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Korean giant Ssangyong — which produces everything from footwear to jet fuel — had won many battles in its war against a small Iowa importer. But after five years of litigating in four states, the importer won $23 million in federal court in Des Moines last month. His ace in the hole? New Jersey case law, which is tougher than most states’ when it comes to breach of contract. When the trial began in January, subsidiary Ssangyong (U.S.A.) Inc. seemed to have the upper hand in its attempt to recoup $27 million in withheld and uncollected receivables, plus interest, from Iowa importer David Suh. It had got the venue it sought, Iowa federal court, after losing a key ruling in New Jersey, and a bench trial instead of a jury sympathetic to the outgunned local businessman. Its lawyers were prepared to present a tightly contained breach of contract case against Suh and his companies. The importer had signed on as an exclusive sales agent for the Paramus, N.J.-based U.S. subsidiary. Settlement discussions, right up to trial, failed. Ssangyong, an Asian behemoth with 65 subsidiaries dealing in 100 countries before starting to sell off divisions in 1998, eagerly went to trial and won most of its points. Its lawyer, litigator Gregory Harvey, a partner with Philadelphia’s Montgomery, McCracken, Walker & Rhodes, succeeded in convincing U.S. District Judge Ronald Longstaff that Suh and his firms had defrauded Ssangyong and had converted $15.72 million in receivables due to Ssangyong. The judge, sitting in the Southern District of Iowa, even rejected Suh’s key explanation for why he kept, and then recycled, Ssangyong’s $15.72 million. Kevin Marino, representing Suh, said Harvey tried to get the judge to focus on Suh’s mid-1995 violations of the March 1993 sales agent agreement — Suh’s withholding of money due to Ssangyong and his conversion of that money to keep his import business afloat. Kevin McNulty, a lawyer for the Suh companies, characterized the Ssangyong theory of the case this way: “It’s a conversion case. You took our money. We want it back. … They ignored Suh’s counterclaims.” McNulty is a partner with Newark’s Gibbons, Del Deo, Dolan, Griffinger & Vecchione. Marino, McNulty and Gibbons, Del Deo partner David De Lorenzi, who also represented Suh’s companies, took a broader approach. In his opening statement, Marino, who heads a three-lawyer firm in Newark, produced a chart that he said “demonstrated the evolution of the relationship” between the adversaries from 1992 through 1995. “This is not a case about the snapshot that Mr. Harvey provided” in his opening, Marino said in court. The defense’s evolutionary approach won, as evidenced by the judge’s use of the time-line chart in his 48-page order issued on July 27 in Ssangyong (U.S.A.) Inc. v. Innovation Group Inc., 3-96-CV-10165. Longstaff concluded that Suh’s firms could not only keep the $15.72 million in withheld receivables, but that Ssangyong must fork over another $7.48 million. The judge found that while Suh did most of what he was accused of, he was justified because Ssangyong, which under the 1993 agreement was financing Suh’s imports, squeezed him by shutting off the credit spigot. The judge ruled that the slowdown and eventual cutoff of financing by Ssangyong during 1995 had cost Suh’s main company, Innovation Group Ltd, (IGL), $23.2 million. Key to his finding were two New Jersey Supreme Court opinions. New Jersey law was applied because that is where the contract was drafted by Ssongyong counsel William Fiore, a partner with Newark’s Meyner and Landis. One of the cases is Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, (1997). The ruling spells out more forcefully than most state court case law when conduct violates the implied covenant of good faith and fair dealing and thus rises to a breach of contract. The other case is Tessler and Son, Inc. v. Sonitrol Sec. Sys., 203 N.J. Super. 477 (1985), which lays out the circumstances under which a clause barring either side to a contract from going after the other for lost profits can be set aside. Longstaff, finding that Ssangyong breached its contract notwithstanding wrongdoing by Suh, used Tessler to vitiate such a clause in the 1993 agreement. Ssangyong (U.S.A.) has posted a $100,000 bond to show good faith, and Harvey has promised the court that by Sept. 8 Ssangyong will post a bond for the entire $7.48 million pending appeal. He says his client will go to the 8th Circuit if he is not successful before Longstaff. FROM LENDING TO PARTNERING In 1992, the U.S. subsidiary of the Seoul-based Ssangyong Business Group, which boasts of being South Korea’s sixth-largest conglomerate, was a trading company dealing primarily in footwear, clothing, jet fuel oil, chemicals and steel. Eager to expand into cookware and stainless steel cooking products, Ssangyong found Suh in Davenport, Iowa, where the South Korean native was operating a successful importing business in top-shelf cookware. Ssangyong became