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Gusmao v. GMT Group

May 1, 2009

HELIO GUSMAO, ET AL., PLAINTIFFS,
v.
GMT GROUP, INC., ET AL., DEFENDANTS.



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

OPINION AND ORDER

FINDINGS OF FACT AND CONCLUSIONS OF LAW

This dispute arises from an alleged breach of a contract for the sale of Vigo Remittance Corporation, an international money transfer service provider. Plaintiffs Helio Gusmao, Flavio Newlands Moniz Freire, and Ivan Newlands Moniz Freire brought suit against defendants GMT Group, Inc., and Global Money Transfers, Inc., to procure the full release of certain funds held in escrow and blocked by defendants purportedly on account of plaintiffs' breach of various terms of the sale agreement. Defendants counterclaimed, seeking a declaratory judgment that, based on plaintiffs' breach of certain contractual warranties and their negligent misrepresentation that Vigo's correspondent was properly licensed to conduct money transfer transactions in Brazil, defendants are entitled to at least $1.1 million of the amount held in escrow. The case was tried before the Court without a jury on February 2 and 3, 2009. This Opinion sets forth the Court's Findings of Fact and Conclusions of Law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure. To the extent any Finding of Fact reflects a legal conclusion, it shall be to that extent deemed a Conclusion of Law, and vice versa. For the reasons discussed below, the Court concludes that defendants have failed to prove any breach of warranty by plaintiffs. Judgment will therefore be entered for plaintiffs.

FINDINGS OF FACT

I. Background

A. The Parties

1. Plaintiffs Helio Gusmao, Flavio Newlands Moniz Freire, and Ivan Newlands Moniz Freire are the former owners of Vigo Remittance Corporation, a New York corporation, and Vigo Remittance Corporation, an Ontario, Canada, corporation (collectively, "Vigo"), both of which are engaged in the international money transfer business. (Gusmao Decl. ¶ 1; Am. Compl. at ¶ 9; Am. Answer at ¶ 9.)

2. Defendants GMT Group, Inc. and Global Money Transfers, Inc. (collectively, "GMT") are Delaware corporations with their principal places of business in Colorado. (Am. Compl. at ¶¶ 5-6; Am. Answer at ¶¶ 5-6.)

B. Nature of the Dispute and Procedural History

3. In 2003, plaintiffs sold their interest in Vigo to GMT for $76.5 million and certain stock in GMT. (Am. Compl. at ¶¶ 10-11; Am. Answer at ¶¶ 10-11.) Pursuant to the contract, GMT held approximately $5 million of the purchase price in escrow against plaintiffs' promise to indemnify it for any breaches of various contractual warranties. (Am. Compl. at ¶¶ 16-17; Am. Answer at ¶¶ 16-17.)

4. After the sale was consummated, GMT claimed indemnification rights against the escrow and refused to release any of the funds to plaintiffs. In particular, it asserted five separate claims for indemnification totaling more than $15.5 million. (JE39.) Defendants have since abandoned or resolved four of those claims, and released approximately $3 million of the funds held in escrow. (Tr. 43.)

5. Plaintiffs commenced this action on July 5, 2006, asserting that GMT lacks any basis for withholding the funds and is therefore in violation of the terms of the sale agreement. (Compl. ¶¶ 46-47, 56; see also Am. Compl. ¶¶ 45-46, 57.) GMT subsequently counterclaimed, asserting that it is entitled to at least $1.1 million of the amount held in escrow because plaintiffs breached certain contractual warranties and negligently misrepresented that Vigo's Brazilian operation was in compliance with all applicable laws. (Countercl. ¶¶ 10-13, 17, 20; see also Am. Countercl. ¶ 3, 9, 13, 15-16.)

6. In an August 1, 2008, Opinion and Order, this Court denied plaintiffs' motion for summary judgment in part, finding genuine issues of material fact relating to the alleged breach of contractual warranties. See Gusmao v. GMT Group, Inc., No. 06 Civ. 5113, 2008 WL 2980039, at *13-14 (S.D.N.Y. Aug. 1, 2008) [hereinafter, "Gusmao I"]. The Court did, however, grant plaintiffs' motion for summary judgment on the negligent misrepresentation claim, as GMT had not sufficiently alleged that plaintiffs owed it any legal duty independent of the contract itself, nor had it submitted any evidence from which a reasonable factfinder could conclude that plaintiffs possessed the kind of specialized knowledge required to impose a duty of care in a commercial context. See id. at *15-16.

