 623 (N.J.Super.Ct. App. Div. 2000) (quoting Sons of Thunder, Inc. v. Borden, Inc., 690 A.2d 575 (1997)); see also Sons of Thunder, Inc. v. Borden, Inc., 690 A.2d 575, 587 (N.J. 1997) ("The obligation to perform in good faith exists in every contract."). Generally, this implied covenant is breached when one party acts outside of commercially acceptable practices. See, e.g., Pennington's Inc. v. Brown-Forman Corp., 785 F. Supp. 1412, 1414 (D. Mont. 1991).
The Court finds the factual scenario in Sons of Thunder to be particularly analogous to the facts at bar. Sons of Thunder involved the breakdown of a relationship between a producer of clam products, Borden, Inc., and its major supplier, Sons of Thunder, Inc. In 1985, the parties had entered into a written contract under which Borden agreed to purchase a minimum amount of clam stock from Sons of Thunder for a period of one year. Sons of Thunder, 690 A.2d at 578. The contract contained an automatic renewal provision, but could be terminated by either party upon ninety days written notice. Id.
Two months after signing the contract with Borden, Sons of Thunder purchased a second clamming boat to enable it to fulfill its obligation to Borden. The purchase was financed by a bank loan which was obtained in part after a Borden representative assured the lender that Borden intended to continue its contract with Sons of Thunder for five years. Id. The record at trial revealed that Borden seldom met the minimum purchase requirements. Id.
In 1987, following a change in management at Borden, Borden sent Sons of Thunder a letter notifying it the contract would be terminated in ninety days. Id. at 580. Within weeks of this letter, the boat was kept docked at shore, with no market for the purchase of such a large clamming vessel. Id.
Sons of Thunder ultimately sued Borden, alleging Borden had breached the 1995 contract by failing to purchase the contractual amount of clam product prior to the purported termination of the contract, and by failing to purchase the required amount during the ninety day notice period. Id. at 581. It further contended Borden had breached the duty of good faith and fair dealing. Id. at 582. The jury found in favor of Sons of Thunder on all of these counts. Id.
Of particular relevance to the present case is the New Jersey Supreme Court's discussion of the claim for breach of the duty of good faith and fair dealing. In affirming the jury's finding on this count, the New Jersey Supreme Court emphasized that "Borden knew that Sons of Thunder was depending on the income from its contract with Borden to pay back" its loan. Id. at 589. Borden also knew that the corporation which managed a related boat from which Borden also purchased clams, the Jessica Lori, was dependent on the success of Sons of Thunder, "and that if one company failed, the other would most likely fail." Id. The court also noted that the relationship between Sons of Thunder and Borden seemed to weaken after Borden experienced a change of management. Id.
As in Sons of Thunder, the Court finds Ssangyong breached its duty of good faith and fair dealing when it intentionally and, without explanation, began underperforming on its sole obligation under the contract: to provide letter of credit financing to clients secured by IGL. Similar to Sons of Thunder, the breakdown in the Ssangyong-IGL relationship began shortly after new management — namely Shim — arrived at Ssangyong. The record reflects that the monthly average issuance delay in letters of credit rose from 5-7 days to 26-27 days in the period from January to June 1995. Tr. 59, 750; Ex. 237. Although the 1993 Agreement did not expressly specify a time period for processing each application, this Court found persuasive the testimony of IGL's expert, James E. Byrne, that there is an expectation in the commercial world that applications for letters of credit will be processed within ten days, and that any length of time in excess often days is commercially unreasonable. Tr. 712-719, 750; Ex. 131. Having worked in the area of letters of credit previously, Tr. 137, Shim undoubtedly was familiar with the need for a quick turnaround, and his failure to process the applications in a timely manner, as well as his refusal to respond to IGL inquiries, evidences bad faith. In fact, Ssangyong's own accounting expert, Scott Peltz, testified that the "slow-down" in processing letters of credit "correlated with the slow-down in collections" of receivables, and that he believed Ssangyong purposely initiated the slow-down. Tr. 82 2 18-23, 408-14; Choi Dep. Tr. Vol. III at 186-89, 3 10-13, Exs. 55-61.
Furthermore, just as Borden knew another corporation was mutually dependent on Sons of Thunder for its survival, Ssangyong knew in the present case that other entities, both Korean manufacturers and United States retailers/distributors, were equally dependant on timely Ssangyong financing. IGL and David Suh repeatedly warned Ssangyong that its swift processing of the letter of credit applications was vital to ensure the goods could be shipped on a timely basis. Exs. 55-56. Ssangyong also knew that by taking a security interest in all of IGL's assets and receivables, it made it next to impossible for IGL to obtain alternative financing in time to continue orders for the upcoming Christmas season. Perhaps most importantly, despite a direct inquiry from David Suh on June 1, 1995 as to whether Ssangyong intended to terminate the relationship, Ex. 63, Ssangyong continued to assure IGL it desired to continue their relationship. Ex. 69. Such an assurance undoubtedly was intended to lull IGL into believing it had a future with Ssangyong, and to convince David Suh to sign the 1995 Agreement. Following Sons of Thunder, the Court therefore concludes that based on the degree to which IGL and others relied on Ssangyong, and the fact Ssangyong was not only aware of this reliance, but also forced IGL into this position by taking such a broad-based security interest, Ssangyong' s conduct amounted to a breach of the implied covenant of good faith and fair dealing.
In reaching this conclusion, the Court is mindful of the fact that Ssangyong maintained the right to terminate the contract without cause upon 180 days prior written notice. Ex 1, ¶ 6.1. Ssangyong failed to take advantage of this remedy, however. Moreover, even if Ssangyong had written such a letter in December 1994, when Shim first became concerned about increases in accounts receivable, Ssangyong had an obligation to continue full performance under the contract during that 180 day period. Sons of Thunder, 690 A.2d at 587; see also United Roasters, Inc. v. Colgate-Palmolive Co., 649 F.2d 985, 990 (4th Cir. 1981) ("What is wrong with Colgate's conduct in this case is not its failure to communicate a decision to terminate. . . but its cessation of performance. Clearly, it had an obligation of good faith performance up until its right of termination was actually effective.").
