Opinion
No. 98 Civ. 3099 (THK).
February 4, 2005
OPINION
Plaintiffs in this action, United States Fidelity Guaranty Company ("USFG") 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 AP"), Inepar Industria e Construcoes, S.A. ("Inepar IC"), 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 IC, a subsidiary of Inepar AP, in April, 2000. Thus, the remaining Defendants are Inepar AP, Inepar IC, and Sade America. Sade America, a direct subsidiary of Inepar IC, is a Delaware corporation with its principal place of business in Florida. Inepar AP and Inepar IC 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 USFG in favor of Sade America, to secure a contract for the construction of container cranes in the Port of New Orleans, USFG 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., 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.
See United States Fid. Guar. Co. v. Petroleo Brasileiro S.A.-Petrobras, Nos. 97 Civ. 6124, 98 Civ. 3099, Orders denying summary judgment, dated Sept. 7, 2001 and Jan. 11, 2002.
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") (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, 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, USFG 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 USFG 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").
Sade Vigesa, S.A. was the former parent company of Sade America, Sade Chile, and SVIS.
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 Sureties seeking payment in accordance with the P-31 Bond.
In addition, Brasoil commenced two parallel actions in Brazil asserting claims against the Sureties under the P-19 and P-31 Bonds. In September 1997, Brasoil instituted an action in the 7th Circuit Court of Rio de Janeiro against the Sureties, under the P-19 Performance Bond. In October 1997, Brasoil commenced a separate action in the 42d Circuit Court of Rio de Janeiro against the Sureties, under the P-31 Performance Bond.
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. See United States Fid. Guar. Co. 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.
The Court vacated those portions of the district court judgment that awarded liquidated damages, attorneys' fees, and prejudgment interest, and remanded for recalculation of prejudgment interest and for other proceedings consistent with the opinion. The Court affirmed the judgment of the district court in all other respects. See United States Fid. Guar. Co., 369 F.3d at 83.
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 judgment, plus interest — USFG 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, USFG 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, USFG 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 America requested that USFG 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 USFG 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 USFG 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.) USFG 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 USFG 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, USFG sustained losses of $410,465.23, and incurred $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, USFG 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 USFG, 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 USFG 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 USFG "on behalf of such Principals." (Pls.' Ex. S-6, lines 7-11; Pls.' Ex. S-39, lines 2-11.)
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 AP and Inepar IC, 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 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 IC. 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.
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 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 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. 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 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.").
Defendants argue that Brazilian law should govern, while Plaintiffs argue that both New York law and Brazilian law may be applicable. See Trial Transcript, dated Sept. 9-10, 2004 ("Tr."), at 82.)
Cláudio Finkelstein, Defendants' expert, testified that "all the facts and all of the issues contemplated in the case have direct conjunction with Brazilian law, and I don't believe any of the parties intend to have any other law regarding those obligations." (See Tr. at 78.) With respect to the Share Purchase Agreement, Finkelstein concluded that although the agreement does not make express reference to a choice of law, it makes express reference to the applicability of one or two articles of the Brazilian Civil Procedure Code, so under international law standards, it contains an implied choice of law clause. (See Tr. at 85.)
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 IC, 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 of "oil exploration and production." (See Pls.' Ex. S-284.) The MOU affirmed Inepar's interest "in acquiring the controlling equity interest" in Sade within 60 days, and provided for an extension of 30 days to complete the negotiations. (See id. ¶ 1.)
After the MOU was executed, and Inepar completed its review of Sade's finances and operations, including Sade's two large platform projects for Petrobras, the parties agreed upon a different form of corporate transaction than called for in the MOU. Instead, Sade was to retain certain projects, including the P-19 and P-31 Projects, as well as a project concerning the Rio de Janeiro subway system. (See Sobrinho Dep. at 79-80, 83-84, 86-88.) On or about September 24, 1996, the document entitled Share Purchase and Sale Promise Agreement and Other Covenants ("Share Purchase Agreement") was executed between Sade and Inepar IC, including Inepar AP as an intervening party, in which it was agreed that Sade would transfer all of its rights, assets and obligations, except those listed as excluded, to its inactive subsidiary Productos Hidromecanicos Limitada, "such that [Sade's] main operational activities are performed through a new company, to which Inepar will be associated." (See Pls.' Ex. S-1279, clause (ix).) Productos Hidromecanicos Limitada was then sold to Inepar and renamed Sade Vigesa Industrial e Servicos, S.A. [SVIS].
The Share Purchase Agreement stated that Sade agreed to "sell to Inepar all assets, rights and obligations existing on the Preclosing Date . . . except for those listed in Exhibit I hereto," which included a list of assets, rights and liabilities that were to be explicitly retained by Sade. (See Pls.' Ex. S-1279, clause (xi).) Among the ten categories of excluded assets and liabilities were obligations arising from the offshore platform projects: "obligations and payables (as well as any and all rights) arising from Sade's participation in contracts and/or consortia created for execution of projects, construction, restoration, hook-up, maintenance and conversion of floating platforms and VLCC ships." (Pls.' Ex S-1279, Ex. 1 ¶ 3.) Ronaldo Carvalho da Silva, the financial director of Sequip Investimentos, S.A. and Sequip Participacoes, S.A., drafted Exhibit I to the Share Purchase Agreement and testified at his deposition that this exclusion was intended to cover Sade's rights and obligations relating to its participation in the P-19 and P-31 Projects. (See Declaration of Kristen Bancroft in Support of the Inepar Defendants' Motion for Summary Judgment on Successorship Claims, executed May 18, 2001 ("Bancroft Decl."), Ex. 17 at 185-88.) Other excluded categories included various social security, tax and creditor debts, a plot of land and a facility, and contracts relating to the supply of wheel sets and axles to Companhia do Metropolitano do Rio de Janeiro-METRO. (See Pls.' Ex. S-1279, clause (xi).) Section 16 of the Share Purchase Agreement specifically addressed the successorship of SVIS to Sade's liabilities such that SVIS (referred to as "NEWCO" in the agreement),
is not a successor thereof, and that it shall not be liable, on the whole or in part, for any obligations assumed by SADE at any time and for any reason . . . except for those obligations specifically set forth in Exhibit III hereto; neither this nor any other [acts] transfer, in any way, even if partially, any other obligations or contingencies, of any nature whatsoever and, accordingly, neither NEWCO nor INEPAR have any duty to pay of [sic] satisfy any of SADE's obligations or contingencies other than those formally transferred . . .
(Pls.' Ex. S-1279 ¶ 16.1.)
On or about October 31, 1996, the Pre-Closing took place, at which Sade Vigesa and SVIS executed the agreement entitled Contractual Instrument for Assumption of Debt, Acknowledgment of Debt, Gift in Payment, Assignment of Contracts, Transfer of Employees and other Agreements ("Assignment Agreement"). (See Bancroft Decl., Ex. 4.) Pursuant to the Assignment Agreement, Sade assigned to SVIS its rights and obligations relating to its operating contracts, defined as all contracts between Sade and third parties at the date of the Assignment Agreement, "with the exception of (a) the supply agreements for bogies and axles for the Companhia do Metropolitano do Rio de Janeiro-Metro and (b) the contracts and/or consortia constituted for the execution of designs, construction, refurbishment, hookups, maintenance and conversions of floating platforms and VLCCs and any and whatever business originating from them." (See Bancroft Decl., Ex. 4, clause 1.1(x).)
The purchase of SVIS stock by Inepar and merger closed on December 19, 1996, at which time Inepar IC acquired all but 100 shares of SVIS. (See Pls.' Ex. S-1582.) Inepar AP acquired the remaining 100 shares. The purchase price paid by Inepar for the stock of SVIS was R$71,566,000.60. (See Pozzo Dep. at 328-29.) The transactions were publicly announced by Sade in local newspapers on January 24, 1997, as "Fato Relevante," or Relevant Fact, in accordance with the form required by Brazilian law. (See Pls.' Ex. S-323.) Contrary to the terms of the actual Share Purchase Agreement, however, the Relevant Fact represented that the transfer from Sade Vigesa to Inepar included "the assets, rights, and obligations related to exploitation of the activity of performance of projects and the manufacture of equipment for . . . oil exploration and production," and there was no mention that the P-19 and P-31 oil platform projects were not among these assets. (Pls.' Ex. S-323; Pozzo Dep. at 306-07.) Nevertheless, when a copy of the Relevant Fact was sent to Petrobras, it was accompanied by a letter confirming that Sade's rights and obligations on the P-19 and P-31 Projects "remain in full force and effect." (Declaration of Roger D. Branigin in Opposition to Motion of the Inepar Defendants for Summary Judgment on the Successorship Claims, executed June 26, 2001 ("Branigin Decl."), Ex. 22.) Later in January 1997, the Sureties corresponded with Inepar regarding the obligations related to the P-19 and P-31 Projects, and in response, Inepar representatives advised the Sureties in February 1997 that the Projects "remain under the responsibility [sic] of Sade Vigesa S/A and, therefore, Sade Vigesa S/A must respond for them, NOT Inepar S/A Industria e Construcoes." (See Bancroft Decl., Ex. 12; Reply Declaration of Kristen Bancroft in Support of the Inepar Defendants' Motion for Summary Judgment on Successorship Claims, executed July 6, 2001 ("Bancroft Reply Decl."), Ex. 2.)
The symbol "RS" is used to indicate Reais, the Brazilian currency.
