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 ...