The opinion of the court was delivered by: Otis D. Wright II United States District Judge
On May 16, 2007, Plaintiffs Eastech Electronics (Taiwan) and Eastern Asia Technology Limited (collectively, "Eastech") filed this action against Philip Asherian, Mark Barron, E&S International Enterprises, Inc. ("ESI"), and APH USA, Inc. ("APH") (collectively, "Defendants"). Plaintiffs alleged breach of contract, intentional and negligent interference with business relations, and libel, among other claims. Defendants counterclaimed, alleging several contractual claims. The matter came on for trial before the court October 8, 2008. The court heard witnesses, considered attorneys' arguments, reviewed deposition testimony, and received several hundred trial exhibits. Following trial, the parties submitted closing briefs setting out their respective positions. (See Docket Nos. 204 -- Eastech's; 205 -- Defendants'.) After considering the evidence presented and the written submissions, the court finds as follows.
Plaintiff Eastech is a contract manufacturer headquartered in Taiwan and operates manufacturing facilities in China, Taiwan and other countries. ESI and APH are California corporations with principal places of business in Van Nuys, California. ESI and APH distribute consumer electronics to retailers (like Costco) in the United States and abroad. Defendant Philip Asherian ("Asherian") is the Chief Executive Officer of ESI and APH. At all relevant times, Asherian was an officer (and agent) of ESI and APH. Defendant Mark Barron ("Barron") is the Chief Financial Officer of ESI. At all relevant times, Barron was an officer (and agent) of ESI.
On or about January 4, 2005, Eastech and ESI entered into a written manufacturing agreement to facilitate future purchases by ESI from Eastech. (See Exh. 94) ("Manufacturing Agreement"). As part of the Manufacturing Agreement Eastech and ESI also entered into the Return Policy, Warranty and After-Sales Service Agreements ("Return Agreements"). (Id.) In June 2006, the parties arranged to use Bank SinoPac ("SinoPac") as a "factor" to provide advance money to Eastech based upon purchase orders from ESI and APH. (Exh. 1286.)*fn1 Eastech, in turn, assigned its accounts receivable with recourse to SinoPac as collateral for the advanced money.
Several problems arose between the parties during their relationship. First, Eastech delivered a shipment of televisions with defective "inverter boards." This problem affected many units in a shipment of unknown quantity. (Exh. 61.) Eastech remedied this problem by replacing the inverter boards. (Id.) It is not clear how many units were defective, nor how many were returned to Costco due to that defect.
Eastech also shipped televisions to Costco with boxes mislabeled "HDTV" (High Definition). This problem led Asherian, with help from Tak Iwao (an ESI/APH agent), to draft APH Debit Memo # 21994 ("DM 21994"), which put the estimate for remedying the mislabeled boxes at $1,193,636.40. (Exhs. 58, 91.) A chart allocating the specific costs underlying the $1,193,636.40 was sent to Eastech on February 16, 2006. (Exh. 54.) Stephen Chow, an Eastech representative, replied that "by looking at this number, [it] seems not right." (Exh. 297.) On February 22, 2006, Tak Iwao, on behalf of ESI/APH, informed Chow that some of the anticipated costs might not be incurred because Costco meant simply to cover up the "HDTV" label with white stickers, but added that other costs might be incurred as a result of the mislabeled boxes. (Exhs. 213, 55.) Iwao suggested, among other things, that Costco might require "ESI to pay [Marketing Development Fund] based on this issue." (Id.)
Negotiations ensued between Eastech and Defendants regarding resolution of the mislabeling issue. Following a March 2006 meeting between Eastech and ESI/APH, the parties set up another meeting for May 2006. (Exhs. 53, 57.) By email from Iwao to Eastech's Chow, ESI/APH requested a meeting to discuss "Box Issue ($1.2M)" and other issues. (Exh. 53.) The parties disagree on the precise agreement reached, but this much is clear: ESI (and APH) would take $10 per unit deductions off of purchases up to the maximum $1,193,636.40 set forth in DM 21994. APH took $362,320.00 in such credits. (See, e.g., Exhs. 235, 241) (deductions from purchase orders).*fn2
While the parties disagree on the specifics of the agreement, the court finds that the settlement figure related only to resolution of the box mislabeling incident. The court also finds that the deductions applied to future orders by ESI/APH, and were subject to proof of actual costs. First, virtually every relevant piece of physical evidence, including DM 21994 itself, suggests that the settlement was limited to the box mislabeling incident. (See, e.g., Exhs. 18 at 2, 53-58, 91, 240 , 241.) The only evidence suggesting otherwise is Defendants' testimony, which proved less than credible in light of the documentary evidence.
