Smart & Associates, LLC v. Independent Liquor (NZ) Ltd. et al

Filing 47

MEMORANDUM, OPINION AND ORDER signed by Judge Charles R. Simpson, III on 11/7/12 granting 26 Motion to disolve temporary restraining order; denying 31 Motion for Partial Summary Judgment. Temporary Restraining Order issued by the Jefferson Circuit Court is DISSOLVED. cc:counsel (SJS)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE

SMART & ASSOCIATES LLC d/b/a SMART BEVERAGE GROUP

v.

PLAINTIFF

CIVIL ACTION NO. 3:10CV-614-S

INDEPENDENT LIQUOR (NZ) LTD., et al.

DEFENDANTS

MEMORANDUM OPINION AND ORDER

This matter is before the court on motion of the plaintiff, Smart & Associates, LLC d/b/a
Smart Beverage Group (“SBG”) for partial summary judgment (DN 31), and on motion of the
defendants, Independent Liquor (NZ) Ltd., et al., (collectively, “Independent”),1 to dissolve the
temporary restraining order issued by the Jefferson County, Kentucky, Circuit Court (DN 26) in this
case.
SBG filed suit against Independent2 in the Jefferson County, Kentucky, Circuit Court in
August of 2010 alleging breach of contract and breach of the implied warranty of merchantability
in the performance of the parties’ agreement for SBG’s purchase and resale of alcoholic drink shots
manufactured by Independent. SBG obtained a temporary restraining order from the state court
prohibiting Republic Bank from honoring a claim by Independent for $124,687.50 under the Letter

1

Republic Bank has been named in this action as the provider of an Irrevocable Standby Letter of Credit securing SBG’s
transactions with Independent. It was joined in order for SBG to seek a restraining order prohibiting Republic from honoring a claim
by Independent under the Letter of Credit. Therefore, reference to the collective entities as “Independent” does not include Republic
Bank.
2

SBG names Independent Liquor (NZ) Ltd., Flavored Beverage Group Holdings, Ltd., and Independent Distillers USA
as defendants. Independent Liquor (NZ) Ltd. was acquired by Flavored Beverage Group Holdings, Ltd. in November, 2007. There
is no further reference to Independent Distillers USA in the Complaint beyond its identification as a Delaware Corporation doing
business in California and Kentucky.

of Credit. Independent removed the action to this court under our diversity jurisdiction and asserted
a counterclaim for the $124,687.50 which it claims remains due and owing, as well as other as yet
undetermined damages. Independent now seeks to have this court dissolve the retraining order, and
SBG seeks judgment on one aspect of its claim for breach of contract.
A party moving for summary judgment has the burden of showing that there are no genuine
issues of fact and that the movant is entitled to summary judgment as a matter of law. Adickes v.
S.H. Kress & Co., 398 U.S. 144, 151-60, 90 S. Ct. 1598, 16 L. Ed. 2d 142 (1970); Felix v. Young,
536 F.2d 1126, 1134 (6th Cir. 1976). Not every factual dispute between the parties will prevent
summary judgment. The disputed facts must be material. They must be facts which, under the
substantive law governing the issue, might affect the outcome of the suit. Anderson v. Liberty
Lobby, Inc., 106 S. Ct. 2505, 2510 (1986). The dispute must also be genuine. The facts must be
such that if they were proven at trial, a reasonable jury could return a verdict for the non-moving
party. Id. at 2510. The disputed issue does not have to be resolved conclusively in favor of the nonmoving party, but that party is required to present some significant probative evidence which makes
it necessary to resolve the parties’ differing versions of the dispute at trial. First National Bank of
Arizona v. Cities Service Co., 391 U.S. 253, 288-89 (1968). The evidence must be construed in a
light most favorable to the party opposing the motion. Bohn Aluminum & Brass Corp. v. Storm King
Corp., 303 F.2d 425 (6th Cir. 1962).
It is undisputed that SBG and Independent entered into a Distribution Agreement on April
28, 2006, and that Agreement terminated in November 2007 when Independent was sold to Flavored
Beverage Group Holdings, Ltd. The Distribution Agreement recited that SBG is in the business of
buying alcoholic products from producers and selling them to licensed wholesale distributors;

