Opinion
No. 98 Civ. 6635 (SAS).
January 10, 2001.
For Plaintiff: David Dunn, Esq., Scott Estes, Esq., Hogan Hartson, LLP New York, New York.
For Defendants: Eduardo L. Tabio, Esq., Fox Horan Camerini, LLP New York, New York.
MEMORANDUM OPINION AND ORDER
After reviewing written submissions and hearing argument by the parties on December 27 and 29, 2000, the following constitute my rulings on their objections to the Report of Special Master Evan M. Bush (the "Report"). The Special Master is directed to finalize the figures in his Report to conform to this Order. That Revised Report, which the Court expects to receive within fourteen days of this Order, shall be the basis for the final judgment. The facts of this case have been summarized in prior opinions, familiarity with which is assumed. See Norwest Financial, Inc. v. Fernandez, 86 F. Supp.2d 212 (S.D.N.y.), aff'd, 225 F.3d 646 (2d Cir. 2000). See also Norwest Financial, Inc. v. Fernandez, No. 98 Civ. 6635, 1999 WL 946786 (S.D.N.Y. Oct. 19, 1999); Norwest Financial, Inc. v. Fernandez, No. 98 Civ. 6635, 2000 WL 191710 (S.D.N.Y. Feb. 9, 2000); Norwest Financial, Inc. v. Fernandez, No. 98 Civ. 6635, 2000 WL 282906 (S.D.N.Y. Mar. 15, 2000); Norwest Financial, Inc. v. Fernandez, 121 F. Supp.2d 258 (S.D.N.Y. 2000).
Special Master Evan M. Bush issued his Report calculating the amount of money due from defendants to plaintiff based on the amount of Credit Losses as of July 31, 1999. This thorough Report was carefully reviewed by both the parties and the Court. The parties submitted the following four documents in response to the Report: [Defendants'] Objections to Report of Special Master ("Def. Obj."); Wells Fargo's Responses to Objections of Defendants to the Special Master's Report ("Pl. Resp."); Objections of Plaintiff to Report of Special Master Evan Bush ("Pl. Obj."); and [Defendants'] Response to Objections of Wells Fargo to Report of Special Master ("Def. Resp.").
The fact that a particular objection is not addressed herein means that no adjustment to the Report was deemed necessary and the objection was dismissed at oral argument. See Transcripts of Oral Argument, December 27 and 29, 2000.
IOSE
Payments to a mutuale known as IOSE were not made by the borrowers for the months of January through March 1998. Report at 15. These missing installments total $272,028.64. Id. Defendants object to these missed installments being included as Credit Losses as it was plaintiff's system problems, not the delinquency of the borrowers, that caused the missed installment payments. See Def. Obj. at 3.
"Mutuale" is a Spanish word. As used here, it is somewhat akin to a labor union.
Because the IOSE accounts were sold obligations, plaintiff argues that Finvercon "should not have to disburse any funds" on account of guarantees on sold obligations. See Pl. Resp. at 4. Section 7.1 of the Stock Purchase Agreement ("SPA") provides that:
Finvercon often sold packages of its loans to other finance companies, such as banks, and guaranteed the underlying payments. Such sales resulted in "sold obligations." See Norwest, 86 F. Supp.2d at 216.
Sellers [defendants] jointly and severally undertake to reimburse Buyer [plaintiff] on demand upon the occurrence of any Credit Loss and, thus, guarantee to Buyer that the Accounts Receivable shall be collected by the Company when and as due and that the Company shall not have to disburse any funds for any Sold Obligation. This guarantee obligation is absolute and Sellers waive any defense they may have against Buyer, including, but not limited to, any defense that the borrowers of the Company may have. . .
Plaintiff interprets the above provision as an absolute guarantee regardless of the reason why the payments were missed. See Transcript of Conference Held on December 27, 2000 ("12/27/00 Tr.") at 12. Defendants object stating that "[t]he language is not so broad [as] to encompass [plaintiff's] own negligence." Id. at 17.
In support of defendants' contention that Finvercon's system problems caused the payments to be missed, defendants' attorney, Eduardo L. Tabio, submitted additional documents at this Court's direction See Letter from Eduardo7 Tabio dated January 3, 2001 ("Tabio Ltr."). Specifically, Mr. Tabio submitted an internal memorandum dated July 7, 1998 from Espie Creech of Norwest's [plaintiff's] Audit Services to Mario Olive, Controller of Finvercon in which she states:
And the other incident had to do with new loans with first payment due dates of January 25th were not collected until the following month — again because of system problems. Again, one incident had to do with no tapes being sent and the other had to do with new loans with first payment due date of 1/25/, 2/25 and 3/25.
Tabio Ltr., Ex. A. Mr. Tabio also submitted a draft internal audit report prepared by Norwest's Audit Services in July of 1998. That report states:
During our review, we noted that on two occasions since December 1997, Finvercon did not provide I.O.S.E. with a list of borrowers who owe payments for that month. As a result, borrowers did not have payments deducted from their paychecks during those two months. Although Finvercon has extended the payment term on these loans to ensure full loan repayment, the delay in collecting payments also delays identification of problems with payment processing and loan delinquency.
