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Hearing Date and Time: November 18, 2019 at 11:00 a.m. EST Objection Deadline: November 8, 2019
SAUL EWING ARNSTEIN & LEHR LLP Stephen B. Ravin John D. Demmy 1270 Avenue of the Americas, Suite 2005 New York, NY 10020 Telephone: (212) 980-7200 Email: [email protected]
[email protected] Attorneys for Fantasy Diamond Corporation UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x : Chapter 11 In re : : Case No. 18–10509 (SHL) Firestar Diamond, Inc., et al., : : Jointly Administered Debtors. : x Related to Docket Nos. 1189, 1190, 1191
RESPONSE OF FANTASY DIAMOND CORPORATION IN OPPOSITION TO THE CHAPTER 11 TRUSTEE’S MOTION FOR SUMMARY JUDGMENT
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TABLE OF CONTENTS Page
TABLE OF AUTHORITIES ....................................................................................................... ii
INTRODUCTION ........................................................................................................................1
FACTUAL BACKGROUND .......................................................................................................3
ARGUMENT ..............................................................................................................................14
A. The Trustee’s Novel Abandonment Argument to Avoid the Estate’s Liability on a Rejection Damages Claim Must be Rejected ...............................14
1. The Concept of Abandonment as Posited by the Trustee Should Have No Application Here ......................................................................14
2. The Agreed Order Makes Clear that FDC Did Not Intend to Abandon the License Agreement ............................................................15
3. Rejection Signifies the Estate’s Abandonment of the License Agreement; But Not Abandonment or “Implied” Termination by FDC .........................................................................................................16
4. The New York Case Law Upon Which the Trustee Relies is Inapposite and Raises Fact Issues Not Susceptible of Resolution in a Summary Judgment Context ............................................................19
B. The License Agreement Has Not Been Validly Terminated by the Trustee ......23
1. The Parties Did Not Agree to a Joint Termination of the License Agreement; But Even if They Had FDC Would Not be Precluded From Seeking Damages ..........................................................................23
2. The Trustee Lacked the Authority to Terminate Because the Debtor was Already in Material Breach ...............................................................25
C. Summary Judgment Must be Denied Because the Trustee’s Contract Damages Argument Fails as Matter of Law and also Turns on the Facts and Circumstances ..............................................................................................27
D. The Trustee’s Claim That Damages are Limited to a Period Through December 31, 2019 is Incorrect ..........................................................................34
CONCLUSION ...........................................................................................................................36
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TABLE OF AUTHORITIES
Page(s)
Cases
407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275 (1968) ........................................................................................................31, 32
Automobile Coverage, Inc. v. American International Group., Inc., 42 A.D.3d 405 (1st Dep’t 2007) ..............................................................................................27
Bear, Stearns Funding, Inc. v. Interface Group-Nevada, Inc., 361 F. Supp. 2d 283 (S.D.N.Y.2005) .......................................................................................25
Benson v. RMJ Sec. Corp., 683 F. Supp. 359 (S.D.N.Y. 1988)...........................................................................................23
Carver v. Apple Rubber Prod. Corp., 558 N.Y.S.2d 379 (N.Y. App. Div. 1990) ...............................................................................19
Castle Creek Tech. Partners, LLC v. CellPoint Inc., No. 02 CIV. 6662 (GEL), 2002 WL 31958696 (S.D.N.Y. Dec. 9, 2002) ...................25, 26, 34
Cauff, Lippman & Co. v. Apogee Fin. Grp., Inc., 807 F. Supp. 1007 (S.D.N.Y. 1992) .........................................................................................21
Chatham Plan, Inc. v. Clinton Tr. Co., 246 A.D. 498 (N.Y. App. Div. 1936) ......................................................................................35
Coniber v. Ctr. Point Transfer Station, Inc., 137 A.D.3d 1604 (N.Y. App. Div. 2016) ................................................................................28
Enslein as Tr. for Xurex, Inc. v. Di Mase, 2019 WL 2505052 (W.D. Mo. June 17, 2019) ........................................................................35
Faryna v. Carey, 1990 WL 159026 (W.D.N.Y. Oct. 12, 1990) ....................................................................19, 20
Gomez v. MLB Enterprises, Corp., No. 15-CV-3326(CM), 2018 WL 3019102 (S.D.N.Y. June 5, 2018) .....................................25
Honeywell Int’l Inc. v. Northshore Power Sys., LLC, 2011 WL 3198877 (N.Y. Sup. Ct. July 25, 2011), aff’d, 946 N.Y.S.2d 474 (N.Y. App. Div. 2012) .................................................................................................28, 29, 33
Jones v. Hirschfeld, 348 F. Supp. 2d 50 (S.D.N.Y. 2004) ........................................................................................20
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Kenford Co. v. Erie Cty., 67 N.Y.2d 257 (1986) ..............................................................................................................28
Kerns Mfg. Corp. v. Veridium Corp., 824 N.Y.S.2d 763 (N.Y. Sup. Ct. 2006) (TABLE) ....................................................................28
Lexington Prod. Ltd. v. B. D. Commc’ns, Inc., 677 F.2d 251 (2d Cir. 1982).....................................................................................................28
In re Lyondell Chem. Co., 416 B.R. 108 (Bankr. S.D.N.Y. 2009) .....................................................................................25
Millennium Aviation Servs., Inc. v. Gen. Dynamics Co., 335 F. App'x 76 (2d Cir. 2009) ................................................................................................34
Nadeau v. Equity Residential Properties Mgmt. Corp., 251 F. Supp. 3d 637 (S.D.N.Y. 2017) ......................................................................................26
NAS Elecs., Inc. v. Transtech Elecs. PTE Ltd., 262 F. Supp. 2d 134 (S.D.N.Y. 2003) ......................................................................................24
In re Old Carco LLC, 406 B.R. 180 (Bankr. S.D.N.Y. 2009) ...............................................................................17, 22
Onex Food Servs., Inc. v. Grieser, No. 93 CIV. 0278 (DC), 1996 WL 103975 (S.D.N.Y. Mar. 11, 1996) .............................25, 34
Pharmacy, Inc. v. Am. Pharm. Partners, Inc., 511 F. Supp. 2d 324 (E.D.N.Y. 2007) .....................................................................................33
Red Apple Child Development Center v. Community School Districts Two, 303 A.D.2d 156 (1st Dep't 2003) .............................................................................................26
Reives v. Lumpkin, 2015 WL 404683 (S.D.N.Y. Jan. 30, 2015), aff'd, 632 F. App'x 34 (2d Cir. 2016) ..........19, 20
Robertson v. Charles Frohman, Inc., 191 N.Y.S. 55 (N.Y. App. Div. 1921) .....................................................................................35
SEB, S.A. v. Montgomery Ward & Co., 412 F. Supp. 2d 336 (S.D.N.Y. 2006) ......................................................................................27
Staebell v. Bennie, 443 N.Y.S.2d 487 (N.Y. App. Div. 1981) .........................................................................20, 21
TNT USA Inc. v. DHL Exp. (USA), Inc., 2012 WL 601452 (E.D.N.Y. Feb. 23, 2012)......................................................................34, 35
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Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89 (2d Cir. 2007).......................................................................................................29
Windley v. City of New York, 961 N.Y.S.2d 441 (N.Y. App. Div. 2013) ...............................................................................19
In re WorldCom, Inc., 2006 WL 2400326 (Bankr. S.D.N.Y. May 30, 2006), amended (May 31, 2006), aff’d, 2007 WL 2049723 ..............................................................................................25
Statutes
11 U.S.C. § 362 ..............................................................................................................................15
11 U.S.C. § 363 ..............................................................................................................................24
11 U.S.C. § 365 ........................................................................................................................15, 24
11 U.S.C. § 365(g) .........................................................................................................................17
Other Authorities
N.Y. Prac., Contract Law § 13:8 ....................................................................................................27
28 N.Y. Prac., Contract Law § 13:8 ...............................................................................................27
28 N.Y. Prac., Contract Law § 20:24 .............................................................................................27
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Fantasy Diamond Corporation (“FDC”) hereby responds in opposition (this “Response”)
to the motion [Docket No. 1189] (the “Motion”) and memorandum of law [Docket No. 1190]
(the “Memo of Law”) filed by the Chapter 11 Trustee (the “Trustee”) in connection with his
Objection to FDC’s Claim No. 54.
I. INTRODUCTION
1. This is a breach of contract action. Debtors indisputably breached express
and implied contractual obligations owed to FDC. FDC has pled and advanced evidence of
damages arising from these breaches. Despite a plainly meritorious prima facie breach of
contract claim, the Trustee seeks summary judgment arguing that as a matter of law FDC has no
claim; but as a matter of law none of the grounds advanced by the Trustee overcome the validity
of FDC’s claim and the Trustee’s submission fails to demonstrate the absence of disputed
material facts entitling him to judgment as a matter of law.
2. First, the Trustee’s newly advanced abandonment argument is contrary to
the Bankruptcy Code, New York law and the facts of this matter. The Trustee argues that by
filing a motion seeking rejection and entering into an agreement providing for rejection FDC
abandoned the rejected contract such that it has no claim for any of the Debtors’ breaches of the
contract including its rejection. Such an irregular argument simply has no support in the
Bankruptcy Code or case law under the Bankruptcy Code. The lack of authority in support of
this argument is not surprising because if the Trustee is right then every motion seeking to
compel assumption or rejection of a contract resulting in a rejection would be, in the Trustee’s
view of the bankruptcy world, an abandonment of the contract preventing a rejection damages
claim. That is not the law and should not be the law. Indeed, the Trustee relies in constructing
this argument on inapposite New York case law outside of the Bankruptcy Code context.
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Further, the Trustee’s position is unsupported by, and is contrary to, the facts of this matter as the
order providing for rejection included an express reservation of rights, undercutting any assertion
of intentional abandonment.1
3. Second, the Trustee’s termination arguments are inapt. FDC never
terminated the contract, but even if it did it is still permitted to seek damages. Under New York
law, when a contract counter-party materially breaches a contract the non-breaching party is
permitted to terminate and also sue for damages; termination does not cause a waiver or
abandonment of breach of contract damages claims.
4. Third, the Trustee’s argument that he terminated in March 2019 also is
contrary to bankruptcy and New York law as a party in material breach of a contract cannot
thereafter seek to assert rights and benefits under the contract (particularly where the asserted
right is to avoid by technicality a claim explicitly preserved in the order entered pursuant to the
motion practice which the Trustee posits as an implied termination).
5. Fourth, the Trustee’s argument that no damages claim is viable here
because the Debtors had no obligation to continue operations is belied by: (i) the affirmative
obligations in the contract for Debtors to do so, (ii) the implied obligations on the Debtors to do
so based on the contract generally and the nature of the relationship between FDC and the
Debtors, (iii) because the cases cited by the Trustee are distinguishable from the facts here, and
(iv) New York case law, in the context of a license, as here, allows for damages in the situation
in which FDC finds itself, in contrast to the supply/output type of contract cases upon which the
Trustee relies. Apart from the Trustee’s legal arguments, various factual disputes preclude
1 Even if bankruptcy logic and the express terms of the order providing for rejection were ignored, abandonment is an intrinsically factual matter under New York law and factual disputes regarding intent, including the Trustee’s injection of his own subjective intent, are present here.
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summary judgment including, for example, under New York law the presence of an implied
obligation to remain in business for the full term of the agreements which is a triable issue of
fact.
II. FACTUAL BACKGROUND
FDC’s History:
6. FDC, founded in 1956 by the current CEO’s grandfather, has been
involved in the jewelry business since then and remains a family owned business. Wein Decl.
¶ 4.2 FDC initially served catalog and direct mail customers before expanding into sales to
national and regional retailers. Wein Decl. ¶ 5.
7. Through October 1, 2012, when it entered into the transactions with
Firestar Diamond, Inc. (“Firestar”) described below, FDC’s customers included most of the large
retail department store and jewelry chains in the United States including Costco, one of the
largest retailers in the world. Wein Decl. ¶ 6.
8. In 2000, FDC was awarded patents relating to its innovative diamond
setting technique used in its “Endless Diamond” product line. Wein Decl. ¶ 7. These patents
along with the trademarks and tradenames developed by FDC (the “FDC IP”) significantly
enhanced FDC’s reputation in the jewelry industry and contributed to substantial increases in
FDC’s revenues, which rose consistently to $72 million in 2007. Id.
The 2008/09 Financial Crisis and its Effects on the Jewelry Industry and FDC:
9. The financial crisis of 2008-09 dramatically impacted FDC’s business.
Wein Decl. ¶ 8. With consumer confidence and resources negatively impacted by the financial
2 The Declaration of Joseph H. Wein in support of FDC’s Response is attached hereto as Exhibit A. References to such shall be to “Wein Decl. ¶ __” with the appropriate paragraph number(s) supplied.
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crisis, the volume of FDC’s business decreased significantly, from $72 million in 2007 to under
$20 million in 2011. Id.
10. Prior to the financial crisis Firestar (or its predecessors) sold manufactured
products to FDC. Wein Decl. ¶ 9. The relationship was significant enough that when FDC
desired to build a factory for jewelry production in India, it partnered with Firestar. Id. The
entity that owned this factory, a 50/50 joint venture between FDC and Firestar was named
Radashir for the FDC CEO’s three children: RAchel, DAnny, SHIRa. Id.
11. As a result of the financial crisis, FDC’s lenders required FDC to liquidate
significant inventory in order to pay down FDC’s loans. Wein Decl. ¶ 10. Firestar, which had
been a supplier of jewelry products to FDC, assisted in such liquidation efforts. Id.3
12. The financial crisis also caused FDC to reduce its own manufacturing
capabilities including sales infrastructure and personnel. Wein Decl. ¶ 11. Such led FDC to seek
to partner with other companies in order to continue its Endless Diamond product line in a cost-
effective manner. Wein Decl. ¶ 12. Because of their long-standing relationship, Firestar was a
logical candidate. Id.
The October 1, 2012 Transaction:
13. On or about October 1, 2012, FDC and Firestar entered into certain
agreements (the “October 1, 2012 Transaction”) providing, in effect, for Firestar to take over
FDC’s business operations and to continue to exploit the FDC IP. Wein Decl. ¶ 13. FDC and
Firestar entered into the following agreements, all dated as of October 1, 2012:
3 For example, FDC sent large lots of unsorted diamonds from liquidated inventory to Firestar, Firestar sorted the diamonds for re-use, and then Firestar supplied the re-sorted diamonds to Radashir to be used in new jewelry ordered by FDC. Wein Decl. ¶ 10.
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(a) the Asset Purchase Agreement (“APA”), whereby FDC sold all of
its assets other than the FDC IP to Firestar, attached to the Wein Declaration as
Exhibit 1;
(b) the License Agreement, pursuant to which FDC provided Firestar
with a license to use the FDC IP, attached to the Wein Declaration as Exhibit 2;4
and
(c) the Costco Letter Agreement, pursuant to which, inter alia, Firestar
agreed to pay royalties to FDC on all sales of non-licensed products by Firestar to
Costco (as amended by the First Amendment to License Agreement dated and
effective as of March 1, 2015, the “Costco Agreement”), attached to the Wein
Declaration as Exhibit 3.
Wein Decl. ¶ 14.
14. The October 1, 2012 Transaction contemplated that Firestar would
continue doing business with FDC’s existing customers including Costco under the Fantasy
name. Wein Decl. ¶ 15. Firestar created a new entity, Fantasy, Inc. (“Fantasy”) to do so. Id.
15. The APA, the Costco Agreement and the License Agreement are
complementary parts of the October 1, 2012 Transaction, and together formed the business
relationship between FDC, Firestar and Fantasy. Wein Decl. ¶ 16.
16. The “jewel” of the business lines covered by the License Agreement was
FDC’s relationship with Costco. Because of its sheer size, both in terms of its customer base and
the volume of products it sells, Costco is among the most desirable retailer customers to which a
manufacturer can sell its merchandise. Wein Decl. ¶ 17. FDC’s relationship with Costco began
in about 1995, and FDC sold to Costco’s antecedents going back to 1985. Wein Decl. ¶ 18.
4 The License Agreement was subsequently amended to extend its “Initial Term” through December 31, 2025. [Docket No. 1191 at Ex. A].
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17. In addition to the substantial value of the FDC IP, FDC transferred
significant relationship value to Firestar/Fantasy. Wein Decl. ¶ 20. The value of FDC’s
relationship with Costco is evidenced by Firestar’s agreement pursuant to the License Agreement
to pay royalties to FDC on all of its sales to Costco in addition to the sales of FDC’s “Endless
Diamond” merchandise, with such royalty obligations continuing even after expiration of FDC’s
patents. Wein Decl. ¶ 19. The October 1, 2012 Transaction was more than a licensing
arrangement as Firestar agreed to take over FDC’s business and provide substantial recurring
consideration in the form of royalties to FDC in return for Firestar’s access to FDC’s Costco and
other customer relationships. Wein Decl. ¶ 20. FDC facilitated this “take over” by negotiating
for the 3 key FDC employees responsible for the Costco relationship as well as other key
employees to become employees of Firestar/Fantasy. Id.
18. FDC was willing to hand over its business to Firestar/Fantasy because of
its longstanding relationship with Firestar and because Firestar was a significant “player” in the
industry. The “first-day” declaration filed by the Debtors’ President and sole director, Mihir
Bhansali [Docket No. 2] (the “Bhansali Declaration”), speaks to Firestar’s prominence in the
industry:
7. FDI and FI have approximately $90 million of annual sales to some of the most well-known and well regarded major department stores, major specialty stores chains, wholesale clubs, and United States armed services bases. Their accounts include Zales, Kay's, Jared's, COSTCO, Sam's Club, Macy's, JC Penney, U.S. Navy, etc.
8. FDI maintains one of the finest and most experienced sales forces in the fine jewelry industry. Its product development team is extremely creative and highly respected.
9. FDI owns and has registered numerous copyrights, trademarks and product design patents which it regularly uses in the conduct of its business.
10. FDI and FI also hold a license for certain intellectual property relating to the Endless Diamond brand and the touch-set jewelry design, which property is
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used in connection with their manufacture of jewelry merchandise to national and regional retailers throughout the United States.
See Bhansali Declaration at ¶¶ 7-10.
19. Upon consummation of the October 1, 2012 Transaction FDC understood
that Firestar/Fantasy would continue in business and exploit the FDC IP throughout the
remainder of the life of the FDC IP and thereafter, consistent with the long and successful history
of FDC and FDC’s strong relationship with Costco and its other customers. Wein Decl. ¶ 21.
FDC expected that Firestar would perform its affirmative obligations (including maintaining
sales staff and attending trade shows) for the full term of the relevant contracts, certain of which
ran through 2025. Id. FDC further expected that if the basic affirmative obligations under the
agreements were performed by Firestar, substantial royalties would have continued to be
generated. Id. After the October 1, 2012 Transaction and up to the commencement of the
Firestar/Fantasy bankruptcy cases, Firestar/Fantasy did exactly that. Id.
20. FDC relied on Firestar/Fantasy’s contractual obligations, express and/or
implied, resulting in FDC’s expectation that Firestar/Fantasy would perform for the full term, in
allowing Firestar/Fantasy access to the valuable FDC IP for such a long term of years. Wein
Decl. ¶ 22. FDC agreed to extensions of the term in reliance on this expectation, forgoing other
potential opportunities to deploy the FDC IP. Id. If FDC had any inclination Firestar/Fantasy
would not perform as promised for the full term, FDC would not have granted a terms of the
length set forth in the agreements and would not have agreed to extend them. Id.
21. Particularly important to FDC with respect to the License Agreement was
the obligation to maintain sales staff and attend the important JCK jewelry industry trade show
(held each June around the time customers make their orders for the key fall and Christmas
holiday season). Wein Decl. ¶ 23. Missing the JCK trade show and failing to maintain sales
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staff and make shipments would destroy the FDC IP. Id. Absent a commitment to perform these
particular affirmative obligations, FDC would have pursued other options and opportunities to
ensure these critical endeavors to stimulate and exploit the FDC IP were undertaken. Id.
22. Both prior to and after the Petition Date, Fantasy sold licensed products as
well as non-licensed products to Costco for which royalty obligations accrued. Wein Decl. ¶ 24.
Prior to the fraud that this Court is all too well aware of, and the resulting bankruptcy, FDC had
been receiving substantial royalty income under the License Agreement, averaging over
$450,000 per year, as follows:
2012 $111,367.65 (partial year) 2013 $433,961.61 2014 $763,367.00 2015 $327,861.00 2016 $393,354.00 2017 $360,769.00
Id.
23. These amounts were in line with FDC’s expectation at the time of
contracting. Wein Decl. at ¶ 25. Indeed, at the time of entering into the License Agreement with
Firestar, royalties of $250,000 per calendar year, the threshold to permit termination of the
agreement prior to the expiration of its term, was well below what FDC anticipated that royalties
would be going forward. Id. In FDC’s view, royalties would only fall below $250,000 if
something catastrophic occurred in the jewel industry or if there was a material breach of the
contract. Id. As had happened in all prior years, in the absence of the fraud, bankruptcy and
breaches of the agreements, and if Firestar/Fantasy had continued to perform its obligations as it
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had prior to bankruptcy, which FDC assumed it would, royalties certainly would have well-
exceeded the $250,000 threshold set forth in section 12(d) of the License Agreement. Id.5
24. But for the fraud that permeated through the Debtors’ corporate family
(and, presumably, with the Debtors as well), these bankruptcy cases, and the destruction of the
business relationship with Costco, FDC would have had many more years to capitalize on, profit
from, and possibly expand upon the Costco business (and other business lines). Wein Decl. ¶ 29.
Unfortunately, the fraud and bankruptcy essentially killed the last 2 years of FDC’s Intellectual
Property and the Costco relationship, which had 7 more years to run under the License
Agreement, and which could have gone indefinitely into the future. Id.6
Debtors’ Bankruptcy and Post-Bankruptcy Sales Efforts:
25. Shortly after news reports made public the alleged fraud committed by
certain persons and entities in the Debtors’ corporate family and ownership structure, which
resulted in the disruption of the Debtors manufacturing and sales capabilities as well as the
prospect that customers would stop buying jewelry from them, see Bhansali Declaration at ¶¶ 33-
41, the Debtors commenced the captioned bankruptcy cases on February 23, 2018. Wein Decl.
¶ 26.
26. As noted above, in their initial pleadings Debtors forthrightly advertised
the fraudulent conduct of their corporate family and ownership and its impact on the Debtors.
Production facilities had been seized; back office functioning was compromised; and customers
were exploring their options. Bhansali Declaration at ¶¶ 36-38, 41; Wein Decl. ¶ 27.
5 Section 12(d) provides a right to terminate for both FDC and Firestar/Fantasy if royalties fell below $250,000 in a given year. 6 This actually somewhat understates the time period of the loss, since while the key patent was to expire in 2 years, there were several additional patents with several years of additional life and the Costco royalties were to extend 5 years beyond the applicable patents, or a minimum of 7 years beyond the Firestar Diamond fraud. Wein Decl. ¶ 29.
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27. Naturally, all of the foregoing, which was a complete surprise to FDC,
was of considerable concern. Firestar/Fantasy’s inability to produce and sell product and the loss
of Fantasy customers – not because the product was not good or salable but because the Debtors
were part of a fraudulent enterprise – had the potential of substantially harming FDC’s business
and the FDC IP. Wein Decl. ¶ 28.
28. Accordingly, after the commencement of the bankruptcy cases and the
shock of such filing and its cause, FDC began communicating with the Debtors’ chief
restructuring officer regarding the Debtors’ viability, the bankruptcy cases generally, and the
Debtors’ plans for the FDC IP and the Fantasy business. Wein Decl. ¶¶ 31-32. Debtors advised
FDC that they planned to continue the Fantasy business and to try to sell it as a going concern;
and, thus, would not agree to allow FDC to take back the FDC IP. Id. Nevertheless, FDC had a
substantial concern that without a prompt resolution of issues with respect to the FDC IP and the
Fantasy business, including a possible going concern sale or an arrangement whereby FDC could
try to revive the Fantasy business by its own, direct exploitation of the FDC IP, that the value of
the FDC IP and the future of the Fantasy business would be severely jeopardized. Id.
29. In connection with the Debtors’ sale efforts, while reserving its rights,
FDC privately through communications with the Debtors, Wein Decl. ¶ 33, and publicly through
its Limited Objection and Reservation of Rights of FDC Corporation to Sale Motion and to
Related Cure Notice [Docket No. 104], stated its willingness to work cooperatively with the
Debtors and potential buyers in potentially providing its consent to a transfer of the License
Agreement as part of a proposed sale.
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30. However, as the Court is aware, the Debtors’ attempts to sell their
businesses as going concerns ultimately failed. See e.g., Docket No. 95 (adjourning the auction
for the Firestar/Fantasy assets) and Docket No. 177 (withdrawing the sale motion).
Proceedings Relating to FDC’s Motion to Compel Rejection of the License Agreement:
31. When it became clear that the Debtors’ sales efforts would not produce a
proposed sale transaction to which FDC could consider providing its consent, which re-provoked
FDC’s fear over the long-term effects of the lack of business activity involving the FDC IP, FDC
sought appropriate relief in the bankruptcy cases to protect and preserve the FDC IP and the
Fantasy business relationships, including with Costco. Wein Decl. ¶ 35. Such relationships
were in jeopardy due to the passage of time in the bankruptcy cases with no resolution of the
issues impacting the Firestar/Fantasy debtors. Id.
32. On May 21, 2018, after the public announcement by the Debtors of the
failure of their going concern sales efforts, FDC filed its motion seeking to compel rejection of
the License Agreement, relief from stay, and related relief [Docket No. 179] (the “Motion to
Compel Rejection”), which originally was scheduled for hearing on June 7, 2018.
33. Debtors’ response to the Motion to Compel Rejection, in effect, was to
request its adjournment in deference to the later-filed motions of Punjab National Bank (“PNB”)
and the U.S. Trustee for appointment of a chapter 11 trustee [Docket Nos. 181 and 185] and
Debtors’ wish for such trustee to make decisions with respect to the License Agreement.
34. The timing of FDC’s efforts to obtain certainty with respect to the FDC IP
was critical, as a rescue effort had to be quick. It was not to “hamstring” the Debtors or the
Trustee in their decision-making or otherwise. Wein Decl. ¶¶ 35-36. The Debtors’ sales effort
had ended, there was no prospect of any going concern sale involving the Fantasy business and
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the FDC IP, and FDC needed quick relief in order to take whatever steps could be taken at such a
late date to attempt to save its business. Id. Even then FDC feared it might already be too late.7
35. At the June 7, 2018, hearing, at which FDC’s CEO was in attendance and
prepared to testify, Wein Decl. ¶ 39, the Court over FDC’s opposition adjourned the matter to the
hearing scheduled for June 26, 2018. The Court also indicated it would be appointing a chapter
11 trustee [Docket No. 216].
