Arbor Leasing, LLC v BTMU Capital Corp.

[*1] Arbor Leasing, LLC v BTMU Capital Corp. 2009 NY Slip Op 51642(U) [24 Misc 3d 1226(A)] Decided on July 10, 2009 Supreme Court, New York County Kapnick, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on July 10, 2009
Supreme Court, New York County

Arbor Leasing, LLC, Plaintiff/Counterclaim, Defendant,

against

BTMU Capital Corporation f/k/a BTM Capital Corporation, Defendant/Counterclaim Plaintiff.



603151/06



Plaintiff was represented by Mark Berman, Esq. and William D. McCracken, Esq., Ganfer & Short, LLP,

360 Lexington Avenue, New York, New York 10017

Tel: 212-922-9250

Defendant was represented by Paul D. Sarkozi, Esq. and Dianne M. Peterson, Esq., Hogan & Hartson,

875 Third Avenue, New York, New York 10022

Tel: 212-918-3000

Barbara R. Kapnick, J.

Plaintiff Arbor Leasing, LLC ("Arbor Leasing"), a limited liability company organized and existing under the laws of the State of Illinois, originally commenced this action against defendants BTMU Capital Corporation f/k/a BTM Capital Corporation ("BTMU"), Arbor Finance Limited ("Arbor Finance") and Copley Capital LLC ("Copley") seeking to recover monies allegedly owed by defendants to plaintiff in connection with the provision of consulting and advisory services relating to complicated global business transactions concerning the leasing of airplanes and jet engines worth millions of dollars.

Plaintiff claimed that defendants wrongfully refused to compensate Arbor Leasing and improperly terminated the Consulting and Remarketing Agreement (the "Agreement") dated July 19, 2004 entered into by plaintiff and the defendants.

Under the Agreement, plaintiff was engaged to act as the "primary relationship manager" [*2]with one of Arbor Finance's clients, Krasnoyarsk Airlines ("Kras Air"), and to provide consulting and advisory services to BTMU.

Article 3 ("Term") of the Agreement provides as follows: (a)This Agreement shall commence upon the date hereof and shall terminate on June 30, 2009, unless the term hereof is extended by an instrument in writing signed by all parties.(b)Notwithstanding anything to the contrary contained herein, the Company may by notice in writing immediately terminate this Agreement without any further payments of any kind hereunder to Arbor USA, if Arbor USA shall:

(i)be in breach of any of the material terms of this Agreement, which in the case of a breach capable of remedy is not remedied by Arbor USA within fourteen (14) days of receipt by Arbor USA of a notice from the Company, specifying the breach and requiring that it be remedied;

(ii)be guilty of gross negligence and/or willful misconduct;

(iii) engage in fraud or other material dishonesty with respect to the Company or any of its Affiliates or customers;

(iv)represent itself as agent or representative of the Company in any matter outside the scope of the Services provided for herein;or

(v) otherwise act in a manner that is materially harmful, or potentially materially harmful, to the business interests or reputation of the Company or any of its Affiliates [emphasis supplied].

There is no dispute that plaintiff's Officer and Managing Member, Boris Stratievsky, was arrested and indicted on or about June 3, 2005 for various felonies, including money laundering and forgery.[FN1]

There is also no dispute that defendants sent a letter dated June 10, 2005 to plaintiff terminating the Agreement pursuant to section 3(b)(v) of the Agreement (the "morals clause"). Plaintiff contends that defendants improperly invoked that provision because Stratievsky's alleged crimes were not related to his work at or role with Arbor Leasing or the services Arbor Leasing [*3]performed for defendants under the Agreement.[FN2]

The defendants previously moved, under motion sequence number 001, for an order pursuant to CPLR § 3211 dismissing the Complaint, on the grounds, inter alia, that Stratievsky's indictment presents a complete defense to this action.

By Decision/Order dated March 9, 2007, the Hon. Helen E. Freedman rejected that argument, finding that "[t]he indictment does not refute plaintiff's central allegation that Stratievsky's arrest and indictment do not constitute acts by Arbor that would trigger the morals clause."

