United States District Court, N.D. California
August 26, 2005.
PETTERS COMPANY INC., Plaintiff,
BLS SALES INC., et al., Defendants.
The opinion of the court was delivered by: CHARLES BREYER, District Judge
MEMORANDUM RE: MOTIONS FOR SUMMARY JUDGMENT
In this diversity action the parties dispute where liability
should fall after the failure of a complex series of commercial
transactions. The parties previously filed various motions for
summary judgment in which they sought to discern remaining
disputes of fact regarding one set of transactions that involved
designer handbags. After the hearing on the motions, the Court
issued an order containing only its rulings. In this memorandum,
the Court elaborates on those rulings.
Although there are several transactions at issue in these
motions, all share the same basic structure. The transaction
began with discussions between National Clothing Co., a
subsidiary of Costco Wholesale Corporation ("Costco"), and Barry
Smith of BLS Sales Inc. (collectively "BLS") regarding Costco's
need for certain goods. Costco then issued purchase orders to BLS
for the goods. Next, BLS contacted Helen Dang and/or Tuan Tran
who in turn would locate a supplier of the goods. BLS would also contact
Petters Company, Inc. ("Petters") in order to secure financing
for the deal. After Petters agreed to provide financing, Costco
cancelled the purchase orders issued to BLS and reissued them to
Petters. Costco and Petters would also sign other agreements
which designated Petters as the "vendor" of the goods. Under this
arrangement, Petters would pay the suppliers, who would ship the
goods directly to Costco. Costco would then send payments to
Petters. After collecting the money and reimbursing itself,
Petters sent the profit from the transaction, if any, to BLS. The
parties refer to this scheme as "purchase order financing."
Critically, in all of the transactions there was never any formal
written contract between Petters and BLS when the transaction was
Three separate transactions are involved in the present motions
and are described below.
I. The 2002 Fendi Transaction
In 2002, Costco contacted BLS regarding its interest in
obtaining high-end handbags. Petters contacted Dang, who in turn
was able to find Fendi and Prada bags that were available for
sale. Following the structure outlined above, the bags were
shipped to Costco. As a part of the deal Petters wired
approximately $3,640,000 to BLS. Only $3,037,961 of this sum was
paid by Costco to Petters, leaving a balance of $602,039.
Petters claims it had several discussions with BLS regarding
the unpaid balance, eventually resulting in a June 2003 oral
agreement between Barry Smith of BLS and Deanna Munson of Petters
for an installment repayment plan. Petters states that this plan
was executed through the $1.3 million promissory note described
II. The 2003 Burberry Transaction
In summer 2003, a similar deal for high-end handbags this
time Burberry, Christian Dior and Prada was executed. Petters
made transfers to BLS totaling $968,360. Costco never made any
payment on this amount. III. The 2003 Coach Transaction and Promissory Notes
In October 2003, a third transaction was arranged, this time
for Coach goods. This deal was substantially larger than the
previous ones, with a value of approximately $16 million. Petters
was required to pay to the supplier, Global Win (Asia) Limited
("Global Win"), 15% of the total transaction cost before November
13, 2003 and provide a letter of credit to Global Win for the
remaining $14 million.
By November 2003, Costco still had not paid the balances due on
the 2002 Fendi and 2003 Burberry transactions. Petters refused to
provide financing for the 2003 Coach transactions unless Smith
and BLS agreed to sign promissory notes and guarantees covering
that debt.*fn1 Smith and BLS agreed to sign the notes and
guarantees, but also asked that Tran and his company Capri, Inc.
("Capri") also sign. Accordingly, Smith, BLS, Tran and Capri
executed two promissory notes and two guarantee agreements to
Petters. The promissory notes were in the amounts of $1,257,239
and $968,360. These amounts correspond with the unpaid amounts on
the 2002 Fendi and 2003 Burberry transactions: $602,039 for the
unpaid balance from the Fendi transaction plus $655,200 in
interest;*fn2 and for the Burberry transaction $968,360
unpaid with no interest. Having received these notes, Petters
wired $2,224,520.83 to Global Win.
On January 20, 2004, Costco cancelled the Coach transaction.