7. In light of Gusmao I, the only remaining claim in this matter involves GMT's allegation that it has suffered damages because Vigo's Brazilian correspondent -- the entity that effectuated the payment of funds to the intended beneficiaries in Brazil -- was improperly licensed under Brazilian law, so that GMT was forced to terminate that correspondent relationship in order to comply with certain provisions of U.S. law.

C. The Parties' Contentions

8. GMT argues that at the time of its sale, Vigo was in violation of the Bank Secrecy Act of 1970, Pub. L. 91-508, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the "PATRIOT Act"), Pub. L. 107-56, and its implementing regulations, which required Vigo to maintain a compliance program that was "effective" and "reasonably designed" to prevent the company from being used to facilitate money laundering. (GMT Post-Tr. Mem. 1-2.) In support of this argument, GMT cites what it claims are numerous failings on the part of Vigo and its Brazilian correspondent. These include: Vigo's use of exchange houses operating in Brazil's parallel market, rather than banks authorized by the Central Bank of Brazil to make remittance payments; Vigo's failure to determine whether its correspondent was properly licensed to effect money transfers or had an anti-money laundering compliance program; the correspondent's payment of funds in U.S. dollars (rather than Brazilian reais) and to persons with expired CPF numbers;*fn1 and Vigo's failure to terminate the correspondent or otherwise change course when apprised of criminal charges pending against the correspondent's owner. (Id. 5-8.)

9. In response, plaintiffs argue that the warranty provisions cited by GMT do not apply to the conduct at issue in this case, and even if they did, that GMT has failed to prove that Vigo's operations violated any provision of U.S. law, or that its correspondent's operations violated any provision of Brazilian law. (P. Post-Tr. Mem. 2-14, 21-22.) Plaintiffs also contend that GMT is not entitled to rely on the relevant warranty provisions because -- prior to the closing of the sale -- plaintiffs disclosed to GMT the very facts that GMT now contends constitute a breach of warranty (id. 14-17), and any damages GMT incurred as a result of its termination of Vigo's Brazilian correspondent, or of dollar payments, are attributable not to a breach of warranty, but instead to GMT's independent decision to replace the correspondent with its own network of payors and to discontinue dollar payments. (Id. 17-19, 21-22.) Finally, plaintiffs challenge the adequacy of GMT's notice of claim and the validity of its damages theory and analysis. (Id. 19-26.)

II. The Creation and Ownership of Vigo

10. Vigo was co-founded in 1985 by Helio Gusmao, a named plaintiff in this action, and Sergio Vilhena, a Brazilian citizen. (Gusmao Decl. ¶ 7.) The company was established as an international money transfer service provider, and its initial geographic reach was limited to Brazil. (Gusmao Decl. ¶ 10; Tr. 46-47.) By the time of the events giving rise to this dispute, however, Vigo customers could send money to forty-seven nations throughout Africa, Australia, Europe, and Latin America. (Gusmao Decl. ¶ 11; cf. Tr. 46-47.)

11. Vigo opened its first office in Newark, New Jersey, but because of the company's rapid success, Gusmao and Vilhena soon decided to obtain a money transfer license from the State of New York and move the company's headquarters to Manhattan. (Gusmao Decl. ¶¶ 7-8.)

12. Because securing a money transfer license required approximately $500,000, Gusmao and Vilhena agreed to raise the money by bringing a new partner into the business. (Gusmao Decl. ¶ 15; Tr. 48-49.) The two ultimately decided on Ivan Freire ("Freire"), a resident of Brazil whom Gusmao had met in the early-to-mid 1980s while operating as an exporter of goods to that country. (Gusmao Decl. ¶ 16; Tr. 49.)

13. In or about 1991, Vilhena left Vigo and began another money transfer company in Miami called Uno. (Gusmao Decl. ¶ 17; Tr. 50.) Following his departure, Gusmao and Freire redistributed the outstanding shares such that each of them possessed a 50% interest in Vigo. (Tr. 50.)

14. In the mid-1990s, Freire transferred his 50% interest in Vigo to his sons, named plaintiffs Flavio Newlands Moniz Freire and Ivan Newlands Moniz Freire (collectively, the "Freire Brothers"). (Gusmao Decl. ¶ 27; Tr. 51.) Gusmao, however, retained the remaining 50% interest in Vigo, as well as decision-making authority for the company. (Tr. 52.)

II. Vigo's Brazilian Operations

15. An international money transfer service provider like Vigo collects money from a sender in the United States and remits payments designated by that sender to the appropriate beneficiary in the destination country. (Gusmao Dep. 11, 38-42.) To process such transactions, a money transfer service provider requires a correspondent in the destination country. The correspondent -- also referred to as the payor -- is the entity on the receiving end of the money transfers which, given the recipient's bank information, account name and branch number, directs those transfers into the recipient's bank account. (Gusmao Dep. 38, 42-43; see also Tr. 113.)

