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UNITED STATES FIDELITY & GUAR. v. PETROLEO BRASILEIRO S.A.

February 4, 2005.

UNITED STATES FIDELITY & GUARANTY COMPANY and AMERICAN HOME ASSURANCE COMPANY, Plaintiffs,
v.
PETROLEO BRASILEIRO S.A. — PETROBRAS, et al., Defendants.



The opinion of the court was delivered by: THEODORE KATZ, Magistrate Judge

OPINION

Plaintiffs in this action, United States Fidelity & Guaranty Company ("USF&G") and American Home Assurance Company ("AHAC") (collectively, "Plaintiffs" or the "Sureties"), seek indemnification for losses and expenses incurred under four performance and payment bonds, pursuant to three indemnity agreements executed by Defendants Inepar Administracao e Participacoes, S.A. ("Inepar A&P"), Inepar Industria e Construcoes, S.A. ("Inepar I&C"), Sade Vigesa Corporation of America ("Sade America"), Sade Vigesa Industrial e Servicos, S.A. ("SVIS"), Internacional de Engenharia, S.A. ("IESA"), and Sade Vigesa (Chile), S.A. ("Sade Chile") (collectively, "Defendants"). Sade Chile was formally dissolved on April 21, 1999. IESA and SVIS were each merged into Inepar I&C, a subsidiary of Inepar A&P, in April, 2000. Thus, the remaining Defendants are Inepar A&P, Inepar I&C, and Sade America. Sade America, a direct subsidiary of Inepar I&C, Page 2 is a Delaware corporation with its principal place of business in Florida. Inepar A&P and Inepar I&C are both Brazilian corporations. This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a).

Judgments have been entered against the Sureties on three bonds they issued as co-sureties on behalf of Defendants or their affiliates to secure contracts involving the construction of oil and gas production facilities in Brazil, known as the P-19 and P-31 Projects. On a fourth bond issued by USF&G in favor of Sade America, to secure a contract for the construction of container cranes in the Port of New Orleans, USF&G has incurred losses as well. The issue before this Court is whether Defendants are required to indemnify the Sureties for their losses under the four bonds, pursuant to their or their affiliates' obligations under the bonds and related indemnification agreements.

  After motions for summary judgment were denied by the Hon. John G. Koeltl, U.S.D.J.,*fn1 the parties consented to trial before this Court, pursuant to 28 U.S.C. § 636©). A trial was held on September 9-10, 2004, at which the sole witnesses were experts on Brazilian law. The remainder of the record consists of the parties' summary judgment submissions, which include voluminous exhibits. Page 3

  The following Opinion constitutes the Court's findings of fact and conclusions of law.

  FACTUAL BACKGROUND

  The Court assumes familiarity with the complex history and factual background leading to the Sureties' liability under the various bonds, which is described in detail in a decision by Judge Koeltl. See United States Fid. & Guar. Co. v. Braspetro Oil Servs. Co., 219 F. Supp. 2d 403 (S.D.N.Y. 2002) ("USFG I"), aff'd in part, vacated in part and remanded, 369 F.3d 34 (2d Cir. 2004). Therefore, I will reiterate only those facts, which are largely undisputed, most pertinent to the issues presented for trial.

  I. The Performance and Payment Bonds

  A. The P-19 and P-31 Performance Bonds

  In 1995, a consortium comprised of Industrias-Verolme Ishibras, S.A. ("IVI") and Sade Vigesa, S.A. ("Sade")*fn2 (the "P-19 Consortium"), entered into a construction contract with Braspetro Oil Services Company ("Brasoil"), known as the P-19 Project, for the conversion of a semi-submersible oil and natural gas exploration platform into a deep-water oil and natural gas production unit. Another consortium, consisting of IVI, Sade, and IESA (the "P-31 Consortium"), entered into a contract with Brasoil for the conversion of a tanker ship into a floating production, Page 4 storage, and off-loading facility, known as the P-31 Project. These contracts required the P-19 and P-31 Consortia to obtain surety bonding. In connection with the P-19 Project, USF&G and AHAC, as co-sureties, issued a performance bond on behalf of the P-19 Consortium as principals, in favor of Brasoil, the obligee, in the amount of $110,512,660 ("the P-19 Performance Bond"). With respect to the P-31 Project, co-sureties USF&G and AHAC issued a performance bond on behalf of the P-31 Consortium as principals, in favor of Brasoil, the obligee, in the penal sum of $163,000,000 ("the P-31 Performance Bond").