Petters responded by refusing to send the letter of credit that
was due on January 31, 2004. Global Win did not return the $2.2
million to Petters, claiming that it was a forfeited deposit.
At some time during the dispute it was discovered that the
handbags at the heart of the transactions were counterfeit.
Petters filed this action on June 1, 2004 against BLS. BLS
filed a crossclaim against Costco and Petters on June 23, 2004.
Capri, Tran and Dang filed crossclaims against BLS and Smith on June 24, 2004. BLS also filed a crosscomplaint
against Capri, Dang, and Tran on July 15, 2004.
Several parties have moved for summary judgment. Each motion is
examined separately below.
I. Summary Judgment Standard
A principle purpose of the summary judgment procedure is to
isolate and dispose of factually unsupported claims. See
Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986). A party
moving for summary judgment that does not have the ultimate
burden of persuasion at trial (usually the defendant) has the
initial burden of producing evidence negating an essential
element of the non-moving party's claims or showing that the
non-moving party does not have enough evidence of an essential
element to carry its ultimate burden of persuasion at trial.
See Nissan Fire & Marine Ins. Co. v. Fritz Cos.,
210 F.3d 1099, 1102 (9th Cir. 2000).
If the moving party does not satisfy its initial burden, the
non-moving party has no obligation to produce anything and
summary judgment must be denied. If, on the other hand, the
moving party has satisfied its initial burden of production, then
the non-moving party may not rest upon mere allegations or
denials of the adverse party's evidence, but instead must produce
admissible evidence that shows there is a genuine issue of
material fact for trial. See Nissan Fire & Marine Ins. Co.,
210 F.3d at 1102. A genuine issue of fact is one that could
reasonably be resolved in favor of either party. A dispute is
"material" only if it could affect the outcome of the suit under
the governing law. See Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248-49 (1986).
II. Defendants Smith and BLS's Motion for Partial Summary
BLS moves for summary judgment on Petters' four causes of
action for breach of the promissory notes and guarantees,
arguing: (1) there was no consideration; (2) the contracts
concerned counterfeit goods and are therefore void for
illegality; and (3) the 3% per month interest rate charged was
usurious. Second, BLS also moves for summary judgment on Petters'
breach of contract claim based on the nonrepayment of the $2.2
million wired to Global Win in the Coach transaction; they argue that there is no
factual support for the assertion that this was a loan to BLS.
Third, BLS moves for summary judgment on Petters' unjust
enrichment claim, also based on the $2.2 million wired to Global
Win; they argue that an unjust enrichment claim cannot be
sustained absent evidence that BLS received a benefit.
A. Promissory Notes and Guarantees
A preliminary issue with respect to the promissory notes is
choice-of-law. The promissory notes and the guaranties both
contain clauses providing that they shall be governed by
Minnesota law. Because this is a diversity case, California's
choice-of-law rules apply. See Shannon-Vail Five Inc. v.
Bunch, 270 F.3d 1207, 1210 (9th Cir. 2001). California generally
follows the approach of the Second Restatement of Conflict of
Laws which allows enforcement of a contractual choice-of-law
clause where (1) the chosen state bears a substantial
relationship to the parties or the contract, or there is some
other reasonable basis for the parties' choice; and (2)
application of the chosen state's law does not violate
fundamental California public policy. See Nedlloyd Lines B.V.
v. Superior Court of San Matero County, 3 Cal.4th 459, 464-65
(Cal. 1992). Here, Petters is located in Minnesota, therefore the
substantial relationship prong is met. Except with regard to the
issue of usury, there is no dispute that the application of
Minnesota law does not violate California's strong public policy.
Whether the interest rates charged by the notes violates
California policy is discussed below.
(1) Lack of Consideration
BLS argues that the promissory notes did not constitute valid,
binding contracts because they were executed without
consideration. See Chalmers v. Kanawyer, 544 N.W.2d 795, 798
(Minn.App. 1996) (When there is a lack of consideration, no
valid contract is ever formed.). They claim that the amounts they
owed to Petters from the 2002 Fendi transaction and the 2003
Burberry transaction was due under prior agreements, and
therefore the promissory notes executed in November 2003 were not
supported by any independent consideration from Petters. The promissory notes were supported by consideration from both
parties. All parties agree that Petters would not finance the
2003 Coach transaction unless BLS agreed to sign the two
promissory notes covering Costco's unpaid debt. Therefore, BLS
received value for executing the promissory notes in the form of
Petters' provision of financing for the 2003 Coach transaction.