B. Whether IGL Also Committed Breach
Ssangyong's primary post-trial position is that IGL breached the 1993 Agreement by retaining and recycling receivables. "It is black letter contract law that a material breach by either party to a bilateral contract excuses the other party from rendering any further contractual performance." Magnetic Resources, Inc. v. Summit MRI, Inc., 723 A.2d 976, 981 (N.J.Super.Ct. App. Div. 1998). With this doctrine in mind, the Court finds that by mid-April 1995, when the average issuance delay rose above 10 days, Tr. 59, IGL became legally excused from performance under the contract. Whether IGL's retention of receivables supports another theory of recovery is addressed later in this Ruling.
Ssangyong contends alternatively that the 1993 Agreement effectively was revised on February 15, 1995, and that IGL breached the revised agreement as of this date by enabling certain customers to exceed the specified credit limits. Again, this Court does not agree, finding the document signed by the parties on February 15, 1995 was simply an "agreement to agree." For example, the document is entitled " proposal . . . regarding concluding a NEW BUSINESS AGREEMENT." Ex. 235 (emphasis added, capitalization in original). Secondly, the third page of the agreement indicates it is a "new agreement summary," further suggesting the document was intended to precede the actual and binding contract. The Court also notes that the term sheet, if effective, would have required Ssangyong to fund letter of credit requests within three business days. This obviously did not occur in the period between February 15, 1995 and June 27, 1995, the date the actual agreements became effective. Tr. 472; Ex. 235. Finally, Shim himself stated in his September 21, 1998 deposition that the February 15, 1995 "agreement" was not a "final agreement" to the extent it effectively added credit limits to the 1993 Agreement. Tr. 176-77. His denial at trial of the accuracy of this statement is not persuasive. Tr. 177.
The Court therefore finds no breach of contract on the part of IGL, its officers or affiliates.
II. SSANGYONG'S CLAIMS OF CONVERSION AND FRAUDULENT CONVEYANCE
The fact Ssangyong was the first to breach, and therefore, effectively nullify the 1993 Agreement does not necessarily mean that Ssangyong abandoned all right to receivables collected by IGL during 1995 on Ssangyong's behalf. Due to the lengthy payment cycles under which the stainless steel products market operated, Ssangyong had fully earned the vast majority, if not all, of these receivables prior to committing a material breach of contract. See, e.g., Platinum Management, Inc. v. Dahms, 666 A.2d 1028, 1047 (N.J.Super.Ct. 1995) (sales representative who breached noncompetition agreement was entitled to recover on counterclaim for bonus earned prior to breach). David Suh also testified at trial that he understood paragraph 10.2 of the 1993 Agreement required IGL to hold all collections in trust for Ssangyong. Tr. 510. Therefore, although the receivables came into IGL's possession lawfully, the Court must consider whether IGL's actions in retaining and recycling the receivables, as well as transferring Ssangyong receivables and Ssangyong-financed inventory to Innova, MMC and IELC constituted conversion and/or fraudulent conveyance.
A. Conversion
1. Committed by IGL as Set Forth in New Jersey Action
Ssangyong's claim for conversion against IGL is governed by New Jersey law. Summary Judgment Order at 19. Under New Jersey law, a claim of conversion depends on a finding the defendant unlawfully exercised "dominion and control over" the plaintiffs property "in a manner inconsistent with" the plaintiffs' rights to the property. McAdam v. Dean Witter Reynolds, 896 F.2d 750, 771 (3d Cir. 1990). Moreover, although not specifically addressed by New Jersey courts, a claim for conversion generally does not depend on a showing of fraud. See, e.g., Roberson v. Painewebber, Inc., 998 P.2d 193, 200 (Okla.Civ. Ct. App. 1999); Deck v. Bird, 810 S.W.2d 728, 729 (Mo.Ct.App. 1991).
In the present case, there is no dispute that IGL retained and deposited payments made by IGL-Ssangyong customers to which Ssangyong was rightfully entitled under the 1993 Agreement, and used the money to fund its own business and affiliated entities. The parties dispute, however, whether IGL was authorized to do so by Choi and whether Shim ultimately ratified the practice on behalf of Ssangyong.
As set out in the Court's findings of fact, the Court notes it does not believe Choi had actual or apparent authority to direct IGL to take such action. The record is devoid of evidence Ssangyong gave Choi actual authority to approve or negotiate a change in the contract. Tr. 596. Paragraph 20.2 of the 1993 Agreement specifically directs that all modifications be in writing and signed by a duly authorized Ssangyong officer. Ex. 1 at ¶ 20.2. Although David contends Chung told him to work with Choi on a day-to-day basis, David also understood that one of Choi's two superiors must sign all significant letters, letter of credit approvals, etc. (Tr. 657).
In the absence of actual authority, New Jersey law also allows an agent to bind its principal in cases of apparent authority, where the principal's conduct has "misled a third-party into believing that a relationship of authority in fact exists." Mercer v. Weyerhaeuser Co., 735 A.2d 576, 592 (N.J.Super.Ct. App. Div. 1999). Under this theory, the person seeking to establish the apparent authority must show "`the principal has by his voluntary act placed the agent in such a situation that a person of ordinary prudence, conversant with business uses, and the nature of the particular business is justified in presuming that such agent has the authority to perform the particular act in question.'" Id. (quoting Mesce v. Automobile Ass'n, 73 A.2d 586, 588 (N.J.Super.Ct. App. Div. 1950)) (emphasis added).