On January 24, 1997, Sade affiliated officers resigned from SVIS and were replaced by Inepar owners and executives. (See Pls.' Ex. S-1581.) The Share Purchase Agreement included a provision that called for SVIS to assume the employment of all of Sade's employees (approximately 3000). (See Pls.' Ex. S-1279 ¶ 6.1.) In order to ensure that Sade would have the labor resources to complete the work in the final months of the P-19 and P-31 Projects, Sade and SVIS entered into an agreement for the provision of labor by SVIS to Sade, entitled the Agreement for Supply of Labor to Perform Offshore Contract Management Services ("Labor Supply Agreement"), dated December 3, 1996. (See Pls.' Ex. S-1580.) SVIS undertook to provide 47 members of its personnel, including management employees, to Sade, due to the "need to maintain the management team through the completion of the Contracts," and SVIS agreed to "perform management services on a cost-plus basis." (Id.) Inepar director and officer Jauneval de Oms, testified that Inepar, through SVIS, "provided personnel to Sade Vigesa S.A. [Sade] in order for Sade Vigesa, S.A. to be able to complete the contracts that it had with Verolme [IVI] . . . We simply provided personnel for Sade Vigesa, S.A. to be able to honor its contracts." (Transcript of Deposition of Jauneval de Oms, dated Dec. 16, 2000 ("Oms Dep."), at 103-06; see also Transcript of Deposition of David Fischel, Sade Vigesa President, dated Dec. 15, 2000 ("Fischel Dep.") at 817-18.)
According to Renato Kachenski, a director of Inepar, SVIS performed the contract management services owed by Sade on the P-19 and P-31 Projects, between December 1996 and February 1998. (See Kachenski Dep. at 321-22.) During that period, SVIS was paid over R$2.6 million for the work it provided, including a 10% "management fee" as profit. (See Branigin Decl., Ex. 29.) The payments received by SVIS from the IVI Consortium, made up of Sade and IVI, for the work it performed on the Projects, were reflected in invoices and receipts obtained by the Sureties. (See Pls.' Exs. S-1578 S-1579; Kachenski Dep. at 66-67, 300-367; Oms Dep. at 103-120.) Although these documents name only IVI as the payor, suggesting that Sade was not a party to the transactions, SVIS and Sade had entered into agreements, in December 1996 and May 1997, authorizing SVIS to bill the Consortium and/or IVI directly. (See Pls.' Exs. S-1372 S-1580.) At one point, in October 1997, SVIS contacted Sade in pursuit of payments owed on the Labor Supply Agreement (see Pls.' Ex. S-1585), and Sade informed SVIS that the Consortium was the only entity handling the responsibility of accounting. (See Pls.' Ex. S-1586.) When Sade refused to continue payments to SVIS/Inepar after the completion of the Projects, SVIS made a series of demands for payment of the balance due. (See Pls.' Ex. S-1591.) SVIS/Inepar and Sade reached a final settlement of accounts in October 2000, where SVIS received an additional R$2 million in payments for the management services it performed on behalf of Sade on the P-19 and P-31 Projects. (See Kachenski Dep. at 334-39.)
Defendants maintain that Sade continued to exist as a separate entity after the merger between SVIS and Inepar, as demonstrated by Sade's correspondence with SVIS/Inepar, and its payment for services rendered by SVIS. Indeed, Defendants argue that Sade remains in existence today as a holding company. Defendants further support their position by pointing to the fact that even after the December 1996 purchase of SVIS stock by Inepar, Sade (under its new name SV Engenharia, S.A.) and IVI filed a civil action in Brazil, in 1997, against Brasoil/Petrobras, claiming damages regarding the P-19 and P-31 Contracts, including but not limited to: (i) loss of revenues; (ii) use of IVI facilities; (iii) depreciation of Sade's and IVI's equipment; (iv) cost of business administration; and (v) pending debts with third parties. (See Defs.' Trial Memorandum ("Defs.' Trial Mem.") at 6-7.) Inepar was not deemed a claimant in any action based on the P-19 and P-31 Projects. (See id.)
C. Successor Liability
The parties each presented experts on Brazilian law to opine on how the Brazilian law of successor liability applies to the Sade/Inepar transaction. Defendants argue, and Plaintiffs do not dispute, that the transaction did not meet the requirements for "universal successorship," where there is a formal transfer of all of the assets and liabilities of the predecessor company to the acquiring company. (See Expert Report of Cláudio Finkelstein on Successor Liability ("Finkelstein Report") at 10-12; Tr. at 69.) Plaintiffs contend that although the Share Purchase Agreement clearly excluded obligations related to the P-19 and P-31 Projects, the "partial spin-off" of SVIS from Sade, and subsequent merger into Inepar, operated, in effect, as a "de facto spin-off" and a "co-assumption of debts" under Brazilian law, such that the Projects' liabilities were nevertheless transferred to Inepar.
Although an expert who submitted a report in support of Defendants' motion for summary judgment disputed the existence of the concept of "de facto spin-off" under Brazilian law (see Declaration and Report of Hermes Marcelo Huck, dated May 16, 2001, Ex. A at 12-13), Defendants' expert at trial conceded that the concept exists under Brazilian law. (See Tr. at 124.)
Plaintiffs also presented an alternative argument, addressed in two paragraphs in their summary judgment papers, but not pursued in their trial memoranda or at trial. Plaintiffs argue that although the liabilities associated with the P-19 and P-31 Projects were listed as excluded under the Share Purchase Agreement, the related Indemnity Agreements were not specifically listed as excluded, and Sade's obligations under those agreements do not "arise from" the excluded Projects. (See Pls.' Memorandum in Opposition to Summary Judgment on the Successorship Claims ("Pls.' Successorship Mem.") at 5.) This argument is unpersuasive because the Projects' Contracts required the issuance of performance bonds, and the Sureties required the bonds to be covered by indemnification agreements. The language in the Indemnity Agreements required the "Principals, in the performance of contracts and the fulfillment of obligations generally" to indemnify the Sureties for expenses incurred "by reason of having executed or procured the execution of the Bonds." (See, e.g., 1994 Agreement, lines 13-14, 24-26; 1995 Agreement, lines 14-15, 26-28 (emphasis added).) In several provisions, the Agreements refer to issues related to the underlying construction contracts. (See 1994 Agreement §§ 5-8; 1995 Agreement §§ 5-8.) Accordingly, the Court finds that Sade's obligations under the Indemnity Agreements are linked to and "arose from" their obligations under the P-19 and P-31 Contracts, and were likewise excluded from the asset transfer under the Share Purchase Agreement. (See Pls.' Ex S-1279, Ex. 1 ¶ 3 (excluding "obligations . . . arising from . . . [the P-19 and P-31 Contracts].")
Under Brazilian law, a spin-off is a legal transaction by which a company transfers part of its net worth to another company created for the purpose of continuing to exploit its commercial activities. (See Declaration of Nilson de Castro Dião, dated June 26, 2001 ("Dião Decl."), at 33 (pagination added).) According to Plaintiffs' expert, Mr. Dião, when there is a de facto spin-off of part or all of a company, "there is joint and several liability for all of the spun-off company's prior obligations between the spun-off company and the company that absorbs part of its net worth." (See Dião Decl. at 29.) Plaintiffs make the following assertions based on Dião's discussion of Brazilian case law construing the doctrine of de facto spin-off: 1) joint and several liability will be imposed on an indirect purchaser of assets and its predecessor where necessary to protect the interests of creditors; and 2) neither the form of the transaction chosen by the parties nor express disclaimers of obligations will be effective or enforceable where they would work an undue hardship on third-party creditors. (See Pls.' Successorship Mem. at 20.)
Dião served as a judge in Brazil for 35 years, and was elevated to the highest appellate court in the state of Rio de Janeiro, the Court of Justice of Rio de Janeiro. Dião served as an Appellate Judge, for two years as an adjunct judge, and as a permanent judge for two years. He was president of the Sixteenth Court and the Sixth Court, both Courts of Appeals. (See Tr. at 52-53.)
Plaintiffs also argue that the doctrine of "co-assumption of debts" applies to the Sade/Inepar transaction. Under that doctrine, Brazilian courts will look to the substance of a corporate transfer, i.e., whether the purchaser effectively acquired the whole estate of the seller, despite the formalities of the transaction, and whether third-party creditors were adversely impacted. (See Dião Decl. at 22, 25-26.) If the "intrinsic legal nature of the transaction" establishes that the total assets of a company are acquired, the acquiring party becomes a party to the creditor relationship, with the original debtor also remaining obligated. (See Dião Decl. at 25.)
Several Brazilian statutes apply to acquisitions of corporations and the transfer of liabilities. Article 229 of the Corporations Law defines a spin-off as:
an operation by which the company transfers parts of its assets to one or more companies, either constituted for this purpose or already existing, thus dissolving the spun-off company, if all its assets are transferred, or dividing its capital, if part of the assets are transferred . . .
(Pls.' Ex. 49B, Translated version of Carlos Antonio Faria Pinto v. Banco Banerj S/A, Fourth Panel of the Superior Court of Brazil, Mar. 19, 2002, at 1.)
Article 233 of the Corporations Law governs the liabilities associated with the spun-off company's prior obligations, and states:
In case of a split-off followed by the demise of the split-off company, the companies that absorb portions of its assets shall be jointly liable for the obligations of the extinct company . . . The split-off company and those that absorb portions of its assets shall be jointly liable for obligations of the former preceding the split-off.
