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Warnaco Inc. v. Farkas

decided: April 14, 1989.

WARNACO, INC., PLAINTIFF-APPELLEE,
v.
HAROLD FARKAS, WAKE WARTHEN, AND MORTON S. ROBSON, DEFENDANTS-APPELLANTS. HAROLD FARKAS, CROSS-CLAIMANT-APPELLEE, V. MORTON S. ROBSON, CROSS-CLAIM-DEFENDANT-APPELLANT



Appeal from a decision of the United States District Court for the Southern District of New York (Robert L. Carter, Judge), granting summary judgment to plaintiff-appellee on a guarantee, and final judgment after trial to cross-claim appellee on an indemnification agreement. We affirm in part the grant of summary judgment on the grounds that the guarantee is not ambiguous and that plaintiff-appellee did not accept the collateral in full satisfaction of the debt. We remand for a hearing on other matters, including the value of the collateral. We affirm in part and reverse in part the judgment on the cross-claim.

Kearse, Pierce and Winter, Circuit Judges.

Author: Winter

WINTER, Circuit Judge

This is an appeal from a grant of partial summary judgment and final judgment after a bench trial before Judge Carter. The summary judgment allowed appellee Warnaco, Inc. to recover the full amount of a guarantee executed by appellants Harold Farkas, Wake Warthen and Morton S. Robson as part of their purchase of a clothing design business. Judge Carter rejected appellants' claims that the language of the guarantee was ambiguous and that appellee had accepted certain trademarks as collateral in full satisfaction of the debt under Article 9 of the Uniform Commercial Code ("U.C.C."), Conn. Gen. Stat. §§ 42a-9-101 et seq. (1988); Warnaco, Inc. v. Farkas, 664 F. Supp. 738 (S.D.N.Y. 1987). The appeal from judgment after trial involves a cross-claim by Farkas against Robson based on an indemnification agreement between them. Judge Carter rejected Robson's affirmative defense of economic duress but failed to reach the defense of fraudulent misrepresentation. We affirm in part the grant of summary judgment on the grounds that the guarantee is not ambiguous and that the trademarks were not accepted in full satisfaction of the debt. We remand, however, for findings concerning a possible disposition of the trademarks and for a determination of their value. On the cross-claim, we affirm the rejection of the defense of economic duress. We remand, however, for a decision regarding the defense of fraudulent misrepresentation.

BACKGROUND

This dispute arose out of the sale by Warnaco of certain trademarks and of two corporations, Jerry Silverman, Inc., and Jerry Silverman Sport, Inc. (collectively "JSI"), that were in the clothing design business. Farkas, Robson and Warthen formed a corporation named Farowa to purchase JSI from Warnaco in 1981. Farkas, a long-time officer of JSI, took fifty percent of the shares while Robson and Warthen each took twenty-five percent. A stock purchase agreement recited that Warnaco "wishes to sell . . . all of the shares of the Common Stock of Jerry Silverman . . . and the Trademarks [of Jerry Silverman]." The sale, however, was conditional upon full payment of the purchase price. The stock purchase agreement thus stated that Warnaco conveyed to Farowa a licensing agreement "to use the Trademarks without payment of royalties," adding that "[a]t such time as the note is paid in full . . . SELLER shall sell, transfer and assign the licensed Trademarks to Purchaser." The parties agree that the transfer was to be for the nominal consideration of one dollar.

Farowa made a cash payment of $750,000 to Warnaco and executed a promissory note for an additional $750,000. The note stipulated six yearly payments of $50,000 and a final principal payment of $450,000, along with quarterly interest payments during its term. In the event of default, the note provided for acceleration and an increased rate of interest. Farkas, Robson and Warthen annexed to the note a personal guarantee, pledging "due and punctual" payment and jointly and severally guaranteeing "twenty percent (20%) of the amount due under this Note." Warnaco and Farowa also entered into a separate agreement that licensed Farowa to use the JSI trademarks. This agreement provided that the license could be terminated upon a default under the promissory note.

