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NORWEST FINANCIAL, INC. v. FERNANDEZ

January 12, 2000

NORWEST FINANCIAL, INC., PLAINTIFF,
V.
JUAN CARLOS FERNÁNDEZ AND GUSTAVO CARLOS LANZILLOTTA, DEFENDANTS.



The opinion of the court was delivered by: Scheindlin, District Judge.

  OPINION AND ORDER

I. INTRODUCTION

In January 1998, plaintiff Norwest Financial, Inc. ("Norwest"), an Iowa corporation, purchased an Argentine consumer finance company named Finvercon S.A. Compañia Financiera ("Finvercon") from defendants Juan Carlos Fernández and Gustavo Carlos Lanzillotta, who remained with Finvercon as President and Vice President respectively. Within a few months, however, this once-promising business relationship turned sour. Norwest terminated defendants in September 1998, and the parties now look to this Court to decide the terms of their divorce.

On September 18, 1998, Norwest filed suit against defendants, seeking: (1) damages and indemnification for defendants' alleged breach of their contract with Norwest; (2) a declaratory judgment stating that Norwest properly terminated defendants; (3) injunctive relief relating to a non-competition clause contained in defendants' contracts with Norwest; and (4) injunctive relief and specific performance of a requirement contained in defendants' contracts with Norwest that defendants post collateral to cover payments of any deferred taxes.

Defendants answered Norwest's claims and filed counterclaims, seeking: (1) reimbursement of money paid to Norwest and Finvercon to satisfy a tax judgment against Finvercon, as well as reimbursement of other tax payments; (2) an order stating that Norwest must provide defendants with a full, detailed and chronological report of its good faith efforts to collect outstanding accounts receivable, verified by an independent auditor or examiner, before Norwest can demand any reimbursement of those accounts receivable; (3) an order stating that Norwest must provide defendants with a full and detailed accounting of the status and maintenance of certain reserve funds, verified by an independent auditor or examiner; (4) a declaratory judgment stating that Norwest is required to assign all of its right, title and interest in certain accounts receivable to defendants simultaneously with defendants' reimbursement of those accounts receivable to Norwest; and (5) a declaratory judgment stating that Norwest is required to offset certain losses against a reserve fund before demanding reimbursement from defendants.

Jurisdiction is based on 28 U.S.C. § 1332. Norwest is a citizen of Iowa, and defendants each are citizens of the Republic of Argentina; the amount-in-controversy exceeds $75,000. See Joint Pretrial Order ("JPTO"), at ¶ 2. Venue is proper and personal jurisdiction is established by the agreement and consent of the parties, pursuant to the terms of the contracts between Norwest and defendants. See id. A non-jury trial was held on October 21-November 2, 1999. The following constitutes the Court's findings of fact and conclusions of law.

II. FINDINGS OF FACT

A. Negotiation and Execution of the Agreements

On or about July 30, 1997, Norwest entered into a series of three agreements with defendants to acquire all of the outstanding stock of Finvercon. The three agreements consisted of a Stock Purchase Agreement ("Purchase Agreement") and two Seller's Director Agreements ("Director Agreements"). The parties entered into all three agreements contemporaneously. See JPTO, Undisputed Facts at ¶ A ("Undisputed Facts"). Both sides agree that the Purchase Agreement and Director Agreements documented a single, integrated transaction by which Norwest acquired Finvercon. See JPTO, Plaintiff's Contentions at ¶ 19 ("Pl.Cont."); JPTO, Defendants' Contentions at ¶ 10 ("Def.Cont.").

The Purchase Agreement details the terms and conditions of the stock purchase. The Purchase Agreement also contains representations and warranties of both the buyer (Norwest) and the sellers (defendants). See Plaintiff's Exhibit ("Pl. Ex.") 1. The Purchase Agreement is governed by New York law. See Pl.Ex. 1, at § 13.12.

Each Director Agreement details the terms and conditions under which Fernández and Lanzillotta would remain as members of Finvercon's Board of Directors following the sale of Finvercon to Norwest. In addition, Fernández's Director Agreement provided that Norwest would appoint Fernández as Finvercon's President, while Lanzillotta's Director Agreement provided that Norwest would appoint Lanzillotta as Finvercon's Vice President. The Director Agreements, which are substantially similar to each other, contain provisions relating to compensation, restrictions, and discharge; they also provided that Fernández and Lanzillotta would serve for a term of three years, although each could be removed immediately for cause or unacceptable performance, as defined in the Director Agreements. See Undisputed Facts at ¶ B; Pl. Exs. 2, 3. The Director Agreements are governed by Argentine law. See Pl. Exs. 2, 3, at § 5.

