Betta Products, Inc. v. Distribution Systems And Services

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Entered on Docket

April 11, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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9 UNITED STATES BANKRUPTCY COURT
10 NORTHERN DISTRICT OF CALIFORNIA
11 | Inte
12 | BETTA PRODUCTS, INC., No. 03-10925
13 Debtor(s).
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BETTA PRODUCTS, INC.,
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16 Plantifi(s),
17 V. A.P. No. 05-1046
18 | DISTRIBUTION SY STEMS AND SERVICES,
INC., aka DSS,
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Defendant(s).
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Memorandum of Decision After’Tral
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23 Pnor to its Chapter 11 filing and for a period of time thereafter, plamtiff Betta Products, Inc.(“Betta”),
24. || wes in the business of selling paper and party jproducts to retailers. It entered into a contract with defendant
25 || Distibution Systems and Services, Inc. (“DSS”), whereby all of Betta’s inventory would be stored in DSS’s
26 || warehouse. As Betta ordered products from manufacturers, it would be sent to DSS. As Betta received
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orders from its customers, it would forward the orders on to DSS who would retrieve, pack and ship the
ordered items to Betta’s customers. Without rehashing the tortured procedural history of this adversary
proceeding, the remaining issues are whether DSS negligently performed its duties under the contract or
converted any of Betta’s inventory.
It is important to note that Betta’s inventory consisted of hundreds of different items and millions of
individual pieces. New shipments arrived and orders were filled on a daily basis. Keeping track of so much
inventory was a monumental task which DSS performed well before bankruptcy. There were inevitable
mistakes and missing items, but nothing of serious consequence. The contract between Betta and DSS
provided for a certain percentage of loss. DSS maintained a perpetual computer inventory, augmented by
periodic physical inventories. There were inevitable discrepancies between the perpetual and physical
inventories, with counts adjusted to match the physical inventory. Betta considered any discrepancy of less
than $1,000.00 per item to be inconsequential. This could result in acceptable write-downs of inventory well
into six figures, as the total value of the inventory was in the range of $10 million to $12 million.
Betta filed its Chapter 11 petition on April 15, 2003. Its inventory, pledged as security to Wells
Fargo Bank, was cash collateral as defined in § 363(a) of the Bankruptcy Code. While the use of cash
collateral is often a routine matter in Chapter 11 cases, it was not in Betta’s case; both Wells Fargo and
another principal creditor opposed Betta’s request to use its inventory. After considerable wrangling, Betta
obtained leave to use the inventory on terms it felt were unreasonable. Betta then decided to in essence call
Wells Fargo’s bluff by abandoning its inventory to it. This abandonment created the situation which
culminated in this adversary proceeding.
By the time Betta abandoned its inventory to Well Fargo on July 25, 2003, it had purchased a great
deal of postpetition inventory which was not subject to the Wells Fargo lien. DSS suddenly found itself in the
middle of wrangling between Wells Fargo and Betta as to exactly what part of the inventory on its premises
belonged to Wells Fargo. To complicate things, Betta continued to instruct DSS to fill orders from inventory
supposedly abandoned to Wells Fargo and Betta made several deals with Wells Fargo to purchase some
items of “its” inventory. DSS received confusing and contradictory instructions as to what it was supposed to
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do. In the words of Betta’s CEO, “what a mess.”
Eventually, DSS was given a list of inventory items to be send to Wells Fargo’s agent. Wells Fargo
sent a representative to oversee the packing and shipping of these items. Betta also sent a representative,
who instructed DSS not to ship a considerable quantity of items on the grounds that they had been purchased
by Betta after its bankruptcy filing. Not surprisingly given what had gone on after the filing, the inventory
actually received by Wells Fargo was “short.” Eventually, after more wrangling, Betta settled with Wells
Fargo and obtained Wells Fargo’s supposed rights against DSS.
Around May of 2004, Betta terminated its contract with DSS and instructed DSS to send designated
items of its inventory to other warehouses. This left a large amount of Betta property in DSS’s possession.
Officers of DSS repeatedly contacted Betta’s CEO to take these items, and were told by him that Betta “had
everything it wanted” and did not need or want the rest. In order to satisfy its outstanding claim under the
contract, DSS sold the remaining inventory of Betta to a liquidator for $50,000.00.
Shortly thereafter, Betta ceased business operations. Its confirmed Chapter 11 plan provided for the
payment to creditors by the prosecution of adversary proceedings, including this one. This adversary
proceeding is actually prosecuted by a litigation trust established by the plan. It seeks damages for alleged
shortages of inventory to Wells Fargo and Betta in the approximate of $400,000.00, plus consequential
damages.
After listening to seemingly endless and often incomprehensible testimony, the court is in no way
convinced that DSS has done anything actionable. As to the claim assigned by Wells Fargo, it is abundantly
clear that Betta itself was responsible for Wells’ Fargo’s shortages by continuing to sell Wells Fargo’s
inventory even after it had supposedly been abandoned and by arbitrarily removing items from Wells Fargo’s
shipment on the grounds that these items had been purchased postpetition.
Betta’s conduct of this case was less than exemplary. Its CEO and other knowledgeable persons had
long since departed the scene, and Betta attempted to prove its case using its former bookkeeper/controller,
who testified for two full days using an incomprehensible array of lists created from computer-generated
perpetual inventories even though both sides agreed that given the huge volume of goods and transactions only
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a physical inventory, which was never done after filing, was the only reliable way to determine the actual
inventory. She augmented her lists with calculations she could not explain and appeared not to
understand herself. She concluded all of her testimony without specifically identifying a single napkin that was
missing. Out of sheer frustration, the court picked at random one item on her list of missing inventory, some
20,000 “jeweled tiaras,” with a cost of 37 cents each, which DSS supposedly had on hand and was
supposed to ship to Wells Fargo but did not. When DSS produced the documents accounting for these
tiaras, Betta mentioned for the first time that it knew its list was in error and had a corrected list. No mention
was made of this when Betta moved for admission of the list (Exhibit 4). This and other incidents completely
destroyed any credibility of Betta’s witness, even if the court had understood her convoluted testimony.
After considering all of the evidence, the court is convinced that DSS performed its obligations under
its contract with Betta properly and without negligence. The considerable confusion surrounding the state of
its inventory was caused by Betta’s decision to abandon its inventory to Wells Fargo and its failure to have a
physical inventory conducted at any time after it filed its Chapter 11 petition. Betta itself caused the shortages
to Well Fargo and displays unmitigated gall by blaming them on DSS.
There is no evidence that DSS converted any of Betta’s inventory. Betta knew that it had left a large
amount of inventory in DSS’s possession after it had terminated the contract, and Betta simply did not want it.
DSS acted in a commercially reasonable manner in disposing of these items. Betta displays even more gall by
suing DSS for failing to return these items to it. The court finds Betta’s argument that it did not know about
the left-over inventory to be completely unsupported by the evidence.
For the foregoing reasons, Betta will take nothing by its tort claims. DSS shall recover its costs of
suit.
This memorandum constitutes the court’s findings and conclusions pursuant to FRCP 52(a) and
FRBP 7052. Counsel for DSS shall submit an appropriate form of judgment forthwith, which shall include the
award of the arbitrators on Betta’s contract claims.
Dated: April 11, 2008
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Alan Jaroslovsky U.S. Bankruptcy Judge
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Case: 05-01046
Doc# 267 Filed: 04/11/08
Entered: 04/11/08 14:19:59
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