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USINA COSTA PINTO S.A. ACUCAR E ALCOOL & USINA SAN

April 16, 1996

USINA COSTA PINTO S.A. ACUCAR E ALCOOL and USINA SANTA BARBARA S.A. ACUCAR E ALCOOL, Plaintiffs, against LOUIS DREYFUS SUGAR COMPANY, INC. and INTERNATIONAL TRADE DEVELOPMENT COMPANY LIMITED, Defendants.


The opinion of the court was delivered by: SCHEINDLIN

 Defendant Louis Dreyfus Sugar Company, Inc. ("LDSC") moves for summary judgment asserting that the issues presented in the claim filed by Usina Costa Pinto S.A. Acucar e Alcool and Usina Santa Barbara S.A. Acucar e Alcool have already been decided. Alternatively, Defendant seeks an order compelling arbitration of the issues raised and/or staying the matter pending arbitration. For the reasons set forth below, Defendant's motions are granted in part and denied in part.

 I. BACKGROUND

 A. Parties and Negotiations

 Plaintiffs are Brazilian sugar mills. Mr. Rubens Ometto Silveira Mello ("Mello") is President of both companies. Defendant LDSC is a Delaware corporation engaged in sugar trading with an office in New York. International Trade Development Company Limited ("Interdevco"), not a party to the present fraud action, is an English corporation and an affiliate of LDSC. Interdevco executed various agreements with Plaintiffs and was a party to an arbitration proceeding between it and Plaintiffs.

 Before 1988, the Brazilian government strictly regulated sugar exports, fixing quotas and internal market prices. In 1988, for the first time, the government permitted private exports of Brazilian sugar. All sugar exports still require a license from a governmental agency known as the Carteira de Comercio Exterior ("CACEX").

 It is unclear whether representatives of LDSC or Interdevco first approached Mello to discuss a deal involving the purchase of 100,000 metric tons of granulated refined sugar. Nonetheless, on May 18, 1988, negotiations commenced when Mello met with Martin Torino of LDSC ("Torino"), Helio Franca, Sr. of LDSC's Brazilian agent, Brasfran, and Alvaro Teixeira de Mello, Intervedco's Brazilian agent. See Affidavit of Charles H. Falk ("Falk Aff."), President of LDSC, dated June 8, 1995, P 10; Ex. C P 6; Ex. D P 9; Ex. E. In a meeting that lasted the entire day, the parties negotiated and drafted a contract whereby Plaintiffs agreed to sell Interdevco 100,000 metric tons of sugar. See Falk Aff. P 11; Ex. E.

 Plaintiffs allege that, at LDSC's insistence, Interdevco replaced LDSC as a party to the contract immediately prior to the execution of the agreements. LDSC allegedly explained that this was necessary to enable Plaintiffs to export large quantities of sugar unencumbered by a Brazilian regulation limiting the amount of sugar to be exported to the United States from Plaintiffs' region. See Affidavit of Rubens Ometto Silveira Mello ("Mello Aff."), President of Plaintiff corporations, dated October 23, 1995, P 17. Plaintiffs claim that the actual reason behind this switch was to eliminate LDSC from the contract in light of a memorandum issued by the Brazilian Central Bank which suggested a "strong indication" of collusion on the part of LDSC in its past dealings in Brazil. See Mello Aff. Ex. A.

 B. Contracts

 Plaintiffs and Interdevco memorialized their understandings in various agreements. Mello, as a representative of Plaintiffs, and Torino, an LDSC employee, signed the original contract dated May 23, 1988 on behalf of Interdevco. Falk Aff. Ex. F. The contract provided for the purchase of two 50,000 metric ton parcels of sugar and contained certain price terms. It also included an arbitration clause stipulating that disputes arising from the contract would be settled according to the rules of the Refined Sugar Association ("RSA") in London. See Falk Aff. Ex. F, P 16. LDSC was not a party to either the agreement or the arbitration clause.

 By additional agreement, also dated May 23, 1988, a "Joint Account Agreement" was formalized. See Falk Aff. Ex. G. Under this Joint Account Agreement, Plaintiffs and Interdevco agreed, inter alia, that a joint account would be established where all funds and profits realized from the sales of sugar or commodity activities would be deposited. The net balances would then be divided and distributed equally between Plaintiffs and Interdevco. Thereafter, by contract dated May 1988, Interdevco sold and transferred to LDSC the sugar sold to it by Plaintiffs under the same terms and conditions contained in the contract between Plaintiffs and Interdevco. *fn1" See Mello Aff. P 22.

 By November 1988, the world market price of sugar rose above the contract price. CACEX would only grant an export license for an amount higher than the contract price, requiring Interdevco to pay Plaintiffs sums in excess of the contract price. To remedy this situation, Plaintiffs and Interdevco executed an agreement ("November Agreement") whereby Plaintiffs agreed to reimburse Interdevco for such overpayments. See Falk Aff. P 22; Ex. M.

 Plaintiffs failed to refund to Interdevco the overpayments it made for the first two cargoes of sugar shipped aboard the vessels EBO and HARMONY. Interdevco, in turn, failed to pay Plaintiffs the monies it owed for the second two cargoes aboard the vessels MAR COURIER and LEONOR. Plaintiffs and Interdevco eventually negotiated an agreement to resolve their disputes over the amounts each owed the other. In this agreement, dated April 7, 1989 ("April Agreement"), the parties agreed to a series of offsets and cross-payments to satisfy the sums owed one another under the various agreements. See Falk Aff. P 27; Exs. D, Q,. The Joint Account was cancelled by a separate agreement which was annexed to the April Agreement. Neither Plaintiffs nor Interdevco performed the April Agreement and Plaintiffs demanded arbitration. Falk Aff. P 33; Ex. K.

 C. London Arbitration

 The arbitration between Intervedco and Plaintiffs entailed six hearings before a panel of arbitrators of the RSA in London. The arbitration settled the disputes between the parties arising out of the April Agreement. LDSC representatives and employees appeared as witnesses for Interdevco. On September 6, 1991, the RSA awarded Plaintiffs $ 2.8 million under the April Agreement as well as an additional $ 1.5 million, which was eliminated following an appeal. See Falk Aff. P 36. Interdevco paid the entire award as modified on appeal. See Falk Aff. P 41.

 D. Present Litigation

 Plaintiffs claim they were first alerted to the alleged Joint Account fraud at the end of the Arbitration. Plaintiffs then brought this fraud action against LDSC alleging that they were fraudulently induced into signing the Contract and the Joint Account Agreement. Plaintiffs claim they were victims of a "bait and switch" tactic in which the contracts executed by Interdevco were secretly transferred to LDSC. They claim LDSC conspired with Interdevco to have Interdevco sell the sugar to LDSC at a low price so that LDSC could keep the profits of the subsequent sale of the sugar, rather than share those profits with them. Defendants' motion to dismiss the fraud claim was denied. See Usina Costa Pinto S.A. Acucar E Alcool v. Louis Dreyfus Sugar Company, Inc., No. 93-2302 (S.D.N.Y. Apr. 8, 1993) (order denying dismissal).

 In its present motion, LDSC argues that Plaintiffs' fraud claim is baseless and that Plaintiffs are merely reasserting their contractual rights under the Joint Account which were covered by the arbitration clause. Accordingly, LDSC moves for summary judgment asserting that the issues presented by Plaintiffs' claim ...


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