36. From and after June 7, 2018, and to the June 26, 2018, hearing FDC and
the Trustee discussed and negotiated with respect to a resolution of the Motion to Compel
Rejection and related issues. Wein Decl. ¶ 40. On June 26, 2018, FDC and the Trustee entered
into an agreement which was memorialized in a proposed order with an attached letter agreement
(the “Agreed Rejection Order”). Id.
37. At no time during the discussions and negotiations with respect to the
Agreed Rejection Order did the Trustee request, nor did FDC offer, to waive its breach of
contract damages claim that would result from a breach or rejection of the License Agreement or
any other agreement between FDC and Firestar/Fantasy or otherwise to “abandon” the License
Agreement. Wein Decl. ¶¶ 42-43. FDC did not intend to waive any claim that it had or may
have had resulting from any breach or rejection of the License Agreement or any other
agreement between FDC and Firestar/Fantasy nor did it intend to “abandon” the License
Agreement. Wein Decl. ¶ 44. Rather, FDC specifically intended to preserve, and did preserve,
7 Firestar/Fantasy had stopped shipping products and also was refusing to agree to FDC proceeding on its own to protect the FDC IP. Wein Decl. ¶ 35. Respectable retailers, including Costco, were scared to continue doing business with product lines affiliated with a global fraud precipitating this bankruptcy. Id. Under these circumstances, it was urgent for the FDC IP to be returned immediately or transferred to a reputable party, particularly in light of the rapidly approaching key JCK tradeshow. Id. This did not occur while the business remained viable, causing the entire holiday sales season for 2018 to be missed, and by the time the FDC IP was released it was already compromised if not essentially destroyed. Id.
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by the explicit words of Paragraph 5 of the Agreed Rejection Order, its rights to assert any and
all claims under the License Agreement. Id.
38. Given the precarious nature of the Fantasy business that it would be
attempting to revitalize after entry of the Agreed Rejection Order, it was of critical importance to
FDC to retain the right to assert any and all claims that it had or may have had resulting from any
breach or rejection of the License Agreement or any other agreement. Wein Decl. ¶ 46. Any
request for a waiver of such would have been a material term of any proposed agreement that
likely would have resulted in markedly different terms being proposed and acceptable to FDC as
a condition of any such agreement. Id.
39. By June 26, 2018, when the form of Agreed Rejection Order was
submitted to the Court, and continuing through actual entry of the Agreed Rejection Order on
July 10, 2018 [Docket No. 265],8 FDC was skeptical that the Fantasy business could be
resuscitated. Wein Decl. ¶ 46. Thus, the prospect of asserting a claim to hopefully recover
something due to the Debtors’ actions and breaches was important to FDC and was neither
waived nor released. Id.
40. FDC’s skepticism was fueled by the fact that by the time of the JCK show
on June 1, 2018, it seemed that Costco and the rest of FDC’s potential major customers had
made a decision to move on from the Fantasy products. Wein Decl. at ¶ 41.
41. After the July 10, 2018, rejection of the License Agreement, FDC made
repeated efforts to revive its business and to continue to exploit its intellectual property
including, without limitation, attempting to resuscitate the relationship with Costco. Wein Decl.
¶¶ 47, 51. Because most retailers order their inventory for the critical Holiday selling season
8 A true and correct copy of the Agreed Rejection Order is attached hereto as Exhibit B.
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(generally, from Thanksgiving through the New Year) well before July 10th of the year, FDC’s
efforts to generate sales in 2018 were not successful. Id.
The FDC Proof Of Claim:
42. On or about November 7, 2018, FDC timely filed its proof of claim
evidencing its claim for $2,800,000 in damages for breach of the License Agreement (the “FDC
Claim”). Wein Decl. ¶ 52.
43. The FDC Claim is straightforward and adequately supported by the 5 year
royalty history from 2013 through 2017, or the 6 year history from 2012 through 2017 (using an
annualized amount for a full 2012) which produces an average annual royalty paid to FDC of
about $455,000 per year. Wein Decl. ¶ 53. Actually, the $2.8 million claim amount represents a
10%+ discount, as on a strictly math formula basis the claim amount would be nearly $3.2
million: $455,000 x 7 = 3,185,000. Id.
III. ARGUMENT
A. The Trustee’s Novel Abandonment Argument to Avoid the Estate’s Liability on a Rejection Damages Claim Must be Rejected.
1. The Concept of Abandonment as Posited by the Trustee Should Have No Application Here.
44. The concept of abandonment as posited by the Trustee does not make
sense in this bankruptcy context. The Trustee argues that FDC intended, by filing a motion
seeking its rejection and entering into an agreement providing for its rejection (i.e., asserting
basic rights provided to non-debtor contract counter-parties under the Bankruptcy Code designed
to remedy the uncertainty that a bankruptcy filing provokes with respect to on-going contractual
relationships), to “abandon” and in fact “abandoned” its rights under the License Agreement.
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45. The Trustee does not cite any case under the Bankruptcy Code which has
found abandonment simply by an executory contract party diligently pursuing and perfecting its
rights and remedies available under §§ 362 and 365 of the Bankruptcy Code. [Memo of Law
¶¶ 26-38]. That omission is telling as the state-law contract abandonment argument the Trustee
relies upon here is inconsistent with the extraordinary protections afforded to debtors by §§ 362
and 365 vis a vis their contract counter-parties.
46. Upon commencement of these bankruptcy cases FDC could not have, due
to §§ 362 and 365, and as it otherwise might have been able to do in the absence of bankruptcy,
take actions without leave of court to assert rights and remedies under the License Agreement
(whether to attempt to collect amounts due, terminate, or otherwise enforce rights and remedies,
including the right to damages for breach of the agreement). What FDC could do in response to
the restrictions placed upon it by the Bankruptcy Code to protect its interests – try to work with
the Debtors outside of the courtroom and thereafter seeking the basic relief available to contract
counter-parties – it did. Such does not imply any intent to “abandon” or constitute an implied
abandonment of the contract as posited by the Trustee.9
2. The Agreed Order Makes Clear that FDC Did Not Intend to Abandon The License Agreement.
47. In any event, any “intent to abandon” or actual abandonment by FDC as
argued by the Trustee is belied by the words of the Agreed Rejection Order. The Trustee is
objecting to FDC’s claim on the ground of “abandonment,” but FDC reserved its rights to all
claims under the License Agreement, which should be “case closed” on abandonment. But the
9 Further, even if applicable, which FDC submits it is not, the very notion of an “abandonment” of an executory contract by a non-debtor in a bankruptcy case while such party is attempting to protect its rights and interests conjures up a myriad of fact issues that cannot possibly be resolved on the record before the Court; including the subjective intent of the parties which clearly are in dispute.
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objective facts beyond the words of the Agreed Rejection Order also demonstrate there was no
intent, at least by FDC, to abandon the License Agreement.
48. From the outset of the bankruptcy cases until just before FDC filed its
Motion to Compel Rejection, the Debtors’ intent was to continue the Fantasy business and to try
to sell it as a going concern, including the License Agreement. Although FDC was skeptical
about that process including how long it would take and whether such would create a scenario in
which the Fantasy business could be saved, it was willing to see if a sale proposal could be
produced that would allow the Fantasy business using the FDC IP to continue. During such time
there was no intent to abandon the License Agreement as it was being positioned for a sale by the
Debtors and FDC was willing to let the process play out if it appeared possible a good result
might occur, which the Debtors were assuring FDC was a possibility. See Wein Decl. ¶ 33.
49. When it became clear there would be no sale, FDC, as all contract
counter-parties would have done, immediately sought certainty with respect to its relationship
with the Debtors. Until the Agreed Rejection Order was entered, FDC still had the obligation to
perform under the License Agreement. Only when the License Agreement was rejected – by an
order that explicitly reserved FDC’s rights – did FDC move on and attempt to revitalize the
Fantasy business with the FDC IP.
3. Rejection Signifies the Estate’s Abandonment of the License Agreement; But Not Abandonment or “Implied” Termination by FDC.
50. Even without the words of the Agreed Rejection Order preserving FDC’s
claims, rejection of the License Agreement caused neither a termination nor abandonment by
FDC of the License Agreement.
51. First, contrary to the Trustee’s suggestion, nothing pled in the Motion to
Compel Rejection indicates FDC’s intent to “abandon” the License Agreement as the Trustee is
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positing such under the inapplicable New York case law cited in the Memo of Law (which will
be discussed in greater detail below). Rather, the Motion to Compel Rejection, as virtually all
motions to compel assumption or rejection are, was filed to force the Debtors (and their
successor, the Trustee) to make a definitive decision with respect to the estate’s continuing
interest in the License Agreement and the FDC IP. Until the Debtors or the Trustee rejected the
License Agreement FDC was bound to continue performing thereunder (i.e., not to interfere with
the Debtors’ right to use the FDC IP). FDC’s duty to perform could be relieved only at such
time as (i) the Debtors/Trustee by agreement and/or the Court by its order relieved FDC of its
obligation by rejection (either by an agreement for rejection approved by the Court or by the
Court compelling rejection), or (ii) (x) relief from stay to terminate the License Agreement was
granted by the Court, again either by approval of an agreement between the parties or by its
order, and (y) FDC actually terminating.
52. The Agreed Rejection Order satisfied conditions (i) and (ii)(x) but not
(ii)(y) as FDC never took any action to terminate the License Agreement. Such is objective
evidence enough that FDC did not intend to abandon or impliedly terminate the License
Agreement. The words of the Agreed Rejection Order also evidence the objective intent of both
FDC and the Trustee that the License Agreement was not being abandoned as the order expressly
preserves all claims available to FDC thereunder.
53. Second, rejection of an executory contract does not terminate the contract.
Section 365(g) of the Bankruptcy Code says that “rejection of an executory contract . . .
constitutes a breach of such contract . . . .” 11 U.S.C. § 365(g); see also In re Old Carco LLC,
406 B.R. 180, 212 (Bankr. S.D.N.Y. 2009) (explaining that rejection does not equal termination
but rather is a breach such that the contract is no longer part of the bankruptcy estate).
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54. Upon rejection, the estate became in material breach of the License
Agreement, which material breach finally relieved FDC of any obligation to perform thereunder.
Thus, at the time when the Trustee asserts FDC was acting in a manner evidencing an
abandonment of the License Agreement – entry of the Agreed Rejection Order – FDC no longer
had any obligation to perform, which is a prerequisite under the New York case law cited by the
Trustee to a determination that a contract party has abandoned a contract.
55. Third, the Agreed Rejection Order did not create a new agreement which
superseded the License Agreement or otherwise evidence its abandonment. Rather, it was the
product of an arms-length negotiation between sophisticated parties represented by counsel
providing for the estate to abandon – by rejection – its interest in the FDC IP and allowing FDC
to attempt to revive the Fantasy business based on the FDC IP. In getting to that agreement, the
parties compromised on discrete issues relating to the License Agreement in order to make a
deal. If the Trustee were correct that, as a matter of bankruptcy law, anything other than a
“clean” or “vanilla” rejection of a contract creates an argument that the contract counter-party
has abandoned its right to a rejection claim would have the unwanted effect of producing more
litigation and less negotiation over motions to compel rejection, to the benefit, FDC suggests, of
no one, including the Court.
56. For example, it was important to the Trustee, in order to maximize the
value of estate assets, to have more time to sell products subject to the FDC IP and the Trustee
raised such issue in the context of FDC’s request for the Trustee simply to reject the License
Agreement. In return for rejection, and the negotiated reservation of claims under the rejected
License Agreement, FDC agreed to allow the Trustee an indefinite period of time to do so
notwithstanding the temporal limitation on “Sell Off Rights” (as defined by the License
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Agreement). (Exhibit 2 to the Wein Declaration at ¶¶ 4-5; and Item 2(c) in Exhibit B to the
Agreed Rejection Order).
57. Although the Agreed Rejection Order provided for relief from the
automatic stay for FDC to terminate the License Agreement, FDC never terminated because the
Trustee’s rejection, which causes the License Agreement no longer to be a part of the estate and
pursuant to which the estate no longer had the right to use the FDC IP, was sufficient to allow
FDC to move forward in an effort to protect and preserve the FDC IP and to revitalize the
Fantasy business. That FDC sought relief from the stay as a reservation of flexibility in
connection with the need to cut off the estate’s rights to the FDC IP does not reflect either a
termination or abandonment of the License Agreement.
4. The New York Case Law Upon Which the Trustee Relies is Inapposite and Raises Fact Issues Not Susceptible of Resolution in a Summary Judgment Context.
58. Even under New York law the Trustee’s abandonment argument is a non-
starter for summary judgment purposes, as such is a question of fact for a jury. Carver v. Apple
Rubber Prod. Corp., 558 N.Y.S.2d 379, 380 (N.Y. App. Div. 1990) (finding trial court errored in
granting summary judgment on abandonment theory). Stated another way, New York law
recognizes that “the issue of abandonment is intrinsically factual.” Windley v. City of New York,
961 N.Y.S.2d 441, 443 (N.Y. App. Div. 2013) (denying motion for summary judgment on
abandonment emphasizing need to draw all reasonable inference in favor of the non-moving
party). The Trustee has the burden of proof of establishing the contract was abandoned as such
will not be presumed. Faryna v. Carey, 1990 WL 159026, at *3 (W.D.N.Y. Oct. 12, 1990).
59. The Trustee’s primary case law support for its abandonment argument,
Reives v. Lumpkin, makes the factual nature of an abandonment defense clear. 2015 WL
404683, at *8 (S.D.N.Y. Jan. 30, 2015), aff'd, 632 F. App'x 34 (2d Cir. 2016); (Memo of Law at
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¶¶ 26-28, 37-38 (citing Reives)). The Reives decision was post-trial and involved in depth
factual findings by the court regarding the parties’ mutual abandonment and surrounding conduct
regarding the operative contract. See id. at *1-7. The court analyzed closely the factual record
and found based on the credibility of witnesses that a particular “heated” conversation
“constituted an express agreement to mutually abandon” the contract at issue. Id. at *4. Here,
this court has not yet had the opportunity to evaluate the creditability of the witnesses as it had in
Reives, and there is no express agreement to mutually abandon the contract at issue. See id. at
*4, 6.
60. The Trustee’s only suggestion in the Memo of Law that abandonment is
amenable to summary judgment is in a footnote and it appears the bulk (if not all) of the other
cases cited by the Trustee did not deal with abandonment at the summary judgment phase. (See
Memo of Law at ¶ 28 fn. 3).10
61. The Trustee asserts that while “abandonment requires mutual assent by the
parties,” mutual intent need not be express and “[i]nstead, it can be inferred from the attendant
circumstances and conduct of the parties” where such conduct is “positive, unequivocal, and
inconsistent with an intent to be further bound by the contract.” (Memo of Law ¶ 27). However,
New York law recognizes additional requirements for abandonment beyond those referenced by
the Trustee. Specifically, under New York law, “[i]n order to constitute an abandonment, . . .
there must be a repudiation of the contract and refusal to perform” under the contract. Staebell
10 The Trustee cites to Jones v. Hirschfeld, 348 F. Supp. 2d 50, 60 (S.D.N.Y. 2004), which recognizes that “[t]he burden of proving the intent to abandon rests upon the party asserting it, … and ordinarily presents an issue of fact …. Because the parties' intent to abandon a contract is a factual question, it is not often grounds for summary judgment.” 348 F. Supp. 2d at 58, 60 (citations omitted). In Jones, summary judgment on abandonment was granted against the Plaintiff, an individual accusing the President of various misdeeds, when, among other things, there was “unambiguous evidence of an abandonment” and “compelling evidence supporting defendant's position,” that Plaintiff repudiated an earlier putative settlement she later sought to enforce including Plaintiff’s agreement to not accept the defendant’s settlement money during negotiations and no contrary evidence was proffered by the Plaintiff. Jones, 348 F. Supp. 2d at 58, 60-61.
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v. Bennie, 443 N.Y.S.2d 487, 488 (N.Y. App. Div. 1981) (emphasis added); Cauff, Lippman &
Co. v. Apogee Fin. Grp., Inc., 807 F. Supp. 1007, 1021 (S.D.N.Y. 1992) (same).
62. There is no factual basis here to assert that FDC repudiated or otherwise
refused to perform under the License Agreement. To the contrary, FDC was prohibited by
bankruptcy law from not performing under the License Agreement until such time as it was
relieved of such obligation by the Court due to the Trustee’s rejection/breach. Moreover, FDC
signified its willingness to continue performing under the License Agreement throughout the
Debtors’ sale process.
63. In the absence of any factual advancement of a refusal to perform by FDC
(and, again, it was prohibited after bankruptcy from not performing), the abandonment defense
must fail. See Staebell, 443 N.Y.S.2d at 488 (rejecting abandonment where it was not clear that
a repudiation and refusal to perform occurred under the facts, because “[a]t best defendant’s acts
were equivocal”).11
64. Even if the elements of an implied abandonment defense were merely
conduct that is “positive, unequivocal, and inconsistent with an intent to be further bound by the
contract,” as suggested in the Memo of Law, that standard is not satisfied here ,and further is not
in accord with the way executory contracts are treated in bankruptcy.
65. First, while filing the Motion to Compel Rejection is a positive action, it is
not an unequivocal act inconsistent with an intent to be further bound. FDC was bound until
such time as an order of the Court relieved it, and even after the filing of the Motion to Compel
Rejection FDC could have been compelled to continue to perform if the Debtors had been able to
continue in business or effect a sale. One response to a motion to compel rejection is to assume.
11 Further, the degree to which any alleged repudiation or nonperformance was equivocal or unequivocal is obviously a factual matter.
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Another is to seek deferral of such motion in favor of a plan or other transaction the Debtors
and/or Trustee could have entered into involving the License Agreement and the FDC IP. The
other possibility is a rejection approved by the court. In effect, that is exactly what happened
here; and always happens in connection with motions seeking assumption or rejection. The non-
debtor party (FDC) is bound to perform until the motion is resolved (which did not occur until
July 10, 2018), including through adjournments of the matter (FDC’s motion was adjourned
from its original June 7th hearing date).
66. Second, the Motion to Compel Rejection merely sought permission to
terminate. It did not seek or represent a self-effectuating termination. As noted above, rejection
is a breach, not a termination. In re Old Carco, 406 B.R. at 212. Indeed, the Agreed Rejection
Order expressly stated the order merely lifted the automatic stay to permit FDC “at its discretion
to provide written notice of termination of the License Agreement.” [Docket No. 265 at ¶ 2].
67. Third, the Agreed Rejection Order expressly reserved “any and all claims,
rights, remedies” under the License Agreement and applicable law. [Docket No. 265 at 2].
Securing a discretionary option to terminate, in the same document that reserves any and all
rights under the License Agreement is not conduct unequivocal and inconsistent with an intent to
be bound, and indeed recognizes the contract is still operative unless and until contractually
compliant notice was tendered.12
68. Further, the Trustee’s argument that the Agreed Rejection Order modified
and in effect replaced the License Agreement “can be viewed … as a series of waivers and
modifications of the Agreement” but that such modifications occurred fails “to provide the 12 The statement that FDC would not give consent to assignment rings hallow (and is also irrelevant) because if the debtor had secured a viable party to assign the License Agreement to, FDC had already indicated it would consider permitting assignment and assumption “if an acceptable transaction” were presented to it. [Docket No. 104 ¶ 11].
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requisite unequivocal evidence of a unanimous intent to abandon” a contract. Benson v. RMJ
Sec. Corp., 683 F. Supp. 359, 374 (S.D.N.Y. 1988) (entering summary judgment against the
party asserting abandonment occurred).13
B. The License Agreement Has Not Been Validly Terminated by the Trustee.
1. The Parties Did Not Agree to a Joint Termination of the License Agreement; But Even if They Had FDC Would Not be Precluded From Seeking Damages.
69. Notwithstanding that the Agreed Rejection Order specifically provides
only for rejection and not termination, and otherwise preserves claim rights under the License
Agreement, the Trustee asserts that the circumstances surrounding entry of the Agreed Rejection
Order support or “implicitly confirm[] the termination” of the License Agreement by FDC and
the loss of any right by FDC to seek breach/rejection damages. (Memo of Law ¶ 39).
70. As an initial matter even if FDC had actually (or impliedly) terminated the
License Agreement, neither the agreement nor New York law would preclude FDC from seeking
damages.
71. The License Agreement explicitly provides that FDC could terminate the
License Agreement upon a material breach and also sue for damages. (License Agreement § 15).
It provides that upon a breach “the non-breaching party shall be entitled to exercise any rights or
remedy available to it at law or in equity” and that “remedies shall include but shall not be
limited to termination (as provided herein), damages and injunctive relief.” Id. (emphasis
added). The License Agreement makes clear that the “exercise of any rights or remedies
available” under the contract by the non-breaching party “shall not preclude the concurrent or
13 Beyond the legal shortcomings in the Trustee’s argument on abandonment/termination there are various factual issues that would need to be resolved and credibility determinations remain to be made. For example, whether the Trustee and FDC’s representatives actually intended to abandon the contract or whether any of the alleged conduct was sufficient to rise to the level of a purported implied abandonment.
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subsequent exercise by it of any other right or remedy and all rights and remedies shall be
cumulative.” Id.
72. New York law is to the same effect. Rejection under § 365 is a material
breach of contract by a debtor. “Under New York law, when one party has committed a material
breach of a 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.” NAS Elecs., Inc. v. Transtech Elecs. PTE Ltd., 262 F. Supp. 2d 134, 145
(S.D.N.Y. 2003) (emphasis added).
73. Nevertheless, FDC never explicitly or impliedly terminated. To have
actually terminated the License Agreement, FDC would have had to provide written notice of
such to the Trustee. FDC never did so nor did it have any obligation under the Agreed Rejection
Order, or otherwise, to do so.14 The Trustee has not presented any facts to suggest otherwise,
and none exist.
74. Moreover, the circumstances here do not support any “implied”
termination, to the extent an implied termination of a material contract is possible consistent with
the requirements of §§ 363 and 365 of the Bankruptcy Code that such actions be subject to order
of the court. The Agreed Rejection Order, to which the Retention Letter (as defined in the
Memo of Law) dated June 26, 2018 was attached, was entered on the Court’s docket on July 10,
2018. As an initial matter, the Rejection Letter itself could not have been operative in the
absence of its approval by the Court. But if, as the Trustee argues, the License Agreement was
14 The License Agreement requires that all notices or communications that are required or permitted under the agreement “shall be in writing” and be delivered via specified methods. (License Agreement § 16(b); see also March 22, 2019 letter from Trustee to FDC’s counsel). No such written notice is alleged to have been transmitted (nor has been proffered), and none of the termination provisions in the License Agreement contemplate an “implicit” termination, undercutting the Agreed Rejection Order argument. (See License Agreement § 12(a)-(d)).
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impliedly terminated precluding the right to assert claims thereunder by the Motion to Compel
Rejection and Rejection Letter, there would have been no rights needing preservation in the
Agreed Rejection Order. That such rights were, in fact, preserved, compels the conclusion that
the Motion to Compel Rejection and Rejection Letter did not effect a termination of the License
Agreement or FDC’s right to assert claims thereunder.15
2. The Trustee Lacked the Authority to Terminate Because the Debtor was Already in Material Breach.
75. In the alternative the Trustee asserts he terminated the License Agreement
via a March 22, 2019 letter, thereby stopping damages from accruing as of that date. But after
rejection, the debtor, or in this case the rejecting Trustee, is not able to take advantage of affirmative
rights under the rejected contract to avoid rejection damages claims or otherwise. In re Lyondell
Chem. Co., 416 B.R. 108, 115 (Bankr. S.D.N.Y. 2009) (“[R]ejection excuses future performance
under that contract by the contract counter-party, and deprives the debtor from securing the
contract's future benefits.”); see also In re WorldCom, Inc., 2006 WL 2400326, at *6 (Bankr.
S.D.N.Y. May 30, 2006), amended (May 31, 2006), aff'd, 2007 WL 2049723 (S.D.N.Y. July 13,
2007.
76. As FDC has already explained,16 New York law is to the same effect:
“when a party to a contract materially breaches that contract, it cannot then enforce that contract
15 In support of his argument the Trustee also relies upon his own subjective beliefs. (Memo of Law ¶¶ 40-42). But such are not grounds for summary judgment; and FDC has a markedly different view, which creates disputed, material issues of fact. See, e.g., Wein Decl. ¶¶ 42-46. 16 [Docket No. 1102 ¶ 16 (also citing Bear, Stearns Funding, Inc. v. Interface Group-Nevada, Inc., 361 F. Supp. 2d 283, 291 (S.D.N.Y.2005) (stating that under New York law “[a] fundamental principle of contract law provides that the material breach of a contract by one party discharges the contractual obligations of the non-breaching party”); Gomez v. MLB Enterprises, Corp., No. 15-CV-3326(CM), 2018 WL 3019102, at *13 (S.D.N.Y. June 5, 2018) (“Defendants materially breached the arbitration agreements and cannot, now, selectively enforce them against Plaintiffs.”); Onex Food Servs., Inc. v. Grieser, No. 93 CIV. 0278 (DC), 1996 WL 103975, at *5 (S.D.N.Y. Mar. 11, 1996) (“It is clear that one who breaches a contract may not seek to enforce other provisions of that contract to his or her benefit.”); Castle Creek Tech. Partners, LLC v. CellPoint Inc., No. 02 CIV. 6662 (GEL),
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against a non-breaching party.” Nadeau v. Equity Residential Properties Mgmt. Corp., 251 F.
Supp. 3d 637, 641 (S.D.N.Y. 2017) (holding that where the defendant materially breached an
arbitration agreement it “therefore cannot use the Agreement to compel arbitration”).
77. The benefit the Trustee seeks to retain is the “right” to terminate and to argue
that claims and damages under the License Agreement no longer exist; but that is not how contract
rejections work and such position also is belied by the express reservation of FDC’s rights as to all
claims under the License Agreement notwithstanding its rejection by the Trustee.17
78. The Trustee attempts to avoid this clear contract law principle by citing a
New York contract law Treatise and distinguishable cases that purport to set out an exception to
this well settled maxim. (Memo of Law ¶ 44).
79. The first case cited, Red Apple Child Development Center v. Community
School Districts Two, does not stand for the proposition that a party in material breach of a
contract can still exercise a contractually provided termination right. See 303 A.D.2d 156, 157
(1st Dep't 2003). Rather, Red Apple involved termination by the party that was not in breach of
the agreement, and stands for the mundane proposition that where a general termination right is
provided via contract no “cause” is needed and a non-breaching party has full discretion to
trigger a termination clause. See id. at 157-58.
2002 WL 31958696, at *7 (S.D.N.Y. Dec. 9, 2002) (“When a party to a contract has breached the agreement, however, either by acting in bad faith or by violating an express covenant within the agreement, it may not later rely on that breach to its advantage.”)).] 17 Though it is clear that a party then in material breach may not seek to enforce rights or benefits under the contract, even if the Trustee still could seek to terminate, termination would not obviate all factual disputes. The Trustee’s letter, dated March 23, 2019, purported to terminate as of August 31, 2019, but such would not have been appropriate under the License Agreement as in the absence of rejection or other material breach a purported termination on March 23 of one year would not effect a termination until August 31 of the following year, in this case August 31, 2020. (See License Agreement §§ 3, 12(d)). The Trustee recognizes the existence of this potential factual dispute. (Memo of Law at fn. 5).
