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AMERICAN EQUITIES GROUP v. AHAVA DAIRY PRODUCTS CORP.

April 23, 2004.

AMERICAN EQUITIES GROUP, INC., Plaintiff, -against- AHAVA DAIRY PRODUCTS CORP., LEWIS COUNTY DAIRY CORP., and MOISE BANAYAN, Defendants


The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge

OPINION

Plaintiff American Equities Group, Inc. ("AEG") and defendants Ahava Dairy Products Corporation ("Ahava"), Lewis County Dairy Corporation ("Lewis County Dairy"), Ahava Food Corporation ("AFC") and Moise Banayan ("Banayan") have each moved for summary judgment pursuant to Federal Rule of Civil Procedure 56(b). For the reasons set forth below, both motions are denied.

 Parties

  AEG is a corporation organized and existing pursuant to the laws of the State of New York. Its current principal place of business is in New York, as it was when AEG filed a voluntary petition for bankruptcy on November 21, 2000. When AEG commenced contractual relations with Ahava, its principal place of business was in Wayne, New Jersey. AEG does business as a financial services company engaged principally in the business of accounts receivable factoring.

  Ahava is a corporation organized and existing pursuant to the laws of the State of New York, with its principal place of business in Brooklyn, New York, engaged in the sale of dairy products. Lewis County Dairy is a corporation organized and existing pursuant to the laws of the State of New York, with its principal place of business in the Lowville, New York.

  AFC is a corporation organized and existing pursuant to the laws of the State of New York, with its principal place of business in Brooklyn, New York.

  Banayan is a resident of the State of New York, and is President of Ahava, Lewis Dairy and AFC.

 Prior Proceedings

  On November 21, 2000, AEG filed a voluntary petition for relief under Chapter 11, Title 11, United States Code (the "Bankruptcy Code") and is continuing to operate its business and manage its property as a debtor-in-possession.

  On April 17, 2001, AEG commenced an adversary proceeding against Ahava, Lewis County Dairy and Banayan to recover an account balance of over $8 million arising out of a Master Purchase & Sale Agreement of November 6, 1996 (the "Agreement") to provide factoring of Ahava's accounts. A factoring agreement is an "agreement to convert receivables into cash by selling them at a discount." E. Armata Bank, Inc. v. Korea Commercial Bank of New York, 361 F.3d 100, 110 (2d Cir. 2004) (internal quotations omitted).

  On September 27, 2001, the motion by defendants to withdraw the adversary proceeding in Bankruptcy Court was granted, and defendants' motion to transfer this case to the District of New Jersey was denied. See American Equities Group, Inc. v. Ahava Dairy Products Corp., 01 Civ. 5207, 2001 WL 1143188 (S.D.N.Y. Sept. 27, 2001).

  Following discovery, both plaintiff and defendants filed simultaneous motions for summary judgment on January 12, 2004. After submission of briefs, oral argument was heard on the motions on February 11, 2004, at which time the motions were deemed fully submitted.

 Facts

  The following facts are taken from the parties' Rule 56.1 statements, the responses to those statements, and the briefs. Factual disputes are noted. As required, the facts are construed in the light most favorable to the non-movant, as applicable. They do not constitute findings of fact by the Court.

  Other than the actual wording of the relevant contracts, virtually every aspect of the relationship between the parties is disputed. AEG contends that the Agreement was generally followed properly by both parties, except that Ahava fell behind on its obligations to AEG, ultimately owing AEG millions of dollars. Ahava, by contrast, argues that the Agreement was not followed from the start, and resembled not a factoring agreement but a criminally usurious loan.

  As mentioned above, the parties entered into the Agreement on November 6, 1996. The Agreement specifies that it, along with

 
all transactions occurring hereunder shall be deemed made in and governed by and construed in accordance with the laws of the State of New Jersey, except as to the application of the New York Uniform Commercial Code, without regard to the principles of conflict of law.
Agreement, ¶ 9 (in all capitals in original). The Agreement also contains a provision waiving any right Ahava may have to a jury trial. Id., ¶ 10. On the same date, Lewis County Dairy and Banayan executed an absolute and unconditional guaranty (the "Guaranty") of payment for all of Ahava's contractual obligations under the Agreement.

  The Agreement provided that AEG would purchase the account receivables of Ahava and advance Ahava, pursuant to a formula set forth in the Agreement, 55% to 75% of the net outstanding value of the receivables, less any management, service, discount and overdraft fees.