the prime lender for two Suh companies, Midko International and Nanam Inc. As Suh, a naturalized U.S. citizen, would get orders from American retailers and wholesalers, he would find Korean manufacturers to fill and ship the products. It was a straight financing deal. Ssangyong would open letters of credit for each order, financing the purchase and shipment, and be repaid, with interest, after Midko or Nanam collected from the customer. Ssangyong could control the financing flow by limiting its letters of credit. But a year later, Ssangyong (U.S.A.) President Y.W. Chung realized that Suh’s operation was a gold mine. So he abandoned the straight financing agreement and worked out a new deal. Ssangyong would become the principal and make Suh its exclusive sales agent. Ssangyong was to take a third of the profit above the loan on each order; Suh would reap two-thirds of the profit after paying back Ssangyong its advances. Suh formed Innovation Group Ltd. (IGL), and on March 8, 1993, IGL and Ssangyong signed the new agreement, which had no credit limits and required Ssangyong to fund every transaction. Thus, Ssangyong assumed more risk along with potentially more reward. “Ssangyong realized that Suh had been leveraging them, and decided to leverage him instead,” says Marino. The deal locked in both sides. IGL couldn’t go anywhere else for financing, and Ssangyong would have a lien on all IGL assets — even intangibles such as good will — if it didn’t repay the receivables. Ssangyong couldn’t go into the cookware business with anyone else. But a few months later, Ssangyong sent over a new vice president for the U.S. subsidiary, S.W. Shim, who was to assume control of the businesses out of New Jersey. Shim was more conservative than Ssangyong president Chung and believed the deal to be too risky. He specifically did not like his company’s lack of control over the credit flow. So, the defense argued, and the judge agreed, Shim began to slow down the opening of the letters of credit in December 1994. Documents presented at trial showed that the openings of the credit letters, which had taken five to seven days, were taking up to 27 days on average by June 1995. The delays, says Gibbons, Del Deo’s De Lorenzi, triggered problems for Suh’s operation. Manufacturers refused to ship their products before payment, and U.S. customers began screaming about not being able to plan with such uncertainty. “The whole thing blew up in Texas,” says De Lorenzi. Three companies controlled by retailer Sam Brown, fearing in April 1995 that they would be unable to get the products they ordered onto their shelves in time for the Christmas season, sued IGL in Fort Bend County, just south of Houston. Brown claimed that his firms were losing millions due to the credit delays. De Lorenzi says IGL asked Ssangyong, which was not named, to defend and indemnify IGL, but it refused. By this time, Suh conceded on the stand, IGL was in a “survivor’s mode.” De Lorenzi produced letters from Suh to Shim at trial showing IGL’s concern with the credit delays, but never got an explanation for the slowdown. Suh’s legal team argued that Shim’s sole purpose was to pressure Suh into ripping up the 1993 agreement and returning to the original straight financing arrangement, with credit controls. By February 1995, Suh did sign a draft agreement, which was formalized into a new contract four months later, on June 27, 1995. But to keep his business afloat, Suh began in early June to withhold the receivables collected from customers and to recycle those receivables to finance new orders, thus leading to Ssangyong’s charge of conversion. Suh went further. Court records show he also began to move IGL’s assets into four other companies controlled in total or in part by him or his family and partners. Close to $9 million was transferred to these companies, sometimes as loans, including inventory, customer lists and equipment, from mid-1995 through 1997. Ssangyong’s lawyer, Harvey, accused Suh of fraudulent conveyance. Harvey argued that the slowdown in the credit letters was justified by IGL’s withholding of Ssangyong’s receivables. Marino, McNulty and De Lorenzi countered that Ssangyong breached first and was killing Suh’s business because he couldn’t go anywhere else for financing, and even if he did, Ssangyong had a lien on IGL’s assets, thus justifying the asset transfers. Ultimately, Longstaff bought most of Harvey’s arguments. He found that IGL did in fact convert Ssangyong’s receivables and he concluded that IGL’s asset transfers did constitute a fraudulent conveyance. The judge specifically rejected Suh’s contention that the manager of the Ssangyong division handling Suh’s business, J.K. Choi, signaled to Suh that it was all right to recycle Ssangyong’s receivables while the Korean company worked out its internal feud over the Suh deal. Longstaff said not only was there no proof of that, but that Choi lacked the authority to do it, and that Suh knew Choi was just a middle manager without such authority. Suh