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80. The second case cited by the Trustee, Automobile Coverage, Inc. v.
American International Group., Inc., is factually distinguishable. 42 A.D.3d 405 (1st Dep’t
2007). The issue in Automobile Coverage was, at most, whether “subsequent breaches of the
agreement” could rescind or modify an “at will” termination that was previously noticed. Id. at
407 (emphasis added). There was no suggestion the party providing the termination notice was
in breach at the time it was offered, only that during the subsequent 90-day waiting period there
were subsequent breaches. Id. The matter sub judice does not involve any “subsequent
breaches” after the termination notice was tendered but rather involves a party already in
material breach attempting to provide a termination notice, which New York law does not
permit.18
C. Summary Judgment Must be Denied Because the Trustee’s Contract Damages Argument Fails as Matter of Law and also Turns on the Facts and Circumstances.
81. FDC does not dispute that the remedy for breach of contract is expectation
damages to put FDC in the position it would have been in but for the breach. Here the contract
was breached (both via rejection and nonperformance), resulting in harm to FDC. Though the
Trustee asserts this breach did not result in compensable damages, the real dispute is the amount
of the compensable harm, an issue of fact not amenable to summary judgment. See SEB, S.A. v.
Montgomery Ward & Co., 412 F. Supp. 2d 336, 348 (S.D.N.Y. 2006) (denying summary
judgment in intellectual property rights dispute concluding “[a]s the amount of damages is a
18 For the same reasons, the Trustee’s citation to a contract law treatise is unpersuasive. (Memo of Law ¶ 44 (quoting 28 N.Y. Prac., Contract Law § 13:8)). Specifically, the portion of the treatise quoted by the Trustee in the Memo of Law relies exclusively on the Automobile Coverage decision, which is distinguishable from the facts here. See 28 N.Y. Prac., Contract Law § 13:8 at fn. 13 (citing only Automobile Coverage for the proposition the Trustee relies upon). Additionally, the same treatise also provides, among other things, that “[a] party in breach of its contractual obligations may not thereafter seek to enforce the contract for its own advantage.” 28 N.Y. Prac., Contract Law § 20:24.
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question of fact, it is for the jury to determine how much, if anything, [plaintiff] is entitled to
recover”). The Trustee’s argument that FDC’s breach failed to give rise to damages must fail.
82. Where “it is certain that damages have been caused by a breach of
contract, and the only uncertainty is as to their amount, there can rarely be good reason for
refusing, on account of such uncertainty, any damages whatever for the breach.” Coniber v. Ctr.
Point Transfer Station, Inc., 137 A.D.3d 1604, 1606 (N.Y. App. Div. 2016) (citations omitted).
Thus, a party breaching a contract cannot escape liability because the amount of the damages
caused are uncertain. Id. The amount of damages is a question for the trier of fact, and not
susceptible to summary judgment where in dispute. See generally Kerns Mfg. Corp. v. Veridium
Corp., 824 N.Y.S.2d 763 (N.Y. Sup. Ct. 2006) (TABLE) (denying summary judgment).
83. Damages need not be shown with mathematical precision and “where a
wrong has been done, the courts will endeavor to make a reasonable estimate of damages.”
Lexington Prod. Ltd. v. B. D. Commc'ns, Inc., 677 F.2d 251, 253 (2d Cir. 1982) (reversing award
of nominal damages where the proffered measure of damages that provided a “rational basis for
computation of damages”).
84. Despite the Memo of Law’s conflation, this is a case about lost future
royalties, not lost profits and “lost profits and royalties are not interchangeable.” See Honeywell
Int'l Inc. v. Northshore Power Sys., LLC, 2011 WL 3198877, at *1, 8 (N.Y. Sup. Ct. July 25,
2011), aff'd, 946 N.Y.S.2d 474 (N.Y. App. Div. 2012).19 Instead, of the more exacting
consequential damages analysis for lost future profits, FDC simply needs to show a “‘stable
19 Thus, the Kenford decisions (“Kenford I” and “Kenford II”) cited in the Memo of Law are distinguishable as each involved the Court analyzing damages issues in the context of a claim for lost profits. Memo of Law ¶¶ 45-46 (citing Kenford Co. v. Erie Cty., 67 N.Y.2d 257 (1986); Kenford Co. v. Cty. of Erie, 73 N.Y.2d 312 (1989)). In any event, “[l]oss of future profits as damages for breach of contract have been permitted in New York under long-established and precise rules of law.” Kenford I, 67 N.Y.2d at 261.
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foundation for a reasonable estimate’ of the damage incurred as a result of the breach.”
Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 108–11 (2d Cir. 2007)
(rejecting lower court’s imposition of consequential damages standard and applying the general
damages “reasonable certainty” standard because under the circumstances the “profits” were
“precisely what the non-breaching party bargained for” and are the only award to satisfy their
expectations) (citations omitted). Because future royalties are “precisely” what FDC, the non-
breaching party bargained for, the general damages standard of a stable foundation to provide a
reasonable estimate applies. See id.
85. Even if this were a lost profits case under a consequential damages rubric,
it was contemplated at the time the bargain was struck that specific percentage royalty payments
on identified property to identified customers would be made for a specific term of years, and the
royalties paid prior to the breach present a reasonably certain figure on which to base a claim for
damages.
86. The License Agreement was for a term of years and, unless a valid
termination occurred, which was only permitted under specific circumstances (License
Agreement §§ 12(a)-(d)), FDC had an expectation that its intellectual property would be
deployed in a manner that would garner it a stream of royalties through that time and is entitled
to its lost future royalties. See Honeywell, 2011 WL 3198877, at *1, 8 (permitting suit for
recovery for lost future royalty damages related to intellectual property agreement against
financially troubled counterparty who failed to perform).
87. Specifically, the loss of the benefit of the bargain by a licensor in an
intellectual property license agreement, such as the “secured use of its trademark” is a
compensable damage available under New York law. See id. at *1, 3 (denying motion to dismiss
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on lack of damages grounds in the context of an eight year trademark license agreement stating
plaintiff “suffered damages when it lost the benefit of its bargain, which included the secured use
of its trademark” and permitting claim for lost future royalties to proceed).
88. Instead of directly confronting this issue, the Trustee returns to its prior
arguments that the alleged good faith cessation of business precludes damages for Firestar’s
breaches. First, given the circumstances triggering the bankruptcy via fraud issues, it is arguable
the cessation of business was not in good faith. Further, as previously explained, the argument is
without merit with respect to the License Agreement, which ran for a specific term of years with
various affirmative (and implied) obligations to stimulate the property.
89. The vast majority of cases relied upon by the Trustee regarding the
unavailability of damages for this particular contract involved basic requirements or output
contracts which are materially different than an intellectual property license agreement.20 The
conclusion that there may not be any good faith requirements or production attached to the
requirement or output contracts and thus no cognizable breach or damages were available if a
contracting party’s bankruptcy left it with no demand for or production of the contractual input, a
result that is neither surprising nor noteworthy. The contractual counterparties in an output or
requirements contract know (and bargained for) the obvious fact there may ultimately be no
requirements or outputs by the counterparty. Here, however, there was still demand for FDC’s
product by various third parties, Firestar just failed to perform blocking such sales and the
20 See Memo of Law ¶¶ 45-51 (Citing MDC Corp., Inc. v. John H. Harland Co., 228 F. Supp. 2d 387 (S.D.N.Y. 2002) (involving requirements contract for checks); Feld v. Henry S. Levy & Sons, Inc., 37 N.Y.2d 466, 470 (1975) (involving outputs contract for breadcrumbs); In re United Cigar Stores Co. of Am., 8 F. Supp. 243 (S.D.N.Y. 1934) (involving requirements contract for ice cream), aff'd, 72 F.2d 673 (2d Cir. 1934); Plywood Sales Corp. v. Sutherlin Plywood Corp., 246 F.2d 466 (9th Cir. 1957) (involving output contract for lumber products); Gutman v. Sal-Vio Masons Inc., 339 N.Y.S.2d 562 (Sup. Ct. 1972) (involving requirements contract for construction materials); Canusa Corp. v. A & R Lobosco, Inc., 986 F. Supp. 723 (E.D.N.Y. 1997) (involving outputs contract for waste and recycling materials); Petrol. Freight Lines Corp. v. Better Gas & Oil Co., 282 N.Y.S. 671 (Sup. Ct. 1935) (involving requirements contract for petroleum products)).
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resulting royalties in breach the License Agreement and harming FDC in a manner it did not
bargain for.
90. FDC submits that the obligation to continue selling product covered by the
License Agreement is based on both the express terms of the License Agreement and as a result
of the licensee’s implied duties and obligations thereunder. New York law recognizes that when
an exclusive license is granted to another in conjunction with an obligation to use reasonable
efforts to stimulate that license, and the counterparty takes action in reliance, an express and/or
implied obligation to remain in business can attach to the contract. See 407 E. 61st Garage, Inc.
v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 280 (1968). Here, in view of the long-term contract
and the numerous affirmative obligations and covenants to retain a staff and attend trade shows
to stimulate the intellectual property, and the plain fact that those obligations could only be met
by staying in business, the contract required either expressly or implicitly for Firestar to remain
in business. (See License Agreement at §§ 8(c), 8(f), 10(a)(ii)). FDC lent its valuable property,
foregoing other opportunities for its deployment and usage, in reliance on Firestar meeting its
various affirmative obligations. Wein Decl. at ¶¶ 20-23.21
91. Regarding summary judgment specifically, the New York Court of
Appeals’ decision in Savoy, reversing the trial court’s grant of summary judgment, is particularly
instructive and counsels strongly against summary judgment of FDC’s claim. Savoy, 23 N.Y.2d
at 280. In granting summary judgment for the defendant the trial court had characterized the
21 In addition, the Trustee’s assertions that no extrinsic or parol evidence is necessary and this matter can be resolved by reference only to the words of the License Agreement, and that “neither party has contended that any provision of the relevant agreements is ambiguous” [Memo of Law ¶ 25], overlooks FDC’s consistently stated position that, at a minimum, the terms of the License Agreement created an implied obligation to remain in business for the contract’s term thereby supporting FDC’s claim for damages. [See, Docket No. 1102 at ¶¶ 9-12 and Docket No. 1086 at ¶ 34; each pleading filed by FDC stating this position and citing 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275 (1968) in support]. The existence of such an implied obligation is also a question of fact not suitable to summary judgment.
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agreement at issue as a “requirements contract” and found the defendant hotel, which
discontinued its operations while having outstanding contractual obligations with the plaintiff’s
parking garage, not liable upon the cessation of its operations despite its agreement “to use all
reasonable efforts to provide the garage with exclusive opportunity for storage of the motor
vehicles of the hotel guests” for a term of years. Id. at 277.22 In reversing, the Court of Appeals
found “that, by ceasing operation of its hotel, Savoy is not excused, as a matter of law, from
obligations under its agreement with the garage, and that there is, at least, an issue of fact as to
implied conditions in the agreement.” Id.23
92. Here, the absence of an express right for Debtors to terminate upon
ceasing operations, the various affirmative obligations undertaken by Debtors to stimulate the
licensed intellectual property, and FDC’s reliance (including, without limitation, turning over all
the human resources and other assets necessary to carry on the Fantasy Diamond business and, in
effect, shuttering its own active business operations) preclude summary judgment. Wein Decl. at
¶¶ 20-23. Because FDC acted in substantial reliance on Firestar performing its affirmative
covenants under the agreement for their full term, together with the above, there is, as in Savoy,
“at least, an issue of fact as to implied conditions under the agreement.” See Savoy, 23 N.Y.2d at
277; Wein Decl. at ¶¶ 20-23.
22 As discussed above, basic requirements contracts are distinguishable from intellectual property licenses, a notion recognized by the Court of Appeals by its rejecting the characterization of the arrangement between the parking garage operator and the hotel as a requirements contract noting the agreement was “akin to the grant of a license or franchise by Savoy to the garage.” Id. at 278. 23 In its analysis the New York Court of Appeals explained “[s]uch a promise to remain in business will be implied particularly where the promisee has undertaken certain burdens or obligations in expectation of and reliance upon the promisor's continued activity.” 23 N.Y.2d at 280 (emphasis added) (citation omitted). The court emphasized and credited (i) plaintiff’s potential “reliance upon promisor’s continued activity” pointing to acts of reliance plaintiff “may have undertaken” as a result of the contract and (ii) the absence of an express termination right upon the hotel ceasing operations (and rejected the attempted creation of an implied termination right upon the hotel ceasing operations) noting the omission of an express termination right upon ceasing operations could just as easily be construed as being “intentionally omitted” to induce the plaintiff garage company to enter the agreement. Id. at 280-81 (emphasis added).
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93. Beyond the express and implied obligations to remain in business giving
rise to a claim for damages, the Trustee’s own case law makes clear that damages are available.
94. For example, the Trustee attempts to import a requirement that the License
Agreement contain a guaranteed minimum royalty in order to give rise to damages and cites case
law purportedly in support of this proposition. (Memo of Law ¶ 51 (citing Honeywell, 2011 WL
3198877, at *8)). However, Honeywell actually supports FDC’s recovery despite the absence of
a minimum royalty and the existence of Firestar’s financial problems. See Honeywell, 2011 WL
3198877, at *8 (permitting non-breaching party to pursue an additional $15 million in lost future
royalties in excess of the minimum required royalties). Thus, under New York law, FDC’s claim
for lost future royalties is compensable. See id. at *1-8.24
95. Further, FDC’s declaration also, at the very least, creates a factual dispute
regarding the contemplation of the parties at the time of entering the agreement. Similarly, were
document discovery permitted, other grounds beyond past performance could be uncovered to
show the true measure of damages to the trier of fact, such as any internal projections that
Firestar had at or around the time of the breach regarding its anticipated sales under the
agreements. See Pharmacy, Inc. v. Am. Pharm. Partners, Inc., 511 F. Supp. 2d 324, 334
(E.D.N.Y. 2007) (denying defendant’s request for summary judgment “on the ground that the
evidence supporting lost royalties is too speculative” noting, among other things, “[a] plaintiff
may use the defendant's pre-litigation projections of sales or profits in establishing damages of
lost sales or profits.”).
24 In Honeywell, the Court permitting litigation to pursue future royalties to go forward where breaching party’s financial problems precipitated the breach and the court recognized, as here, the plaintiff “also allegedly suffered a diminished capacity to make profitable trademark license agreements with other entities during the term of the Agreement, and expenses associated with procuring a substitute licensee.” Honeywell, 2011 WL 3198877, at *7-8.
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D. The Trustee’s Claim That Damages are Limited to a Period Through December 31, 2019 is Incorrect.
96. Finally, the argument that damages are limited to the first period after
which Firestar could have purportedly exercised a termination right also fails. (See Memo of
Law ¶¶ 52-54).25
97. First, as set forth above, a breaching party cannot thereafter invoke
affirmative rights or benefits under the contract, in this case termination rights. Critically,
Firestar did not have a “unilateral right to terminate” as suggested in the Memo of Law. (Memo
of Law ¶ 52). Instead, under Section 12(d) both FDC and Firestar were granted the option to
terminate but only if royalties fell below $250,000 in any calendar year. (License Agreement
§ 12(d)). For each year Firestar performed its duties under the contract royalties were well above
this threshold. Wein Decl. at ¶ 24. The only time it is alleged that royalties fell below this
threshold (although no proof of such has been provided other than the Trustee’s unsupported
statement) was because Firestar/Fantasy failed to perform and materially breached the License
Agreement. See Onex Food, 1996 WL 103975, at *5 (“It is clear that one who breaches a
contract may not seek to enforce other provisions of that contract to his or her benefit.”); Castle
Creek Tech. Partners, 2002 WL 31958696, at *7 (same).
98. Second, the cases cited by the Trustee on this issue are not persuasive.
The first case, Millennium Aviation Servs., Inc. v. Gen. Dynamics Co., was an appeal from the
United States District Court for the District of Connecticut in a case applying Connecticut law
and did not involve a party then-in-breach attempting to trigger a contractual termination
provision. See 335 F. App'x 76, 77-78 (2d Cir. 2009). Other cases, like TNT USA Inc. v. DHL
25 Further, the March 22, 2019 letter was not contractually compliant as notice was required to be given within 60 days of the end of the calendar year.
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Exp. (USA), Inc., in contrast to the matter sub judice, involved an “unconditional right to
terminate.” 2012 WL 601452, at *7 (E.D.N.Y. Feb. 23, 2012). Where there is an absolute and
unconditional contractual right to terminate by a party, it is logical to limit expectation damages
to the length of the notice period as parties expectation of the length of the contract at the time
the bargain is struck is that it only lasts until the unconditional notice is tendered and the notice
period runs. See id. at *7-8 (explaining this conclusion is based on the expectations of the parties
at the time of bargaining).
99. This matter, however, involves a limited termination right only available
upon royalties falling below a specific amount. (License Agreement § 12(d)). None of the
Trustee’s cases involve this circumstance of a limited termination option available only when
royalties fall below a certain threshold, the occurrence of which only in fact occurred due to the
counterparties breach.26 Instead they all involve true unconditional or at will termination
provisions that obviously bore on the parties expectations at the time of contracting, and thus,
their appropriate expectation damages.27 That is not the case here.
26 Indeed, one case cited by the Trustee recognizes the critical difference between absolute and unconditional termination rights, and those, like here that have condition’s precedent to termination. (Memo of Law ¶ 52 (citing Enslein as Tr. for Xurex, Inc. v. Di Mase, 2019 WL 2505052, at *15 n.30 (W.D. Mo. June 17, 2019)). The Enslein Court recognized this difference and distinguished a number of the cases relied upon by the Trustee for involving “unconditional” “without cause” or “terminable at will” termination provisions. Enslein, 2019 WL 2505052, at *15 n.30 (emphasis in original). 27 See (Memo of Law ¶ 52 also citing Watermelons Plus, Inc. v. N.Y. City Dep't of Educ., 76 A.D.3d 973, 974-75 (N.Y. App. Div. 2010) (finding the contract contained an unconditional termination clause, which limited damages); Chatham Plan, Inc. v. Clinton Tr. Co., 246 A.D. 498, 499 (N.Y. App. Div. 1936) (noting the contract “was terminable at will by either party”)) (emphasis added). The final case cited is a 1921 decision that involved an absolute right to terminate a contract at the end of a 10 week period on two week’s-notice and sheds no light on a party then-in material breach attempting to invoke a limited termination right, the potential availability of which (royalties below $250,000), only came about due to that parties breach. See Robertson v. Charles Frohman, Inc., 191 N.Y.S. 55, 58 (N.Y. App. Div. 1921).
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IV. CONCLUSION
WHEREFORE, FDC respectfully requests that the Motion be denied and requests such
other relief as the Court deems just and proper.
Dated: November 8, 2019 SAUL EWING ARNSTEIN & LEHR LLP
By: /s/ John D. Demmy
Stephen B. Ravin John D. Demmy 1270 Avenue of the Americas, Suite 2005 New York, NY 10020 Telephone: (212) 980-7200 Email: [email protected]
[email protected] Attorneys for Fantasy Diamond Corporation
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Exhibit A
Declaration of Joseph H. Wein
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UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x : Chapter 11 In re : : Case No. 18–10509 (SHL) Firestar Diamond, Inc., et al., : : Jointly Administered Debtors. : x
DECLARATION OF JOSEPH H. WEIN IN SUPPORT OF FANATSY DIAMOND CORPORATION’S OPPOSITION
TO THE CHAPTER 11 TRUSTEE’S MOTION FOR SUMMARY JUDGMENT
I, Joseph H. Wein, hereby declare the following, under the penalty of perjury:
Background and Introduction:
1. I submit this declaration in support of the response of Fantasy Diamond
Corporation (“FDC”) in opposition to the motion for summary judgment [Docket No. 1099] filed
by the Chapter 11 Trustee (the “Trustee”).
2. I am the Chief Executive Officer and President of FDC, having held that position
since 2009. Prior thereto I was CEO of Fantasy Diamond beginning in 2002, and since 1985
have been employed by FDC in a variety of positions.
3. Except as otherwise indicated, all facts set forth in this Declaration are based on
my personal knowledge including my review of relevant documents and information. If called
upon to testify, I could and would testify competently to all the facts set forth herein.
FDC’s History:
4. FDC has been, since its founding in 1956 by my grandfather, and remains, a
family owned and operated business.
5. FDC has been involved in the jewelry business since 1956, initially serving
catalog and direct mail customers before expanding into sales to national and regional retailers.
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6. Through October 1, 2012, when it entered into transactions described below with
Firestar Diamond, Inc. (“Firestar”), FDC’s direct customers included most of the large retail
department store and jewelry chains in the United States including Costco, one of the largest
retailers in the world.
7. In 2000, FDC was awarded patents relating to its innovative diamond setting
technique used in its “Endless Diamond” product line. These patents along with the trademarks
and tradenames developed by FDC (the “FDC IP”) significantly enhanced FDC’s reputation in
the jewelry industry. Such contributed to substantial increases in FDC’s revenues, which over
time consistently increased and rose to over $70 million in 2007.
The 2008/09 Financial Crisis and its Effects:
8. The financial crisis of 2008-09 dramatically impacted FDC’s business. Jewelry is
fundamentally a luxury and/or non-essential consumer product. With consumer confidence and
resources negatively impacted by the financial crisis, the volume of FDC’s business decreased
significantly, from the “high water mark” of $70 million in revenues in 2007 to under $20
million in revenues in 2011.
9. Prior to the financial crisis FDC had its own manufacturing and sales capabilities.
In addition, Firestar (or its predecessors) also manufactured and supplied jewelry products to
FDC. The relationship was significant enough that when FDC desired to build a factory for
jewelry production in India it turned to Firestar to partner with. The entity that was formed to
own this factory was, in effect, a 50/50 joint venture between FDC and Firestar and was named
Radashir (for my three children: RAchel, DAnny, and SHIRa). After the 2008-09 financial
crisis FDC sold its interest in Radashir to Firestar, with the factory continuing thereafter to
manufacture and supply product to FDC.
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10. During the financial crisis, FDC’s lenders required FDC to liquidate significant
inventory in order to pay down FDC’s loans. Firestar assisted in such liquidation efforts: FDC
would send large lots of unsorted diamonds from liquidated inventory to Firestar, Firestar would
sort the diamonds for re-use, and Firestar then would supply these re-sorted diamonds to
Radashir to be used in new jewelry ordered by FDC.
11. Another impact of the financial crisis on FDC was that FDC was compelled to
close down some of its manufacturing locations and otherwise decrease its sales and other
operational infrastructure.
12. The decrease in FDC’s own manufacturing capabilities and in its sales
infrastructure and personnel led FDC to seek to partner with other companies in order to
continue its Endless Diamond product line in a cost-effective manner. Because of their long
standing relationship, Firestar was a logical candidate for FDC to partner with in order to
continue its business going forward.
The October 1, 2012 Transaction:
13. On or about October 1, 2012, FDC and Firestar entered into certain agreements
(the “October 1, 2012 Transaction”) providing, in effect, for Firestar to take over FDC’s business
operations and to continue to exploit the FDC IP.
14. FDC and Firestar entered into the following agreements, all dated as of October 1,
2012:
(a) the Asset Purchase Agreement, whereby FDC sold all of its assets other
than the FDC IP to Firestar, attached hereto as Exhibit 1;
(b) the License Agreement, pursuant to which FDC provided Firestar with a
license to use the FDC IP, attached hereto as Exhibit 2; and
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(c) the Costco Letter Agreement, pursuant to which, inter alia, Firestar agreed
to pay royalties to FDC on all sales of non-licensed products by Firestar to Costco
(as amended by the First Amendment to License Agreement dated and effective
as of March 1, 2015, the “Costco Agreement”), attached hereto as Exhibit 3.
15. The October 1, 2012 Transaction contemplated that Firestar would continue doing
business with FDC’s existing customers including, most importantly, Costco, under the Fantasy
name. Thus, Firestar created a new entity, Fantasy, Inc. (“Fantasy”) to conduct such business
operations.
16. The APA, the Costco Agreement and the License Agreement are complementary
parts of the October 1, 2012 Transaction, and together formed the business relationship between
FDC, Firestar and Fantasy.
17. The “jewel” of the business lines covered by the License Agreement was FDC’s
relationship with Costco. Because of its sheer size, both in terms of its customer base and the
volume of products it sells, Costco is among the most desirable retailer customers to which a
manufacturer can sell its merchandise.
18. FDC’s relationship with Costco proper began in or about 1995. FDC also sold to
Costco’s antecedents going back to before 1985.
19. The incredible value of FDC’s relationship with Costco, transferred to
Firestar/Fantasy pursuant to the October 1, 2012 Transaction, is evidenced by Firestar’s
agreement pursuant to the License Agreement to pay royalties to FDC on all of its sales to
Costco in addition to the sales of FDC’s “Endless Diamond” merchandise, with such royalty
obligations continuing even after expiration of FDC’s patents.
20. In addition to the substantial value of the Fantasy and Endless Diamond brands
and the FDC IP, FDC transferred significant relationship value to Firestar/Fantasy. In other
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words, Firestar agreed to take over FDC’s business and to provide substantial recurring
consideration in the form of royalties to FDC in return for Firestar’s access to FDC’s Costco and
other customer relationships. One of the ways in which FDC facilitated this “take over” was to
negotiate for the key FDC employees responsible for the Costco relationship as well as other key
employees to become employees of Firestar/Fantasy. This was much, much more than a
licensing arrangement: it was a hand-over of an entire operating business.
21. Upon consummation of the October 1, 2012 Transaction it was my absolute
understanding that Firestar/Fantasy would continue in business and exploit the FDC IP
throughout the remainder of the life of the FDC IP and thereafter, consistent with the long and
successful history of FDC and FDC’s very strong relationship with Costco and its other
customers. Stated another way, I expected that Firestar would perform its affirmative obligations
(including maintaining sales staff and attending trade shows) for the full term of the relevant
contracts, certain of which ran through 2025. I further expected that if the basic affirmative
obligations under the agreements were performed by Firestar, substantial royalties would have
continued to be generated. In the time after the October 1, 2012 Transaction and up to the
commencement of the captioned Firestar/Fantasy bankruptcy cases (the “Bankruptcy Cases”),
Firestar/Fantasy did exactly that.
22. FDC was agreeable to allowing the valuable FDC IP to be used by
Firestar/Fantasy for such a long term of years only because FDC (and I) relied on
Firestar/Fantasy’s contractual obligation and my expectation that it would perform for the full
term. FDC also agreed to extensions of the term in reliance on this expectation, forgoing other
potential opportunities to deploy the FDC IP. If I had any inclination that Firestar/Fantasy would
not perform as promised for the full term, FDC would not have granted a term of the length
originally granted and would not have been agreeable to extensions of the term.
