Abgin Corp. v Voila Bakeries, Inc.

[*1] Abgin Corp. v Voila Bakeries, Inc. 2010 NY Slip Op 52137(U) [29 Misc 3d 1234(A)] Decided on October 15, 2010 Supreme Court, New York County Feinman, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on October 15, 2010
Supreme Court, New York County

Abgin Corp., Plaintiff,

against

Voila Bakeries, Inc., Defendant.



109298/06



Plaintiff:

Benjamin Vinar, Esq.

144-15 77th Avenue

Flushing NY 11367

718-793-9226

Defendant:

Steven R. Goldberg, Esq.

One North End Avenue

Suite 1201

New York NY 10282-1101

212-845-5100

Paul G. Feinman, J.

Plaintiff Abgin Corp. (Abgin) moves for partial summary judgment on part of its first claim for breach of contract, seeking payment of commissions of $82,065.24, plus interest of $36,565.28, and the cost of the audit plaintiff was compelled to conduct, in the amount of $31,081.24.

In this action, defendant purchased plaintiff's customer lists and baking recipes, in return for which it was to pay plaintiff commissions in the form of percentages of the revenues defendant received from its sales for a period of four years. Plaintiff claims that, while defendant paid the commissions for the first two years of the contract, after that defendant began to under report its product sales revenues, paying plaintiff substantially less than the amounts to which plaintiff was entitled under the contract. Plaintiff estimates that, at the end of the four-year period, it was short-changed approximately $200,000.00. In moving for summary judgment, it submits the report of its accountant, who did an audit of the daily sales records produced by defendant by order of this court upon discovery, and who calculates, based on the invoices [*2]produced, that defendant owes, at a minimum, the amounts sought in this motion. Plaintiff asserts that, at the trial, it expects to submit evidence from its accountant impugning defendant's reports of sales as incomplete, and will seek to recover the remainder of the commissions, over and above those reported and disclosed by the invoices submitted in discovery. In this motion, plaintiff also seeks to recover the costs of its accountant's audit under the contract.

In opposing, defendant contends that summary judgment is inappropriate, because plaintiff's accountant failed to submit the backup invoices supporting his calculations, and failed to show his exact calculations. Defendant claims there is an ambiguity in the contract regarding the commissions due on sales to "Joint Customers." It also contends that a fact issue is raised by its affirmative defense that plaintiff breached warranties, representations, and covenants in the contract, because the recipes it sold were not as profitable to defendant. Finally, it claims that there is a triable issue as to whether the fee paid the accountant was an audit fee under the contract.

BACKGROUND

On September 26, 2001, France Croissant Ltd. (FC) entered into an Agreement of Purchase and Sale of Assets with defendant Viola Bakeries, Inc. (Agreement) under which FC sold to defendant certain assets relating to FC's business of manufacturing, baking, and selling (wholesale) pastries, breads, and muffins, which products and prices were listed in an exhibit to the contract (Exhibit A to Notice of Motion). These assets included FC's exclusive customers, and certain joint customers of FC and defendant, which were specified in schedules 2.2 (a) and 2.2 (b) (i) to the Agreement, as well as FC's manuals, advertising matter, pricing, mailing, and distribution lists, and its rights to use the recipes, formulae, and proprietary manufacturing processes with respect to sales to the customers listed and to defendant's customers (id., § 1). The purchase price was to be paid, commencing after an initial transition period when defendant learned FC's recipes and baking processes and began supplying and servicing all of the customers set forth in the schedules, for four years. It was to be paid in the form of commissions of "8.5% of revenues actually received from sales to the Exclusive FC Customers listed in Schedule 2.2 (a) annexed hereto" of both the FC Products and the Viola Products listed in Schedule 2.2 (b) (ii), and to Joint Customers, listed in Schedule 2.2 (b) (i), commissions in the amount of the listed percentages (on that same schedule) of revenues actually received from sales of both FC Products and Viola Products. The payments were to be made monthly, and were to be accompanied by a statement from defendant indicating the revenues collected from Exclusive FC Customers and the Joint Customers during the applicable collection period.