(Pls.' Ex. 40a, Jose Luiz de Souza Tavares v. Banco Banerj S/A, State of Rio de Janeiro 1st Civil Panel, Interlocutory Appeal No. 7147/99, Feb. 29, 2000, at 4.) A later paragraph in Article 233 describes the procedures for transactions that seek to limit the liabilities assumed by an acquiring company, stating:
The act of partial spin-off may stipulate that the companies who absorbed parts of the spun-off company's assets shall be liable only for the obligations that were transferred to them, with no joint and several liability among them or with the spun-off company, but in this case any previous creditor may oppose the stipulation in relation to its credit, provided it notifies the company within 90 days of the date of publication of the spin-off acts.
(Pls.' Ex. 31A, Translated Version of Jose Greppe Junior v. Unibanco, 16th Civil Chamber of the Rio de Janeiro State Court of Appeals, Apr. 14, 1998, translation not paginated.)
The parties agree that a fact-intensive analysis is applied by Brazilian courts when determining whether there has been a "de facto spin-off" or "co-assumption of debts." (See Pls.' Successorship Mem. at 22; Tr. at 124.) Defendants argue that the facts in this case, most particularly that Sade and SVIS expressly agreed that the assets and liabilities relating to the P-19 and P-31 Contracts were to remain with Sade, and that Sade continued to exist as an independent company after the stock transfer, do not support successor liability by Inepar for the obligations of Sade.
Plaintiffs argue that several Brazilian cases have held that a de facto spin-off occurs when applied to "circumstances that precisely mirror the transactions between [Sade] and Inepar." (See Pls.' Successorship Mem. at 19.) Dião testified that, in accord with recent case law, a de facto spin-off occurred between Sade and Inepar, since all employees related to the Projects were acquired by Inepar, and, as a consequence, Sade no longer had the means to perform its obligations under the P-19 and P-31 Contracts. (See Tr. at 71-73.) Dião based his opinion on the fact that Sade was, in effect, "entirely deactivated." (See Tr. at 71-72.) At trial, Dião also discussed several cases involving partial acquisitions of companies in which the courts held that, for the benefit of creditors, the transactions would be viewed as de facto spin-offs.
Plaintiffs argue that "the transfer of assets from [Sade] to Inepar through [SVIS] left [Sade] with no financial or tangible assets." (See Pls.' Successorship Mem. at 22.) However, Sade's financial statements, for the period following the asset transfer, are not in the record. (See Tr. at 73.)
According to Dião, Brazilian law is based on a civil system of law, as opposed to American and British law, yet case law does have an important role to play in informing and guiding judges so that the law has a continuity and a coherence. (See Tr. at 55.) Finkelstein's expert report noted that under Brazil's system of civil law, predominance is given to statutory law and judicial decisions take a secondary role. (See Finkelstein Report at 5-6.)
The Superior Court of Justice of Brazil, which is the highest court in Brazil for civil commercial cases, heard the caseCarlos Antonio Faria Pinto v. Banco Banerj S/A ("Banerj"), which involved a bank, Banerj, from the state of Rio de Janeiro, which engaged in a merger by which another bank ("new Banerj"), aquired its assets. (See Pls.' Ex. 49B, Translated version ofCarlos Antonio Faria Pinto v. Banco Banerj S/A, Fourth Panel of the Superior Court of Brazil, Mar. 19, 2002.) New Banerj argued, on appeal, that it was not the successor of the former Banerj because the "transaction entered into with the latter was aimed simply at transferring the assets and liabilities expressly listed; this was not the case of spin-off of a company" and succession only occurs "when the spun-off company ceases to exist, which is not the case, because liquidation has not yet finished." (See Banerj, at 2.) The court held that new Banerj was responsible for the debts of the predecessor company. (See Tr. at 56.)
Reporting Justice Ruy Rosado de Aguar denied the appeal by new Banerj, finding that the "the transfer of the sold bank's assets cannot be allowed to adversely affect the interests of the creditors." (Id. at 3.) Justice de Aguar based his ruling on the finding of the lower appeal court:
[N]o one is ignorant of the fact that the former Banerj transferred to the new Banerj all its banking assets and productive commercial establishment and that for this reason, it became insolvent, so much so that its extra-judicial liquidation was decreed by the Central Bank. Call it whatever you want, but in accordance with art. 229 of the Corporations Law, in reality that transaction resulted in a spin-off of the former Banerj . . .
(Id. at 3-4.)
Concurring Justice Aldir Passarinho Junior also denied the appeal and found that in order to arrive at another conclusion "one would really have to get into an examination of the factual subject matter . . . preceding the liquidation proceeding itself," and noted that the court might have decided differently if the factual situation had been different. (See id. at 5.) Thus, both Justices' decisions characterized the asset transfer transaction in Banerj as a spin-off, in part because the transfer of all the former Banerj's banking assets resulted in its insolvency, and subsequent liquidation.
A lower court ruling in the Banerj case also focused on the the liquidation of the former Banerj and held that "[I]n view of Article 233 of Corporate Law, in [the] case of a split-off followed by a demise of the split-off company, the companies that absorb its assets shall be jointly liable for the obligations of the failed company." (Pls.' Ex. 35A, Translated version of Laura Maria Fialho Teixeira Bandeira v. Banco Banerj S/A, 4th Civil Panel of the Court of Justice of Rio de Janeiro, Sept. 14, 1998, at 2.) The court emphasized that the transaction was completed "in order to allow for liquidation of the former State-owned bank" and found that "the artificial demise of the [predecessor bank] is obvious." (Id. at 3.)
Another case heard by the Superior Court of Justice, Walter Rodrigues da Cunha v. Companhia Fluminense de Trens Urbanos ("Flumitrens"), involved the spin-off of a railroad transportation company, Flumitrens, which was sold to another corporation, Supervia. (See Pls.' Ex. 50, Walter Rodrigues da Cunha v. Companhia Fluminense de Trens Urbanos, Fourth Panel of the Superior Court, Nov. 25, 2002.) In that case, the issue was whether the successor company could be sued for the collection of a prior wrongful death judgment against the predecessor company. Supervia argued that the assets of Flumitrens were transferred to Supervia, but not the liabilities for debts already incurred, which were instead transferred to the State Finance Department. (See id. at 3.) The court looked to the undisputed appeal petition stating that "Flumitrens today only exists on paper. Along the lines of privatization adopted by the State, Flumitrens today kept only the payroll and debts, transferring to . . . Supervia . . . all its assets having any material value." (Id. at 3-4.) The court also considered the interests of the third-party creditor who would be adversely affected if Supervia was not held liable for the debts of the acquired company "which is de-capitalized and insolvent, or passes its liability on to the State," noting the burdensome process of receiving debt from the State. (Id. at 4.) Accordingly, the court held that the judgment debt should be charged to Supervia. Like Banerj, in Flumitrens the court found successor liability of an acquiring company in a spin-off which left the predecessor company essentially insolvent, bereft of any assets, and liquidated.
A third case, Jose Greppe Junior v. Unibanco ("Unibanco"), decided by the Rio de Janeiro State Court of Appeals, involved a transaction between two banks, in which Unibanco acquired the assets of Banco Nacional, and a Banco Nacional creditor sought a right to collect outstanding debts from Unibanco. (See Pls.' Ex. 31A, Translated Version of Jose Greppe Junior v. Unibanco, 16th Civil Chamber of the Rio de Janeiro State Court of Appeals, May 19, 1998, translation not paginated.) At the time of the litigation, a spin-off had occurred and Banco Nacional had not yet dissolved, but was undergoing judicial liquidation. (Id.)
The court in Unibanco found that, under Article 233 of the Corporation Law, joint and several liability can occur in cases of either total or partial spin-offs, but the law allows liability to be limited, provided it is stipulated in the contract. (Id.) Under normal circumstances, the statute requires creditors who oppose the limited liability to notify the company within 90 days of the date of publication of the transaction. In this case, the court found that the appellant creditor was not required to issue notification within 90 days because the Relevant Fact publication stated that the contract included the "takeover of that institution's [Banco Nacional's] liabilities to the public," which the court found equivalent to expressing Unibanco's acceptance of joint and several liability for the obligations. (Id.) Having found that Banco Nacional's situation was "obviously one of insolvency," and that the debt at issue was derived from assets that were expressly acquired by the spun-off company, the court held that the creditor could proceed against Unibanco for collection. (Id.)
Cláudio Finkelstein testified for the Defendants on theories of successor liability under Brazilian law. Finkelstein discussed an employment case, Cèlio Pereira de Rezende v. Inepar S/A Industria e Construcoes ("Rezende"), involving the Sade and Inepar parties directly. The action was filed by a former Sade employee seeking compensation for injuries he suffered as an employee of Sade, and Inepar brought an interlocutory appeal to challenge its inclusion as a co-defendant. (See Pls.' Ex. 52, Translation of Cèlio Pereira de Rezende v. Inepar S/A Industria e Construcões, Second Court of the Civil Appeal, Judicial Branch of the State of São Paulo, Interlocutory Appeal No. 772.376-0/1, Mar. 13, 2003.) The plaintiff-appellee claimed that Inepar was jointly and severally liable for Sade's debts through its acquisition of SVIS. Finkelstein summarized the appeal court's holding, in a 2 to 1 decision, that, unless proven otherwise, Inepar is not to be considered a successor to Sade with respect to the employee's claims. (See Tr. at 93, 64; Finkelstein Declaration 2.9.1.) Judge Palma Bisson, the designated reporting judge on the case, stated:
Mr. Finkelstein is a professor at Catholic University in Rio de, where he taught constitutional law and commercial law, and now teaches primarily private and public international law. Finkelstein is currently the Director of the International Law Chapter of the Brazilian Constitutional Law Association, and prior to that was the Director of the Association of Economic Litigation, based in Rio de Janeiro. (See Tr. at 77.)
