Opinion
02 Civ. 6078 (JSR).
June 20, 2003.
David B. Rosenberg, Esq., Jill Levi, Esq., Todd Levi, LLP, New York, N.Y., Attorney for Plaintiffs.
Jane Sigda, Esq., John Horenstein, Esq., Stephen R. Stegich, III, Esq., Condon Forsyth LLP, New York, N.Y., Attorney for Defendants.
MEMORANDUM
By Order dated January 31, 2003, the Court denied in all respects defendant's motion for summary judgment and granted in part and denied in part plaintiffs' motion for summary judgment. This Memorandum sets forth the reasons for those rulings.
Defendant Varig-S.A. ("Varig") is the well-known (but financially troubled) Brazilian airline. On September 10, 1996, Varig leased two Boeing 737-200 aircraft (the "Aircraft") from PLM Worldwide Leasing Corporation ("PLM"). In late 2000, PLM effectively transferred the two Aircraft to plaintiff BCI Aircraft Leasing, Inc. ("BCI") pursuant to a financing arrangement by which co-plaintiff Wells Fargo Bank Northwest, N.A. ("Wells Fargo") eventually became the nominal owner as trustee for two BCI-affiliated companies created for this purpose, BCI 2000-A-B, LLC and BCI 2000-A-C, LLC. In its capacity as owner-trustee for BCI 2000-A-B and BCI 2000-A-C, Wells Fargo also acquired PLM's interest in the lease with Varig (the "Lease").
Erroneously designated in the caption of the Complaint as "Wells Fargo Northwest Bank." See Plaintiffs' Memorandum of Law in Support of Their Motion for Summary Judgment, dated November 25, 2002, at 1 n. 1.
Thereafter, Varig failed to make the monthly payments that were due under the Lease on October 1, 2001 and November 2, 2001. Following the second default, plaintiffs, defendant, and a company named Transamerica Equipment Financial Services ("TEFS") that had helped refinance plaintiffs' purchases entered into a letter agreement dated November 26, 2001 (the "November Agreement") whereby the parties agreed that Varig would be relieved of its obligations under the Lease if it made certain reduced payments and then returned the Aircraft earlier than had been originally agreed under the Lease. In conformance with the November Agreement, Varig signed a note (the "Note") in favor of BCI in the principal amount of $2.1 million, payable in twelve monthly installments, failure to pay any of which in full and on time would constitute an event of default under the November Agreement. The November Agreement also contained the following provision:
Provided that (a) Varig delivers to BCI on or before November 30, 2001 a copy of this letter agreement and the original Note executed by all required signatories, and pays the installments then due under the Note, and (b) Varig performs each and every one of its obligations under this letter agreement and the Note, Varig will be relieved of its obligation to pay Basic Rent and any other sums due under the Lease; but if Varig does not perform each and every one of its obligations under this letter agreement and the Note, BCI and TEFS, at their option, will have all remedies upon default under this letter agreement, the Note and the Lease; provided however, that in no event shall Varig be liable for any amounts greater than the amounts for which it would have been liable under the Lease.
Complaint, dated July 30, 2002 ("Compl."), Ex. F (November Agreement), at cl. 4, ¶ 2.
Thereafter, Varig failed to make the payments due under the Note on April 30, 2002 and June 30, 2002. In July 2002, plaintiffs notified Varig of its defaults and demanded payment of all amounts due under the November Agreement, the Note, and the Lease. After obtaining TEFS's consent (initially given orally but subsequently memorialized on September 25, 2002), plaintiffs commenced this lawsuit on July 30, 2002.
Plaintiffs' Complaint seeks: (1) all basic rent and maintenance payments owing under the Lease, plus interest ("Count 1"); (2) legal fees, costs, and expenses incurred as a result of defendant's default under the Lease ("Count 2"); (3) immediate return of the two Aircraft in their agreed-upon condition ("Count 3"); (4) judgment against defendant in the total accelerated amount due in respect of the Note, plus interest ("Count 4"); and (5) legal fees, costs, and expenses incurred as a result of defendant's default under the Note ("Count 5"). Defendant's answer asserts the following fourteen "affirmative defenses:" (1) failure to state a claim upon which relief can be granted; (2) failure to join a necessary and indispensable party (i.e., TEFS); (3) inconvenient venue; (4) the claims arising out of the transactional documents "may be governed by laws other than the laws of the State of New York"; (5) "the liquidated damages provisions of the Lease and the Note" constitute unenforceable penalties; (6) failure to mitigate; (7) commercial impracticability and/or impossibility; (8) invalidity of default notices; (9) material breach on plaintiffs' part; (10) waiver of default through failure to reclaim the Aircraft; (11) the sums demanded exceed the amount Varig was obligated to pay under the Lease; (12) set-off for capital improvements performed on the Aircraft at defendant's expense; (13) partial payment of sums due under the Note; and (14) payment in full of sums due under the Note.
