Eleventh Circuit Finds Error in District Court’s Refusal to Order an Accounting

In Zaki Kulaibee Establishment v. McFlicker, No. 11-15207 (Nov. 18, 2014), the Eleventh Circuit held that the district court abused its discretion when it denied Zaki Kulaibee Establishment’s (“Zaki”) request for an accounting. Zaki, a Saudi Arabian company, sold military aircraft parts to Airspares Network, Inc. (“ANI”) pursuant to a Consignment Services Agreement (“CSA”) executed in June 2003. Under the CSA, ANI would hold and sell the aircraft parts on behalf of Zaki, who retained title to the parts until sold. The expected effect was that Zaki would sell the aircraft parts for more than he would otherwise be able to, and ANI would receive a commission on the sales. ANI was also tasked with many reporting obligations.

After receiving an incomplete sales report from ANI in December 2003, Zaki learned of a pass-through scheme in which ANI sold Zaki’s parts to affiliated companies, who in turn resold them to the ultimate customer at a higher price. The sales reports contained sales to the affiliated companies rather than the end customer, causing the reports to show artificially deflated sales prices. ANI filed suit after Zaki diverted the next shipment to another company, but the litigation was dismissed after the execution of a Settlement and Release Agreement (SRA). The SRA reaffirmed many CSA provisions with a few changes aimed at settling prior issues between the parties. The SRA proved ineffective, however, as ANI continued to report sales inaccurately and allegedly manipulated storage costs. Zaki notified ANI of its intent to terminate the CSA and commanded ANI to stop selling and return the parts. ANI refused.

In order to assess the damages incurred, Zaki requested the number and value of parts still in ANI’s warehouse, the final prices of the parts sold to outside purchasers, and the nature and amount of storage expenses. ANI did not voluntarily produce this information, and court orders were unsuccessful in compelling production. Moreover, Zaki’s attempt to obtain an inventory of ANI’s warehouse was stifled by ANI’s noncompliance with city code and permit requirements, notwithstanding court orders forcing ANI to fix the violations. Zaki’s request for an accounting was denied by the district court, which found such an order inappropriate since Zaki had an adequate remedy at law in its breach-of-contract claim.

With Florida law governing, the Eleventh Circuit noted that a court-ordered accounting is appropriate where a party has shown a sufficiently complicated transaction and an inadequate remedy at law, or where a fiduciary relationship exists between the parties. Given Florida courts’ rather broad interpretation of “fiduciary obligation,” the court agreed with Zaki that ANI assumed the “mantle of a fiduciary.” The Eleventh Circuit noted the mutually beneficial features of a consignment relationship and emphasized that the parties could only achieve beneficial results through the exercise of substantial trust by the consignor. The Court cited several state and federal cases implying that certain fiduciary duties are imposed on consignees and noted that a court-directed accounting is warranted where a consignee disclaims his duty to account.

The Eleventh Circuit said that the additional requirement of an inadequate remedy at law does not apply when a fiduciary relationship exists. Nevertheless, the Court again mentioned that Zaki was incapable of assessing damages and thus prevented from obtaining adequate relief. Therefore, even if no fiduciary relationship existed, Zaki’s breach of contract action was not an adequate remedy due to ANI’s noncompliance.

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