[T]his circumstance, namely that the appellee's employer [Sade] was merely a shareholder in another company [SVIS] that merged with the appellant [Inepar], does not make the latter its successor via consolidation . . . because in a consolidation between two companies, it is presumed that both companies will disappear and a new, resulting company will appear, which is a generally known and obvious fact. Well, as we can see, that is not what happened.
(Pls.' Ex. 52 at 4-5.) Judge Bisson emphasized that the transaction does not imply that any of the companies will disappear, rather "each of them [is] able to continue existing as entirely different corporate entities, which in fact is what occurred." (Id. at 5.)
A second concurring judge, Judge Romeu Ricupero, also ruled to exclude Inepar from the employee's claim, noting that "the appellant is not the defendant's successor via merger or consolidation, and until proof to the contrary is presented, they are both different companies." (Id. at 9.) The judge cited precedent which held that third parties who are not parties to the employment contract should not be included on a claim based on an employer's liability for violating the norms of protection and work safety, unless there is convincing justification. (Id.)
The dissenting judge, Gama Pellegrini, denied the interlocutory appeal, stating "from what one can gather from the documentation submitted to the proceedings, the [lower court] judge is right in deciding that [Sade] and [Inepar] should be co-defendants, since the successive amendments to their bylaws support that understanding." (Id., Vote No. 6502, at 3). Judge Pellegrini did not indicate the specific language of the amendments relied on, but stated that the inclusion of Inepar in the action was based on Inepar's manifested intent to acquire the shares of SVIS. (See id.)
The parties in this indemnification action have not cited to any language in the amendments of SVIS's bylaws to support their claims.
In Finkelstein's view, the Rezende case serves as significant precedent for other successorship claims against Inepar, because Brazilian courts follow a principle which seeks to protect the working relationship, and, therefore, any doubts of successorship should have favored the employee plaintiff. (See Tr. at 94.) Dião, in contrast, viewed the Rezende court to be primarily focused on procedural issues related to the work accident, rather than on issues involving the spin-off. (See Tr. at 66.) However, despite what may have been only a cursory analysis of the Sade/Inepar corporate transaction, the court in Rezende was unequivocal in its characterization of Sade as having a continued existence, after the merger, as an independent corporate entity.
In Dião's opinion, the Banerj, Flumitrens and Unibanco decisions affirm the doctrine that when parties purport to convey only specific assets and liabilities to acquiring companies, the courts may rule that in order to protect the rights of creditors, the acquiring companies are liable for all of the debts of the predecessor companies. (See Tr. at 58-60.) Finkelstein, on the other hand, argues that the contexts of the three cases is substantially different from the instant case, because the predecessor companies were "basically emptied" under a national privatization plan or simply had "no assets." (See Tr. at 97, 99.)
The Court concludes that the relevant statutory authority and case law supports the conclusion that Inepar did not succeed to Sade's liabilities arising out of the P-19 and P-31 Contracts and Indemnity Agreements. Article 233 of the Corporation Law is clear that in order for a company which absorb assets of another company to be liable for that company's debts and obligations, the split-off must be followed by the demise of the split-off company. Moreover, in the case of a partial spin-off, the parties may agree that the companies which absorb part of the spin-off are to be liable only for the obligations that were transferred to them. The three cases cited by Dião are not inconsistent with the statutes and are clearly distinguishable from the facts of this case. The courts in those cases found the acquiring companies to be liable for the obligations of the spun-off company because the predecessor companies were either dissolved, insolvent, or in the process of liquidation. They were no longer functioning companies with assets. By contrast, the record supports the conclusion of the Rezende court that Sade continued to exist separate from Inepar, although it may have altered its business structure as a result of the transaction.
The testimony and documents related to the Share Purchase Agreement and the events which followed do not depict a situation which serves to negate Sade's and Inepar's contractual agreement excluding the P-19 and P-31 Contracts from the spin-off. Although SVIS did indeed perform work on the P-19 and P-31 Projects through its labor supply agreements, the documentation shows that Sade continued to be involved in the Projects both as a member of the Consortium and as a party to its subcontracting agreement with SVIS. (See Pls.' Exs. S-1372 S-1580.) In fact, SVIS and Inepar each corresponded with Sade, seeking compensation for their contributions to the Projects. (See Pls.' Exs. S-1585, S-1586, S-1591.) Although all of the employees who were employed by Sade on the P-19 and P-31 Projects subsequently became paid employees of SVIS, including the CEO and President of Sade (see Tr. at 20-23), Sade continued to exist and retained the assets and obligations related to the P-19 and P-31 Projects, as well as the Rio de Janeiro subway project. Moreover, at the time of the execution of the Share Purchase Agreement, there had not yet been a declaration of default on the Projects. While the Contracts contained obligations, they clearly were assets as well. In fact, Sade pursued claims against Brasoil for payments related to the P-19 and P-31 Contracts. There is no evidence that SVIS became a member of the P-19 or P-31 Consortium, or that SVIS received or became entitled to a share of the profits of the Consortia. After the acquisition of SVIS by Inepar, Sade continued to be a participant in the execution of the Contracts. Sade did not dissolve and was not left insolvent, thus making it unlikely that Brazilian courts would apply the doctrine of de facto spin-off.
David Fischel, the President of Sade Vigesa, made a statement at his deposition suggesting that the Contracts were transferred to SVIS after the acquisition. (See Fischel Dep. at 685-87.) However, it is apparent there was some confusion in Fischel's response, since, at another point in his deposition, he testified that SVIS had indeed contracted with Sade to provide personnel for Sade's offshore contracts. (See Fischel Dep. at 817-18.)
Finkelstein testified that Sade had engaged in a partial spin-off, by transferring a "number of ongoing operations," and retained "not only the payments, but a number of credits." (Tr. at 89.) Although Finkelstein testified solely as an expert on foreign law, he had personal knowledge of Sade's continued existence as a holding company, with no ongoing operations, but with assets, management, and an outsourcing business. (See Tr. at 90-91.)
While the parties did not discuss any cases applying the doctrine of "co-assumption of debts," the Court finds that a similar fact inquiry would be required to determine whether the "purchaser effectively acquired the whole estate of the seller." The record does not indicate that Inepar acquired the entire estate of Sade, because it did not acquire the assets and liabilities under the P-19 and P-31 Contracts. Thus, there was no co-assumption of debts.
Having considered the experts' testimony, relevant Brazilian statutes and case law, the Court concludes that the evidence does not support Plaintiffs' claim that Inepar assumed all of Sade's obligations on the P-19 and P-31 Projects so as to render meaningless the Share Purchase Agreement provision which specifically excluded the obligations and assets related to those Projects. Accordingly, the Court finds that Defendants are not liable, on the basis of successor liability, for any indemnification obligations relating to the P-19 Performance and Payment Bonds or the P-31 Performance Bond.
II. Indemnification for the P-31 Performance Bond Based Upon Inepar's Succession to IESA's Obligations as a Member of the Consortium
Plaintiffs proposed several theories to support their claim against Inepar for losses under the P-31 Performance Bond, based on both successor liability and the 1996 Indemnity Agreement. The first basis upon which Plaintiffs argue Inepar's liability — as a successor to Sade through a de facto spin-off — has been addressed and rejected.
Plaintiffs advance two additional arguments in an attempt to impose liability on Defendants, each of which is premised on their contention that IESA, which has since merged into Inepar, is liable as a Principal on the Bond by virtue of its membership in the P-31 Consortium. Plaintiffs first argue that the language in the 1996 Indemnity Agreement, in which Inepar agreed to indemnify the Sureties "with respect to any surety bond issued . . . before or after the date of this Agreement" on behalf of the named Principals, Inepar AP and Inepar AC, and "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" (Pls.' Ex. S-195, lines 1-5, 9-13), covers bonds signed by IESA, before IESA's merger with Inepar. Second, Plaintiffs argue, and Defendants do not dispute, that Inepar is liable for all of IESA's obligations as a consequence of the merger. Defendants contend, however, that those liabilities do not include the losses on the P-31 Performance Bond because IESA did not sign the Bond and was not otherwise jointly and severally liable with the members of the Consortium — IVI and Sade — who did sign the Bond. Thus, the threshold question for both of Plaintiffs' claims is to what extent IESA is liable under the P-31 Performance Bond as a function of its participation in the Consortium, when only the other two Consortium members, not IESA, were identified as Principals on the Bond.
Article 227 of Brazilian Corporations Law provides that a "merger is the operation by which one or more companies are absorbed by another, which succeeds them in all their rights and obligations." (See Dião Decl. at 12.)
A. Controlling Law
The parties have discussed both Brazilian and New York law in their submissions, and have each presented experts on Brazilian law on the controlling issues.
The P-31 Performance Bond was issued on behalf of the members of the Consortium, naming as Principals only IVI and Sade. Plaintiffs' claims are based on their contentions that IESA was obligated as a Principal on the Bond by virtue of its membership in the Consortium, and that Inepar succeeded to IESA's obligations. Plaintiffs' claims against Inepar turn on issues of corporate succession and the obligations of individual members of a Brazilian consortium to those who contract with the consortium. All of the members of the P-31 Consortium are Brazilian corporations, which contracted to perform the P-31 Project for another Brazilian corporation, Brasoil.