In the present case, assuming Choi did in fact direct David to retain and recycle receivables, the Court finds it was nevertheless unreasonable for an individual with David's business acumen to rely solely on statements from Choi. When speaking generally of the internal hierarchy of Ssangyong, David made clear he understood Choi was not considered a decision-maker with regard to the 1993 Agreement. David testified on direct examination that when he first told Choi IGL was concerned about slow-downs in letter of credit approvals, he hoped the message would get "relayed to the management of Ssangyong." Tr. 431. David later admitted he was aware "it would be very difficult for [Mr. Choi] to make that official saying IGL knew to recycle," which the Court interprets as meaning it would be difficult to obtain Chung's or Shim's approval for IGL's plan to retain and recycle receivables. Tr. 601. Also significant is the fact that David and other IGL personnel bypassed Choi and wrote directly to Chung and Shim whenever an important matter was at issue. Exs. 65, 70.
IGL claims that Shim "ratified"the retention and recycling of receivables by continuing to conduct business with IGL after becoming aware of IGL's conduct in late June 1995. This Court does not agree. On July 14, 1995, shortly after learning of IGL's conduct, Shim issued a "default letter," in which he demanded that IGL forward all retained receivables. Ex. 245. Although Ssangyong may have been less than diligent in following through with its demand for repayment, this Court cannot find it abandoned its right to be repaid. Shim testified at trial that even after sending the July 14 letter, he continued to believe the relationship between the two organizations could be salvaged — albeit on his terms. Tr. 313.
The Court also notes the distinction between retention, or "diversion" of receivables, and recycling of those same funds. Shim admitted to knowing about the "diversion" of Ssangyong funds in June 1995. Tr. 312. It is not clear, however, whether he knew David intended to form new corporations with Ssangyong funds. Under New Jersey law, a principal can ratify the unauthorized acts of an agent only upon a showing he had full knowledge of the conduct at issue. See, e.g., Thermo Contracting Corp. v. Bank of New Jersey, 354 A.2d 291, 300 (N.J. 1976) ("A principal, having full knowledge of all the material facts, who approves its agent's unauthorized act, is deemed to ratify that act."). In the present case, even assuming Shim's passivity somehow ratified IGL's retention of Ssangyong receivables, there is no evidence he also ratified the recycling of those receivables. Although Ssangyong voluntarily entered into the April 1996 consent decree, it may have done so to shorten the litigation process. The fact IGL itself no longer had possession would have made the funds and inventory extremely difficult and time-consuming to trace. In any event, there was no evidence Ssangyong ratified IGL's pre-April 1996 transfers to the affiliated entities. The Court therefore concludes that IGL acted "in a manner inconsistent with" Ssangyong's right to its receivables and inventory, and accordingly, is liable for conversion. McAdam v. Dean Witter Reynolds, 896 F.2d 750, 771 (3d Cir. 1990). Because conversion is a strict liability tort, see, e.g., Moore v. Regents of the Univ. of Cal., 793 P.2d 479, 494 (Cal. 1990), the fact IGL may originally have intended to repay Ssangyong is no defense.
2. Committed by IGL Affiliates in Iowa Action
Count IV of the original Iowa complaint alleges 101, 11, IELC and MMC have wrongfully converted receivables and other property in a manner inconsistent with Ssangyong' s superior right to that property. Iowa Complaint, ¶ 69-7 1. This Count subsequently was dismissed upon consent of the parties.
B. Fraudulent Conveyance
1. Uniform Fraudulent Transfer Act
Count I of the Iowa action seeks to void IGL's assignment and/or transfer of Ssangyong receivables to IGI, II, MMC and IELC, pursuant to the Uniform Fraudulent Transfer Act ("UFTA"), Iowa Code §§ 684.1 et seq. Iowa Complaint, ¶ 56.
Under Iowa's adoption of the UFTA, a transfer is fraudulent as to present and future creditors if made: (1) "[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor;" or (2) "[w]ithout receiving a reasonably equivalent value in exchange for the transfer or obligation." Iowa Code § 684.4(1). A transfer is considered fraudulent as to creditors whose claim arose before the transfer if IGL was insolvent at the time of transfer, or was rendered insolvent because of the transfer, and the affiliates failed to tender a "reasonably equivalent value" in exchange for the transfer. Id. § 684.5. Because the Court finds Ssangyong has proven IGL made the transfers with an intent to defraud, the Court finds Ssangyong has succeeded on its UFTA claim.
a. Intent to Defraud
Iowa Code § 684.4(2) states that in determining whether an intent to defraud has been shown, a court should consider the following factors:
a. Whether the transfer or obligation was to an insider.
b. Whether the debtor retained possession or control of the property transferred after the transfer.
c. Whether the transfer or obligation was disclosed or concealed.
d. Whether, before the transfer was made or obligation was incurred, the debtor had been sued or threatened suit.
e. Whether the transfer was of substantially all of the debtor's assets.
f. Whether the debtor absconded.
g. Whether the debtor removed or concealed assets.
h. Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
i. Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
j. Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.
k. Whether the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
In the present case, the Court finds Ssangyong has proven at least six of the above eleven factors. First, the evidence leaves no doubt David Suh, who directed the transfers at issue, was an "insider" with regard to IGL and all of the IGL affiliates, and retained a great deal of control over the transferred assets and inventory, thus satisfying the first two factors. David is or was an officer of IGI, IGL, and MMC. PTO Stip. ¶ 8. David testified he himself formed IGI, in which he was also a shareholder, "on a very temporary basis" to maximize the use of Ssangyong receivables. Tr. 494. David also formed IELC — albeit with Ssangyong's knowledge — to purchase the land and build the warehouse used by Innova and presumably, MMC. Tr. 495. And although not an officer per se in Innova, David manages its day-to-day business affairs and income: running the computer system, performing bookkeeping, payroll and shipping functions, and storing and purchasing necessary inventory. Tr. 489. At one point, he considered himself a vice-president of Innova. Tr. 637-39. Perhaps most importantly, David is treated by Ryan and Krull as their virtual equal in terms of compensation. Before Innova was formed, Ryan, Krull and David agreed informally the three would split all profits equally. (Tr. 703). David is compensated, or at least, entitled to take compensation, at levels virtually equivalent to Innova' s named principals, Krull and Ryan. See Dep. of Krull at 79 (admitting that $500,000 was "available" to David for 1998, which Ryan testified is the same amount received for that year by Ryan and Krull (Tr. 704)).