Section 15, entitled "Audit Rights," provided that FC had the right, upon reasonable advance notice, not more than once per calendar year, to have defendant's revenue records audited. The audit "may be conducted by (i) an independent third party acceptable to [defendant], (ii) [FC's] regular independent accounting firm, or (iii) one of the big five' accounting firms" (id., § 15). The audit was to be conducted at FC's expense, except if the audit revealed an underpayment of five percent (5%) or more in any given year, in which case defendant was to reimburse FC for all reasonable costs of the accounting firm. This section also provided that, if the audit was conducted by FC's regular independent accounting firm, then defendant was permitted to retain an independent third party to verify the results of the audit (id.). [*3]

Sometime after the Agreement was executed, FC assigned all its rights under the Agreement for value to plaintiff (Affidavit of Christine Lelamer, dated March2, 2010, ¶ 4).

The four-year period of the Agreement, during which defendant was obligated to pay plaintiff commissions, commenced on October 15, 2001 and continued through to October 15, 2005 (id., ¶ 5). For a period of fifteen months, until June 2003, defendant provided plaintiff with quarterly printouts of what defendant claimed were its daily sales (id., ¶ 6). In June 2003, defendant refused to furnish any more daily sales reports through to the end of the contract period (id., ¶ 12). Defendant informed plaintiff that, as of October 2003 through the end of the contract period, there were no additional sales of any product to which plaintiff was entitled to commissions under the Agreement, and it did not pay any commissions after September 2003 (id., ¶ 13).

Plaintiff then retained an accountant in October 2005 and demanded an audit of defendant's daily sales records (id., ¶ 15). Defendant only produced records for four, non-consecutive months out of the thirty-four months at issue (id. at 16). It claimed there was some data corruption in its computer (Affidavit of Jack Hanan in Opposition, dated May 2010, ¶ 14). Plaintiff's accountant was unable to perform an audit based on these records (id., ¶ 17).

Plaintiff then brought this action, alleging breach of contract and breach of fiduciary duty, seeking an accounting and recovery of the commissions due, interest, and auditing expenses, as well as punitive damages for the alleged breach of fiduciary duty (Exhibit B to Notice of Motion). In its answer, defendant admitted that it entered into the Agreement, but denied the rest of the material allegations in the complaint. It set forth, as an affirmative defense and counterclaim, that plaintiff breached the representations, warranties, and covenants of the Agreement. It alleged that certain of the recipes provided by FC were for a product size not wanted by customers, and that defendant had to reformulate the recipes to make different sized products. Thus, it claimed that the recipes were not as profitable, and that it did not get the benefit of its bargain (Exhibit C to Notice of Motion).

Plaintiff sought and, through an order of this court, eventually obtained in discovery, defendant's daily invoices of sales to the covered customers listed in the Agreement, from the period January 2003 to the end of the contract payments on October 15, 2005 (id., ¶ 19). It retained an accountant, Stuart Doloboff, to conduct an audit of these invoices (id., ¶ 21). Mr. Doloboff determined that over 96% of the sales recorded by defendant in the invoices it produced for the 25-month period were for sales of products listed in the Agreement as sales for which commissions were due to plaintiff (id., ¶ 22). Plaintiff asserts that Mr. Doloboff did the mathematical calculations of the amounts of the commissions provided for in the Agreement, subtracting out bagels, donuts, and kaisers (which were not to be included), and determined that the amount due from defendant was $82,065.24, and calculated the interest at the legal rate of 9% as $36,565.28. It contends that these amounts are not the entire amount at issue in this action, but that they are the amounts that are indisputably owed to plaintiff.