Defendant's answer also contains two counterclaims that are irrelevant to the instant motions.
Defendant seeks summary judgment in its favor on all of plaintiffs' claims, arguing that TEFS, rather than plaintiffs, is the real party in interest. See Rule 17(a), Fed.R.Civ.P. Plaintiffs, in turn, seek summary judgment in their favor on Counts 1, 2, 4 and 5 of the Complaint, and also seek to dismiss defendant's first, second, third, fifth, sixth, seventh, eighth, tenth, eleventh and fourteenth affirmative defenses.
Rule 17(a) provides in pertinent part:
Every action shall be prosecuted in the name of the real party in interest . . . [but] [n]o action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest; and such ratification, joinder, or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest.
The premise of defendant's motion is that the various agreements entered into between plaintiffs and TEFS in connection with plaintiffs' refinancing constitute an irrevocable assignment to TEFS of plaintiffs' rights under the Lease and the Note, rather than simply giving TEFS a security interest in the Aircraft and the Lease payments. See, e.g., Varig's Local Rule 56.1 Statement of Facts, dated November 25, 2002, Ex. E (Mortgage and Security Agreement), at 12 ¶ 19;id., Ex. F (Consent Agreement), at 1 ¶ 1; id., Ex. C (Loan Agreement), at § 2(e)(ii). They note, for example, that all but one of these agreements refers to an "assignment" and that the agreements require Varig's payments to be paid directly to TEFS, rather than to plaintiffs. But it is undisputed that TEFS never obtained legal title to the Aircraft; that the "assignment" in question was effected in connection with refinancing a loan and was effectuated simultaneously with the loan itself; that all payments received by TEFS from Varig were used to reduce the outstanding balance on plaintiffs' loan from TEFS and that the agreements provide that if TEFS receives from Varig any amounts exceeding what plaintiffs owe TEFS, TEFS must transfer that excess to plaintiffs; that TEFS retains a right to obtain payments from plaintiffs if Varig's payments to TEFS fall short of what plaintiffs owe TEFS; and that TEFS's rights in the Lease, the Note and all other collateral are extinguished once its loan to plaintiffs is paid off. In other words, the transaction bears all the hallmarks of an assignment of a security interest with plaintiffs retaining their legal rights under the Lease, the November Agreement, and the Note. See Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1069 (2d Cir. 1995); In re Joseph Kanner Hat Co., Inc., 482 F.2d 937, 940 (2d Cir. 1973); see also United States v. Poling, 73 F. Supp.2d 882, 893 (S.D. Ohio 1999) (applying New York law). Accordingly, plaintiffs remain the real parties in interest under Rule 17(a).
Moreover, even if one were to assume arguendo that plaintiffs had assigned all their relevant rights to TEFS, the instant suit would still be proper because TEFS ratified plaintiffs' actions. See Fed.R.Civ.P. 17(a). Specifically, shortly after the instant suit was filed, TEFS signed a waiver and consent document confirming its approval of plaintiffs' exercise of remedies against Varig and giving plaintiffs the exclusive right to prosecute claims asserted in this action. TEFS also agreed, in an affidavit submitted to the Court, to be bound by any determination reached herein.See Affidavit of Dean Stubbe in Support of Plaintiffs' Motion for Summary Judgment, sworn to November 21, 2002, at ¶ 11. Accordingly, even if plaintiffs were not the real parties in interest, their actions have been ratified, and thus the suit may proceed in its present posture. See, e.g., Gusto Records, Inc. v. Artists Rights Enforcement Corp., No. 88 Civ. 0527, 1992 WL 26746, at *3 (S.D.N.Y. 1992).
