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Gusmao v. GMT Group

August 1, 2008


The opinion of the court was delivered by: Gerard E. Lynch, District Judge


This dispute arises from an alleged breach of the contract governing the sale of Vigo Remittance Corporation ("Vigo"), an international money transfer service provider. Upon the completion of discovery, plaintiffs, who sold the company to defendants, again move for summary judgment and a declaration that they are entitled to the full release of certain funds held in escrow and blocked by defendants purportedly according to the terms of the contract. For the following reasons, plaintiffs' motion for summary judgment will be granted in part and denied in part.


I. Sale of Vigo

On December 18, 2002, Helio Gusmao, Flavio Newlands Moniz Freire, and Ivan Newlands Moniz Freire, full owners of Vigo and plaintiffs in this action, sold most of their interest in Vigo to GMT Group, Inc., and Global Money Transfers, Inc., (collectively, "GMT" or "defendants") in exchange for $76.5 million and stock in GMT. (See D. Rule 56.1 Stmt. ¶ 5; Declaration of Alexander Zubatov, dated January 25, 2008, ("Zubatov Decl.") Ex. D Stock Contribution Agreement, ("SCA").) The sale closed on March 31, 2003. (D. Rule 56.1 Stmt. ¶ 6.) Pursuant to the SCA, GMT held approximately five million dollars of the purchase price in escrow (id. ¶ 7) against plaintiffs' promise to indemnify GMT for breaches of certain contractual warranties (SCA § 10.2).

II. Funds in Escrow

After the sale, GMT claimed indemnification rights against the escrow, preventing any funds from being released to plaintiffs. By letter dated September 29, 2004, GMT asserted five separate claims for indemnification totaling more than $15.5 million. (Zubatov Decl. Ex. DD.) Four of the five claims involved lawsuits brought by third parties against Vigo: the first claim, for more than seven million dollars, relating to a class action lawsuit in California ("McCann claim"); the second claim, for more than four million dollars, relating to a civil lawsuit in New York City by a former Vigo correspondent for unpaid commissions ("Dannyjoe claim"); the third claim, for $1.8 million, relating to a breach of contract action in Canada ("Commonwealth claim"); and the fourth claim, for $1.5 million, by a former Vigo employee for unspecified damages ("Valencia claim"). (Id.) The fifth claim, for "at least" $1.1 million, related to damages allegedly suffered by Vigo because its Brazilian correspondent -- the entity that effectuated the payment of funds to the intended beneficiaries in Brazil -- was allegedly improperly licensed under Brazilian law, thereby forcing Vigo to terminate that relationship "in order to comply with U.S. law" ("Brazil claim"). (Id.)

As of June 2006, GMT had refused to release any funds, and more than $4.9 million still remained escrowed.*fn2 Plaintiffs then brought this action, seeking a declaration that they were entitled to the release of at least a portion of those blocked funds. (Compl. ¶¶ 47, 56; see also Am. Compl. ¶ 57.) Plaintiffs claim that GMT has refused to release the funds without any legitimate basis for doing so, thereby violating the terms of the parties' agreement. GMT, in turn, counterclaimed, asserting that plaintiffs breached their contractual warranties and negligently misrepresented to GMT that Vigo's correspondent was properly licensed to conduct money transfer transactions in Brazil, and seeking a declaratory judgment that GMT is entitled to at least $1.1 million of the amount held in escrow. (Countercl. ¶¶ 13, 17, 20; see also Am. Countercl. ¶ 3.)

On February 2, 2007, before the completion of discovery, plaintiffs moved for summary judgment dismissing GMT's counterclaims and declaring that all escrowed funds be released to them. The Court denied that motion on June 6, 2007, without prejudice to any similar motion to be filed after the close of discovery. (See Order of June 11, 2007.) Discovery having been completed, plaintiffs again move for summary judgment. What were initially four claims valued by GMT at $14.45 million have essentially melted away.*fn3 The Brazil claim is now the only outstanding claim of those GMT initially asserted, and the only possible justification that GMT has for blocking release of the escrowed funds to plaintiffs. (D. Rule 56.1 Stmt. ¶ 23.)

GMT initially valued the Brazil claim at $1.1 million, but in March 2007 (after all or most of the other justifications for retaining the full escrow disappeared), the purported value of the claim ballooned to more than $5.2 million. (Zubatov Decl. Ex. F, Declaration of Karin Gillies, dated March 16, 2007, ¶ 6.) GMT's expert report dated January 4, 2008, now concludes that GMT's damages are closer to $1.4 million, constituting lost profits from unrealized money transfer transactions between October 1, 2003, and October 31, 2005. (Declaration of Jason Halper, dated March 10, 2008, ("Halper Decl.") Ex. H, Report of David J. Zaumeyer, dated January 4, 2008, ("Zaumeyer Rep.") ¶ 11.) In their current papers, GMT contends that the value of the Brazil claim is "roughly" two million dollars (D. Opp. 24 n.4), and apparently has agreed to release all but two million dollars of the escrowed funds to plaintiffs (see D. Rule 56.1 Stmt. ¶ 19). Plaintiffs insist that they are entitled to that remaining two million dollars.

III. Brazil Claim

Understanding the Brazil claim requires understanding the basic process by which Vigo transferred money to Brazil.

