ATSCO FOOTWEAR HOLDINGS LLC LLC v. KBG LLC (2021)

Order, Supreme Court, New York County (O. Peter Sherwood, J.), entered April 14, 2020, which granted defendant's CPLR 3211(a)(1) and (7) motion to dismiss the complaint to the extent it alleged breach of a “Management Agreement” for failure to properly calculate “Net Gross Profits” for the 2013 through 2016 calendar years, and for failure to include certain management fees and royalty fees in the calculation of “Net Gross Profits,” unanimously affirmed, with costs.

The letters and emails submitted by defendant establishes that plaintiff's principals “knowingly, voluntarily and intentionally” (Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgt., L.P., 7 N.Y.3d 96, 104, 817 N.Y.S.2d 606, 850 N.E.2d 653 [2006]) waived their contractual right to audit the “Computation Statements” setting forth the Net Gross Profits calculations during the relevant calendar years.  Further, such correspondence constitutes “documentary evidence” that “utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law” (Goshen v. Mutual Life Ins. Co. of N.Y., 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858, 774 N.E.2d 1190 [2002];  see also Amsterdam Hospitality Group, LLC v. Marshall–Alan Assoc., Inc., 120 A.D.3d 431, 432–433, 992 N.Y.S.2d 2 [1st Dept. 2014]).

Contrary to plaintiff's contention, its audit right and right to a proper calculation of Net Gross Profits were not “separate and distinct” such that the waiver of the former did not amount to relinquishment of the latter.  The purpose of the audit right was to allow plaintiff to verify whether Net Gross Profits were properly calculated.  Thus, by waiving the audit rights, plaintiff was also waiving its right to challenge the calculation.  We reject plaintiff's contention that its failure to invoke the audit procedure set forth in the Management Agreement does not bar it from now challenging the Net Gross Profits calculations.  Acceptance of such a contention would render the contractual procedure for challenging the calculations meaningless (see Beal Savings Bank v. Sommer, 8 N.Y.3d 318, 324, 834 N.Y.S.2d 44, 865 N.E.2d 1210 [2007];  RM 14 FK Corp. v. Bank One Tr. Co., N.A., 37 A.D.3d 272, 274, 831 N.Y.S.2d 120 [1st Dept. 2007]).  Plaintiff's contention that its waivers were “inoperable” because they “took place before [it] knew the full extent of KBG's breach of the Management Agreement” is circular, as the whole point of the audit right was to enable plaintiff to verify whether the Net Gross Profits were properly calculated.

Defendant could properly invoke the account stated doctrine as a defense to plaintiff's breach of contract claim, in view of plaintiff's express waiver of its audit rights and acquiescence to defendants' calculations, and acceptance of payments (see An–Jung v. Rower LLC, 173 A.D.3d 488, 99 N.Y.S.3d 879 [1st Dept. 2019];  York Hunter Servs., Inc. v. Brooklyn Historical Socy., 14 Misc.3d 1216[A], 2007 N.Y. Slip Op. 50042[U], *3, 2007 WL 79642 [Sup. Ct., Kings County 2007]).  The parties' agreements as to the correctness of the amounts due were independent of the underlying Management Agreement (cf.  Federated Fire Protection Sys. Corp. v. 56 Leonard St., LLC, 170 A.D.3d 432, 433, 93 N.Y.S.3d 558 [1st Dept. 2019]).  Plaintiff's contention that defendant's reliance on the account stated doctrine is barred if “fraud, mistake, or other equitable considerations are shown” (Cushman & Wakefield, Inc. v. Kadmon Corp., LLC, 175 A.D.3d 1141, 1142, 105 N.Y.S.3d 878 [1st Dept. 2019]) is unavailing, as plaintiff could have discovered any fraud or mistake had it not waived its audit rights.

The court properly determined, as a matter of law, that the “management fees that KBG was paid by its affiliates” and “royalty fees that KBG paid to its affiliate, KBG–IP, LLC” (Royalty Fees) were excludable from the calculation of Net Gross Profits.  These fees do not constitute “revenue” within the contract's definition of “Net Gross Profits.”  The management fees are clearly unrelated to defendant's business of importing, marketing, distributing, or selling its branded footwear.  The royalty fees are not revenue to defendant, but to a separate entity formed for the purpose of holding and owning certain trademarks.  In any event, the inclusion of royalty fees would be duplicative, as they are fees paid out of revenues that defendant had earned from its use of the trademarks, which were already factored into the Net Gross Profits calculations.