1:04-ap-03895 | Omnilex

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
_______________________________________
)
In re 	) 	Chapter 11
)
)
INDESCO INTERNATIONAL, INC., et al, 	) 	Case No. 00-15452 (REG)
) 	(Jointly Administered)
Debtors. 	)
_______________________________________)
)
CONTINENTAL AFA DISPENSING CO., 	) 	Adversary Pro. No. 04-3895 (REG)
(formerly known as Indesco International, Inc.) )
and CONTINENTAL SPRAYERS 	)
INTERNATIONAL, INC., 	)
)
Plaintiff, 	)
)
- against - 	)
)
AFA POLYTEK, B.V., 	)
)
Defendants. 	)
_______________________________________)
)
AFA POLYTEK, B.V., 	) 	Adversary Pro. No. 04-4128 (REG)
)
Plaintiff, 	)
)
- against - 	)
)
CONTINENTAL AFA DISPENSING CO. 	)
(formerly known as Indesco International, Inc.), )
and CONTINENTAL SPRAYERS 	)
INTERNATIONAL, INC., 	)
)
Defendants. 	)
_______________________________________)
DECISION AND ORDER ON MOTION FOR SUMMARY
JUDGMENT
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APPEARANCES:
KASOWITZ, BENSON, TORRES & FRIEDMAN LLP
1633 Broadway
New York, NY 10019-6799
Attorneys for Continental AFA Dispensing Company
and Continental Sprayers International, Inc.
By: 	Andrew K. Glenn, Esq. (argued)
Cara M. Ciuffani, Esq.
COHEN TAUBER SPIEVAK & WAGNER LLP
420 Lexington Avenue, 24th Floor
New York, NY 10170
Attorneys for AFA Polytek, B.V.
By: 	Stephen Wagner, Esq. (argued)
Sari E. Kolatch, Esq.
Jed Lewin, Esq.
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Facts ................................................................................................................................................ 2
Discussion ....................................................................................................................................... 5
I. Summary Judgment Standard .................................................................................................. 5
II. Contract Interpretation ........................................................................................................... 6
III. Preliminary Issues ................................................................................................................. 8
A. The Cross-Default Clauses............................................................................................... 9
1. The CSI Sprayers License Agreement ........................................................................ 9
2. The OpAd Sprayers License Agreement .................................................................. 10
3. The OpAd Sprayers Supply Agreement ................................................................... 11
4. The Polytek Note ...................................................................................................... 12
5. The Machinery Lease Agreement and CSI Parts Supply Agreement ....................... 14
6. Summary ................................................................................................................... 14
B. Reading the Agreements Together ................................................................................. 15
C. Setoff ............................................................................................................................... 19
IV. Continental’s Claims and Polytek’s Counterclaims ........................................................... 20
A. The Polytek Note ........................................................................................................... 20
1. Breach of Contract .................................................................................................... 20
2. Indemnification ......................................................................................................... 25
B. The Machinery Lease Agreement ................................................................................... 25
C. The CSI Sprayers License Agreement ............................................................................ 30
D. The CSI Parts Supply Agreement ................................................................................... 39
1. Whether Polytek Provided Adequate Notice ............................................................ 40
2. Defective Parts .......................................................................................................... 45
E. The OpAd Sprayer Agreements ....................................................................................... 50
1. Continental’s Alleged Breaches ................................................................................ 53
a. Failure to Pursue the USA Detergent Letter of Intent .......................................... 53
b. Failure to Market OpAd Products ......................................................................... 55
2. Damages .................................................................................................................... 57
a. General vs. Consequential Lost Profit Damages .................................................. 57
b. Limitation on Damages in the OpAd Sprayers Supply Agreement ...................... 60
c. Standards for Recovery of General vs. Consequential Lost Profit Damages ....... 62
d. Lost Royalties under the OpAd Sprayers License Agreement ............................. 63
e. Lost Profit Damages under the OpAd Sprayers Supply Agreement..................... 67
Conclusion .................................................................................................................................... 71
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ROBERT E. GERBER
UNITED STATES BANKRUPTCY JUDGE:
In these related adversary proceedings under the umbrella of the chapter 11 cases of
reorganized debtors Indesco International Inc. and its affiliates (“Indesco”), each of the above-
captioned parties—Continental AFA Dispensing Company (“Continental AFA”), and
Continental Sprayers International Inc. (“CSI”, and collectively with Continental AFA,
“Continental”),1 and AFA Polytek B.V. (“Polytek”)—is a manufacturer of sprayers used in
household products, such as spray cleaners. Each of Continental and Polytek asserts claims
against the other for breach of contract, arising from one or more of six agreements relating to
their respective sprayer businesses that were entered into or updated as settlement agreements in
March 2002, in connection with the emergence from bankruptcy of Indesco, Continental’s
predecessor.
As described more fully below, the Bankruptcy Settlement Agreements provided, in
general, that Continental and Polytek would:
(1) supply each other with machines, molds, services, and finished
products;
(2) effectively divide their sales and marketing efforts; and
(3) make specified payments to each other.
In these adversary proceedings, Continental seeks damages from Polytek in a five count
complaint on what are essentially four claims 2 for admittedly unpaid sums under the Bankruptcy
Settlement Agreements. Polytek, in turn, seeks damages from Continental on four of its own
1 Indesco International (renamed Continental AFA) and CSI were the debtors.
2 A fifth claim seeks recoveries for fees and expenses on the first claim.
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claims for alleged breaches of contract by Continental—and also asserts those claims as defenses
to any obligations Polytek owed to Continental.
Continental moves for summary judgment, pursuant to Federal Rule of Civil Procedure
(“Fed. R. Civ. P.”) 56, made applicable to this adversary proceeding by Federal Rule of
Bankruptcy Procedure (“Bankruptcy Rule”) 7056, on all of the claims in either direction—for
plaintiff’s summary judgment on the claims Continental asserts against Polytek, and for
defendant’s summary judgment on the claims Polytek asserts against Continental.
Continental’s motion is granted in part and denied in part, as set forth below and in a
table attached to this decision laying out the disposition with respect to each claim.
FACTS
With all inferences drawn in favor of the non-moving party (here, Polytek), the facts
underlying the motions are as follows.
The principal products of Polytek (a Dutch corporation) and Continental (whose
companies are Delaware corporations with their principal places of business in Missouri), are
trigger sprayers and other liquid dispensing systems. The products include the older “T1000”
and “T8500” models (designed by one of Continental’s predecessors), and the newer “OpAd”
trigger sprayer (designed by Polytek).
In 1997, Indesco was formed as a holding company to acquire Polytek, Continental AFA,
and CSI, all of which were engaged in the sale of trigger spray devices.3 On January 1, 1999,
CSI and Polytek entered into a ten year lease, pursuant to which Continental leased to Polytek
3 See Gratch affirmation, dated July 31, 2006, ¶ 3.
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certain machines, equipment, and molds to be used in connection with the production of the
older T8500 and T1000 sprayers in exchange for monthly payments. 4
The joint venture did not last long, and in October 2000, prior to entering bankruptcy,
Indesco sold its Polytek shares to Arbo Consult Nederland, B.V. (“Arbo”) in exchange for
$2 million in cash; a series of leases, licenses, and equipment; the assumption of about $8.2
million in debt; and a subordinated promissory note, by which Polytek agreed to pay Continental
$350,000 (the principal), and 10% annual interest in quarterly installments until the principal
became due in October 2003 (the “Polytek Note”). Additionally, as part of this transaction, CSI
and Polytek entered into an agreement by which CSI granted Polytek an exclusive license to
manufacture and sell T8500 and T1000 sprayers (the “CSI Sprayers License Agreement”), and
an agreement by which Polytek granted Indesco a license to the newer OnePak technology and
the right to exclusively manufacture, distribute, and sell OpAd spray devices in a defined
territory (the “OpAd Sprayers License Agreement”). The parties also amended the 1999
Machinery Lease Agreement. 5
On November 17, 2000, an ad hoc committee of noteholders filed an involuntary chapter
11 petition against Indesco. Indesco consented to an order for relief, and the case continued in
chapter 11. On January 11, 2002, this Court entered an order confirming a plan which embodied
a bankruptcy settlement, and pursuant to which a group of Indesco bondholders assumed control
of Indesco. 6 As part of this settlement, Continental and Polytek modified and restated their four
previous agreements—the Machinery Lease Agreement, the Polytek Note, the CSI Sprayers
4 See Glenn declaration, dated July 10, 2006 (“Glenn Decl. I”), Ex. 4 (the “Original Machinery Lease
Agreement”).
5 See Glenn Decl. I, Ex. 5 (the “First Amendment to the Machinery Lease Agreement”).
6 Id.
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License Agreement, and the OpAd Sprayers License Agreement7 —and entered into two new
supply agreements—one that provided for Continental’s sale of parts for the T8500 and T100
sprayers to Polytek (the “CSI Parts Supply Agreement”),8 and the other that provided for
Polytek’s sale of OpAd sprayers to Indesco (the “OpAd Sprayers Supply Agreement”).9 All
six of these agreements, (collectively, the “Bankruptcy Settlement Agreements,” or the
“Agreements”), were executed on March 13, 2002. These Agreements reflected a central plan
designed to allow both Continental and Polytek to produce and market T8500, T1000, and OpAd
sprayers. Relevant details of the specific Agreements are provided in the Discussion.
In or about October of 2002, Continental and Polytek experienced apparent difficulties
meeting their obligations under the Agreements. Polytek asserted that Continental had failed to
produce a coherent marketing plan for the OpAd spray devices.10 In response, Continental
asserted that its efforts had shown that there was not a market for OpAd sprayers priced over
10.5 cents per unit, and that Polytek’s demand that Continental pay 14 cents per unit was not
reasonable.11 Over the following months, Continental and Polytek continued to communicate
about Continental’s inability to successfully market OpAd devices at 14 cents per unit, and
Polytek claimed that any failure to sell OpAd devices resulted from Continental’s failure to
7 See Glenn Decl. I, Ex. 6 (the “Second Amendment to the Machinery Lease Agreement”); Glenn Decl. I,
Ex. 1 (the “Polytek Note”); Glenn Decl. I, Ex. 3 (the “CSI Sprayers License Agreement”); Glenn Decl. I,
Ex. 7 (the “OpAd Sprayers License Agreement”), respectively. Except as noted, all references to these
agreements are as amended.
8 See Glenn Decl. I, Ex. 2.
9 See Glenn Decl. I, Ex. 8.
10 See Wagner affidavit, dated July 31, 2006 (“Wagner Aff. I”), Ex. M, Letter from Arthur Cooijmans to
Tom Richmond, dated Oct. 18, 2002.
11 See Letter from Richmond to Cooijmans, dated Oct. 23, 2002, Wagner Aff. I, Ex. N (“Richmond 10/23/02
Letter”).
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pursue an aggressive marketing plan.12 On February 20, 2003, Polytek sent a letter to
Continental stating that because Continental breached the OpAd Sprayers License Agreement
and the Interim Supply Agreement and had failed to cure its defaults, Polytek was terminating
Continental’s license under the OpAd Sprayers License Agreement and rights under the Interim
Supply Agreement and all related agreements, effective immediately.13 On August 6, 2004,
Continental sent a letter to Polytek notifying Polytek of its alleged defaults under the
Agreements.14 Shortly thereafter, both Polytek and Continental filed complaints against each
other. After discovery, Continental moved for summary judgment.
Polytek admits that it has not paid Continental pursuant to these Agreements, and the
amounts due under the Agreements are not materially in dispute. Rather, this Court has been
asked to consider the parties’ conduct―including potential breaches of contract by either
party―to determine whether Polytek is excused for all or part of its payment obligations
pursuant to the Agreements, and whether Polytek itself is entitled to damages.
DISCUSSION
I.
Summary Judgment Standard
Summary judgment is appropriate if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that there “is no
genuine issue as to any material fact” and that the moving party is “entitled to a judgment as a
12 See Letter from Cooijmans to Richmond, dated Dec. 12, 2002, Wagner Aff. I, Ex. O; Letter from
Richmond to Cooijmans, dated Jan. 6, 2003, Wagner Aff. I, Ex. P.; Minutes of Conference Call between
Cooijmans and Richmond, dated Jan. 28, 2003, Wagner Aff. I, Ex. Q.
13 See Letter from Yehochai Schneider to Richmond, dated Feb. 20, 2003, Wagner Aff. I, Ex. R (“Schneider
2/20/03 Letter”).
14 See Letter from Richmond to Cooijmans, dated Aug. 6, 2004, Wagner Aff. I, Ex. S (“Richmond 8/6/04
Letter”).
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matter of law.” 15 The moving party bears the initial burden of showing that the undisputed facts
entitle it to judgment as a matter of law.16 The moving party may discharge its burden of proof
by demonstrating that “there is an absence of evidence to support the non-moving party’s case on
which that party would have the burden of proof at trial.”17
In determining a summary judgment motion, it is well settled that a court should not
weigh the evidence or determine the truth of any matter, and must resolve all ambiguities and
draw all reasonable inferences against the moving party.18 A fact is material if it “might affect
the outcome of the suit under the governing law….”19 An issue of fact is genuine if “the
evidence is such that a reasonable jury could return a verdict for the nonmoving party.” 20
II.
Contract Interpretation
All six Agreements, without dispute, are governed by New York state law. Under New
York law, “when parties set down their agreement in a clear, complete document, their writing
should as a rule be enforced according to its terms.” 21 “When the terms of a written contract are
15 	Fed. R. Civ. P. 56(c), made applicable here by Bankruptcy Rule 7056. See Celotex v. Catrett, 477 U.S.
317, 322 (1986) (“Celotex”).
16 	See Rodriguez v. City of New York, 72 F.3d 1051, 1060-61 (2d Cir. 1995); Ferrostaal, Inc. v. Union Pacific
R.R. Co., 109 F.Supp.2d 146, 148 (S.D.N.Y. 2000) (“The initial burden rests on the moving party to
demonstrate the absence of a genuine issue of material fact . . .”).
17 	Greenblatt v. Prescription Plan Servs. Corp., 783 F. Supp. 814, 819 (S.D.N.Y. 1992) (“Prescription Plan
Servs.”) (citing Celotex, 477 U.S. at 323).
18 	See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio, 475 U.S. 574, 587 (1986) (holding that summary
judgment is appropriate “[w]here the record taken as a whole could not lead a rational trier of fact to find
for the nonmoving party”); Virgin Atlantic Airways Ltd. v. British Airways PLC, 257 F.3d 256, 262 (2d Cir.
2001); Lovejoy-Wilson v. NOCO Motor Fuel, Inc., 263 F.3d 208, 212 (2d Cir. 2001) (“We…constru[e] the
evidence in the light most favorable to the non-moving party.”).
19 	Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
20 	Id.
21 	CIBC World Markets Corp. v. TechTrader, Inc., 183 F.Supp.2d 605, 610-611 (S.D.N.Y. 2001) (Buchwald,
J.) (“TechTrader”) (quoting W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440,
566 N.E.2d 639 (1990) (“W.W.W. Assocs.”)). As noted in earlier decisions, “the Court fully concurs with
the statements in TechTrader with respect to the legal principles to be applied with respect to motions for
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ambiguous, however, a court may turn to evidence outside the four corners of the document to
ascertain the intent of the parties.”22 [W]hen the language of a contract is ambiguous and there
exists relevant extrinsic evidence of the parties’ actual intent, summary judgment is precluded.23
“Whether or not a writing is ambiguous is a question of law to be resolved by the courts.”24 “[I]f
a contract is unambiguous on its face, its proper construction is a question of law.”25
Therefore, the Court must decide whether the each of the six Agreements is ambiguous
with respect to the matters in controversy.26 Under New York law:
[A] word or phrase is ambiguous when it is capable of more than a
single meaning when viewed objectively by a reasonably
intelligent person who has examined the context of the entire
integrated agreement and who is cognizant of the customs,
practices, usages and terminology as generally understood in the
particular trade or business.27
If contractual terms have a definite and precise meaning and are not reasonably susceptible to
differing interpretations, they are not ambiguous. 28 “[T]he court should not find the contract
summary judgment involving contractual interpretation, and finds the TechTrader discussion to be as
capable, and concise, as any such discussion could be with respect to such matters.” ML Media Partners v.
Century/ML Cable Venture et. al. (In re Adelphia Communications Corp.), 287 B.R. 605, 614 n. 23 (Bankr.
S.D.N.Y. 2003).
22 	TechTrader, 183 F.Supp.2d at 611 (citing Scholastic, Inc. v. Harris, 259 F.3d 73, 82 (2d Cir. 2001); Curry
Rd. Ltd. v. K Mart Corp., 893 F.2d 509, 511 (2d Cir. 1990)).
23 	TechTrader, 183 F.Supp.2d at 611 (citing Mellon Bank, N.A. v. United Bank Corp. of N.Y., 31 F.3d 113,
116 (2d Cir.1994); Sayers v. Rochester Tel. Corp. Supplemental Mgmt. Pension Plan, 7 F.3d 1091, 1094
(2d Cir. 1993)).
24 	TechTrader, 183 F.Supp.2d at 611 (quoting W.W.W. Assocs., 77 N.Y.2d at 162).
25 	Metropolitan Life Ins. Co. v. RJR Nabisco, Inc., 906 F.2d 884, 889 (2d Cir. 1990).
26 	See TechTrader, 183 F.Supp.2d at 611.
27 	Id. (quoting Shepley v. New Coleman Holdings Inc., 174 F.3d 65, 70 (2d Cir. 1999)) (with TechTrader
having omitted quotation marks and citations in Shepley).
