Tuesday, April 20, 2010

Reseller mounts a preemptive strike for collection of monies and declaratory relief under Law 75 against its distributor and wins in federal court despite a related action in local court.

In Lamex Foods Inc. v. Audeliz Lebron Corp., 2010 WL 500405 (D.P.R. Feb. 5, 2010)(JAF), the court turned a deaf ear to a distributor's claim under Law 75 to excuse compliance with its obligation to pay for goods sold and delivered.

Plaintiff, a reseller and broker of food products in the U.S., sued its alleged distributor of frozen foods in federal court on three counts, one, collection of monies against the distributor corporation and its principals in their personal capacity on an alter ego theory, two, for preliminary and permanent injunctive relief to censure "false representations" about plaintiff, and three, for declaratory judgment that plaintiff is not liable under Law 75.

The court held an evidentiary hearing on the request for preliminary injunctive relief and, absent any objections by defendant, consolidated the hearing with a bench trial on the merits. It does not appear that defendant raised any constitutional objections to the scope of an injunction that would have the effect of censuring commercial speech.

On a side note, the court observed that defendant's claim under Law 75, which was pending in local court, was that an "exclusive verbal agreement" existed. While the court noted that Law 75 does not require the formality of a written instrument confirming exclusivity, citing RW v. Welch, 13 F. 3d 478 (1st Cir. 1994), the court found the allegation to be suspect as "strain[ing] the imagination" absent any written confirmation or support for the allegation over a period of months if not years.

The dispute arose over defendant's late payments and subsequent delinquency to pay outstanding invoices for goods sold and delivered exceeding $1.2 million. Plaintiff then froze defendant's account for non-payment.

In an interesting twist, plaintiff then attempted to have another distributor Trafon Group resell the poultry products in Puerto Rico, until Trafon declined upon receipt of a claim letter from defendant threatening suit and plaintiff's inability to defend and hold Trafon harmless. This incident was part of the basis of plaintiff's claim that defendant was engaged in a "smear campaign".

Litigation in both federal and local court ensued. In local court, the distributor filed a Law 75 suit and sought to deposit in court monies due plaintiff. At a status conference, the federal court (Fuste, J) warned defendant that it viewed "the litigation strategy as one merely meant to delay and to frustrate a good-faith resolution of the matter."

This was a revelation of things to come.

After a bench trial, the court ruled in plaintiff's favor. First, the court held that, based on a factual stipulation, the money was due and owing. The defendant’s "meritless" Law 75 claim could not serve to condition the obligation to pay. The court ordered the local court to disburse and release funds due plaintiff. The court also awarded damages consisting of cold storage costs for merchandise sold but undelivered to defendant because of its delinquency in payments.

On the claim to pierce the corporate veil the court determined that plaintiff had produced no evidence that the defendant corporation would be unable to meet its financial obligations. Thus, it dismissed under Puerto Rico law the alter ego theory to reach the individuals.

As to Law 75, the court concluded that the relationship, on a purchase order basis, was not protected under Law 75. The court reasoned that plaintiff "deals with various clients in Puerto Rico and does not rely on [defendant] to create a market for its services."

As to the claim for injunctive relief, the court found that isolated conduct informing the nature of the legal dispute was insufficient to warrant injunctive relief. Anticipating a potential constitutional issue, the court noted that plaintiff failed to specify the "legal right" that the behavior is said to violate.

In sum, the court ordered defendant to pay the principal amount due, damages incurred, plus interest, less amounts collected by plaintiff from a line of credit and the amounts deposited in local court.

NOTE: In Lamex Foods v. Audeliz Lebron, No. 10-1677 (1st Cir. June 27, 2011), the First Circuit vacated the District Court’s (Fusté, J.) Judgment holding that consolidation of a preliminary injunction hearing with a bench trial on the merits without providing adequate and clear prior notice violated the constitutional right to a jury trial. Thus, the court vacated the judgment with respect to the claims for declaratory relief and to pierce the corporate veil and remanded the action for further proceedings. Significantly, because Defendant conceded the amount and existence of the debt owed to Plaintiff, it affirmed the court’s monetary judgment in Plaintiff’s favor. As to the appeal from a discovery sanction, the court affirmed the court’s imposition of sanctions against Defendant for its President’s evasive and non-responsive answers during his deposition.