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Zaki Kulaibee Establishment v. McFliker

United States Court of Appeals, Eleventh Circuit

November 18, 2014

ZAKI KULAIBEE ESTABLISHMENT, a company formed under the laws of the Kingdom of Saudi Arabia, Plaintiff - Appellant,
v.
HENRY H. MCFLIKER, a natural person, a.k.a. Harris H. McFliker, a.k.a. Harold McFliker, AYODH PERSAUD, a natural person, a.k.a. Joe Persaud, SHAMMIE PERSAUD, a.k.a. Bebe Nafessa Persaud, a.k.a. Be Be N. Persaud, a.k.a. Bi Bi N. Persaud, AIRSPARES NETWORK, INC., a Florida corporation, DAYTONA AEROSPACE, INC., a Florida corporation, et al., Defendants - Appellees

Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 0:08-cv-60296-MGC.

For ZAKI KULAIBEE ESTABLISHMENT, a company formed under the laws of the Kingdom of Saudi Arabia, Plaintiff - Appellant: Steven L. Brannock, Tracy S. Carlin, Sarah C. Pellenbarg, Brannock & Humphries, PA, Tampa, FL; William F. Hamilton, Quarles & Brady, LLP, Tampa, FL; Susan Marie Mohorcic, Phillips Richard & Rind, PA, Miami, FL.

For HENRY H. MCFLIKER, a natural person, a.k.a.: Harris H. McFliker, a.k.a.: Harold McFliker, AYODH PERSAUD, a natural person, a.k.a.: Joe Persaud, SHAMMIE PERSAUD, a natural person, a.k.a.: Bebe Nafessa Persaud, a.k.a.: Be Be N. Persaud, a.k.a.: Bi Bi N. Persaud, AIRSPARES NETWORK, INC., a Florida corporation, DAYTONA AEROSPACE, INC., a Florida corporation, Defendants - Appellees: Riley W. Cirulnick, Steven Neil Lippman, Rice Pugatch Robinson & Schiller, PA, Fort Lauderdale, FL.

Before TJOFLAT, Circuit Judge, MOORE,[*] and SCHLESINGER,[**] District Judges.

OPINION

Page 1302

TJOFLAT, Circuit Judge

Zaki Kulaibee Establishment (" Zaki" ), a Saudi Arabian company, contracted with Airspares Network, Inc. (" ANI" ), a Florida-based

Page 1303

aircraft parts dealer, to sell a large shipment of aircraft parts on consignment. Zaki claims ANI breached the contract by selling Zaki's parts without properly accounting for the sales proceeds, charging Zaki for inflated storage expenses, and failing to return the parts after Zaki terminated the consignment agreement. Zaki sued for breach of contract and conversion, among other things. Noting that ANI possessed both the relevant records and all of Zaki's remaining parts, Zaki also requested an accounting. The District Court refused to order ANI to account, holding that Zaki had an adequate remedy at law. We conclude that this was error and remand for an accounting.

I.

A.

In 1999, Zaki purchased a large collection of new and used military aircraft parts at an auction held by the Royal Saudi Air Force.[1] Zaki then began reselling the parts online. ANI purchased several of the parts in the course of its business and eventually contacted Zaki about the possibility of selling parts on consignment for Zaki in the United States. In June 2003, Zaki al-Kulaibee, Zaki's owner and president, and Abdurahman Saud, Zaki's business director, traveled to Florida to meet with Henry McFliker, ANI's founder and past president, and Ayodh Persaud, ANI's current president, to discuss the potential relationship. ANI's lawyers drew up a draft Consignment Services Agreement (the " CSA" ) designating ANI as Zaki's " agent and consignee," and after some negotiation, Mr. Zaki and Mr. Persaud executed the agreement. In the CSA, Zaki agreed to ship its parts to ANI in Florida, and ANI promised to store and market the parts. In return, ANI would retain as its commission 100 percent of the first $1 million in sales, 75 percent of the next $1 million, and 50 percent of all sales above $2 million. In the CSA, the parties estimated the aggregate retail value of the parts to be $500 million.

Under the CSA (which the parties agreed would be construed according to Florida law) ANI would hold the parts for the sole purpose of selling them on Zaki's behalf, Doc. 99-1, at 8, § 9,[2] but Zaki retained title to the parts until sold, id. at 7, § 7. ANI agreed to segregate Zaki's parts from its other products, id. at 3, § 4(a); to insure the parts and include Zaki as an additional named insured on the policy, id.; and to " diligently and in good faith use its best efforts" to sell the parts at fair market value, id. at 4, § 4(c). The CSA also tasked ANI with several reporting obligations: to provide a sales report " each month during the Term" for all sales of its parts from the preceding month, id. at 4-5, § 4(e); to maintain records of all sales of Zaki's parts, id., § 4(g); to open its books and records to Zaki's inspection on request " to ensure correct computation of the payments due [Zaki]," id.; to provide regular sales and inventory reports to Zaki on reasonable request, id.; and to allow Zaki " to conduct an audit of any such reports and records relating to [Zaki's parts]" on reasonable notice, id.