In his affidavit, Mr. Doloboff attests that he or his staff reviewed over twenty thousand invoices provided by defendant (Affidavit of Stuart Doloboff In Support, dated February 26, 2010, ¶ 4). He states that the Agreement provided for payment of 8.5% commission for Exclusive FC Customers and varying commissions ranging from 2.5% to 8.5% on sales to Joint Customers as set forth in schedules 2.2 (a) and 2.2 (b) (i), and that the Agreement applied to sales [*4]of "Products," consisting of pastries, breads, and muffins, that used to be manufactured by FC and "Viola Products" listed in schedule 2.2 (b) (ii) (id., ¶ ¶ 6-7). He affirms that, under his direction and supervision, his staff performed comparisons on the invoices for the period October 2003 through October 2005 for the product categories, and determined that the combined sales subject to the Agreement amounted to $1,029,561.50 (id., ¶¶ 9-11). He states that, applying the commission rates, defendant owed plaintiff a combined amount of $84,654.79 in commissions on those sales (id., ¶ 12). Mr. Doloboff then attests that he was instructed by plaintiff that it was understood between the parties that bagels, donuts, and kaiser rolls were to be excluded, and therefore, he instructed his staff "to take a statistically significant sample of the proportion of sales of bagels-donuts-kaiser rolls to product sales as a whole," and using a random sample of 17 weeks out of the 145-week period, determine the percentage of total sales those items constituted (id., ¶ 15). He states that it was determined, based on this sample method, that bagels, donuts, and kaiser rolls constituted 2.6% of defendant's total sales, which amounted to $30,655.61, which would be subtracted from the total sales of the $1,029,561.50, equaling $998,905.89 in sales subject to commissions, and $82,065.24 in commissions owed (id., ¶¶ 15-17).

Mr. Doloboff then sets forth his calculation of the legal interest due. Mr. Doloboff further attests that his affidavit and audit was limited to the invoices produced by defendant, but that other documents have lead him to conclude that there are many more sales of covered products than are disclosed on the invoices submitted. He expects to testify that there were additional covered sales, as evidenced by daily printouts that were provided to plaintiff by defendant for sales in October 2004 (id., ¶ ¶ 20-21).

Finally, Mr. Doloboff asserts that his staff spent 325.25 hours and he personally spent 30 hours performing the audit. He further states that his staff time is charged at $65 per hour and his time is charged at $250 per hour, plus there were incidentals for document reproduction of $1,283.12. Thus, he attests that the amount he billed plaintiff for the audit was $31,081.24 (id., ¶ 24).

Based on this proof, plaintiff argues that the Agreement is unambiguous, it requires defendant to pay commissions for sales covered by it, and that the defendant does not dispute that it failed to pay any commissions on any sales made by it to customers listed in the Agreement for the period October 2003 through to October 2005. Plaintiff urges that Mr. Doloboff's affidavit resolves any issues regarding the amounts due, based on his review of the invoices produced by the defendant against the products and customers listed in the Agreement.

In opposition, defendant urges that the motion be denied because plaintiff failed to provide all the invoices as exhibits so that Mr. Doloboff's calculations could be checked for accuracy. It contends that Mr. Doloboff, instead of actually subtracting out the commissions for bagels, donuts, and kaiser rolls, took a sample, which was not appropriate. Defendant challenges the sample size and asserts that the seasonality of certain products, and the variations in the sale of any individual product, make sampling inaccurate (Affidavit of David Dew In Opposition, dated May 19, 2010, ¶7). Defendant maintains that there is a factual issue as to the percentages applied to Joint Customers. It points to the fact that Mr. Doloboff's affidavit does not make clear which percentage (between 2-8.5%) was applied to which Joint Customer. It also urges that plaintiff inappropriately included sales for all Joint Customers, but that it had an oral agreement [*5]with a principal of plaintiff that certain sales to Joint Customers, where the customer was no longer buying plaintiff's products, were not covered (Dew Aff., ¶ 8; Hanan Aff., ¶¶ 7-9). In addition, defendant urges that its affirmative defense that plaintiff breached the representations and warranties of the Agreement, because the recipes that defendant bargained for were not what their customers had been receiving or wanted (Dew Aff., ¶ 5), raises triable issues. It contends that it had to reformulate the recipes to make them larger, raising productions costs, and effectively eliminating its profit margin (id., ¶ 5; Hanan Aff., ¶¶ 4-5). With regard to the audit fees sought, defendant argues that there is an issue of fact as to whether the fees paid to Mr. Doloboff was an "audit fee" under the Agreement, or whether it was just an expert fee for litigation.

