## Facts

- Two related foreign garment manufacturers supplied women’s apparel in transactions connected to a New York sourcing company that acted as a middleman for a major retailer.
- The parties did not operate under a master agreement; transactions were documented through individual purchase orders and related invoices.
- The purchase orders allocated responsibility to the manufacturers for “claims” tied to delays, quality, and workmanship, and the parties used “chargebacks” to adjust payments.
- Historically, significant chargebacks were negotiated and agreed to before being imposed.
- The sourcing company imposed disputed chargebacks for, among other things, defective goods, packaging, “new-store discounts,” and freight; the new-store discount chargebacks were unusually large and asserted months after the fact.
- The manufacturers’ invoices stated freight was the sourcing company’s responsibility, conflicting with later freight chargebacks.
- After late 2006, the manufacturers refused further chargebacks and sought payment of outstanding invoice balances.
- The manufacturers sued for breach of contract, account stated, and fraudulent conveyance/alter-ego relief; the sourcing company and an affiliated entity counterclaimed for breach of contract based largely on the disputed chargebacks.

## Issues

1. Whether the sourcing company breached the purchase-order contracts by failing to pay for garments delivered and accepted, after accounting for any valid chargebacks.
2. Whether the asserted chargebacks were authorized by the purchase orders, course of dealing/course of performance, or trade usage, including whether delayed and unusually large chargebacks were enforceable.
3. Whether the affiliated entity could be held liable with the sourcing company on an alter-ego/fraudulent-transfer theory, warranting joint and several liability.

## Decision

- Following a bench trial, the court found for the manufacturers on breach of contract.
- The court rejected chargebacks that were late, unusually large, or insufficiently supported by the parties’ documents and established course of dealing, including contested freight and delayed new-store discount chargebacks.
- The court awarded $1,454,996.33 in damages, inclusive of interest.
- The court imposed joint and several liability on the sourcing company and the affiliated entity and directed entry of judgment closing the case.

## Legal Principles

- In contract disputes formed through discrete purchase orders rather than a master agreement, liability and offsets are determined by the purchase-order terms as informed by course of dealing/course of performance and supported trade usage.
- A party asserting chargebacks as payment offsets bears the burden to show they are authorized by the governing documents and consistent with the parties’ established practice; delayed or atypical chargebacks lacking support may be disallowed.
- Where an entity is treated as an alter ego in connection with the challenged obligations and transfers, the court may impose joint and several liability to prevent avoidance of contractual debts.

## Conclusion

The court held that the sourcing company failed to pay for apparel delivered under purchase orders and could not justify major offsets through unsupported or delayed chargebacks, awarding $1,454,996.33 (including interest) and imposing joint and several liability on the sourcing company and its affiliated entity.


Atateks Foreign Trade Ltd. v. Private Label Sourcing, LLC, No. 07 Civ. 6665 (HB) (S.D.N.Y. June 23, 2009)