28 	TechTrader, 183 F.Supp.2d at 611 (citing Seiden Assocs. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir.
1992)).
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ambiguous where the interpretation urged by one party would ‘strain [ ] the contract language
beyond its reasonable and ordinary meaning.’” 29
III.
Preliminary Issues
In defense against Continental’s claims and in support of its own counterclaims, Polytek
contends that Continental breached some or all of the six Agreements, and that as a result,
Polytek was excused from performance and is entitled to a setoff. Polytek argues that even if
Continental fulfilled its specific obligations under some of the six Agreements, the Court should
nevertheless find that Continental is in default under all six Agreements because the six
Agreements should be read as a single integrated contract.30 For support, Polytek points to
cross-default clauses contained in four of the six Agreements.31 Continental acknowledges these
cross-default clauses, but argues that there is no basis for treating the Agreements as a single
contract, and that absent a relevant cross-default clause, Continental’s breach under one
Agreement should not constitute a default by Continental under another Agreement.32
Continental also argues that because all six Agreements are separate contracts, Polytek’s claim
for a setoff does not prevent the Court from granting summary judgment for Continental on any
of its claims. 33
Therefore, as a threshold matter, this Court must determine the extent to which the
breaches of one Agreement excuse performance by the non-breaching party under the other
29 Law Debenture Trust Co. of New York v. Maverick Tube Co., 595 F.3d 458, 467 (2d Cir. 2010) (quoting
Bethlehem Steel Co. v. Turner Construction Co., 2 N.Y.2d 456, 459, 161 N.Y.S.2d 80, 93, 141 N.E.2d 590
(1957)).
30 See Polytek Opposition Br., at 27-29.
31 In general terms, a cross-default clause provides that a default on another agreement constitutes a default
under the agreement containing the cross-default clause.
32 See Continental Letter Brief, dated Nov. 1, 2006 (“Continental Letter Br. II”), at 2-3.
33 See Continental Reply Br., at 19-20.
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Agreements, and whether Polytek’s counterclaims seeking a setoff preclude summary judgment
on Continental’s claims.
A. The Cross-Default Clauses
Four of the six Agreements contain cross-default provisions.34 As Polytek has
acknowledged, the CSI Parts Supply Agreement and the Machinery Lease Agreement do not
contain any cross-default provisions.35 Of the four Agreements that do have cross-default
clauses, each contains different language.
1. The CSI Sprayers License Agreement
Article VI of the CSI Sprayers License Agreement states:
2. Polytek shall be in default under this Agreement upon the
occurrence of any of the following events (each an “Event of
Default”), which shall be grounds for termination of this
Agreement by CSI . . .
(b) A material breach by Polytek or any of its Affiliates in
the performance of any covenant, representation or
warranty under this Agreement or any other agreement to
which Polytek or any of its Affiliates and CSI or any of its
Affiliates are a party, that remains uncured beyond a period
of thirty (30) days;
3. If CSI or any of its Affiliates commits a material breach in the
performance of any covenant, representation or warranty contained
in this Agreement or any other agreement to which Polytek or any
of its Affiliates and CSI or any of its Affiliates are a party, that
remains uncured beyond a period of thirty (30) days, Polytek shall
have all rights available at law or in equity, including, without
limitation, the right to terminate this Agreement. 36
34 See CSI Sprayers License Agreement, §§ 6.2(b) and 6.3; OpAd Sprayers License Agreement, § 10.1(ii);
OpAd Sprayers Supply Agreement, §§ 7.1-7.4; Polytek Note, Art. VI, ¶ A(ii).
35 See Polytek Letter Brief, dated Oct. 25, 2006 (“Polytek Letter Br. I”), at 2.
36 CSI Sprayers License Agreement, §§ 6.2(b) and 6.3.
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The plain language of these sections of the contract is unambiguous. Pursuant to section
2(b), if Polytek commits a material breach of any Agreement between the two parties, then
Continental has the right to terminate the CSI Sprayers License Agreement and Polytek is
automatically in default under the CSI Sprayers License Agreement. This is a cross-default
provision. If Continental commits a material breach of any Agreement between the two parties,
Polytek has the right to terminate the CSI Sprayers License Agreement (and has all other
remedies available at law or in equity), but it does not automatically result in a default by
Continental under the CSI Sprayers License Agreement. And although the contract gives
Polytek “all remedies at law or in equity,” the breach of one agreement is not automatically the
breach of another agreement between the same parties unless either (i) the contracts are read
together or (ii) the contract so provides. This one so provides, but only for a breach by Polytek.
2. 	The OpAd Sprayers License Agreement
Articles X and XI of the OpAd Sprayers License Agreement, provide:
10.1 Events of Default. Licensee [Indesco] shall be in default
under this Agreement upon the occurrence of any of the following
events (each an “Event of Default”):
(ii) a material breach by Licensee [Indesco] in the
performance of any covenant, representation or warranty
under this Agreement or any other agreement to which
Polytek or any of its Affiliates and CSI or any of its
Affiliates are a party, that remains uncured beyond a period
of thirty (30) days;
10.2 Default by Licensor. If Licensor [Polytek] commits a material
breach in the performance of any covenant, representation or
warranty contained in this Agreement or any other agreement to
which Licensor [Polytek] or any of its Affiliates and Licensee
[Indesco] or any of its Affiliates are a party, that remains uncured
beyond a period of thirty (30) days, Licensee [Indesco] shall have
all rights available at law or in equity, including, without
limitation, the right to terminate this Agreement.
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11.1 Termination by Licensor. Licensor [Polytek] shall have the
right to terminate Licensee’s rights under this Agreement if any of
the following shall occur and be continuing: (i) the occurrence of
an Event of Default under Section 10.1 of this Agreement that
remains uncured beyond any applicable cure period . . .”
11.2 Termination by Licensee. Licensee [Indesco] shall have the
right to terminate its performance under this Agreement if Licensor
[Polytek] commits an Event of Default under Section 10.2 of this
Agreement.37
The plain language here is also unambiguous. Section 10.1(ii) provides that if Indesco
commits a material breach of any Agreement between the two parties, then Indesco is
automatically in default of the OpAd Sprayers License Agreement. However, if Polytek commits
a material breach of any other Agreement between the parties, Continental can terminate the
OpAd Sprayers License Agreement, and Continental has any other remedy at law or in equity,
but Polytek is not automatically in default of the OpAd Sprayers License Agreement.
Therefore, the cross-default provision in the here is also unilateral rather than reciprocal,
but it runs for the benefit of Polytek upon a default by Continental, rather than for the benefit of
Continental.
3. The OpAd Sprayers Supply Agreement
Article 7 of the OpAd Sprayers Supply Agreement, under which Continental was to
purchase OpAd sprayers from Polytek, states:
7.1. Events of Default. Indesco shall be in default under this
Agreement upon the occurrence of any of the following events
(each, and [sic] “Event of Default”):
7.1.3 A Material breach by Indesco or any of its Affiliates
in the performance of any material covenant . . . or any
other agreement to which both Supplier [Polytek] and
Indesco or any of their Affiliates, respectively, are a party
that remains uncured beyond a period of thirty (30) days.
37 OpAd Sprayers License Agreement, §§ 10.1-11.2.
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7.2. Default by Supplier. If Supplier [Polytek] commits a material
breach in the performance of any material covenant contained in
this Agreement or any other Agreement to which both Supplier or
any of their Affiliates, respectively, are a party that remains
uncured beyond a period of thirty (30) days, then Indesco shall
have all rights available at law or in equity.
7.3. Termination by Supplier. Supplier [Polytek] shall have the
right to terminate Indesco’s rights and Supplier’s obligations and
performance under this Agreement if a default under Section 7.1
shall occur and be continuing.
7.4. Termination by Indesco. Indesco shall have the right to
terminate its performance under this Agreement if a default under
Section 7.2 shall occur and be continuing.38
The language here is nearly identical to the provisions quoted from the OpAd Sprayers License
Agreement. The cross-default provision in section 7.1.3 unambiguously provides that a default
by Continental under any Agreement between the parties is a default under the Interim Supply
Agreement. However, there is no cross-default provision providing that a default by Polytek
under another Agreement is a default under the OpAd Sprayers Supply Agreement.
4. The Polytek Note
Article VI of the Polytek Note provides, in part:
A. . . . [E]ach of the following events shall constitute a
default under this Note (a “Default”): . . .
(i) failure to pay any of the Subordinated Debt when
due, by maturity, acceleration or otherwise, it being
understood that failure to pay interest under this Note if
Cash Flow is available and payment is not prohibited by the
terms of Senior Debt shall constitute a Default;
(ii) failure to comply with any term or provision of
this Note or any other agreement between the Maker and
Payee including, without limitation, the Stock Purchase
Agreement;
38 OpAd Sprayers Supply Agreement, §§ 7.1-7.4.
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(iii) any warranty, representation or covenant made
in connection with this Note or the Stock Purchase
Agreement, shall be untrue or incomplete in any material
respect; provided, however, that, if Maker violates any
provision of the last paragraph of Article V of this Note,
any such violation shall not constitute a Default unless and
until ABN AMRO Bank has declared a default under the
ABN AMRO Facility based upon the same act or omission
by the Company;39
(iv) Maker or the Company becomes insolvent or
the subject of a voluntary or involuntary proceeding in
bankruptcy, or a reorganization, arrangement or creditor
composition proceeding, or cease doing business as a going
concern, or if there is filed or issued a levy or writ of
attachment or garnishment or other like judicial process
upon Maker or the Company, or is the subject of a
dissolution, merger, or consolidation.
B. Upon the occurrence of a Default, Payee [Indesco] may,
at its option and without prior notice to Maker [Polytek], declare
any or all of the Subordinated Debt to be immediately due and
payable and charge interest at the default rate of two percentage
points (2%) above the stated Interest Rate in Article IIA. 40
Section (A)(ii) of this Article clearly contains a cross-default provision. The issue is whether it
applies only upon a default by Polytek, or whether it is reciprocal.
On the one hand, (A)(ii) says only “failure” not “Maker’s failure.” This suggests that the
cross-default clause applies to defaults by both Polytek and Continental. The parties included
the word “Maker” at the beginning of (A)(iv); if they intended the cross-default to only apply to
a default by Polytek, they could have easily included “Maker” at the beginning of (A)(ii) to
demonstrate that. While (A)(i) also omits the word “Maker,” it is clear that such a default could
only be committed by Polytek, since only Polytek had an obligation to pay under the Note. By
contrast, the Stock Purchase Agreement imposed obligations on both Polytek and Continental; it
39 	The “Company” is defined as ARBO Consult Nederland B.V. See Polytek Note, at 1.
40 	Polytek Note, Art. VI.
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is thus entirely possible that Continental could have committed a default under another
agreement, such as the Stock Purchase Agreement, which would trigger (A)(ii).
On the other hand, although (A) states the following “shall constitute a default” without
specifying “by Polytek,” it would be unusual that any party other than the maker could be said to
be ‘in default’ under a promissory note. A promissory note only imposes obligations on a
maker; a payee (here, Continental) generally has no obligations under a note. If, for example,
Continental had failed to turn over the stock to Arbo, that would provide Polytek with a defense
to payment on the note, but it would not constitute ‘a default’ by Continental under the note. It
would make little sense to say that if Continental committed a material breach of an obligation it
owed to Polytek under a different contract, it would constitute a default under the Note since, for
all intents and purposes, Continental could not be in default under the Note.
For these reasons, the Court finds that the language of the Polytek Note is ambiguous.
Without parol evidence, the Court is unable to determine whether the cross-default provision
applies to both parties or only to a default by Polytek. While the latter reading may well turn out
to be the preferable one, the Court cannot now determine that as a matter of law.
5. The Machinery Lease Agreement and CSI Parts Supply Agreement
The Court concludes that Machinery Lease Agreement and the CSI Parts Supply
Agreement contain no cross-default provisions.
6. Summary
The CSI Sprayers License Agreement contains a cross-default provision that runs only
for the benefit of Continental upon the breach of another agreement by Polytek. Both the OpAd
Sprayers License and Supply Agreements contain default provisions that run only for the benefit
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of Polytek upon the breach of another agreement by Continental. And finally, the Court cannot
determine the meaning of the cross-default provision in the Polytek Note on summary judgment.
B. Reading the Agreements Together
Polytek further asserts that “even in the absence of an explicit cross-default provision . . .
as a matter of law, all of the agreements must be read together as one integrated whole.” 41
Therefore, Polytek asserts, a default under any one of the Agreements, by either party, would
constitute a default by the breaching party under any or all of the other Agreements. In support,
Polytek cites to three cases from this Circuit.42
Under New York law, “[i]n the absence of anything to indicate the contrary intention,
instruments executed at the same time, by the same parties, for the same purpose, and in course
of the same transaction will be read and interpreted together, it being said that they are in the
eyes of the law, one instrument.”43 In Liberty USA, Judge Batts of the Southern District of New
York read an asset purchase agreement and promissory note as an integrated whole where the
two were executed on the same day between the same parties, had a common purpose, and “the
Promissory Note is explicitly incorporated into the Asset Purchase Agreement, and is
specifically cited as part of the consideration for the contract.” 44
In Vulcan Rail, the New York Court of Appeals held that three agreements relating to
public contracts were to be read together where the agreements were executed at substantially the
same time and related to the same subject-matter, and where “[t]he contract between the
41 Polytek Letter Br. I, at 3. See also Hr’g Tr. 8/17/06 at 30-31.
42 See Liberty USA Corp. v. Buyer’s Choice Insurance Agency LLC, 386 F. Supp.2d 421, 425 (S.D.N.Y 2005)
(“Liberty USA”); Nau v. Vulcan Rail & Contr. Co., 286 N.Y. 188, 36 N.E.2d 106 (1941) (“Vulcan Rail”);
Manufacturers & Traders Trust Co v. Erie County Indus. Dev. Agency, 269 A.D.2d 871, 872, 703 N.Y.S.2d
636 (4th Dep’t 2000) (“Manufacturers & Traders”).
43 Liberty USA, 386 F.Supp.2d at 425 (citations omitted).
44 Id. at 426.
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defendant and the city of New York was referred to in defendant’s acceptance of plaintiff’s offer
and substantially made a part thereof, and the last writing referred and substantially made the
acceptance a part of it.”45
And in Manufacturers & Traders, a New York court held that two contracts must be
analyzed as an integrated whole where the two contracts were contemporaneous, related to the
same subject-matter, and “each agreement refer[red] to the other.”46
Polytek argues that the six Agreements should be read together because all of the
Agreements were executed simultaneously as “part of one unified and inseparable transaction”—
the global settlement between Polytek and Continental—with the common purpose of resolving
the litigation between the parties so that Indesco could exit from bankruptcy.47 While that
statement, in part, is at least arguable true, New York law does not support reading these six
Agreements as a single contract, and the cases cited by Polytek are clearly distinguishable from
the facts here.
First, the six Agreements were not executed at the same time. Although the final,
amended, versions of all six Agreements were approved by this Court on March 13, 2003 as part
of a unified settlement, four of the Agreements were simply amended or restated incident to the
settlement, and had been originally executed two or three years prior. And because four of the
agreements were originally entered into before Indesco’s chapter 11 filing, and before any
litigation between Polytek and Continental, the six agreements cannot be said to have all shared
the common purpose of resolving the litigation between Polytek and Continental.
45 Vulcan Rail, 286 N.Y. at 197.
46 Manufacturers & Traders, 269 A.D.2d at 872.
47 Hr’g Tr. 8/17/06 at 29; Polytek Opposition Br. at 27-28.
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Second, the Agreements are not all part of a unitary transaction, and each agreement is
supported by independent consideration. Unlike in Liberty USA, where the promissory note was
the consideration for the asset purchase agreement, the Agreements here are each independently
supported by consideration. The Polytek Promissory Note was consideration supplied by Arbo
to Indesco in exchange for Indesco’s shares in Polytek, and was not consideration for any of the
other 5 Agreements between Polytek and Continental. The licenses provided in the OpAd and
CSI Sprayers License Agreements were granted in exchange for a promise to make royalty
payments, not in consideration for any of the other Agreements. Similarly, the Machinery Lease
Agreement provided molds and equipment to Polytek in exchange for monthly payments by
Polytek to Continental, and the two supply agreements both require payments by the purchasing
party.
Some of the Agreements do contain cross-references. The CSI Parts Supply Agreement
references the CSI Sprayers License Agreement. It states that “[t]he purpose of this letter is to
set forth our agreement with respect to your supplying parts for those certain products which are
the subject matter of that certain Technical Assistance and License Agreement.” 48 In addition,
the OpAd Sprayers Supply Agreement and OpAd Sprayers License Agreement contain cross-
references to each other.
In this case, the cross-references in the Agreements do not support reading them as one
contract. If the Agreements were read as one contract as Polytek urges, then, in effect, the Court
would be reading cross-default provisions into the Agreements where they do not exist, and
would be reading the unilateral cross-default provisions to be reciprocal. Such a reading is
inconsistent with the unambiguous language of the Agreements. The fact that some of the
48 CSI Parts Supply Agreement, at 1.
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Agreements here contain cross-default provisions and others do not, and that some cross-default
provisions run for the benefit of one party and not the other, evidences an intent on the part of the
parties that cross-default provisions run only where they are explicitly provided in the terms of
the Agreements.49 Similarly, treating the cross-references as a basis for reading the cross-default
provisions would make little sense; the parties knew how to include explicit cross-defaults in the
Agreements when they wanted to (and in the case of the OpAd Agreements, included both cross-
references and cross-defaults).