Justice Freedman did, however, grant the motion to the extent of dismissing plaintiff's claims for breach of implied contract and unjust enrichment against all the defendants, and dismissed plaintiff's remaining claim for breach of contract against defendants Arbor Finance and Copley.[FN3] Plaintiff's claim against BTMU for breach of contract was severed and continued.

BTMU thereafter served an Answer and asserted a counterclaim against Arbor Leasing for breach of contract based, inter alia, on Arbor Leasing's alleged failure to provide BTMU with corporate financial statements and documentation requested by BTMU in a timely and professional manner.[FN4]

Plaintiff/counterclaim defendant now moves for summary judgment on the issue of liability on its remaining cause of action for breach of the Agreement, on the grounds that:

(1)the morals clause unambiguously applies only to the corporate entity - i.e., Arbor Leasing - and does not apply to Mr. Stratievsky, who did not sign the Agreement in his individual capacity;[FN5] and

(2)Illinois LLC law dictates that the contractual obligations of Arbor Leasing are not [*4]obligations of Mr. Stratievsky (see, Illinois Limited Liability Company Act § 10-10),[FN6] since Arbor Leasing's Articles of Organization do not provide specifically for its members to be liable for any obligations of the LLC.

Plaintiff argues that Mr. Stratievsky's actions (and, specifically, his indictment for money laundering) cannot be considered acts by Arbor Leasing in violation of the morals clause and do not constitute a breach of Arbor Leasing's obligations under the termination provision of the Agreement.

Defendant argues that summary judgment should be denied on the grounds that there is at least an issue of fact as to whether BTMU properly terminated the Agreement.[FN7]

Specifically, defendant contends that plaintiff's assertion that BTMU terminated the Agreement solely upon the basis of the federal indictment of Mr. Stratievsky is wrong. Defendant contends that it terminated the Agreement as a result of Arbor Leasing's repeated misconduct - such as its concealment of critical financial information from BTMU and its use of the Russian Companies to engage in money laundering-like transactions.

Joseph O'Brien, the Executive Vice President-Sales of Engine Lease Finance Corporation, a subsidiary of BTMU, acknowledges in a sworn Affidavit that BTMUCC certainly considered the effects of the Indictment of Arbor's President and Member, Mr. Stratievsky - the fact that the key person with whom we had been dealing was accused by U.S. federal authorities of money laundering and was incarcerated, the fact that BTMUCC needed to report the situation to the Federal Reserve Bank and the fact that the Indictment heightened BTMUCC's concerns that it could not trust Arbor to provide accurate and complete financial information. Still, it was Arbor's conduct that prevented BTMUCC from being in a position to trust Arbor to supervise Russian bank accounts and handle BTMUCC's Russian operations. It was Arbor's conduct that required BTMUCC to hire a forensic accountant to review all of the transactions that Arbor was charged to supervise. And it was Arbor's conduct that required BTMUCC to incur the cost and administrative difficulties of replacing personnel and bank accounts in Russia so that BTMUCC could be in a position to provide comfort to regulators and itself that it could [*5]accurately report and monitor its Russian financial activity.[FN8]

Plaintiff, however, argues in reply that none of the documents produced by defendant during discovery or in connection with this motion indicate that defendant considered terminating the Agreement prior to Mr. Stratievsky's arrest and/or cite the other factors outlined in Mr. O'Brien's Affidavit, even though those documents (if they exist) would be in defendant's possession.[FN9]

To the contrary, defendant admitted in its response to plaintiff's First Set of Interrogatories that the earliest date that BTMU considered terminating the Agreement based on the morals clause was between the dates of June 3 and June 10, 2005, i.e., after learning of the indictment.

In addition, a BTMU document annexed as Exhibit "M" to plaintiff's reply affidavit provides, in relevant part, as follows: As B. Stratievsky is a US citizen it was our practice to have a background check done. This was completed by Peter LeVine and Associates, a professional background investigator and our normal source for this type of check. The check searched for all activity in Illinois and California and revealed motor violations[,] an apartment eviction and a late credit card payment. The background check showed [*6]nothing to indicate money laundering activity. I also traveled with B. Stratievsky to Siberia to do the original due diligence on the airline in December and then spent the next four months working with him continuously to close the transaction. I never witnessed any inappropriate actions or behavior. He performed every task as directed and in a timely manner.

