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August 26, 2005.

BLS SALES INC., et al., Defendants.

The opinion of the court was delivered by: CHARLES BREYER, District Judge


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 initiated.

  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 below.

  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 Judgment

  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 fails.

  (2) Illegality

  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.

  (3) Usury

  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 ...

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