Moreover, Liberty USA instructs a court to read different agreements together only “[i]n
the absence of anything to indicate the contrary intention.”50 Here, the fact that some of the
Agreements contained cross-default provisions and others did not indicates that the parties’
intent was the six Agreements should not be read together. Because Indesco and Polytek, the
parties that negotiated and drafted these Agreements, are sophisticated parties, this Court will not
look beyond the explicit language of the Agreements, which are unambiguous on their face.
These cross-default provisions should be strictly enforced according to their narrow terms. 51
By contrast, a good argument could be made that the two OpAd agreements should be
read together. However, because both of those agreements contain cross-default provisions that
49 See William P. Pahl Equipment Corp. v. Kassis, 182 A.D.2d 22, 30, 588 N.Y.S. 2d 8 (1st Dep’t 1992)
(denying reformation of a contract on the basis of mutual mistake, and finding that where memorandum of
agreement contained a cross-default provision but contract of sale did not, “[t]hat the contract of sale did
not contain a similar provision seems to us persuasive that the parties, sophisticated businessmen
represented by counsel throughout the negotiation, drafting and execution of the agreements, never
intended that one be included.”), lv. denied in part, dismissed in part, 80 N.Y.2d 1005, 592 N.Y.S.2d 665,
607 N.E.2d 812 (1992).
50 Liberty USA, 386 F.Supp.2d at 425.
51 See, e.g., Jones Apparel Group, Inc. v. Polo Ralph Lauren Corp., 3 Misc.3d 1107(A), 787 N.Y.S.2d 678
(Sup. Ct. 2004) (rejecting argument that “if there were a default in the Canada agreements, the U.S.
agreements would expire as well” where “the cross-default/expiration provisions in the Lauren Agreements
provide that a default or expiration of either of the United States agreements results in a default or
expiration of the Canada agreements, [but] the reverse is not provided for”), aff’d 791 16 A.D.3d 279,
N.Y.S.2d 409 (1st Dep’t 2005).
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run for the benefit of Polytek, the Court need not reach the issue of whether they ought to be
construed as one contract.52
For these reasons, this Court declines to read the contracts together beyond what is
required by the specific cross-default provisions.
C. Setoff
Continental argues that Polytek’s claims for setoff do not preclude summary judgment.
Continental is correct in part, but only in part.
“Offset claims do not bar summary judgment on promissory notes or other payment
obligations, unless such obligations and the offset claims involve contractually ‘dependent’
promises.” 53
Because the Agreements are not to be read as a unitary contract, and each Agreement
contains separate and distinct obligations, summary judgment on Continental’s claims under one
contract is not precluded by Polytek’s counterclaims arising under other contracts.
However, both Continental and Polytek asserted claims (and counterclaims) for the
other’s alleged breaches of the CSI Sprayers License Agreement and CSI Parts Supply
Agreement. Polytek’s claim under the CSI Sprayers License Agreement is clearly “contractually
dependent” on Continental’s claim under the CSI Sprayers License Agreement; they arise out of
the same contract. Therefore, summary judgment can only be granted on Continental’s claim
under the CSI Sprayers License Agreement if summary judgment is also granted on Polytek’s
52 See In re Kopel, 232 B.R. 57, 65 n.4 (Bankr. E.D.N.Y. 1999).
53 Computech Int’l v. Compaq Computer Corp., No. 02-Civ.-2628, 2004 WL 1126320, at *12 , 2004 U.S.
Dist. LEXIS 9120, at *35 (S.D.N.Y. May 21, 2004) (quoting Pereira v. Cogan, 267 B.R. 500, 507
(S.D.N.Y. 2001)). See also Prescription Plan Servs., 783 F.Supp. at 823 (“[W]here a counterclaim
presents an independent, unliquidated claim and presents no issue of fact as to the plaintiff's claim, the
entry of summary judgment on plaintiff's claim is not only proper but is required.” (internal citations
omitted)).
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counterclaims under the CSI Sprayers License Agreement, and vice versa. The same is true for
the CSI Parts Supply Agreement.54
IV.
Continental’s Claims and Polytek’s Counterclaims
A. The Polytek Note
On Claim #1, Continental seeks judgment in the in the amount of at least $350,000 plus
accrued interest totaling approximately $157,500 on the Polytek Note. In Claim # 5, Continental
seeks judgment for all attorneys’ fees, expenses, and court costs incurred to enforce its rights
under the Polytek Note. In each case, Continental seeks plaintiff’s summary judgment on those
claims. Though the matter is close, the Court determines that ambiguities in the Polytek Note
make it impossible to conclude as a matter of law that Polytek has no defenses to these two
claims. Thus, summary judgment on two claims under the Polytek Note is denied.
1. Breach of Contract
As part of Indesco’s sale of Polytek to Arbo, Polytek became obligated to Continental on
a subordinated promissory note effective October 19, 2000. The note was subsequently
amended, with that amendment approved by this Court on March 13, 2002. The terms of the
Note, with a principal amount of $350,000, required Polytek to pay interest to Continental at a
rate of ten percent per year in quarterly installments subject to certain conditions.55 The entirety
of the Polytek Note became due and payable on October 15, 2003. It is undisputed that Polytek
has not made any payments on the interest or principal on the Note since its execution on
54 See Created Gemstones, Inc. v. Union Carbide Corp., 47 N.Y.2d 250, 254, 391 N.E.2d 987, 417 N.Y.S.2d
905 (1979) (“On this appeal, plaintiff argues that the same factual issues which precluded a grant of
summary judgment on the complaint also dictate that summary judgment be denied as to the counterclaims.
More specifically, plaintiff contends that defendant’s right to prevail on the counterclaims is dependent
upon whether it breached the contract. It is correct.”).
55 See Polytek Note, Art. II, ¶ A.
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October 19, 2000.56 Continental asserts that it is entitled to summary judgment due to Polytek’s
failure to make any payments on the interest or principal. Polytek raised various defenses.
Polytek first asserts that the Note provides that all interest payments be derived only from
positive cash flow, and only when such cash is available, and argues that because Polytek has
had negative cash flow since 2000, with the exception of a brief period in 2003, it is excused
from payment of interest obligations under the Note, even now that the Note is mature. 57 The
Court does not agree.
Article II of the Polytek Note states:
Interest on the principal from time to time outstanding shall accrue
from the date hereof at the rate of ten (10%) percent per annum
and shall be due and payable quarterly in arrears solely from the
consolidated Cash Flow of Maker and the Company on the first
business day of each calendar quarter and continue to accrue until
paid in full.58
And Article I of the Polytek Note unconditionally states, “The entire principal of, and any unpaid
accrued interest on, this Note shall be due and payable on October 15, 2003.”59
Even if Polytek is correct in asserting that it was not obligated to make periodic interest
payments due to its negative cash flow,60 the Polytek Note did not provide that these payments
would be completely extinguished under such circumstances. The above-quoted language of the
Article II states that interest “shall be due and payable . . . solely from the consolidated Cash
Flow,” but that interest shall “continue to accrue until paid in full.” The cash flow condition is a
56 Continental Rule 7056-1 Statement, ¶¶ 24, 27; Polytek Rule 7056-1 Statement, ¶¶ 24, 27.
57 Polytek concedes that principal payments are not tied to cash flow availability. See Polytek Letter Brief,
dated Nov. 1, 2006 (“Polytek Letter Br. II”), at 1.
58 Polytek Note, Art. II, ¶ A.
59 Id. at Art. I.
60 Polytek has not explained why it failed to make the required payment(s) during its short period of positive
cash flow in 2003.
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limitation on when interest will be payable (as well as due), and not on the accrual of interest.
The interest on the Note continued to accrue notwithstanding Polytek’s payment or
nonpayment—and, pursuant to Article I of the Note, was properly due and payable on the
maturity date, October 15, 2003. Because Article I of the Polytek Note is unconditional, Polytek
became obligated to pay all accrued interest on the Note at maturity, regardless of Polytek’s cash
flows. 61
Second, Polytek argues that both interest and principal payments on the Polytek Note are
subordinate to the senior debt facility originally held by ABN AMRO and now held by ING.
Continental argues in response that the Note was subordinate only to the senior debt “in
existence” at the time the Note was made, and that the current debt held by ING was not then in
existence. On this point, I agree with Continental.
Article IV of the Polytek states:
“Payment of the Principal Amount and interest under this Note (the
“Subordinated Debt”) shall be subordinated in right of payment to
all loans, advances, liabilities, obligations, payments, capital
leases, or other indebtedness of the Maker existing on October 19,
2000, whether evidenced by note, guarantee or other instrument or
document, whether absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees,
and any other sums chargeable to Maker (the “Senior Debt”).
Subordination shall be on commercially reasonable terms
satisfactory to the holders of Senior Debt. Senior Debt shall not
include any obligations of Maker to the Parents or any Affiliate.62
61 Continental also asserted that evidence of the alleged negative cash flow that Polytek first provided with its
opposition brief was withheld from discovery despite Continental’s document requests directly on point,
and therefore, should be stricken. See Fed. R. Civ. P. 37(c)(1) (“If a party fails to provide information or
identify a witness as required by Rule 26(a) or 26(e), the party is not allowed to use that information or
witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially
justified or is harmless.”). Counsel for Polytek admitted that Polytek did not provide a complete
production of documents with respect to the existence of negative cash flow and senior debt, but argues that
the failure was “harmless” and therefore, the evidence need not be stricken. See Hr’g Tr. 8/17/06 at 51.
The Court finds that even if Polytek did in fact have negative cash flows, Continental is still entitled to
payment. Therefore, the Court need not decide this evidentiary issue.
62 Polytek Note, Art. IV (emphasis added).
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Thus it is clear from the language of the Polytek Note that the Note is subordinated only
to debt that was in existence on October 19, 2000. The ING Bank credit agreement is dated
April 5, 2001, and it is undisputed that Polytek owed nothing to ING Bank before April 5,
2001.63 But Polytek argues that the ING Bank credit was “existing” on October 19, 2000
because it is the same debt as the ABN-AMRO Debt. I disagree.
The ABN-AMRO credit facility, dated August 1, 1997, was “refinanced” with a loan
from ING Bank, dated April 5, 2001.64 As the word “refinancing” implies, the money from the
ING Bank credit facility was used to pay off the ABN-AMRO credit facility. Therefore, the
ABN-AMRO debt was extinguished on April 5, 2001. The ABN-AMRO credit facility was not
assigned to ING. Rather, Polytek executed a new agreement with ING Bank, creating a wholly
new credit facility. The fact that the money from ING Bank was used to pay off ABN-AMRO
does not mean that the debts under the two facilities are the same debt.65 Any other reading
would lead to absurd results.66
Because the ING Bank credit facility was not in existence on October 19, 2000, it is not
“Senior Debt” under the Polytek Note. And Polytek has not provided evidence of any other
63 See Van Gogh Affidavit, dated July 14, 2006 (“Van Gogh Aff.”), Ex. D.
64 See id.
65 C.f., Harder v. U.S., Civ. A. No. 91-10513-WD, 1993 WL 667770, at *8, 1993 U.S. Dist. LEXIS 12085, at
*24 (D. Mass Aug. 18, 1993) (finding that “paying off a first loan with the proceeds of a second, without
any manifestation that the parties intended simply to renew the first, is decisive evidence that the parties
have extinguished the first obligation” even where the two loans were executed between the same parties);
In re Mulcahy, 3 B.R. 454, 456 (Bankr. S.D. Ind. 1980) (noting that if debtors had gone to a third party
lender and borrowed money to pay off first loan, that paying off would certainly have extinguished first
debt and security interest).
66 First, the ING Bank Credit Agreement states “Purpose: Refinancing existing credit facilities.” Van Gogh
Aff., Ex. D (emphasis added). If the ING credit facility were “existing” before April 5, 2001, as Polytek
argues, then a purpose of the ING credit facility would have been to pay itself off. And second, as noted by
Continental, if the Polytek Note were subordinated to any “refinanced” debt, then Continental would
effectively never be entitled to payment.
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“Senior Debt.” Therefore, the Polytek Note is not subordinate to any debt of Polytek.67 The
language of the Polytek Note is clear on these issues. Because the ABN-AMRO “Senior Debt”
was extinguished in April 2001, and because the Note is mature, neither the subordination
provisions nor the cash flow condition excuse Polytek from payment of the interest and
principal. It is undisputed that Polytek has not paid Continental any of the $350,000 in principal
or $157,510 in interest that is due on the Polytek Note.
If it were to consider the issues of senior debt and cash flow in isolation, the Court would
find that there is no disputed issue of material fact, and that Continental is entitled to payment on
the Note as a matter of law. However, as determined above, the cross-default provision in the
Polytek Note is ambiguous. It may run only for the benefit of Continental, or it may be
reciprocal. If at trial, the Court finds that the cross-default provision in the Polytek Note is
reciprocal, and finds that Continental breached another Agreement between the parties, then,
pursuant to the cross-default provision, Continental is in default under the Polytek Note, and its
right to payment may be limited. 68 Accordingly, Continental’s motion for summary judgment on
its claim for breach of contract arising from Polytek’s default on the Polytek Note is denied.
67 Continental also asserted that that Polytek’s debt under the Note is only subordinated to debt that is
“commercially reasonable.” Because the Court finds that Polytek’s debt to Continental under the Note is
not subordinated to the ING debt, the Court need not also address whether the ING debt must be or is
“commercial reasonable.”
68 In fact, Yehochai Schneider, co-managing director of Polytek, stated in his deposition that Polytek did not
make payments on the Note because it believed that Polytek was entitled to a setoff. See Glenn declaration,
dated Aug. 15, 2006 (“Glenn Decl. II”), Ex. 23 (“Schneider Deposition Tr.”), at 56-57, 63-64.
Continental pointed to this statement as a reason for the Court to ignore Polytek’s other defenses based on
cash flow and senior debt. But Continental did not ask Schneider whether this was the only reason Polytek
withheld payment, nor has Continental offered any other evidence to that effect. See Hr’g Tr. 8/17/06 at 4
(“The Court: … As I read the Schneider deposition testimony, he was asked a question in substance, ‘So
why didn’t you guys pay it,’ and he said, ‘Because we had claims against you guys that exceeded it.’ He
was not then asked, ‘Is that the only reason?’ It is the implication, but he wasn’t asked that.”).
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2. Indemnification
In the Note, Polytek agreed to reimburse Continental AFA for “any and all costs and
expenses [including court costs and attorneys’ fees] in connection with the enforcement of
[Continental AFA]’s rights under this Note.”69 Continental seeks attorneys’ fees, expenses and
court costs incurred in enforcing its rights under the Polytek Note. The language of the Note is
clear and unambiguous, and the intent of the provision is unmistakable. Polytek has not
contested the validity of this provision.70 Polytek’s only defense to this claim rests on the
contention that Polytek has not breached its obligations under the Note.
Polytek has failed to meet its obligations under the Note. But again, because of the
ambiguous cross-default provision in the Note, Continental’s motion for summary judgment for
indemnification for all costs and expenses arising in connection with the enforcement of its rights
under the Polytek Note is also denied.
B. The Machinery Lease Agreement
On January 1, 1999, Continental and Polytek entered into the Machinery Lease
Agreement, pursuant to which Continental agreed to lease Polytek certain machines, equipment,
and molds to be used in connection with the production of the T8500 and T1000 sprayers. This
equipment included a “Mid-West” trigger pump sprayer assembly machine for manufacturing
T1000 trigger sprayers, and a “Bodine” machine for producing T8500 sprayers, along with the
machines’ related parts and molds.
In Claim # 4, Continental seeks judgment in the amount of (i) at least $160,000, plus
accrued interest for past due lease payments; (ii) approximately $1,824,000 pursuant to the
69 Polytek Note, Art. III, ¶ E.
70 See Polytek Rule 7056-1 Statement, ¶ 30.
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Acceleration Clause; and (iii) attorneys’ fees and expenses, and costs under the Machinery Lease
Agreement. Summary judgment in Continental’s favor on these claims is granted.
The Machinery Lease Agreement provided that Polytek would pay $67,786 each month
for the term of the 10-year lease. The Machinery Lease Agreement was amended on October 19,
2000, at which time the monthly rent was reduced to $32,000, and then was amended again on
March 13, 2002 (collectively, the “Machinery Lease Agreement”).71
In support of its claim, Continental points to paragraph 9 of the Machinery Lease
Agreement, which provides that:
An event of default shall occur if:
(a) Lessee fails to pay when due any installment of rent and
such failure continues for a period of 10 days,
(b) Lessee shall fail to perform or observe any covenant,
condition or agreement to be performed or observed hereunder and
such failure continues uncured for 15 days after written notice
thereof to Lessee by Lessor . . .72
Paragraph 9 further provides that “Upon the occurrence of any event of default . . . Lessor
at its option may: (a) declare all unpaid rentals and other sums due and to become due
immediately due and payable.”73
Continental also points to the so-called “hell-or-high-water clause” in paragraph 2 of the
original Lease, which reads: “All rents shall be paid without notice or demand and without
71 Though the leased equipment and the monthly payments were modified by the amendments, the Machinery
Lease Agreement as amended is otherwise substantially similar to the original Machinery Lease
Agreement.
72 Original Machinery Lease Agreement, ¶ 9.
73 Id.
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abatement, deduction or set-off of any amount whatsoever.”74 Continental argues that this clause
prevents Polytek from asserting a setoff as a defense for non-payment.
As of the date of Continental’s Complaint, Polytek had failed to make five monthly
payments, amounting to $160,000, and the remaining payments due under the lease were
approximately $1,824,000.75 In addition, the Machinery Lease Agreement contains no cross-
default clauses.76
Polytek makes various arguments in support of its position that Continental is not entitled
to payment, or is only entitled to payment in part, under the Machinery Lease.