* * * •A copy of the indictment has been procured today and is attached to the same cover e-mail. We are working with the Chicago office of Vedder Price to obtain additional information on the criminal proceeding as soon as it becomes available.•We are therefore taking steps:

a. To sever the relationship with Arbor;

b. To establish a new banking relationship forthis transaction;

c. To restrict withdrawals to approved payees pending moving the accounts.

While defendant could have terminated the Agreement based on various grounds, including breach of any of the material terms of the Agreement, gross negligence and/or wrongful misconduct, and fraud or other material dishonesty with respect to the defendant or any of its Affiliates or customers, the termination letter did not refer to any of those provisions or factors, but relied solely on the "morals clause."

Based on the papers submitted and the oral argument held on the record on December 3, 2008, this Court finds that BTMU's termination of the Agreement on the ground that Arbor Leasing acted "in a manner that is materially harmful, or potentially materially harmful, to the business interests or reputation of" BTMU or any of its Affiliates, was improper.

Accordingly, plaintiff's motion for summary judgment on the issue of liability on its claim for breach of the Agreement is granted.

All parties shall appear for a status conference in IA Part 39 on September 2, 2009 at 10:00 a.m. in order to coordinate discovery on the issue of plaintiff's damages, as well as defendant's counterclaim.

This constitutes the decision and order of this Court.

Date:July , 2009____________________________

Barbara R. Kapnick [*7]

J.S.C. Footnotes

Footnote 1:In a Plea Agreement entered on May 14, 2008 in the United States District Court for the Northern District of Illinois, Eastern Division, Mr. Stratievsky pled guilty to one count of attempting to engage in a prohibited monetary transaction, in violation of Title 18, Unites States Code, Section 1957(a).

Footnote 2:The indictment did not refer to either Arbor Leasing or BTMU.

Footnote 3:Justice Freedman found that "under the Agreement only BTMU had the right to terminate the Agreement for breach of the morals clause" and that "Arbor Finance and Copley have no obligations to pay BTMU under the Agreement."

Footnote 4:Two additional counterclaims for breach of fiduciary duty, which were asserted against Arbor Leasing and Stratievsky, were dismissed as duplicative of the counterclaim for breach of contract, by Decision/Order dated July 26, 2007 (Freedman, J.).

Footnote 5:Plaintiff contends that Mr. Stratievsky (who signed the Agreement as "Vice President" of Arbor Leasing) meets the Agreement's definition of an "Associate" of the Company, but that the morals clause does not expressly apply to "Associates".

Footnote 6:Plaintiff contends that although New York law applies to the Agreement pursuant to paragraph 17 of the Agreement, issues of corporate governance are governed by the law of the state in which the entity is chartered, i.e., Illinois. See, Hart v General Motors Corp., 129 AD2d 179 (1st Dep't 1987), lv to app denied, 70 NY2d 608 (1987).

Footnote 7:Defendant also requests that this Court search the record and grant summary judgment in its favor.

Footnote 8:Mr. O'Brien claims that

[d]uring the week of May 23, 2005, three BTMUCC employees travelled to Arbor's offices in Russia to conduct an accounting and legal audit of the Kras Air transaction. Even after the field portion of the audit, however, we had many questions about the services Arbor was performing and how it was accounting for and handling funds received from Kras. We had identified serious problems with Arbor's performance under the Agreement, including without limitation impermissible and unrelated transactions, and scheduled an internal meeting for Monday June 6, 2005 to begin discussions regarding the serious concerns resulting from the field portion of the audit.

According to Mr. O'Brien, defendant considered during meetings early in the week of June 6, 2005 "the suspicious nature of Arbor's financial administration and reporting, and that the misuse of the Russian Companies' bank accounts for transactions unrelated to the Kras Air lease appeared to be consistent with the money laundering allegations in the Indictment."

Footnote 9:Many documents were withheld by defendant based on the ground that they were protected from disclosure by the attorney-client privilege and/or work product. Plaintiff argues in its reply papers that in the event this Court denies the instant motion, this Court should find that defendant has opened the door to the disclosure of the allegedly privileged documents by selectively using certain of those documents in opposition to this motion.