As discussed, New York choice of law principles hold that the law of the jurisdiction of incorporation controls issues which involve corporate liability for the acts of others. See Kalb, 8 F.3d at 132. Similarly, IESA's liability for the acts of the Consortium, as a function of its membership in the Consortium, should be governed by the law of Brazil, which is the jurisdiction of each of the Consortium members, and of the formation of the Consortium.
In their briefs, Plaintiffs argue IESA's liability under both New York law governing joint ventures, and Brazilian Law governing consortia. Defendants argue, and the Court agrees, that under New York choice of law principles, the liabilities associated with membership in the P-31 Consortium, formed by three Brazilian corporations under Brazilian law, pursuant to the bidding requirements for a contract with a Brazilian corporation, should be analyzed under Brazilian law.
The Consortium undertook certain obligations upon entering into its contract with Brasoil, called for in the Bidding Requirements, which included the creation of a Consortium with joint and several liability on behalf of its members, and the securing of a Performance Bond. The members of the Consortium entered into a series of contracts outlining their obligations to each other, and to Brasoil. To the extent that it is necessary to interpret provisions of these contracts to determine IESA's liability, the Court follows New York choice of law principles which hold that contract-based claims are governed by the "center of gravity" or "grouping of contacts" approach. See Maryland Cas. Co. v. Continental Cas. Co., 332 F.3d 145, 151-52 (2d Cir. 2003). Under this approach, courts may consider a spectrum of significant contacts, including the place of contracting, the places of negotiation and performance, the location of the subject matter, the domicile or place of business of the contracting parties, as well as public policy concerns. See id.; Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 84 N.Y.2d 309, 317, 618 N.Y.S.2d 609 (1994). The places of contracting and performance are given the heaviest weight in the analysis. See USFG I, at 474 (quoting Brink's Ltd. v. South African Airways, 93 F.3d 1022, 1030 (2d Cir. 1996)); see also Lazard Frères Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1539-40 (2d Cir. 1997).
In USFG I, the Court found, and the parties did not dispute, that "specific questions relating to the interpretation of the P-19 and P-31 Contracts should be governed by Brazilian law."See USFG I at 475. In contrast, the Court found, and the parties did not dispute, that any question with respect to the validity, enforceability and interpretation of the P-19 and P-31 Bonds should be governed by New York law because the most significant contacts of the parties in connection with the Bonds were in New York, and, in addition, the P-31 Bond contains a forum selection clause that provides for jurisdiction and venue in the Southern District of New York. See USFG I at 474. However, IESA did not sign the Bond. Instead, Plaintiffs argue that IVI and Sade signed the Bond on behalf of the entire Consortium. Thus, Plaintiffs' claims, while concerning liability under the P-31 Performance Bond, primarily involve the vicarious liability of IESA, a non-signatory to the Bond, based upon the acts of the other members of the Consortium who signed as Principals on the Bond. Here, the operative agreements are (1) those agreements defining the relationship and authority of the members of the Consortium with respect to each other, and (2) the Contracts between the Consortium and Brasoil, since the Contracts required a performance bond to be issued on behalf of the Consortium. These agreements have their most substantial contacts in Brazil, which is the place of contracting and performance, and accordingly, the Court finds they should be governed by Brazilian Law.
B. The P-31 Consortium and Related Contracts
There is no dispute that two members of the P-31 Consortium, Sade and IVI, were obligated to indemnify the Sureties on the P-31 Bond pursuant to the 1995 Indemnity Agreement, as well as the P-31 Bond, which both of them signed. See USFG II, at *7. Plaintiffs argue that IESA was also a full member of the Consortium, and granted the lead member of the Consortium, IVI, the right to act on behalf of the Consortium, which included signing the P-31 Bond. Plaintiffs further claim that the members of the Consortium had obligations under the P-31 Contract of joint and several liability, which included the obligations under the Bond.
Defendants seek to distinguish IESA's role from the other members of the P-31 Consortium, as merely a subcontractor — the party responsible for the design engineering of the process plant for the P-31 Project. According to Defendants, IESA's role, in return for a projected payment of approximately $7.7 million, did not justify its full participation in the Project, which was expected to cost $163 million. (See Declaration of Kristen Bancroft in Support of Inepar IC and IESA's Motion for Summary Judgment Dismissing all Claims Against IESA, executed May 18, 2001 ("Bancroft Decl. II"), Ex. 17 at 178-79.) Defendants argue that although IESA was technically a member of the Consortium due to the bid requirements for the Project: (1) IESA did not manage the P-31 Consortium; (2) did not enter into an indemnity agreement with the Sureties; (3) did not sign the P-31 Performance Bond; (4) was not to share in any profits realized by the Consortium; and (5) was paid directly for its limited work by the Project owner. (Defs.' Trial Mem. at 8.) Defendants argue, in addition, that IESA was not obligated as a Principal on the Bond in favor of Brasoil because the P-31 Performance Bond listed only the Consortium's primary two members, IVI and Sade, as the "Principal Contractor," without reference to IESA. (See Pls.' Ex. S-123.) Finally, Defendants contend that several of the agreements among the members of the Consortium qualified IESA's liabilities commensurate with its minor role in the Project.
The bidding and contracting requirements for the Project were set by Brasoil in its public request for bids. (See Public Announcement No. 846-9-021-95 ("Bid Announcement"), Pls.' Ex. S-1561.) The Bid Announcement included a requirement that the bidder submit proof of a commitment to establish a Consortium; that the Consortium provide an "[i]ndication of the company responsible for the consortium, that must be in the position of leader, to be signed by the consortium members;" and that "[b]idders presenting a bid in consortium are jointly and severally responsible for acts performed in consortium, in both the bidding phase and that of performance of the contract." (See Pls.' Ex. S-1561 ¶¶ 3.1.5 (a), (b), (e).) The Call for Bids anticipated the submission of a bond by the winning consortium. (See id. ¶ 9.1.)
Following the issuance of the Bid Announcement, IVI and Sade selected IESA to fulfill the design engineering portion of the bid for the P-31 Project. (See Bancroft Decl. II, Ex. 17, at 176.) According to Defendants, prior to the submission of any bid, IESA expressed its discomfort with the prospect of becoming jointly liable for the performance of a very large construction project, in which IESA's role was to provide services constituting only 4.5% of the contract price. (See Bancroft Decl. II, Ex. 17 at 183-84.) To address IESA's concerns, the Consortium members entered into a Private Instrument of Commitment dated August 19, 1995, which provided that IESA "shall not have any responsibility regarding commitments relative to the guarantees required in said Invitation to Bid," and that IESA's responsibility to the Consortium was to be limited to the performance of engineering services, with Sade and IVI assuming all of the other responsibilities regarding compliance with the contractual obligations associated with the Project. (See Bancroft Decl. II, Ex. 2, ¶ 1.1.) The Private Instrument of Commitment stated that it reflects an agreement between IESA, Sade and IVI, "notwithstanding the execution of [the Consortium Agreement]," which was "to be submitted to Petrobras, for all legal purposes." (Id.)
The IVI, Sade, IESA Consortium won the bid for the Project, and in order to comply with the bid requirements, IVI, Sade, and IESA entered into an agreement, entitled Document of Agreement to Form a Consortium, executed on August 21, 1995. The agreement referenced paragraph 3.1.5 of the Bid Announcement, which permitted bidders to form a Consortium, and stated that "[i]t is in the best interests of the companies IVI, SADE and IESA to jointly execute the work requested by Brasoil," pursuant to the Bid Announcement. (See Pls.' Ex. S-1130.) The document stated that the Consortium was governed by the following "basic conditions":
IVI, SADE and IESA shall be jointly and severally liable for the actions conducted as the CONSORTIUM, in both the Bidding and Contract Performance.
The CONSORTIUM shall be led by IVI, which shall represent it before BRASOIL and third parties.
(Pls.' Ex. S-1130 ¶¶ 2, 3.)
On October 5, 1995, IVI, Sade, and IESA executed the Instrument Establishing the Consortium ("Consortium Agreement"), in which each member declared its intent to "establish . . . a consortium . . . pursuant to Invitation to Bid No. 846-9-021-95," with IVI designated to lead the Consortium and represent it before Brasoil. (Pls.' Ex. S-1154 ¶¶ 1.1 3.1.) Clause 8.1 states "[the agreement] does not grant power of attorney to any of the consortium members, with the exception of the lead company's power to represent the consortium before BRASOIL." (Id. ¶ 8.1.) The Consortium members acknowledged their "individual and joint and several liability for all actions conducted in relation to the bidding and the contract, fulfilling and meeting all tax and administrative requirements arising from the contract's intent, up to fulfillment of the obligations set forth in the contract to be signed with BRASOIL." (Id. ¶ 4.2.) The document established the members' "working interests," expressed in terms of percentages, with IESA representing 5.35%. (Id. ¶ 3.2.) The members' working interests, however, were specifically established "without prejudice to joint and several liability." (Id.)