First, Polytek argues that it was excused from making lease payments because Polytek
had stopped using the equipment. Polytek cites Paragraph 13.1 of the Machinery Lease, which
provides:
In the event that Polytek’s utilization of the Mid-West . . . machine
. . . is at 60% of the capacity of the machine or less, Polytek shall
have the right to notify [Indesco] of such fact. Upon receipt of such
notice, Indesco shall use its best efforts to obtain orders
substantially equivalent to those theretofore fulfilled by Polytek
using such machine so as to increase the utilization of such
machine above 60% of its capacity. If for any reason such
machine is not utilized by Polytek above 60% of the machine’s
capacity within 60 days of Polytek’s written notice of
underutilization contemplated above, the lease shall automatically
terminate and no further lease payments will be owed by Polytek.77
74 Original Machinery Lease Agreement, ¶ 2. See also First Bank Nat’l Ass’n v. Scripps Howard, No. 94-
Civ.-3186, 1995 WL 548845, at *1-2, 1995 U.S. Dist. LEXIS 13301, at *1-2 (S.D.N.Y. Sept. 14, 1995)
(wherein similar language was part of a hell-or-high-water clause).
75 See Continental Summary Judgment Br., at 13. Polytek did not assert that it had made any of these
payments and did not contest the dollar amounts of these allegedly due payments. See Polytek Rule 7056-1
Statement, ¶¶ 13-14.
76 See Continental Letter Brief, dated Oct. 25, 2006 (“Continental Letter Br. I”), at 5; Polytek Letter Br. I, at
2.
77 Second Amendment to the Machinery Lease Agreement, ¶ 13.1.
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Polytek asserts that “as a result of Continental’s breach of the Amended License Agreement and
failure to maintain the T1000 parents in Europe, Polytek was faced with much cheaper
competition and was required to subcontract the manufacture of the sprayers in China in order to
maintain the P & G business. As a result, the Equipment was at 0% capacity.”78
But the language of paragraph 13.1 of the Machinery Lease provides that Polytek is
permitted to terminate the lease if the machine is operating at a capacity of 60% or less only after
written notice is provided to Indesco, and Indesco fails to increase capacity. This requirement of
written notice is unambiguous. Polytek has not suggested or provided any evidence indicating
that it gave written notice of the low production to Continental.79
Moreover, assuming arguendo that Polytek had properly given notice and the lease
terminated, the Machinery Lease provides that upon termination, “Polytek will cooperate in
transporting the machine at CSI’s and Indesco’s cost and expense to such location as CSI or
Indesco shall determine.”80 Instead of returning the equipment, Polytek retained and has
continued to use the equipment, despite Continental’s demand for the equipment’s return.81
Moreover, Polytek continuously failed to account for the location or status of the
equipment. It was not until after appearing before this Court that Polytek agreed to find out
78 Polytek Opposition Br., at 26.
Polytek attempts to obscure its failure to make lease payments by blaming the lack of capacity on
Continental’s alleged delinquency. See id; Polytek Rule 7056-1 Statement, ¶ 13. But whether or not
Continental allowed patents to lapse is not a condition to Polytek’s obligation to pay under the lease, and
the Machinery Lease Agreement contains no cross-default provision. This allegation is therefore irrelevant.
79 Schneider stated that “Continental was informed of the termination of production for our P&G in our
Helmond facility, along with under-utilization of the Equipment.” Schneider Affidavit, dated July 31, 2006
(“Schneider Aff.”), ¶ 46. However, he did not state that any written notice was ever given. In addition,
Polytek did not allege that written notice was in fact provided; instead, Polytek argued that the Court
should ignore the written notice requirement as futile. See Hr’g Tr. 8/17/06 at 44-45.
80 Second Amendment to the Machinery Lease Agreement, ¶ 13.3.
81 See Polytek Rule 7056-1 Statement, ¶¶ 15-16.
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about the status of the molds.82 In its letter brief dated October 25, 2006, Polytek notified this
Court that it had sent the molds to China for Polytek’s use in the production of spray devices
there.83 Additionally, Polytek has now built its own molds. Continental has not asserted any
claims arising from this possible misappropriation of the molds, but the Court is troubled by
Polytek’s actions and late-game admissions.
Second, while Polytek admits that the Original Lease, executed on January 1, 1999,
contained a “hell-or-high-water” provision rendering its obligation to pay rent unconditional,84 it
asserts that the amendments to the Machinery Lease Agreement “eviscerated” the hell-or-high-
water provision in the Machinery Lease, and therefore, that it is entitled to assert a setoff as a
defense for non-payment of rent under the Lease.85
Polytek argues that the First Amendment to the Lease eviscerated the hell-or-high-water
provision because it changed the amount of the lease payments and removed some of the
equipment from the Lease.86 This argument is without merit. The parties did not effect a new
Lease; they simply amended the existing Lease, complete with all its provisions. Language in
the First Amendment to the Lease specifically stated that there were “No Other Changes”87 and
that “all other terms and conditions of the Machinery Lease Agreement [shall] remain in full
force and effect and unimpaired other than an adjustment for the Rent….” 88
82 See Hr’g Tr. 8/17/06 at 72 (“Mr. Wagner: With regard to the molds, Your Honor, I don’t know what the
answer to that question is. I think that we can find out with a phone call. I don’t know if [Polytek is] using
the molds. I don’t know where the molds are.”).
83 Polytek Letter Br. I, at 8; Declaration of Peter Dirkx, ¶ 4.
84 See Polytek Letter Br. I, at 3-4.
85 Id. at 4.
86 See id.
87 First Amendment to the Machinery Lease Agreement, ¶ 4.
88 Id. at ¶ B.
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Polytek also suggests that paragraph 13.1 of the second amendment to the Machinery
Lease Agreement eviscerated the hell-or-high-water clause, since it allegedly “tied Polytek’s
obligation to make lease payments to its utilization of the equipment ‘notwithstanding any other
provision in the Agreement to the contrary.’”89 That interpretation of the Machinery Lease is
misguided. The Lease does not “tie” Polytek’s obligations to pay rent to any conditions
whatsoever. Instead, as discussed above, paragraph 13.1 of the Machinery Lease provides for
the termination of the Lease if capacity falls below 60%, and Polytek provides written notice,
and Indesco fails to increase capacity. 90 But it does not condition the obligation to pay rent upon
a 60% or greater capacity, or upon anything else. And again, Polytek did not properly exercise
its right to notify Continental of its reduced production in writing, nor did it take any steps
toward terminating the Lease, as is clearly required in the Machinery Lease Agreement.
Polytek has failed to raise a disputed issue of fact, and has failed to provide a valid
excuse for non-payment of its obligations under the Machinery Lease Agreement. Summary
judgment on Continental’s claim for breach of contract arising from default on the Machinery
Lease is therefore granted, inclusive of all accelerated lease payments and interest.
C. The CSI Sprayers License Agreement
In Claim # 3, Continental seeks judgment in the amount of at least $33,000, plus accrued
interest, attorneys’ fees and expenses, and costs under the CSI Sprayers License Agreement.
The CSI Sprayers License Agreement, whereby Continental granted Polytek an exclusive
license to manufacture and sell T8500 and T1000 sprayers in Europe, Africa, and Asia in
exchange for royalty payments from Polytek, was first executed in conjunction with the sale of
89 Polytek Letter Br. I, at 4.
90 Second Amendment to the Machinery Lease Agreement, ¶ 13.1
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Polytek to Arbo in October of 2000, and was then amended as a part of the bankruptcy
settlement on March 13, 2002.
Article V of the CSI Sprayers License Agreement provides that Polytek shall pay certain
royalties to Continental on a quarterly basis.91 And Article VI states:
Polytek shall be in default under this Agreement upon the
occurrence of any of the following events . . .
(a) the failure to remit any payments due under this Agreement
when due, and such failure continues for ten (10) day after
notice thereof . . .” 92
Polytek has not made any royalty payments since at least March 2004.93 Continental now seeks
at least $33,000 in royalty payments due and owing under the CSI Sprayers License Agreement.
Polytek argues that it was under no obligation to make these payments because
Continental breached its obligations under the Agreement by failing to maintain certain patents,
and by knowingly supplying licensed products to parties who resold them into Polytek’s
exclusive territory. Polytek also asserts a counterclaim for no less than $2 million in damages
that it allegedly suffered as a result of Continental’s breach of the CSI Sprayers License
Agreement.
The Court determined above that the CSI Sprayers License Agreement contains a non-
reciprocal cross-default provision which provides that if Polytek commits a material breach of
91 See CSI Sprayers License Agreement, Art. V. The royalties due under the Agreement were a percentage of
Polytek’s net sales of the T8500 and T1000 sprayers.
92 CSI Sprayers License Agreement, Art. VI.
93 See Continental 7056-1 Statement, ¶ 42 (“Polytek failed to make royalty payments on the Amended
License Agreement.”). Continental’s letter of default sent to Polytek asserted the same. See Richmond
8/6/04 Letter. Although Polytek stated in its Rule 7056-1 Statement that paragraph 42 was “Disputed,” it
stated in its opposition brief that it had stopped making royalty payments. See Polytek’s Opposition Br., at
11-12 (“Believing Continental had valid patents for the Continental Sprayers in the Territory, Polytek paid
royalties to Continental until some time in 2003.”). In addition, Polytek failed to provide any evidence that
it paid royalties to Continental after March 2004.
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any Agreement between the parties, Polytek shall be in default under the CSI Sprayers License
Agreement.94 The Court also found that Polytek committed a material breach of the Machinery
Lease Agreement by failing to make rent and interest payments due under that Agreement.
Accordingly, Polytek is in default of the CSI Sprayers License Agreement as well.
Although Polytek defaulted under the CSI Sprayers License Agreement, the Court also
finds that material terms in the Agreement are ambiguous, and that Polytek has raised a disputed
issue as to whether Continental also breached the CSI Sprayers License Agreement. Therefore,
summary judgment on Continental’s claim and on Polytek’s counterclaim is denied.95
Article IV of the CSI Sprayers License Agreement provides:
During the Term, CSI agrees to grant and does hereby grant to
Polytek an exclusive, perpetual license to manufacture, assemble,
distribute and sell in the Territory, Licensed Products under the
Technical Information provided by CSI hereunder and under all
those patents within the Territory included in the Intellectual
Property owned by CSI and in connection therewith to use the
Intellectual Property.96
And Article X obligates Continental to “maintain and protect at its expense all Intellectual
Property licensed to Polytek under this Agreement.”97 Intellectual Property is defined in the
License Agreement as:
all of CSI’s patents, copyrights, trademark rights, associated
marks, trade names, logos, labels, designs and artworks used in on
or related to the Licensed Products, whether or not registered
94 See page 9 above.
95 As explained above, Polytek’s claim under the CSI Sprayers License Agreement is clearly “contractually
dependent” on Continental’s claims under the CSI Sprayers License Agreement. See page 19 above.
Therefore, the Court must deny summary judgment on both the claim and counterclaim.
96 CSI Sprayers License Agreement, Article IV. “Licensed Products” are defined as “the trigger sprayer
products manufactured, assembled, distributed or sold by Polytek prior to the date hereof pursuant to the
license granted under the Original Agreement…”. Id. at Art. I, ¶ 3. “Territory” is defined as Europe, the
Middle East, and Africa. Id. at Art. I, ¶ 7.
97 Id. at Art. X.
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and/or applied for by Polytek in the Territory, existing on the date
hereof.98
Because “Intellectual Property” is defined as intellectual property relating to the T8500 and
T1000 sprayers that was in existence on the date of the execution of the Machinery Lease
Agreement (March 13, 2002), Continental had a duty to maintain only the intellectual property
that existed on that date, and not all intellectual property related to the T8500 or T1000 sprayers.
But the parties dispute what intellectual property was “in existence” on March 13, 2002.
On March 13, 2002, Continental had a pending European patent application (No.
93902815.5), which had been filed on December 30, 1992. Sometime after the execution of the
CSI Sprayers License Agreement, this application issued as EP Patent No. 0634989, which
continues to be valid and enforceable in France, Germany, Italy, and the United Kingdom. 99
Patent application No. 93902815.5 clearly related to a “Licensed Product” under the Agreement,
and was clearly in existence when the License Agreement was executed.100 Therefore, it is
“Intellectual Property” under the Agreement. And because this patent is still in existence,
Continental did not breach the License Agreement with respect to this patent.
98 Id. at Art. I, ¶ 2 (emphasis added).
99 See Glenn declaration, dated Oct. 25, 2006 (“Glenn Decl. III”), Ex. 1 (“Howell Decl.”), ¶ 3-6. Polytek did
not dispute these facts.
100 Neither party distinguished between an application for a patent and an issued patent—treating both as a
“patent” under the terms of the agreement. As one of Polytek’s experts explained, “The filing of a patent
application provides the application with provisional patent protection for the invention while the EPO
considers the patent request. The application process can take several years . . .” Bartelds declaration,
dated Oct. 25, 2006 (“Bartelds Decl. II”), ¶ 2. Therefore, the Court treats as irrelevant the fact that there
was only an application for the patent pending on the date the CSI License Agreement was executed, and
that the actual patent did not issue until after the Agreement was executed.
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Continental also maintained a valid and enforceable design patent, UK Design 2030758
“Trigger Sprayer Design,” which was in existence when the CSI Sprayers License Agreement
was executed.101 Polytek argued that:
[A] registered design is not a patent. It relates to the aesthetics of
an item, rather than the technology. While it is a type of
intellectual property―as is a logo or trademark―it provides
substantially less protection than a patent.102
But the definition of “Intellectual Property” in the Machinery Lease Agreement includes not only
patents, but also, “copyrights, trademark rights, associated marks, trade names, logos, labels,
designs and artworks.”103 This design patent is clearly a “design” related to the T1000 and
T8500 sprayers. Therefore, this patent was another piece of Intellectual Property that was
adequately maintained by Continental pursuant to the Agreement.
Polytek asserts that Continental failed to maintain valid patents protecting “the majority
of sprayers licensed to Polytek,”104 and that other patents related to the T1000 and T8500
sprayers were not maintained. And pointing to case law for support, Polytek argues that a patent
licensor cannot collect royalties from a licensee on a patent after the patent has expired or has
failed to be maintained.105
But the Court is not persuaded. First, the CSI Sprayers License Agreement did not
require Continental to maintain “a majority” of patents related to the sprayers, nor did it identify
any specific patents that had to be maintained. Continental only had a duty to maintain
101 See Howell Decl., ¶ 5. See also Glenn Decl. III, Ex. 2 (“Foster Decl.”), ¶ 6. Polytek did not argue that this
design patent has lapsed.
102 Polytek Letter Brief II, at 3.
103 CSI Sprayers License Agreement, Art. I, ¶ 2.
104 Polytek Letter Brief II, at 4.
105 See Polytek Opposition Br., at 22-23 (citing Brulotte v. Thys Co., 379 U.S. 29 (1965); E.R. Squib & Sons v.
Chemical Foundation, 93 F.2d 475 (2d Cir. 1937); Kaufman Malchman & Kirby, P.C. v. Hasbro Inc., 897
F.Supp. 719 (S.D.N.Y 1995)).
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“Intellectual Property”―whatever patents, trademarks, etc. relating to the Licensed Products
were in existence as of March 13, 2002.
Additionally, the royalties that Continental is entitled to receive under the Agreement are
not for any specific patents or number of patents either; the royalties are for all Intellectual
Property, whatever it may be, that was properly maintained after that date. The Court finds that
Continental did maintain some Intellectual Property—the EP Patent No. 0634989 and the
Trigger Sprayer design patent. Therefore, as long as Continental did not allow other Intellectual
Property to lapse, thereby breaching the Agreement, it is entitled to collect the full royalties
provided under the Agreement, even though the royalties may in fact only represent one patent
and one registered design.
Under the terms of the CSI Sprayers License Agreement, Continental’s failure to
maintain a significant number of other patents related to the T1000 and T8500 sprayers would
not constitute a breach as long as those patents were not “existing” when the Agreement was
executed. With respect to these other patents, however, the Court finds that the material phrase
“existing on the date thereof” in the CSI Sprayers License Agreement is ambiguous. In addition,
the Court finds that Polytek has raised a disputed issue of fact as to whether there were additional
patents that Continental subsequently failed to maintain that existed on March 13, 2002―in
other words, whether Continental breached the License Agreement.
Polytek provided a declaration on from Erik Bartelds, a European patent attorney, which
explained:
A European patent application is a request pending at the European
Patent Office (“EPO”) for a patent related to a particular invention.
The filing of a patent application provides the application with
provisional patent protection for the invention while the EPO
considers the patent request. The application process can take
several years and the applicant is required to pay an annual
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renewal fee to the EPO while the application is pending. . . . In the
case of bankruptcy of the applicant, the proceedings before the
EPO are interrupted and running time limits are “frozen.” The
proceedings will be resumed after the EPO has been informed
which party is authorized to continue the proceedings. Any
renewal fees that fell due during the interruption will then become
due upon resumption of the proceedings. Thus, a company that
informs the EPO about its bankruptcy can – when emerging from
bankruptcy – still validly pay the renewal fees that came due
during the period the applicant was in bankruptcy.106
Both parties acknowledge that at least two additional patent applications related to the
T1000 and T8500 sprayers (the “Divisional Patents”) were pending before Indesco entered
bankruptcy in 2000. 107 It is also undisputed that by 2005, the applications for those two
Divisional Patents had expired.108 But in light of the European patent process, it is not clear
whether they “existed” on March 13, 2002, the date the License Agreement was executed.