In return, Petters received the value of BLS assuming
responsibility for a debt they may not have been previously
obligated to pay. The Court need not determine whether the values
exchanged were of a comparable magnitude, since courts "will not
examine the adequacy of consideration so long as something of
value has passed between the parties." Powell v. MVE Holdings,
Inc., 626 N.W.2d 451, 463 (Minn.Ct.App. 2001).
Therefore, BLS's argument that there was no consideration
BLS claims that the promissory notes are invalid because the
bags sold in the Fendi and Burberry transactions were illegal
counterfeit marks as defined by federal trademark law.
Under Minnesota law,*fn3 in order to render a contract
unenforceable because of illegality the defendant must both have
knowledge of the vendor's unlawful intent and have actively
participated in the unlawful design. See Anheuser-Busch
Brewing Ass'n v. Mason, 44 Minn. 318, 320 (Minn. 1890). A
contract is not void simply because there is something immoral or
illegal in its surroundings or because it tends to promote an
illegal purpose. Id.
Here, BLS claims that Petters knew that the bags were fakes
because it paid a 15% deposit for the "manufacture" of the Coach
bags. Under BLS's logic, because Petters knew that Costco was
interested in acquiring grey-market goods,*fn4 the fact that
Petters paid a deposit for manufacturing costs demonstrates it
knew that the bags were not authentic. Petters denies knowledge
that the bags were counterfeit and points out that BLS has not produced any direct evidence of such knowledge. Because there is
a dispute of fact as to whether such knowledge exists, summary
judgment on these grounds is inappropriate.
BLS argues that the promissory notes are void because they
charge a usurious 3% per month rate of interest.*fn5
California's Constitution provides that business loans charging
an excess of 10% interest per year are usurious. In contrast,
while Minnesota law also limits interest rates of certain
contracts, the state does not allow corporations to assert the
defense of usury. Dahmes v. Industrial Credit Co.,
261 Minn. 26, 31 (Minn. 1961); Minn. Stat. § 334.022. BLS argues that
Minnesota law does not apply because the contractual interest
rate violates fundamental California public policy. See
Nedlloyd Lines B.V. v. Superior Court of San Matero County,
3 Cal.4th 459, 464-65 (Cal. 1992) (Contractual choice-of-law clause
not honored where doing so would violate strong California public
California courts have had the opportunity to determine whether
California's prohibition on usury is fundamental public policy
overriding a contractual choice-of-law provision. While they have
never settled on a particular standard, they have allowed
interest rates above the constitutional limit where there is a
substantial relationship between the contract and the state which
is referenced in the choice-of-law provision.
In Ury v. Jewelers Acceptance Corp., 227 Cal.App.2d 11 (Cal.
Ct. App. 1964), the court expressed doubt that California had a
strong public policy with respect to usury, since the state's
constitutional usury provision contains exceptions for banks,
loan associations, licensed pawnbrokers and myriad other
entities. Id. at 20. The court limited its ruling, however, to
the contract before it, finding no strong public policy against a
20.3% interest rate on a commercial loan. In Gamer v. duPont Glore Forgan, Inc., 65 Cal.App.3d 280
(Cal.Ct.App. 1976), the court found that although California's
usury law represents strong public policy, the contract's choice
of New York law was not invalid because the prime rate of
interest at the time was 9% and New York allowed a rate only up
to 12.25%. Id. at 287-90. The court also found it important
that the contract had a substantial relationship to New York.
Id. at 290.
In Sarlot-Kantajarian v. First Pennsylvania Mortgage Trust,
599 F.2d 915 (9th Cir. 1979), the Ninth Circuit followed Ury to
find that a contractual choice-of-law clause selecting
Massachusetts law was valid where the contractual rate was no
more than 18% and where Massachusetts, as the place of contract,
disbursement and repayment, had a substantial relationship to the
contract. Id. at 917.