Tabio Ltr., Ex. B.
These documents provide persuasive evidence that the missed payments were encountered during the transition period as a result of Norwest's system problems and were in no way the fault of defendants. And despite the broad language of the guarantee for sold obligations, defendants should not be liable for these missed payments which will ultimately be received by Finvercon at the end of the loan period. Plaintiff would not have had to disburse funds for sold obligations but for its own negligence. It is well accepted that one cannot ordinarily be indemnified for its own negligence. See Haynes v. Kleinewefers and Lembo Corp., 921 F.2d 453, 456 (2d Cir. 1990) (a negligent party has no right to be indemnified unless the contract demonstrates an "unmistakable intent" to indemnify the negligent party). The amount of Credit Losses should therefore be reduced by $272,028.64, plus any accrued interest.
Refinancings or New Agreements with Intermediaries
With regard to refinancings, the January 12, 2000 Opinion and Order states:
First, defendants argue that Norwest should not have claimed as Credit Losses the accounts receivable for which it has made new agreements with the intermediaries. Norwest can claim these accounts as Credit Losses up to the amount owed on the loan at the time of the Closing, because defendants guaranteed those amounts and Finvercon did not receive the money. But defendants do not owe any money for any breach of the new agreements that the intermediaries made with Norwest, because defendants did not guarantee payments by the intermediaries.Norwest, 86 F. Supp.2d at 225.
At oral argument, much of the focus was on the so-called new agreement with the Province of Tucuman. In his Report, Mr. Bush succinctly described the Tucuman problem.
During 1998, one of the mutuales, . . . became substantially in arrears in its payments to Finvercon. On December 11, 1998 the Province of Tucuman issued a decree to pay the arrears through six series of postdated checks. Each series generally consisted of twelve checks and were payable from January 1999 to October 2000. The total amount of the checks consisted of $1,012,211 which consisted of past due payments ($957,670), interest at 4.5% and IVA.
Report, Appendix II.
Plaintiff objects to any adjustment to the amount of Credit Losses for the post-dated checks that were in Finvercon's possession as of the date of the Credit Loss claim but not yet cashed. See 12/27/00 Tr. at 23-24. Plaintiff maintains this position even though most, if not all, of the post-dated Tucuman checks have already been cashed. Id. at 26. Plaintiff bases its position on a "snapshot theory," arguing that the cut-off for Credit Losses was July of 1999 and that any subsequent payments, as well as new Credit Losses, would — have to be rolled forward to avoid an "administrative and practical nightmare." Id. at 27.
Plaintiff is correct. As a result, the post-dated Tucuman checks should not affect the amount of Credit Losses as of July 31, 1999. The unilateral decree by the Province of Tucuman is not a new arrangement, as described in the January 12 Opinion, that would relieve defendants of their guarantee. However, punitive interest terminates as of the date of the decree. Furthermore, if this new arrangement with the Province of Tucuman resulted in a downward adjustment to the amount owed, defendants are only liable for the compromised amount. If Mr. Bush concludes that the Province of Tucuman negotiated to repay a discounted amount, then the Credit Losses should be reduced by the amount of the reduced debt, i.e., the difference between the original amount owed and the amount owed after renegotiation, plus any punitive interest assessed after the date of reorganization. Cooperative Valores
This ruling applies to any other similar arrangement and is not limited to the Province of Tucuman.
The Special Master treated the loans involving Cooperativa Valores as judicial-accounts as of the date that Cooperativa Valores applied for reorganization, December 28, 1998. However, Finvercon acquired the underlying loans on these accounts. Because Finvercon bought the paper on these loans, the individual debtors became obligated to Finvercon. Cooperative Valores merely functioned as an intermediary collecting the payments from these debtors on Finvercon's behalf. According to plaintiff, because the borrowers did not file for reorganization, no judicial activity occurred with respect to the underlying loans and the accounts should be treated as non-judicial. See Pl. Obj. at 7-8. This would result in a net upward adjustment of $95,486.42. Id. at 6.
Defendants point out that prior to its reorganization, Valores always paid 100% of the amounts due collectively on all loans, without identifying to Finvercon which individual borrowers had made payments on the installments due. See Def. Resp. at 3. Finvercon therefore never knew which particular borrower may have been in default. Id. at 4. Defendants argue that Valores' right to receive payments constitutes an asset, which is part of its estate in bankruptcy, and this collection must continue for the benefit of all of its creditors under the supervision of a Court-appointed Trustee. Id. This argument is without merit, however, as Finvercon owns the underlying paper on the loans and it is to Finvercon that future payments must be made. Defendants also point out that if Finvercon had obtained from Valores all right title and interest to the underlying loans, with the right to commence collections proceedings against the individual borrowers, then the borrowers should have received formal notification which was never given. Id. at 4-5.