  In 1997, Brasoil declared the P-19 and P-31 Consortia in default under their contracts, and asserted claims against the Sureties under the P-19 and P-31 Bonds. After conducting an investigation, the Sureties concluded that the P-19 and P-31 Consortia had not defaulted, and denied Brasoil payment under the Bonds. The Sureties then commenced a Declaratory Action in the Southern District of New York against Brasoil and Japanese lending institutions which had been made co-obligees on the P-19 Bond, seeking a declaration of their rights under the P-19 and P-31 Performance Bonds. Brasoil and the Japanese banks asserted counterclaims against the Sureties seeking payment in accordance with the P-19 Bond, and Brasoil filed counterclaims against the Page 5 Sureties seeking payment in accordance with the P-31 Bond.*fn3

  After a lengthy bench trial before Judge Koeltl, the Court found, inter alia, that the P-19 and P-31 Consortia defaulted under their contracts with Brasoil, and therefore held that the Sureties were obligated to fulfill the Consortia's obligations, pursuant to the P-19 and P-31 Performance Bonds. See USFG I, 219 F. Supp. 2d at 484. On September 30, 2002, the Court (Koeltl, J.) entered a judgment against the Sureties in favor of Brasoil and the Japanese banks under the P-19 Bond, in the amount of $149,440,499, and in the amount of $220,567,710 under the P-31 Bond. See United States Fid. & Guar. Co. v. Braspetro Oil Servs. Co., 226 F. Supp. 2d 459, 469-70 (S.D.N.Y. 2002). Thus, under the P-19 and P-31 Bonds, the Sureties were found liable for $370,008,209, with post-judgment interest accruing from September 30, 2002 at the rate of 1.68% per annum.

  The judgment was appealed, and on May 20, 2004 the Second Circuit Court of Appeals affirmed the district court judgment in part and vacated it in part.*fn4 See United States Fid. & Guar. Co. Page 6 v. Braspetro Oil Servs. Co., 369 F.3d 34 (2d Cir. 2004). Plaintiffs now seek indemnification from Defendants against all liability, including losses, expenses, and attorneys' fees, incurred under the P-19 and P-31 Bonds.

  B. The P-19 Payment Bond

  On behalf of the P-19 Consortium, Plaintiffs also issued a payment bond in the penal sum of $38,000,000, in favor of Brasoil, as owner, to secure the financing of labor, materials, and equipment provided by Marubeni America Corporation ("MAC") under the P-19 contract ("the P-19 Payment Bond"). The principals on the Bond were identified as IVI and Sade, and MAC was named a claimant under the Bond. In September 1997, MAC commenced an action against the Sureties in the New York County Supreme Court, for payment under the Bond, alleging that the P-19 Consortium defaulted on its payments. On January 14, 2000, the New York Supreme Court entered a judgment against the Sureties in the principal amount of $10,657,400. See Marubeni America Corp. v. United States Fidelity & Guaranty Co., No. 604801/97, slip op. at 9 (N.Y. Sup. Ct. Jan. 7, 2000), aff'd, 280 A.D.2d 269, 721 N.Y.S.2d 6 (1st Dep't 2001), lv. to appeal denied, 754 N.E. 2d 199, 729 N.Y.S.2d 439 (2001).

  After unsuccessful appeals, the Sureties satisfied the Page 7 judgment, plus interest — USF&G having paid $7,216,836.86, and AHAC having paid $7,226,369.19. (See Pls.' Conclusions of Law at 3; Declaration of Christine T. Alexander, executed Feb. 5, 2003 ("Alexander Decl."), ¶¶ 12, 14 & Ex. C; Declaration of Dominque Sena, executed Feb. 4, 2003 ("Sena Decl."), ¶ 10 & Ex. A.) Plaintiffs now seek indemnification from Defendants for their losses and expenses relating to the P-19 Payment Bond.