In Mencor Enterprises v. Hets Equities Corp.,
190 Cal.App.3d 432 (Cal.Ct.App. 1987), the court conducted a detailed analysis
of the several provisions of the Restatement (Second) of Conflict
of Laws that could affect the question of whether to apply
Colorado law, which would have allowed for the 44% interest rate
specified in the contract. The court concluded that the validity
of the rate "depends on the relationship of Colorado to the
parties and the contract . . . [the] rate will be applied only if
Colorado has a relationship to the parties or the contract."
Id. at 439. The court ultimately declined to answer this
question, finding that it was inappropriate to make this
determination on demurrer, and that an evidentiary hearing should
Here, no evidentiary hearing is required. The question comes
before this Court on a motion for summary judgment and the
undisputed factual record establishes a substantial relationship
between the contract and Minnesota. On their face, the promissory
notes state that Petters is a Minnesota corporation and that the
presumptive place of repayment is Minnesota. As such, there is a
substantial enough relationship to allow the contractual interest
rate. Minnesota's decision to exempt all corporations from usury
restrictions is similar in purpose and effect to California's
decision to exempt certain classes of financial institutions.
See Ury, 227 Cal.App.2d at 20. That Minnesota has chosen to
exempt a broader class of entities does not reflect a radical
departure from California's policies. For these reasons, this Court finds that the contractual choice-of-law
clause does apply and that BLS's claim of usury should be
B. The $2.2 Million "Loan"
BLS also moves for summary judgment in its favor on Petters
cause of action for breach of contract based on the alleged $2.2
million loan from Petters to BLS for the Coach transaction. This
money was wired from Petters to Global Win, and Petters claims
that it was a loan for which BLS is liable.
(1) Sufficiency of the Evidence
BLS argues that there is no evidence that such a loan existed.
Petters responds that Barry Smith of BLS admitted in his
deposition that the basic structure of the Coach deal, as with
other deals, was that Petters was engaging in "purchase-order
financing" for BLS.
There is a dispute of material fact as to whether there was an
oral or implicit agreement between Petters and BLS creating a
$2.2 million loan. Smith admitted in his deposition that he would
tell Costco that "we've set up our financing through Petters" and
that it was BLS's practice to "ask Petters to finance" Costco
transactions. In addition, there are documents from prior
transactions showing that BLS had requested "financing" from
Petters. This appears to evidence an understanding between the
parties of a debtor-creditor relationship between them. BLS, as
the party moving for summary judgment, bears the burden of
demonstrating that this is not enough to have created a
contractual relationship. As BLS has failed to satisfy that
burden, the motion must be denied.
(2) Total Breach
As discussed above, as a part of the 2003 Coach transaction
Petters was to have paid Global Win $2.2 million up front and
then post a $14 million letter of credit for the balance of the
amount owed on the transaction. However, after Costco cancelled
the transaction Petters failed to post the letter of credit. BLS
argues that this failure constituted a total breach of contract
that excuses BLS's performance.
"[T]otal breach plus repudation makes the defendant liable for
damages and discharges plaintiff's remaining remedies." G.W.
Anderson Construction v. Mars Sales, 164 Cal.App.3d 326, 338 (Cal.Ct.App. 1985).*fn6 In response,
Petters argues that it did not breach the contract because its
own obligation to post a letter of credit was discharged when
Costco cancelled its order.
Because the terms, indeed the existence, of the underlying
contract remain in dispute, it would be inappropriate at this
stage to make a ruling regarding whether Petters did or did not
commit total breach. Therefore, summary judgment should not be
C. Unjust Enrichment
Petters' complaint also contains a cause of action for unjust
enrichment against Smith and Dang based on the alleged $2.2
million loan. In that cause of action, Petters alleges that Smith
and Dang have been unjustly enriched by retaining the loan
proceeds based on the illegitimate justification that the sum
constituted a non-refundable deposit.
In order to make out a claim for unjust enrichment, the
plaintiff must show that the defendant received some benefit.
See Rowell v. Crow, 93 Cal.App.2d 500, 503 (Cal.Ct.App.
1949). Here, there is no evidence in the record that BLS or Smith
ever received any benefit from the $2.2 million. The money was
wired by Petters to a Global Win account and there is no evidence
that Smith ever received any commission from it. Accordingly,
Smith's motion for summary judgment on Petters' unjust enrichment
claim is granted.