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Independent is in the business of producing alcoholic beverages for sale. Distrib.Agr., Recitals (A);
(B). In this agreement, Independent appointed SBG as its sole distributor in the United States of its
“Twistee Shots.” Distrib.Agr., ¶¶ 2, 3; First Schedule. SBG was required to “pay for all stock
purchased from Independent within 30 days of despatch [sic] (from the Bill of Lading date) from
the port of despatch [sic] under an Irrevocable Letter of Credit.” Distrib.Agr., ¶ 5.3.
The parties continued to do business for a number of years after the termination of the
Agreement, apparently without a subsequent written agreement. SBG executed a number of Letters
of Credit to guarantee its payments, as required by Independent. Payment terms were expanded to
60 to 90 days with later shipments of goods.
In May, 2009, SBG and Independent exchanged a number of e-mails concerning a shipment
to SBG of spoiled product. Independent apparently determined that there were 8,587 cases of
spoiled product shipped at a value of $244,729.50. SBG urges that it paid for the defective product,
but that Independent replaced only 4,212 cases, having unilaterally decided to “net the exchange rate
loss against the value of the replacement stock owed to [SBG]” for losses Independent claimed to
have suffered as a result of SBG’s late payments between December 2008 and March 2009.
Independent contends that the late payments caused the company to lose in excess of $190,000.00
due to the devaluation of the U.S. Dollar against the New Zealand Kiwi while SBG was
approximately $830,000.00 in arrears during that period.
On October 9, 2009, Republic Bank & Trust Company (“Republic”) issued the Irrevocable
Standby Letter of Credit in issue in this case to Independent on behalf of SBG securing an aggregate
sum of $400,000.00.

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On December 8, 2009, SBG was notified by Independent that SBG would no longer be the
U.S. importer for Independent.
On March 23, 2010, SBG withheld $124,687.50 from its payment to Independent of a final
balance of $168,181.50 invoice for new merchandise. SBG contends that it offset the value of the
replacement stock which Independent withheld. SBG also contends in this action that Independent
shipped cases of out-of-date product, but it is unclear from the record whether SBG made any
demand for replacement of those goods.
On August 13, 2010, Independent submitted a written demand to Republic on the Letter of
Credit in the sum of $124,687.50 for the withheld amount. Republic has not paid under the Letter
of Credit, as it was temporarily restrained by the Jefferson County, Kentucky, Circuit Court from
honoring Independent’s demand for payment. That restraining order remains in effect at the present
time, and Independent has moved for its dissolution. (DN 26).
SBG contends that Independent’s demand under the Letter of Credit is improper as it seeks
in effect to recover the “exchange rate loss” which Independent unilaterally imposed on SBG. SBG
urges that neither the Distribution Agreement nor the parties’ subsequent course of dealing permit
Independent to recoup purported losses in dollar value for conversion of Dollars to Kiwis. SBG
notes that it was always billed in U.S. Dollars and paid in U.S. Dollars. In any event, Michael C.
Smart, Member/Manager of Smart & Associates, LLC d/b/a SBG, avers that from 2006 until the end
of SBG’s business arrangement with Independent, “SBG made timely and consistent payments to
[Independent].” Smart Aff., ¶ 3.
Smart’s November 4, 2011 deposition testimony appears to contradict this averment.
Independent contends that between December 2008 and March 2009, SBG was more than

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$830,000.00 in arrears in its payments, resulting in a substantial loss due to the devaluation of the
U.S. Dollar against the New Zealand Kiwi. At his deposition, Smart was shown a number of
Independent’s spread sheets and a summary sheet purporting to reconcile losses due to late payments
on SBG’s account, credit and/or replacement of defective product, and amounts owed on new orders.
(Smart depo., Ex. 46) Smart testified concerning the summary that
I had a discussion with Peter McHugh. I would assume I had several discussions
with Peter McHugh about this subject, basically objecting to – I mean, not arguing
with the fact of the payment dates, just objecting to the fact that suddenly the
exchange rate issue, the fact that the exchange rate issue has jumped up and how that
affects our business and how that affects our relationship in any of our documents.
There is no basis for that... Obviously there is no issue with the facts of these
numbers, the fact of what we owe and what we pay. There is really – you know, we
are not arguing the fact of when we paid it.

Smart depo., pp 263-64 (emphasis added).
SBG has moved for partial summary judgment seeking an order which finds that Independent
“[is] not entitled to payment of $124,687.50 from the letter of credit or otherwise.” Tend. Ord., DN
31-15.
SBG postulates that Independent had no right to recoup any supposed loss due to the
devaluation of the U.S. Dollar during the time SBG was in arrears in its payments to Independent.
SBG urges that there was no provision for such recoupment in the Distribution Agreement and that
such action was contrary to the parties’ established course of dealing. However, there is a genuine
issue of material fact concerning whether SBG had paid all sums due and owing to Independent.
Further, SBG has cited no law concerning its asserted right to a judgment finding that Independent
is not entitled to payment of $124,687.50.

