Second Generation, a clothing distributor, entered into an agreement with Kody Brand, a clothing manufacturer, wherein Kody Brand would manufacture and ship various items of clothing that Second Generation would then distribute to major retailers in the United States. Kody Brand’s subsidiaries (all referred to as “Kody”) all performed different parts of the manufacturing and distribution process, but the entities were operated by the same employees and often performed overlapping tasks. After several years, Kody Brand began delivering shipments late then ceased shipping altogether.
Second Generation included a “liquidated damages” provision in its contract with Kody Brand. If a party to a contract with a liquidated damages provision breaches, the contract provides either a set damages amount or a formula for calculating how much the breaching party must pay in damages. Second Generation’s liquidated damages provision set damages at 2% of the contract price for any late order per day late.
When Second Generation demanded that Kody pay liquidated damages, Kody refused, and Second Generation sued. SAM filed a successful summary judgment motion on behalf of Second Generation. As a result of the summary judgment motion, Second Generation was awarded more than $2.5 million in liquidated damages and nearly $1 million in fees and interest. Moreover, all of the Kody Defendants were held to be the alter egos of one another, which made all of the defendants jointly and severally liable. This was critical as the primary stakeholders had considerable assets but the entities had nothing. Kody appealed from the $3.5 million judgment in Second Generations favor. After extensive briefing and oral argument, the Second Appellate District upheld the trial court’s decision on alter ego as well as the enforceability of the liquidated damages provision.
The Kody defendants argued that the liquidated damages award should be overturned, particularly since the liquidated damages award was more than seven times the actual damages Second Generation incurred. In enforcing the liquidated damages provision, the court rejected Kody’s hindsight test and instead focused the efforts Second Generation made at the time it entered to contract to ascertain the range of damages it would incur in the event of a breach.
Equally significant is that the Court of Appeal upheld the trial court’s finding of alter ego against all of the defendants. There is a paucity of cases in which courts find alter ego liability on summary judgment, and appellate courts are even less likely to uphold such a finding on appeal. In affirming the alter ego ruling, the Second Appellate District stated that SAM had presented “a veritable mountain of evidence” of alter ego liability and that an inequitable result would follow if the Kody defendants were not found to be jointly and severally liable.
Through the hard work and legal strategy formulated by the SAM team, Second Generation was able to obtain and uphold a high liquidated damages award and will be able to pursue the damage award from each of the defendants, who are jointly and severally liable.
For more information about our Business Litigation Practice please contact Dan Rozansky at email@example.com