16. Consistent with this general description, in order to utilize Vigo's services to effect a money transfer to Brazil, a customer would visit one of the company's branches in the United States and identify the intended recipient of the funds transfer, including the recipient's name and his or her banking information and CPF. (Tr. 93-95; Trujillo Dep. 51-52.) Vigo would relay that information to its Brazilian correspondent, which would effect the transfer into the paying bank. (Tr. 93-95; Trujillo Dep. 51-54.) The customer paid an up-front fee for this service (Trujillo Dep. 52), and the recipient generally received Brazilian reais in accordance with the "retail" exchange rate for dollars. (Cf. Tr. 97.) Ultimately, Vigo profited from the up-front fee paid by the customer, and by capturing the "FX [foreign exchange] spread," which is the difference between the retail and wholesale exchange rates. (Gusmao Decl. ¶ 18; cf. Tr. 53.)

17. During the early stages of its operations, Vigo did not have an exclusive correspondent in Brazil. (Gusmao Decl. ¶ 19.) Instead, it worked with a variety of exchange houses, negotiating exchange rates, prices and quality of service on an ad hoc basis. (Id.; Tr. 49-50.) Eventually, Vigo selected Politiburo Cambio e Turismo, Ltda. ("Politiburo") as its exclusive Brazilian correspondent.*fn2 (Gusmao Decl. ¶ 19; Tr. 47-48.)

18. Owned and operated by Freire,*fn3 Politiburo was an "exchange house," or a business that buys and sells currency. (Gusmao Decl. ¶ 20; cf. Gusmao Decl. ¶¶ 18-19, 21; Tr. 47-48, 50; JE42 at 15.) Like many exchange houses in Brazil, it operated exclusively in Brazil's unofficial or "parallel" market.*fn4 (Gusmao Decl. ¶ 20; Guerrero Dep. 105-06; Timm Dep. 128.) Unlike the situation in those countries in which such exchange houses were not visible and could therefore be deemed to be part of the "black market," however, at the time of the events giving rise to this dispute exchange houses in Brazil's parallel market were highly visible, with parallel market exchange rates often being quoted by the government, on Brazilian television, and in Brazilian newspapers.*fn5 (Gusmao Decl. ¶ 25; Timm Dep. 27, 97, 127-28, 136; Trujillo Dep. 68.)

19. In early March 2003, Politiburo and Vigo entered into a contract formalizing their exclusive relationship. (Gusmao Decl. ¶¶ 22-23.) The agreement, typical of those Vigo used with correspondents in other countries (Gusmao Decl. ¶ 22; Tr. 74), was initially effective for only one year, but 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, whereupon the agreement [would] be terminated on the expiration of the term during which the notice was given.*fn6 (JE28 § 8(a); see also Gusmao Decl. ¶ 22.)

20. In addition to the automatic renewal provision, the agreement between Vigo and Politiburo also contained a section entitled "Representations and Warranties of Correspondent" that read as follows:

Correspondent represents and warrants to Vigo that:

(i) Corporate Existence and Power. Correspondent is a corporation duly organized, validly existing and in good standing under the laws of the Correspondent Payment County, and has all corporate powers and has all government licenses, authorizations, consents and approvals required to carry on its business as now conducted and as proposed to be conducted in Correspondent Payment County in accordance with this agreement. . . . Correspondent is authorized to effect money transmission payment to beneficiaries in Correspondent Payment Country in all locations wherein it conducts business and complies with all state and Correspondent Payment Country laws and regulations applicable to such transmission. (JE28 § 5(b)(i); see also Gusmao Decl. ¶ 24.)

21. While running Vigo, Gusmao never discussed with Freire or anyone else whether Politiburo possessed a license to engage in money transmission in Brazil, as his understanding was that there were no licensing procedures or requirements for money transmission in Brazil, just as there were no such procedures or requirements in many of the countries in which Vigo operated. (Gusmao Decl. ¶ 26; see also Tr. 73-76.) Gusmao instead relied on Politiburo's contractual representation that it was, in fact, in compliance with all legal or regulatory requirements applicable to money transmitters in Brazil. (Tr. 61-62.)

III. The Sale of Vigo

22. Prior to March 31, 2003, plaintiffs owned 100% of Vigo's issued and outstanding shares of capital stock. (JE47 at ¶ 9; JE48 at ¶ 9.)