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23. Particularly important to me with respect to the License Agreement was the
obligation to maintain sales staff and attend the JCK trade show. The JCK show, which occurs
in early June, around the time customers make their orders for the key fall and Christmas holiday
season, is the leading jewelry industry show/convention for jewelry manufacturers, wholesalers
and retailers. Missing the JCK trade show and failing to maintain sales staff and make shipments
could destroy the FDC IP. Absent a commitment to perform these particular affirmative
obligations, in reliance on which FDC entered into the agreements with Firestar/Fantasy, FDC
would have pursued other options and opportunities to ensure these critical endeavors to
stimulate and exploit the licensed products were undertaken. It is my understanding that during
the Bankruptcy Case the Debtors failed to perform these obligations.
24. Both prior to and after the Petition Date, Fantasy sold licensed products as well as
non-licensed products to Costco for which royalty obligations accrued. Prior to commencement
of the Bankruptcy Cases, FDC had been receiving substantial royalty income under the License
Agreement, averaging over $450,000 per year, as follows:
2012 $111,367.65 (partial year)
2013 $433,961.61
2014 $763,367.00
2015 $327,861.00
2016 $393,354.00
2017 $360,769.00
25. The above royalties were in line with my expectation at the time of contracting
regarding my expected performance of the licensed FDC products. Indeed, at the time of
entering into the License Agreement with Firestar, royalties of $250,000 per calendar year, the
threshold to permit termination of the agreement prior to the expiration of its term, was well
below what I anticipated the performance of this portfolio to achieve going forward. As set forth
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above, the royalties for each year prior to commencement of the Bankruptcy Cases well
exceeded $250,000 every year. It was and is my belief that had Fantasy performed its basic
affirmative covenants under the License Agreement royalties would have well-exceeded the
$250,000 threshold in 2018 and thereafter. Given the ongoing business that FDC transferred to
Firestar, along with the entire sales and marketing team, rights to the FDC IP, active SKUs and
customer relationships, I considered $250,000 to an absolute minimum royalty that would be
achieved through basic sales efforts. Royalties would only fall below this threshold if something
went fundamentally wrong in the jewelry industry as a whole or if there was a material breach of
contract in performing the required marketing and sales efforts.
Debtors’ Bankruptcy and Post-Bankruptcy Sales Efforts:
26. It is my understanding, from pleadings filed by the Debtors in the Bankruptcy
Cases, that approximately three weeks after news reports made public the alleged fraud
committed by certain persons and entities in the Debtors’ corporate family and ownership
structure, which resulted in the disruption of the Debtors’ manufacturing and sales capabilities
and the prospect that customers would be discontinuing buying jewelry from them, the Debtors
commenced the captioned bankruptcy cases on February 23, 2018.
27. It also is my understanding, from pleadings filed by the Debtors in the Bankruptcy
Cases, that in their initial pleadings Debtors forthrightly advertised the fraudulent conduct of
their corporate family and ownership and its impact on the Debtors, including that production
facilities had been seized; back office functioning had been compromised; and customers were
exploring other options.
28. The events recited in paragraphs 26 and 27 above were a complete surprise to me
and FDC, generally, and were of considerable concern to FDC. Firestar/Fantasy’s inability to
produce and sell product and the loss of customers for the Fantasy product – not because the
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Fantasy product was not good or salable but because the Debtors appeared to have been an active
part of or otherwise caught up in a fraudulent enterprise – had the very likely potential of
substantially harming FDC’s brand, business and the FDC IP. These events completely
surprised me and were highly concerning because as of such time Fantasy-related products
remained viable and in demand but this upheaval certainly seemed to have significant potential
to threaten the value of the FDC IP and critical business relationships.
29. But for the fraud that permeated through the Debtors’ corporate family (and,
presumably, with the Debtors as well), these bankruptcy cases, and the destruction of the
business relationship with Costco and other customers, FDC might have had many more years to
capitalize on, profit from, and possibly expand upon the Costco business (and other business
lines). Unfortunately, the fraud and bankruptcy essentially killed the last 2 years of the FDC IP
and the Costco relationship, which had 7 more years to run under the License Agreement, and
which could have gone indefinitely into the future. This understates the time period of the loss,
since while the key patent was to expire in 2 years hence, there were several additional patents
with several years of additional life. In any case, the Costco royalties were to extend 5 years
beyond the applicable patents, or a minimum of 7 years beyond the Firestar Diamond fraud.
Debtors’ Post-Bankruptcy Sales Efforts:
30. I am aware that after the commencement of the Bankruptcy Cases the Debtors
attempted to sell their assets as a going concern but those efforts ultimately were not successful.
31. Commencing soon after commencement of the Bankruptcy Cases and continuing
through the ultimate failure of the Debtors’ sale process, I had several conversations with the
Debtors’ chief restructuring officer, Mark Samson, with respect to the Debtors’ intentions, sales
efforts and plans to continue operations going forward.
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32. Mr. Samson advised that Debtors were trying to sell all of their business lines as
going concerns, including the Fantasy business, and would not agree to relinquish their rights in
and to the FDC IP and the License Agreement to allow FDC to attempt to find another licensee.
Had this been done immediately or even soon after commencement of the Bankruptcy Cases, I
believe it is possible that FDC could have minimized the damage to the Endless Diamond brand,
the on-going viability of the Fantasy business, and the customer relationships that FDC had built
up and maintained over many years but that the Debtors were in the process of destroying.
33. During my conversations with Mr. Samson I also advised him directly that FDC
was willing to work with the Debtors and any possible buyers in order to both facilitate a sale
and ensure that the Fantasy business including the FDC IP and the business relationships that
FDC had built up over the prior 60+ years could be preserved, maintained and moved forward
for the benefit of all, including FDC, the Debtors’ estate and any buyer of the Debtors’ assets.
34. In connection with the Debtors’ sale efforts, while reserving its rights, FDC also
publicly stated its willingness to work cooperatively with the Debtors and potential buyers with
respect to potentially providing its consent to a transfer of the License Agreement. See Limited
Objection and Reservation of Rights of FDC Corporation to Sale Motion and to Related Cure
Notice [Docket No. 104].
FDC’s Motion to Compel Rejection of the License Agreement:
35. When it became clear that the Debtors’ sales efforts would not produce any
proposed sale transactions which FDC could review and consider providing its consent, I
authorized my counsel to seek appropriate relief in the Bankruptcy Cases in order to give FDC
some opportunity to attempt to protect and preserve the FDC IP and the Fantasy-related business
relationships, especially with Costco. There was no intent to hamstring the Debtors or the
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Trustee in their decision-making or deliberative process. Instead, my understanding was that
such valuable relationships were in severe jeopardy due to the passage of time from
commencement of the Bankruptcy Cases with no resolution of the issues impacting the
Firestar/Fantasy debtors; and quick action was necessary if FDC was to have any chance at all to
rescue the FDC IP and the Fantasy business line. Specifically, in and around this time,
Firestar/Fantasy had stopped shipping products but also was refusing to agree to a rejection of
the License Agreement or any relief with respect to the FDC IP that might enable FDC to take
action to protect FDC IP. It is my understanding that respectable retailers, including Costco,
were scared to continue doing business with product lines affiliated with a global fraud. These
circumstances are why it was urgent for the FDC IP to be returned immediately or transferred to
a reputable party. Unfortunately, this did not occur while the business remained viable and by
the time the FDC IP was released its value and exploitability was severely compromised if not
essentially destroyed.
36. I understand that on May 21, 2018, FDC filed its motion seeking to compel
rejection of the License Agreement, relief from stay, and related relief [Docket No. 179] (the
“Motion to Compel Rejection”). The Motion to Compel Rejection was filed when it was
because the Debtors’ sales effort had ended, there was no prospect of any going concern sale
involving the Fantasy business and the FDC IP, and FDC needed rapid relief in order to take
whatever steps could be taken at such late date to attempt to save its business (even though FDC
feared it might then be too late to save the Fantasy business). From my observations, during the
first few months of the bankruptcy, customers remained open to a quick resolution and transfer
of the Fantasy business to another qualified vendor. Initially Fantasy’s key sales person and
relationship manager for Costco and the other major customers kept assuring Costco and others
that the business would be transferred quickly since it was in the interests of all involved to
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maintain rather than destroy the business. I understand that after a few months, this explanation
began to wear and after the failed sales effort of the Fantasy business line, Costco and the other
important customers walked away. Fundamentally the business was significantly damaged and
arguable destroyed at this point. Customers no longer believed that the Fantasy business and
product line would be transferrable in a timely and acceptable fashion. Retailers, especially
Costco, needed to make their plans. By the end of the JCK show, around June 4th, 2018 Costco
and the rest of Fantasy’s major customers had made their decisions and commitments for Fall
and Christmas 2018. At that point, the business had been severely compromised if not
substantially destroyed.
37. The Motion to Compel Rejection was originally scheduled for a hearing on June
7, 2019.
38. I understand that Debtors’ response to the Motion to Compel Rejection, in effect,
was to request that the Court adjourn the matter in deference to the later-filed motions of Punjab
National Bank (“PNB”) and the U.S. Trustee for appointment of a chapter 11 trustee [Docket
Nos. 181 and 185, respectively]. I understand that Debtors disputed certain of PNB’s
allegations, but did not oppose the appointment of a chapter 11 trustee [Docket No. 195].
39. I was in attendance at the June 7, 2018, hearing and was prepared to testify to the
matters set forth above in this Declaration. It is my understanding that at the June 7, 2018,
hearing the Court adjourned the Motion to Compel Rejection until the hearing scheduled for June
26, 2018; and that on June 7, 2018, the Court approved the appointment of a chapter 11 trustee.
Both of these actions inevitably led to further delay in FDC being able to take appropriate action
to protect the FDC IP and its business relationships in the industry, including most importantly
with Costco.
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40. I am aware that from and after June 7, 2018 and up to the day prior to the
scheduled June 26, 2018, hearing FDC, through its counsel, and the Trustee had discussions and
negotiations with respect to a resolution of the Motion to Compel Rejection and related issues.
On June 26, 2018 FDC and the Trustee entered into an agreement to resolve the Motion to
Compel Rejection which was memorialized in a proposed order with attached letter agreement
(the “Agreed Rejection Order”).
41. My understanding is that at the June 26th hearing the Agreed Rejection Order was
presented to the Court and that it was entered as an order on the Court’s docket on July 10, 2018
[Docket No. 265].
42. At no time during the discussions and negotiations with respect to the Agreed
Rejection Order did I understand that the Trustee had requested FDC to waive or abandon its
breach of contract damages claim that would result from a breach by rejection or otherwise of the
License Agreement or any other agreement between FDC and Firestar/Fantasy.
43. At no time during the discussions and negotiations with respect to the Agreed
Rejection Order did I offer or authorize the making of any offer for FDC to waive or abandon its
breach of contract damages claim that would result from a breach by rejection or otherwise of the
License Agreement or any other agreement between FDC and Firestar/Fantasy.
44. FDC did not intend to waive or abandon any claim that it had or may have had
resulting from any breach or rejection of the License Agreement or any other agreement between
FDC and Firestar/Fantasy. Rather, and consistent with my reading of the Agreed Rejection
Order, FDC did not waive or abandon any claim that it had or may have had resulting from any
breach or rejection of the License Agreement or any other agreement between FDC and
Firestar/Fantasy.
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45. My reading of the Agreed Rejection Order, specifically paragraph 5 thereof, is
consistent with my intent and belief at the time, that FDC explicitly reserved its right to assert
any claim that it had or may have had resulting from any breach or rejection of the License
Agreement or any other agreement between FDC and Firestar/Fantasy.
46. It was important to me at the time the Agreed Rejection Order was being
negotiated that FDC not waive or abandon any claim that it had or may have had resulting from
any breach or rejection of the License Agreement or any other agreement between FDC and
Firestar/Fantasy. Any such request for a waiver or abandonment would have been a material
term of any proposed agreement that likely would have resulted in different terms being
proposed by and acceptable to FDC as a condition of any such agreement. By June 26, 2018 and
through July 10, 2018 when the Agreed Rejection Order was entered, due to the passage of time
coupled with the pervasive fraud in which the Debtors were involved (or complicit), and the
Debtors’ failed sales efforts, I was skeptical that the Fantasy business could be resuscitated.
Thus, the prospect of asserting a claim to hopefully recover something due to the Debtors’
actions and breaches, was important to FDC and would not have been waived or released.
47. My skepticism was fueled by the fact that by the time of the JCK Jewelry show on
June 1st, 2018, it was clear that Costco and the rest of FDC’s major customers had made a
decision to move on from Fantasy. Costco in particular, is one of the most desirable customers
on the planet, and for every supplier they had, there were hundreds of suppliers hungry to get in.
It appears that being patient for a few months in the Winter of 2018, Costco simply discontinued
their Fantasy product and moved on. What might have been an opportunity for FDC to mitigate
damages earlier in 2018 was a destroyed business by July 2018.
48. In my view, the Agreed Rejection Order represents an arms-length agreement
between sophisticated parties represented by counsel which provided for a compromise of
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several issues. It was never my intent or understanding that the Rejection Motion or the Agreed
Rejection Order (and its attached letter) constituted a termination or abandonment of the relevant
agreements preventing FDC from asserting breach of contract/rejection damages claims, but
instead were actions towards a limited modification of certain, very discrete rights under such the
License Agreement which were agreeable to FDC to induce the Trustee to agree to reject the
License Agreement.
49. For example, it was my understanding that the Trustee was very concerned about
selling off inventory in his possession and that a rejection of the License Agreement could impair
his ability to do so. Under the License Agreement Sell Off Rights (as defined in the License
Agreement) apply only upon a termination of the License Agreement and then only for a limited
period of time. As a compromise in return for his agreement to reject the License Agreement,
FDC agreed to allow the Trustee to sell off existing inventory for an indefinite period of time,
both to facilitate the Trustee’s desire to maximize the value of estate assets but also, from FDC’s
perspective, to induce the Trustee to reject (see ¶ 4 and Item 2(c) in Exhibit B to the Agreed
Rejection Order).
50. Moreover, my reading of the Agreed Rejection Order is that it does not provide
for termination of the License Agreement and does not provide the Trustee with any right or
ability post-rejection to terminate the License Agreement. Such is consistent with my
understanding of what FDC agreed to by the Agreed Rejection Order as the Trustee’s rejection
of the License Agreement, which I understand causes the estate no longer to have any right to
use the FDC IP, was sufficient to allow FDC to move forward in an effort to protect and preserve
the FDC IP and to revitalize the Fantasy business. Finally, even though the Agreed Rejection
Order provided for relief from the automatic stay for FDC to terminate the License Agreement,
FDC never took any action to do so.
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51. After the July 10, 2018 rejection of the License Agreement, FDC made repeated
efforts to revive its business and to continue to exploit the FDC IP including, without limitation,
attempting to resuscitate the relationship with Costco. Because most retailers order their
inventory for the critical Holiday selling season (generally, from Thanksgiving through the New
Year) well before July 10th of the year, FDC’s efforts to generate sales in 2018 were not
successful. Moreover, the fraud and bankruptcy and the delay in obtaining the right to pursue
business relationships, as a practical matter, made FDC’s efforts in this regard impossible with
respect to Costco and for almost all other retailers with which FDC attempted to retain or obtain
as customers. It is uncertain at best whether the Costco relationship is capable of being
resuscitated.
The FDC Proof Of Claim:
52. On or about November 7, 2018, FDC timely filed its proof of claim evidencing its
claim for $2,800,000 in rejection damages under the License Agreement (the “FDC Claim”).
53. FDC’s rejection claim is straightforward and adequately supported by the 5 year
royalty history from 2013 through 2017, or the 6 year history from 2012 through 2017 (using an
annualized amount for a full 2012) which produces an average annual royalty paid by Firestar to
FDC of about $455,000 per year. Actually, the $2.8 million claim amount represents a 10%+
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EXHIBIT 1
Asset Purchase Agreement
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ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") is made and executed as of the 1st day of October 2012, by and between FIRESTAR DIAMOND, INC., a Delaware corporation, as purchaser ("Purchaser"), and FANTASY DIAMOND CORPORATION., an Illinois corporation, as seller ("Seller").
RECITALS WHEREAS, Seller is engaged in the manufacture, marketing, distribution and
sale of fine diamond and gold jewelry (the "Business"); and
WHEREAS, Seller desires to sell, convey, transfer and deliver to Purchaser and Purchaser desires to purchase from Seller certain inventory and samples which are used by Seller in connection with the operation of its Business, pursuant to and in accordance with the terms and conditions set forth in this Agreement; and
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Sale and Purchase of Assets
1.1 Assets To Be Sold and Purchased. Subject to the terms and conditions of this Agreement, at the Closing (as defined herein), Seller agrees to sell, convey, transfer, assign and deliver to Purchaser, and Purchaser agrees to purchase and acquire from Seller, all of Seller's right, title and interest in and to the following assets (collectively, the "Assets"):
(a) Seller's active inventory of finished goods which can be used by Purchaser, as referenced in Schedule 1.1(a) (the "Purchased Active Inventory");
(b) Seller's inventory of finished goods that are on consignment with customers, as referenced in Schedule 1.1(b) (the "Purchased Consignment Inventory"); and
(c) Seller's active sample line and trays, as referenced in Schedule 1.1(c) (the "Purchased Sample Inventory").
1.2 No Assumption of Liabilities. Except as otherwise expressly provided in this Section 1.2, Purchaser shall not assume or be responsible for, and shall in no event be liable for any debts, liabilities or obligations of (or claims against) Seller, whether fixed or contingent, known or unknown, liquidated or unliquidated, suspected or unsuspected, material or immaterial, absolute or contingent, matured or utunatured, determinable or undeterminable, direct or indirect, secured or unsecured, or otherwise.
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2. Purchase Price.
2.1 Amount of the Purchase Price. The purchase price for the Assets (the "Purchase Price") shall be the sum of One Million Dollars ($1,000,000). The estimated Purchase Price attributable to the Purchased Active Inventory and Purchased Sample Inventory is Three Hundred Three Thousand Three Hundred Forty Five Dollars ($303,345). The estimated Purchase Price attributable to the Purchased Consignment Inventory is ($696,655). Purchaser shall be obligated to purchase all of Seller's Consignment Inventory. To the extent the Purchased Consignment Inventory is greater or lesser than $696,655, the Purchased Active Inventory shall be adjusted so that the Purchase Price shall remain $1,000,000.
2.2 Payment of the Purchase Price. The Purchase Price, attributable to the Purchased Active Inventory and Purchased Sample Inventory shall be paid by the Purchaser, as the Purchased Active Inventory and the Purchased Sample Inventory is physically received and approved by Purchaser. The Purchase Price attributable to the Purchased Consignment Inventory shall be paid as the existence and value of each portion of the Purchased Consignment Inventory is verified by the Purchaser. Upon receipt of each portion of the Purchase Price from Purchaser, Seller shall immediately wire back to Purchaser or its designees those funds received in partial satisfaction of the obligations owed by Seller to Purchaser and certain of its affiliates.
3. Closing.
3.1 Closing Condition, Time and Place. The closing of the sale and purchase of the Assets pursuant to this Agreement (the "Closing") shall take place upon the satisfaction of all conditions set forth in this Section 3 of the Agreement, effective as of October 1, 2012 (the "Closing Date"). For all purposes, and provided the Closing has occurred, title to the Assets shall be deemed to have passed to Purchaser and the effective time of the Closing shall be deemed to occur at 12:01 a.m. on the Closing Date.
3.2 Deliveries by Seller. Subject to the terms and conditions of this Agreement, on the Closing Date, Seller shall deliver the following to Purchaser:
(a) An executed Bill of Sale in form and substance reasonably acceptable to Purchaser;
(b) An executed License Agreement in form and substance reasonably acceptable to Purchaser;
(c) An executed Lien Release Agreement, in a form satisfactory to the parties hereto, under which Seller provides releases of any prior liens upon and security interest in the Assets;
(d) A certified copy of resolutions duly adopted by the board of directors of Seller authorizing the transactions contemplated by this Agreement;
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(e) The Purchased Active Inventory and the Purchased Sample Inventory; and
(f) Such other documents as reasonably requested by Purchaser in order to convey the Assets to Purchaser.
3.3 Deliveries by Purchaser.
(a) A certified copy of resolutions duly adopted by the board of directors of Purchaser authorizing the transactions contemplated by this Agreement; and
(b) Subject to the terms and conditions of this Agreement, on the Closing Date and upon Purchaser's receipt of the executed documents described in Section 3.2 above, Purchaser shall wire transfer the Purchase Price to an account designated by Seller.
4. Representations and Warranties of Seller. As of the date hereof and as of the Closing Date, Seller represents and warrants to Purchaser as follows:
4.1 Title. Seller owns the Assets and at the Closing, Seller will transfer to Purchaser good and marketable title to all of the Assets, free and clear of all encumbrances, liens, charges, claims or other restrictions of any kind or character.
4.2 Power and Authority of Seller. Seller has the authority to enter into this Agreement and any other documents and transactions contemplated hereby. This Agreement and the other documents executed and delivered by Seller pursuant hereto constitute the legal, valid and binding obligations of Seller, enforceable in accordance with their respective terms. No authorization, consent or approval or any order of any governmental or public authority or agency is required for the execution of this Agreement or the consummation of the transactions contemplated hereby by Seller.
5. Representations and Warranties of Purchaser. As of the date hereof and as of the Closing, Purchaser represents and warrants to Seller as follows:
5.1 Power and Authority of Purchaser. Purchaser has the authority to enter into this Agreement and any other documents and transactions contemplated hereby. This Agreement and the other documents executed and delivered by Purchaser pursuant hereto constitute the legal, valid and binding obligations of Purchaser, enforceable in accordance with their respective terms. No authorization, consent or approval or any order of any governmental or public authority or agency is required for the execution of this Agreement or the consummation of the transactions contemplated hereby by Purchaser.
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6. Conditions to Obligations to Close. The obligation of Purchaser to consummate the transactions contemplated by this Agreement is subject to the satisfaction of the Seller executing and delivering to Purchaser, the documents described in Section 3.2 above.
7. Seller's Conduct Pending Closing. From and after the date of this Agreement through the Closing, Seller shall not (i) sell any of the Assets other than the sale of inventory in the ordinary course of business that creates a new receivable, (ii) allow a Lien, to attach to the Assets, or (iii) grant any right to a third party in respect of the Assets.
8. Miscellaneous.
8.1 Notices. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given (i) when hand delivered, (ii) one day after deposit with a nationally recognized commercial overnight courier with evidence of receipt to be obtained, or (iii) on the third day after deposit in the United States mail, postage prepaid and certified, return receipt requested, in each case addressed to the party entitled thereto at the address set forth below, unless such address is modified by notice under this section:
If to Seller:
Fantasy Diamond Corporation 1550 West Carroll Avenue Chicago, Illinois 60607 Attention: Joseph H. Wein
With a copy to:
Sulzer & Shopiro, Ltd. 111 W. Washington Street, Suite 855 Chicago, Illinois 60602 Attn: James M. Sulzer
If to Purchaser:
Firestar Diamond Inc. 154 West 14th Street New York, NY 1001 Attention: Mihir Bhansali
With a copy to:
Klestadt & Winters, LLP 570 Seventh Avenue — 17 th Floor New York, NY 10018
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Attention: Ian R. Winters
or to such other address or telecopy number as any party may designate by written notice in the aforesaid manner.
8.2 Assignability. This Agreement shall not be assignable by the Seller. Purchaser may assign its rights to any third party upon notice to Seller and without Seller's consent, provided that no such assignment shall release Purchaser from its obligations under this Agreement.
8.3 Governing Law; Exclusive Jurisdiction. Except to the extent governed by the Bankruptcy Code, the internal law, not the law of conflicts, of the State of Illinois will govern all questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement. Seller and Purchaser each consent to the exclusive jurisdiction of the courts of the State of Illinois, County of Cook, in connection with any dispute or claim arising out of or related to this Agreement.
8.4 Entire Agreement. This Agreement and Exhibits hereto, and other documents delivered or to be delivered pursuant to this Agreement contain or will contain the entire agreement among the parties hereto with respect to the transactions contemplated herein and supersede all previous oral and written agreements.
8.5 Amendment. This Agreement may only be amended by an agreement in writing signed by Purchaser and Seller. Neither the failure nor any delay by any party in exercising any right hereunder will operate as a waiver of such right, and no single or partial exercise of any such right will preclude any other or further exercise of such right or the exercise of any other right.
8.6 Headings. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the interpretation or meaning of this
Agreement.
8.7 Counterparts. This Agreement shall be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. A signature page of this Agreement executed and transmitted via facsimile or e-mail shall be deemed an original for all purposes.
8.8 Further Assurances. At any time after the Closing Date, Seller will, at Purchaser's request, promptly execute, acknowledge and deliver any other assurances or documents reasonably requested by Purchaser in order to complete the conveyance of the
Assets.
8.9 Expenses. Each party shall bear its own direct and indirect expenses incurred in connection with the negotiation, preparation and consummation and performance of the transactions contemplated hereby.
5
18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 23 of 79
[SIGNATURE PAGE FOLLOWS]
6
18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 24 of 79
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
PURCHASER:
F1RESTAR DIAMOND, INC.
