The opinion of the court was delivered by: Scheindlin, District Judge.
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.
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
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
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
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.
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
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
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,
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
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
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.
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.
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.
On September 21, 1998, Sondereker met with Fernández and
Lanzillotta. See id. at 389, 647, 970-73. The participants
offer very different versions of what transpired at that meeting.
According to Sondereker,
he told Fernández and Lanzillotta that they were being removed
for cause, because they had not paid the tax judgment or posted
the collateral; he also noted concerns with mismanagement. See
id. at 389-90. According to Fernández and Lanzillotta,
Sondereker did not mention the tax judgment or the collateral;
rather, they claim that Sondereker said that Fernández was being
terminated because he did not fit Norwest's "style" and
Lanzillotta was being terminated because he was Fernández's
partner. See id. at 647, 652-53, 970-73. Sondereker denies
making these statements. See id. at 390-91.
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 ...