  C. The Port of New Orleans Performance Bond

  In May 1995, Sade America, a subsidiary of Sade, entered into a contract with Paceco Corporation for the assembly, transport, construction, and testing of container cranes which Paceco was obligated to design, engineer, construct, deliver, and erect under its contract with the Board of Commissioners of the Port of New Orleans. (See Alexander Decl. ¶¶ 21-22.) In connection with this project, USF&G issued a performance bond on behalf of Sade America as principal, in favor of Paceco as obligee, in the penal sum of $9,815,200. (See Alexander Decl. ¶ 23 & Ex. G.) Subsequently, Sade America entered into a subcontract with Boh Brothers Construction Company ("Boh Brothers") for the subcontractor to assemble and test the container cranes. (See Alexander Decl. ¶ 22.)

  In February 1998, USF&G received notice that Boh Brothers filed a statement of claim in the mortgage records of Louisiana's Orleans Parish against Paceco, Paceco's surety, and the Port of New Orleans. (See Alexander Decl. ¶ 24.) To lift the lien, Sade Page 8 America requested that USF&G issue a Release of Lien Bond in favor of Boh Brothers, in the penal sum of $2,005,421, in the event that Boh Brothers succeeded on its lien claim. (See Alexander Decl. ¶ 25 & Ex. H.) Approximately six months thereafter, Boh Brothers asserted a claim against Sade America and USF&G under the Release of Lien Bond.

  Pursuant to an agreement between them, Sade America and Boh Brothers brought their dispute before the American Arbitration Association ("AAA"). On September 24, 2002, the AAA entered an award against Sade America and USF&G in the full amount of the Release of Lien Bond, $2,005,421, plus pre and post-award interest, as well as 50% of the arbitrators' compensation, fees, and expenses. (See Boh Bros. Construction Co. LLC v. Sade Vigesa Corporation of America and United States Fidelity Guaranty, No. 50 T 110 00299 98 (2002) (Harley, Arb.), attached as Ex. J to Alexander Decl.) USF&G has paid the full amount of the award, $2,652,995.93, as well as $450,394.00 in fees and expenses. (See Plaintiffs' Trial Memorandum ("Pls.' Trial Mem.") at 4; Alexander Decl. ¶¶ 29, 33 & Ex. I.)

  Separate from Boh Brothers' claim against it, Paceco brought suit against Sade America and USF&G for alleged defects in the container cranes and shortcomings in Sade America's performance under the contract. (See Alexander Decl. ¶ 28.) In response to Paceco's claim, USF&G sustained losses of $410,465.23, and incurred Page 9 $238,043.27 in related expenses. (See Pls.' Trial Mem. at 4; Alexander Decl. ¶¶ 29-30 & Ex. I.) Plaintiffs now seek indemnification for the expenditures relating to the Release of Lien Bond, as well as the other losses under the Port of New Orleans Bond.

  II. The Agreements of Indemnification

  As a condition of providing surety bonding, USF&G and AHAC required the principals on the various projects to execute indemnity agreements in their favor. There are three relevant indemnity contracts, executed in 1994, 1995, and 1996, respectively.

  On August 19, 1994, Sade Chile, Sade America, and Sade entered into an indemnity agreement (the "1994 Agreement") in favor of USF&G, with an indemnity limit of $200,000,000. (See Pls.' Ex. S-6.) A second indemnity agreement was executed on February 17, 1995 (the "1995 Agreement") by Sequip, IVI, and Sade as principals and indemnitors, in favor of USF&G and AHAC, as co-sureties, with an indemnity limit of $500,000,000. (See Pls.' Ex. S-39.) Both the 1994 and 1995 Agreements require its principals and "any and all present or future affiliates or subsidiaries either owned or controlled by any of" these companies to assume "the obligations of Principals . . . with respect to any surety bond . . . issued, before or after this Agreement," by USF&G "on behalf of such Principals." (Pls.' Ex. S-6, lines 7-11; Pls.' Ex. S-39, lines 2-11.) Page 10