DISCUSSION

The plaintiff's motion for partial summary judgment on the first claim for breach of contract is granted as to liability, and is otherwise denied.

Plaintiff has met its burden by presenting prima facie proof of the unambiguous contract, its performance by providing the recipes and customer lists, and defendant's breach by its failure to pay any commissions due from October 2003 through to October 2005. Defendant has failed to meet its burden in opposition, by failing to raise a triable issue as to liability for breach. First, its affirmative defense is insufficient as a defense to the Agreement. Under the Agreement, plaintiff provided "all rights (other than [FC's] rights set forth in Section 2.5 hereof) to use, without limitation, the recipes, formulae and proprietary manufacturing processes" used in FC's business, as well as the customer lists, and the manuals, advertising materials and price lists (Exhibit A to Notice of Motion, Agreement, § 1.1). There is no dispute that FC provided all of these assets. In section 2.5, the Agreement provided for a transition period during which FC permitted defendant's representatives to visit, on 10 occasions, FC's main baking facility, and receive training on the recipes and baking techniques, and defendant could request that FC employees come to its main baking facility for training. The Agreement further set forth, in section 3, the representations and warranties of FC. FC represented and warranted the ownership of its assets, that it had the necessary consents and approvals, that the corporation authorized and approved the Agreement, that there was no pending litigation by or against FC, that it had filed all tax returns and paid all taxes due, and that FC had good relations with all its customers (id., Agreement, ¶ 3). There is nothing in this provision warranting or representing the size of the product produced by FC's recipes, or warranting any particular profit margin to be made by using the recipes.

Defendant's attempt to raise a factual issue, by vague allegations regarding complaints by unidentified customers that the product size was not the same, is rejected. These allegations lack any detail, and appear to be based on hearsay. Moreover, defendant does not deny that it was using the recipes sold to it by plaintiff and selling to plaintiff's customers subject to the Agreement. It also does not deny that it had the transition period, and that it used the recipes, selling products to the customers on the lists and paying plaintiff commissions for those products and sales for two years, until it decided to stop making any payments. Defendant fails to demonstrate any provision in the Agreement in which plaintiff warranted that defendant would make a particular profit margin. Defendant's attempt to vary and contradict the provisions of the Agreement with parole evidence fails as a matter of law. [*6]

With regard to "Joint Customers," defendant contends that the contract was vague as to who was a "Joint Customer," and that he had an oral side agreement with Mr. Lelamer, a former principal of plaintiff who died in 2003, that "Joint Customers" who only purchased defendant's products, were not joint customers for whose sales a commission would be earned. This alleged side agreement, again, is based on hearsay and depends on an oral agreement that contradicts the clear terms of the written Agreement with a party that is unavailable to testify or be cross-examined. The Agreement clearly specifies "Joint Customers" as those set forth in schedule 2.2 (b) (i), and specifically sets forth the percentages for calculation of the commissions due on sales to each of those Joint Customers (Exhibit A to Notice of Motion, Agreement, section 1.1 and schedule 2.2 [b] [i] attached). There is no ambiguity. If defendant wanted a provision excluding customers who only purchased defendant's products, it could have drafted such a provision, or sought an amendment to the Agreement. It did not. It is beyond cavil that a court must enforce, not rewrite a contract, and that it "may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing" (Morlee Sales Corp. v Manufacturers Trust Co., 9 NY2d 16, 19 [1961] [citation omitted]; see Reiss v Financial Performance Corp., 97 NY2d 195, 199 [2001]). Accordingly, defendant has failed to raise any triable issues of fact as to its liability to pay commissions due under the Agreement.