The Purchase Agreement and the Director Agreements were negotiated over an extended period, with each party advised by Argentine and American counsel of its choosing. See Undisputed Facts at ¶ C. Both Fernández and Lanzillotta were experienced businessmen. See Trial Transcript ("Trial Tr.") at 609-14, 953-56. Although Fernández testified that neither his Argentine nor his American counsel reviewed his Director Agreement, he also stated that he read and understood his Director Agreement and made a conscious choice not to consult counsel. See id. at 253-54, 259-64.*fn1

The purchase and sale provided for in the Purchase Agreement took place on January 7, 1998 (the "Closing"). See Undisputed Facts at ¶ A. On that day, Norwest appointed Fernández and Lanzillotta as President and Vice President, respectively, of Finvercon. See Trial Tr. at 623, 975-76.

Emilio Iribarren, the former President of Island Finance, a subsidiary of Norwest, testified that Norwest originally preferred to enter into employment contracts with defendants but was dissuaded by Fernández. See id. at 75-76. According to Iribarren, Fernández explained to Norwest that it was common in Argentina for Presidents and Vice-Presidents not to be employees of their companies and that the arrangement would have tax advantages both for Norwest and for defendants. See id. Iribarren testified that, as a result of this request, defendants were paid compensation instead of a salary and were named to Finvercon's board of directors. See id. at 76. While defendants dispute this testimony, I find that Iribarren's version is accurate.

Under their Director Agreements, Fernández and Lanzillotta were paid yearly compensation of $230,000, plus 1/12 of that figure, for a total of $249,166.67. See Pl. Exs. 2, 3, at § 1.2(a). In addition, the Director Agreements provided for a bonus linked to Finvercon's net profit. See id. From January through August 1998, defendants received monthly payments of $20,763.89 from Finvercon. See Pl.Ex. 62. Those monthly installments, if multiplied by 12 months, would total $249,166.67. Thus, Finvercon paid defendants the compensation described in § 1.2 of their Director Agreements for January through August 1998.

B. Credit Losses

Before its purchase by Norwest, Finvercon was a consumer finance company that carried out a diverse range of banking operations. See Trial Tr. at 610. Among other activities, Finvercon made loans to individuals, either through unions or other intermediaries known as "mutuales," and to commercial entities. See id. at 124, 145-47, 610. Collectively, these loans constituted Finvercon's accounts receivable. See id. at 88, 521. In addition, Finvercon sold packages of its loans to other finance companies; these packages constituted Finvercon's "sold obligations." See id. at 89-90, 525-531. On occasion, Finvercon would repurchase some of these sold obligations, and those loans were called "repurchased obligations." See id. at 531-33.

During the negotiations to purchase Finvercon, Norwest expressed concern that Fernández and Lanzillotta did not have sufficient reserves to cover Finvercon's outstanding credits. See id. at 86-88. Fernández and Lanzillotta took full responsibility for the collectability of Finvercon's portfolio, and they allowed Norwest to withhold a portion of the purchase price in order to guarantee the portfolio. See id. at 86-88. This withheld portion became known as the "Contingent Portion of the Purchase Price." See id. at 86-88; Pl.Ex. 1, at § 2.2(b).

At the time of the sale, Finvercon's financial statements reflected a number of outstanding loans that were severely past due. See Trial Tr. at 88. Finvercon had a reserve fund covering the full amount of these loans. See id. at 88-89. Pursuant to the sale, Fernández and Lanzillotta transferred that reserve fund to Norwest, as part of the Contingent Portion of the Purchase Price, and the severely past due loans remained on Finvercon's financial statements. See id. Fernández and Lanzillotta chose this arrangement because they believed the loans might still be collectible. See id. at 88-89, 114-15.

As part of the purchase of Finvercon by Norwest, the parties wrote several guarantees regarding these outstanding credits into the Purchase Agreement. See Pl.Ex. 1, at §§ 2.2(b), 7.1. Most important, defendants agreed to reimburse Finvercon and Norwest for any Credit Losses "[up]on demand." See id. Fernández admitted that he did not negotiate any right to audit or verify Norwest's Credit Loss determinations before paying them. See Trial Tr. at 99-100, 763.*fn2

On September 28, 1998, in compliance with the notice provisions of the Purchase Agreement, Norwest demanded that defendants pay to Finvercon the sum of $2,405,794.43 on account of Credit Losses incurred by Finvercon. See Undisputed Facts at ¶ T; Pl.Ex. 34. In response to a request from defendants, Norwest provided an explanation of the amounts contained in its demand, but defendants did not pay. See Pl.Ex. 36.