III. Plaintiff Petters' Motion for Summary Judgment
Petters moves for summary judgment on their breach of contract
claims based on the two promissory notes and the two guarantees.
Petters also moves for summary judgment on BLS's counterclaim for
a commission on the Coach transaction.
A. Promissory Notes
(1) BLS and Smith
BLS and Smith make the same arguments in defense to Petters'
claims under the promissory notes as they did in their motion for
summary judgment, i.e. lack of consideration, illegality and
usury. They also argue that summary judgment is precluded by disputes of fact regarding their defenses of duress, the amounts
owed under the notes, and their defense of failure to mitigate.
As discussed above, the Court finds that there was valid, legal
consideration in support of the contract.
As already noted, there is a dispute of fact as to whether
Petters knew that the transactions that it had financed were for
counterfeit goods. If they did have such knowledge, and if they
actively participated in the scheme, then the contracts would be
void. Therefore, summary judgment in Petters' favor is
There is no dispute of fact regarding the issue of usury. The
only dispute relates to choice of law. As discussed above,
because the contract specifies Minnesota as the place of
repayment, and because Petters is a Minnesota company,
Minnesota's usury laws apply. BLS's claim of usury therefore
According to BLS, Petters waited until the day the $2.2 million
deposit was due to Global Win and then threatened to not send the
money unless BLS signed the notes and guarantees. BLS argues that
if it had not signed the promissory notes and guarantees at that
time, the $16 million Coach deal would have fallen apart, reaping
catastrophic harm on BLS's relationship with Costco one of its
biggest clients and driving BLS out of business. Therefore,
they argue, the contract is void under a theory of economic
An important preliminary question in resolving this issue is
choice of law. If Minnesota law applies, then this theory can be
rejected because Minnesota does not recognize economic duress.
See Bond v. Charlson, 374 N.W.2d 423, 428 (Minn. 1985)
(rejecting economic duress theory and stating that "[d]uress is
available as a defense to a contract only when agreement is
coerced by physical force or unlawful threats"); St. Louis Park
Inv. Co. v. R.L. Johnson Inv. Co., 411 N.W.2d 288, 291
(Minn.App. 1987). However, California does recognize such a theory of duress. See Rich &
Whillock, Inc. v. Ashton Development, Inc., 157 Cal.App.3d 1154,
1158 (Cal.Ct.App. 1984).
Under the Restatement, which applies to this question, the
choice-of-law clause in the promissory notes is given effect over
a claim of duress unless it is claimed that the duress caused
assent to the choice-of-law clause itself. See Restatement
(Second) of Conflict of Laws § 201 Comments a & c; § 187 Comment
b. Here, a reasonable interpretation of Smith's argument is that
he agreed to all of the terms of the promissory note and
guarantee under duress and would not have assented to any of the
provisions of either contract (including the choice-of-law
clauses) absent such duress. Under these circumstances,
California law applies.
California recognizes economic duress where there is "a
wrongful act which is sufficiently coercive to cause a reasonably
prudent person faced with no reasonable alternative to succumb to
the perpetrator's pressure." Rich & Whillock,
157 Cal.App.3d at 1158. Examples of "wrongful acts" include "the assertion of a
claim known to be false, a bad faith threat to breach a contract
or a threat to withhold a payment." Id. Indeed, it may even be
enough for the plaintiff to have engaged in "the wrongful
exploitation of business exigencies to obtain disproportionate
exchanges of value." Id. at 1159.
Petters argues that there cannot be economic duress here
because it committed no wrongful act in demanding the
memorialization of a prior debt as a condition to enter into the
2003 Coach deal. However, there is a dispute of fact regarding
whether BLS owed any debt to Petters at all. If BLS's version of
the facts is believed, then Petters' conduct could be classified
as wrongful under California's broad construction of economic
Petters also claims that BLS had a reasonable alternative in
that it could have secured a loan from another company. They
argue further that BLS never objected to the promissory notes and
had ample time to determine whether or not BLS would sign them.