conceded at trial that payments totaling $484,285 were made by IGL to Choi from 1993 through 1997, including two $100,000 payments in July and August 1995 at the height of the dispute. Ssangyong called the payments bribes, while Marino said they were unrelated to the dispute, saying last week that “this is business as usual in the Korean culture.” Marino notes that Ssangyong never disciplined Choi. Ssangyong’s allegations of bribery against Suh are what prompted the Gibbons, Del Deo team, which included associate Michael Langan, to bring in Marino as separate counsel to Suh in 1998. Ssangyong also has filed a civil RICO action against Suh, now before Longstaff. However, the judge stayed the case pending the contract trial. RACE TO THE COURTHOUSE After Sam Brown’s companies sued IGL in Texas state court, “the race to the courthouse was on,” says De Lorenzi. IGL filed a third-party complaint in Texas against Ssangyong. Then, in February 1996, Ssangyong, using William Wallach, a partner with Newark’s McCarter & English, sued Suh and IGL in federal court in Newark. The Gibbons, Del Deo lawyers moved before U.S. District Judge Nicholas Politan to delay the case pending the Texas action. Politan agreed, but Ssangyong appealed to the 3rd Circuit. Meanwhile, Ssangyong, not wanting to litigate in a tiny Texas town, went to federal court in Des Moines. Ssangyong couldn’t sue IGL with the New Jersey case pending, but it could, and did, sue Suh’s four affiliated companies that were now holding most of IGL’s assets. Later, the 3rd Circuit overturned Politan, and eventually both sides agreed to consolidate the federal cases in Iowa. The Texas case, and a similar action in state court in California filed by customers, was stayed. The Texas suit by the Brown companies has been settled, but the California suit has not, says De Lorenzi. Longstaff, after seven trial days in January and post-trial briefs filed in March, adopted the defense’s theory. The judge focused not on the snapshot of the blowup in mid-1995, but on the entire relationship as it evolved from the 1992 contract through the entrepreneurial deal the next year to Ssangyong’s slowdown on credit letters, leading to the 1995 contract. Longstaff concluded that Shim had no bona fide reason to slow down the letters of credit, and was in fact coercing Suh to rip up the 1993 agreement. He found that Ssangyong “did not act in a commercially reasonably manner” and therefore breached its covenant of good faith and fair dealing. Longstaff repeatedly cited Sons of Thunder, which he noted was very close to the present case. Borden had been producing clam product under a 1985 contract from its main supplier, Sons of Thunder. Borden agreed to taking a minimum amount of stock for a year, leading Sons of Thunder to buy a second clamming boat with financing obtained in part by Borden’s assurance to the lender that Borden intended to continue its contract for five years under an automatic renewal provision. But after a change of management in 1987, Borden told Sons of Thunder it would terminate the deal in 90 days, leaving the supplier with a boat docked at shore. Sons of Thunder sued and won, proving bad faith and unfair dealing by Borden. RIDING THE THUNDER Longstaff took note of IGL’s helplessness in an interlocking relationship, noting that Ssangyong could have gotten out of the contract legitimately by giving 180 days’ notice, but chose instead to squeeze its smaller, captive junior partner. Tessler allowed the judge to let Suh and IGL out from under the provision in the contract barring either side from recovering lost profits because he was convinced that Ssangyong’s actions were intentional. He denied punitive damages, though, finding that Ssangyong did not act maliciously but out of a desire to protect itself. Suh’s legal team says that while all states have an implied duty to show good faith and fair dealing in contracts, Sons of Thunder makes New Jersey law among the strongest nationwide. Says Gibbons, Del Deo’s McNulty, “ Sons of Thunder makes it clear and strong that when each party’s cooperation is key and they are interlocked, you breach and you sabotage the relationship.” Harvey, of course, disagrees. In his motion to reconsider, he argues that even if Ssangyong delayed the letters of credit for no justifiable reason, IGL never proved that its losses were due to those delays. He further argues in his accompanying motion brief that Tessler should not apply because the judge never explicitly says that Shim intentionally committed “willful and wanton conduct,” the language of Tessler. Says Marino, “We proved at trial that Shim just did not understand this business. He had no idea how lucrative it was,” noting that Suh’s operation was grossing $3 million a month before the slowdown began curtailing business. That, in fact, is the one point on which both sides agree. Suh, whose imports are sold on the Home Shopping Network, has a bonanza business that continues to thrive.

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