  It has been established that Sade, as a Principal on the P-19 and P-31 Bonds, parent of a Principal on the Port of New Orleans Bond, and party to the 1994 and 1995 Indemnity Agreements, is liable, under the common law and by agreement, to indemnify the Sureties on the P-19, P-31, and Port of New Orleans Bonds. See United States Fidelity and Guaranty Company v. Seguip Participacoes, S.A., et al., No. 98 Civ. 3099 (THK), 2003 WL 22743430, at **7, 10 (S.D.N.Y. Nov. 19, 2003) ("USFG II"). Plaintiffs claim, under a theory of successor liability, that Defendants acquired Sade's indemnity obligations for liabilities incurred under the Bonds when SVIS, a subsidiary of Sade, was merged into Inepar.

  The third agreement for indemnification was signed on March 22, 1996 (the "1996 Agreement") by the defined principals, Inepar A&P and Inepar I&C, with an indemnity limit of $200,000,000. (See Pls.' Ex. S-195, line 134.) This Agreement, similar to the 1994 and 1995 Agreements, included as its principals "any present or future directly or indirectly majority-owned or controlled subsidiaries, affiliates or associated companies or corporations now existing or hereafter created or acquired whether operating solely or in joint venture with others not named here-in." (See id., lines 3-5.) The Agreement states that the Indemnitors are required to indemnify the Sureties: "with respect to any surety bond, undertaking or instrument of guarantee . . . issued, before or after the date of Page 11 this Agreement, by [the Sureties] on behalf of such Principals." (See id., lines 9-12.) Plaintiffs seek indemnification under the 1996 Agreement against Defendants for losses incurred under the P-31 Bond and the Port of New Orleans Bond, because the principals on those Bonds were IESA and Sade America, which both became subsidiaries of Inepar after the 1996 Agreement was issued.

  DISCUSSION

  I. Indemnification for the P-19 Performance and Payment Bonds and P-31 Performance Bond Based Upon Inepar's Succession to Sade's Obligations

  Plaintiffs argue that Defendants are liable under the P-19 and P-31 Bonds, as successors to SVIS and Sade, because substantially all of the assets of Sade were transferred to SVIS (originally known as Produtos Hidromecanicos Limitada) in 1996, and then SVIS was acquired by, and eventually merged into, Inepar I&C. Defendants respond that although Sade conveyed a substantial part of its assets and liabilities to SVIS, under a share purchase agreement, Sade retained certain assets and liabilities, including its obligations with respect to the P-19 and P-31 Projects. The issue presented, therefore, is whether the spin-off of SVIS by Sade, and subsequent transfer of certain assets to Inepar, renders Inepar liable for Sade's indemnity obligations on the P-19 and P-31 Projects even if Sade purported to retain the liabilities related to the Projects. Page 12

  A. Controlling Law

  A federal court proceeding on the basis of diversity jurisdiction must apply the choice of law rules of the forum state, here New York, to determine what substantive law is applicable. See Fieger v. Pitney Bowes Credit Corp., 251 F.3d 386, 393 (2d Cir. 2001); Schwimmer v. Allstate Ins. Co., 176 F.3d 648, 650 (2d Cir. 1999).