The inquiry into whether there was a reasonable alternative is an
issue of fact, and may only be resolved on summary judgment if
there is no dispute of fact. See Cross Talk Productions, Inc.
v. Jacobson, 65 Cal.App.4th 631, 644 (Cal.Ct.App. 1998). The
parties dispute whether it was feasible for BLS to have secured alternate financing. If BLS is
right that there was no other way to secure financing and that it
faced financial ruin if the Coach deal fell apart, then it had no
reasonable alternative under California law. See Rich &
Whillock, 157 Cal.App.3d at 1158 (stating that financial ruin or
bankruptcy is not a reasonable alternative).
Therefore issues of fact remain and summary judgment on the
issue of duress is denied.
e. Amount Owed on the Promissory Notes
BLS argues that a dispute of fact remains regarding the precise
amount owed on the promissory notes because the notes
memorialized the prior debt, a portion of which Costco may have
repaid and which therefore should be credited against the notes.
However, the notes on their face make no provision for this kind
of set off and instead plainly require BLS and Smith to pay the
amounts specified on their face. BLS has produced no evidentiary
or legal basis to ignore the plain terms of the contract.
Accordingly, if the promissory notes are valid the amount owed is
a fixed sum for which BLS is liable.
f. Failure to Mitigate
BLS argues that Petters could have mitigated its damages by
obtaining more money from Costco. Specifically, BLS claims that
Costco failed to pay the entire amount owed on the Fendi and
Burberry transactions because it claimed that some goods were not
shipped and some goods were damaged. According to BLS, some of
these denials were in violation of the California Commercial Code
and the UCC and therefore Petters, as the "vendor" in the
transaction, had a right to demand that Costco pay more than it
did. BLS further suggests that Petters may also have reduced its
debt by suing Costco.
These issues go to the size of BLS's debt prior to the
signature of the promissory notes. However, a reasonable
interpretation of the notes is that they set an agreed-upon fixed
value on the remaining debt on the date they were signed. As
stated above, BLS has produced no evidence that the amounts due
on the notes is anything other than what they provide for on
their face. BLS's failure to mitigate argument therefore fails. (2) Tran and Capri
Tran and Capri claim that the promissory notes are invalid or
otherwise unenforceable for reasons similar to those given by
Smith and BLS. However, since they played a different role in the
transactions, Tran and Capri's claims require an independent
Tran and Capri argue that the promissory notes and guarantees
are not enforceable against them because they did not receive any
benefit from any of the transactions at issue in this case.
Unlike Smith and BLS, there is no allegation that Tran and Capri
may have received a commission from the Coach transaction. They
also were not participants in the earlier Fendi and Burberry
However, there remains a material dispute of fact as to whether
Tran and Capri received consideration for signing the notes and
guarantees. Petters argues that Tran and Capri received a benefit
from signing the notes because they stood to gain an $800,000
profit on the 2003 Coach transaction, which Petters would not
have financed unless the notes were signed. Tran claims that he
did not stand to gain financially from the transaction. Summary
judgment on this issue is therefore denied.
Tran's usury argument is identical to the one made by BLS
above. However, Tran argues, based on Mencor that the
substantialness of the relationship of the contract to Minnesota
is an issue of fact that must be resolved at trial. In Mencor
the court declined to pass judgment on the applicability of
Colorado's less restrictive usury law and instead opted to allow
the trial court to conduct an evidentiary hearing to determine
"the reasonable relationship of the contract to Colorado, the
substantial contacts of the parties with Colorado and
consideration of California's fundamental policy with respect to
usury." Id. at 441. In so doing, the court distinguished the
posture there a demurrer from the posture in prior cases
which decided the issue on summary judgment. See id. at 440. Here, there is no dispute of fact that Petters is a Minnesota
corporation and that the contract calls for payment in Minnesota.
There are no issues of fact to be resolved at trial and therefore
this issue may be resolved in this summary judgment motion in
c. Fraud and Duress
Tran claims that Smith fraudulently induced him to sign the
promissory notes and guarantees, thereby rendering them invalid
even as to Petters. According to Tran, Smith falsely told him
that Petters conditioned its financing of the 2003 Coach
transaction on both Smith and Tran signing the promissory notes
and guarantees. In fact, Petters had required only that Smith
and/or BLS sign the notes and guarantees. Tran also claims that
Smith told him that the notes were "just a formality," and that
Smith would assume responsibility for the underlying debt. Tran
also states that he believed he was signing only one promissory
note, and that Smith led him to believe that the second note he
signed was a copy of the first. Although the fraud was allegedly
perpetrated by Smith, Tran claims that it still expunges him of
liability to Petters.