The initial consignment term was to last five years, but would continue automatically for one-year intervals absent express termination by either party. Id. at 8, § 8(a). Section 4(f) of the CSA provided

Page 1304

that if, after the initial term, Zaki wanted all or substantially all of the parts returned, it must first terminate the agreement.[3] Section 8(c) further provided, in some tension with § 4(f), that if either party terminated the relationship, ANI had the option to continue selling any consigned parts still in its possession.[4]

ANI wired an initial deposit to cover shipping costs, and Zaki sent the first lot of parts, contained in 115 forty-foot shipping containers, during the summer of 2003. Because of the sheer number of parts involved--approximately 150,000 line items of inventory, comprising around 5,000,000 individual parts--ANI felt that the time and expense involved in conducting an intake inventory, a process that would entail opening each box and physically verifying the quantity and condition of each part, would be prohibitive. Accordingly, ANI simply adjusted its inventory to reflect the number of parts included on the inventory list Zaki had provided.

B.

Zaki received the first sales report from ANI in December 2003. Noticing that the report appeared to be incomplete, Zaki sent representatives to Florida to inquire further. Upon investigation, Zaki uncovered what it believed to be a pass-through scheme between ANI and five other companies,[5] all selling aircraft parts, most operated out of the same location by the same people.[6] According to Zaki, ANI had divvied up Zaki's inventory amongst these affiliated entities and allowed them to list and sell Zaki's parts online in their own names. When an affiliated company sold one of Zaki's parts, it would purchase the part from ANI, then turn around and resell it to the actual customer at a higher price. ANI would report sales made through these affiliated companies to Zaki at the lower price paid by the affiliated company to ANI, rather than at the price paid by the end customer to the affiliated company. Zaki also came to believe that

Page 1305

ANI was selling some of its parts without reporting the sales at all.

Zaki raised these concerns with ANI, and ANI responded by complaining that many of the parts it received were non-conforming and that the money it had advanced for shipping had been used to pay for the shipment of unsellable parts. Zaki then diverted its second shipment of aircraft parts (about eight containers worth) to another consigner in California, prompting ANI to file a lawsuit against the alternate consigner in June 2004. ANI also initiated a simultaneous arbitration proceeding against Zaki in Florida. By November 2004, Zaki and ANI had worked out a Settlement and Release Agreement (the " SRA" ), dismissing the litigation and the arbitration and releasing each other from all prior claims. Doc. 99-1, at 26-27. Zaki also agreed to allow ANI to take possession of the second lot of parts that had been diverted to California and to ship a third lot of parts from Saudi Arabia.

The SRA reaffirmed the terms of the CSA with a few changes, which included the following. First, to settle the issue of non-conforming parts, the parties agreed that they would work together to identify any such parts and return them to Zaki. Id. at 22, § 5(a). Second, they agreed to waive all claims related to parts that were " listed on the inventory but not found in the warehouse." Id., § 5(b). Third, Zaki agreed to pay ANI $1.275 million as a settlement and to allow ANI to keep an additional 25 percent of all sales (raising its total commission to 75 percent) until the settlement amount was paid. Id. at 21, § 4(b). Fourth, to address Zaki's concerns that ANI was underreporting the actual prices for which its parts were being sold, ANI agreed to calculate Zaki's share based on the price paid by the final customer, not the intermediate price paid by one of ANI's " Affiliated Entities" (i.e., the other five companies also selling Zaki's parts). Id. at 22, § 4(b)(4). Fifth, Zaki agreed to pay half of ANI's " Warehouse Expenses," which were defined as those non-labor costs associated with storing Zaki's parts incurred between December 1, 2004, and November 30, 2006. Id. at 23-24, § 6. This would be done by allowing ANI to set off half of these expenses from Zaki's share of the sales proceeds (which had been reduced to 25 percent until the settlement amount was paid). Id. at 22, § 4(b)(3).

Finally, the SRA reiterated ANI's reporting obligations, including ANI's duty to provide, on written request, copies of all purchase orders verifying the sale price for all sales by it or any of its affiliated companies, id., § 4(d), and, on reasonable notice, any invoices, policies, or related documents underlying any storage expenses deducted from Zaki's share of the sales, id. at 24, § 6(c). ANI also promised to account separately for each of the three lots Zaki had consigned to it. Id. at 25, § 8(e).

Unfortunately, this fragile dé tente proved fleeting. Zaki claims that ANI did not completely cease its practice of calculating Zaki's share of the sale amount based on the transfer price paid by the affiliated entity (rather than the price paid by the final customer.) Also, Zaki claims that ANI continued to conceal some sales altogether. Finally, Zaki claims that ANI was manipulating its storage costs to improperly increase the amount it was entitled to set off, and that it continued to take offsets for these expenses beyond the two-year period specified in the SRA.

The combined effect of these actions, Zaki claims, was that Zaki received practically no money from ANI in the years following the execution of the settlement agreement.[7] ANI does not contest Zaki's

Page 1306

assertion that little money actually changed hands but contends that Zaki's sales revenue was insufficient to cover its share of the storage costs, and that ANI was entitled to add these costs to the $1.275 million settlement figure. In essence, ANI's perspective is that the total amount Zaki owed ANI was growing, rather than shrinking.

Despite repeated requests by Zaki, ANI provided virtually no documentation to support this claim.[8] Nor did ANI ever provide any account of how much of the $1.275 million settlement amount had been paid, or how Zaki's share of the proceeds were being applied to the debt.[9] In fact, other than the summary sales reports, which ANI provided intermittently and only until the end of the initial consignment ...


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