Despite the stated agreement to joint and several liability in the Consortium Agreement and Document of Agreement to Form a Consortium, the Consortium members entered into an "Internal Operational Agreement" on October 6, 1995, which states that "regarding the joint and several liability of the parties under the terms of the [Consortium Agreement] . . . required in the Invitation to Bid . . . IVI, SADE VIGESA and IESA formally agree that the ultimate liability of each [of the Parties] regarding the implementation of the services to be provided to BRASOIL, for all legal purposes and effects, shall be quantified and/or limited to the respective area of action for each party . . ." (Pls.' Ex. S-1155 ¶ 2.) The agreement specifically describes IESA's role as "performing the Engineering services for the Process Plant." (Id. ¶ 1.) The agreement also states that "IESA shall not bear any responsibility in regard to the commitments related to the guarantees required by said Invitation to Bid, including bond expenses," nor share in the division of profits in the P-31 Contract. (Id. ¶ 3.) IESA's contract manager and project coordinator, Jose Miguel Simão, participated in the drafting of the Internal Operating Agreement, and testified that, to his knowledge, neither the Agreement, nor the understanding that IESA's liabilities would be limited, was ever communicated to Peterobas/Brasil or any entity outside the Consortium. (See Transcript of Deposition of Jose Miguel Simão, dated Oct. 11, 2000 ("Simão Dep."), at 39-40, 48-51.) Simão also acknowledged that the Internal Operating Agreement allocated liability only between and among the members of the P-31 Consortium. (See id. at 55-56.)
On October 25, 1995, the Consortium executed the Contract with Brasoil which describes in detail the conditions, technical requirements, and specifications that govern the P-31 Project. (See Pls.' Ex. S-1561.) The Contract defines the "Contractor" as the Consortium, naming as its members IVI, Sade, and IESA. In the Contract, the Consortium agreed to its responsibility to "tak[e] administrative and technical responsibility for the management, supervision, and planning of work" which:
also applies in the case of a consortium, individually and jointly, towards BRASOIL, in relation to all technical, fiscal, judicial and administrative activities connected with the services covered by this Contract.
(Id. ¶ 3.1.1.)
The Brasoil Contract incorporates the P-31 Performance Bond, which was attached as Appendix X, and provides that the Bid Announcement constitutes "an integral part of this Contract." (Id. ¶ 20.2.) The Contract includes a provision requiring insurance for the project, which was satisfied by the Bond. (See id. ¶ 11.) According to Defendants, IESA began its performance under the P-31 Contract immediately after its execution.
The Bond itself was issued on October 25, 1995, naming the Consortium of IVI and Sade as Contractor; it was signed by IVI and Sade. (See Pls.' Ex. S-123.) The Bond provides that the Consortium and the Sureties, "jointly and severally bind themselves" to Brasoil for the performance of the P-31 Project subject to the rights and conditions of the Bond. (See id. ¶ 1.) There is no evidence that Brasoil lodged any objection to IESA's absence from the Bond as a Principal.
On December 6, 1995, the Sureties' bond broker, Marsh McLennan, wrote to IVI to request certain information "in order for [the Sureties] to facilitate the addition of [IESA] as an additional principal on the performance bond." (See Bancroft Decl. II, Ex. 9.) The letter acknowledged a recognition that IESA was not willing to indemnify the Sureties beyond IESA's contract limit of $7.5 million, and stated that "based on the IVI and Sade Indemnity, the sureties may be willing to work with this indemnity from IESA." (Id.) On January 2, 1996, the Consortium sent a letter to Marsh McLennan, enclosing financial statements, balance sheets, IESA's most recent six-month report, and other financial documents "to enable you to continue the process of including IESA in the P. Bond." (See Declaration of Robert D. Branigin in Opposition to Motion for Summary Judgment Seeking Dismissal of All Claims Against IESA, executed June 26, 2001 ("Branigin Decl. II"), Ex. 10.) On February 27, 1996, IESA wrote to Marsh McLennan stating: "We hereby expressly acknowledge and confirm that we will complete, sign and present to be approved and consequently registered at the Central Bank of Brazil an Agreement of Indemnity . . . We also hereby declare that said Indemnity Agreement covers an amount of $7,729,592.00 U.S. Dollars." (Bancroft Decl. II, Ex. 10.) Mr. Simão conceded that IESA's letter reflected IESA's agreement to serve as a Principal under the Bond, although it sought to limit its liability. (See Simão Dep. at 78-82.) Shortly thereafter, on February 29, 1996, the Sureties sent IESA a copy of an indemnity agreement to sign, with the requested limit of $7,729,592, along with a sample rider adding IESA as a principal on the Performance Bond. (See Bancroft Decl. II, Ex. 11.) USFG attached the rider to the P-31 Bond, even though the Sureties did not receive IESA's signature on the rider or the indemnity agreement.
Defendants argue that there is no indication that IESA endorsed the Consortium's provision of the financial documents to the Sureties. (See Reply Memorandum in Support of Inepar IC and IESA's Motion for Summary Judgment Dismissing All Claims Against IESA at 3.)
Inepar acquired a portion of the shares of IESA on or about September 1, 1997. Eventually Inepar IC acquired additonal IESA shares, and as of October 6, 1998, Inepar IC held approximately 92% of the outstanding shares of IESA. (See Bancroft Decl. II, Exs. 14-16.) In April 2000, IESA was merged into its parent, Inepar IC, and today it functions effectively as a division of Inepar IC, continuing to engage in the business of providing engineering design services. (See Pozzo Dep. at 50-52.)
C. The Parties' Intent and Obligations
Defendants argue, and Plaintiffs do not dispute, that IESA was not a signatory to the Bond and, under Brazilian law, a consortium does not carry the presumption of joint and several liability. Article 278 of Brazilian Law 6404, referred to in the Consortium Agreement, provides:
A joint-venture shall have no legal identity. Companies forming a joint-venture may only be bound under the conditions provided for in the particular contract and each one shall be liable for its own obligations. There shall be no presumption of solidarity.
A "joint-venture" is treated as synonymous with a "consortium," and Professor Finkelstein's translation of the same statute substitutes the word "consortium" for "joint-venture." (See Tr. at 104.)
(Brazilian Law No. 6404 of Dec. 15, 1976, as amended through 1997, Art. 279, Chapter XXII, cited in Defs.' Notice of Motion for Summary Judgment Dismissing All Claims Against IESA, at 15-16.) Thus, under Brazilian law, although the members of a consortium are part of a legal entity registered with the Secretary of State, they are presumed not to be jointly and severally liable. (See Tr. at 100.) Nevertheless, members of a consortium can still agree to joint and several liability by express agreements which require solidarity, which, according to Dião, occurs frequently to ensure greater guarantees that members' rights will be satisfied in the case of a default by the consortium. (See Dião Decl. at 17.)
Under Brazilian law, in contrast to the American tradition, the obligations of parties to a contract are determined, in the first instance, by the parties' intent, which prevails over the literal meaning of the contract. (See Dião Decl. at 5.) Article 85 of the Civil Code provides that "in declarations of will, intent is observed more than the literal meaning of [a contract's] language." (See id. at 5.) In determining intent, courts consider the good faith of the parties, principles of equity, common sense, and the reasonableness of various interpretations. (See id. at 8.) Similarly, Article 130 of the Commercial Code requires agreements to be construed in accordance with the totality of the circumstances. (See id.) However, according to Finkelstein, under Brazilian law, a party cannot be deemed obligated under a bond unless it expressly agrees to be bound thereunder. (See Finkelstein Expert Report on IESA at 5-6; Tr. at 101-02.)
Plaintiffs argue that IESA manifested an intent to be a Principal on the Bond through its participation in several Consortium agreements, as well as the P-31 Contract, which established joint and several liability for actions under the Contract. Plaintiffs contend that applying either Brazilian or New York law, these agreements evidence IESA's liability under the Bond.
If the Bond alone is viewed as the contract between the Consortium and Plaintiffs, it is controlled by New York law (see supra, Section II(A)), and the best evidence of the parties' intent is the contract itself. See Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of New York, 375 F.3d 168, 177 (2d Cir. 2004) (quoting Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569, 780 N.E.2d 166, 750 N.Y.S.2d 565 (2002)). "If an agreement is complete, clear and unambiguous on its face [, it] must be enforced according to the plain meaning of its terms."Id. (internal quotations omitted). "Whether or not a writing is ambiguous is a question of law to be resolved by the courts."W.W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 566 N.E.2d 639, 565 N.Y.S.2d 440 (1990). The Court finds the language of the Bond to be unambiguous in identifying the two Principals as IVI and Sade. IESA was not listed as a Principal, and unlike the two others, did not sign the Bond.
Plaintiffs argue, however, that under a theory of integrated contracts, adopted by New York courts, the various agreements entered into by the Consortium may be construed together to constitute a single contract and, taken together, evidence the parties' intent that IESA be jointly and severally liable under the Bond. The Court finds, however, that even if the Bond and the other documents are read together and construed under New York law, at best, they are ambiguous as to IESA's obligations to the Sureties.
The members of the Consortium did expressly agree to joint and several liability before Brasoil in the Brasoil Contract, which incorporates the Performance Bond and the Bid Announcement, and in the Consortium Agreement, which included stamps of certification filed with the Registrar of Commerce. (See Pls.' Exs. S-1154 S-1561; Tr. at 115-16.) However, neither the Consortium Agreement, nor the Brasoil Contract, obligated the Consortium to joint and several liability to third parties. Although the Brasoil Contract requires the Consortium to obtain insurance for the project, it does not explicitly require the Bond to list all members of the Consortium as Principals, or for the members to agree to joint and several liability to the Sureties for the Bond. Finally, the Bond was issued without IESA being identified as a principal or signing the Bond. The other two members, however, did sign the Bond.
The Court agrees with Plaintiffs' argument that the Consortium's private agreements, which limited IESA's responsibilities, did not affect its liability to third parties; however, as discussed, the documents which did address the Consortium's liability to third parties did not unequivocally render IESA liable on the Bond.