On the one hand, according to Polytek’s own expert who conducted a patent search in
2003, the two Divisional Patents were deemed to have lapsed on July 2, 2001.109 This would
suggest that the patents did not exist when the CSI Sprayers License Agreement was executed on
March 13, 2002, and therefore, they were not Intellectual Property that had to be maintained
pursuant to the Agreement.
On the other hand, Polytek points to numerous facts suggesting that the Divisional Patent
applications did “exist” on March 13, 2002. First, assuming Continental notified the European
Patent Office of its bankruptcy, Continental’s patent applications for these two Divisional
106 Bartelds Decl. II, ¶¶ 2-3. Continental did not dispute this account of European patent law.
107 See Howell Decl., ¶¶ 7-8. These two patents applications, EP Patent Nos. 0819476 and No. 0819475, were
so-called “divisional patent” applications of EP Patent No. 0634989, the so-called “parent patent”
application.
108 See Bartelds declaration, dated July 28, 2006 (“Bartelds Decl. I”) (stating search of Continental’s patents
in June 2003 revealed that all European patents other than No. 0634989 had expired). See also Continental
Letter Br. I, at 2-3 (explaining that Continental had recently applied to revive the two Divisional Patents).
109 See Bartelds Decl. II, ¶ 6.
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Patents were frozen and Continental was under no obligation to make renewal payments during
the pendency of the bankruptcy.110 In addition, had Continental made the payments upon
emergence from bankruptcy on March 15, 2002, 111 the patents would not have lapsed and would
have “related back” to when they were originally filed.112 Second, since “[t]he filing of a patent
application provides the application with provisional patent protection for the invention while the
European Patent Office considers the patent request,”113 if a third-party had begun selling
sprayers in Europe that infringed on the Divisional Patents on March 13, 2002, Continental
presumably would have been able to assert its intellectual property rights by pointing to the
Divisional Patent applications.114 Third, other evidence presented by Polytek suggests that the
head of R&D for Continental may have believed that some of these patents were still “active” as
of May 8, 2002, after the execution of the License Agreement.115
110 See id. at ¶¶ 2-3. As counsel for Polytek explained at the hearing, “the patents didn’t lapse or weren’t
terminated in 2000 or 2001, they simply weren’t being maintained.” Hr’g Tr. 8/17/06 at 39.
111 The effective date of Indesco’s chapter 11 plan was March 15, 2002, two days after the execution of these
Agreements.
112 It is worth noting that when a divisional patent has fully expired, and then a new application for that patent
is later refiled, the date of the second application for the divisional patent will relate back to the date of the
first application, provided the parent patent application is still pending. See Bartelds Decl. II, ¶ 7.
It has not been established whether the Divisional Patents were deemed to have lapsed on July 2, 2001
because (a) Continental never notified the European Patent Office of its bankruptcy or (b) Continental did
notify the European Patent Office, but once it emerged from bankruptcy and failed to pay the accrued
renewal fees, the date that the patents lapsed was deemed to relate back to the date they would have lapsed,
but for the bankruptcy.
113 Bartelds Decl. II, ¶ 2.
114 Similarly, if Continental did in fact notify the European Patent Office of the Bankruptcy, then it is possible
that on March 13, 2002 (or anytime during Indesco’s bankruptcy), the European Patent Office records
would have shown that the patent applications for the Divisional Patents were still pending. Continental
argues that “Polytek was a sophisticated party with the capacity to discover the status of Continental’s
patents via a simple patent search.” Continental Letter Br. I, at 3. If on March 13, 2002, however, a patent
search by Polytek would have shown that all or most of the relevant patents applications were still pending
because Indesco was still in bankruptcy, that would render Continental’s assertion moot.
115 In a letter dated May 8, 2002, Don Foster, head of R&D for Continental wrote, “My belief is that we should
keep the [U.S.] patents on the list active. We will also need to make a decision regarding foreign patents
that do or will require annuity payments to keep the patents active.” Wagner affidavit, dated Oct. 25, 2006
(“Wagner Aff. II”), Ex. FF. And in his deposition, when asked “As of May 8th, 2002, were the foreign
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For these reasons, the Court finds that the term “existing on the date thereof” is
ambiguous in this context. A reasonable trier of fact could find that the Divisional Patents (or
any other similarly situated patents) were or were not “existing” on March 13, 2002.116
In addition, neither party disputes that the Divisional Patents were no longer in existence
at some point after the License Agreement was executed. Because a reasonable trier of fact
could find that the Divisional Patents “existed” on March 13, 2002 and expired sometime after,
Polytek has raised a disputed issue as to whether or not Continental breached the CSI Sprayers
License Agreement. Therefore, summary judgment for Continental on both its claim and on
Polytek’s counterclaim must be denied.
Polytek also argues that Continental’s motion for summary judgment should be denied
because Continental breached its obligations under the Agreement by knowingly supplying
Licensed Products to parties who resold them into Polytek’s exclusive territory. Continental
responds in opposition by asserting that Polytek has provided no evidence to substantiate that
patents on the 8500 still in place?” Foster responded, “Some of them may have been, some of them
probably weren’t.” Wagner Aff. II, Ex. EE, at 110. Foster did also state that “There was a decision made
prior to the bankruptcy to allow – because of the expense of foreign patents, to allow annuities on the
patents in Europe of expire….” Id. But even if Continental did decide in 2000 to stop paying and let the
European patents expire, Foster’s testimony suggests that Continental thought that the European patents
would not actually go into abandonment or expire until after the bankruptcy, which may have been the
case. Of course, Continental’s belief as to the existence of the patents is not dispositive of their existence.
116 Polytek also submits that Polytek and Continental both thought that multiple patents related to the T1000
and T8500 sprayers were in existence when the CSI Sprayers License Agreement was executed, and argues
that “at the very least, the parties were mutually mistaken a concerning the existence of the patents.” See
Polytek Letter Br. II, at 6. Generally, a contract entered into under a mutual mistake of a material fact is
voidable and subject to rescission. See, e.g., Gould v. Board of Educ. Of Sewanhaka Cent. High School
Dist., 81 N.Y.2d 446, 453, 616 N.E.2d 142, 599 N.Y.S.2d 787 (1993); Gulf Insurance Co. v. Transatlantic
Reinsurance Co., 69 A.D.3d 71, 886 N.Y.S.2d 133 (1st Dep’t. 2009). However, there is a “heavy
presumption that a deliberately prepared and executed written instrument manifest[s] the true intention of
the parties,” and therefore, a “high order of evidence is required to overcome that presumption.” Chimart
Assoc. v. Paul, 66 N.Y.2d 570, 574, 489 N.E.2d 231, 498 N.Y.S.2d 344 (1986) (alteration in original).
Even if Polytek could meet this burden, Polytek failed to raise the affirmative defense of mutual mistake in
its Amended Answer. In fact, it was only raised in its second supplemental letter brief, filed after the
hearing, and to which no further responsive papers were filed. Therefore, the Court not need address this
defense.
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claim, and that an affidavit supplied by Polytek on this issue should be disregarded because it
contradicts the affiant’s previous deposition testimony. 117 Because summary judgment on this
claim and Polytek’s counterclaim is denied on other grounds, the Court need not now reach these
issues.
D. The CSI Parts Supply Agreement
In a letter agreement dated March 13, 2002, Polytek agreed to purchase, and Continental
agreed to sell, parts for the production of T8500 and T1000 sprayers.118 It is undisputed that
Continental sent, and Polytek received, the parts provided pursuant to the Parts Supply
Agreement.119 It is also undisputed that that as some point, Polytek stopped paying for the parts
that it received.120 Continental now seeks $153,000, plus accrued interest, as payment for the
parts provided.
Polytek states that some of the parts it received from Continental were defective, and
asserts a counterclaim for $500,000 in damages that it assertedly suffered as a result of
Continental’s alleged breaches of the warranties of merchantability and fitness for a particular
purpose. In opposition to Continental’s motion for summary judgment, Polytek argues that it
does not have to pay Continental for the defective parts, and that its counterclaim for damages
117 	See Continental Reply Br., at 14-15.
118 	See CSI Parts Supply Agreement, ¶ 1:
So long as you continue to manufacture parts (“Parts”) for the T8500 and T1000
and other products manufactured using the Mid-west trigger spray machine, you
will continue to sell to us and we will purchase from you Parts on the same
terms and conditions as we have been doing prior to this letter agreement, at
current prices subject to adjustment (both upwards and downwards) for changes
in the costs of the underlying raw materials as such changes occur, on a monthly
basis.
119 	Though neither party presented any evidence of delivery or receipt of the goods, Polytek never alleged that
the parts never made it to Polytek. Rather, Polytek alleges that the parts arrived, but were defective. See
Polytek Opposition Br., at 19-20.
120 	See Continental Rule 7056-1 Statement, ¶ 34; Polytek Rule 7056-1 Statement, ¶ 34 (“It is undisputed that
Polytek stopped paying for the defective parts.”).
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also offsets Continental’s claim for payment. The Court notes that the CSI Parts Supply
Agreement contains no cross-default clause.121
1. Whether Polytek Provided Adequate Notice
Under New York law, contracts for the sale of goods are governed by Article 2 of the
Uniform Commercial Code. Under Article 2, when a buyer is not satisfied with the goods
received, the buyer can either accept all units, reject all units, or accept some and reject the
rest.122 “Rejection of goods must be within a reasonable time after their delivery or tender. It is
ineffective unless the buyer notifies the seller.”123 Goods are deemed accepted if the buyer does
not properly reject the goods after having a reasonable opportunity to inspect them, or if the
buyer “does any act inconsistent with the seller’s ownership.”124 Once goods are accepted, they
cannot be rejected.125
The buyer can revoke acceptance of any unit, but only when the good’s “non-conformity
substantially impairs its value,” and the buyer accepted the good either “(a) on the reasonable
assumption that its non-conformity would be cured and it has not been seasonably cured; or (b)
without discovery of such non-conformity if his acceptance was reasonably induced either by the
difficulty of discovery before acceptance or by the seller’s assurances.” 126 In addition,
Revocation of acceptance must occur within a reasonable time
after the buyer discovers or should have discovered the ground for
it and before any substantial change in condition of the goods
121 See page 14 above.
122 See U.C.C. § 2-601.
123 Id. § 2-602(1).
124 Id. §2-606(1)(c). In addition, “after rejection any exercise of ownership by the buyer . . . is wrongful as
against the seller.” U.C.C. § 2-602(2)(a).
125 See id. § 2-607(2).
126 Id. § 2-608(1).
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which is not caused by their own defects. It is not effective until
the buyer notifies the seller of it.127
“In order to effectively reject or revoke, the buyer must unequivocally communicate his
intent to the seller.”128 A buyer’s “mere complaint about the goods does not constitute clear and
unequivocal act of rejection.”129
Two cases are instructive here. In Ask Technologies, a case from this district, the buyer
of computer hardware claimed that he rejected or revoked acceptance of the goods because he
had communicated his dissatisfaction to the seller by means of letters and phone calls. Despite
these complaints, the court found that the buyer had accepted the hardware because the seller had
quickly repaired many of the defects and the buyer had used the hardware for nine months
following installation.130 And in Sears, Roebuck, a New York state court found that “the
undisputed evidence of defendant’s continued retention and use of the boiler for a substantial
period of time, covering several heating seasons, despite plaintiff’s orders to remove the boiler
and credit her account, constitutes an acceptance.”131
In sum, retaining the goods—rather than returning them or making them available for
return to the seller—constitutes acceptance, even where the buyer notified the seller that the
goods received were defective.
127 Id. § 2-608. The basic requirements for rejection and revocation of acceptance are the same, although the
buyer must satisfy additional requirements to revoke. See id.; id. § 2-607(1).
128 Ask Technologies Inc. v. Cablescope, Inc., No. 1-Civ.-1838, 2003 WL 22400201, at *3, 2003 U.S. Dist.
LEXIS 18694, at *7 (S.D.N.Y. Oct. 20, 2003) (“Ask Technologies”) (citing Sears, Roebuck & Co. v.
Galloway, 195 A.D.2d 825, 826, 600 N.Y.S.2d 773 (3d Dep’t 1993) (“Sears, Roebuck”)). The basic
requirements for rejection and revocation of acceptance are the same, although the buyer must satisfy
additional requirements to revoke. See U.C.C. §§ 2-607(1), 2-608.
129 Maggio Importato, Inc. v. Cimitron, Inc., 189 A.D.2d. 654, 592, N.Y.S.2d 325, 326 (1st Dep’t 1993) lv.
Denied, 82 N.Y.2d 652, 601 N.Y.S.2d 582, 619 N.E.2d 660 (1993). See also White v. Schweitzer, 221 N.Y.
461, 465, 117 N.E. 941 (1917) (“Mere complaint by the vendee that the goods do not come up to the
contract does not amount to rejection.”).
130 Ask Technologies, 2003 WL 22400201, at *3, 2003 U.S. Dist. LEXIS 18694, at *7.
131 Sears, Roebuck, 195 A.D.2d at 826.
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Under the U.C.C., even if goods are accepted and acceptance is never properly revoked,
the buyer can still recover damages for defective goods.132 But “the buyer must within a
reasonable time after he discovers or should have discovered any breach notify the seller of
breach or be barred from any remedy.” 133 In addition, “[t]he burden is on the buyer to establish
any breach with respect to the goods accepted.”134 U.C.C. § 2-714, which governs a buyers
damages for breach in regard to accepted goods, provides:
(1) Where the buyer has accepted goods and given notification
(subsection (3) of Section 2-607) he may recover as damages for
any non-conformity of tender the loss resulting in the ordinary
course of events from the seller's breach as determined in any
manner which is reasonable.
(2) The measure of damages for breach of warranty is the
difference at the time and place of acceptance between the value of
the goods accepted and the value they would have had if they had
been as warranted, unless special circumstances show proximate
damages of a different amount.
(3) In a proper case any incidental and consequential damages
under the next section may also be recovered.135
And U.C.C. § 2-717 allows a buyer to “deduct all or any part of the damages resulting from any
breach of the contract from any part of the price still due under the same contract.”136
As previously noted,137 rejection and revocation require that the buyer unequivocally
communicate his intent to reject or revoke and that the buyer not act inconsistently with the
132 See U.C.C. §§ 2-607(3), 2-714. See also, Cliffstar Corp. v. Elmar Industries, 254 A.D.2d 723, 724, 678
N.Y.S.2d 222, 223 (4th Dep’t 1998) (“Cliffstar Corp.”) (finding that buyer was not precluded from
recovering for seller’s breach of contract and breach of warranties even though buyer had not rejected or
revoked acceptance where buyer had provided adequate and timely notice to seller of defects).
133 U.C.C. § 2-607(3). The buyer is also entitled to damages if he rejects or if acceptance is properly revoked.
See id. §§ 2-711(2).
134 Id. § 2-607(4).
135 Id. § 2-714.
136 Id. § 2-717.
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seller’s ownership. But in contrast, a buyer’s right to damages for accepted goods under U.C.C.
§ 2-607(3)(a) is preserved as long as he provides notice to the seller within a reasonable time
after he detects the defect.138 “[T]he drafters of the UCC did not intend a rigorous test to
determine the sufficiency of notice; it can be oral as well as written, and it need not describe
every objection to the transaction.”139 “The notification need only alert the seller that the
transaction is troublesome and does not need to include a claim for damages or threat of future
litigation.”140 In addition, “Timeliness is governed by the standard of reasonableness and is a
question of fact.”141
As evidence of notice, Polytek relies on the affidavit of Jos Van Gemart, Manager of
Quality Assurance for Polytek, and the deposition testimony of Yehochai Schneider, Managing
Director of Polytek.142 Schneider testified that Arthur Cooijmans, Polytek’s former Managing
Director, notified Continental that the parts that were coming in were damaged, bent, and were
jamming up the equipment. 143 And in an affidavit, Gemart stated:
137 See pages 40-41 above.
138 See U.C.C. § 2-607(3)(a).
139 Besicorp Group, Inc. v. Thermo Electron Corp., 981 F.Supp. 86, 102 (N.D.N.Y. 1997) (citing U.C.C. § 2-
607, at Comment 4).
140 Computer Strategies, Inc. v. Commodore Business Machines, Inc., 105 A.D.2d 167, 176, 483 N.Y.S.2d
716, 723 (2nd Dep’t 1984), appeal and reargument denied 110 A.D.2d 743 (2d Dep’t 1984) (citing U.C.C.
§ 2-607, at Comment 4).
141 Cliffstar Corp., 254 A.D.2d at 724 (citing Cuba Cheese v. Aurora Val. Meats, 113 A.D.2d. 1012, 494
N.Y.S.2d 571 (4th Dep’t 1985).
142 See Gemart declaration, dated Oct. 25, 2006 (“Gemart Decl.”), ¶¶ 3-4; Schneider Deposition Tr., at 65: 6-
23.
143 See Polytek Opposition Br., at 20 (citing Schneider Deposition Tr., at 65: 6-23).
Continental argued that Schneider’s testimony that Arthur Cooijmans notified Continental about the
defective parts is hearsay and should not be considered. These statements are not being offered here to
prove that the parts were in fact defective, but rather to prove that Cooijmans gave notice to Continental.
But if Schneider did not personally observe the conversations between Cooijmans and Continental, then
this testimony is hearsay. Schneider’s testimony implies but does not establish that he personally observed
Cooijmans contacting and notifying Continental. Both parties are on notice that if Schneider cannot
establish that he has personal knowledge of these facts, his statements here would be excluded at a further
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The shipments often contained several defective products
that could not [be] used in manufacture of the sprayers. It
was our policy to contact Continental within 24 hours of
the inspection to advise them of the defective condition of
the shipment and seek a credit and/or replacement parts.