During the following twelve months, Norwest made four more demands for payment of the Credit Losses — on October 21, 1998, February 5, 1999, July 27, 1999, and September 23, 1999. See Undisputed Facts at ¶¶ U, V, W, X; Pl. Exs. 37, 38, 39, 40. The amounts demanded by Norwest increased with each letter. On October 21, 1998, Norwest demanded $5,559,857.81, because it had added different accounts to its calculation of Credit Losses. See Pl.Ex. 37. On February 5, 1999, Norwest demanded $6,644,059.19, because of additional Credit Losses in the intervening months. See Pl.Ex. 38. On July 27, 1999, Norwest demanded $10,457,556.60, because of some corrections and additional Credit Losses in the intervening months. See Pl.Ex. 39. On September 23, 1999, Norwest demanded $13,561,984.29, because of additional Credit Losses in the intervening months. See Pl.Ex. 40. The supporting data attached to the September 1999 letter corrects several mistakes that Finvercon found in its earlier data. See Trial Tr. at 533-35, 539-40. During his deposition in connection with this matter, Fernández discovered an error in the September 1999 demand. See id. at 535, 539-42. Norwest corrected the error and sent a revised demand on October 22, 1999. See id. at 535-37; Pl.Ex. 102.

Norwest obtained the data for these demands from Finvercon's computer system. For the first three demands, the data was in Argentina. See Trial Tr. at 149-53, 518-19. Around May or June of 1998, however, the data was transferred to Norwest's headquarters in Des Moines. See id. at 519-21. The parties stipulated that this transfer of information was complete and accurate. See id. at 82.

In its demands, Norwest charged the following for each account receivable that had become a Credit Loss: unpaid principal and compensatory interest computed for the original life of the loan, punitive interest on any missed payments,*fn3 and unpaid VAT tax*fn4 on both the compensatory and punitive interest. See id. at 94-97, 484-86, 524-25. The rate of punitive interest was equal to one-half the rate of compensatory interest. See id. at 93-97, 524-25. Although the Purchase Agreement defines "Credit Loss" and "account receivable," it does not mention punitive interest. See Pl.Ex. 1, at §§ 2.2(b), 3.8. In addition, punitive interest was not reflected on Finvercon's books, because Finvercon charged punitive interest but did not accrue those charges in the customer accounts. See Trial Tr. at 96.*fn5

Three categories of claimed Credit Losses deserve special note. First, Norwest claimed as Credit Losses the loans that were severely past due at the time of the Closing and for which Finvercon had a reserve fund. See id. at 88-89, 114-15. Second, Norwest claimed as Credit Losses certain loans for which debtors had made payments to the intermediaries — the unions or mutuales — who did not forward the payments to Finvercon; Finvercon negotiated with the intermediaries to secure those payments. See id. at 176-82. Third, Norwest claimed as Credit Losses several sold obligations that were not listed in the Purchase Agreement. See id. at 562-65.

C. Deferrals of VAT Tax

Argentine law permits taxpayers to defer VAT taxes provided that they invest in certain promoted activities in specified geographic areas, a procedure known as the Tax Benefits Regime. See id. at 209-10. Prior to Norwest's acquisition of Finvercon, Finvercon had filed applications to defer various payments of VAT taxes, including applications for the months of February, March, and April 1997 to defer taxes totaling $317,500.00. See Undisputed Facts at ¶ D. Those applications were prepared by Salvador Pristera, an accountant who worked at Finvercon. See Trial Tr. at 789-790.

In February 1998, the Argentine branch of government responsible for the administration of taxation, known as the DGI, provided written notice to Finvercon that it had rejected Finvercon's applications to defer the VAT taxes. See Undisputed Facts at ¶ E. Pristera received this notification. See Trial Tr. at 767-68. Pristera testified that he informed Mario Olive, Finvercon's controller, of the problem. See id. at 769-70. Olive denied that Pristera notified him. See id. at 157. I credit Olive's testimony and find that Pristera did not inform him of the DGI's notification.

In April 1998, the DGI commenced legal proceedings against Finvercon to collect VAT taxes due and unpaid, for, among other periods, the months of February, March and April 1997. See Undisputed Facts at ¶ F. Pristera received notification of this claim. See Trial Tr. at 771. Pristera contacted the office of Ruben Pardo, a lawyer who regularly handled work for Finvercon; Pardo and one of his associates, Carla Baldini, handled the matter and, until July 1998, spoke only with Pristera. See id. at 773-74, 999-1007.