By: Title: al ilelz eAecanee. 9°6
SELLER:
FANTASY DIAMOND CORPORATION
By: Title:
u11L1\ 9J
7
18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 25 of 79
Exhibit B
INVENTORY
Finished Goods Excluding Memo Goods 263,377 B-6
Memo Goods
Zale 537,760 B-2
JC Penney 10,516 B-4
Fred Meyer 131,026 8-1
Reeds I I-
9,212 B-3
Macy's 8,140 B-5
696,655
Salesperson's Sample Lines
Line 1 & Line 2 39,968
(Estimates)
39,968
L 1,000,000 r
18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 26 of 79
18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 27 of 79
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18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 29 of 79
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18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 31 of 79
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18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 49 of 79
JCPENNEY
CONSIGNMENT REC - AUG 31, 2012
Item
Location Actual cost FDC FINAL ACTUAL
10306D4T JCP $ 194.51 1 $ 19451
1209704W JCP $ 350.52 3 $ 1,051.56
13433D4W JCP $ 532.43 1 $ 532.43
12112D4W JCP $ 617.50 5 $ 3,087.50
13395A4W JCP $ 414.36 1 $ 414.36
1356404W JCP $ 262.40 5 $ 1,312.00
13818D4W JCP $ 351.54 7 $ 2,460.78
13910A4T JCP $ 390.91 2
$ 781.82_
_ $ 681.22, 14202D4W JCP 681.22 1
26 I $ 10,516.18( 8-4
18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 50 of 79
MACY'S CONSIGNMENT REC
JULY 31 2012
Location Actual cost FINALMC
01365D4Y MACYEAST : $ 397.35 1.00 $ 397.35
0164504T MACYEAST , $ 249.94 1.00 $ 249.94
0436304W MACYEAST $ 334.69 1.00 $ 334.69
05512D4W MACYEAST $ 228.76 1.00 $ 228.76
10015D4Y MACYEAST $ 159.05 1.00 $ 159.05
1019704T MACYEAST $ 239.72 1.00 $ 239.72 ,
1089404W MACYEAST $ 84.38 2.00 $ 168.76
1095004W MACYEAST $ 71.75 2.00 $ 143.50
1237104W MACYEAST $ 1,099.13 1.00 $ 1,099.13
1248304W MACYEAST $ 948.11 1.00 $ 948.11
12484A4Y MACYEAST $ 610.43 1.00 $ 610.43
12622D4Y MACYEAST $ 182.94 1.00 $ 182.94_
12766D3T MACYEAST $ 294.77 1.00 $ 294.77
12862D4Y MACYEAST $ 409.04 1.00 $ 409.04
1308304W/161C MACYEAST $ 137.35 1.00 $ 137.35
1314504Y MACYEAST $ 1,079.34 1.00 $ 1,079.34
1352503Y/LC MACYEAST $ 132.15 1.00 $ 132.15
1354304W MACYEAST $ 386.30 1.00 $ 386.30
1378404W MACYEAST $ 275.46 1.00 $ 275.46
13961D4Y MACYEAST $ 304.07 1.00 $ 304.07
1450604Y MACYEAST $ 359.63 1.00 $ 359.63 4
23.00 $ 8,140.49 B-5
18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 51 of 79
36095142.6 11/07/2019
EXHIBIT 2
License Agreement
18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 52 of 79
LICENSE AGREEMENTTHIS LICENSE AGREEMENT (this ‘Agreement”), is made and entered into as of the
I st day of October, 2012 (the ‘Effective Date”), by and between Fantasy Diamond Corporation,an Illinois Corporation with a principal place of business at 1550 West Carroll Avenue, ChicagoIllinois. 60607 (hereinafter Licensor”), and Firestar Diamond, Inc., a Delaware corporation witha business address of 1 54 West 14th Street, New York, NY 10011. (hereinafter Licensee”).
Recitals
WHEREAS, Licensor is engaged in business as a manufacturer, importer and wholesalerof diamond and gold jewelry (the Business”);
WHEREAS, in connection with the operation of its Business, Licensor uses certainknow-how, manufacturing, marketing or distribution techniques, technology, technical data,drawings, designs, molds, models, data and like information, some of which is covered byvarious US patents, US trademarks, US copyrights, fictitious trade names, US service marks, andother intellectual property, both registered and unregistered, which are owned by Licensor or inwhich Licensor claims a proprietary interest (the ‘intellectual Proper”); and
WHEREAS. Licensee has experience marketing, selling, and distributing fine diamondand gold jewelry and is currently engaged in business as a manufacturer, importer andwholesaler of fine diamond and gold jewelry;
WHEREAS, Licensee desires to obtain the right to use the Intellectual property inconnection with the operation of its business; and
WHEREAS, Licensor and Licensee desire to enter into this Agreement upon the termsand conditions stated herein, which agreement shall replace and supersede all prior agreementsor understanding by and between the Parties with respect to subject matters set forth herein; and
NOW, THEREFORE, for and in consideration of the foregoing and for other good andvaluable consideration, the receipt and sufficiency of which are hereby acknowledged, the partieshereto hereby agree as follows:
Agreement
1. Basic Terms. As used in the Agreement, the following terms shall have thefollowing definitions:
(a) Patents. The Patents” shall mean the patents and patent applicationsreferenced on Schedule 1(a) which have been issued to Licensor or for which registrationapplications have been filed by Licensor, subject to loss of Patents for (i) failure to issue; (ii)abandonment; or (iii) other loss of rights including as a result of final unappealable litigation orother challenge.
(b) Trademarks. The Trademarks” shall mean the trademarks andtrademark applications referenced on Schedule 1(b) which have been issued to Licensor or for
18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 53 of 79
which registration applications have been tiled subject to loss of Trademarks for (i) failure toissue; (ii) abandonment: or (iii) other loss of rights including as a result of litigation or otherchallenge, and any common-law counterparts of the same.
(c) Property. The “Property” shall mean of the Patents (including anyreissues, continuations and continuations-in-part): Trademarks: and molds, tooling, samples andcad files related to such Licensor products as are agreed upon between the parties in writingwithin thirty days of the Effective Date. which shall be listed by sku number and attachedasSchedule 1(c).
(d) Merchandise. The “Merchandise” shall mean jewelry bearing theTrademarks or sold/consigned under the brands subject of the Trademarks or jewelrymanufactured based on the Property other than the Trademarks.
(e) Close Out Merchandise. The “Close Out Merchandise” shall meanMerchandise which: (i) was sold or consigned by Licensee but is subsequently returned toLicensee by its customers and sold at a discount or reshipped to a different customer on memo.or (ii) is produced or otherwise sourced by Licensee to meet the projected purchase needs of asingle customer hut is unsold more than 90 days after production and is subsequently sold toanother customer at a discount. Licensee may not specifically produce goods for discountedprograms without the prior written consent of Licensor.
(f) Gross Profit Margin. The “Gross Profit Margin” shall mean the saleprice of Close-Out Merchandise less Licensee’s cost of goods sold (on a LIFO basis), duty andfreight.
(g) Royalty. The “Royalty” shall mean the payments due from Licensee toLicensor in accordance with Section 4.
(h) Royalty Credits. The “Royalty Credits” shall mean the Return Creditsand Cancelled Order Credits which shall be deducted from Royalty payments which wouldotherwise be due and payable by Licensee to Licensor as a result of returns and cancelled orders.as provided for in Sections 4(d) and 4(e)
(i) Refunds. “Refunds” shall mean amounts actually refunded or credited toretailers for Merchandise returned for reasons other than Quality Returns as defined in 4(d)(ii)below.
(j) Teitory/Channels of Distribution.
(i) Territory. The “Territory” shall mean the United States and allof its territories and armed service bases (wherever located) and Zales affiliates located inCanada and any other country or territory subsequently approved in writing by Licensor.
(ii) Distribution Channel. The Merchandise may he sold orotherwise distributed to jewelry specialty stores with more than 5 retail locations and their e
commerce counterparts. department stores and their e-commerce counterparts, price clubs and
their c-commerce counterparts, armed services sales outlets and their c-commerce counterparts,
18-10509-shl Doc 1211-1 Filed 11/08/19 Entered 11/08/19 16:49:33 Exhibit A - Declaration of Joseph H. Wein Pg 54 of 79
retail buying clubs and their c-commerce counterparts, retail television and their on-linecounterparts, and c-commerce only sales channels), including those stores or other retailersidentified on Schedule 1(j)(ii), and any additional store or category of stores approved inadvance and in writing by Licensor (the Distribution Channel”).
(k) Notices. Addresses tbr notices:
If to Licensor:
Fantasy Diamond Corporation1550 West Carroll AvenueChicago, Illinois 60607Attention: Joseph H. Wein
With a copy to:
Sulzer & Shopiro, Ltd.111 W. Washington StreetSuite 855Chicago, Illinois 60602Attn: James M. Sulzer
If to Licensee:
Firestar Diamond, Inc.154 West 14th StreetNew York, NY 10011Attention: Mihir Bhansali
With a copy to:
Klestadt & Winters, LLP570 Seventh Avenue — 17111 FloorNew York, NY 10018Attention: Ian R. Winters
2. Grant of License.
(a) Generally. Except as specifically provided for below, upon the terms andconditions set forth in this Agreement and provided Licensee is not in breach of this Agreement,Licensor hereby grants to Licensee a limited exclusive right to use the Property, and theexclusive right to use the various Endless Diamond” Trademarks referenced on Schedule 1(b),in connection with the design, manufacture, merchandising. marketing, advertising and sale ofthe Merchandise within the l’erritory and through the Distribution Channel.
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(h) Limited Retention of Rights. Notwithstanding Licensee’s limitedexclusive license to use the Property provided for in this Agreement, Licensor may continue touse the Property itself, in connection with its own sale or other distribution of Merchandise toindependently owned and operated jewelry specialty stores consisting of not more than 5 storelocations and their c-commerce counterparts (“Small Special Stores”): Helzherg DiamondShops. Sterling Jewelers and their c-commerce counterparts: and such additional stores approvedin writing by’ Licensee at the request of Licensor. Licensor agrees that if Licensee enters into anagreement with a single retailer to exclusively sell at least $200,000 yearly of an item describedby a single sku that is also sold by Licensor. Licensor shall cease selling that item until theearlier of(i) sales of the item cease to generate at least $200,000 in sales in any year: or (ii) theexclusivity arrangement shall end. Licensee shall promptly notify Licensor of the occurrence ofeither of these conditions. Except as provided for in Section 2(c) below. Licensor may not enterinto any license agreement with any other party with respect to the use or other exploitation ofthe Property.
(c) Retention of Litigation Rights. Notwithstanding Licensee’s limitedexclusive license to use the Property, Licensor shall retain the sole and exclusive right to initiateand prosecute enforcement actions against third party manufacturers, and to continue prosecutionof the actions referenced on Schedule 2(c) which have commenced against third party retailei’sasof the Effective Date. based upon their prior, current or future violation of Licensor’s rights withrespect to the Property. In connection with the settlement or resolution of any such enforcementproceeding. Licensor may grant such third party limited rights to use the Property which were thesubject of the enforcement proceeding. Notwithstanding. Licensor shall not commence anyenforcement proceedings against a third party to which Licensee is currently selling merchandiseor otherwise doing business without the prior written consent of Licensee. Licensor shall havethe sole and exclusive right to any award or other financial recovery which results from thecommencement of any such enforcement proceeding.
(d) Retention of Rights to Fulfill Open Orders. Notwithstanding Licensee’slimited exclusive license to use the Property, Licensor shall fulfill all purchase orders acceptedhut not fulfilled by Licensor as of the Effective Date (the “Open Orders”). NotwithstandingLicensor’s fulfillment of the Open Orders. Licensee shall be entitled to all Gross Profits resultingfrom the fulfillment of the Open Orders. For purposes of this Section 2(d). “Gross Profits” shallmean payments received by Licensor relating to the Open Orders, less costs of goods sold, duty.freight. agreed upon transition costs and expenses listed on Schedule 2(d). and the Royalty whichwould have been due and payable by Licensee to Licensor in connection with such sales had thesales been made by Licensee. Gross Profits shall he reported and paid b Licensor to Licenseeeach Wednesday with respect to payments received by Licensor during the preceding calendarweek.
(e) License to Use Office Space. If available and Licensee can hereasonably accommodated, in Licensor’s sole discretion, using space and equipment resourcesexisting at the time of Licensee’s request. Licensor shall provide Licensee with reasonable accessto and use of office space located at 1550 West Carroll Avenue. Chicago. IL 60607, or suchother office space which may he occupied by Licensor in the event that Licensor vacates itscurrent office space. and such telephones. copiers. and other furniture. fixtures or equipment that
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Licensee may require from time to time in connection with the merchandising, marketing andsale of Merchandise during the Term of this Agreement.
3. Term. The term of this Agreement shall commence on Effective Date and,subject to the terms and conditions set forth herein, shall continue through August 31, 2017 (the“Initial Term”). The Initial Term shall automatically renew for additional 1-year terms (each a“Renewal Term”) unless six (6) months’ prior notice of non-renewal is provided to the otherparty. The Term shall include the Initial Term plus any Renewal Terms. Licensee understandsand agrees that, during any Renewal Term of the Term of this Agreement, Licensee shallcontinue to be bound to the terms and conditions of this Agreement. Each twelve (12) monthperiod shall be a “Contract Year” hereunder.
4. Royalty.
(a) Royalty. l)uring the Term, except as otherwise provided for in Section4(b) below, Licensee shall pay to Licensor a royalty in an amount equal to four percent (4%) ofNet Sales (as defined in 4(c) below) of Merchandise to Costco, and six percent (6%) of Net Salesof Merchandise to all other customers. Royalties, as defined herein, shall be calculated on thebasis of Net Sales as defined herein. In the event of a loss of all Patent rights covering aparticular sku for Merchandise, the applicable Royalty for that sku shall be five percent (5 %) ifsold by Licensee under one of the Trademarks and four percent (4%) if sold by Licensee otherthan under one of the Trademarks. Licensor shall notify Licensee of any change in the status ofthe Property.
(b) Additional Royalty. In the event that Merchandise sold to Costco in anygiven fiscal year has a Gross Profit Margin of equal to or greater than 15%, then an additionalroyalty of 1% shall be due with respect to all sales of Merchandise made to Costco within suchfiscal year. This additional royalty shall be paid within 120 days of the close of the fiscal year.The parties acknowledge that Licensee’s fiscal year currently ends March 31st
(c) Royalty fbr Close-Out Goods. A reduced royalty (the ‘Close OutRoyalfr) in an amount equal to the lesser of (i) 6% (or 4% if sold to Costco) and (ii) thirty threeand 33/100 percent (33.33%) of the Gross Profit Margin shall be due on Net Sales of Close OutMerchandise. The Close Out Royalty on any sale of Close Out Merchandise shall not exceed6%, and no Close Out Royalty shall be due or payable in the event that Licensee sells Close OutMerchandise for amounts less than or equal to the cost of the Close Out Merchandise (includingcustoms, duty and freight). The Royalty paid for Close-Out Goods shall he no less than zero.Merchandise returned to Licensee by its customer which is subsequently re-shipped back to thesame customer shall not be deemed a sale of Close Out Merchandise and the royalty ratesspecified in Section 4(a) above shall apply.
(d) Net Sales. As used herein, the term “Net Sales” shall mean the paymentsor value received by Licensee on account of sales of Merchandise, less Refunds, Quality Returnsand credits actually given, co-op advertising charges, product-specific markdowns on paid items,training charges, and new store opening credits actually given. For Close Out Merchandise soldto the Navy. commissions and sales salaries actually paid may be deducted from Net Sales. Theparties agree that that the Navy co-op advertising fee is (i) 18% for jewelry where the largest
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stone is 49 points or less: (ii) 13% for jewelry where the largest stone 50-74 points; and (iii) 11%for jewelry where the largest stone is 75 points or larger.
(e) Returns; Royalty Credit.
(i) Licensee shall receive an additional credit against Royalties due onaccount of returns of Merchandise received by Licensee from its customers which werepreviously sold (i.e.. for which paYment received) or delivered on consignment/memo and whichMerchandise is subsequently melted or otherwise broken up by Licensee (Returns”). For eachaccount, the first ten percent (10%) of total sales and consignment taken in Returns in a singleContract Year will result in a return credit of fifty percent (50%) of the Royalty based on theapplicable sales price or consignment price for the Merchandise returned or delivered onconsignment/memo. For each customer. Returns which total more than (1 0%) of total sales andconsignment in a single Contract Year will result in a return credit of one hundred percent(1 00%) of the Royalty based on the applicable sales price or consignment price for theMerchandise returned or delivered on consignment/memo (“Return Credits”). The ReturnCredit is in addition to the deduction from Net Sales Ofl account of Refunds precipitated byreturns provided for in Section 4(c). By way of example, if Licensee had $1.0 million of NetSales to client X (not Costco) in a contract year and received aggregate Returns of$l20.000.Licensee would he entitled to a Return Credit of $4.200 ($100,000 X 3% and 520.000 X 6%).The value of Returns for purposes of the Return Credit will calculated based on the sale price orconsignment price of Merchandise returned by the customer and not the liquidation valuerealized from the returned Merchandise. For Return Credits on Merchandise sold or consignedto Costco. consisting of solitaire diamonds 1 .00 carat or larger. which Merchandise issubsequently returned to Licensee and melted or broken up, such Return Credit shall hecalculated omitting the sales price atribitahle to the solitaire I .00cart orjarger. (tcC-J-(r 9-i.w -i-c1pk i) ‘ ‘.I-’-
(ii) Notwithstanding the provisions set forth in 4(d)(i) above, /Merchandise Returns which result solely as a result of: (a) quality control rejects. quality controlreturns or any returns which are reshipped to the same account and (b) orders or shipments whichare cancelled and/or rejected due to nonconformance (“Quality Returns”) will not result in acredit against Royalties due hut will be deducted from gross sales for purposes of determiningNet Sales.
(iii) Example of Royalty Calculations.
Example 1:
ASSUMPTIONSRoyalty 6%coop advertising 2% example - depends on customernegative royalty 50% assume less than 10% of overall gross sales is returned during the year
Gross Shipments 1,000,000Returns (100,000)Net Sales 900,000coop advertising (18000) 2%Net Sales for Royalty Purposes 882000Royalty Earned 52,920 6%
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Example 2:
ASSUMPTIONSRoyalty 6%coop advertising 2% example - depends on customernegative royalty 50% assume less than 10% of overall gross sales is returned during the year
Amount of returns melted 45,000 negative royalty accrues for melted returnsNegative Royalty Accrued (1,350) 50%
(0 Cancelled Orders; Royalty Credit. Licensee shall receive a credit againstRoyalties due on account of order cancellations received by Licensee for which the applicableMerchandise is melted or broken up (Cance11ed Order Credits”). Cancelled Order Creditsshall be applicable only to Merchandise that is melted or broken up as follows: (i) cancellationsreceived by Licensee 3 1 days or more prior to the ship date specified in the cancelled purchaseorder shall result in no royalty credit, (ii) cancellations received by Licensee within 21-30 priorto the ship date specified in the cancelled purchase order shall result in a royalty credit of (40%)of the royalty applicable to the cancelled purchase order, (iii) cancellations received by Licenseewithin 1 0-20 prior to the ship date specified in the cancelled purchase order shall result in aroyalty credit of (70%) of the royalty applicable to the cancelled purchase order, (iv)cancellations received by Licensee less than 10 days prior to the ship date specified in thecancelled purchase order, but prior to Licensee’s importation of the goods subject of thecancelled order, shall result in a royalty credit of (90%) of the royalty applicable to the cancelledpurchase order, and (v) cancellations received by Licensee after Licensee has imported the goodssubject of the cancelled order, shall result in a royalty credit of(100%) of the royalty applicableto the cancelled purchase order. The amount of any cancellation penalty paid by Licensee’scustomers with respected to cancelled orders shall be deducted from the applicable CancelledOrder Credits.
(f Payment of Royalty. Royalty payments shall be paid not later than thefifteenth(15th) day after the last day of each calendar month ibr Net Sales in the previouscalendar month less any applicable Royalty Credits, and shall be provided by Licensee toLicensor contemporaneously with each Monthly Report (defined in Section 5(b) below).
5. Books and Records/Payment.
(a) Maintenance of Records. Licensee shall keep true and accurate books ofaccount and records in accordance with U.S. generally accepted accounting principles,consistently applied, covering all transactions relating to this Agreement and the license herebygranted. Such books of account and records shall be kept available for the longer of five (5)years after the date of the report to which such books of account and records relate or as requiredby the (Jnited States Internal Revenue Service.
(b) Monthly Reports.
(i) Generally. Not later than the lifteenth (15th) day after the lastday of each calendar month (hereafter referred to as a month”) during the Term, Licenseeshall submit to Licensor a report setting forth the following information with respect to the justconcluded month (the Month1y Report”): (1) The quantity, description and purchase price of
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all Merchandise sold by Licensee during such month and for the Year to date: (2) The identityof each purchaser of the Merchandise, as well as the quantity purchased by such entity by skunumber during such month and for the Year to date: (3) A summary of Royalty Credits onaccount of returns and cancelled orders received by Licensee during the month and how thosecredits were calculated; (4) any Reduced Royalties applied and the Merchandise and retailer towhich it applied and the normal sales price for such Merchandise; and (5) A statementindicating how the Royalty for such month was computed.
(ii) Accuracy of Information. The information disclosed on suchMonthly Report shall he in a form reasonably acceptable to Licensor. Such information shallhe comprehensive and must be presented in a clear and understandable manner and capable ofverification against ordering, hilling and shipping records. Additionall’. all figures disclosedon such Monthly Report shall have been computed in accordance with generally acceptedaccounting principles, consistently applied.
(c) Audit. Licensor and its duly authorized representatives shall have theright, upon reasonable advance notice, during normal hours of business days. to examine andcopy such hooks of account and records, and all other documents and materials in the possessionor under the control of Licensee with respect to the subject matter and the terms of thisAgreement. The cost and expense of such examination shall he borne by Licensor. except that ifsuch examination reveals an underpayment to Licensor of more than 7%. the costs of such auditshall he paid by Licensee within 30 days of Licensee’s receipt of the invoice for such audit. andall undisputed underpaid amounts shall he paid with interest (as set forth in 5(d) below) within30 days of Licensee’s receipt of the audit report indicating underpayment. Licensee shall assistLicensor in such examination in every reasonable manner requested by Licensor at no cost toLicensor.
(d) Acceptance of Reports and Statements. The receipt and/or acceptance byLicensor of any Monthly Reports or statements furnished, or Royalties paid hereunder,including. hut not limited to the cashing of any royalty checks paid hereunder (regardless ofLicensee’s endorsement on such checks), shall not preclude Licensor from questioning thecorrectness thereof within a reasonable period of time. In the event that any inconsistencies ormistakes are discovered in such statements or payments. such mistakes shall promptly herectified by Licensee and the appropriate payment shall be made by Licensee in accordance withthis Agreement. Interest at a rate of 8% per annum shall be added with respect to anyunderpayments
6. Travel and Expense Reimbursement. In the event the parties agree that travel ormarketing assistance is appropriate for the representatives of Licensor. Licensee shall pay forsuch travel and reimburse Licensor for expenses incurred in connection with such marketingefforts. All travel accommodations and expense reimbursement shall he as customary forLicensee and shall require prior written approval of Licensee.
7. Standards/Procedures. Unless otherwise consented to by Licerisor. noMerchandise shall be designed. manufactured, distributed or sold by Licensee unless it is of astandard greater than or substantially equal to that which has been previously sold by Licensor toits customers. Unless otherwise consented to by Licensor. diamond jewelry merchandise sold by
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Licensee under the Endless Diamonds” Trademark shall consist of diamonds of a SI2 quality orbetter and a I color or better. All Merchandise shall be marked for Patents and Trademarks inaccordance with United States laws and industry custom.
(a) Generally. All submissions and requests herein must be conveyed toLicensor by a means which provides evidence of Licensor’s date of receipt of such submission orrequest (for example, and without limitation, by email, certified mail, return receipt requested,overnight courier, or hand delivery where the recipient must sign for the package). Allsubmissions for approval shall be at the sole expense of Licensee, and Licensee shall supplyLicensor with such information in connection with any submission as Licensor may from time to
time reasonably direct.
(h) Product Designs and Graphics. Each design and graphic for theMerchandise containing a Trademark that Licensee proposes to market hereunder shall beconsistent with the registered use of such Trademarks.
(c) On Going Quality Control. Licensor may, from time to time, and at anytime hereunder, request that Licensee provide Licensor with randomly selected inventory orproduction samples so that Licensor may review the quality and consistency of the Merchandise.At any time during the Term, Licensor may notify Licensee if any of the samples obtained by, orsold by Licensee constitutes, in the exercise of Licensor’ s reasonable judgment, Merchandisenot meeting the agreed-upon quality standards (Substandard Merchandise”). Licensee agrees
that, upon receipt of notification that certain Merchandise does not meet such standards,Licensee shall promptly take all commercially reasonable steps necessary to bring suchMerchandise into conformance. Licensee shall not offer for sale or sell SubstandardMerchandise following receipt of Licensor’s notice of the same.
(d) Other Uses of the Property. For uses of the Trademarks upon all labels,packing and packaging materials (including, without limitation, boxes and bags), and other uses(including, without limitation, uses upon Licensee’s purchase orders, invoices, business cards,business forms, and the like), Licensee shall use the Property in a maimer that is consistent withthe registered use of the Trademarks and does not violate the rights of any third party.
8. Sales, Distribution and Advertising.
(a) Distribution Channels. Licensee may sell Merchandise to any accountidentified herein as being within an acceptable Distribution Channel. Should Licensee questionwhether or not a particular account is appropriate, Licensee may seek Licensors approval of suchaccount, which approval shall not be unreasonably withheld or delayed by Licensor.
(b) Pricing. Licensee shall determine the pricing of the Merchandise takinginto consideration the factors normally considered for pricing decisions, including the image andmarket position of the Property and the Merchandise, pricing strategies of competitors, the costsof goods and production, target markets, market conditions and general economic conditions.Licensee shall not sell Merchandise to Affiliates at prices which are solely designed to avoid orminimize payment of Royalty obligations required in connection with this Agreement.
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(c) Personnel. Licensee shall maintain and supervise its sales personnel andprovide all sales personnel with the necessary information and resources incentives to developthe potential sales of the Merchandise. Licensee shall also maintain adequate accounting.shipping. receiving, inventory, technical support, customer service. design. and productdevelopment personnel. All of the costs, expenses and liabilities associated with Licensee’spersonnel shall he the sole and absolute responsibility of Licensee.
(d) Consulting. Licensor shall, upon request. provide Licensee with agreedupon reasonable consulting services by Joe Wein regarding the design. marketing.merchandising and sale of Merchandise. No additional consulting fee shall he due or payable byLicensee to Licensor in connection with the provision of any such consulting services. Suchconsulting shall he subject to Mr. Wein’s schedule and Mr. Wein’s discretion as to quantity. Mr.Wein’s expenses fhr consulting hereunder shall be pre-approved by Licensee. Mr. Wein shallnot he obligated to provide consulting services for which out of pocket expenses. if any, shall nothe reimbursed as provided for in this Agreement.
(e) Advertising. Licensee may undertake an advertising campaign duringthe Term to support the sales effort of the Merchandise throughout the Territory. Suchadvertising may include, hut is not limited to. display advertising in industry periodicals.consumer advertising and cooperative advertising with major retailers which purchase theMerchandise.
(f) Trade Shows. Pursuant to this Agreement. Licensee shall promote the saleof Merchandise at the JCK trade show and such other additional tradeshows which Licenseedeems appropriate. Upon Licensor’s request, Licensee shall provide Licensor with such space asis agreed upon by the parties at Licensee’s tradeshow booth to market and sell Merchandise tothe categories of customers for which it has retained limited distribution rights hereunder.Licensor shall pay to Licensee its proportionate share of all actual costs and expenses paid byLicensee that are directly related to the tradeshow booth. based on the proportion of booth spaceprovided to Licensor.
(g) Sales Via The Internet.
(i) Use of the Property. Licensee, without the prior written consentof Licensor. which may he given or withheld in Licensor’s commercially reasonable discretion.may not operate. nor may Licensee knowingly authorize any third party to operate a site, thedomain name to which is comprised of, or incorporates all or any aspect of the Property.Nothing herein, however, shall restrict Licensee from using or authorizing the use of theProperty as a meta tag or in other usual and customary ways of directing visits to such website(s) (for example only. by means of linking). provided such use is legal and does not violatethe rights of any third party.