The Court notes there is little information in the record regarding the formation and structure of MMC. Because the corporation was formed for the same basic purpose as Innovav — to continue the steel portion of the business without the liabilities of IGL, the Court presumes its operated under the same format as Innova, with David Suh providing most of the management functions. In fact, David Suh repeatedly uses the pronoun "we" when referring to MMC's business history. Tr. 493-94.
Next, the Court finds that although David historically was very quick to share business dealings and corporate structuring with Ssangyong's attorneys, he changed this pattern in June 1995. David states he believed Ssangyong management had fully authorized IGL's retention and recycling of receivables, yet chose not to inform Ssangyong of his intent to carry out future business through newly formed corporations. The concealment of IGL's transfers to these corporations satisfies the third factor under section 684.4(2).
The Court next finds the fourth factor, whether the debtor had been sued or threatened suit, is also satisfied. The Sam Brown companies filed suit against IGL in April 1995, (Ex. 285, 286), and IGL did not make its first transfer to IGI until sometime after June 1, 1995. It made its loans to Innova and MMC on or about February 1996.
Finally, Ssangyong has also proven two other factors, that the transfers represented all or substantially all of IGL's assets, and that IGL was insolvent or became insolvent shortly after the transfers were made. Whether a party is insolvent depends on its balance sheet; i.e. whether its liabilities exceed its assets. Iowa Code § 684.2; see also Benson v. Richardson, 537 N.W.2d 748, 757 (Iowa 1995) ("an individual debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at fair valuation") (internal citation omitted). The parties stipulated prior to trial that IGL transferred more than $5,474,000 to Innova, MMC, IGI and IELC prior to entry of the April 1996 Consent Order. PTO Stip., Ex. G. Ssangyong's financial
expert, Scott Pelz, testified at trial, however, that IGL showed a negative net worth for all months between January 1, 1995 and December 31, 1997, other than the months of August through November, in which it showed a "positive 3 hundred and some-odd thousand dollars net worth." Tr. 44-45. Regardless of whether IGL's transfers to affiliated entities were considered "loans," it is clear to the Court IGL satisfied the definition of insolvent at the time it made each transfer, or shortly thereafter. During the months of August through November 1995, it appears IGL transferred away what little assets it had left.
The UFTA does not set forth a minimum number of factors that must be satisfied in order to find fraudulent intent. See Iowa Code § 684.4(2). Nevertheless, the Eighth Circuit has held that proof of five out of eleven "badges of fraud" is sufficient to establish such intent. In re Sherman, 67 F.3d 1348, 1354-55 (8th Cir. 1995). Following Sherman, and in view of the strong evidence supporting the six factors addressed, the Court finds Ssangyong has proven IGL made the transfers with intent to defraud.
b. Reasonably Equivalent Value and Insolvency
Because Ssangyong has proved IGL transferred assets to its affiliates with the intent to defraud Ssangyong, the Court need not address independently the issues of reasonably equivalent value and insolvency. See Iowa Code § 684.4(1) (proof of intent to defraud sufficient to establish fraudulent transfer with respect to present and future creditors). The Court therefore concludes Ssangyong has established its claim for fraudulent transfer under Iowa's adoption of the UFTA, and is entitled to a remedy set forth in Iowa Code § 684.7.
2. Common Law
Count II of the Iowa action sets forth a cause of action for fraudulent conveyance under the common law. Iowa Complaint, ¶¶ 6 1-65. To evaluate a claim for fraudulent conveyance under Iowa common law, however, courts look for the same indicia, or "badges" of fraud that are codified in Iowa Code § 684.4(2). See, e.g., Production Credit Ass'n v. Shirley, 485 N.W.2d 469, 472 (Iowa 1992) (indicia of fraud include "inadequacy of consideration, insolvency of the transferor and pendency or threat of third-party creditor litigation); see also Graham v. Henry, 456 N.W.2d 364, 366 (Iowa 1990) (other "badges" of fraud include whether a relationship exists between the transferor and transferee, whether the transfer was accompanied by "secrecy or concealment, departure from the usual method of business, any reservation of benefit to the transferor, and the retention of benefit to the transferor, and the retention by the debtor of possession of the property"). Because the Court previously has found Ssangyong proved its claim under the UFTA by establishing many of the same factors considered at common law, the Court finds it has also succeeded on its common law claim for fraudulent conveyance.
III. IGL'S REMAINING COUNTERCLAIMS
A. Tortious Interference
In addition to its counterclaims for breach of contract, breach of the duty of good faith and fair dealing and reformation, which are addressed in part 1(A) above, IGL also has alleged separate counterclaims for tortious interference with an existing or prospective business advantage, unfair competition, fraud in the inducement and trade libel and defamation. The Court will evaluate all of these counterclaims under New Jersey law. Summary Judgment Order, at 23.