Second, the parties' conduct in deducting the settlement figure from future purchases, coupled with Eastech's consistent reluctance to accept a lump sum deduction leads the court to find that the deductions applied only to future purchases and were subject to proof of actual costs incurred by APH/ESI. For example, when Mark Barron attempted to gain "approval by an officer of Eastech on the attached [DM 21994]," Eastech's Colleen Hallam immediately responded that "this was not the agreement made." (Exh. 60) ("Eastech will continue to make payments through current purchase price reductions and does not concur in your statement that you [reserve the right] to offset this obligation with balances owed to Eastech at any time."). And, following two weeks of testimony and numerous recorded depositions, the court simply believes Eastech's witnesses over Defendants' concerning the terms of the agreement.
Third, the court finds that the deductions were subject to proof of actual costs incurred by APH/ESI. Following the March settlement meeting, Steve Liao (Eastech's vice president) sent Asherian an email thanking him for assuring that "ESI [will] only bill Eastech whatever Costco charge[s] APH/AKAI" and imploring him to "help Eastech [ ] keep the cost down." (Exhs. 57, 216, 233.) Other exhibits corroborate the requirement of proof. (See, e.g., Exh. 300) (Eastech needs "feedback on [ ] Costco charge" and "billing from Costco if any"). The credibility of Eastech's witnesses -- in light of the physical evidence -- further underlies this finding.
Sometime in 2006, Eastech began negotiating a large loan with Bank SinoPac (the "Syndicated Loan"). (So Depo. at 26:1-12; 33:1-6; 34:8-18; 35:3-15.) This loan was to be secured in large part by accounts receivable from Eastech's customer, Philips. On August 28, 2006, Eastech's Chow sent ESI's Iwao an email notifying him that $1 million is past due and that another $2.6 million will be due within days. (Exh. 243.) Chow again expressed Eastech's concern regarding the past due accounts on September 5, 2006. (Exh. 245.)
On September 15, 2006, Barron sent Eastech's Colleen Hallam an email seeking approval of DM 21994. (Exh 92.) Ms. Hallam declined the request, stating "this is different from what we discussed." (Id.) ("The arrangement that was made regarding this amount has always been that it would be deducted from future purchases at $10.00 per unit."). Barron replied that DM 21994 "was due and payable effective November 28, 2005 when it was written."(Exh. 93.) Hallam promptly responded (copying Iwao) "this was notthe agreement made." (Id.) On November 14, 2006, Asherian emailed Barron and Iwao stating that ESI/APH's "future with [Eastech] is doubtful," and "we need to hold the total chargeback on the [money] they owe us." (Exh. 45.)
On January 24, 2007, George Talavera from Bank SinoPac emailedMark Barron to inform him that nearly $3.4 million is past due. (Exh. 18 at 3.) Barron informed Talavera that ESI's "business relationship has ended with Eastech" and that ESI is in the process of preparing a final accounting, including certain "hold back amounts [ ] to cover our future returns." (Id.) On February 2, 2007, Talavera sought an update from Barron. (Id. at 2.) Barron informed Talavera that some payments had been made and claimed $805,585.76 in deductions resulting from the mislabeling issue as well as a $600,000.00 "reserve for [future] returns." (Id.) On February 5, 2007, Barron informed Talavera that ESI's "business with Eastech will continue." (Id. at 1.) Confusion over the past due payments led SinoPac to contact Eastech in search of an explanation.
Eastech became concerned that problems with its accounts receivable might negatively affect the Syndicated Loan from SinoPac. On February 7, 2007, Chow sent Iwao an email asking the latter to call him because "Mark Barron [was] giving [SinoPac] wrong information, and this is totally mess[ing] up the relationship [with SinoPac]." (Exh. 253) ("SinoPac just inform[ed] us that their US office [had been] told by ESI's CFO [that] (i) they will stop [doing] business with Eastech and (ii) they will claim [$1,000,000 in credit]"). Iwao assured Chow that "the comment from SinoPac to Eastech is incorrect." (Id.) Iwao also informed Chow that Barron discussed the matter with Ming Dai, a SinoPac representative in Los Angeles, and that "Ming is going to explain to SinoPac [Hong Kong]." (Id.)