Both plaintiff and defendants are partially correct. The money collected by Valores but not paid to Finvercon, approximately 1, 176, 050 pesos, now under the control of the bankruptcy trustee, should be treated as judicial. As such, punitive interest and value added tax ("IVA") ceases as of December 28, 1998. However, those amounts owed by the individual debtors to Finvercon subsequent to that date and not paid are to be treated as non-judicial and thus subject to punitive interest and IVA. Mr. Bush is directed to adjust his figures accordingly.
Missed Payments with Scheduled Due Dates Prior to Closing on Sold and Repurchased Obligations
The Report identifies a number of Credit Loss claims that involve missed payments prior to the Closing Date of January 7, 1998. The Special Master has separated the amounts into the following two categories: (1) payments made July 11, 1997 to January 6, 1998 (payments made within 180 days before the Closing Date); and (2) payments made prior to July 11, 1997 (payments made more than 180 days before the Closing Date). In the case of sold obligations, the amounts are $331,706.25 and $279,830.34, respectively. See Report at 17. In the case of repurchased obligations, the amounts are $28,379.19 and $9,189.07, respectively. Id. at 19.
Accounts receivable that were six months past due at the time of Closing are only recoverable against the contingent portion of the purchase price. See Norwest, 86 F. Supp.2d at 225 ("Where an account already was 180 days past due at the Closing, that account is not covered by § 7.1 because the `occurrence' took place before the Purchase Agreement came into effect. Norwest may still recover the money it lost on those accounts, however, because Finvercon was fully reserved for those accounts at the time of the sale."). Accordingly, the second set of figures for sold and repurchased obligations, $279,830.34 and $9,189.07 respectively, cannot be treated as Credit Losses but may be recovered against the contingent portion of the purchase price. The amount of Credit Losses should be reduced by these amounts.
Calculation of Legal Interest
The Special Master computed legal interest as of the date of the missed scheduled payment date for sold and repurchased obligations "because interest was due from the Seller from the time that Finvercon paid the purchaser." Report at 11. Defendants argue that the calculation of legal interest should not depend on the due date of the particular payments on sold and repurchased obligations, but on the date such amounts were demanded from the defendants and not paid. See Transcript of December 29, 2000 Conference ("12/29/00 Tr.") at 37.
Defendants are correct. Legal, or prejudgment, interest can only run from the time of the breach, not from the time the underlying payment was missed. However, a bright-line rule is needed to effectively apply this ruling. Therefore, for the first demand made on September 28, 1998 in the amount of $2,405,794.43, interest shall run from October 1, 1998. For all other Credit Losses that occurred after that date, interest will begin to run sixty days after the time the Credit Loss accrued. While the sixty-day figure is somewhat arbitrary, it is the best approximation of the interval between the occurrence of a Credit Loss and the demand for its payment. Mr. Bush is directed to adjust his interest calculations accordingly.
• Partial Credit
Defendants claim that two years ago they paid plaintiff $46,000 which has never been credited against the Credit Losses. See Def. Obj. at 24. Plaintiff argues that this amount was due to defendants shortly after their termination, arose from transactions unrelated to the Credit Losses and was offset by Finvercon against the amounts owed by defendants under the SPA. See Pl. Resp. at 17. Plaintiff states that this payment was not made on account of Credit Losses and cannot be correlated to any particular accounts. Id.
Defendants have submitted an excerpt from Finvercon's Answer in an Argentinian litigation between defendants and plaintiff. See Tabio Ltr., Ex. D. That excerpt states that Circulos Noroeste S.R.L. owed Finvercon $371,992 and that Finvercon proceeded to compensate such debt with the sums received from Obtener S.A. as of 10/01/98." Id. However, this document does not indicate that the $46,000 was part of the sum received from Obtener S.A., nor does it explain what Obtener S.A. is or its relationship to Finvercon. Based on this evidence, I cannot conclude that the $46,000 payment was made against a Credit Loss. Accordingly, no adjustment is warranted.
Adjustment for Unpaid Sold Obligations
Plaintiff objects to the $103,452.93 deduction for missed installments on Sold Obligations. See Pl. Obj. at 1. Because these obligations had been incurred by Finvercon as of July 31, 1999 and Finvercon was obligated to make such payments in the ordinary course to the acquiring banks, plaintiff argues that this deduction is not appropriate. Id. at 1-2. Defendants object stating that the record closed as of July 31, 1999 and there is no proof that any disbursements ever took place for these obligations. See Def. Resp. at 2.
Defendants are right. Just as there was no reduction in the amount of Credit Losses for the post-dated Tucuman checks, there can be no increase for debts incurred but not yet paid by Finvercon. Credit Losses must be fixed as of July 31, 1999 and any further adjustments, both positive and negative, can be made in a supplemental exhibit or schedule which will be submitted to the Court every six months to account for all post-judgment transactions. Therefore, the $103,452.93 deduction stands.
Mr. Bush is directed to revise his Report in accordance with these rulings and furnish the parties and this Court with copies of the Revised Report.