To establish a claim of tortious interference of existing or prospective business advantage under New Jersey law, IGL must prove it "had a reasonable expectation of economic advantage, which was lost as a direct result of [Ssangyong's] malicious interference, and that [it] suffered losses thereby." Ideal Dairy Farms, Inc. v. Farmland Dairy Farms, Inc., 659 A.2d 904, 933 (N.J.Super.Ct. App. Div. 1995) (citing Baldasarre v. Butler, 625 A.2d 458 (N.J. 1993)). For purposes of this tort, the term malice does not mean Ssangyong necessarily showed ill-will toward IGL, but that its "harm was inflicted intentionally and without justification or excuse." Printing Mart-Morristown v. Sharp Elecs., Corp., 563 A.2d 31, 37 (N.J. 1989). The relevant inquiry is whether Ssangyong's conduct violated the "`rules of the game.'" Id. (quoting Harper-Lawrence, Inc. v. United Merchants Mfrs. Inc., 619 A.2d 623 (N.J.Super.Ct. App. Div. 199 3)).
In its post-trial memorandum, IGL alleges that Ssangyong's continued and unexplained delays in financing amounted to tortious interference with IGL's current and prospective relationships not only with customers, but also with supphers, manufacturers and at least one lender. This Court agrees. There is no doubt in the record Shim purposely delayed processing letters of credit with full knowledge he was placing many of IGL's business dealings at risk. See Ex. 55 (May 5, 1995 memorandum from David Suh to Shin' indicating that "because of shipping schedules, the following letters of credit need to be opened by Tuesday, May 9 at the latest."); Ex. 56 (May 15, 1995 memorandum from David Suh to Shim stating: "The product to fill the purchase order for this amendment is sitting at the port in Thailand. We are facing penalties, if this does not ship now. We are requesting that you please approve and process this amendment today to avoid any penalties."); Ex. 57 (May 12, 1995 memorandum: "Please issue the urgent L/C."); Exs. 58-61 (similar memoranda expressing urgency with regard to delayed letters of credit); See also Ex. 62 (May 17, 1995 letter from Harry Schwartz, Executive Vice President of Julie Pomerantz, Inc. to David Sub, which Sub then forwarded by facsimile to Shim, explaining the "disaster" Julie Pomerantz would experience if letters of credit did not issue immediately).
On May 22, 1995, Shim responded collectively to recent memoranda received from IGL personnel. In this letter, Shim indicated he had received the various memoranda, but that the credit limit for IGL/Ssangyong had exceeded the amount set forth in the February 15, 1995 document, and that Ssangyong desired to see a written collection plan. See Ex. 66. This letter clearly shows Shim intentionally delayed approving letters of credit with knowledge of the possible consequences to IGL and Ssangyong/IGL clients, and supports the Court's previous finding of a breach of the duty of good faith and fair dealing. Moreover, because Shim's conduct, as evidenced by this letter, reveals that he acted "intentionally and without justification or excuse," Printing Mart-Morristown v. Sharp, 563 A.2d at 37, the Court finds IGL has proven its claim for tortious interference with an existing or prospective business relationship.
B. Libel
1. Trade Libel or Defamation
Count VI of the counterclaims alleges Ssangyong committed trade libel and defamation based solely on an April 9, 1996 letter written by Shim to Brenton Bank in response to a letter written by Brenton asserting that a $124,584 deposit it had made to Ssangyong's account was in error. Ex. C to Trial Ex. 76. The letter states in relevant part:
Thank you for your recent letter regarding the $124,584.64 transfer to our account on March 22, 1996. Please be advised that Ssangyong has commenced litigation against IGL in the United States District Court for the District of New Jersey alleging among other things, that IGL converted and stole approximately $24,000,000 in monies due and owing to Ssangyong. It is our understanding that the March 22, 1996 transfer referenced in your letter involves monies that are due to Ssangyong and if provided to IGL, would be converted along with the other funds. For this reason, we disagree with your statement that the monies should be returned and that the payment was in error.Id. Initially, the Court notes that under current New Jersey law, the terms "trade libel," "slander" and "defamation" are used interchangeably. See, e.g., Kass v. Great Coastal Express, Inc., 704 A.2d 1293, 1295 n. 1 (N.J. 1998) (setting forth elements of defamation in claim for trade libel); Biondi v. Nassimos, 692 A.2d 103, 105 (N.J.Super.Ct. App. Div. 1997) (interchanging terms "slander" and "defamation").
To establish that a statement constitutes slander, a plaintiff must prove: "that defendant communicated to a third person a false statement about plaintiff that tended to harm plaintiff's reputation in the eyes of the community or to cause others to avoid plaintiff." McLaughlin v. Rosanio, Bailets Talamo, Inc., 751 A.2d 1066, 1069 (N.J.Super.Ct. App. Div. 2000) (internal citation omitted). To determine whether a particular statement amounts to defamation, "a court must examine three factors: content, verifiability, and context." Id.
This Court concludes Shim's letter meets the standard for defamation in the present case. Although at the time the letter was written, Shim may have been justified in believing that IGL had wrongfully retained as much as $15 million of its receivables, there is no basis for alleging it had "stolen as much as $24 million." Shim was an experienced businessman, and knew or should have known that his statement would cause Brenton Banks to question the credit worthiness of IGL and David Suh. As argued by IGL, Shim's letter was both grossly inaccurate and reckless.
The fact a statement is defamatory does not entitle a plaintiff to recover unless the plaintiff can show "actual harm to reputation through the production of concrete proof, " however. McLaughlin v. Rosanio, Bailets Talamo, Inc., 751 A.2d 1066, 1069 (N.J.Super.Ct. App. Div. 200 0). In the present case, IGL has not even attempted to assert it was actually damaged by Shim's letter, and thus its claim for simple trade libel or defamation must fail.
2. Slander or Defamation Per Se
IGL argues alternatively that Shim's letter is so egregious as to amount to slander or defamation per se. Under New Jersey law, "[i]f a defamatory statement constitutes slander per se, a plaintiff may establish a cause of action not only without proving `special damages," that is, damages of a pecuniary nature, but without proving any form of actual damage to reputation. Biondi, 692 A.2d at 106 (internal citation omitted). An otherwise defamatory statement may be slander per se if it imputes to another person: "(1) a criminal offense; (2) a loathsome disease; (3) conduct, characteristics or a condition that is incompatible with his business, trade or office; or (4) serious sexual misconduct." Id. IGL argues in the present case that Shim's letter meets the first and third categories for slander per se.