The Document of Agreement to Form a Consortium includes joint and several liability before "Brasoil and third parties," but that phrase was not included in the Consortium Agreement, which only discusses joint and several liability to Brasoil. (Pls.' Ex. S-1130 ¶ 3; Ex. S-1154 ¶ 4.2.)
Without particular reference to the Sureties' interests in the Brasoil Contract, an argument that the Sureties were third-party beneficiaries of the contract could not succeed. See Piccoli A/S v. Calvin Klein Jeanswear Co., 19 F. Supp. 2d 157, 162 (S.D.N.Y. 1998) (finding that a third party may only assert a claim as an intended beneficiary of a contract, where either "(1) no one other than the third party can recover if the promisor breaches the contract or (2) the language of the contract otherwise clearly evidences an intent to permit enforcement by the third party"); Ignacio Messina C.S.P.A. v. Ocean Repair Service Co., No. 86 Civ. 7898 (KMW), 1991 WL 116336, at *6 (S.D.N.Y. June 17, 1991) ("New York law requires that the parties' intent to benefit a third party must be shown on the face of the agreement"). In any event, Plaintiffs have not argued that they are third-party beneficiaries of Brasoil's Contract with the Consortium, and neither party has addressed the issue under Brazilian law.
Moreover, the parties' conduct, which, under Brazilian law, is at least as relevant as the language in the relevant contracts, does not evidence an intention for IESA to be jointly and severally liable under the Bond. Brasoil accepted the Bond, which identified only IVI and Sade as Principals, and incorporated it into the Contract. Even assuming that the Brasoil Contract required a Bond from the Consortium which imposed joint and several liability to the Surety on all three members of the Consortium, Brasoil's acquiescence to a Bond signed by only two members of the Consortium signifies its assent to a modification of that requirement. There is no evidence to the contrary, such as a demand by Brasoil or the Sureties at the time of the Bond's execution, for the signatures of all three members of the Consortium. Contrary to Plaintiffs' contention, IVI's signing of the Bond did not evidence an act to represent the Consortium as a whole. Although the Consortium Agreement authorized IVI to represent the Consortium in all actions related to the Brasoil contract, "before Brasoil," it expressly declared that IVI's authority was not the equivalent of a general power of attorney before parties other than Brasoil. (See Pls.' Ex. S-1154 ¶¶ 3.1, 8.1; Tr. at 110) Moreover, if IVI was signing the Bond on behalf of the Consortium, there would have been no need for Sade to sign separately, which it did. Finally, the correspondence between the parties following the execution of the Bond strongly suggests a recognition that IESA was not a principal on the Bond. In December 1995, the Sureties requested IESA to sign a rider adding it as an "additional principal" on the Bond, with an acknowledgment that they were "willing to work with" IESA's stated limit of liability in the amount of $7.7 million. Subsequently, the Sureties prepared a proposed rider to the Bond and an indemnity agreement, with liability of IESA limited to $7,729,592. These communications are strong evidence that the parties recognized that IESA was not jointly and severally liable as a Principal on the Bond.
The Document of Agreement to Form a Consortium authorized IVI to represent the Consortium "before third parties" (Pls.' Ex. S-1130 ¶ 3), but that document was issued before the Consortium Agreement and was overridden by the later agreement.
Neither the proposed rider nor the Indemnity Agreement were signed by IESA, and Plaintiffs have not sought to enforce the draft indemnity agreement.
The final argument advanced by Plaintiffs seeks to establish IESA's liability based on the American common law of suretyship, under which a surety obligation can be imputed to a principal on an underlying contract if the principal had actual or imputed notice of the secondary obligation, such as a bond requirement.See Restatement (Third) of Suretyship and Guaranty, § 20 (1996). This argument seeks to impose liability on IESA on the basis of its obligations as a Principal on the underlying Brasoil Contract. As discussed, New York choice of law principles require that the Brasoil Contract be construed in accordance with Brazilian law. The parties have not submitted any evidence of a Brazilian law of suretyship, and how it would affect a Principal on the Brasoil Contract. Accordingly, the Court finds no basis to impose liability on IESA as a result of a common law obligation to the Sureties derived from the Brasoil Contract.
In contrast to the Restatement, New York case law and jurisprudence is such that a surety may not circumvent the requirement of an express agreement to be bound by unilaterally purporting to name another as a principal to a bond. See Carrols Equities Corp. v. Villnave, 57 A.D.2d 1044, 1045, 395 N.Y.S.2d 800 (4th Dep't 1977) (rejecting surety's argument that surety agreement entitled it to attorney's fees from contractor based upon principles of indemnity, "since [contractor's] signature does not appear on the bond and the record does not provide sufficient basis for a finding of implied consent"); see also Farrar v. Lee, 10 A.D. 130, 132-33, 41 N.Y.S. 672 (1st Dep't 1896) (refusing to hold a defendant liable on a bond which defendant had not signed and which did not purport to have been executed on his behalf); N.Y. Jur. 2d Guaranty and Suretyship § 46 (2004) ("the fact that a principal — contractor does not sign a performance bond may . . . preclud[e] the surety's recovery from the contractor on principles of indemnity"); 63 N.Y. Jur. 2d Guaranty and Suretyship § 469 (2004) ("the surety on a performance bond cannot recover from the contractor on principles of indemnity where the contractor's signature does not appear on the bond and there is no sufficient basis for a finding of implied consent").
Having considered the parties' contractual agreements, conduct, correspondence, and expert testimony, as well as relevant Brazilian and New York law, the Court finds that the evidence does not support IESA's liability as a Principal on the Bond, which it did not sign. Accordingly, the Court finds that Defendants are not liable for any indemnification obligations under the P-31 Performance Bond.
III. Indemnification for the Port of New Orleans Bond
Sade America was named as a Principal on the 1994 Indemnity Agreement, under which the Court (Koeltl, J.) granted summary judgment against it, separate from the other Inepar Defendants, for liability for losses incurred by the Sureties under the Port of New Orleans Bond. See United States Fid. Guar. Co. v. Petroleo Brasileiro S.A. — Petrobras, Nos. 97 Civ. 6124, 98 Civ. 3099, Order, dated Jan. 11, 2002. This Court has also entered judgment against Sade, as a parent of Sade America and a principal on the 1994 and 1995 Indemnity Agreements, for indemnification of USFG's losses under the Port of New Orleans Bond. See USFG II at *11. Plaintiffs contend that Inepar, as well, is liable for the losses under the Port of New Orleans Bond as a successor to SVIS and Sade America, because the Port of New Orleans Contract and related obligations (the Performance Bond, Release of Lien Bond, and 1994 and 1995 Indemnity Agreements as applied to those Bonds) were expressly transferred to SVIS under the Share Purchase Agreement, and then SVIS was acquired by, and eventually merged into, Inepar IC.
The Share Purchase Agreement, executed in September 1996, is the same agreement underlying Plaintiffs' claims of successor liability under the P-19 and P-31 Bonds, which, in contrast to the expressly transferred Port of New Orleans Contract, were explicitly retained by Sade. See supra, Section I.
Plaintiffs argue, in the alternative, that Defendants are liable under the 1996 Indemnity Agreement executed between Inepar and the Sureties. Plaintiffs claim that the Indemnity Agreement, which includes a New York choice of law clause, requires Inepar to indemnify the Sureties for losses on bonds issued to its subsidiaries before or after the Agreement, and applies to the Port of New Orleans Bond issued on behalf of Sade America. Defendants argue, however, that language in the Agreement, serves to bind only those signatories "who intend to assume the obligations of Principals" with respect to the surety bonds, and there is no evidence that Defendants intended to be Principals on the Port of New Orleans Bond at the time of the Agreement. (See Defs.' Memorandum in Opposition to USFG's Motion for Summary Judgment as to the Port of New Orleans Project ("Defs.' Opp'n Mem.") at 7, n3.) The Court finds the disputed language ambiguous and, as will be discussed, relies instead on Plaintiffs' sounder claim of successor liability through Inepar's express acquisition of the Port of New Orleans Contract, and the related indemnification obligations under the 1994 and 1995 Agreements signed by Sade America and Sade.
While Defendants argue that the transfer of assets from Sade to Inepar expressly excluded the P-19 and P-31 Bonds, they do not similarly dispute Inepar's acquisition of the Port of New Orleans Project liabilities, since they were not listed as excluded. (See Pls.' Ex. S-1279, Ex. 1.) In their submissions, Defendants simply state that they "dispute the extent to which [the Inepar Defendants other than Sade America] are obligated in connection with the Port of New Orleans Project yet "that dispute is overshadowed by USFG's complete failure to substantiate its claim [through proof of payments, etc.]." (See Defs.' Opp'n Mem. at 6-7; Defs.' Trial Mem. at 13.) Defendants provided no law or further explanation in support of the purportedly disputed issue of Inepar's liability, except insofar as they challenge the applicability of the 1996 Indemnity Agreement. By contrast, Plaintiffs presented evidence expressly documenting the transfer of the Port of New Orleans Contract under the Sade/Inepar transaction, including the transfer of all obligations pertaining to the Contract. (See Declaration of William J. Taylor in Support of USFG's Motion for Summary Judgment as to the Port of New Orleans Project, executed May 18, 2001 ("Taylor Decl."), ¶ 3 Ex. G; Bancroft Decl. Ex. 4, clause 6.3.)