23. In 2001, Gusmao met Mario Trujillo and Roger Timm. (Gusmao Decl. ¶ 28.) Trujillo informed Gusmao that he was looking to acquire a business, and was particularly interested in entering the money transfer industry. (Gusmao Decl. ¶ 28; Trujillo Dep. 11-12.) In light of this interest, Gusmao attended a few meetings with Trujillo and Timm. (Gusmao Decl. ¶ 28.) Although these meetings did not immediately lead to an agreement, Trujillo and Timm contacted Gusmao one year later to inform him that they had acquired the proper financing and were prepared to move forward with an acquisition of Vigo. (Gusmao Decl. ¶ 29; cf. Trujillo Dep. 11.)

24. Because other parties had also expressed interest in buying Vigo, and because he was bound by a non-disclosure agreement, Gusmao was unable to entertain Trujillo and Timm's renewed interest at the time they approached him. (Gusmao Decl. ¶ 29.) In mid-2002, however, after it became apparent that none of the interest expressed by other buyers would lead to a definitive agreement, Gusmao contacted Trujillo and made two trips to Boston to meet with various officials of Great Hill Partners, the organization that was expected to finance the acquisition. (Gusmao Decl. ¶¶ 30, 32; Hayes Dep. 10-11; cf. Trujillo Dep. 12.)

25. On May 24, 2002, the parties signed a letter of intent ("LOI") reflecting their agreement that Trujillo and his associates would acquire Vigo for $80,759,500. (Gusmao Decl. ¶ 33; JE4; see also Trujillo Dep. 13-14.) The LOI was negotiated largely by Gusmao and Trujillo, although Gusmao kept the Freire Brothers informed of the terms of the proposed sale, as well as the status of the deal after the LOI was signed. (Gusmao Decl. ¶ 34; Trujillo Dep. 14.) In addition to the purchase price, the LOI contemplated that Gusmao and the Freire Brothers would jointly receive a 5% share in GMT, though this share was later increased. (Gusmao Decl. ¶ 33; Tr. 42; JE4 at 1.) The LOI also provided for the establishment a $5 million escrow account, to be funded by money withheld from the purchase price, retained for three years, and released only after the occurrence of certain agreed-upon conditions. (Gusmao Decl. ¶ 33; Tr. 42; JE4 at 1.)

26. For approximately six months following the execution of the LOI, Trujillo and Timm conducted due diligence on Vigo. (Gusmao Decl. ¶ 35; Trujillo Dep. 148-50.) Trujillo, who visited Vigo's New York headquarters nearly every day, was given office space near Gusmao so that his questions and concerns could be readily addressed. (Gusmao Decl. ¶ 35; Trujillo Dep. 148-49.) He was also afforded liberal access to Vigo personnel, documents, and customers. (Gusmao Decl. ¶ 36; Trujillo Dep. 149-50.) Through this process, Trujillo educated himself on numerous aspects of Vigo's business, including the countries in which Vigo operated and the countries to which it was contemplating expanding its service. (Gusmao Decl. ¶ 36.)

27. Although Timm was not in Vigo's offices with any regularity (Timm Dep. 14-15), he took specific responsibility for "the international side of the company, particularly the payers and all the related topics for those foreign payers." (Timm Dep. 12.)

28. During the course of this due diligence, in a meeting on June 4, 2002, Gusmao informed Timm that Lori Oppenheimer served as Vigo's independent compliance consultant. (JE6 at MT 0033; cf. Trujillo Dep. 152.) Oppenheimer, a former JP Morgan Chase compliance officer and attorney, monitored Vigo's compliance function, acted as an outsourced senior compliance officer, and conducted annual training of all Vigo personnel. (JE6 at MT 0033; Tr. 57-58.) Vigo also had an internal compliance officer who reported to Oppenheimer, among others. (JE6 at MT 0036-37.)

29. Several days after his meeting with Gusmao, Timm held a discussion with other Vigo personnel that prompted him to note that he "[n]eed[ed] to check out the legal structure of [Politiburo], is it a legally recognized exchange house?" (JE6 at MT 0036.)

30. Ultimately, before the closing of the transaction, both Trujillo and Timm learned that Politiburo was unlicensed*fn7 (Trujillo Dep. 172-73, 210; Timm Dep. 50; cf. Trujillo Dep. 175-76; JE14 at 5), and that it operated in the parallel market.*fn8 (Trujillo Dep. 173; Timm Dep. 27, 37-38, 135; cf. JE14 at 5.)

31. In addition, based on information relayed by Gusmao, Trujillo learned that Vigo's Brazilian payor was related to the sellers in some manner. (Trujillo Dep. 28, 31.) Neither he nor anyone else at GMT, however, made anything more than a minimal ...


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