A. Structure of Money Transfers

To use Vigo's services, a customer entered a Vigo branch in the United States and identified the intended recipient of the funds transfer, providing the recipient's name and banking information. (D. Rule 56.1 Stmt. ¶ 25.) Vigo then transferred that information to its Brazilian correspondent, which would effect the transfer into the paying bank. (Id.; Zubatov Decl. Exs. N-P.) The customer paid an up-front fee for the service, and the recipient received Brazilian reais in accordance with the "retail" exchange rate for dollars. (D. Rule 56.1 Stmt. ¶ 26.) Those effecting the transfer profit both through the up-front fee paid by the person sending the money and through capture of the "FX spread," which is the difference between the retail and wholesale exchange rate.*fn4 (Id. ¶¶ 26-27.)

B. Vigo's Brazilian Correspondent

At the time of the sale, Vigo dealt exclusively with Vigo do Brasil Cambio e Turismo Ltda., predecessor of Politiburo Cambio e Turismo, Ltda. (collectively "Politiburo"). (Zubatov Decl. Ex. I, Deposition of Helio Gusmao, dated August 7, 2007, ("Gusmao Dep.") 38; id. Exs. N-P; D. Rule 56.1 Stmt. ¶¶ 38, 40.) Politiburo, an "exchange house" (Gusmao Dep. at 36; D. Rule 56.1 Stmt. ¶ 55), operated exclusively in Brazil's black market.*fn5 Before the Vigo sale closed, Politiburo and Vigo entered into a contract formalizing their relationship. (See Zubatov Decl. Exs. O & P; P. Mem. 10 n.9.) The agreement, initially effective for one year, would be "automatically renewed for an additional one-year term commencing on the anniversary of [March 12, 2003, the date the agreement was signed,] unless either party ha[d] notified the other in writing, not less than 60 days before any such anniversary date, of its intention to cancel the agreement." (Zubatov Decl. Ex. P § 8(a).)*fn6

The relationship between Vigo and Politiburo was not without its difficulties. In around September 2003, GMT discontinued making dollar payments in Brazil through Politiburo in order to comply with Brazilian regulations. (Zubatov Decl. Ex. M, Deposition of Roger Timm, dated Oct. 24, 2007, ("Timm Dep.") 81-82, 117-18; id. Ex. K, Deposition of Jorge Guerrero, dated Oct. 30, 2007, ("Guerrero Dep.") 31-36.) By letter dated February 27, 2004, Politiburo informed Vigo that, as of April 30, 2004, it would cease to serve as Vigo's payee in Brazil. (Zubatov Decl. Ex. Z.) Shortly thereafter, on March 8, 2004, Vigo's compliance officer Jorge Guerrero recommended to the board of GMT and Vigo that Vigo terminate Politiburo as Vigo's correspondent for compliance reasons. (Zubatov Decl. Ex. BB.) Guerrero based his recommendation in part on Politiburo's "lack of confirmation of compliance, compounded by the results of our assessment of risks presented by continued remittance services through Politiburo." (Id.) The board accepted that recommendation, and by letter dated March 18, 2004, Vigo informed Politiburo that Vigo would terminate its remittance service to Brazil through Politiburo on March 19, 2004, the day Vigo faxed the letter to Politiburo (Halper Decl. Ex. G), and approximately forty days before Politiburo was to cease operations of its own accord. Vigo had recently (or very soon thereafter) initiated correspondent services with Bradesco, a licensed correspondent affiliated with Bank of America. (Zubatov Decl. Ex. J; see also D. Rule 56.1 Stmt. ¶ 75.) As an independent report detailing Vigo's compliance explained:

In February 2004, Vigo initiated correspondent services in Brazil with Bradesco, through Bank of America. Bradesco holds the proper license from the Central Bank in Brazil. Immediately upon securing the Brazil payment platform, Vigo closed all correspondent activity with all casas de cambio and other financial services businesses in Brazil not licensed by the Central Bank. This took place in March 2004.

(Zubatov Decl. Ex. J.)

C. Sellers' Warranties

GMT claims that it is entitled to retain the escrowed funds because plaintiffs breached their contractual warranties. Pursuant to the SCA, plaintiffs, as sellers, warranted the "full compliance" of "each Acquired Company and, to Vigo Stockholders' Knowledge, each of the Acquired Companies' respective Affiliates and Representatives (other than the Agents or the Correspondents)" with various laws and legal requirements. (SCA § 3.14(a)(i).) Plaintiffs also warranted that "to [their] [k]nowledge, no . . . circumstance exist[ed] that . . . could reasonably be expected to constitute or result in a violation" by Vigo of various laws and legal requirements. (Id. § 3.14(a)(ii).) Under the contract, Politiburo is a correspondent, as it is a "foreign bank[] or other foreign Person[] or financial institution[] to which [Vigo] transmits money." (Id. § 1.)*fn7

IV. Parties' Contentions

GMT claims that plaintiffs breached these warranties because Politiburo "was not properly licensed under Brazilian law," and "[i]n order to comply with U.S. law, Vigo terminated [Politiburo] following discovery that it did not hold proper licenses." (Zubatov Ex. DD.) Specifically, GMT claims that Vigo's use of Politiburo to effect money transfers to Brazil violated the laws of the United States, New York, and Brazil. (D. Opp. 14; id. at 9.) In turn, plaintiffs argue: first, that they as sellers never breached any warranties; second, that even if they did, those breached warranties never became a part of the parties' bargain; third, that assuming GMT was somehow damaged by Politiburo's improper licensing, those damages were not caused by plaintiffs; and lastly, that GMT can claim no damages, ...

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