In Biondi, the New Jersey Superior Court recognized that the per se doctrine has been subject to severe criticism, and cautioned that: "Courts should not permit speculative inferences regarding the possible meaning of an alleged defamatory statement to support a verdict in favor of a plaintiff who is unable to show any actual damage to his reputation." Id. at 108. This sentiment was echoed recently in McLaughlin. McLaughlin, 751 A.2d at 1069 ("the [slander per se] doctrine has been "severely criticized' as allowing compensation when there is no injury").
Nevertheless, neither the Biondi nor the McLaughlin court overruled the doctrine. See Biondi, 692 A.2d at 107 ("We leave for another time whether we should eliminate slander per se. Today we decide only that we will not expand the four slander per se categories."). In fact, in a ruling issued in January of this year, a federal district court sitting in New Jersey recognized this paradox. Kadetsky v. Egg Harbor Township Bd. of Educ., 82 F. Supp.2d 327, 343 n. 15 (D.N.J. 2000) ("Undoubtedly, the doctrine of slander per se has been highly criticized for its rule that parties need not prove special damages . . . . Yet the Supreme Court of New Jersey continues to recognize what it has called a relic from tort law's previous age, explicitly leaving for another time the issue of whether to eliminate the doctrine altogether.") (internal citation omitted).
In the present case, although reluctant to do so, this Court is bound to follow the current state of New Jersey law and find that Shim committed slander per se when he wrote the April 1996 letter to Brenton Bank. His allegation that IGL "converted and stole" $24 million in Ssangyong receivables clearly accuses IGL of criminal conduct, with no room for an alternative interpretation. Similarly, the language also meets the third category of slander per se: converting and/or stealing a trade partners' funds is definitely conduct, characteristics or a condition that is incompatible with his business, trade or office. Biondi, 692 A.2d at 106.
In its post-trial memorandum, Ssangyong argues Shim's statements were insulated under the ligitation privilege. This privilege, however, applies only to communications "(1) made in judicial or quasi-judicial proceedings; (2) by litigants or other participants authorized by law; (3) to achieve the objects of the litigation; and (4) that have some connection or logical relation to the action." Hawkins v. Harris, 661 A.2d 284, 289 (N.J. 1995). In the present case, although Shim and IGL may have been in the process of litigation, Ssangyong's letter to Brenton Banks was not made "within the context of that litigation" to "achieve the objects of the litigation." Id. Accordingly, Ssangyong's defense is without merit. The Court finds in favor of IGL on the claim of slander or defamation per Se.
C. Unfair Competition
Count IV of IGL's counterclaims contends Ssangyong engaged in unfair competition in violation of the 1993 and 1995 Agreements. In its August 17, 1999 Summary Judgment Order, this Court declined to grant summary judgment on this count, even though the tort has been categorized "not as a distinct tort, but rather as an amalgamation of several different torts." Summary Judgment Order, at 27. In reaching this conclusion, however, the Court urged counsel for IGL to reevaluate its counterclaims and eliminate duplicity whenever possible. Id. at 28.
Unfortunately, counsel not only failed to heed the Court's advice, but also failed to produce evidence at trial to support an independent basis for this tort. Rather, in its post-trial memorandum, IGL argues simply that "Ssangyong's repeated and intentional delays in processing letters of credit, its abrupt termination of the 1993 Agreement, and its false statements to Brenton Bank . . . were acts which fell far short of what is acceptable and appropriate in the marketplace." IGL's Post Trial Memorandum of Law, at 53. The Court finds IGL has failed to distinguish the tort either factually or legally from its claims for tortious interference and trade libel/defamation. Accordingly, the Court finds in favor of Ssangyong on this counterclaim.
D. Fraud in the Inducement
Count VI of IGL's counterclaims alleges Ssangyong committed fraud in the inducement with regard to the 1993 and 1995 Agreements. IGL did not address this tort at trial or in its post-trial memorandum, and accordingly, the Court finds in favor of Ssangyong on this count.
IV. DAMAGES
A. IGL's Claims
The Court must now complete the difficult task of awarding damages and entering judgment. Because the Court finds IGL to have experienced the greatest loss, the Court will begin by assessing damages relative to each of IGL's successful claims.
1. Breach of Good Faith and Fair Dealing
Under New Jersey law, a defendant who has been found to breach the implied covenant of good faith and fair dealing must compensate the plaintiff "for all of the natural and probable consequences of the breach of that contract." Sons of Thunder, 690 A.2d at 590 (internal citation omitted). Lost profits is considered one of these "natural and probable consequences." Id.
To recover for lost profits in the present case, IGL must prove "`the amount of damages with a reasonable degree of certainty, that the wrongful acts of the defendant caused the loss of profit, and that the profits were reasonably within the contemplation of the parties at the time the contract was entered into.'" Id. (quoting Unique Systems, Inc. v. Zotos Int'l, Inc., 622 F.2d 373, 378-79 (8th Cir. 1980)). This Court finds all three factors have been met in the present case. With regard to the first factor, the Court adopted in its findings of fact the damages calculated by IGL's expert witness, John Andrew Koch. Tr. 788-92; Ex. 127. The record reflects that Mr. Koch was qualified to make such calculations, and that the methodology he employed — combining lost profits, diminution in value and uncollectible receivables — produced a figure that represents IGL's actual loss to a reasonable degree of certainty. Although Ssangyong cross-examined Mr. Koch at trial, it chose not to produce independent evidence to counter Mr. Koch's overall loss estimates.
