The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge
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
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
Banayan is a resident of the State of New York, and is President of
Ahava, Lewis Dairy and AFC.
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
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
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.
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
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
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
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
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 ...