In addition, plaintiff has also demonstrated, as a matter of law, that it is entitled to recover its audit expenses under Section 15 of the Agreement. In order to be entitled to such audit fees, plaintiff had to demonstrate: that it gave reasonable advance notice of an audit; that it had not requested an audit more than once per calendar year; that the audit was conducted by either an independent third party acceptable to defendant, plaintiff's regular independent accounting firm, or one of the big five accounting firms; and that the audit must reveal an underpayment of 5% or more in any given year of the commissions due (Exhibit A, Agreement, § 15). Plaintiff's auditor's affidavit and the affidavit of its principal, Christine Lelamer, show that defendant had advance notice, that an audit had not been requested more than once a calendar year, and that Mr. Doloboff was plaintiff's accountant hired to do the audit (Affidavit of Christine Lelamer in Support, dated March 2, 2010, ¶ 21). Mr. Doloboff's affidavit further demonstrates that there was an underpayment of more than 5% on the commissions due.

Defendant's claim that it did not have advance notice of the invoices used by the auditor fails to raise a triable issue. The invoices, which became the basis of plaintiff's auditor's affidavit, were submitted by defendant only upon order of this court in discovery, and, therefore, defendant clearly had reasonable advance notice of the audit. The fact that plaintiff had previously hired an accountant to do an audit, but that this accountant was unable to complete such audit because of the defendant's failure to turn over the daily sales records or invoices, did not constitute plaintiff's once yearly audit. Defendant will not be permitted to benefit from its own failure to produce the records it was obligated to produce under the Agreement. Moreover, the fact that plaintiff did not engage its accountant until it obtained the invoices from defendant in discovery, does not bar it from coming within this provision as plaintiff's regular independent accounting firm. The court notes that, according to section 15, where the audit is conducted by plaintiff's regular independent accounting firm, defendant "shall be permitted to retain an independent third party to verify the results of such audit." Therefore, defendant, if it deems [*7]necessary, may so retain an auditor and may present the auditor's results at the trial on damages in this action. Accordingly, summary judgment of liability is granted as to defendant's breach of contract for failing to pay the commissions due under the Agreement, and its liability for plaintiff's auditor's expenses.

With regard to damages, however, the court finds triable issues, warranting denial of summary judgment. It is not clear from Mr. Doloboff's affidavit exactly how he made the calculations for the commissions due, and what product sales figures for which customers were taken from the invoices. Further, it is not clear why Mr. Doloboff did not just count the excluded sales for bagel, donuts, and kaiser rolls, or whether his method for taking a sample size for these sales was appropriate here. With respect to Mr. Doloboff's auditing fees, the work done and the amount of time spent by himself and his staff is being challenged by defendant, and is subject to cross-examination at the trial on damages.

Accordingly, it appearing to the court that plaintiff is entitled to judgment of liability on its breach of contract claim and is entitled to recover its audit expenses pursuant to Section 15 of the Agreement, and that the only triable issues of fact arising on plaintiff's motion for summary judgment relate to the amount of damages to which plaintiff is entitled, it is

ORDERED that the plaintiff's motion is granted only with regard to liability on the claim for breach of contract; and it is further

ORDERED that plaintiff shall, within 20 days from entry of this order, serve a copy of this order with notice of entry upon counsel for all parties hereto and upon the Clerk of Trial Support Office (Room 158) and shall serve and file with said Clerk a note of issue and statement of readiness and shall pay the fee therefor, and said Clerk shall cause the matter to be placed upon the calendar for such trial.

October 15 , 2010_________________________________

J.S.C.