As to the second factor, the Court concluded in the body of this Ruling that Ssangyong breached the covenant of good faith and fair dealing knowing IGL was completely dependant upon it for financing. A finding that Ssangyong caused IGL's lost profits reasonably flows from this conclusion.
The Court also finds the estimated $23.2 million in profits was reasonably within the parties' contemplation at the time they entered into the contract. The evidence shows Ssangyong had a one-year history providing financing to Nanam/Midko before it decided to enter into the 1993 Agreement. Tr. 327-42. Based on the obvious transformation from the Nanam/Midko to the 1993 Agreement, the Court finds credible the testimony of David Suh that Ssangyong knowingly and voluntarily assumed a substantial risk with respect to the 1993 Agreement, in exchange for a greater return on its investment. Tr. 338. It is not unreasonable for the parties to have contemplated that IGL itself would acheive three year profit totals in the range of $20 million from this new venture. Accordingly, the Court finds IGL is entitled to recover Mr. Koch's adjusted figure of $23.2 million as damages for Ssangyong's breach of the duty of good faith and fair dealing.
2. Tortious Interference with Existing and Prospective Relationships
Although IGL succeeded on its tortious interference claim, there is no evidence it was damaged beyond the amount claimed for breach of contract. The Court finds IGL has been fully compensated with the award for lost profits set forth above. See, e.g., Inter Medical Supplies Ltd. v. EBI Medical Systems, Inc., 975 F. Supp. 681, 687 (D.N.J. 1997) (plaintiffs did not claim separate compensatory damages arising from tort; "entire amount of damages plaintiff sought for "lost profits' was presented to the jury" in conjunction with contract claims).
IGL also seeks punitive damages to account for what it tenus Ssangyong's "egregious" conduct. Although punitive damages are available in a tort action, any such award must be accompanied by a finding the defendant is guilty of actual malice. Herman v. Sunshine Chem. Specialties, Inc., 627 A.2d 1081, 1085 (N.J. 1993). As noted by the New Jersey Superior Court in Jugan v. Friedman, 646 A.2d 1112 (N.J.Super.Ct. App. Div. 1994), "[e]very fraud is reprehensible, but not every fraud . . . warrants punitive damages."
In the present case, although IGL succeeded in proving Ssangyong acted "intentionally and without justification or excuse," Printing Mart-Morristown, 563 A.2d at 37, the Court does not believe Ssangyong acted with actual malice or "ill will." See id. (differentiating the term "malice" in the literal sense and as used in the context of a claim for tortious interference with a contract). Although Ssangyong clearly knew IGL would suffer from delayed financing, the Court finds Ssangyong was motivated more by a desire to protect its own interests than with a desire to harm IGL. Absent a showing of actual malice, punitive damages are not appropriate with regard to IGL's claim for tortious interference with current and prospective business relationships.
3. Slander Per Se
As discussed above, IGL has not presented evidence of special, or compensatory damages, flowing from Ssangyong's slanderous letter. The Court therefore will award nominal damages in the amount of $1,000.00 to compensate IGL for any incidental damage to reputation it may have suffered from the letter at issue. See Newman v. Delahunty, 681 A.2d 671, 685 (N.J.Super.Ct. Law Div. 1994) (trial court awarded nominal damages of $1,000.00 for slander per se in absence of specific evidence of compensatory damages).
IGL also seeks punitive damages on this claim. The New Jersey Court of Appeals has held that a plaintiff "need not show injury which gives rise to compensatory damages in order to receive punitive damages," provided the plaintiff show some type of harm caused by the defamatory conduct. Cooper Dist. Co., Inc. v. Amana Refrigeration. Inc., 63 F.3d 262, 281 (1995) (citing Nappe v. Anschelewitz, Barr, Ansell Bonello, 477 A.2d 1224, 123 1-32 (N.J. 1984). Among the factors considered in evaluating a potential award for punitive damages in this context, however, is whether the defendant's conduct was "especially egregious." Newman, 681 A.2d at 685 (citing Fischer v. Johns — Mansville Corp., 512 A.2d 466 (1986)). Again, although Shim, and therefore Ssangyong, were certainly reckless and inaccurate in sending this letter to Brenton Bank, the Court cannot consider the letter "especially egregious." Shim did not originate the correspondence with Brenton, but rather, wrote the letter in response to Brenton's letter requesting repayment of a sum Brenton claimed was wrongfully credited to Ssangyong' s account. Ssangyong's good faith belief that it was entitled to the bank deposit in dispute mitigates against Shim's poor judgment in choosing the content of the letter. Punitive damages are not appropriate on this claim.
B. Ssangyong's Claims for Conversion and Fraudulent Conveyance
As set forth in part II above, the Court finds Ssangyong had a vested interest in the receivables and inventory retained, recycled and transferred by IGL prior to the point at which Ssangyong breached the contract. Furthermore, the Court finds IGL is not entitled to retain profits on the "recycled receivables." Although IGL obtained the funds in a rightful manner, it soon became a willful converter. IGL retained and loaned and/or transferred Ssangyong's receivables and Ssangyong-financed inventory knowing: 1) the receivables and inventory were rightfully the property of Ssangyong; 2) Choi had no authority to direct the retention and reuse of the funds or inventory; and 3) Shim had expressly requested the receivables be submitted forthwith. The argument that IGL somehow assumed the risk of these new "sales" and should be able to keep the profits is without merit. Ssangyong receivables funded the loans and accordingly, Ssangyong assumed all risk of loss (albeit unknowingly). See, e.g., Hozie v. The Vessel Highland Light, No. CV 97-4 199 ABC BQRX, 1998 WL 938587, 5 (C.D. Cal. June 1, 1998) (in admiralty context, when value of property is enhanced in hands of willful converter, owner may recover enhanced the value of property); Fall v. Miller, 462 N.E.2d 1059, 1062 (Ind.Ct.App. 1984) (executor who converts assets of estate liable for profits made on converted funds).