This was an ongoing problem with regard to the poor
condition of the parts and with regard to receiving a credit
or replacement from Continental. I personally called
Continental on several occasions to advise them of
defective parts that arrived in the shipments, and the issue
was also brought to Continental’s attention by Polytek’s
former buyer Ger Classon, and former managing director
Arthur Cooijmans.”144
Gemart also stated that shipments of parts were inspected by Polytek’s inspection department
“upon delivery,” and that it was Polytek’s policy to notify Continental within 24 hours of
inspecting the goods to advise them of the defective condition of the shipment. 145
Continental does not dispute these facts. Thus, there is no disputed issue of fact with
respect to notice. Rather, the parties disagree as the significance of Polytek’s actions as a matter
of law.
Polytek’s actions did not rise to the level of rejection or revocation as a matter of law.
Polytek did in fact communicate its dissatisfaction with the parts to Continental. But mere
complaint is insufficient for rejection or revocation.146 And as Continental noted, there is no
evidence that Polytek returned the goods, provided documentation regarding the storage of
trial. However, because Polytek provided other admissible evidence which raises a disputed issue of fact as
to whether Polytek notified Continental of the defective parts (testimony from Gemart that he personally
contacted Continental), the Court need not address the admissibility of Schneider’s testimony now.
144 Gemart Decl., ¶ 3-4. Unless Gemart personally observed Ger Classon and Cooijmans' conversations with
Continental, Gemart’s statements to that effect are hearsay. See note 143 above. The portion of Gemart’s
testimony stating that he personally called Continental is admissible evidence.
145 See Gemart Decl., ¶ 3.
146 It does not appear that Polytek contends that it either rejected or revoked acceptance of the goods. Rather,
all of the cases that Polytek cited address when a party that has accepted the goods is entitled to damages
under U.C.C. § 2-714.
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goods, or invited Continental to inspect or pick up the goods. Therefore, the Court finds as a
matter of law that Polytek accepted, and did not reject or revoke acceptance of the parts supplied
by Continental.
But as discussed above, the requirements under § 2-607(3)(a) for a buyer to recover
damages for accepted goods are far less rigorous. Polytek’s notice to Continental did not detail
the nature of the defects in the products, and was oral rather than written, but such notice was
nevertheless sufficient under § 2-607(3)(a). In addition, because Polytek inspected shipments
from Continental upon delivery, and notified Continental of a defective shipment within 24 hours
after inspection, Polytek’s notice to Continental was timely under § 2-607(3)(a). Thus, the
substance and form of the notice Polytek gave to Continental about the defective parts satisfied
the less rigorous requirements of § 2-607(3)(a) as a matter of law. Polytek is therefore entitled to
recover damages from Continental (or assert a setoff) as long as Polytek also proves that the
parts were actually defective.
2. Defective Parts
But Polytek is only entitled to damages if the parts were in fact defective.147 Under
U.C.C. § 2-607(4), because Polytek accepted the parts, it bears the burden of establishing that
Continental breached the implied warranties of merchantability and fitness for a particular
purpose.148 Although the party moving for summary judgment has the burden of demonstrating
147 As noted above, page 42, where the buyer has accepted goods and given notification,
The measure of damages for breach of warranty is the difference at the time and
place of acceptance between the value of the goods accepted and the value they
would have had if they had been as warranted, unless special circumstances
show proximate damages of a different amount.
U.C.C. § 2-714(2).
The buyer may also recover incidental and consequential damages under §2-715.
148 See U.C.C. § 2-607(4) (“The burden is on the buyer to establish any breach with respect to the goods
accepted.”).
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the absence of a genuine issue of material fact, that party can “discharge this burden by
demonstrating to the Court that there is an absence of evidence to support the non-moving
party’s case on which that party would have the burden of proof at trial.”149 As a result,
Continental need not provide any evidence that the products it supplied were not defective, and
may simply point to Polytek’s lack of evidence on this issue. Because Polytek will bear the
burden to prove defectiveness at trial, Fed. R. Civ. P. 56 “requires the nonmoving party to go
beyond the pleadings and by her own affidavits, or by the depositions, answers to interrogatories,
and admissions on file, designate specific facts showing that there is a genuine issue for trial.150
At summary judgment, “we go beyond the paper allegations of the pleadings, which were
enough to survive the common law demurrer. The time has come, as James and Hazard put it,
‘to put up or shut up.’ Accordingly, unsupported allegations do not create a material issue of
fact.”151
“The principles governing admissibility of evidence do not change on a motion for
summary judgment.” 152 Federal R. Civ. P. 56 provides that affidavits submitted by a party
moving for summary judgment or one opposing summary judgment must be made on personal
knowledge, set out facts that would be admissible in evidence, and show that the affiant is
competent to testify on the matters stated.153 And similarly, “a motion to strike is appropriate if
149 	Prescription Plan Servs., 783 F. Supp. at 819 (citing Celotex, 477 U.S. at 323).
150 	Celotex, 477 U.S. at 324.
151 	Weinstock v. Columbia University, 224 F.3d 33, 41 (2d Cir. 2000) (citing Fleming James,
Jr. & Geoffrey C. Hazard, Jr., Civil Procedure 150 (2d ed.1977)).
152 	Raskin v. Wyatt Co., 125 F.3d 55, 66 (2d Cir. 1997) (“Raskin”). At the hearing, Polytek’s counsel stated,
“That is what we have to do under Rule 56. We have to submit evidence that would be admissible at trial
to show an issue of fact.” Hr’g Tr. 8/17/06 at 14.
153 	See Patterson v. County of Oneida, 375 F.3d 206, 219 (2d Cir. 2004).
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documents submitted in support of a motion for summary judgment contain inadmissible hearsay
or conclusory statements, are incomplete, or have not been properly authenticated.”154
In support of its contention that Continental’s supplied defective parts, Polytek submitted
documents, an affidavit from Gemart, and deposition testimony from Schneider. Continental
raises various evidentiary objections to this evidence.
Continental argues that Polytek’s documents were not authenticated.155 In Bazak
International, a case cited by Continental, Judge Marrero of this district noted that at summary
judgment, “[t]his threshold determination is relatively low, as evidence is admissible as authentic
‘if sufficient proof has been introduced so that a reasonable juror could find in favor of
authenticity or identification.’”156 Judge Marrero determined that the letter at issue was
sufficiently authenticated for the purpose of summary judgment where “[b]oth Feldman and his
employee Luis Gonzales (“Gonzales”) attest[ed] that the letter was handwritten by Feldman, and
subsequently typed on the computer and sent to Tarrant by Gonzales.” 157
And in a more recent case from this district, Chief Judge Preska addressed whether
performance reviews submitted on a motion for summary judgment had been properly
authenticated or must be struck.158 She determined that the “[d]efendant has failed to support
any of the offered records with a proper affidavit. The affidavit of defense counsel, who lacks
personal knowledge as to the creation or maintenance of Defendant’s records, is insufficient to
154 Spector v. Experian Info. Servs., Inc., 321 F.Supp.2d 348, 352 (D.Conn. 2004). See also ABB Indus. Sys.,
Inc., v. Prime Tech. 120 F.3d 351, 357 (2d Cir. 1997) (stating that inadmissible hearsay cannot be used to
raise a triable issue of fact to defeat a summary judgment motion).
155 See Continental Reply Br., at 8.
156 Bazak Intern. Corp. v. Tarrant Apparel Group, 378 F. Supp. 2d 377, 391 (S.D.N.Y. 2005) (“Bazak
Intern.”) (citing U.S. v. Ruggiero, 928 F.2d 1289, 1303 (2d Cir. 1991), cert. denied, 502 U.S. 938 (1991)).
157 Bazak Intern., 378 F.Supp. at 391.
158 See Kaur v. New York City Health and Hospitals Corp., 688 F.Supp.2d 317 (S.D.N.Y. 2010) .
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certify their authenticity.”159 However, she found that circumstantial evidence supported a
conclusion of authenticity in that case.160
But those cases are distinguishable. The documents presented here appear to be
inspection reports made by employees at Polytek demonstrating that some of the parts Polytek
received from Continental were defective.161 They were attached to an affidavit from Polytek’s
counsel, who lacked personal knowledge, and were not authenticated or referenced in any other
affidavits or deposition testimony provided by Polytek. In addition, there is insufficient
circumstantial evidence to support authentication here. The majority of the writing in these
documents is not in English, and no translations of it were provided by Polytek.162 The only
words that the Court can make out on these documents are the names “Polytek” and
“Continental” and some phrases indicating some problems with some unidentifiable products.
Even in light of the “relatively low”163 threshold for determining authenticity at summary
judgment, I find that these documents were not properly authenticated and cannot be considered
on this motion.
Continental further argues that Schneider’s deposition testimony regarding the defective
products was hearsay.164 Continental is right in part, but only in part. Some portions of
159 Id. at 323.
160 Id. at 324 (pointing to the fact that all documents were on the defendant’s letterhead, that witnesses had
testified to the existence of a performance review policy, that some of the evaluations were signed by the
plaintiff herself, that some of the reviews were identified by the plaintiff in her deposition testimony, and
that there was no indication that the documents were produced in contemplation of litigation as
circumstantial evidence to support authenticity).
161 Polytek did not even identify these documents as inspection reports. The Court identifies them as such here
because they say “Inspectie Rapport” at the top, which the Court assumes are cognates of English words.
162 In addition to the authenticity problem, the fact that these documents are not in English and that Polytek
failed to provide the Court with a translation may be an independent and sufficient ground for excluding
them.
163 Bazak Intern., 378 F. Supp. 2d at 391.
164 See Continental Reply Br., at 8.
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Schneider’s testimony on this issue are hearsay.165 However, Schneider also testified that he
personally saw the defects in the parts, and he explained in some detail what the defects were.166
In addition, he testified that the percentage of parts received by Polytek that were defective was
probably between 10 and 30%.167 These portions of Schneider’s testimony are not hearsay
because they contain no out-of-court statements.
Turning now the substance of the motion, I find that Polytek has raised a disputed issue
of fact as to whether some of the parts it received from Continental were defective. In addition
to the admissible portions of Schneider’s testimony, Gemart’s affidavit supports Polytek’s
assertion that some of the Continental parts were defective. Gemart testified that “[t]he
shipments often contained several defective products that could not be used in manufacture of
the sprayers.” 168
The testimony from Gemart and Schneider, and any other evidence, may ultimately fail
to meet Polytek’s burden of “establish[ing] any breach with respect to the goods accepted.”169
However, Polytek has provided some admissible evidence supporting its contention that some of
the parts were in fact defective, and has thus raised a disputed issue of fact. And of course,
whether the parts were in fact defective is material to whether Polytek is entitled to damages as a
matter of law.
In sum, the court finds that Polytek provided timely and proper notice of defective parts
under U.C.C. § 2-602(4), and that Polytek raised a disputed issue of fact as to whether some of
165 See, e.g., Schneider Deposition Tr., at 65: 17-20 (Schneider’s testimony stating that Cooijmans told
Continental that some of the parts were defective). It is hearsay if used for the purpose of proving that the
parts were in fact defective (i.e. for the truth of the matter asserted).
166 Id. at 66. See also id. at 65: 7-11.
167 Id. at 67.
168 Gemart Decl., ¶ 3.
169 U.C.C. § 2-602(4).
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the parts it received from Continental were defective. Continental has failed to meet its burden
of establishing that Polytek is not entitled to damages as a matter of law. Therefore, summary
judgment on Continental’s claim and Polytek’s counterclaim must be denied.
E. The OpAd Sprayer Agreements
On October 19, 2000, Continental and Polytek entered into a License Agreement with
respect to the OpAd spray devices and the intellectual property associated with it, which was
later amended on March 13, 2002. Pursuant to the OpAd Sprayers License Agreement, Polytek
granted to Continental the following two rights:
(A) the exclusive right within [North, South, and Central America] to
manufacture, assemble, distribute and sell OnePak Products and to use
the Intellectual Property and Technical Information . . . and
(B) a non-exclusive right to sell OpAd Products to any U.S. Consumer
of the OpAd Products in Asia . . . . 170
The OpAd Sprayers License Agreement obligated Continental to, among other things:
(a) pay royalties to Polytek once Continental purchased the machine to
produce OpAd sprayers, and began producing them; 171
(b) establish a written a written marketing plan for OpAd in the Territory
by June 30, 2002; 172
(c) “promptly commence and thereafter during the Royalty Payment Term
of the license granted in Section 2.1 diligently pursue the marketing and sale of
the OnePak products in the Territory. . . .”; 173 and
170 OpAd Sprayers License Agreement, § 2.1.
171 Id. at Art. III.
172 Id. at § 2.5.3.
173 Id. at § 2.5.1.
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(d) “promptly and diligently proceed with [USA Detergents, Inc.] in order
to convert the Letter of Intent into a legally binding contract for the purchase of
OpAd sprayers . . .”174
On March 13, 2002, Continental and Polytek also entered into the OpAd Sprayers Supply
Agreement. The Agreement provided that Polytek would supply OpAd sprayers to Continental
until Continental purchased its own machine for producing OpAd spray devices and that
machine was properly operating, or until the expiration of the OpAd License.175 The Agreement
further provided that Continental would immediately commence diligent marketing efforts (as
contemplated by the OpAd Sprayers License Agreement) and would “diligently pursue the
gradual increase of purchases of OpAd Product or demonstrate third party customer orders or
contracts of the OpAd Product so as to reach, in the aggregate, a constant volume of 3,000,000
OpAd units a month by June 30, 2003.” 176 Continental also agreed to provide monthly forecasts
for its supply requirements after June 30, 2002.177 Lastly, Continental agreed to purchase three
million OpAd spray devices per month after July 1, 2003, until such time as Continental’s
Machine was capable of producing spray devices for commercial sales.178
Both the OpAd Sprayers License Agreement and OpAd Sprayers Supply Agreement
contain cross-default clauses providing that if Continental materially breaches any agreement
174 Id. at § 2.5.2. As noted in this section, Indesco had previously entered into a letter of intent, dated
November 6, 2001, with USA Detergents, Inc. (“USA Detergents”) regarding sale of OpAd sprayers to
USA Detergents.
175 See OpAd Sprayers Supply Agreement, § 2.1.
176 Id. at § 2.3.
177 Id.
178 Id.
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between the parties, it will be in default under the OpAd Sprayers License Agreement and OpAd
Supply Agreement as well.179
Polytek asserts that Continental breached the OpAd Sprayers License Agreement by
failing to pursue the USA Detergents letter of intent, and by failing to make reasonable efforts to
market and sell OpAd Products, as required by the License Agreement. And Polytek contends
that Continental breached the OpAd Sprayers Supply Agreement by: (i) failing to initiate
marketing efforts with “a view toward commencing purchases of OpAd sprayers;” (ii) failing to
provide Polytek with a monthly written forecast of its OpAd supply requirements; and (iii)
failing to gradually increase purchases so as to reach a constant volume of purchases of three
million units per month by June 30, 2003. 180 As a result of these alleged breaches, Polytek
terminated both OpAd Agreements by letter on February 20, 2003.181 Polytek seeks damages in
the amount of no less than $5 million for the lost royalties that it would have earned pursuant to
the License Agreement and another $5 million in lost profits it would have earned under the
Supply Agreement. It is undisputed that Continental did not purchase any OpAd Sprayers from
Polytek, nor did Continental provide evidence of third-party customer orders or contracts for
purchase.182
179 	See pages 10-12 above.
180 	See Polytek Answer, ¶¶ 94-99.
181 	See Schneider 2/20/03 Letter. Polytek’s Managing Director Yehochai Schneider notified Continental by
letter that:
For the reasons state above, and your failure to cure the various defaults existing
under the Supply Agreement and the License Agreement despite ample
opportunity to do so and notices by Afa Polytek to that effect, we see no other
choice but to terminate ContinentalAFA’s license under the License Agreement,
and its rights under the Supply Agreement and all related agreements, effective
immediately.
Id. at 3.
182 	Continental Rule 7056-1 Reply Statement, at 12, ¶ 31.
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In response, Continental contends that it fulfilled its obligations with respect to the USA
Detergents letter of intent. Continental also asserts that its efforts to market the OpAd sprayer
satisfied any obligation it had under both the OpAd License and the Interim Supply Agreement,
and that any inability to sell OpAd sprayers resulted from Polytek’s high pricing of the product.
In addition, Continental argues that even if it did breach its obligations under these
Agreements, Polytek is not entitled to recover these damages as a matter of law. With respect to
the lost royalty damages under the OpAd Sprayers License Agreement, Continental argues that
Polytek cannot recover because the Agreement terminated prior to Continental owing Polytek
any royalties. With respect to OpAd Sprayers Supply Agreement, Continental argues that
Polytek is not entitled to relief because the Agreement precludes claims for lost profits. Finally,
Continental argues that Polytek has failed to provide any evidence of lost profit damages.