  The primary issue to be resolved with respect to Plaintiffs' successorship claims against Defendants is whether, when it acquired SVIS, Inepar, a Brazilian corporation, succeeded to the liability of Sade, also a Brazilian corporation, for losses under the Bonds. The Court in USFG I, in deciding which forum's law applied to whether Petrobras, a Brazilian corporation, was liable for the obligations of three other Brazilian corporations, IVI, Sade, and IESA, under the Indemnity Agreements, on a theory of partnership, alter ego, instrumentality, and/or domination, applied New York choice of law principles which hold that the law of the jurisdiction of incorporation "determines when the corporate form will be disregarded and liability will be imposed on shareholders." USFG I at 476 (quoting Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995) (applying law of state of incorporation to alter ego theory of liability)); see also Kalb, Voorhis & Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir. 1993) ("Because a corporation is a creature of state law whose primary purpose is to insulate Page 13 shareholders from legal liability, the state of incorporation has the greater interest in determining when and if that insulation is to be stripped away.") (quoting Soviet Pan Am Travel Effort v. Travel Comm., Inc., 756 F. Supp. 126, 131 (S.D.N.Y. 1991)). Applying this New York principle, the Court found that "since [the parties] are Brazilian corporations," Brazilian law should apply to the Sureties' attempts to hold Petrobras liable for the other corporations' obligations. See USFG I at 476.

  The question of successor liability in this proceeding turns on whether certain Brazilian corporations succeeded to the obligations of other Brazilian corporations, and, as in USFG I, should be governed by the law of Brazil, which is the jurisdiction of the relevant entities' incorporation. See, e.g., Time, Inc. v. Simpson, No. 02 Civ. 4917 (MBM), 2003 WL 23018890, at *2 (S.D.N.Y. Dec. 22, 2003) (applying the law of the state of incorporation to claims of corporate alter ego liability); United Feature Syndicate, Inc. v. Miller Features Syndicate, Inc., 216 F. Supp. 2d 198, 214-15 (S.D.N.Y. 2002) (applying the law of the state of incorporation to claims of veil-piercing, to impose liability on corporate officers); Wausau Bus. Ins. Co. v. Turner Constr. Co., 141 F. Supp. 2d 412, 417-18 (S.D.N.Y. 2001) (finding that the law of the state of incorporation applies to piercing the corporate veil to hold parent liable for subsidiary's conduct, yet ultimately applying the substantially similar state law briefed by parties); Soviet Pan Am Page 14 Travel Effort, 756 F. Supp. at 131 (applying the law of the state of incorporation to piercing the corporate veil and "likewise, . . . for successor liability . . . which also involves corporate liability for the acts of others"). Indeed, the parties have demonstrated implied consent to the application of Brazilian law through the pleadings, expert reports, and expert testimony, which all include arguments concerning Brazilian law.*fn5 See, e.g., Golden Pac. Bancorp v. FDIC, 273 F.3d 509, 514, n. 4 (2d Cir. 2001) (applying New York law where the parties have implied consent to New York law in their briefs); Krumme v. Westpoint Stevens Inc., 238 F.3d 133, 138 (2d Cir. 2000) (finding that the parties' briefs assume New York law controls and that "implied consent . . . is sufficient to establish choice of law.") Accordingly, this Court relies on the expert testimony and expert reports on Brazilian law, as well as various Brazilian statutes and cases which have been brought to the Court's attention. See Fed.R.Civ.P. 44.1 ("The Page 15 court, in determining foreign law, may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence.").

  B. Share Purchase Agreement and Merger

  Inepar first contemplated a proposed partnership with Sade in March or April 1996. (See Transcript of Deposition of Renato Kachenski, Inepar Director, dated Feb. 21-22, 2001 ("Kachenski Dep."), at 165-66, 171, 243; Transcript of Deposition of Di Marco Pozzo, Inepar Director and Rule 30(b)(6) corporate designee, dated Dec. 12-14, 2000 ("Pozzo Dep."), at 91-92.) Inepar and Sade officials then engaged in a series of meetings to discuss a possible merger between their two companies. (See Pozzo Dep. at 100.) Those discussions culminated in a non-binding Memorandum of Understanding ("MOU"), dated June 26, 1996, between Inepar I&C, Sequip Investimentos S.A., and Sequip Paricipacoes S.A., with Sade and an independent investment Bank, Banco Factor S.A., acting as "intervenors" to the MOU. (See Pls.' Ex. S-284; Transcript of Deposition of Atilano de Oms Sobrinho, Chairman of Inepar, dated Dec. 15, 2000 ("Sobrinho Dep."), at 66, 68-69.) The MOU recognized that significant synergies existed between Inepar and Sade, including the areas ...


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