In a similar vein, the Court also finds IGL is not entitled to deduct a commission from the receivables it withheld from Ssangyong. In Dept. of Ins. v. Universal Brokerage Corp., 697 A.2d 142 (N.J. Super Ct. App. Div. 1997), the New Jersey Superior court was called to consider a similar issue involving an insurance agent who had misappropriated more than $1 million in premiums. On appeal, the Superior Court affirmed the lower court's refusal to allow a set-off against the restitution order to account for commissions. Id. at 144. As explained by the court: "An agent who fails to remit the collected premiums to the insurance company fraudulently converts such moneys and forfeits his/her right to compensation because the commissions are not considered as having been earned." Id. See also Commercial Ins. Co. of Newark v. Apgar, 267 A.2d 559, 567 (N.J. Super Ct. App. Div. 1970) (same); Smith v. Kreps, 140 A.2d 314, 315 (N.J. 1928) (real estate agent not entitled to collect commission after fraudulently inducing principal to enter into sales agreement).
The Court must now determine the appropriate form of redress for Ssangyong. In the New Jersey action, among the types of damages sought by Ssangyong is a money judgment to compensate it for the funds allegedly retained and recycled by IGL. See New Jersey Complaint, at 15. Although Ssangyong also has requested several forms of equitable relief in both the New Jersey and Iowa actions, the Court finds the most appropriate form of damages to compensate Ssangyong for IGL's wrongful conversion and fraudulent conveyances is a money judgment in the form of a set-off against the amount it owes to IGL. This finding is reflected in the amount of judgment entered below.
V. CONCLUSION AND ENTRY OF JUDGMENT
In conclusion, the Court finds that beginning with Shim's arrival at Ssangyong in late 1994, Ssangyong failed to act toward IGL in good faith. Ssangyong clearly had the advantage in the relationship, due to the fact IGL was entirely dependent upon it for all financing. For this reason, the Court finds Ssangyong was the first to commit a wrongdoing, and ultimately, must pay for IGL's losses.
Nevertheless, Ssangyong's conduct with regard to the 1993 Agreement did not give IGL carte blanche to use Ssangyong funds in whatever manner it chose. IGL had a contractual remedy against Ssangyong for breach of contract, and retained the right to have the security agreements lifted in court. That IGL may not have achieved a quick judicial resolution is no excuse for its wrongful conversion of funds Ssangyong earned prior to the breach.
Accordingly, for the reasons set forth above,
1. New Jersey Complaint
The Court finds in favor of IGL and against Ssangyong on Ssangyong's claim of breach of contract as set forth in Count I in the New Jersey action. Ssangyong's request for an accounting in Count II of the New Jersey complaint is denied as moot. The Court finds in favor of IGL and against Ssangyong on Count III of the New Jersey complaint (breach of the implied duty of good faith and fair dealing). The Court finds in favor of Ssangyong and against IGL on Ssangyong's claim of conversion, for which a separate count was not included in the complaint. It is the Court's understanding that the remaining counts will be disposed of in the New Jersey federal district court.
2. New Jersey Counterclaims
The Court finds in favor of Ssangyong and against IGL on Count I of the counterclaim, breach of contract. Count II, reformation, is denied as moot. The Court finds in favor of IGL and against Ssangyong on IGL's claim for breach of the duty of good faith and fair dealing in Count III of the counterclaims.
The Court further finds in favor of Ssangyong and against IGL on IGL's claim for unfair competition in Count IV of the counterclaims. The Court finds in favor of IGL and against Ssangyong on the tortious interference charge set forth in Count V of the counterclaims. The Court finds in favor of Ssangyong and against IGL on IGL's claim for fraud in the inducement in Count VI of the counterclaims. Lastly, the Court finds in favor of IGL and against Ssangyong and Shim with regard to slander per se in Count VII of the counterclaims.
3. Iowa Complaint
The Court finds in favor of Ssangyong and against the IGL affiliates on Counts I and II of the Iowa action, which set forth statutory and common law claims for fraudulent conveyance, respectively. Ssangyong's request for a constructive trust in Count III is denied. Counts IV and V were previously dismissed upon consent of the parties.
4. Judgment
In conclusion, the Court finds IGL and David Suh are entitled to a total damage award of $23.2 million. This sum is appropriately reduced by $15,722,758.00 — the adjusted amount of Ssangyong receivables IGL wrongfully converted and/or transferred — plus $1,000.00 in nominal damages for Ssangyong's slander per Se. Although Ssangyong also succeeded on several of its claims against the IGL affiliates in the Iowa action, the Court finds Ssangyong has been made whole by its set-off against the money it owes IGL in the New Jersey action. Furthermore, because it appears the IGL affiliates that remain operable have fully repaid IGL, or are in the process of repaying IGL, for loans and transfers made, the Court finds the IGL affiliates have not reaped a windfall by avoiding a legal or equitable judgment.
The Clerk of Court is hereby directed to enter judgment in favor of IGL and David Suh and against Ssangyong and Shim in the amount of $7,478,242.00, plus interest from the date of judgment. In view of the Court's resolution of the various issues, and the fact neither party is without fault, the Court directs that both sides pay their own fees and costs.
IT IS ORDERED AND ADJUDGED: Judgment is entered in favor of Innovation Group, Ltd., and David J. Suh and against Ssangyong (U.S.A.), Inc. in the amount of $7,477,242.00, plus interest from the date of judgment. A separate judgment is also entered in favor of Innovation Group, Ltd., and David J. Suh and against Ssangyong (U.S.A.), Inc., and Sang Won Shim in the amount of $1,000.00, plus interest from the date of judgment. The Court directs that both sides pay their own fees and costs.