The parties agree that the Restatement provides the governing
If a party's manifestation of assent is induced by
either a fraudulent or a material misrepresentation
by one who is not a party to the transaction upon
which the recipient is justified in relying, the
contract is voidable by the recipient, unless the
other party to the transaction in good faith and
without reason to know of the misrepresentation
either gives value or relies materially on the
Restatement (Second) of Contracts, § 164(2).
Here, Petters did give value for the promissory notes by
financing the 2003 Coach transaction. Further, there is nothing
in the record to suggest that Petters had a reason to know of
Smith's alleged fraud. Therefore, Tran's efforts to extinguish
his liability against Petters on fraud and duress grounds fails.
Notably, Tran has made a cross-claim for fraud against Smith, and
so he is not without remedy for Smith's alleged wrongdoing.
d. Unilateral Mistake
Tran next claims that he signed the notes and guarantee based
on an understanding that Smith was going to "take care of" the
payments and that he believed that they were "just a formality." Further, he claims that when he signed the second
promissory note for $968,000, he believed he was signing a copy
of the first note and that his signature would create no new
legal obligations. He argues these mistakes make the note and
Both parties again rely on the Restatement:
Where a mistake of one party at the time a contract
was made as to a basic assumption on which he made
the contract has a material effect on the agreed
exchange of performances that is adverse to him, the
contract is voidable by him if he does not bear the
risk of the mistake under the rule stated in § 154,
(a) the effect of the mistake is such that
enforcement of the contract would be unconscionable,
(b) the other party had reason to know of the mistake
or his fault caused the mistake.
Restatement (Second) of Contracts § 153.
(i) The $1.3 million Promissory Note
With respect to the $1.3 million note, Petters argues that Tran
cannot invoke the defense of mistake because it is undisputed
that Tran signed the note with knowledge that it was binding upon
him. Petters also argues that Tran also bore the risk of mistake
because he signed the notes knowing that he was ignorant as to
all the details. See Restatement (Second) of Contracts § 154(b)
(party bears risk of mistake where "he is aware, at the time the
contract is made, that he has only limited knowledge with respect
to the facts to which the mistake relates but treats his limited
knowledge as sufficient").
Both of these critiques have merit. First, even if Tran was
mistaken that Smith would cover Tran's liability on the note, his
signature still indicates that he accepted liability to Petters
for the amount stated by the note. Second, even if Tran did
believe that his signature of the notes was a mere formality, he
assumed the risk that this was not true by signing a note which
on its face was far more than a legally insignificant document.
As such, Tran's mistake defense fails with respect to the first
note. (ii) The $968,000 Promissory Note
With regard to the $968,000 promissory note, Petters argues
that Tran's account is inconsistent with the evidence and lacks
credibility. These, however, are factual contentions that cannot
be resolved at summary judgment.
Petters also argues that Tran bore the risk of the mistake.
However, if Tran is credible in claiming that he signed the
second note under the belief that it was a copy of the first note
then he did not enter into that agreement knowing he was ignorant
of key facts. As such, Tran's account creates a material dispute
of fact that precludes summary judgment on the second note.
(iii) The guarantee
Tran signed one guarantee. It appears that he is arguing that
he signed the guarantee under the same mistake that prompted him
to sign the $968,000 promissory note. Summary judgment is
Petters also moves for summary judgment on BLS's counterclaim
for breach of an alleged contract requiring Costco and Petters to
pay BLS a 10% commission on the failed 2003 Coach transaction.
However, Smith admitted in his deposition that a specific 10%
figure was never discussed or contemplated. Instead Smith
testified, and all other parties agree, that the understanding
was that BLS would receive whatever profits were left over at the
end of the transaction. All parties further agree that BLS would
receive nothing if there were no profits remaining at the end of
the transaction. Pursuant to this understanding, summary judgment
should be granted on BLS's commission claim.