The document, dated September 25, 2002, provides in pertinent part:
TEFS hereby ratifies and confirms its approval of the exercise by [plaintiffs] on or after July 1, 2002 of any rights and remedies (1) under the [Lease]; (2) under [the Note]; and (3) under [the November Agreement], including but not limited to the serving and declaring of any notices and defaults under the Lease, commencing [this litigation], prosecuting the claims asserted in the Action in the names of the Plaintiffs therein, taking all steps necessary to pursue any such rights and remedies and claims against VARIG in the Action and all actions of [plaintiffs] in connection therewith. . . . Having consented to the Exercise of Remedies, to the extent required, in connection with the actions previously taken by [plaintiffs], TEFS hereby waives any obligation of [plaintiffs] in any of the documents identified above, to obtain the prior consent, written or otherwise of TEFS to the Exercise of Remedies. Unless a written notice is sent by TEFS to [plaintiffs] and VARIG, [plaintiffs] shall have the exclusive right to prosecute the claims asserted in the Action.
Declaration of Dean Stubbe in Opposition to Defendant's Motion for Summary Judgment, sworn to December 3, 2002, Ex. I.
For each of the foregoing reasons, defendant's motion must be denied in its entirety. Plaintiffs' motion, by contrast, must be granted in part. It is undisputed that Varig, by failing to make timely payments, breached the terms of the November Agreement, thereby triggering a provision that renders Varig liable for the amounts claimed in Counts 1, 2, 4, and 5 of the Complaint. The question, then, is whether defendant has raised a colorable defense to any one or more of these counts, either by way of an "affirmative defense" or otherwise.
Plaintiffs have not sought summary judgment on Count 3, involving return of the aircraft.
With respect to Varig's "affirmative defenses," Varig has adduced no legal contention or factual showing to support its first affirmative defense of failure to state a claim. Likewise, in view of the Court's rejection, supra, of defendant's argument that plaintiffs are not the real parties in interest, defendant's second affirmative defense (failure to join a necessary and indispensable party) must also be rejected.
Varig has also expressly abandoned its third affirmative defense of inconvenient venue and its eleventh affirmative defense, which asserts that the sums demanded exceed the amount that would be owed under the Lease. See Defendant Varig's Memorandum of Law in Opposition to Plaintiff's Motion for Summary Judgment, dated December 5, 2002, at 16 n. 6. As for Varig's fourth affirmative defense (relating to choice of law), it is irrelevant to the outcome of the instant motion practice.
Regarding Varig's sixth, seventh and eighth affirmative defenses (for, respectively, failure to mitigate, commercial impracticability and/or impossibility, and invalidity of default notices), these are barred, under the laws of all relevant jurisdictions, by the provision in the November Agreement that states:
Varig hereby confirms that (except as the Lease is modified by this letter agreement and the Note) it has no defenses to payment of any amounts due or performance of its obligations under the Lease, this letter agreement or the Note, and, to the fullest extent permitted by applicable law hereby waives all defenses (other than the defense of prior payment) to payment of any amounts due or performance of its obligations under the Lease, this letter agreement and the Note.
Compl., Ex. F. (November Agreement), at cl. 4, ¶ 4. See, e.g., RepublicBank Dallas, N.A. v. LaSalle National Bank, No. 85 C 8879, 1986 WL 5771, at *4 (N.D. Ill. May 8, 1986).
Moreover, the Lease contains a further provision that specifically waives Varig's defense of failure to mitigate.See Affidavit of Stephen R. Stegich, Esq. in Support of Varig's Motion for Fees and Costs, sworn to November 25, 2002, Ex. AA (Lease), at § 14.5.
As to the ninth and tenth affirmative defenses (alleging material breach and waiver of default by plaintiffs), Varig makes clear in its papers that the only breach and/or waiver that it alleges is plaintiffs' alleged failure to "timely" reclaim the Aircraft. Even if true, that would likely only be a defense to Count 3 of the complaint — a count on which plaintiffs do not seek summary judgment. See, e.g., Affidavit of Stephen R. Stegich, Esq. in Support of Varig's Motion for Fees and Costs, sworn to November 25, 2002, Ex. AA (Lease), § 18 (reciting unconditional duty to pay rent). Moreover, neither the November Agreement nor any other evidence in the record supports Varig's premise that plaintiffs had an obligation to "reclaim" the Aircraft; quite the contrary, Varig was obliged toreturn the Aircraft on specified dates. See Compl., Ex. F (November Agreement), at cl. 1.
Defendant's fourteenth affirmative defense (payment in full) is also meritless because defendant has provided nothing but a single conclusory statement — to wit, "The note has been paid in full," Affidavit of Paulo Mario Rossi in Opposition to Plaintiffs' Motion for Summary Judgment, at ¶ 9 — to counter plaintiffs' documentary evidence showing the existence of outstanding interest. See Affidavit of Craig Papayanis in Support of Plaintiffs' Motion for Summary Judgment, sworn to November 22, 2002, Ex. N. A mere conclusion is not sufficient to avoid summary judgment. By contrast, the twelfth and thirteenth defenses (set-off and part payment) remain viable, but plaintiffs, having recognized that these defenses go solely to the issue of damages, have not moved for dismissal thereof.