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Independent states that it only seeks to recoup SBG’s past due payments for product
purchased. Mo. to Dissolve, pp. 7-8.3 In Answers to Interrogatories, Independent states that it is
owed “approximately $125,000 for unpaid invoices...” (DN 38-3, Ans. to Interrog., No. 5). This
“approximately $125,000" appears to refer to the $124,687.50 which Independent contends SBG
“unilaterally offset...against INDEPENDENT’s final bill...” and for which Independent has made
a claim under the Letter of Credit. Resp. to SJ Mo., p. 5.
The parties clearly dispute the obligation underlying the $124,687.50. SBG urges that it paid
for the spoiled product. It urges that Independent unilaterally and impermissibly offset its selfproclaimed ‘exchange rate loss’ by withholding replacement product valued at $124,687.50. SBG
then admittedly deducted a corresponding amount from its payment on a future invoice, crediting
itself for spoiled product for which it had received no replacement. From the outset, SBG disputed
Independent’s right to unilaterally offset its purported exchange rate loss, despite the fact that SBG
admits that it paid its invoices late.
By contrast, Independent urges that it was entitled to offset a portion of the loss it suffered
due to the devaluation of the U.S. Dollar against the Kiwi during the prior year, and that therefore,
SBG improperly offset an amount which it owed for new product ordered and invoiced after
Independent provided all replacement product to which SBG was entitled.4 Independent thus urges
the court to lift the retraining order to permit it to recover the amount withheld by SBG, and to deny
SBG’s motion for partial summary judgment.

3

This is, or course, no more than argument of counsel in a brief.

4

Independent further claims in this action that SBG made commitments to its distributors concerning replacements and
credits which SBG failed to honor and that Independent was forced to honor in its stead. It claims additional damages not in issue
in this motion.

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SBG has admitted that it paid its bills late over a period of approximately 8 months prior to
the spoiled product issue. Independent created a document purportedly establishing its “loss” over
that 8-month period of time. The document is wholly unauthenticated. Independent has not
substantiated the “loss,” nor has it articulated a basis upon which it offset this “loss” by withholding
replacement of spoiled product. Independent attempts to offer the document as undisputed by SBG.
However, it simply presented the document to Smart at his deposition and asked if he had any reason
to doubt the numbers. Smart responded that SBG was not denying when and what it paid on its
account. SBG does dispute that Independent could unilaterally offset an “exchange rare loss” by
withholding replacement products.
In support of its motion to dissolve the restraining order, Independent has offered a letter
dated April 28, 2010 from its New Zealand attorneys responding to SBG’s counsel prior to the filing
of this action. This letter is, of course, not evidence in the case, but rather a recitation of facts given
outside of litigation. In that letter, Independent’s counsel stated that
In early 2009 our client shipped 8,587 cases of defective product and has had
numerous communications with your client about them. Those cases were replaced
at our client’s expense with 1136 cases in September and 2520 and 1692 cases, both
of new stock, in November. By prior agreement with your client, the 1136 cases
were treated as 852 cases of product because they were short dated. When our client
agreed to provide your client with additional replacement stock, your client was
informed that 3523 cases would not be replaced in order to compensate our client for
the losses it sustained due to your client’s failure to comply with our client’s credit
conditions as a result of which our client sustained losses due to exchange
fluctuations. Ultimately, our client bore about 50% of that loss.
DN 26-3.
Assuming, arguendo, that counsel’s recitation is accurate, Independent has failed to cite any
law to support its exercise of this self-help remedy. Independent urges that its exchange rate loss
claim is “legally tenable,” citing, generally, a number of cases and treatises which suggest that
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factors such as currency fluctuation may be considered in seeking to make a creditor whole. (DN
38, pp. 7-8). This authority does not appear to support Independent’s unilaterally imposed setoff,
however.
The dispute over whether Independent is entitled to be compensated for loss incurred due
to SBG’s delayed payments is an issue to be addressed in this case. But Independent’s demand
under the Letter of Credit for the amount it claims is outstanding on SBG’s account raises another
question. The state court enjoined Republic Bank from honoring Independent’s demand under the
Letter of Credit. (DN 1-5). That court issued a restraining order without opinion. Upon removal,
we address afresh whether injunctive relief is proper in this case.
We start from the premise that upon removal to this court, “all injunctions, orders and other
proceedings had in such action prior to its removal shall remain in full force and effect until
dissolved or modified by the District Court.” 28 U.S.C. § 1450.
As noted in Langley v. Prudential Mortgage Capital Company LLC, 554 F.3d 647 (6th Cir.
2009), “A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on
the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the
balance of equities tips in his favor, and that an injunction is in the public interest. Winter v. Natural
Res. Def. Council, Inc., [555 U.S. 7], 129 S.Ct. 365, 374, 172 L.Ed.2d 249 (2008).”
SBG has failed to meet its burden to establish that it is likely to succeed on the merits. It has
offered nothing more than an intuitive argument that since the contract did not provide for an
“exchange rate loss,” such a remedy is therefore unavailable to Independent under any circumstance.
This ill-defined argument fails to account for SBG’s late payments, no matter how large the