Pristera testified that he also informed Olive of the DGI's April claim. See id. at 771. According to Pristera, Olive told him to refer the matter to Pardo. See id. at 772. Pristera also testified that he informed Chris Keiser, the Norwest assistant general counsel overseeing the Carribean, Central America, and South America, that Finvercon had received a claim from the DGI. See id. at 772-73. Both Olive and Keiser denied that Pristera told them about the DGI's claim in April. See id. at 155-56, 489-91. I credit the testimony of Olive and Keiser and find that they did not learn about the DGI's claim in April.

In addition, both Olive and Keiser testified that Pristera had told them in September that he had notified Fernández of the tax problem, either in February or in April. See id. at 159-63, 497-98. Both also testified that Pristera told them that Fernández had instructed Pristera to refer the tax problem to Pardo. See id. at 159-64, 499. Finally, Keiser testified that Pristera told Keiser that he would deny ever making those statements. See id. at 514. At trial, Pristera testified that he never informed Fernández or Lanzillotta of the tax problem. See id. at 770-72. Pristera also stated that he did not tell Keiser that he would deny making certain statements. See id. at 814-15. Fernández and Lanzillotta testified that they first learned about the tax problem in August 1998. See id. at 312, 665, 969.

Regardless of what Pristera may or may not have said to Keiser or Olive, I credit the testimony of Fernández and Lanzillotta and find that they did not learn about the tax problem until August 1998. First, had Fernández or Lanzillotta learned of the tax problem any earlier, they would have engaged in the same flurry of phone calls and meetings that marked late August and early September 1998. They certainly would not have allowed the interest and penalties to accumulate for months. Second, Fernández's testimony is supported by the testimony of Horacio Seligra, a public accountant whom Fernández regularly consulted on tax deferral matters. Seligra testified that Fernández first contacted him about the tax problem in August 1998. See id. at 949-53.

On August 26, Pardo called Fernández to inform him that the DGI had obtained a judgment against Finvercon. See id. at 312, 665. This judgment obligated Finvercon to pay the deferred VAT taxes, plus punitive and compensatory interest and other costs (the "tax judgment"). See Undisputed Facts at ¶ G. Pardo explained to Fernández that Finvercon's accounts might be seized as a result of this judgment. See Trial Tr. at 665. Fernández understood that Finvercon had to pay promptly in order to avoid seizure. See id. at 324. Fernández demanded that Pardo send him all of the information on the matter and then spoke with Pristera. See id. at 319-24, 665. After discussing the matter with Pristera, Fernández informed Keiser, Olive, and Iribarren. See id. at 313, 669. Olive, who was on vacation at the time, notified Eric Torkelson, Norwest's Controller, and Keiser. See id. at 157. Keiser informed Jim Goodson, Norwest's general counsel, John Sondereker, a Senior Vice President at Norwest, and Iribarren. See id. at 491-92. On the same day that Fernández learned of the tax judgment — August 26 — he sent a fax to Iribarren and Keiser, in which he stated: "This matter does not cause any damage to Finvercon, and if it does, Gustavo and I will compensate for it." See Pl.Ex. 19. In addition, Iribarren, Olive, and Keiser all testified that Fernández had told them that he and Lanzillotta would compensate Finvercon for the tax judgment. See Trial Tr. at 110-11, 167, 493-94.

The Purchase Agreement contains several guarantees related to the tax deferrals. See Pl.Ex. 1, at §§ 2.2(c), 7.2, 7.3. On August 31, 1998, Norwest demanded, verbally and in writing, that defendants immediately pay to Finvercon the sum of $481,920.67 for the tax judgment. See Undisputed Facts at ¶ K; Pl.Ex. 20. Norwest repeated this demand, in writing, on September 2, 1998, and on September 3, 1998. See Undisputed Facts at ¶ K; Pl. Exs. 21, 22. Defendants did not satisfy these demands. See Trial Tr. at 496. On September 3, 1998, Finvercon paid the sum of $441,494.17 to Banco Hipotecario Nacional for the tax judgment. See Undisputed Facts at ¶ H. On September 8, 1998, Finvercon paid the additional sum of $41,529.00 to Banco Hipotecario Nacional for the attorneys' fees charged by the Argentine government to collect the tax judgment. See id.