A. Transfer of the Port of New Orleans Contract
On or about October 31, 1996, the Pre-Closing to the Share Purchase Agreement took place, at which Sade and SVIS executed the Assignment Agreement. (See Bancroft Decl., Ex. 4.) Attachment 6 to the Assignment Agreement lists operational agreements of Sade's that were conveyed to SVIS, among other assets and liabilities transferred from Sade to SVIS, and specifically identifies the Port of New Orleans Contract for the construction of the two container cranes. (See Taylor Decl., Ex. G). The Assignment Agreement states that, with regard to the contracts transferred, SVIS "assumes SADE's legal standing . . . becoming the subject of the rights, intentions, actions and obligations pertaining to SADE's CONTRACTS, including the OPERATING CONTRACTS . . . exempting SADE from any responsibility for the execution of said CONTRACTS." (See Bancroft Decl., Ex. 4, clause 6.3.)
On May 8, 1997, Leo Torresan, the operations director of SVIS, in a letter to USFG, acknowledged that, as a result of the "restructuring process of our company," Sade "was split off and a new company named [SVIS] was created." (See Taylor Decl., Ex. H, Transcript of Deposition of Leo Roberto Galdino Torresan, dated Oct. 12, 2000 ("Torreson Dep."), at 58-60 and Ex. 1.) Mr. Torresan further stated that "[f]or the new company we transferred personal [sic], equipments and most of the contracts, including some which USFG has issued Performance Bond [sic]." (See Torresan Dep. at Ex. 1.) In the next paragraph, the letter states that "[t]hese contracts are summarized below" and lists the "New Orleans" Project in the "USA" as one of the transferred contracts. (See id.)
The uncontroverted evidence demonstrates that the Port of New Orleans Contract was expressly transferred from Sade to SVIS/Inepar as part of the the 1996 Share Purchase Agreement and Assignment Agreement. Moreover, under Brazilian law, where there is a spin-off, the company that absorbs part of the assets of the spun-off company succeeds the latter in the rights and obligations of the transferred assets. (See Finkelstein Report at 11, discussing Article 229 of the Brazilian Corporate Law.) Indeed, Defendants' expert agrees that Inepar succeeded Sade "with respect to those obligations and liabilities which were expressly transferred . . . in the `Assignment Agreement.'" (Finkelstein Report at 22.) Accordingly, the Court holds that Defendants are liable for all losses and expenses related to the Port of New Orleans Bond.
Notwithstanding this assertion, Finkelstein contends that, under Brazilian law, Inepar was not liable for Sade America's obligation as a function of their parent-subsidiary relationship. (See Tr. at 113.) Plaintiffs argue, and the Court agrees, that the controlling issue is not whether Inepar is liable for its subsidiary's debts, but whether Inepar expressly acquired the Port of New Orleans Contract and related obligations from Sade/SVIS through the spin-off and merger transaction.
B. Plaintiffs' Claims for Damages
Plaintiffs originally sought damages of approximately $6 million in their Notice of Motion for Summary Judgment, dated May 18, 2001, but now seek $3,751,898.72 for losses and expenses on the Port of New Orleans Bond. The reduction is largely attributable to a decrease in the amount Plaintiffs are claiming under the Paceco Bond, which is the claim that Defendants previously argued was "unreasonable." (See Defs.' Opp'n Mem. at 14-15.) Additionally, whereas Plaintiffs originally sought damages for paid losses and expenses, plus exoneration for anticipated liabilities, Plaintiffs now only seek indemnification for actual paid losses and expenses. In their trial submissions, Defendants make the totally conclusory assertion that Plaintiffs seek "unreasonable amounts of money . . . for exoneration and indemnification for the losses and expenses in connection with the [Port of New Orleans] bonds . . . [and] lack proper production of evidence supporting the sums requested." (See Def. Trial Mem. at 13.) They have failed to specify what amounts they view as unreasonable or why they take that view.
At trial, Plaintiffs estimated that their total losses and expenses were $3,754,323.50 (see Pls.' Trial Mem. at 4), but the documentary evidence, filed in February 2003, as part of theUSFG II litigation, only supports claims for damages of $3,751,898.72.
A surety seeking indemnification for losses and expenses incurred while discharging its obligations under a bond must show that it acted reasonably and in good faith. See Frontier Ins. Co. v. Lubiam USA, Inc., No. 97 Civ. 3480 (DC), 1998 WL 265016, *2 (S.D.N.Y. May 22, 1998) (reasonableness requirement satisfied where surety's payment to obligee was not voluntary); North Am. Specialty Ins. Co. v. Schuler, 291 A.D.2d 924, 925, 737 N.Y.S.2d 741 (4th Dep't 2002) (surety "is entitled to indemnification if it acted in good faith and the amount paid [to settle the claim] was reasonable"). The reasonableness requirement imposed on sureties relates to the conditions under which the surety made payments. See, e.g., St. Paul Fire Marine Ins. Co. v. Pepsico, Inc. 160 F.R.D. 464, 466 (S.D.N.Y. 1995) (surety is obligated "to reasonably and in good faith defend all claims under [the bond]" and "defaulted on this duty . . . [because it] blindly paid on bonds without investigating or defending claims and, therefore, did not act reasonably and in good faith"). Absent a claim that a surety acted unreasonably or in bad faith, there is no requirement that a surety's expenditures in defending a claim be "scrutinized" by the court. See USFG II at *8.
The respective Indemnity Agreements between the Sureties and, Sade and Sade America, both state that Plaintiffs:
shall be entitled to charge [Principals] for any and all disbursements made by it in good faith . . . under the belief that it is or was liable for the sums and amounts so disbursed . . . and that the vouchers or other evidence of any such payments made by the Surety shall be prima facie evidence of the fact and amount of the liability to the Surety.
(Pls.' Exs. S-6, lines 30-32, S-39, lines 33-36.) Indeed, Defendants agreed that vouchers of the Sureties' payments, such as receipts showing the discharge of obligations, would be sufficient to serve as prima facie evidence of liability to the Sureties. (See Defs.' Opp'n Mem. at 9-10.) Defendants argued, however, at the time of Plaintiffs' motion for summary judgment, that Plaintiffs had merely submitted the declaration of the Sureties' attorney, Christine Alexander, who asserted that the Sureties had paid losses and expenses in certain amounts, without providing any information concerning the number of payments made, the reasons for the payments, the recipients of the payments, or the time of the payments. (See id. at 9-10.)
On February 5, 2003, after the arbitration award was entered against USFG in favor of Boh Brothers, Plaintiffs submitted documentation, in the context of the USFG II litigation, in the form of a computer-generated list of records of invoices for paid losses and expenses for the Port of New Orleans Bond. (See Alexander Decl. ¶¶ 29-33 Ex. I.) Plaintiffs' invoices clearly identify the payee, date of payment, and the purpose and amount of each payment, including computerized calculations of the total paid losses and expenses on each Bond. (See Alexander Decl. ¶ 29 Ex. I.) According to Ms. Alexander:
Consistent with its regular course of business, USFG made the payments reflected in Exhibit I [the computer generated list of invoices] in the good faith belief that USFG is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursement so that USFG's and/or the Indemnitors' rights would be protected and preserved and/or to avoid or lessen USFG's liability or alleged liability.
(Alexander Decl. ¶ 32.) Plaintiffs have thus provided prima facie evidence of their damages. See, e.g., Hartford Fire Ins. Co. v. Macase Contracting Corp., No. 94 Civ. 5721 (LAP), 1997 WL 7675, at *2 (S.D.N.Y. Jan. 9, 1997) (based on an indemnity clause permitting "records of any nature maintained by the Surety in the ordinary course of business" to serve asprima facie evidence of payment, granting summary judgment in favor of surety based upon sworn affidavit setting forth sums, recipients, and purposes of surety's paid losses); Am. Home Assurance Co. v. Gemma Constr. Co., Inc., 275 A.D.2d 616, 620, 713 N.Y.S.2d 48 (1st Dep't 2000) (surety demonstrated prima facie entitlement to indemnification for paid losses by submitting sworn itemized statement of loss and expense and copy of payment drafts).
As found in USFG II, Defendants have failed to articulate any ground upon which to infer that Plaintiffs acted unreasonably or in bad faith in paying obligations under the Bond. See USFG II at *11 ("USFG has sufficiently documented its losses and expenses, and Defendants have raised no issue of fact as to the bona fides or reasonableness of USFG's payments related to the claims asserted against it on the Port of New Orleans performance bond"); see also Int'l Fid. Ins. Co. v. Spadafina, 192 A.D.2d 637, 639, 596 N.Y.S.2d 453, 454-55 (2d Dep't 1993) (surety "stated a prima facie case under the [indemnity] contract by submitting proper documentation of payment of the settlement to [the obligee] as well as the fees and costs incurred in making a settlement and, as [the indemnitor's] conclusory affidavits are insufficient to raise a triable issue as to either the bona fides of the settlement or as to the reasonableness of its amount, summary judgment is granted in favor of" the surety).
Defendants' argument, made in their summary judgment submissions, that Plaintiffs claimed "unreasonable" amounts of damages under the Paceco Bond, was not made in response to Plaintiffs' reduced claims in the USFG II litigation.
Defendants are therefore liable for all losses and expenses incurred by the Sureties under the Port of New Orleans Bond, in the amount of $3,751,898.72.
CONCLUSION
For the foregoing reasons, the Court concludes that Plaintiffs are entitled to indemnification against the liability, losses, expenses, and attorneys' fees incurred in relation to the Port of New Orleans Bond issued in favor of Defendants or their affiliates. Plaintiffs are not entitled to indemnification for any losses or expenses incurred in relation to the P-19 and P-31 Bonds.
The Clerk shall enter Judgment in accordance with this Opinion.
SO ORDERED.