Robson and Warthen were principally financial backers of JSI, while Farkas managed day-to-day operations. JSI did not prosper, and Warnaco and Farowa executed a subsequent agreement, of no significance for this appeal, extending the time for payment. JSI's financial condition continued to deteriorate, however, and in September 1983 Robson informed Farkas that he, Robson, would no longer provide financing unless he could exercise control of the company and could bring in new management. In response, Farkas executed a revocable proxy agreement, authorizing Robson to vote Farkas's shares in JSI. Discussions were then commenced among Farkas, Robson and one Princess Katalin zu Windisch-Graetz ("Princess Katalin"), a designer of evening gowns, about Princess Katalin's assuming the day-to-day management of the business while Farkas continued to be responsible for financial matters. By November 5, 1983, a draft agreement designed to implement that arrangement had been prepared. Two days later, however, Farkas revoked his proxy. Nevertheless, preparation for the change in management continued, with Princess Katalin moving sample designs of her evening-wear line into the JSI showroom in December.

What happened next is a matter of factual dispute between the parties. According to Robson, Princess Katalin reported for work on the first business day of 1984, but was refused admittance. Robson then confronted Farkas, who demanded that Robson buy Farkas's stock and indemnify Farkas against any personal liability. On January 6, 1984, Robson agreed to purchase Farkas's interest and entered into an agreement to indemnify Farkas against personal liability on the guarantee of the promissory note. Robson claims that he entered into this purchase and indemnification agreement in reliance on an allegedly inaccurate cash flow projection provided by Farkas. Farkas disputes Robson's account.

Robson and Princess Katalin were unable to restore JSI to financial health, and Farowa defaulted on its payments to Warnaco. In response, Warnaco terminated the trademark licensing agreement. Sometime before Warnaco had notified Farowa of the termination of the licensing agreement, however, Robson attempted to license the trademarks to an entity called "Deborah for Kenneth Green, Inc." ("DKG"). After receiving Warnaco's termination notice, Robson put DKG in touch with Warnaco, and the two companies negotiated a new license agreement. Robson claims the value of the trademarks is substantially greater than the amount due under the note. Warnaco claims that it never received any payments under its agreement with DKG, which has since been terminated.

Warnaco subsequently filed this diversity action in the Southern District of New York to recover on the guarantee of the promissory note by Farkas, Robson and Warthen. Farkas filed a cross-claim against Robson to recover on the indemnification agreement. Judge Carter dealt with the matter in two stages. In his first decision, Warnaco, Inc. v. Farkas, 664 F. Supp. 738 (S.D.N.Y. 1987), he granted summary judgment to Warnaco on the full amount of the guarantee. In doing so, he rejected appellants' claim that the guarantee was ambiguous. Id. at 741. He also rejected a defense based on Article 9 of the U.C.C., Conn. Gen. Stat. §§ 42a-9-101 et seq. That defense asserted that the stock purchase and licensing agreements constituted a security arrangement subject to Article 9 of the U.C.C., under which the trademarks were collateral securing the purchase price of JSI. Appellants argued that Warnaco elected to accept the collateral in full satisfaction of the debt under Section 9-505. Judge Carter held that because Section 9-505 requires written notice to the debtor of the creditor's acceptance of the collateral, the failure of Warnaco to give such notice meant that there had been no acceptance. He did not, however, hold a hearing concerning the licensing agreement with DKG on the value of the trademarks. Instead, he entered judgment for the full amount of the guarantee.

Because Farkas's cross-claim raised material issues of fact, a trial was held. After hearing the evidence, Judge Carter held that Robson's defense of economic duress failed. Although he entered a final judgment for Farkas, Judge Carter did not address Robson's fraudulent misrepresentation defense.

Discussion

We begin with appellants' challenges to Warnaco's recovery on the guarantee. Appellants claim first that the guarantee is ambiguous as to the amount ...


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