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delinquency or how long the delay. Without any principled argument or citation to legal authority,
SBG has failed to establish that it is likely to succeed on its claim concerning the $124, 687.50.
In any event, the court finds that the paramount purpose of the Letter of Credit is best served
by declining to enjoin Republic Bank from honoring the claim. The court recognizes that
[t]he very object of a letter of credit is to provide a near foolproof method of placing
money in its beneficiary’s hands when he complies with the terms contained in the
letter itself...Parties to a contract may use a letter of credit in order to make certain
that contractual disputes wend their way towards resolution with money in the
beneficiary’s pocket rather than in the pocket of the contracting party. Thus, courts
typically have asserted that such letters of credit are “independent” of the underlying
contract...And they have recognized that examining the rights and wrongs of a
contract dispute to determine whether a letter of credit should be paid risks depriving
its beneficiary of the very advantage for which it bargained, namely that the dispute
would be resolved while he is in possession of the money [citations omitted]...[T]he
“fraud in the transaction” exception is available only where the beneficiary’s conduct
has “so vitiated the entire transaction that the legitimate purposes of the
independence of the issuer’s obligation would be no longer served. [citations
omitted].
Itek v. First National Bank of Boston, 730 F.2d 19, 24-25 (1st Cir. 1984). See also, Aetna Life and
Casualty Co. v. Huntington National Bank, 934 F.2d 695, 702 (6th Cir. 1991)(“We need not decide
whether fraud in the strict common law sense is required to establish “fraud in the transaction.” At
a minimum, however, it is necessary that the issuer show intentional fraud.”).
In Langley, supra, Judge Moore explained in concurrence that
[A] bank’s duty to pay on letters of credit is independent of whether or not the
applicant...and the beneficiary...have performed on the underlying contract. White
& Summers, supra, § 26-2, at 138. In other words, the bank “must pay on a proper
demand from the beneficiary even though the beneficiary may have breached the
underlying contract with the applicant.” Id...Most important, the “independence
principle” is threatened if courts are willing to enjoin payment of letters of credit not
just in exceptional cases involving fraud, but in ordinary contract disputes as well.
As this court has explained elsewhere:

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There are important policy reasons for upholding the validity of the
documents without reference to the underlying agreements. The letter of
credit’s primary value to the financial world is reliability...
Security Fin. Group., Inc., v. N. Ky. Bank & Trust, Inc., 858 F.2d 304, 307 (6th Cir.
1988). When courts are too willing to enjoin payment of letters of credit, the
independence principle is weakened because parties must look not only at the “paper
transaction” embodied in the letters but also at the underlying contracts.
Langley, 554 F.3d at 649-50.
The court concludes that under the facts of this case, the temporary restraining order should
be dissolved. This is essentially a garden variety contract dispute. SBG has not shown “fraud in the
transaction.” SBG urges that Independent’s action was not contemplated by the parties’ contract
or course of dealing. However, Independent’s claim for payment clearly arises from the very
business arrangement which was secured by the Letter of Credit. Rather than “vitiating the entire
transaction,” Independent’s conduct arises from the very heart of the obligation of SBG to pay for
product received according to the terms of the parties’ agreement and SBG’s admitted failure to pay
according to those terms. The very protection to be afforded Independent by the Letter of Credit
would be rendered a nullity if SBG was permitted to further impede payment to Independent on its
claim while the parties litigate payment issues under the parties agreement.
Finally, in this instance, an injunction is not warranted, as SBG’s remedy at law is sufficient
to render it full relief should it prevail. See, Price v. Paintsville Tourism Commission, 261 S.W.3d
482, 484 (Ky. 2008). This is nothing more than a question of contract law and remedies available
to the parties to redress any breaches of their agreement.

For the reasons set forth herein, and the court being otherwise sufficiently advised, IT IS
HEREBY ORDERED AND ADJUDGED that the motion of the plaintiff, Smart & Associates,
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LLC d/b/a Smart Beverage Group, for partial summary judgment (DN 31) is DENIED, the motion
of the defendants, Independent Liquor (NZ) Ltd., et al, to dissolve the restraining order (DN 26) is
GRANTED, and the Temporary Restraining Order issued by the Jefferson Circuit Court is
DISSOLVED.

IT IS SO ORDERED.

November 7, 2012

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