(ii) Territorial Limitations. The parties acknowledge that theworldwide web is not subject to the same geographic limitations as more traditional forms ofretailing. Therefore, any such web site shall contain such statements and protections as arereasonable and customary to assist Licensee in its efforts to honor the territorial limitation ofthis Agreement. Accordingly. any page operated by. or authorized by Licensee containing the
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Merchandise shall: () State that such goods are for delivery only within the Territory: (2) Bein the primary language(s) spoken within the Territory; and (3) Restrict the payment for theMerchandise to the primary currency or currencies accepted within the Territory. Licensoracknowledges that, due to the realities of internet commerce, and despite Licensees best effortsotherwise, Licensee cannot guarantee that the territorial restrictions of this Agreement will bestrictly upheld with respect to sales via the internet. Accordingly, Licensor agrees thatLicensee shall have satisfied its territorial obligation under this Agreement if Licensee shallhave complied with the foregoing conditions.
9. Acknowledgments and Protection of Property.
(a) Efforts. To induce Licensor to grant the license provided for in thisAgreement, Licensee has represented to Licensor that Licensee will use commercially reasonableefforts to exploit the Property consistent with the terms and conditions set forth in thisAgreement.
(b) Product I)istribution. Licensee agrees to cooperate with Licensor inmaintaining the marketing and quality standards of the Property in connection with itsmerchandising, advertising and sale of Merchandise.
(c) Rights to Property. Licensee hereby acknowledges that as betweenLicensor and Licensee, Licensor owns the Property and all rights, registrations, applications andthings with respect to such Property, and all renewals and extensions of any such registrations,applications and filings. Licensee further acknowledges that it is acquiring hereunder only theright to use the Property in connection with the design, marketing, manufacture and sale of theMerchandise in the Territory in accordance with the terms of this Agreement.
(d) Form of Property. Should Licensor modify the fbrm of all or any part ofthe Property during the Term, Licensor shall provide Licensee with written notice specifying thechange(s) made. From the date of such notice forward, except for any reorders booked prior tothe date of such notice and orders related to active or advertised programs, Licensee may notcommence production of any Merchandise containing an obsolete form of the Property.Additionally, Licensee shall have a reasonable amount of time from the date of such notice tocomplete its work in progress at the time of such notice of Merchandise with such obsoletedform of the Property and to sell off its inventory of Merchandise bearing such obsoleted form ofthe Property.
(e) Property Protection.
(i) Licensee agrees that it shall not use the Property in any mannerwhatsoever at any time during the Term, within or outside the Territory, except for suchusages, and in such manner, as have been approved of by Licensor in accordance with thisAgreement. Licensee shall not knowingly use the Property in a manner that violates any rightof any third party.
(ii) Licensee agrees to cooperate with Licensor in protecting anddefending the rights associated with the Property. Licensor shall use its reasonable businessj udgment in determining what action, if any, that it shall take in the event that any claim or
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problem arises within the Territory with respect to the Property. Licensor shall reimburseLicensee for costs and expenses incurred by Licensee (including reasonable attorneys’ fees)with respect to any actions requested by Licensor unless the action is a result of Licensee’sactions or omissions.
(iii) Licensee shall notify Licensor in writing of any infringements orimitations by third parties of the Property, the Merchandise and/or the promotional orpackaging material associated therewith, which may come to Licensees attention. Licensorshall use its reasonable business judgment in determining what action, if any. that it shall takeon account of any such infringement or imitation.
(f) Usage of the Property Within the Territory. It at any time during theTerm. Licensor determines, in its reasonable opinion, that it is unable to distribute theMerchandise hearing a particular element of the Property within any independent jurisdictionwithin the Territory, then this Agreement shall immediately terminate only with respect to suchelement of the Property within such independent jurisdiction within the Territory upon writtennotice by Licensor to Licensee stating such determination. Licensee may not attempt to sellMerchandise in such independent jurisdiction bearing such element of the Property after receiptof such notice. If such Merchandise cannot he legally sold, all outstanding orders to Licensee forMerchandise containing such element of the Property in such area shall he canceled and suchgoods returned to Licensee’s inventory.
10. Covenants of Licensee.
(a) Generally. Licensee covenants and agrees that Licensee:
(i) Shall manufacture Merchandise to he sold under the Trademarksof a quality which meets the quality standards set forth herein and make and sell Merchandiseunder the Property in a manner that will not knowingly violate any proprietary right of anythird party:
(ii) Shall retain, at its own expense. employees qualified, and in suchnumbers, as may he reasonably necessary to assist Licensee in the satisfaction of its obligationshereunder, including, without limitation, designers, merchandisers and production/samplecoordinators;
(iii) Shall not knowingly offer for sale or sell Merchandise to anyentity that Licensee reasonably believes will resell or attempt to resell the Merchandise outsideeither the Territory or the Distribution Channel, and Licensee shall not provide any assistanceto any entity in selling the Merchandise outside the Territory or the Distribution Channel:
(iv) Shall comply, at its own expense. with all laws, ordinances.rules, regulations and other requirements of all govermnental units or agencies havingjurisdiction. which laws. rules. regulations and other requirements pertain to this Agreement.
11. Mutual Confidentiality. The parties agree that they will assure that they and theirAffiliates, subsidiaries, successors and assigns and their respective employees, agents. attorneysand representatives shall maintain as confidential, shall not use for the account of any entity
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other than the disclosing party, and shall not disclose or cause to be disclosed to any person orentity, any proprietary information of the other party to which such party may gain access as aresult of its participation hereunder. The foregoing shall not apply to information that: (i) Waspreviously known to the recipient free of any obligation to keep it confidential; (ii) Wasindependently developed by recipient; (iii) Is or becomes publicly available by means other thanthe unauthorized disclosure by recipient; or (iv) The recipient is required to disclose by anyentity having appropriate jurisdiction.
12. Termination.
(a) By Licensee for Cause. Licensee may send written notice of intent toterminate this Agreement to Licensor if Licensor breaches any covenant or fails to perform anymaterial term or provision of this Agreement. Such notice must specify Licensors breach ofperformance or failure to perform. If Licensor has not cured, or taken reasonable steps leading tothe cure ol’ such material breach or nonperformance. within fifteen (15) days after receipt of suchnotice, then the Licensee shall have the right to terminate this Agreement upon an additionalthirty (30) days written notice.
(b) B Licensor for Cause. Licensor may send written notice of intent toterminate this Agreement to Licensee if Licensee breaches any covenant or fails to perform anymaterial term or provision of this Agreement. Such notice must specify Licensee’s breach ofperformance or failure to perform. If Licensee has not cured, or taken reasonable steps leadingto the cure of such material breach or nonperformance, within fifteen (15) days after receipt ofsuch notice, then the Licensor shall have the right to terminate this Agreement.
(c) Without Prior Notice. Licensor shall have the right to terminate thisAgreement without prior notice to Licensee if Licensee files a petition in bankruptcy or isadjudicated a bankrupt, or if a petition in bankruptcy is filed against Licensee and such petition isnot dismissed within thirty (30) days of its filing, or if Licensee makes an assignment for thebenefit of its creditors or an arrangement pursuant to any bankruptcy law; or if a final non-appealable injunction order is issued by a court of properjurisdiction which prohibits the sale ofMerchandise by Licensee which injunction is not vacated or stayed within sixty (60) days after itis issued.
(d) Licensor or Licensee may send written notice of intent to terminate thisAgreement to the other party, within sixty (60) days following the end of any Calendar Year(commencing with the 2013 Calendar Year), in the event that Licensee fails to pay Licensor anamount not less than $250,000 in Royalties in any Calendar Year. In the event such notice issent to and received by Licensee, Licensee may pay to Licensor an amount equal to thedifference between $250,000 and the amount of Royalties paid by Licensee to Licensor inconnection with the preceding Calendar Year.
(e) Result of Termination. Licensee shall be obligated upon termination andagain at the completion of any Sell-Off Period, in addition to any other obligation upon Licenseehereunder, to:
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(i) Immediately pay Licensor all payments that have accrued to theaccount of Licensor up to such time as Licensee ceases to sell Merchandise:
(ii) Make a full accounting to Licensor of all Net Sales. RoyaltyCredits and any other deductions applied on the date of termination and after the Sell-OffPeriod, if applicable, within ten (10) business days after the effective date of the termination orexpiration of the Sell-Off Period of this Agreement:
(iii) Continue to account to Licensor and pay Royalties to Licensor.as specified herein, for all Merchandise disposed of during the Sell-Off Period (as definedbelow), if applicable: and
(iv) cease using the Property except as needed for Sell-Off Period and.upon conclusion of the Sell-Off Period. return all tangible Property to Licensor. in the conditionexisting as of the date of termination.
(f) Liquidation of Goods.
(i) Generally. Upon the expiration of this Agreement, or itstermination for any reason whatsoever, Licensee shall immediately (except as hereinafterpermitted) discontinue the use of the Property and thereafter will no longer use or have theright to use the Property in any form or manner whatsoever and within ten (1 0) business daysof such expiration or termination provide a final accounting to Licensor as described above.
(ii) Licensor’s Right of First Refusal. Licensor shall have a right offirst refusal to purchase any finished Merchandise in Licensee’s possession or under Licensee’scontrol on the date this Agreement expires or is terminated, except that. to the extent thatLicensee has the right to dispose of the Merchandise. Licensor’s right of first refusal shall notextend to Merchandise required by Licensee to fulfill its orders and commitments. Such rightof first refusal must he exercised by Licensor, if at all, within five (5) business days afterLicensee delivers to Licensor an accounting of Licensee’s inventory. In the event that Licensorexercises this right with respect to any Merchandise, such items would he purchased atLicensee most favored customer pricing.
(iii) Licensee’s Sell-Off Right. If Licensor declines to purchase anyMerchandise remaining upon termination or expiration of this Agreement. and provided suchtermination was not a termination by Licensor due to the issuance of court ordered injunctionprohibiting Licensee’s sale of the Merchandise, Licensee shall have one hundred eighty (180)days (hereinafter referred to as the “Sell-Off Period”) in which to use the Property to make anorderly disposition of the Merchandise, and during which all provisions of this Agreementshall apply’ except as otherwise stated in this 12(f)(iii). During the Sell-Off Period, Licensee’sdisposition of Merchandise and use of the Property shall be on a non-exclusive basis and shallbe made through the same Distribution Channels used by Licensee prior to the termination ofthis Agreement. The Sell-Off Period shall begin on the later of(i) the date Licensor notifiesLicensee that it shall or shall not exercise its rights hereunder with respect to any Merchandise.or (ii) upon the expiration of Licensor’s five (5) day response time, if no answer be given.After the later of the expiration or termination of the Term and the Sell-Off Period, Licensee
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shall deliver to Licensor, in as-is” condition, all materials used for the design, development.manufacture. distribution, sale, advertising, marketing, promotion and/or servicing of theProperty and/or the Merchandise bearing the Property. Thereafter. Licensee shall not provideto others or permit others to use such materials or any variations or simulations thereof inconnection with any goods.
1 3. Assignability/Sublicensing.
(a) Licensee’s Rights.
(i) Assignment. The license granted hereunder is and shall bepersonal to Licensee and shall not be assigned by any act of Licensee, other than to anAffiliate, or by operation of law. A sale or transfer of a majority of the issued shares of stockby any shareholder of Licensee, other than a transfer to an Affiliate, shall constitute anassignment of Licensee’s rights hereunder to the extent that such sale shall result in the transferof control of Licensee from one person or entity to another person or entity. In the event of apermitted assignment hereunder, the assignee shall agree to be bound in writing by all termshereof and Licensee shall be liable to Licensor for any breach of this Agreement by anassignee of Licensee.
(ii) Sublicenses/Sub-Distributors. Licensee shall have no right togrant any sublicenses or to grant any sub-distribution rights, other than a sublicense to anAffiliate, without the prior written consent of Licensor.
14. Indemnification.
(a) By Licensee. Licensee shall indemnify, defend and hold Licensor. anyparent company. sister company, subsidiary, related company having majority commonownership with Licensee (each an AfIiliate”), and each of their respective officers, directors,employees, agents and Affiliates harmless from and against any and all demands, claims, actions,causes of action, liabilities, suits, proceedings, investigations or inquiries, or any settlementthereto, and all related expenses, including, but not limited, to all litigation expenses (includingreasonable attorneys’ fees and court costs) and settlement amounts for settlements approved byLicensee, as well as all special and consequential damages and damage to Licensor’s goodwilland reputation that arises from or in connection with, directly or indirectly, (i) Licensee’sfulfillment or failure to fulfill its obligations hereunder, including, without limitation, withrespect to the design, manufacture, packing, packaging, distribution, promotion, sale,exploitation or consumption of the Merchandise: and (ii) Licensee’s manufacture ofMerchandise.
(b) By Licensor. Licensor shall indemnify, defend and hold Licensee. anyparent company, sister company, subsidiary, or Affiliate thereof, and each of their respectiveofficers. directors. employees, agents and Affiliates harmless from and against any and alldemands. claims. actions, causes of action, liabilities. suits, proceedings. investigations orinquiries. or any settlement thereto. and all related expenses. including. hut not limited. to alllitigation expenses (including reasonable attorneys’ fees and court costs) and settlement amountsfor settlements approved by Licensor arising out of any claim that Licensee’s use of the Property
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in the form delivered by Licensor to Licensee hereunder, and otherwise in accordance with theterms of this Agreement, constitutes an infringement upon the rights of a third party.
15. Remedies. in the event that either Licensee or Licensor should breach or violateany of its covenants, representations or warranties contained in this Agreement, or fail to performany of its material obligations hereunder, the non-breaching party shall be entitled to exerciseany rights or remedy available to it at law or in equity. Such rights and remedies shall includehut shall not he limited to termination (as provided herein), damages and injunctive relief Theexercise of any rights or remedies available to Licensee or Licensor shall not preclude theconcurrent or subsequent exercise by it of any other right or remedy and all rights and remediesshall he cumulative.
16. General Provisions.
(a) Currency. All amounts stated herein are in U.S. dollars. and all paymentsrequired hereunder shall he made in U.S. dollars. Should any conversion of currency berequired. such conversion shall be made in accordance with the conversion rate published in the‘Wall Street Journal on the day before any payment shall be due.
(b) Notices. All notices and other communications which are required orwhich may be given under the provisions of this Agreement. unless otherwise specified, shall hein writing and may he delivered by confirmed overnight courier to the people and at the addressspecified in Paragraph 1(h) of this Agreement. Either party may change its address at any timeby written notice to the other party as set forth above.
(c) Entire Understanding. This Agreement sets forth the entire agreement andunderstanding between the parties with respect to the subject matter hereof and may not he orallychanged. altered, modified or amended in any respect. To effect any change. modification,alteration or amendment of this Agreement, the same must be in writing, signed by the partieshereto.
(d) Successors and Assigns. This Agreement shall be binding upon and shallinure to the benefit of all successors and assigns of the parties.
(e) No Waiver. No waiver by either party. whether expressed or implied, ofany provision of this Agreement or of any breach or default of any party. shall constitute acontinuing waiver of such provision or any other provisions of this Agreement. and no suchwaiver by any party shall prevent such party from acting upon the same or any subsequentdefault of any other part of any provisions of this Agreement.
(0 Severability. If any provision of this Agreement. or part thereof, isdeclared invalid, void or otherwise unenforceable within any independent jurisdiction within theTerritory, such provision or part thereof shall be deemed severed from this Agreement solelywith respect to such independent jurisdiction within the Territory and every other provision ofthis Agreement (including such stricken provision) shall otherwise remain in full force and effectwith respect to the remainder of the Territory. If any provision is held invalid as to duration.
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scope. activity, or subject. such provision shall be construed by limiting and reducing it so as tobe enforceable to the extent compatible with applicable law.
(g) Counterparts. This Agreement may be executed in one or morecounterparts. each of which shall be deemed an original, but all of which together shall constituteone and the same document.
(h) Facsimile Shznatures. This Agreement shall become binding andenforceable upon a partY at such time as a counterpart has been signed and either deposited in themail, or transmitted via email to the other party.
(i) Authority. Each individual signing on behalf of a party hereto representsand warrants that he/she is duly authorized by such party to execute this Agreement on behalf ofsuch party.
(j) Governing Law/Venue. This Agreement shall he construed andinterpreted pursuant to the laws of the State of New York without consideration to its choice oflaw provisions.
(k) Relationship of Parties. This Agreement does not constitute and shall notbe construed as constituting an agency. a partnership or joint venture between Licensor andLicensee. Additionally, nothing contained herein shall be construed as to create betweenLicensor and Licensee the relationship of franchisor and franchisee. Licensee shall have no rightto obligate or bind Licensor in any manner whatsoever, and nothing herein contained shall giveor is intended to give any rights of any kind to any third persons.
(I) Survival of Terms. All terms, conditions, obligations and provisionscapable of surviving the termination or expiration of this Agreement shall so survive.
(m) Draftsmanship of Agreement. This writing is the result of the mutualeffort of the parties and their respective counsel and the parties agree that neither party shall beconsidered the draftsman of this Agreement.
IC’\5 cri ,I! efeJv
UL t U i5 fl(T
,Lv
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IN WITNESS WHEREOF, the parties have executed this Agreement on the date stated above.
Fantasy Diamond Corporation — Firestar Diamond. Inc. -_________________
By: By:Name: Joseph H. Wein Name: Mihir BhansaliTitle: QhiefE ecutiv 0 ficer Title: Chief Executive OfficerDate:\\ Date: /
7/1)-_____
cu
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Schedule 1(a) — Patents and ApplicationsPatents:PAT. NO.6,591,6336,318,121CA 2379399
CA 2568100
D648,650 (US)D649,0840650,308 (US)
D650,307 (US)
134,839 (CA)134837 (CA)134836 (CA)134835 (CA)
Patent Applications:Serial No.PCT/US1 0/5077713/498,227 (US)29/407,93229/407,93329/363,63729/384,35629/427,965
TitleJewelry apparatusJewelry apparatusJewelry apparatus and Method of SettingGemstones ThereinJewelry apparatus and Method of SettingGemstones Therein9 Gemstone Arrangement (US)13 Gemstone ArrangementEleven Gemstone Arrangement - US
Fifteen Gemstones in an Arrangement in aJewelry Setting (design)9 Gemstone11 Gemstone Arrangement — CA13 Gemstone Arrangement — CA15 Gemstone Arrangement
TitleJewelry Apparatus — utilityJewelry Apparatus8 Gemstones12 Gemstone Arrangement — US13 gemstone square cut — US15 Gemstone Arrangement — US10 Gemstone US
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788919017870801478/561051(US)1265539(Canada)785610317782548378/974,344
Schedule 1(b) - Trademarks
Serial Number Word Mark
_________
Owner75/843496 Diamond jewelry
FantasyENDLESS DIAMONDS I()-
__
- - -
_____
1,212,919(CA) ENDLESS DIAMONDS Diamond jçIry FantasyJewelry manufacturing and casting to the
Fantasy0388882 (CA) FDCorder and specification of others
________
FANTASY DIAMOND Jewelry manufacturing and casting to theFANTASYi 78974259
CORPORATION + design order and specification of others
__________
ENDLESS DIAMOND JOURNEY iJewejyiamond jewelry - FANTASYENDLESS_DIAMOND LUXURY 4jeweIry -
_____
FANTASY
ENDLESS DIAMOND SOLITAIRE
ENDLESS_DIAMOND COUTUREENDLESS DIAMOND
— ENDLESS DIAMONDS +designFANTASY DIAMOND75109850CORPORATION
Diamond JewehyFANTASY
ENDLESS DIAMOND SOLITAIRE1EarnondeweIry
Fantasy
____ ____
Diam4jeweIry
_________
F5mond jewelry
__________
LDiamci1Jewelry manufacturing and casting to the
FANTASY-
order and specification of others
FANTASYFANTASYFANTASY
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Schedule 1(c) - Licensor Product Numbers
Parties to finalize within thirty days of the Effective Date. Fantasy to provide product numbers and access to Firestarto Fantasy’s image database, and parties will discuss any products to be deleted from the list.
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Schedule 1(1 )( ii) — Licensee’s Distribution Channel
AAFES.comAmazon.com (on site and store front)ASPCA.orgBeyondtherack.comBlessingsonu.comBlueNile.cornFingerhut.comFred Meyer.comgroupon.comGettington.comGilt.comHautelook.comlce.comjessicasimpson.comJewelry.comJCP.comKohls.comLeiolie.comMyHabit.comOverstock.comSams.comUSAA.comwalmart. cornZales.comZulily.corn
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Schedule 2(d) - Transition Costs
Steven Magid —8 weeks ($10,862).Sung Park —8 weeks ($16,154)Abby Abraham — by week as needed ($1,577 per week)Judy Ormond -2 days per week for as long as we are doing collections, cash posting or
reconciliation for Firestar ($229/thy)Marge Tulik - per day as needed misc. accounting issues and payment reconciliation ($322/thy)
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Schedule 2(c) - Litigation
IJitra
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36095142.6 11/07/2019
EXHIBIT 3
Costco Letter Agreement
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FIRESTAR DI INC. 154 West 14th Street, 12th Floor, New York, NY 10011
Tel: +1 646 253 9400 Fax: +1 646 253 9600
October 1, 2012
Fantasy Diamond Corporation
1550 West Carroll Avenue
Chicago, IL 60607
Attn: Mr. Joe Wein
Dear Joe:
As you know, Firestar, Inc. ("Firestar") and Fantasy Diamond Corporation ("Fantasy") have entered into a
License Agreement dated as of October 1, 2012, (the "License Agreement") pursuant to which Fantasy
has authorized Firestar to use certain Property' owned by Fantasy in connection with its manufacture,
marketing, advertising and sale of diamond and jewelry products.
In conjunction with the License, Fantasy will be introducing Firestar to its customer Costco in order to
help facilitate the potential sale of Merchandise by Firestar to Costco. The parties recognize that the
introduction of Firestar to Costco may also help facilitate Firestar's sale of its own line of diamond and
jewelry products which are not the subject of the License Agreement ("Non-Licensed Merchandise").
In consideration for Fantasy's introduction of Firestar to Costco, in addition to payment of any royalties
due under the License Agreement, Firestar agrees to pay to Fantasy a commission in an amount equal to
4% of all Net Sales of Non-Licensed Merchandise to Costco (the "Commission") for five years from the
effective date of this agreement (the "Term"). Upon the expiration of the Term, Firestar shall pay
Fantasy a commission in an amount equal to 2.5% of all Net Sales of Non-Licensed Merchandise fo'r a
period of three years commencing on the date the Term expires (the "Wind Down Commission").
For purposes of this Agreement, Net Sales shall mean payments or other value received from Costco on
account of sales of non-licensed merchandise, less refunds actually given for returns, chargebacks, coop
charges, product specific markdowns on previously paid items, and deductions and allowances given by
Firestar or taken by Costco on items for which payments were received.
Firestar shall receive an additional credit against Commissions and Wind Down Commissions due on
account of returns of Non-Licensed Merchandise received by Firestar from Costco which were previously
sold or delivered on consignment/memo and which Non-Licensed Merchandise is subsequently melted
or otherwise broken up ("Returns"). [FD note: could be affiliate that breaks up]The first ten percent
(10%) of total sales and consignment taken in Returns in a single Contract Year will result in a return
credit of fifty percent (SO%) of the Commission based on the applicable sales price or consignment price
for the Non-Licensed Merchandise returned or delivered on consignment/memo. Returns which total
more than ten percent (10%) of total sales and consignment in a single Contract Year will result in a
return credit of one hundred percent (100%) of the Commission based on the applicable sales price or
consignment price for the Non-Licensed Merchandise returned or delivered on consignment/memo
Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the License Agreement.
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By:
Na Joe Wein
Titl resident
("Return Credits"). For Return Credits on Non-Licensed Merchandise sold or consigned to Costco,
consisting of solitaire diamonds 1.00 carat or larger, which Non-Licensed Merchandise is subsequently
returned to Licensee and melted or broken up, such Return Credit shall be calculated omitting the sales
price attributable to the solitaire 1.00 carat or larger.
For the avoidance of doubt, Fantasy will not be entitled to receive the Commission provided for herein
on any sale of merchandise by Firestar to Costco in the event that Fantasy is entitled to receive a royalty
payment on account of such sale pursuant to the License Agreement.
Firestar will provide Fantasy with monthly commission statements ("Commission Statements"). The
Commission Statements will provide a summary of gross revenues, deductions from gross revenues to
achieve Net Sales and the amount of all Net Sales, Return Credits and resulting commissions due.
Commission payments shall be tendered by Firestar to Fantasy contemporaneously with all Commission
Statements").
Very truly yours,
Firestar Diamond, Inc.
By:
Name: Mihir Bhansali
Title: President
Agreed to and acknowledged:
Fantasy Diamond Corporation
LA-% ( (9e_
iikh2 eurcir-, c-se- 9-0
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35964713.3 11/07/2019 36164325.7
Exhibit B
Agreed Rejection Order
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114901660.1 114972233.2 07/10/2018
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x : In re : Chapter 11 : Firestar Diamond, Inc., et al., : Case No. 18–10509 (SHL) : Debtors. : Jointly Administered x Related to Docket No. 179 AGREED ORDER GRANTING MOTION OF FANTASY DIAMOND CORPORATION:
(I) TO COMPEL REJECTION OF LICENSE AGREEMENT AND FOR RELIEF FROM THE AUTOMATIC STAY TO PROVIDE NOTICE OF TERMINATION UPON
REJECTION, AND/OR (II) FOR RELIEF FROM THE AUTOMATIC STAY TO PROVIDE NOTICE OF NON-RENEWAL OF THE TERM OF THE LICENSE
AGREEMENT, TO THE EXTENT NECESSARY, AND (III) FOR RELATED RELIEF
Upon the motion [Docket No. 179] (the “Motion”)1 of Fantasy Diamond Corporation
(“Fantasy Diamond”) for entry of an order (i) pursuant to 11 U.S.C. § 365 compelling Debtors to
reject the certain License Agreement dated and entered into by and between Fantasy Diamond and
Debtor Firestar Diamonds, Inc. as of October 1, 2012 (the “License Agreement”, a true and correct
copy of which is attached as Exhibit A), (ii) pursuant to 11 U.S.C. § 362, for relief from the
automatic stay, and, (iii) for related relief; and the Court having jurisdiction over the Motion
pursuant to 28 U.S.C. §§ 157 and 1334; and the Court having found that this is a core proceeding
pursuant to 28 U.S.C. § 157(b)(2); and the Court having found that the venue of this proceeding
and the Motion in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409; and the Court
having found that notice of the Motion and the hearings on the Motion was appropriate and no
other notice need be provided; and the Court having reviewed the Motion, all statements and
evidence presented in connection with and at the hearings on the Motion on June 7, 2018 and
1 Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the License Agreement (as defined herein).
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2 114901660.1 07/10/2018 114972233.2
June 26, 2018, including all responses to the Motion; and the Court having determined, based on
such statements and evidence and upon the agreement between Fantasy Diamond and the
Chapter 11 Trustee as set forth in the letter attached hereto as Exhibit B, that just cause exists for
the relief granted herein; and upon all of the proceedings before the Court with respect to the
Motion; and after due deliberation and sufficient cause appearing therefor;
IT IS HEREBY ORDERED THAT:
1. The Motion is GRANTED as set forth herein;
2. Rejection of the License Agreement is hereby authorized and approved pursuant
to 11 U.S.C. § 365(a) effective as of the entry of this Order on the Court’s docket.