1. Continental’s Alleged Breaches
a. Failure to Pursue the USA Detergent Letter of Intent
Pursuant to the OpAd Sprayers License Agreement, Continental was obligated to
“promptly and diligently proceed with [USA Detergents] in order to convert the Letter of Intent
into a legally binding contract for the purchase of OpAd sprayers.”183 However, the OpAd
Sprayers License Agreement further provided that “Nothing herein shall require Licensee to
enter into any agreement that is not consistent with or adds material terms to the Letter of
Intent.”184 The letter of intent itself was not a binding agreement.185
Continental argues that USA Detergents was not willing to enter into a contract under the
terms of the letter of intent, and therefore, that Continental fulfilled its obligations under section
183 OpAd Sprayers License Agreement, § 2.5.2.
184 Id.
185 See Wagner Aff. I, Ex. W (“USA Detergents Letter of Intent”), ¶ 19.
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2.5.2 of the OpAd Sprayers License Agreement. Continental provided the testimony of Ben
Holder, who was a general manager at Continental and was in charge of marketing the OpAd
products. He testified that the president of USA Detergents informed him that “he had no
incentive to change over to OpAd and went with an Asian unit.”186
Polytek’s position is that Continental demanded a price above the price established in the
letter of intent, and that, as a result, USA Detergents was unwilling to enter into a binding
contract. Polytek provided testimony from Yehochai Schneider, who stated that:
At some point I also learned that Continental had abandoned the
deal with USA Detergents (“USAD”) and failed to convert the
letter of intent that had previously been negotiated into a binding
contract. It is my understanding that Continental suddenly
demanded 18¢ per unit from USAD, rather than the 14¢ that was
agreed to in the letter of intent.187
This testimony is inadmissible hearsay.188 Polytek made no showing that Schneider, as
managing director of Polytek, had personal knowledge of the conversations that transpired
between Continental and USA Detergents. Therefore, it cannot be considered at summary
judgment.
However, Polytek did provide some admissible evidence in support of its position that
Continental demanded a higher price from USA Detergents or otherwise voluntarily walked from
the deal. Elsewhere in his deposition, Holder testified that Steve Bowsher, then CEO of
Continental, told Holder not to go forward with any further discussions with USA Detergents
186 Glenn Decl. II, Ex. 32 and Wagner Aff. I, Ex. Z (“Holder Deposition Tr.”), at 105-06.
187 Schneider Aff., ¶ 22.
188 See page 46 above (“The principles governing admissibility of evidence do not change on a motion for
summary judgment.” Raskin, 125 F.3d at 66).
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sometime between May and June of 2002.189 Holder also testified that Continental was generally
marketing the OpAd products at 16 to 18¢.190
Although this evidence is thin, it is enough to defeat summary judgment. A reasonable
trier of fact might find that Continental demanded a price from USA Detergents above the price
established in letter of intent, or otherwise abandoned the USA Detergents deal, such as by
reason of what Bowsher told Holder. This disputed issue of fact is material to whether
Continental breached its obligations with respect to the USA Detergent letter of intent. Pursuant
to the terms of section 2.5.2 of the OpAd Sprayers License Agreement, there are no conditions to
Continental’s obligation to “promptly and diligently” pursue a binding contract with USA
Detergent according to the terms of the letter of intent. If in fact Continental did demand a
higher price than the 14¢ in the letter of intent or decided to abandon the potential deal
altogether, then Polytek could establish that Continental breached its obligations under this
section of the License Agreement.
b. Failure to Market OpAd Products
Polytek also raises a disputed issue of fact as to whether Continental breached its
obligation to pursue a marketing plan for the OpAd products under both OpAd Agreements.
Section 2.5.2 of the License Agreement provides that Continental “shall promptly
commence and thereafter during the Royalty Payment Term of the license . . . diligently pursue
the marketing and sale of OnePak Products [in North, South, and Central America].”191
Continental’s obligation to commence some form of marketing plan began “promptly”
from the date of the execution of the Agreement. Though the obligation would only persist as
189 See Holder Deposition Tr., at 109.
190 See id. at 114.
191 OpAd Sprayers License Agreement, § 2.5.1.
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long as the Royalty Payment Term endured, Continental’s commitment to commence the
marketing and sale of OnePak Products was not tied to the Royalty Payment Term.192
Polytek submitted the deposition of Ben Holder, who was put in charge of marketing
OpAd sprayers in March 2002. 193 The marketing plan he came up with was only three pages,194
and Holder acknowledged that his recommendations in the plan were not based on any formal
market research.195 In addition, Schneider testified that:
In my 40 years of active involvement in manufacturing, I have
reviewed and participated in dozens of marketing and sale plans
for [a] new product launch. I can state unequivocally that I have
never witnessed such a non-professional, and I daresay, childish,
presentation. It contained no market analysis, no marketing
program, and no strategy for positioning OpAd relative to
Continental’s other products.196
Even though the OpAd products did not generate a lot of interest at that price, at least as long as
Holder remained in his position, Continental did not lower the price.197 During the summer of
2002, Thomas Richmond replaced Steven Bowsher as CEO of Continental. In November or
December 2002, Holder was transitioned out of his position as head of marketing for OpAd. He
192 “Royalty Payment Term” is defined as “the period commencing on the date on which [Continental]
commences Commercial Sales of OpAd products manufactured on its Machine and ending on the date
which is the eighth anniversary of such date . . .” Id. at § 1.2.1. “Machine” is defined as collectively, an
assembly machine used for the sole purpose of assembling OpAd sprayers and either molds to make OpAd
parts or contracts for an adequate supply of OpAd parts. See Id. It is undisputed that Continental never
purchased the Machine and never manufactured OpAd products on its own. Therefore, the Royalty
Payment Term never commenced.
193 Ben Holder was a general manager at Continental. See page 54 above.
194 See Wagner Aff. I, Ex. K.
195 See Holder Deposition Tr., at 89. Holder also testified that Continental marketed the OpAd products in the
16-18¢ range. See id. at 114.
196 Schneider Aff., ¶ 21. While Schneider’s opinions may or may not turn out to be admissible at trial, Polytek
will be able to make the points in the last sentence.
197 See Holder Deposition Tr., at 115.
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was not replaced, but rather, the responsibility for the OpAd business was transferred to
Richmond, the new CEO.198
Continental’s duty to commence marketing began immediately upon the execution of the
License Agreement, irrespective of whether the Royalty Payment Term had begun. In light of
this evidence, Polytek raises a disputed issue of fact as to whether Continental breached its
obligations under the OpAd License and Interim Supply Agreements to market the OpAd
products.199
2. Damages
a. General vs. Consequential Lost Profit Damages
For Continental’s alleged breach of the OpAd Sprayers License Agreement, Polytek
seeks lost royalties, a form of lost profit damages. And with respect to the OpAd Sprayers
Supply Agreement, Polytek seeks lost profits, measured by the difference between the cost of
manufacturing each unit and the contract price.200 Polytek contends that both are direct or
general contract damages as contrasted to consequential damages, the latter of which cannot be
recovered under the OpAd Parts Supply Agreement and are subject to a higher standard of proof.
In support, Polytek asserts that New York law recognizes two types of lost profits—those that
are consequential damages and those that are direct, general contract damages—and that its
damages are the latter type.
198 See id. at 119-120.
199 In addition, the OpAd Sprayers License Agreement and the OpAd Sprayers Supply Agreement contain
cross-default clauses. See pages 10-12 above. The Court found above that Polytek raised a disputed issue
of fact as to whether Continental breached the Machinery Lease Agreement. If that alleged breach was
material, then Continental would be in default under the two OpAd Agreements as well.
200 See Polytek Opposition Br., at 29-36; Hr’g Tr. 8/17/06 at 53-55.
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Polytek points to two cases in support of its argument that the damages that it seeks here
are direct damages, rather than consequential damages.201 Since this motion was briefed and
heard, the Second Circuit has issued a decision directly on point.202 In Tractebel Energy, the
Circuit clarified:
Lost profits are consequential damages when, as a result of the breach,
the non-breaching party suffers loss of profits on collateral business
arrangements. In the typical case, the ability of the non-breaching
party to operate his business, and thereby generate profits on collateral
transactions, is contingent on the performance of the primary contract.
When the breaching party does not perform, the non-breaching party's
business is in some way hindered, and the profits from potential
collateral exchanges are “lost.” . . .
By contrast, when the non-breaching party seeks only to recover
money that the breaching party agreed to pay under the contract, the
damages sought are general damages. The damages may still be
characterized as lost profits since, had the contract been performed, the
non-breaching party would have profited to the extent that his cost of
performance was less than the total value of the breaching party's
promised payments. But, in this case, the lost profits are the direct and
probable consequence of the breach. The profits are precisely what the
non-breaching party bargained for, and only an award of damages
equal to lost profits will put the non-breaching party in the same
position he would have occupied had the contract been performed. 203
Polytek, therefore, is correct.
The damages that Polytek seeks under the OpAd Sprayers Supply Agreement are “lost
profit” damages, but they are general, rather than consequential, lost profit damages. Polytek is
201 See ATI Telecom, Inc., v. Trescom, No. 95-Civ.-9749, 1996 WL 455010, 1996 U.S. Dist. LEXIS 11479
(S.D.N.Y. 1996) (Chin, J.) (“ATI Telecom”) (finding that damages sought by ATI, a company engaged in
the business of reselling long distance service to retail establishments, were direct damages, even though
the damages the constituted the difference between the contract price and the price ATI paid on the market
to a third party and compensation for a reduction in ATI’s profits); American List Corp. v. U.S. News and
World Report, Inc., 75 N.Y.2d 38, 42, 549 N.E.2d 1161, 1164, 550 N.Y.S.2d 590, 593 (1989) (“American
List Corp.”) (finding damages sought by plaintiff to be direct damages where plaintiff sought recovery of
money that the defendant was obligated to pay under the contract, and which were set out in a schedule of
costs in the contract, less the costs reasonably saved by the plaintiff as a result of the breach).
202 See Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89 (2d Cir. 2007) (“Tractebel
Energy”).
203 Id. at 109. In support, the Second Circuit cited American List Corp., a case upon which Polytek relied.
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not seeking profits that it would have made from collateral business transactions with third
parties, but rather, profits it would have made from Continental’s purchases of sprayers pursuant
to the Agreement.
The lost royalty damages that Polytek seeks under the OpAd Sprayers License
Agreement for the USA Detergents deal are also general, rather than consequential, lost profit
damages. Although the royalties arise out of transactions that Continental would enter into with
third parties, the License Agreement obligated Continental to enter into such agreements with
third parties—at least in the case of USA Detergents, and at least insofar as USA Detergents
would agree to a contract on the terms of the letter of intent.
In a case from the District of Massachusetts, Judge O’Toole decided that similar lost
royalty damages were direct, rather than consequential.204 In Callisto, the two parties had
entered into a license and distribution agreement pursuant to which Callisto licensed its digital
photo album computer program to Inter-State, and Inter-State was obligated to use its best efforts
to market and sell the computer program in a bundle.205 When Inter-State stopped performing,
Callisto terminated the Agreement and sued for lost royalties. Judge O’Toole determined:
Here, the royalty payments were expressly required by the
Agreement and constituted Inter-State's primary consideration for
the license it obtained. The loss of such royalties would be the
natural and probable consequence of a failure to perform by Inter-
State and should not be considered consequential damages. 206
Similarly, if in fact Continental breached the OpAd Sprayers License Agreement by
failing to pursue the USA Detergents deal, then the lost royalty payments sought by Polytek
204 Callisto Corp. v. Inter-State Studio & Pub. Co., No. 05-11953-GAO, 2006 WL 1240711, 2006 U.S. Dist.
LEXIS 31004 (D. Mass. May 4, 2006) (“Callisto Corp.”).
205 See id., 2006 WL 1240711, at *1, 2006 U.S. Dist. LEXIS 31004, at *1.
206 Id., 2006 WL 1240711, at *2, 2006 U.S. Dist. LEXIS 31004, at *6.
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would be the natural and probable consequence of that breach, and therefore, would not be
consequential damages.
The distinction between direct, general lost profit damages on the one hand, and
consequential lost profit damages on the other, is significant here for two reasons: first, because
Polytek contends that the limitation on damages contained in the OpAd Sprayers Supply
Agreement bars only consequential lost profit damages; and second, because different standards
of proof govern the two different types of lost profit damages.
b. Limitation on Damages in the OpAd Sprayers Supply Agreement
Continental further contends that pursuant to the terms of the Interim Supply Agreement,
Polytek cannot recover any lost profit damages under that Agreement. Polytek asserts that the
language bars recovery of consequential lost profits, but not general lost profits.
The OpAd Sprayers Supply Agreement provides:
4.1.1. Limitation on Damages. Notwithstanding any of the
contrary provision[s] herein:
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR
ANY PUNITIVE, CONSEQUENTIAL, LIQUIDATED,
INCIDENTAL OR INDIRECT DAMAGES, INCLUDING
DAMAGES FOR LOST PROFITS (EXCEPT AS PROVIDED IN
SECTION 4.1.2 BELOW), LOSS OF OPPORTUNITY OR USE
OF ANY KIND, SUFFERED BY THE OTHER PARTY,
WHETHER IN CONTRACT, TORT OR OTHERWISE.
4.1.2. Failure to Deliver. If Supplier fails to deliver any OpAd
Sprayers in accordance with an order submitted by Indesco
pursuant to Section 2.5 hereof, the purchase requirement under
Section 2.3 hereof shall be reduced by the number of unit sales lost
as a result of such failure to deliver and Indesco shall be entitled to
recover from Supplier lost profits on such sales.207
207 OpAd Sprayers Supply Agreement, § 4.1. It is clear that under section 4.1.2., Continental is entitled to
recover lost profits for a breach by Polytek. Therefore, Section 4.1.1., as least in so far as it limits recovery
of “lost profits,” only applies to Polytek.
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As Continental points out, the language of the Agreement does not distinguish between
indirect and direct “lost profit” damages, which might suggest that both are prohibited.
However, Polytek’s reading of the clause is the only reasonable one. Section 4.1.1
provides that the parties may not recover punitive, consequential, liquidated, incidental, or
indirect damages, including lost profits. Under the doctrine of noscituur a sociis, “a word is
known by the company it keeps.”208 The word “including,” which proceeds “lost profits,”
demonstrates that the lost profits prohibited by section 4.1.1 are those that are a subset of
“punitive, consequential, liquidated, incidental, or indirect damages.” In other words, “lost
profits” are only precluded insofar as they fall within the broader categories of indirect or
consequential damages.209 And subsequently, lost profit damages that are direct or general, and
not within a subset of “punitive, consequential, liquidated, incidental, or indirect damages,” can
be recovered.
Therefore, Section 4.1.1 does not, as a matter of law, preclude Polytek from recovering
the lost profits it seeks for Continental’s alleged breach of the Interim Supply Agreement. The
OpAd Sprayers License Agreement does not contain a limitations of damages clause.
208 In re Motors Liquidation Co., No. 09-50026, ---B.R.---, 2011 WL 18945, at *4, 2011 Bankr. LEXIS 11, at
*13 (citing Gustafson v. Alloyd Co., 513 U.S. 561, 575, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995)). See also N.
Singer & J. Singer, Sutherland Statutes and Statutory Construction § 47.16 (7th ed. 2007).
209 See ATI Telecom, 1996 WL 455010, at *2-3, 1996 U.S. Dist. LEXIS 11479, at *5-7 (finding that provision
in contract that “In no event will either party under this Agreement be liable for indirect, consequential,
special, incidental or punitive damages, or lost profits, revenue, customers, goodwill or opportunity, of any
kind whatsoever, resulting from a breach of this Agreement by such party,” did not bar recovery for direct
damages).
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c. 	Standards for Recovery of General vs. Consequential Lost Profit Damages
In Tractebel Energy, the Second Circuit also articulated the different standards for the
recovery of consequential lost profits and general lost profits.210 “[T]here exists a higher burden
for proving consequential damages than for general damages.”211
“In New York, a party is entitled to recover [consequential] lost profits only if (1) it is
demonstrated with certainty that the damages have been caused by the breach, (2) the extent of
the loss is capable of proof with reasonable certainty, and (3) it is established that the damages
were fairly within the contemplation of the parties.”212
All damages, whether general or consequential, “must not be merely speculative,
possible, and imaginary, but they must be reasonably certain and such only as actually follow or
may follow from the breach of contract.”213 A [f]ailure to demonstrate such non-speculative
damages will result in summary judgment in favor of the defendant.214
While consequential lost profit damages can only be recovered when such damages are
foreseeable or within the contemplation of the parties,215 there is no such requirement for the
recovery of general lost profit damages. 216
210 	See Tractebel Energy, 487 F.3d at 110-11.
211 	Id. at 111.
212 	Id. at 109 (citing Kenford Co., Inc. v. County of Erie, 67 N.Y.2d 257, 261, 502 N.Y.S.2d 131, 493 N.E.2d
234 (1986) (“Kenford I”)).
213 	Id. at 110 (citing Wakeman v. Wheeler & Wilson Mfg. Co., 56 Sickels 205, 209, 101 N.Y. 205 (1886))
(emphasis added by Second Circuit).
214 	See Upper Deck Co., LLC v. Breakey Intern., BV, 390 F.Supp.2d 355, 362 (S.D.N.Y. 2005) (Cederbaum,
J.) (“Upper Deck”).
