Opinion ID: 182383
Heading Depth: 2
Heading Rank: 1

Heading: The Relationships Among the Parties

Text: Props and Kid are Italian companies, subsidiaries of nonparty Diesel S.p.A. (SpA), which owns the trademarks on Diesel-brand merchandise. Props and Kid are licensed by SpA to produce adult shoes and children's shoes, respectively, bearing Diesel trademarks. In 2005, Props and Kid entered into distribution agreements with GBMI, a California corporation (the Distribution Agreements), pursuant to which GBMI would purchase Diesel-brand shoes designed and manufactured by Diesel and sell them to retailers in the United States. In the summer of 2006, GBMI was experiencing severe financial difficulties and owed SpA and Kid more than $7 million in back royalties and advertising commitments. By December 31, 2006, those amounts had increased to more than $11.5 million. Greystone is a Delaware company that makes loans to financially distressed companies and takes security interests in their assets. In December 2006, Greystone, GBMI, and Diesel entered into agreements pursuant to which Greystone would make funds available to GBMI and would make payments from those funds directly to Diesel. On December 2, SpA and Kid sent a letter to GBMI, with a copy to Greystone, stating that Props and Kid were each willing to sign a three-way agreement with Greystone and GBMI with respect to such financing. On December 4, Greystone and GBMI executed a loan and security agreement (LSA), pursuant to which Greystone established a $25 million revolving credit account for GBMI (the revolver) in exchange for a security interest in substantially all of GBMI's present and after-acquired assets, including all of [GBMI's] books and records relating . . . to [GBMI's] business. On the same day, two letter agreements, identical in substance, were executedone by GBMI, Greystone, and Props, the other by GBMI, Greystone, and Kid (the tripartite agreements or TPAs)with reference to the LSA and the Distribution Agreements. The TPAs contained payment provisions requiring, inter alia, that GBMI not place an order under the Distribution Agreements unless it had received a bona fide purchase order for Diesel products from a retailer (a Customer Purchase Order) and that GBMI provide copies of such customer orders to Diesel and Greystone; that Diesel, before delivering such products to GBMI, send Greystone copies of Diesel invoices for those products (Diesel Invoices); and that GBMI supply Diesel and Greystone with copies of invoices that GBMI sent to its customers (Customer Invoices). In those circumstances, GBMI's delivery of such Customer Invoices to Greystone would constitute an irrevocable request that Greystone automatically pay Diesel, from GBMI's revolving credit account, the amounts shown on the corresponding Diesel Invoices. With respect to GBMI debts on orders not placed according to the terms of the TPAsincluding debts to its suppliers other than DieselGreystone was not authorized to make payments from GBMI's credit account except as expressly instructed by GBMI. Diesel was aware that the credit account could be used to pay other GBMI creditors. The TPAs provided that Diesel had the right, at any time before shipping shoes to GBMI, to request and receive information from Greystone as to, inter alia, whether GBMI was in noncompliance or default with respect to any requirements imposed by the LSA (the notice provisions), Despite the December 2006 arrangements, GBMI's financial difficulties continued. At various timesbeginning in December 2006 and January 2007GBMI was in default of revenue covenants and other terms of the LSA. In addition, during the next eight months, Diesel shipped to GBMI several lots of shoes for which Diesel was never paid. On September 4, 2007, Diesel notified Greystone that Greystone was in default of the TPAs for, inter alia, failing to make payments, and notified GBMI that GBMI was in default of the Distribution Agreements; Diesel informed each that unless its defaults were cured within 30 days, Diesel would consider its agreements terminated (the conditional termination letters). On October 17, 2007, after neither Greystone nor GBMI had cured its defaults, Diesel notified them that their respective contracts were terminated as of October 4. Diesel shortly thereafter commenced the present action. At the time of termination, GBMI had received orders from retailers for 520,202 pairs of Diesel shoes for the 2008 spring-summer season (SS08) and had incurred significant expenses associated with collecting those orders. After terminating the Distribution Agreements with GBMI, Diesel designated Diesel USA (D-USA), a wholly owned subsidiary of SpA, as its United States distributor. D-USA had operated Diesel-brand retail stores but had no experience in selling shoes to retailers, and it had little information about other retailers' orders for the SS08 season. In November, D-USA hired a former GBMI employee, who gave D-USA a complete list of GBMI's open orders (the Order Book). Props personnel referred to the Order Book as the GBMI employee's dowry and wrote [i]t looks like Christmas came early this year. D-USA had net sales for the SS08 season of more than $14 million, selling 369,266 pairs of Diesel-brand shoes to retailers who included those identified from the GBMI Order Book.