3. The automatic stay of 11 U.S.C. § 362(a) is hereby terminated to allow Fantasy
Diamond at its discretion to provide written notice of termination of the License Agreement.
4. Notwithstanding rejection or termination of the License Agreement, Fantasy
Diamond, Inc. shall retain certain rights and obligations in respect of Merchandise covered by the
License Agreement as set forth in Exhibit B.
5. Other than as set forth herein or in Exhibit B, the Debtors and Fantasy Diamond
shall reserve and retain any and all claims, rights, remedies, and defenses whatsoever that they
may have under the License Agreement and/or applicable law.
6. Notwithstanding the possible applicability of Federal Rules of Bankruptcy
Procedure 4001(a)(3), 6004(h), 7062, 9014 or otherwise, this Order shall be immediately
effective and enforceable upon its entry.
7. The Debtors and Fantasy Diamond are hereby authorized to take all actions
necessary to effectuate the relief granted pursuant to this Order.
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3 114901660.1 07/10/2018 114972233.2
8. The Court shall retain jurisdiction with respect to all matters arising from or
related to the interpretation or implementation of this Order.
Date: July 10, 2018
/s/ Sean H. Lane The Honorable Sean H. Lane United States Bankruptcy Judge
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114901660.1 114972233.1 06/25/2018 114972233.3 06/26/2018
EXHIBIT A
License Agreement
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LICENSE AGREEMENTTHIS LICENSE AGREEMENT (this ‘Agreement”), is made and entered into as of the
I st day of October, 2012 (the ‘Effective Date”), by and between Fantasy Diamond Corporation,an Illinois Corporation with a principal place of business at 1550 West Carroll Avenue, ChicagoIllinois. 60607 (hereinafter Licensor”), and Firestar Diamond, Inc., a Delaware corporation witha business address of 1 54 West 14th Street, New York, NY 10011. (hereinafter Licensee”).
Recitals
WHEREAS, Licensor is engaged in business as a manufacturer, importer and wholesalerof diamond and gold jewelry (the Business”);
WHEREAS, in connection with the operation of its Business, Licensor uses certainknow-how, manufacturing, marketing or distribution techniques, technology, technical data,drawings, designs, molds, models, data and like information, some of which is covered byvarious US patents, US trademarks, US copyrights, fictitious trade names, US service marks, andother intellectual property, both registered and unregistered, which are owned by Licensor or inwhich Licensor claims a proprietary interest (the ‘intellectual Proper”); and
WHEREAS. Licensee has experience marketing, selling, and distributing fine diamondand gold jewelry and is currently engaged in business as a manufacturer, importer andwholesaler of fine diamond and gold jewelry;
WHEREAS, Licensee desires to obtain the right to use the Intellectual property inconnection with the operation of its business; and
WHEREAS, Licensor and Licensee desire to enter into this Agreement upon the termsand conditions stated herein, which agreement shall replace and supersede all prior agreementsor understanding by and between the Parties with respect to subject matters set forth herein; and
NOW, THEREFORE, for and in consideration of the foregoing and for other good andvaluable consideration, the receipt and sufficiency of which are hereby acknowledged, the partieshereto hereby agree as follows:
Agreement
1. Basic Terms. As used in the Agreement, the following terms shall have thefollowing definitions:
(a) Patents. The Patents” shall mean the patents and patent applicationsreferenced on Schedule 1(a) which have been issued to Licensor or for which registrationapplications have been filed by Licensor, subject to loss of Patents for (i) failure to issue; (ii)abandonment; or (iii) other loss of rights including as a result of final unappealable litigation orother challenge.
(b) Trademarks. The Trademarks” shall mean the trademarks andtrademark applications referenced on Schedule 1(b) which have been issued to Licensor or for
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which registration applications have been tiled subject to loss of Trademarks for (i) failure toissue; (ii) abandonment: or (iii) other loss of rights including as a result of litigation or otherchallenge, and any common-law counterparts of the same.
(c) Property. The “Property” shall mean of the Patents (including anyreissues, continuations and continuations-in-part): Trademarks: and molds, tooling, samples andcad files related to such Licensor products as are agreed upon between the parties in writingwithin thirty days of the Effective Date. which shall be listed by sku number and attachedasSchedule 1(c).
(d) Merchandise. The “Merchandise” shall mean jewelry bearing theTrademarks or sold/consigned under the brands subject of the Trademarks or jewelrymanufactured based on the Property other than the Trademarks.
(e) Close Out Merchandise. The “Close Out Merchandise” shall meanMerchandise which: (i) was sold or consigned by Licensee but is subsequently returned toLicensee by its customers and sold at a discount or reshipped to a different customer on memo.or (ii) is produced or otherwise sourced by Licensee to meet the projected purchase needs of asingle customer hut is unsold more than 90 days after production and is subsequently sold toanother customer at a discount. Licensee may not specifically produce goods for discountedprograms without the prior written consent of Licensor.
(f) Gross Profit Margin. The “Gross Profit Margin” shall mean the saleprice of Close-Out Merchandise less Licensee’s cost of goods sold (on a LIFO basis), duty andfreight.
(g) Royalty. The “Royalty” shall mean the payments due from Licensee toLicensor in accordance with Section 4.
(h) Royalty Credits. The “Royalty Credits” shall mean the Return Creditsand Cancelled Order Credits which shall be deducted from Royalty payments which wouldotherwise be due and payable by Licensee to Licensor as a result of returns and cancelled orders.as provided for in Sections 4(d) and 4(e)
(i) Refunds. “Refunds” shall mean amounts actually refunded or credited toretailers for Merchandise returned for reasons other than Quality Returns as defined in 4(d)(ii)below.
(j) Teitory/Channels of Distribution.
(i) Territory. The “Territory” shall mean the United States and allof its territories and armed service bases (wherever located) and Zales affiliates located inCanada and any other country or territory subsequently approved in writing by Licensor.
(ii) Distribution Channel. The Merchandise may he sold orotherwise distributed to jewelry specialty stores with more than 5 retail locations and their e
commerce counterparts. department stores and their e-commerce counterparts, price clubs and
their c-commerce counterparts, armed services sales outlets and their c-commerce counterparts,
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retail buying clubs and their c-commerce counterparts, retail television and their on-linecounterparts, and c-commerce only sales channels), including those stores or other retailersidentified on Schedule 1(j)(ii), and any additional store or category of stores approved inadvance and in writing by Licensor (the Distribution Channel”).
(k) Notices. Addresses tbr notices:
If to Licensor:
Fantasy Diamond Corporation1550 West Carroll AvenueChicago, Illinois 60607Attention: Joseph H. Wein
With a copy to:
Sulzer & Shopiro, Ltd.111 W. Washington StreetSuite 855Chicago, Illinois 60602Attn: James M. Sulzer
If to Licensee:
Firestar Diamond, Inc.154 West 14th StreetNew York, NY 10011Attention: Mihir Bhansali
With a copy to:
Klestadt & Winters, LLP570 Seventh Avenue — 17111 FloorNew York, NY 10018Attention: Ian R. Winters
2. Grant of License.
(a) Generally. Except as specifically provided for below, upon the terms andconditions set forth in this Agreement and provided Licensee is not in breach of this Agreement,Licensor hereby grants to Licensee a limited exclusive right to use the Property, and theexclusive right to use the various Endless Diamond” Trademarks referenced on Schedule 1(b),in connection with the design, manufacture, merchandising. marketing, advertising and sale ofthe Merchandise within the l’erritory and through the Distribution Channel.
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(h) Limited Retention of Rights. Notwithstanding Licensee’s limitedexclusive license to use the Property provided for in this Agreement, Licensor may continue touse the Property itself, in connection with its own sale or other distribution of Merchandise toindependently owned and operated jewelry specialty stores consisting of not more than 5 storelocations and their c-commerce counterparts (“Small Special Stores”): Helzherg DiamondShops. Sterling Jewelers and their c-commerce counterparts: and such additional stores approvedin writing by’ Licensee at the request of Licensor. Licensor agrees that if Licensee enters into anagreement with a single retailer to exclusively sell at least $200,000 yearly of an item describedby a single sku that is also sold by Licensor. Licensor shall cease selling that item until theearlier of(i) sales of the item cease to generate at least $200,000 in sales in any year: or (ii) theexclusivity arrangement shall end. Licensee shall promptly notify Licensor of the occurrence ofeither of these conditions. Except as provided for in Section 2(c) below. Licensor may not enterinto any license agreement with any other party with respect to the use or other exploitation ofthe Property.
(c) Retention of Litigation Rights. Notwithstanding Licensee’s limitedexclusive license to use the Property, Licensor shall retain the sole and exclusive right to initiateand prosecute enforcement actions against third party manufacturers, and to continue prosecutionof the actions referenced on Schedule 2(c) which have commenced against third party retailei’sasof the Effective Date. based upon their prior, current or future violation of Licensor’s rights withrespect to the Property. In connection with the settlement or resolution of any such enforcementproceeding. Licensor may grant such third party limited rights to use the Property which were thesubject of the enforcement proceeding. Notwithstanding. Licensor shall not commence anyenforcement proceedings against a third party to which Licensee is currently selling merchandiseor otherwise doing business without the prior written consent of Licensee. Licensor shall havethe sole and exclusive right to any award or other financial recovery which results from thecommencement of any such enforcement proceeding.
(d) Retention of Rights to Fulfill Open Orders. Notwithstanding Licensee’slimited exclusive license to use the Property, Licensor shall fulfill all purchase orders acceptedhut not fulfilled by Licensor as of the Effective Date (the “Open Orders”). NotwithstandingLicensor’s fulfillment of the Open Orders. Licensee shall be entitled to all Gross Profits resultingfrom the fulfillment of the Open Orders. For purposes of this Section 2(d). “Gross Profits” shallmean payments received by Licensor relating to the Open Orders, less costs of goods sold, duty.freight. agreed upon transition costs and expenses listed on Schedule 2(d). and the Royalty whichwould have been due and payable by Licensee to Licensor in connection with such sales had thesales been made by Licensee. Gross Profits shall he reported and paid b Licensor to Licenseeeach Wednesday with respect to payments received by Licensor during the preceding calendarweek.
(e) License to Use Office Space. If available and Licensee can hereasonably accommodated, in Licensor’s sole discretion, using space and equipment resourcesexisting at the time of Licensee’s request. Licensor shall provide Licensee with reasonable accessto and use of office space located at 1550 West Carroll Avenue. Chicago. IL 60607, or suchother office space which may he occupied by Licensor in the event that Licensor vacates itscurrent office space. and such telephones. copiers. and other furniture. fixtures or equipment that
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Licensee may require from time to time in connection with the merchandising, marketing andsale of Merchandise during the Term of this Agreement.
3. Term. The term of this Agreement shall commence on Effective Date and,subject to the terms and conditions set forth herein, shall continue through August 31, 2017 (the“Initial Term”). The Initial Term shall automatically renew for additional 1-year terms (each a“Renewal Term”) unless six (6) months’ prior notice of non-renewal is provided to the otherparty. The Term shall include the Initial Term plus any Renewal Terms. Licensee understandsand agrees that, during any Renewal Term of the Term of this Agreement, Licensee shallcontinue to be bound to the terms and conditions of this Agreement. Each twelve (12) monthperiod shall be a “Contract Year” hereunder.
4. Royalty.
(a) Royalty. l)uring the Term, except as otherwise provided for in Section4(b) below, Licensee shall pay to Licensor a royalty in an amount equal to four percent (4%) ofNet Sales (as defined in 4(c) below) of Merchandise to Costco, and six percent (6%) of Net Salesof Merchandise to all other customers. Royalties, as defined herein, shall be calculated on thebasis of Net Sales as defined herein. In the event of a loss of all Patent rights covering aparticular sku for Merchandise, the applicable Royalty for that sku shall be five percent (5 %) ifsold by Licensee under one of the Trademarks and four percent (4%) if sold by Licensee otherthan under one of the Trademarks. Licensor shall notify Licensee of any change in the status ofthe Property.
(b) Additional Royalty. In the event that Merchandise sold to Costco in anygiven fiscal year has a Gross Profit Margin of equal to or greater than 15%, then an additionalroyalty of 1% shall be due with respect to all sales of Merchandise made to Costco within suchfiscal year. This additional royalty shall be paid within 120 days of the close of the fiscal year.The parties acknowledge that Licensee’s fiscal year currently ends March 31st
(c) Royalty fbr Close-Out Goods. A reduced royalty (the ‘Close OutRoyalfr) in an amount equal to the lesser of (i) 6% (or 4% if sold to Costco) and (ii) thirty threeand 33/100 percent (33.33%) of the Gross Profit Margin shall be due on Net Sales of Close OutMerchandise. The Close Out Royalty on any sale of Close Out Merchandise shall not exceed6%, and no Close Out Royalty shall be due or payable in the event that Licensee sells Close OutMerchandise for amounts less than or equal to the cost of the Close Out Merchandise (includingcustoms, duty and freight). The Royalty paid for Close-Out Goods shall he no less than zero.Merchandise returned to Licensee by its customer which is subsequently re-shipped back to thesame customer shall not be deemed a sale of Close Out Merchandise and the royalty ratesspecified in Section 4(a) above shall apply.
(d) Net Sales. As used herein, the term “Net Sales” shall mean the paymentsor value received by Licensee on account of sales of Merchandise, less Refunds, Quality Returnsand credits actually given, co-op advertising charges, product-specific markdowns on paid items,training charges, and new store opening credits actually given. For Close Out Merchandise soldto the Navy. commissions and sales salaries actually paid may be deducted from Net Sales. Theparties agree that that the Navy co-op advertising fee is (i) 18% for jewelry where the largest
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stone is 49 points or less: (ii) 13% for jewelry where the largest stone 50-74 points; and (iii) 11%for jewelry where the largest stone is 75 points or larger.
(e) Returns; Royalty Credit.
(i) Licensee shall receive an additional credit against Royalties due onaccount of returns of Merchandise received by Licensee from its customers which werepreviously sold (i.e.. for which paYment received) or delivered on consignment/memo and whichMerchandise is subsequently melted or otherwise broken up by Licensee (Returns”). For eachaccount, the first ten percent (10%) of total sales and consignment taken in Returns in a singleContract Year will result in a return credit of fifty percent (50%) of the Royalty based on theapplicable sales price or consignment price for the Merchandise returned or delivered onconsignment/memo. For each customer. Returns which total more than (1 0%) of total sales andconsignment in a single Contract Year will result in a return credit of one hundred percent(1 00%) of the Royalty based on the applicable sales price or consignment price for theMerchandise returned or delivered on consignment/memo (“Return Credits”). The ReturnCredit is in addition to the deduction from Net Sales Ofl account of Refunds precipitated byreturns provided for in Section 4(c). By way of example, if Licensee had $1.0 million of NetSales to client X (not Costco) in a contract year and received aggregate Returns of$l20.000.Licensee would he entitled to a Return Credit of $4.200 ($100,000 X 3% and 520.000 X 6%).The value of Returns for purposes of the Return Credit will calculated based on the sale price orconsignment price of Merchandise returned by the customer and not the liquidation valuerealized from the returned Merchandise. For Return Credits on Merchandise sold or consignedto Costco. consisting of solitaire diamonds 1 .00 carat or larger. which Merchandise issubsequently returned to Licensee and melted or broken up, such Return Credit shall hecalculated omitting the sales price atribitahle to the solitaire I .00cart orjarger. (tcC-J-(r 9-i.w -i-c1pk i) ‘ ‘.I-’-
(ii) Notwithstanding the provisions set forth in 4(d)(i) above, /Merchandise Returns which result solely as a result of: (a) quality control rejects. quality controlreturns or any returns which are reshipped to the same account and (b) orders or shipments whichare cancelled and/or rejected due to nonconformance (“Quality Returns”) will not result in acredit against Royalties due hut will be deducted from gross sales for purposes of determiningNet Sales.
(iii) Example of Royalty Calculations.
Example 1:
ASSUMPTIONSRoyalty 6%coop advertising 2% example - depends on customernegative royalty 50% assume less than 10% of overall gross sales is returned during the year
Gross Shipments 1,000,000Returns (100,000)Net Sales 900,000coop advertising (18000) 2%Net Sales for Royalty Purposes 882000Royalty Earned 52,920 6%
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Example 2:
ASSUMPTIONSRoyalty 6%coop advertising 2% example - depends on customernegative royalty 50% assume less than 10% of overall gross sales is returned during the year
Amount of returns melted 45,000 negative royalty accrues for melted returnsNegative Royalty Accrued (1,350) 50%
(0 Cancelled Orders; Royalty Credit. Licensee shall receive a credit againstRoyalties due on account of order cancellations received by Licensee for which the applicableMerchandise is melted or broken up (Cance11ed Order Credits”). Cancelled Order Creditsshall be applicable only to Merchandise that is melted or broken up as follows: (i) cancellationsreceived by Licensee 3 1 days or more prior to the ship date specified in the cancelled purchaseorder shall result in no royalty credit, (ii) cancellations received by Licensee within 21-30 priorto the ship date specified in the cancelled purchase order shall result in a royalty credit of (40%)of the royalty applicable to the cancelled purchase order, (iii) cancellations received by Licenseewithin 1 0-20 prior to the ship date specified in the cancelled purchase order shall result in aroyalty credit of (70%) of the royalty applicable to the cancelled purchase order, (iv)cancellations received by Licensee less than 10 days prior to the ship date specified in thecancelled purchase order, but prior to Licensee’s importation of the goods subject of thecancelled order, shall result in a royalty credit of (90%) of the royalty applicable to the cancelledpurchase order, and (v) cancellations received by Licensee after Licensee has imported the goodssubject of the cancelled order, shall result in a royalty credit of(100%) of the royalty applicableto the cancelled purchase order. The amount of any cancellation penalty paid by Licensee’scustomers with respected to cancelled orders shall be deducted from the applicable CancelledOrder Credits.
(f Payment of Royalty. Royalty payments shall be paid not later than thefifteenth(15th) day after the last day of each calendar month ibr Net Sales in the previouscalendar month less any applicable Royalty Credits, and shall be provided by Licensee toLicensor contemporaneously with each Monthly Report (defined in Section 5(b) below).
5. Books and Records/Payment.
(a) Maintenance of Records. Licensee shall keep true and accurate books ofaccount and records in accordance with U.S. generally accepted accounting principles,consistently applied, covering all transactions relating to this Agreement and the license herebygranted. Such books of account and records shall be kept available for the longer of five (5)years after the date of the report to which such books of account and records relate or as requiredby the (Jnited States Internal Revenue Service.
(b) Monthly Reports.
(i) Generally. Not later than the lifteenth (15th) day after the lastday of each calendar month (hereafter referred to as a month”) during the Term, Licenseeshall submit to Licensor a report setting forth the following information with respect to the justconcluded month (the Month1y Report”): (1) The quantity, description and purchase price of
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all Merchandise sold by Licensee during such month and for the Year to date: (2) The identityof each purchaser of the Merchandise, as well as the quantity purchased by such entity by skunumber during such month and for the Year to date: (3) A summary of Royalty Credits onaccount of returns and cancelled orders received by Licensee during the month and how thosecredits were calculated; (4) any Reduced Royalties applied and the Merchandise and retailer towhich it applied and the normal sales price for such Merchandise; and (5) A statementindicating how the Royalty for such month was computed.
(ii) Accuracy of Information. The information disclosed on suchMonthly Report shall he in a form reasonably acceptable to Licensor. Such information shallhe comprehensive and must be presented in a clear and understandable manner and capable ofverification against ordering, hilling and shipping records. Additionall’. all figures disclosedon such Monthly Report shall have been computed in accordance with generally acceptedaccounting principles, consistently applied.
(c) Audit. Licensor and its duly authorized representatives shall have theright, upon reasonable advance notice, during normal hours of business days. to examine andcopy such hooks of account and records, and all other documents and materials in the possessionor under the control of Licensee with respect to the subject matter and the terms of thisAgreement. The cost and expense of such examination shall he borne by Licensor. except that ifsuch examination reveals an underpayment to Licensor of more than 7%. the costs of such auditshall he paid by Licensee within 30 days of Licensee’s receipt of the invoice for such audit. andall undisputed underpaid amounts shall he paid with interest (as set forth in 5(d) below) within30 days of Licensee’s receipt of the audit report indicating underpayment. Licensee shall assistLicensor in such examination in every reasonable manner requested by Licensor at no cost toLicensor.
(d) Acceptance of Reports and Statements. The receipt and/or acceptance byLicensor of any Monthly Reports or statements furnished, or Royalties paid hereunder,including. hut not limited to the cashing of any royalty checks paid hereunder (regardless ofLicensee’s endorsement on such checks), shall not preclude Licensor from questioning thecorrectness thereof within a reasonable period of time. In the event that any inconsistencies ormistakes are discovered in such statements or payments. such mistakes shall promptly herectified by Licensee and the appropriate payment shall be made by Licensee in accordance withthis Agreement. Interest at a rate of 8% per annum shall be added with respect to anyunderpayments
6. Travel and Expense Reimbursement. In the event the parties agree that travel ormarketing assistance is appropriate for the representatives of Licensor. Licensee shall pay forsuch travel and reimburse Licensor for expenses incurred in connection with such marketingefforts. All travel accommodations and expense reimbursement shall he as customary forLicensee and shall require prior written approval of Licensee.
7. Standards/Procedures. Unless otherwise consented to by Licerisor. noMerchandise shall be designed. manufactured, distributed or sold by Licensee unless it is of astandard greater than or substantially equal to that which has been previously sold by Licensor toits customers. Unless otherwise consented to by Licensor. diamond jewelry merchandise sold by
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Licensee under the Endless Diamonds” Trademark shall consist of diamonds of a SI2 quality orbetter and a I color or better. All Merchandise shall be marked for Patents and Trademarks inaccordance with United States laws and industry custom.
(a) Generally. All submissions and requests herein must be conveyed toLicensor by a means which provides evidence of Licensor’s date of receipt of such submission orrequest (for example, and without limitation, by email, certified mail, return receipt requested,overnight courier, or hand delivery where the recipient must sign for the package). Allsubmissions for approval shall be at the sole expense of Licensee, and Licensee shall supplyLicensor with such information in connection with any submission as Licensor may from time to
time reasonably direct.
(h) Product Designs and Graphics. Each design and graphic for theMerchandise containing a Trademark that Licensee proposes to market hereunder shall beconsistent with the registered use of such Trademarks.
(c) On Going Quality Control. Licensor may, from time to time, and at anytime hereunder, request that Licensee provide Licensor with randomly selected inventory orproduction samples so that Licensor may review the quality and consistency of the Merchandise.At any time during the Term, Licensor may notify Licensee if any of the samples obtained by, orsold by Licensee constitutes, in the exercise of Licensor’ s reasonable judgment, Merchandisenot meeting the agreed-upon quality standards (Substandard Merchandise”). Licensee agrees
that, upon receipt of notification that certain Merchandise does not meet such standards,Licensee shall promptly take all commercially reasonable steps necessary to bring suchMerchandise into conformance. Licensee shall not offer for sale or sell SubstandardMerchandise following receipt of Licensor’s notice of the same.
(d) Other Uses of the Property. For uses of the Trademarks upon all labels,packing and packaging materials (including, without limitation, boxes and bags), and other uses(including, without limitation, uses upon Licensee’s purchase orders, invoices, business cards,business forms, and the like), Licensee shall use the Property in a maimer that is consistent withthe registered use of the Trademarks and does not violate the rights of any third party.
8. Sales, Distribution and Advertising.
(a) Distribution Channels. Licensee may sell Merchandise to any accountidentified herein as being within an acceptable Distribution Channel. Should Licensee questionwhether or not a particular account is appropriate, Licensee may seek Licensors approval of suchaccount, which approval shall not be unreasonably withheld or delayed by Licensor.
(b) Pricing. Licensee shall determine the pricing of the Merchandise takinginto consideration the factors normally considered for pricing decisions, including the image andmarket position of the Property and the Merchandise, pricing strategies of competitors, the costsof goods and production, target markets, market conditions and general economic conditions.Licensee shall not sell Merchandise to Affiliates at prices which are solely designed to avoid orminimize payment of Royalty obligations required in connection with this Agreement.
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(c) Personnel. Licensee shall maintain and supervise its sales personnel andprovide all sales personnel with the necessary information and resources incentives to developthe potential sales of the Merchandise. Licensee shall also maintain adequate accounting.shipping. receiving, inventory, technical support, customer service. design. and productdevelopment personnel. All of the costs, expenses and liabilities associated with Licensee’spersonnel shall he the sole and absolute responsibility of Licensee.
(d) Consulting. Licensor shall, upon request. provide Licensee with agreedupon reasonable consulting services by Joe Wein regarding the design. marketing.merchandising and sale of Merchandise. No additional consulting fee shall he due or payable byLicensee to Licensor in connection with the provision of any such consulting services. Suchconsulting shall he subject to Mr. Wein’s schedule and Mr. Wein’s discretion as to quantity. Mr.Wein’s expenses fhr consulting hereunder shall be pre-approved by Licensee. Mr. Wein shallnot he obligated to provide consulting services for which out of pocket expenses. if any, shall nothe reimbursed as provided for in this Agreement.
(e) Advertising. Licensee may undertake an advertising campaign duringthe Term to support the sales effort of the Merchandise throughout the Territory. Suchadvertising may include, hut is not limited to. display advertising in industry periodicals.consumer advertising and cooperative advertising with major retailers which purchase theMerchandise.
(f) Trade Shows. Pursuant to this Agreement. Licensee shall promote the saleof Merchandise at the JCK trade show and such other additional tradeshows which Licenseedeems appropriate. Upon Licensor’s request, Licensee shall provide Licensor with such space asis agreed upon by the parties at Licensee’s tradeshow booth to market and sell Merchandise tothe categories of customers for which it has retained limited distribution rights hereunder.Licensor shall pay to Licensee its proportionate share of all actual costs and expenses paid byLicensee that are directly related to the tradeshow booth. based on the proportion of booth spaceprovided to Licensor.
(g) Sales Via The Internet.
(i) Use of the Property. Licensee, without the prior written consentof Licensor. which may he given or withheld in Licensor’s commercially reasonable discretion.may not operate. nor may Licensee knowingly authorize any third party to operate a site, thedomain name to which is comprised of, or incorporates all or any aspect of the Property.Nothing herein, however, shall restrict Licensee from using or authorizing the use of theProperty as a meta tag or in other usual and customary ways of directing visits to such website(s) (for example only. by means of linking). provided such use is legal and does not violatethe rights of any third party.