215 	See id. at 358 (citing Kenford I, 67 N.Y.2d at 261).
216 	See M & G Polymers USA, LLC v. Carestream Health, Inc., No. 07C-11-242 PLA, 2010 WL 1611042, at
*37, 2010 Del. Super. LEXIS 131, at *114 (Del.Super. 2010) (stating that under New York law, “[n]o
parallel foreseeability or contemplation requirement exists as an obstacle to an aggrieved buyer’s direct
damages claim”), aff’d, 9 A.3d 475, 2010 WL 4657943, 2010 Del. LEXIS 577 (Del. 2010)
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And while consequential damages may be recovered only where the amount of loss is
also “capable of proof with reasonable certainty”217 with respect to general damages, however,
the amount need not be reasonably certain. As the Second Circuit stated, “‘[c]ertainty,’ as it
pertains to general damages, refers to the fact of damage, not the amount.”218 The “long standing
New York rule” is that “when the existence of damage is certain, and the only uncertainty is as to
its amount, the plaintiff will be not denied a recovery of substantial damages. Moreover, the
burden of uncertainty as to the amount of damage is upon the wrongdoer.”219 “The non-
breaching party need only provide a “‘stable foundation for a reasonable estimate’ of the damage
incurred” before an award of general damages can be made. 220 “New York courts have
significant flexibility in estimating general damages once the fact of liability is established.”221
Since the damages that Polytek seeks here for lost royalties and lost profits are general
damages, Polytek must demonstrate that the existence of the damages is reasonably certain. But
Polytek need not demonstrate that the amount is reasonably certain, or that they were
foreseeable.
d. Lost Royalties under the OpAd Sprayers License Agreement
Continental argues that Polytek is not entitled to damages for any lost royalties under the
OpAd Sprayers License Agreement because that agreement did not go into effect until
Continental purchased the machine; Continental had only an option, but not an obligation to
217 Upper Deck, 390 F.Supp.2d at 358 (citing Kenford I, 67 N.Y.2d at 261).
218 Tractebel Energy, 487 F.3d at 110 (emphasis in original).
219 Contemporary Mission, Inc., v. Famous Music Corp., 557 F.2d 918, 926 (2d Cir. 1977) (internal citations
omitted).
220 Tractebel Energy, 487 F.3d at 110 (citing Freund v. Washington Square Press, Inc., 34 N.Y.2d 379, 383,
357 N.Y.S.2d 857, 314 N.E.2d 419 (1974) (“Washington Square Press”)).
221 Id. at 112.
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purchase the machine; and Polytek terminated the Agreement before Continental exercised that
option.222
But the contract unambiguously provides that Continental was obligated the purchase the
machine by January 1, 2004. Section 2.2, the “Covenant to acquire the Machine” states:
On or before the Machine Commitment Date, [Continental] agrees
to enter into a firm, binding contract(s) to purchase the Machine …
If [Continental] shall for any reason not enter into firm binding
contract(s) to purchase the Machine on or prior to the Machine
Commitment Date, the License granted in Section 2.1 above shall
automatically terminate without any need for further action or
notice by any person or entity and all rights of [Continental]
hereunder shall cease and terminate.223
The Covenant to acquire the Machine contains mandatory language: it says that
Continental “agrees to enter”—not that Continental “may.” In addition, Article X of the OpAd
Sprayers License Agreement states that Continental shall be in default if it commits “[a] material
breach by the Licensee in the performance of any covenant . . . contained in this Agreement.”224
Section 2.2 is titled “Covenant to acquire the Machine.” Thus, if Continental failed to purchase
the machine, it would constitute a default under the Agreement. For these reasons, the only
reasonable reading of the Agreement is that it created an obligation, and not merely an option.
It is a fundamental principle that “damages for breach of contract should put the plaintiff
in the same economic position he would have been in had the defendant fulfilled the contract.”225
222 If Continental did in fact breach the OpAd Sprayers License Agreement, then Polytek’s termination of the
Agreement by letter on February 20, 2003 is irrelevant and does not preclude Polytek from recovering
damages. See NAS Electronics, Inc. v. Transtech Electronics PTE Ltd., 262 F.Supp.2d 134, 145 (S.D.N.Y.
2003) (Koeltl, J.) (“Under New York law, when one party has committed a material breach of contract, the
non-breaching party is discharged from performing any further obligations under the contract, and the non-
breaching party may elect to terminate the contract and sue for damages.”).
223 OpAd Sprayers License Agreement, § 2.2(a). “Machine Commitment Date” is defined as January 1, 2004.
See id. at § 1.11.
224 OpAd Sprayers License Agreement, § 10.1.
225 Lucente v. International Business Machines, 310 F.3d 243, 262 (2d Cir. 2002).
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Therefore, to calculate the damages Polytek to which is entitled under the OpAd Sprayers
License Agreement or the Interim Supply Agreement, the Court must consider what position
Polytek would have been in had Continental fulfilled all its obligations under the Agreement—in
other words, if Continental had purchased the machine by January 1, 2004. It is true that Polytek
was not entitled to receive royalties until after Continental purchased the machine and began
producing OpAd products on its own. But because Continental had an obligation to purchase the
machine by January 1, 2004, the Court can assume, for the purpose of determining damages, that
this obligation was or would have been fulfilled.
Second, Continental asserts that Polytek cannot recover lost royalty damages for the USA
Detergents deal because Polytek failed to prove with certainty that these sales would have
occurred. Of course, Continental was not unconditionally obligated to enter into a contract with
USA Detergents; Continental was only obligated to enter into the USA Detergents contract upon
the terms set out in the letter of intent. Therefore, to recover these lost royalties, Polytek would
need to demonstrate that but for conduct by Continental, the letter of intent would have
materialized into a binding contract.226
As discussed above,227 Continental’s Ben Holder testified that Steve Bowsher, then CEO
of Continental, told Holder in May or June of 2002 not to go forward with any further
discussions with USA Detergents. 228 As determined above, in light of this evidence a reasonable
226 See Summit Properties Intern., LLC v. Ladies Professional Golf Ass’n, No. 07-Civ.-10407, 2010 WL
2382405, at *5, 2010 U.S. Dist. LEXIS 58444, at *13 (S.D.N.Y. June 14, 2010) (deciding at summary
judgment that plaintiff Summit could not seek lost profits from prospective deal with Golfsmith at trial
because “Summit puts forth no evidence to support the allegation that but for LPGA’s interference the deal
with Golfsmith was likely to come into fruition”).
227 See pages 54-55 above.
228 See Holder Deposition Tr., at 109.
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trier of fact might find that Continental demanded a price from USA Detergents above the price
established in letter of intent or otherwise voluntarily abandoned the USA Detergents deal.
The Court also determines that with this evidence, Polytek raises a disputed issue of fact
as to whether, but for these alleged actions by Continental, the USA Detergents letter of intent
would have materialized into binding contract.
If in fact Continental did demand a higher price or abandon the deal, then Continental
may be found to have breached its obligations under this section of the License Agreement. And
if Continental’s conduct, as opposed to any decision by USA Detergents, was the reason that the
USA Detergent deal failed to materialize into a binding contract on the terms of the letter of
intent, then the lost royalties that Polytek seeks here would be non-speculative and directly
traceable to that breach.229 In other words, Polytek would have met its burden of establishing the
existence of these general damages with “reasonable certainty.”
In addition, if Polytek establishes that Continental breached these obligations, there is
likely to be sufficient evidence for Polytek to satisfy the low burden of providing a “stable
foundation for a reasonable estimate” of the amount of lost royalties from the USA Detergents
deal.230 The Letter of Intent provides both the price and quantity for the deal between USA
Detergents and Continental.231 And the OpAd Sprayers License Agreement establishes the
amount of royalties that Continental was obligated to pay to Polytek.232
For these reasons, summary judgment on this claim is denied.
229 	I don’t understand Polytek to be seeking damages for lost royalties under the OpAd Sprayers License
Agreement other than those related to the USA Detergents deal. Any such lost royalties would be far more
speculative.
230 	See Tractebel Energy, 487 F.3d at 110 (citing Washington Square Press, 34 N.Y.2d at 383).
231 	See USA Detergents Letter of Intent.
232 	See OpAd Sprayers License Agreement, § 3.1.
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e. Lost Profit Damages under the OpAd Sprayers Supply Agreement
Continental also contends that Polytek cannot recover any lost profits under the Interim
Supply Agreement because Polytek did not provide any evidence as to what its lost profits were,
and therefore, hasn’t demonstrated the existence of lost profits to a “reasonable certainty.”
“Absent any evidence to support plaintiffs’ claims or amounts, any claim of damages is
speculative and unsubstantiated.”233 Again, because the damages that Polytek is seeking here are
general lost profit damages, Polytek must prove the existence of the damages to a “reasonable
certainty,” but need not prove the amount of the lost profits to a reasonable certainty.234
Polytek will ultimately bear the burden at trial. Therefore, Polytek must provide
evidence upon which a reasonable trier of fact could determine with reasonable certainty that
Polytek would have made a profit by selling OpAd parts to Continental pursuant to the Interim
Supply Agreement if Continental had not breached that Agreement—in other words, evidence
that Polytek’s manufacturing costs for the OpAd sprayers were less than the sale price provided
in the Agreement.
At the hearing on the motion, Continental’s counsel stated:
Lost profits are comprised of basically two components: what you
would have sold them for, which is in the agreement, there is [no]
doubt about that; but what your costs were to manufacture them.
All they have put forward, first of all, again going to the damages
provisions of their disclosures, they say that some day they will
give us documents to reflect what their damages are. They never
did . . . 235
233 Brodeur v. Hayes, 18 A.D.3d 979, 981, 795 N.Y.S.2d 761, 763 (3d Dep’t 2005) (affirming Supreme
Court’s grant of summary judgment for defendant and dismissal of plaintiff’s cause of action seeking
damages for legal malpractice because plaintiff had not yet paid underlying judgment, plaintiff had right to
indemnification, foreclosure sale netted a surplus, and plaintiff provided no proof of any other damages), lv.
dismissed, lv. denied, 5 N.Y.3d 871, 808 N.Y.S.2d 134, 842 N.E.2d 19 (2005).
234 See pages 61-62 above.
235 Hr’g Tr. 8/17/06 at 69-70 (apparent transcription error corrected).
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More importantly, we asked for documents about their damages,
and they never produced a single document that demonstrated what
their costs of production were, because, obviously, if their costs of
production were 15 cents, the contract price to sell us was 14 cents,
they have no damages. 236
And in response, Polytek’s counsel stated:
In terms of damages, they asked questions to Mr. Schneider and to
Mr. Gratch as to what the costs of manufacture are; and the truth of
the matter is, at that time they didn’t know what the cost of
manufacture was. Your Honor, there are no documents that point
to the cost of manufacture. Cost manufacture takes in all of the
components, the amount of electricity that the company pays for,
what percentage of that is put to the manufacture of the OpAd.
The amount of their payroll. How much or percentage of that is
OpAd. All of those kinds of things, of which there is no specific
document that we can produce that will show the cost of
manufacture. It is testimony that would be given by a person with
knowledge, probably Mr. van Gogh, who was again identified as
the CFO of the company, and he would have given that kind of
testimony, if asked. He wasn’t asked. He wasn’t deposed. So it is
not fair to come up here and say, “We didn’t produce a document
that showed what our costs were,” without also acknowledging that
there might not be such a document. 237
Polytek’s counsel stated at the hearing that no single document establishing Polytek’s
costs exists, and that Continental failed to depose Polytek’s officer who would have the relevant
personal knowledge. Polytek’s counsel misses the point. At trial, Polytek will have the burden
of proving that it is entitled to damages. Therefore, at summary judgment, Polytek must provide
evidence to at least raise a disputed issue of fact as to whether Polytek’s costs were less than the
sale price.
At the same time, Polytek’s counsel was correct in that its claim for lost profit damages
need not be supported by documentary evidence, especially if none exists. Any evidence,
236 Hr’g Tr. 8/17/06 at 70-71.
237 Hr’g Tr. 8/17/06 at 71-72.
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including an affidavit from a person with personal knowledge, could be used to establish a
disputed issue here.238 And Polytek provided the testimony of Schneider, who testified by
affidavit that:
Had Continental performed its purchase obligations, in 2003,
Polytek’s cost of these sprayers would have been approximately 10
to 10.5 cents to manufacture each OpAd Sprayer. As I previously
noted, Continental was obligated to purchase 3,000,000 OpAd
Sprayers a month, at a cost of 14¢ each, until their own OpAd
Equipment was capable of producing such capacity. The Amended
OnePak License Agreement required Continental to purchase the
OpAd Equipment by January, 2004. It takes approximately two
years from the date of purchase for the OpAd Equipment to be
operational and able to mass produce the sprayers. Accordingly,
had Continental fulfilled its obligations under the OpAd
Agreements, it would have purchased 3,000,000 OpAd Sprayers
per month, or 36,000,000 annually, for a period of approximately
three years.239
The critical first sentence of this quoted language is highly conclusory, and without
anything more to back it up, might well not be credible at trial. But though the matter is close, a
reasonable trier of fact might find, based upon it, that Polytek’s per unit manufacturing costs
were less than the per unit price Continental was obligated to pay to Polytek under the Interim
Supply Agreement. Therefore, Polytek has (though just barely) raised a disputed issue as to
whether it would have made a profit from selling OpAd sprayers to Continental if Continental
had not breached the agreement. And because Continental was obligated to purchase OpAd
parts pursuant to the contract, these damages, if proven at trial, would be would be non-
speculative and directly traceable to Continental’s failure to purchase the OpAd parts. In other
238 See Federated Retail Holdings, Inc. v. Sanidown, Inc., No. 06-Civ.-6199, 2009 WL 2394528, at *2 n.6, *3,
2009 U.S. Dist. LEXIS 68383, at *8-9 n.6, *10 (S.D.N.Y. Aug. 5, 2009) (finding that affidavit from
defendant company’s president proffering that defendant maintained a particular profit margin with respect
to the sale and manufacture of feather and down products was sufficient “information from which a
reasonable fact finder could make a damages determination with reasonable certainty” and denying
plaintiff’s motion for summary judgment on defendant’s counterclaim for lost profits).
239 Schneider Aff., ¶ 19.
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words, Polytek would have met its burden of establishing the existence of these general damages
with “reasonable certainty.” Therefore, summary judgment on this claim is denied.
However, to the extent that Polytek seeks to introduce any documentary evidence in
further support of its claims for lost profit damages under the OpAd Agreements, such evidence
will likely be inadmissible. Through 2007, Fed. R. Civ. P. 26(a)(1), made applicable by
Bankruptcy Rule 7026, stated:
[A] party must, without awaiting a discovery request, provide to
the other parties:
(C) a computation of any category of damages claimed by
the disclosing party, making available for inspection and copying
as under Rule 34 the documents or other evidentiary material, not
privileged or protected from disclosure, on which such
computation is based, including materials bearing on the nature
and extent of injuries suffered;240
And Fed. R. Civ. P. 37(c)(1), made applicable here by Bankruptcy Rule 7037, provides:
If a party fails to provide information or identify a witness as
required by Rule 26(a) or (e), the party is not allowed to use that
information or witness to supply evidence on a motion, at a
hearing, or at a trial, unless the failure was substantially justified or
is harmless.241
In its Rule 26(a)(1) Disclosure, Polytek stated:
240 	Fed. R. Civ. P. 26 was revised, and, beginning in 2008, the requirement of initial disclosure of
computations of damages was moved to 26(a)(1)(A)(iii). Fed. R. Civ. P. 26(a)(1)(A) now states:
[A] party must, without awaiting a discovery request, provide to the other
parties:
(iii) a computation of each category of damages claimed by the
disclosing party—who must also make available for inspection and copying as
under Rule 34 the documents or other evidentiary material, unless privileged or
protected from disclosure, on which each computation is based, including
materials bearing on the nature of injuries suffered;
Fed. R. Civ. P. 26(a)(1)(A).
The Drafters’ Notes to the 2007 Amendments explain, “The language of Rule 26 has been amended as part
of the general restyling of the Civil Rules to make them more easily understood and to make style and
terminology more consistent throughout the rules. These changes are intended to be stylistic only.”
241 	Fed. R. Civ. P. 37(c)(1).
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C. Response to Rule 26(a)(1)(C)
Computations of any category of damages in Polytek’s possession,
custody or control will be made available for inspection and
copying at a time and place convenient to all parties.242
Continental’s counsel stated at the hearing, without dispute by Polytek, that no documentary
evidence supporting a computation of damages was ever provided.243 Unless Continental’s
counsel is later shown to have been incorrect, Polytek will have to overcome Rule 37(c)(1) to
present such documents as evidence at trial.244
CONCLUSION
For the reasons set forth above, summary judgment on Continental’s claim for breach of
contract arising from default on the Machinery Lease is granted, inclusive of all accelerated lease
payments and interest.
Summary judgment for Continental on its two claims arising out of the Polytek Note is
denied. Summary judgment for Continental on each of its claim and on Polytek’s counterclaim
arising out of the CSI Sprayers License Agreement is denied. Summary judgment for
Continental on each of its claim and on Polytek’s counterclaim arising out of the CSI Parts
Supply Agreement is denied. Finally, summary judgment for Continental on Polytek’s claims
arising under the OpAd Sprayers Supply Agreement and OpAd Sprayers License Agreement is
denied.
The principles of law set forth above (upon which the Court ruled on those matter upon
which it did not grant summary judgment, and otherwise) shall constitute the law of the case.
The Court declines to enter a separate judgment, under Fed. R. Civ. P. 54(b) or otherwise, on the
242 Wagner Aff. II, Ex. DD, at 6.
243 See Hr’g Tr. 8/17/06 at 69-70, quoted above, pages 67-68.
244 See Fed. R. Civ. P. 37(c)(1). See also Design Strategy, Inc. v. Davis, 469 F.3d 284 (2d Cir. 2006).
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relatively small portion of this controversy upon which summary judgment was granted. To the
extent that the Court found matters established or not established, such determinations shall be
binding going forward pursuant to Fed. R. Civ. P. 56(g).
SO ORDERED
Dated: New York, New York 	s/ Robert E. Gerber__________
April 13, 2011 	Honorable Robert E. Gerber
United States Bankruptcy Judge
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Continental AFA Dispensing Company, and Continenta v. AFA Polytek, B.V.,

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