BLS argues that it is entitled to a commission under settled
California*fn7 law which provides that a broker's right to a
commission accrues when "the contract of sale is executed, or
when opportunity to make such contract is given to the seller."
Twogood v. Monnette, 191 Cal. 103, 107 (Cal. 1923). This precedent, which discusses
only the time of accrual, does not apply because there was never
any brokerage or commission contract among the parties. Cf.
id. at 105 (referring to express commission contract between
the parties). Here, it appears that there may have been an
implied contract that BLS would be entitled to profits on
transaction, if there were any. The parties contest whether this
agreement was a commission agreement or a profit agreement.
Regardless of what label should be assigned to the contract, it
is clear that BLS was only entitled to money from the transaction
if there was a profit left over at the end. Because the Costco
transaction was not profitable, the time that BLS's right to
collect accrued is immaterial. BLS has no right to collect any
money at all from an unprofitable transaction. As such, the
motion for summary judgment on BLS's commission claim is granted.
III. Cross-defendant Costco's Partial Motion for Summary
Judgment Against Cross-Complaintants BLS and Barry Smith
A. BLS's Right to a Commission
As stated above, Costco's motion for summary judgment on BLS's
crossclaim for a 10% commission should be granted.
B. BLS's Third-Party Beneficiary Rights
Costco also argues for dismissal of BLS's theory that it can
recover as a third-party beneficiary of the purchase order
agreements between Costco and Petters. It is undisputed that the
purchase orders do not mention either a commission or BLS.
Instead, BLS argues that the understanding of the parties that
BLS would be paid the profits from the transaction is enough to
support a finding of third-party beneficiary rights. Therefore
the dispute is a legal one over the question of whether
third-party beneficiary rights may be proven absent any clear
manifestation of such rights on the face of the contract.
The parties dispute whether California or Washington law
applies to this question. The purchase orders are on their face
"subject to all terms and conditions of the National Distributors
Vendor Agreement," which, in turn, states that all disputes will
"be resolved under Section 20 of the Costco Wholesale Standard
Terms United States (2000)." The Standard Terms state that the
agreements subject thereto are "governed by and construed according to the laws of the state of Washington." Thus, the
purchase orders incorporate by reference the Washington
BLS claims that Costco has waived invocation of the
choice-of-law clause by failing to argue choice of law before,
and by citing only California law in its motion to dismiss.
However, courts have not found that this type of conduct to merit
application of estoppel absent something more, such as the
estopped party having argued the specific issue of choice-of-law
or a showing of intentional delay. See General Signal Corp. v.
MCI Telecomm. Corp., 66 F.3d 1500, 1505 (9th Cir. 1995)
(declining to apply judicial estoppel). BLS's further claim that
the Vendor Agreement was not produced in discovery also falls
short because the document was, in fact, produced.
Under Washington law, "creation of a third-party beneficiary
contract requires that the parties intend that the promisor
assume a direct obligation to the intended beneficiary at the
time they enter into the contract." Del Guzzi Construction Co.,
Inc. v. Global Northwest Ltd., 105 Wash.2d 878, 879 (Wash.
1986). Further, "the contracting parties' intent is determined by
construing the terms of the contract as a whole, in light of the
circumstances under which it is made." Schaaf v. Highfield,
127 Wash.2d 17, 22 n. 5 (Wash. 1995). Costco is therefore correct
that the contracts' failure to refer to BLS or a commission is
fatal to the third-party beneficiary claim.
BLS has also included a separate cause of action for
indemnification of all damages BLS is ordered to pay to Petters.
BLS states that Costco's wrongful conduct was the proximate cause
of Petters' damages. Costco moves for summary judgment on this
claim to the extent it is based on any alleged breach of contract
related to the Coach transaction. As shown above, BLS has no
contract claim for a commission or as a third-party beneficiary
for the Coach transaction. Thus, to the extent BLS seeks
indemnity based on either of these alleged contracts, that claim
is dismissed. CONCLUSION
For the reasons stated above, BLS's motion for summary judgment
is GRANTED in part and DENIED in part; Petters' motion for
summary judgment is GRANTED in part and DENIED in part; and
Costco's motion for summary judgment is GRANTED.
IT IS SO ORDERED.
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