On February 16, 2007, SinoPac Hong Kong's Steve Chan sent Eastech's CFO, Sunny Ng, an email informing him of a message from ESI. (Exh. 254.) The email related that ESI returned $699,094.00 worth of goods to Eastech "and ESI expressed they will not pay anything until all inventory is sold; it is the most updated message we got from our [Los Angeles] branch." (Id.) (emphasis in original). On February 20, 2007, Chow sent Iwao an email attaching SinoPac's email and asking "do you know what this [refusal to pay until all inventory is sold] is all about?" (Id.) On February 28, 2007, Chow sent a similar email to Mark Barron, taking issue with the refusal to pay until all inventory is sold, informing him that his "negative" communications with SinoPac are "affecting the current credit application" [i.e., the Syndicated Loan], and asking Barron to contact him before any further communications with SinoPac. (Exhs. 255, 266.)*fn3
On March 6, 2007, while still attempting to collect on the past due accounts, SinoPac's Talavera sought from Mark Barron a "time frame [for] when [the] hold back for defectives will be released and all credit/deductions will be finalized." (Exh. 18.) Talavera reminded Barron that the merchandise was ordered five months earlier and suggested "surely you have an idea percentage wise on how much returns you would anticipate based on historical performance and quality of the merchandise received from Eastech." (Id.) On March 19, 2007, SinoPac offered Eastech a $110 million uncommitted term sheet relating to the Syndicated Loan. (Exh. 1290.)
On March 30, 2007, ESI's Mark Barron (with help from Iwao) sent a letter to SinoPac's Talavera purporting to explain the situation. This letter, which forms the basis for Eastech's tort claims, provides:
It has come to my attention that Eastech has yet to resolve the outstanding issues on their account and that it may affect the relationship between SinoPac and ESI. At this time I would ask that SinoPac take the amount related on the DM # 21994 in the amount of $1,193,636.40 less the amounts already paid back by Eastech of $362,320 or $831,336.40 off the books and ask Eastech to reimburse SinoPac directly. Please be aware of the following facts relating to this chargeback.
ESI and Eastech signed a Manufacturing Agreement on January 5, 2005. Eastech's Senior Vice President, Steve Liao, signed the agreement on behalf of Eastech. Under the terms of the [ ] agreement, per Form A-01, Section 1 b, provisions were made for Epidemic Defects (a failure rate in excess of the 5%) which states that manufacturer is responsible for all costs associated with epidemic failure.
[W]e are a company that values our relationships with our vendors and have long term relationships as a result. Eastech has continually failed to fulfill their commitments under the agreement. Outline of the facts are as follows:
(1) Eastech accepted our purchase order under the terms of our manufacturing contract for delivery of a 20" LCD TV. Eastech shipped the product 30 days late and thereby missed the promotion period of our customer, Costco. Obviously, Costco was very upset at the delayed shipment. (2) The original box of the 20" LCD TV was labeled as a High Definition (HD) TV whereas the actual unit was not HD. This created quite an embarrassment and loss of credibility for ESI after this material problem was found out by our customer when the product was already on their sales floor. Needless to say, Costco was extremely aggravated by this situation. (3) Finally, this 20" LCD TV had a power failure defect that resulted in epidemic failure rate far in excess of our epidemic failure rate of 5%. Although ESI allowed Eastech to provide a remedy for this problem, by this time Costco had elected to discontinue their product 4 months early.
Eastech acknowledged their responsibility in every one of these cases and accepted to credit $1,193,696.40 for the damages caused by these events. Eastech to date has credited ESI the amount of $362,320 leaving an outstanding balance of $831,336.40.
Although ESI would like to move forward with Eastech and continue an amicable working relationship, it has come to a point where we are concerned that this may affect our valued relationship with Bank SinoPac and ask that you remove this balance from our account immediately.
(Exh. 47) (the "Barron Letter").
On April 15, 2007, SinoPac sent Eastech a second uncommitted term sheet for $120 million. (Exh. 390.) Henry So, an Assistant Vice President and a lending officer with SinoPac, explained that the $10 million increase from the first term sheet "was to accommodate the size of the Philips receivables." (So Depo at 16:15-17; 52:21-23.) So was responsible for recommending the Syndicated Loan to SinoPac's Credit Committee, which was the final decision maker on such loans. (Id. at 26:7-8.) SinoPac's final round of due diligence commenced sometime in April 2007. (Id. at 42:7-10.) SinoPac undertook to assess Eastech's financial position, its accounts receivable, and visited Eastech's China factory. (Id. at 37:7-14.) So testified that, at some point, the Credit Committee requested an independent audit of "all the accounts receivable of Eastech" and noted that such request by the committee was "unusual." (Id. at 50:1-6.) So further testified that the independent audit was never completed. (Id. at 67:6-12.)
SinoPac's Credit Committee turned down the Syndicated Loan "on or about April 23, 2007." (Id. at 43:1-9.) Over objection from Defendants, So testified that the loan was turned down for "several reasons and one was the [problem with Eastech's accounts receivable from ESI]." (Id. at 44:9-23.) Over hearsay objections, So also testified that Angus Chen, SinoPac's President, pointed out "there must be some problem with [Eastech's] accounts receivable." (Id. at 6716-22.) Without objection, So also testified that Mr. Chen "instructed us to have an investigation ... [and absent] a very comfortable result, we should not go ahead with [ ] this proposed loan." (Id. at ...