That leaves defendant's fifth affirmative defense, which, liberally construed, alleges the legal invalidity (as an unenforceable penalty) of the clause of the November Agreement that requires Varig, upon default of the latter Agreement, to pay not only the remaining balance due under the Note, plus interest, legal fees, costs and expenses, but also what would then have been due under the otherwise-replaced Lease, which, as noted earlier, called for higher payments. See Compl., Ex. F (November Agreement), at cl. 4, ¶ 2. Since Varig does not contest that it is liable for whatever is due under the Note (though it asserts that that amount is modest), the result, if this defense were to prevail, would be to preclude recovery under Counts 1 and 2 but not under Counts 4 and 5. Since, however, defendant has not affirmatively moved on this basis for summary judgment on Counts 1 and 2, the result, so far as plaintiffs' motion is concerned, would be to preclude summary judgment in plaintiffs' favor on Counts 1 and 2, but not on Counts 4 and 5. Plaintiffs argue that, under Illinois law (which the parties agree governs the November Agreement), clause 4, paragraph 2 of the November Agreement does not impose a penalty because the outstanding Lease payments constitute a lawful "benchmark" of plaintiffs' actual damages. See Scavenger Sale Investors, L.P. v. Bryant, 288 F.3d 309, 311 (7th Cir. 2002). But they offer no evidence to suggest either that this is presently so or that, more importantly, it was even reasonably contemplated at the time the parties entered into the November Agreement that the default provisions pertaining to the Note would not fully suffice to make plaintiffs whole.
Thus, it is apparent that the sole purpose of the added default sums derived from the Lease is to secure prompt payment. Such an added incentive is an unenforceable penalty. See Checkers Eight Limited Partnership v. Hawkins, 241 F.3d 558, 562 (7th Cir. 2001) ("[W]hen the sole purpose of [a] clause is to secure performance of the contract, the provision is an unenforceable penalty."); Raffel v. Medallion Kitchens of Minnesota, 139 F.3d 1142, 1145-46 (7th Cir. 1998) (holding that a clause in a commercial lease requiring lessee to pay full amount of abated rent upon late payment of one month's rent was an unlawful penalty). Since, moreover, penalties such as this are void ab initio as a matter of public policy, the waiver-of-defenses clause contained in the November Agreement,see Compl., Ex. F (November Agreement), at cl. 4, ¶ 4, is ineffective to waive Varig's fifth affirmative defense. See, e.g., Penske Truck Leasing Co., L.P. v. Chemetco, Inc., 725 N.E.2d 13, 19 (Ill.App. 2000) (citing Restatement (Second) of Contracts § 356).
Plaintiffs' attempt to characterize Varig's timely payments under the November Agreement as a condition subsequent, the non-occurrence of which triggered Varig's pre-existing obligations under the Lease, is unavailing. See Raffel, 139 F.3d at 1145 (rejecting argument that "payment of the first seven months of rent was excused only on the condition that [defendant] pay the other months' rent in a timely fashion").
For the foregoing reasons, as set forth in the Order of January 31, 2003, defendant's summary judgment motion is denied in its entirety and plaintiffs' motion for summary judgment is granted in part and denied in part as follows: with respect to Counts 1 and 2 of the complaint, plaintiffs' motion is denied; with respect to Count 4, plaintiffs' motion is granted as to liability but denied as to damages; with respect to Count 5, plaintiffs' motion is granted as to liability; and, of the fourteen affirmative defenses asserted in defendant's answer, the first, second, third, sixth, seventh, eighth, tenth, eleventh and fourteenth are stricken. As a result of these rulings, all that likely remains for trial is the following: resolution of Count 3, calculation of damages as to Counts 4 and 5, and resolution of Varig's counterclaims.
Plaintiffs did not seek summary judgment as to damages on this count.
Although plaintiffs did not move to dismiss the ninth affirmative defense, it is clear from the foregoing discussion that this cannot prevail in the terms here asserted.
Although, technically, Counts 1 and 2 remain to be tried, in light of the Court's discussion of Varig's fifth affirmative defense, supra, these two counts are unlikely survive a motion for judgment as a matter of law.