(ii) Territorial Limitations. The parties acknowledge that theworldwide web is not subject to the same geographic limitations as more traditional forms ofretailing. Therefore, any such web site shall contain such statements and protections as arereasonable and customary to assist Licensee in its efforts to honor the territorial limitation ofthis Agreement. Accordingly. any page operated by. or authorized by Licensee containing the
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Merchandise shall: () State that such goods are for delivery only within the Territory: (2) Bein the primary language(s) spoken within the Territory; and (3) Restrict the payment for theMerchandise to the primary currency or currencies accepted within the Territory. Licensoracknowledges that, due to the realities of internet commerce, and despite Licensees best effortsotherwise, Licensee cannot guarantee that the territorial restrictions of this Agreement will bestrictly upheld with respect to sales via the internet. Accordingly, Licensor agrees thatLicensee shall have satisfied its territorial obligation under this Agreement if Licensee shallhave complied with the foregoing conditions.
9. Acknowledgments and Protection of Property.
(a) Efforts. To induce Licensor to grant the license provided for in thisAgreement, Licensee has represented to Licensor that Licensee will use commercially reasonableefforts to exploit the Property consistent with the terms and conditions set forth in thisAgreement.
(b) Product I)istribution. Licensee agrees to cooperate with Licensor inmaintaining the marketing and quality standards of the Property in connection with itsmerchandising, advertising and sale of Merchandise.
(c) Rights to Property. Licensee hereby acknowledges that as betweenLicensor and Licensee, Licensor owns the Property and all rights, registrations, applications andthings with respect to such Property, and all renewals and extensions of any such registrations,applications and filings. Licensee further acknowledges that it is acquiring hereunder only theright to use the Property in connection with the design, marketing, manufacture and sale of theMerchandise in the Territory in accordance with the terms of this Agreement.
(d) Form of Property. Should Licensor modify the fbrm of all or any part ofthe Property during the Term, Licensor shall provide Licensee with written notice specifying thechange(s) made. From the date of such notice forward, except for any reorders booked prior tothe date of such notice and orders related to active or advertised programs, Licensee may notcommence production of any Merchandise containing an obsolete form of the Property.Additionally, Licensee shall have a reasonable amount of time from the date of such notice tocomplete its work in progress at the time of such notice of Merchandise with such obsoletedform of the Property and to sell off its inventory of Merchandise bearing such obsoleted form ofthe Property.
(e) Property Protection.
(i) Licensee agrees that it shall not use the Property in any mannerwhatsoever at any time during the Term, within or outside the Territory, except for suchusages, and in such manner, as have been approved of by Licensor in accordance with thisAgreement. Licensee shall not knowingly use the Property in a manner that violates any rightof any third party.
(ii) Licensee agrees to cooperate with Licensor in protecting anddefending the rights associated with the Property. Licensor shall use its reasonable businessj udgment in determining what action, if any, that it shall take in the event that any claim or
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problem arises within the Territory with respect to the Property. Licensor shall reimburseLicensee for costs and expenses incurred by Licensee (including reasonable attorneys’ fees)with respect to any actions requested by Licensor unless the action is a result of Licensee’sactions or omissions.
(iii) Licensee shall notify Licensor in writing of any infringements orimitations by third parties of the Property, the Merchandise and/or the promotional orpackaging material associated therewith, which may come to Licensees attention. Licensorshall use its reasonable business judgment in determining what action, if any. that it shall takeon account of any such infringement or imitation.
(f) Usage of the Property Within the Territory. It at any time during theTerm. Licensor determines, in its reasonable opinion, that it is unable to distribute theMerchandise hearing a particular element of the Property within any independent jurisdictionwithin the Territory, then this Agreement shall immediately terminate only with respect to suchelement of the Property within such independent jurisdiction within the Territory upon writtennotice by Licensor to Licensee stating such determination. Licensee may not attempt to sellMerchandise in such independent jurisdiction bearing such element of the Property after receiptof such notice. If such Merchandise cannot he legally sold, all outstanding orders to Licensee forMerchandise containing such element of the Property in such area shall he canceled and suchgoods returned to Licensee’s inventory.
10. Covenants of Licensee.
(a) Generally. Licensee covenants and agrees that Licensee:
(i) Shall manufacture Merchandise to he sold under the Trademarksof a quality which meets the quality standards set forth herein and make and sell Merchandiseunder the Property in a manner that will not knowingly violate any proprietary right of anythird party:
(ii) Shall retain, at its own expense. employees qualified, and in suchnumbers, as may he reasonably necessary to assist Licensee in the satisfaction of its obligationshereunder, including, without limitation, designers, merchandisers and production/samplecoordinators;
(iii) Shall not knowingly offer for sale or sell Merchandise to anyentity that Licensee reasonably believes will resell or attempt to resell the Merchandise outsideeither the Territory or the Distribution Channel, and Licensee shall not provide any assistanceto any entity in selling the Merchandise outside the Territory or the Distribution Channel:
(iv) Shall comply, at its own expense. with all laws, ordinances.rules, regulations and other requirements of all govermnental units or agencies havingjurisdiction. which laws. rules. regulations and other requirements pertain to this Agreement.
11. Mutual Confidentiality. The parties agree that they will assure that they and theirAffiliates, subsidiaries, successors and assigns and their respective employees, agents. attorneysand representatives shall maintain as confidential, shall not use for the account of any entity
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other than the disclosing party, and shall not disclose or cause to be disclosed to any person orentity, any proprietary information of the other party to which such party may gain access as aresult of its participation hereunder. The foregoing shall not apply to information that: (i) Waspreviously known to the recipient free of any obligation to keep it confidential; (ii) Wasindependently developed by recipient; (iii) Is or becomes publicly available by means other thanthe unauthorized disclosure by recipient; or (iv) The recipient is required to disclose by anyentity having appropriate jurisdiction.
12. Termination.
(a) By Licensee for Cause. Licensee may send written notice of intent toterminate this Agreement to Licensor if Licensor breaches any covenant or fails to perform anymaterial term or provision of this Agreement. Such notice must specify Licensors breach ofperformance or failure to perform. If Licensor has not cured, or taken reasonable steps leading tothe cure ol’ such material breach or nonperformance. within fifteen (15) days after receipt of suchnotice, then the Licensee shall have the right to terminate this Agreement upon an additionalthirty (30) days written notice.
(b) B Licensor for Cause. Licensor may send written notice of intent toterminate this Agreement to Licensee if Licensee breaches any covenant or fails to perform anymaterial term or provision of this Agreement. Such notice must specify Licensee’s breach ofperformance or failure to perform. If Licensee has not cured, or taken reasonable steps leadingto the cure of such material breach or nonperformance, within fifteen (15) days after receipt ofsuch notice, then the Licensor shall have the right to terminate this Agreement.
(c) Without Prior Notice. Licensor shall have the right to terminate thisAgreement without prior notice to Licensee if Licensee files a petition in bankruptcy or isadjudicated a bankrupt, or if a petition in bankruptcy is filed against Licensee and such petition isnot dismissed within thirty (30) days of its filing, or if Licensee makes an assignment for thebenefit of its creditors or an arrangement pursuant to any bankruptcy law; or if a final non-appealable injunction order is issued by a court of properjurisdiction which prohibits the sale ofMerchandise by Licensee which injunction is not vacated or stayed within sixty (60) days after itis issued.
(d) Licensor or Licensee may send written notice of intent to terminate thisAgreement to the other party, within sixty (60) days following the end of any Calendar Year(commencing with the 2013 Calendar Year), in the event that Licensee fails to pay Licensor anamount not less than $250,000 in Royalties in any Calendar Year. In the event such notice issent to and received by Licensee, Licensee may pay to Licensor an amount equal to thedifference between $250,000 and the amount of Royalties paid by Licensee to Licensor inconnection with the preceding Calendar Year.
(e) Result of Termination. Licensee shall be obligated upon termination andagain at the completion of any Sell-Off Period, in addition to any other obligation upon Licenseehereunder, to:
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(i) Immediately pay Licensor all payments that have accrued to theaccount of Licensor up to such time as Licensee ceases to sell Merchandise:
(ii) Make a full accounting to Licensor of all Net Sales. RoyaltyCredits and any other deductions applied on the date of termination and after the Sell-OffPeriod, if applicable, within ten (10) business days after the effective date of the termination orexpiration of the Sell-Off Period of this Agreement:
(iii) Continue to account to Licensor and pay Royalties to Licensor.as specified herein, for all Merchandise disposed of during the Sell-Off Period (as definedbelow), if applicable: and
(iv) cease using the Property except as needed for Sell-Off Period and.upon conclusion of the Sell-Off Period. return all tangible Property to Licensor. in the conditionexisting as of the date of termination.
(f) Liquidation of Goods.
(i) Generally. Upon the expiration of this Agreement, or itstermination for any reason whatsoever, Licensee shall immediately (except as hereinafterpermitted) discontinue the use of the Property and thereafter will no longer use or have theright to use the Property in any form or manner whatsoever and within ten (1 0) business daysof such expiration or termination provide a final accounting to Licensor as described above.
(ii) Licensor’s Right of First Refusal. Licensor shall have a right offirst refusal to purchase any finished Merchandise in Licensee’s possession or under Licensee’scontrol on the date this Agreement expires or is terminated, except that. to the extent thatLicensee has the right to dispose of the Merchandise. Licensor’s right of first refusal shall notextend to Merchandise required by Licensee to fulfill its orders and commitments. Such rightof first refusal must he exercised by Licensor, if at all, within five (5) business days afterLicensee delivers to Licensor an accounting of Licensee’s inventory. In the event that Licensorexercises this right with respect to any Merchandise, such items would he purchased atLicensee most favored customer pricing.
(iii) Licensee’s Sell-Off Right. If Licensor declines to purchase anyMerchandise remaining upon termination or expiration of this Agreement. and provided suchtermination was not a termination by Licensor due to the issuance of court ordered injunctionprohibiting Licensee’s sale of the Merchandise, Licensee shall have one hundred eighty (180)days (hereinafter referred to as the “Sell-Off Period”) in which to use the Property to make anorderly disposition of the Merchandise, and during which all provisions of this Agreementshall apply’ except as otherwise stated in this 12(f)(iii). During the Sell-Off Period, Licensee’sdisposition of Merchandise and use of the Property shall be on a non-exclusive basis and shallbe made through the same Distribution Channels used by Licensee prior to the termination ofthis Agreement. The Sell-Off Period shall begin on the later of(i) the date Licensor notifiesLicensee that it shall or shall not exercise its rights hereunder with respect to any Merchandise.or (ii) upon the expiration of Licensor’s five (5) day response time, if no answer be given.After the later of the expiration or termination of the Term and the Sell-Off Period, Licensee
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shall deliver to Licensor, in as-is” condition, all materials used for the design, development.manufacture. distribution, sale, advertising, marketing, promotion and/or servicing of theProperty and/or the Merchandise bearing the Property. Thereafter. Licensee shall not provideto others or permit others to use such materials or any variations or simulations thereof inconnection with any goods.
1 3. Assignability/Sublicensing.
(a) Licensee’s Rights.
(i) Assignment. The license granted hereunder is and shall bepersonal to Licensee and shall not be assigned by any act of Licensee, other than to anAffiliate, or by operation of law. A sale or transfer of a majority of the issued shares of stockby any shareholder of Licensee, other than a transfer to an Affiliate, shall constitute anassignment of Licensee’s rights hereunder to the extent that such sale shall result in the transferof control of Licensee from one person or entity to another person or entity. In the event of apermitted assignment hereunder, the assignee shall agree to be bound in writing by all termshereof and Licensee shall be liable to Licensor for any breach of this Agreement by anassignee of Licensee.
(ii) Sublicenses/Sub-Distributors. Licensee shall have no right togrant any sublicenses or to grant any sub-distribution rights, other than a sublicense to anAffiliate, without the prior written consent of Licensor.
14. Indemnification.
(a) By Licensee. Licensee shall indemnify, defend and hold Licensor. anyparent company. sister company, subsidiary, related company having majority commonownership with Licensee (each an AfIiliate”), and each of their respective officers, directors,employees, agents and Affiliates harmless from and against any and all demands, claims, actions,causes of action, liabilities, suits, proceedings, investigations or inquiries, or any settlementthereto, and all related expenses, including, but not limited, to all litigation expenses (includingreasonable attorneys’ fees and court costs) and settlement amounts for settlements approved byLicensee, as well as all special and consequential damages and damage to Licensor’s goodwilland reputation that arises from or in connection with, directly or indirectly, (i) Licensee’sfulfillment or failure to fulfill its obligations hereunder, including, without limitation, withrespect to the design, manufacture, packing, packaging, distribution, promotion, sale,exploitation or consumption of the Merchandise: and (ii) Licensee’s manufacture ofMerchandise.
(b) By Licensor. Licensor shall indemnify, defend and hold Licensee. anyparent company, sister company, subsidiary, or Affiliate thereof, and each of their respectiveofficers. directors. employees, agents and Affiliates harmless from and against any and alldemands. claims. actions, causes of action, liabilities. suits, proceedings. investigations orinquiries. or any settlement thereto. and all related expenses. including. hut not limited. to alllitigation expenses (including reasonable attorneys’ fees and court costs) and settlement amountsfor settlements approved by Licensor arising out of any claim that Licensee’s use of the Property
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in the form delivered by Licensor to Licensee hereunder, and otherwise in accordance with theterms of this Agreement, constitutes an infringement upon the rights of a third party.
15. Remedies. in the event that either Licensee or Licensor should breach or violateany of its covenants, representations or warranties contained in this Agreement, or fail to performany of its material obligations hereunder, the non-breaching party shall be entitled to exerciseany rights or remedy available to it at law or in equity. Such rights and remedies shall includehut shall not he limited to termination (as provided herein), damages and injunctive relief Theexercise of any rights or remedies available to Licensee or Licensor shall not preclude theconcurrent or subsequent exercise by it of any other right or remedy and all rights and remediesshall he cumulative.
16. General Provisions.
(a) Currency. All amounts stated herein are in U.S. dollars. and all paymentsrequired hereunder shall he made in U.S. dollars. Should any conversion of currency berequired. such conversion shall be made in accordance with the conversion rate published in the‘Wall Street Journal on the day before any payment shall be due.
(b) Notices. All notices and other communications which are required orwhich may be given under the provisions of this Agreement. unless otherwise specified, shall hein writing and may he delivered by confirmed overnight courier to the people and at the addressspecified in Paragraph 1(h) of this Agreement. Either party may change its address at any timeby written notice to the other party as set forth above.
(c) Entire Understanding. This Agreement sets forth the entire agreement andunderstanding between the parties with respect to the subject matter hereof and may not he orallychanged. altered, modified or amended in any respect. To effect any change. modification,alteration or amendment of this Agreement, the same must be in writing, signed by the partieshereto.
(d) Successors and Assigns. This Agreement shall be binding upon and shallinure to the benefit of all successors and assigns of the parties.
(e) No Waiver. No waiver by either party. whether expressed or implied, ofany provision of this Agreement or of any breach or default of any party. shall constitute acontinuing waiver of such provision or any other provisions of this Agreement. and no suchwaiver by any party shall prevent such party from acting upon the same or any subsequentdefault of any other part of any provisions of this Agreement.
(0 Severability. If any provision of this Agreement. or part thereof, isdeclared invalid, void or otherwise unenforceable within any independent jurisdiction within theTerritory, such provision or part thereof shall be deemed severed from this Agreement solelywith respect to such independent jurisdiction within the Territory and every other provision ofthis Agreement (including such stricken provision) shall otherwise remain in full force and effectwith respect to the remainder of the Territory. If any provision is held invalid as to duration.
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scope. activity, or subject. such provision shall be construed by limiting and reducing it so as tobe enforceable to the extent compatible with applicable law.
(g) Counterparts. This Agreement may be executed in one or morecounterparts. each of which shall be deemed an original, but all of which together shall constituteone and the same document.
(h) Facsimile Shznatures. This Agreement shall become binding andenforceable upon a partY at such time as a counterpart has been signed and either deposited in themail, or transmitted via email to the other party.
(i) Authority. Each individual signing on behalf of a party hereto representsand warrants that he/she is duly authorized by such party to execute this Agreement on behalf ofsuch party.
(j) Governing Law/Venue. This Agreement shall he construed andinterpreted pursuant to the laws of the State of New York without consideration to its choice oflaw provisions.
(k) Relationship of Parties. This Agreement does not constitute and shall notbe construed as constituting an agency. a partnership or joint venture between Licensor andLicensee. Additionally, nothing contained herein shall be construed as to create betweenLicensor and Licensee the relationship of franchisor and franchisee. Licensee shall have no rightto obligate or bind Licensor in any manner whatsoever, and nothing herein contained shall giveor is intended to give any rights of any kind to any third persons.
(I) Survival of Terms. All terms, conditions, obligations and provisionscapable of surviving the termination or expiration of this Agreement shall so survive.
(m) Draftsmanship of Agreement. This writing is the result of the mutualeffort of the parties and their respective counsel and the parties agree that neither party shall beconsidered the draftsman of this Agreement.
IC’\5 cri ,I! efeJv
UL t U i5 fl(T
,Lv
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IN WITNESS WHEREOF, the parties have executed this Agreement on the date stated above.
Fantasy Diamond Corporation — Firestar Diamond. Inc. -_________________
By: By:Name: Joseph H. Wein Name: Mihir BhansaliTitle: QhiefE ecutiv 0 ficer Title: Chief Executive OfficerDate:\\ Date: /
7/1)-_____
cu
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Schedule 1(a) — Patents and ApplicationsPatents:PAT. NO.6,591,6336,318,121CA 2379399
CA 2568100
D648,650 (US)D649,0840650,308 (US)
D650,307 (US)
134,839 (CA)134837 (CA)134836 (CA)134835 (CA)
Patent Applications:Serial No.PCT/US1 0/5077713/498,227 (US)29/407,93229/407,93329/363,63729/384,35629/427,965
TitleJewelry apparatusJewelry apparatusJewelry apparatus and Method of SettingGemstones ThereinJewelry apparatus and Method of SettingGemstones Therein9 Gemstone Arrangement (US)13 Gemstone ArrangementEleven Gemstone Arrangement - US
Fifteen Gemstones in an Arrangement in aJewelry Setting (design)9 Gemstone11 Gemstone Arrangement — CA13 Gemstone Arrangement — CA15 Gemstone Arrangement
TitleJewelry Apparatus — utilityJewelry Apparatus8 Gemstones12 Gemstone Arrangement — US13 gemstone square cut — US15 Gemstone Arrangement — US10 Gemstone US
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788919017870801478/561051(US)1265539(Canada)785610317782548378/974,344
Schedule 1(b) - Trademarks
Serial Number Word Mark
_________
Owner75/843496 Diamond jewelry
FantasyENDLESS DIAMONDS I()-
__
- - -
_____
1,212,919(CA) ENDLESS DIAMONDS Diamond jçIry FantasyJewelry manufacturing and casting to the
Fantasy0388882 (CA) FDCorder and specification of others
________
FANTASY DIAMOND Jewelry manufacturing and casting to theFANTASYi 78974259
CORPORATION + design order and specification of others
__________
ENDLESS DIAMOND JOURNEY iJewejyiamond jewelry - FANTASYENDLESS_DIAMOND LUXURY 4jeweIry -
_____
FANTASY
ENDLESS DIAMOND SOLITAIRE
ENDLESS_DIAMOND COUTUREENDLESS DIAMOND
— ENDLESS DIAMONDS +designFANTASY DIAMOND75109850CORPORATION
Diamond JewehyFANTASY
ENDLESS DIAMOND SOLITAIRE1EarnondeweIry
Fantasy
____ ____
Diam4jeweIry
_________
F5mond jewelry
__________
LDiamci1Jewelry manufacturing and casting to the
FANTASY-
order and specification of others
FANTASYFANTASYFANTASY
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Schedule 1(c) - Licensor Product Numbers
Parties to finalize within thirty days of the Effective Date. Fantasy to provide product numbers and access to Firestarto Fantasy’s image database, and parties will discuss any products to be deleted from the list.
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Schedule 1(1 )( ii) — Licensee’s Distribution Channel
AAFES.comAmazon.com (on site and store front)ASPCA.orgBeyondtherack.comBlessingsonu.comBlueNile.cornFingerhut.comFred Meyer.comgroupon.comGettington.comGilt.comHautelook.comlce.comjessicasimpson.comJewelry.comJCP.comKohls.comLeiolie.comMyHabit.comOverstock.comSams.comUSAA.comwalmart. cornZales.comZulily.corn
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Schedule 2(d) - Transition Costs
Steven Magid —8 weeks ($10,862).Sung Park —8 weeks ($16,154)Abby Abraham — by week as needed ($1,577 per week)Judy Ormond -2 days per week for as long as we are doing collections, cash posting or
reconciliation for Firestar ($229/thy)Marge Tulik - per day as needed misc. accounting issues and payment reconciliation ($322/thy)
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Schedule 2(c) - Litigation
IJitra
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114901660.1 114972233.1 06/25/2018 114972233.3 06/26/2018
EXHIBIT B
Letter Agreement
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114975489.1 06/26/2018
P . O. Box 1266 W ilming ton, DE 19899-1266 Phone : (302) 421-6800 Fax: (302) 421-6813
C our ie r Addre s s : 1201 Nor th M arke t S t ree t , Sui t e 2300 Wilmingt on, DE 19801
D E L AW AR E FL O R I D A I L L I N OI S M AR Y L AN D M ASS AC H U S E T T S NE W J E R SE Y NE W Y O R K P E N N SY L VAN I A WAS H I N GT O N, D C
A DELAWARE LIMITED LIABILITY PARTNERSHIP
John D. Demmy
(302) 421-6848
Fax: (302) 421-5881
www.saul.com
June 26, 2018 BY ELECTRONIC MAIL Richard Levin, Esquire Chapter 11 Trustee for Fantasy Diamond, Inc. Jenner & Block 919 Third Avenue, New York, NY 10022-3908
Re: Firestar Diamond, Inc., et al., Case No. 18–10509 (SHL) (Bankr. S.D.N.Y.)
Dear Mr. Levin:
This letter is to confirm the agreement between Fantasy Diamond Corporation and you,
solely in your capacity as the duly appointed Chapter 11 Trustee and authorized representative of the bankruptcy estates of the above referenced debtors (the “Debtors”), made in connection with our agreement to request entry of an order by the United States Bankruptcy Court for the Southern District of New York (the “Court”) granting the motion filed by Fantasy Diamond Corporation on May 21, 2018 [Docket No. 179] (the “Motion”), approving and authorizing rejection of the certain License Agreement dated October 1, 2012, by and between Fantasy Diamond Corporation, as licensor, and Fantasy Diamond, Inc., as licensee (the “License Agreement”), providing for relief from stay for Fantasy Diamond Corporation to terminate the License Agreement and otherwise to take the actions provided for in and as otherwise contemplated by this letter (the “Order”).
We have agreed as follows:1
1. In return for entry of the Order on the Court’s docket within two (2) days of the June 27, 2018 hearing on the Motion, and upon the sale by Fantasy Diamond Corporation of any Merchandise (as such term is defined in the License Agreement) from such time through August 13, 2019, to any buyer other than (i) any Small Special Stores (as such term is defined in the License Agreement), (ii) Helzberg Diamond Shops and its e-
1 Capitalized terms not defined herein have the meanings given to them in the License Agreement (as such term is defined herein).
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Richard Levin, Esquire June 26, 2018 Page 2
114975489.1 06/26/2018
commerce counterpart, (iii) Sterling Jewelers and its e-commerce counterpart, and (iv) all additional excluded persons or entities approved in writing by Fantasy Diamond, Inc. as excluded as contemplated in Article 2.b. of the License Agreement, Fantasy Diamond Corporation shall pay the sum certain amount of $5,000.00 to the then appropriate and authorized representative of the bankruptcy estate of Fantasy Diamond, Inc. 2. Fantasy Diamond Corporation will buy “salesman’s samples of touch set Merchandise,” as follows:
(a) Fantasy Diamond Corporation will buy all Silver/CZ samples (made with sterling silver, which is .925 pure). Calculation of the purchase price for such samples shall be: actual weight in gm multiplied by 0.925 multiplied by 60% multiplied by silver price in gm at second London fix the day of settlement (with the Silver/CZ samples weighed by placing them on a tared jewelry gram scale in bulk quantities, such as 50 or 100 or any convenient quantity, without removing tags). (b) Fantasy Diamond Corporation will buy $10,000 of Gold/Diamond samples (made with 14K gold, which is 14/24 pure). Calculation of the purchase price for such samples shall be: actual weight in gm (minus 0.2 gm/unit) multiplied by 14/24 multiplied by 99% multiplied by gold price in gm at the second London fix the day of settlement plus 75% of diamond value based on the bill of materials or cost sheet at Debtors’ s cost (with the Gold/Diamond samples weighed by placing them on a tared jewelry gram scale in quantities if possible, without removing tags, and with 0.2 gm per unit deducted for diamonds and tags). Fantasy Diamond Corporation may purchase more than $10,000 in value of Gold/Diamond samples upon further inspection of any and all such samples. (c) Fantasy Diamond Corporation consents to the Fantasy Diamond, Inc. bankruptcy estate having as much time as is needed to exercise its Sell Off Rights under the License Agreement, with all such sales subject to the 1.5% royalty provided for by the License Agreement. (d) For all the samples purchased by Fantasy Diamond Corporation Debtors shall provide Fantasy Diamond Corporation with the product cost sheets in the manner in which such were maintained by the Debtors and/or in a reasonably usable form.
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Richard Levin, Esquire June 26, 2018 Page 3
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Please indicate your acknowledgement and agreement to the foregoing by executing this letter and returning it to me.
Thank you for your timely and sincere efforts in this matter. Sincerely, SAUL EWING ARNSTEIN & LEHR LLP
By: /s/ John D. Demmy John D. Demmy
Attorneys for Fantasy Diamond Corporation ACKNOWLEDGED AND AGREED: Richard Levin, Esq., in his capacity as Chapter 11 Trustee of Firestar, Inc. and Fantasy Diamond, Inc. By: /s/ Richard Levin Dated: June 26, 2018
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36164325.8 11/08/2019
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK x : Chapter 11 In re : : Case No. 18–10509 (SHL) Firestar Diamond, Inc., et al., : : Jointly Administered Debtors. : x
CERTIFICATE OF SERVICE
I, John D. Demmy, hereby certify that on November 8, 2019, I caused a copy of the
foregoing Response of Fantasy Diamond Corporation in Opposition to the Chapter 11
Trustee’s Motion for Summary Judgment to be served electronically with the Court and served
through the Court’s CM/ECF system upon all registered electronic filers appearing in this case
who consented to electronic service and via Electronic Mail on the below parties.
Marc Hankin, Esquire Carl Wedoff, Esquire Jenner & Block LLP 919 Third Avenue New York, NY 10022
Angela Allen, Esquire Jenner & Block LLP 353 North Clark Street Chicago, IL 60654
SAUL EWING ARNSTEIN & LEHR LLP
By:/s/ John D. Demmy John D. Demmy 1270 Avenue of the Americas, Suite 2005 New York, NY 10020 (212) 980-7200
Dated: November 8, 2019
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