  Immediately following the signing of the Agreement, the parties executed a supplemental letter agreement (the "Letter Agreement"). The Letter Agreement permitted Ahava "to collect any amounts owed by customers whether prepay, COD or payments on account and to deposit said moneys in a bank account designated and owned solely by AEG (the "AEG Collection Account')." Further, Ahava agreed "to provide its reasonable commercial best efforts in collecting, excluding litigation, and depositing promptly into the AEG Collection Account all outstanding consumer debts."

 AEG's Claims

  Pursuant to the Letter Agreement, Ahava did its own collections of receivables from its customer and deposited the proceeds into a bank account at Republic Bank maintained under the exclusive control of AEG (the "DBA Account"). Ahava could not make any withdrawals out of the DBA Account. Ahava would report the information about the account receivables it had collected in a regular or weekly submission of customer sales reports. AEG contends that the receivables were purchased by AEG pursuant to the Agreement, that the purchase of a group of receivables was referred to as a "pool," and that AEG subsequently advanced funds to Ahava based on the purchasing of the account receivable pools. Ahava disputes this account, referring to the advance of funds by AEG as a loan, and contending that the pools were held by AEG as collateral. According to AEG, however, it did loan Ahava additional monies via credit line arrangements and term loan arrangements, but those began some time in 1998 and continued through December 2000.

  The Agreement's initial term expired on November 6, 1997. AEG contends that the term expired with a balance due of over $4 million. Ahava contends that the numbers are drawn from the Summary of Ahava's Account, which is an inaccurate document. AEG and Ahava agreed to continue their contractual relationship and to extend the Agreement through November 2000. AEG contends that from November 1997 through November 2000, the parties continued their contractual relationship in accordance with the terms of the Agreement. During this time, AEG claims that it advanced millions of dollars to Ahava, and that Ahava was obligated to continue depositing its collected accounts receivables and related fees into a collection account set up by Ahava for the benefit of AEG. Ahava denies this, stating that the terms of the Agreement were not followed from the very beginning.

  AEG contends that it performed its obligations under the Agreement, but that Ahava fell behind on its payment obligations. Ahava denies that it fell behind on its payment obligations, and contends that AEG failed to perform its obligations under the Agreement. AEG contends that at no time prior to the commencement of this litigation did Ahava give notice of non-acceptance of any of the advanced monies or dispute the money or fees assessed to Ahava.

  According to AEG, by December 2000 Ahava breached its payment obligations under the Agreement by failing to deposit all of the account receivables it collected into the collection account, leaving an outstanding balance due to AEG of over $8 million. AEG alleges that in total, Ahava paid only $35,271,338 of the $43,353,157 owed to AEG. AEG states that as of late 2000 Ahava has made no payments to AEG on the outstanding balance. Ahava disputes this, stating that there was no funding to Ahava from AEG in 2000, and thus no obligation to pay AEG. Further, Ahava alleges that the Book Account is an unreliable document, and that approximately $8.7 million of payments by Ahava were not recorded.

  On December 20, 2000, pursuant to the Agreement, AEG gave notice of default to Ahava. Ahava acknowledges receiving the default notice from AEG, but denies that it was sent pursuant to the Agreement, because it denies that it owed AEG anything.

  AEG states that it was advised by Ahava that it was unwilling to pay its outstanding payment obligations under the Agreement and that Ahava would shortly no longer be in business. AEG also alleges that Ahava is undercapitalized, as that term is generally construed. Ahava argues that these statements are inadmissible under Fed.R. Evidence 408 because they were made in the context of settlement negotiations.

  AEG states, and Ahava does not deny, that at no time prior to the commencement of this lawsuit did Ahava give notice of non-acceptance of any of the monies advanced to Ahava.

 Ahava's Alleged Alter Egos

  AEG claims that Ahava, Lewis County Dairy and AFC are alter egos of each other, and that Ahava and AFC share the same (i) post office boxes, (ii) office space, (iii) telephone and facsimile numbers, (iv) officers, directors and personnel; (v) customers; and (vi) plant and equipment. Ahava disputes this and states that Ahava and AFC have different post office boxes, offices, and telephone and facsimile numbers.

  As to the shareholders, Ahava states that when AFC was formed in 1999, Banayan, Ruben Beityakov, Farrojollah Banayan, and Yossi Banayan were each 25% shareholders. Later, after AFC received a $7.1 million loan from New York City's Economic Development Corporation ("EDC"), Banayan was forced to take a second and third mortgage on his home in order to support AFC, which none of the other shareholders were willing to do. Banayan thereby became AFC's sole shareholder. AFC's funding comes virtually exclusively from EDC, and AFC did not use any of Ahava's assets as seed money.

  Ahava also states that while Ahava never employed more than 31 people, AFC employs nearly 60 people. Ahava also states that the customers of Ahava and AFC are not the same. Ahava distributed only dairy products, while AFC distributes a variety of ...


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