On September 9, 1998, Ezequiel Camerini, a lawyer representing defendants, informed Norwest that, in his view, Norwest had failed to notify defendants about the tax problem in a timely fashion, as required by § 12.3(b) of the Purchase Agreement, and Finvercon had failed to raise all reasonable defenses to the tax judgment, as required by § 2.2(c) of the Purchase Agreement. See Pl.Ex. 25. On September 10, 1998, Norwest replied, stating that it had not learned of the tax problem until August 1998 but alleging that Fernández had known earlier. See Pl.Ex. 26. On September 14, 1998, Camerini stated that Fernández did not learn about the tax problem in February and indicated that defendants were trying to determine whether Norwest had raised all reasonable defenses. See Pl.Ex. 27. On September 16 and 17, 1998, Norwest sent letters to Camerini relating its view that it had raised all reasonable defenses and that defendants were liable for the tax judgment. See Pl. Exs. 80, 81. On October 8, 1998, defendants paid to Finvercon the amounts that had been demanded of them to satisfy the tax judgment. See Undisputed Facts at ¶ L. Fernández testified that he also paid off other deferred taxes before their due date, in the amount of $1,800,000, between October 1998 and October 1999. See Trial Tr. at 673-74.

D. Collateral for Deferred Taxes

Section 5.11 of the Purchase Agreement states:

Sellers shall provide to the Company at Closing collateral, satisfactory to Buyers, in the form of dollar-denominated bonds issued by the Republic of Argentina with a residual face value of not less than the amount of Taxes actually deferred as of the Closing.

Pl.Ex. 1, at § 5.11. At the Closing, defendants did not provide this collateral and Norwest did not demand it. See Trial Tr. at 332, 500-01, 675-76.

On September 10, 1998, Norwest demanded that defendants provide the collateral immediately. See Undisputed Facts at ¶ M; Pl.Ex. 26. On September 14, 1998, Camerini responded that Norwest had waived the posting of the collateral, both by failing to demand it at the Closing and through the statements of Shari Del Carpio, a Norwest employee. See Pl.Ex. 27. On September 16, 1998, Norwest indicated that it did not consider the collateral requirement to be waived and demanded that defendants post the collateral. See Pl.Ex. 80. Norwest reiterated its demand on September 17, 1998. See Pl.Ex. 81.

E. Personal Lending by Fernández and Lanzillotta

In 1998, Fernández made personal loans to several companies and one individual while serving as President of Finvercon. See Trial Tr. at 292-307, 653-65. Four of the companies — Torrance S.A., Poliequipos S.A., Colomba Viajes S.A., and Obtener — had outstanding loans with Finvercon. See id. at 292-93. Two of the companies — Adicom S.A. and Lanci Impersores, S.R.L. — had never done any business with Finvercon. See id. at 306. The individual, Hugo Iurcovich, lived in Brazil and was either the President or Vice President of Colomba Viajes, which had outstanding loans with Finvercon. See id. at 296-97. In 1998, Lanzillotta made loans to two commercial entities — Obtener, which had outstanding loans with Finvercon, and Suriser, which did not — while serving as Vice President of Finvercon. See id. at 966-68.

Fernández admits that he did not notify Norwest about most of his personal lending. See id. at 294, 307-08. He testified that he did ask Iribarren for permission to make some loans to Colomba Viajes and Obtener, although Iribarren stated at trial that Fernández only asked him about a short-term loan to Obtener. See id. at 103-08, 294-95, 311-12. I credit Iribarren's testimony and find that Fernández only asked permission to make a single loan to Obtener.

Prior to its purchase by Norwest, Finvercon had made a number of loans to commercial entities. See id. at 124. Norwest made clear, even before it purchased Finvercon, that Finvercon could not continue to make commercial loans after the Closing. See id. at 124. Indeed, once the Closing took place, Norwest instituted a policy against making commercial loans. See id. at 147-48, 623-24. In addition, Fernández testified that Finvercon could not and did not make loans to individuals outside Argentina. See id. at 663.

F. Termination

On September 18, 1998, the shareholders of Finvercon, at a shareholders' meeting, removed Fernández and Lanzillotta as directors of Finvercon. See Undisputed Facts at ¶ O; Trial Tr. at 508-09. This shareholders' meeting consisted of John Sondereker, Mario Olive, Chris Keiser, and John Deal, head of Norwest's quality support unit. See Trial Tr. at 389, 508-09. Following this meeting, Olive became the President of Finvercon. See id. at 510.

I credit Sondereker's testimony and find that he told defendants that they were being terminated because they had not paid the tax judgment or posted the collateral. This finding is supported by the fact that, on the day of their termination, Norwest sent both Fernández and Lanzillotta written notice of their removal, indicating that "such revocation constitutes a termination with Cause as defined in clauses 1.4 and 1.5(a) of the Agreement, for reasons and events that are known to you." See Pl. Exs. 30, 31.

The removal of defendants was part of a larger shakeup at Finvercon. On the same day that defendants were notified of their removal, Norwest fired Pristera. See Trial Tr. at 154-55, 510-14, 811-14. In addition, Norwest already had removed Iribarren from his role of supervisor of Finvercon in early September. See id. at 129. Iribarren ...


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