Long-pending ARC case against agency’s principals headed to trial after parties fail to conclude it through “barrage of dispositive motions”

Airlines Reporting Corporation v. Belfon (D. Virgin Islands Sept. 16, 2010).  World Wide Travel was formed in 1985 and was converted from the Agent Reporting Plan to the ARC program in 1999.  In 2001, WWT began to report sales late, fail to report sales and to other otherwise breach its remittance-related obligations under the Agent Reporting Agreement.  WWT filed a Chapter 11 bankruptcy petition in 2002, and the case was subsequently converted to a Chapter 7 liquidation.  In 2003, ARC filed a proof of claim for over $600,000 in the bankruptcy case, and the bankruptcy court upheld the validity and amount of this claim in 2006.

Also in 2003, ARC sued Angela Belfon, Ronald Belfon and Verne David, three of WWT’s officers, alleging that they were personally liable for WWT’s debt under causes of action for breach of fiduciary duty, conversion, fraud, common law conspiracy, breach of corporate fiduciary duty and tortious interference with contract.  After seven years of litigation, the parties filed what the court described as “a barrage of dispositive motions,” including Ronald Belfon’s motion to dismiss for lack of subject matter jurisdiction and motion for summary judgment and ARC’s motion for summary judgment on its breach of fiduciary duty, conversion and fraud causes of action.  In a 99-page opinion, the court denied Belfon’s motion to dismiss, granted a portion of his summary judgment motion, denied ARC’s motion and advised the parties “to begin trial preparation.”

Belfon’s motion to dismiss.  The court rejected Belfon’s arguments that ARC lacked standing to sue and that diversity jurisdiction did not exist.  As to the standing issue, the court held that, as the judgment creditor of an insolvent corporation, ARC had standing to pursue a breach of fiduciary duty claim against the agency’s officers.

ARC had more trouble with Belfon’s diversity jurisdiction argument.  The court held that ARC was not the “real and substantial party in interest” for purposes of determining diversity jurisdiction under 28 U.S.C. § 1332 because it was only acting as the representative of its airline owners and had no separate pecuniary interest in the outcome of the litigation.  Thus, the court ruled, the various citizenships of ARC’s owners controlled for diversity jurisdiction purposes.  Fortunately for ARC, none of its 15 airline owners had either a principal place of business or place of incorporation in the Virgin Islands, in which the defendants were citizens, which allowed the court to rule that complete diversity existed.

ARC’s summary judgment motion.  When much of a court’s 99-page opinion in a seven-year-old case deals with the plaintiff’s motion for summary judgment, one can be fairly certain that the judge will find some genuine issues as to material facts.  Although the court did find some genuine factual issues, it also confirmed some useful legal principles in its analysis.

First, the court held that, as soon as WWT became insolvent, the fiduciary duty owed by WWT’s officers and directors shifted so that they had an obligation to manage the corporation’s affairs for the benefit of its creditors.  As ARC pointed out in its brief, this duty requires that officers and directors “maximize the value of the assets for payment of unsecured creditors.”  Significantly, the court held that the existence of this particular fiduciary duty did not require any “showing of actual participation” by the officers and directors in the alleged wrongs at issue, i.e., the failure to remit trust funds to ARC.  ARC’s only burden was to prove that, while WWT was insolvent, the defendants failed to manage the corporation for the benefit of its creditors.  As the court noted, the defendants did not dispute ARC’s evidence that WWT was insolvent during the period at issue.

Second, the court held that the Agent Reporting Agreement between ARC and WWT formed an express trust under which WWT had a fiduciary duty to hold funds collected from ticket sales in trust for the airlines.  The court indicated that the defendants could be liable for WWT’s breach of fiduciary duty for failing to remit such funds if ARC could prove that they participated in the commission of such breach.

The court then analyzed the parties’ evidence, viewing it in a light most favorable to the defendants, to determine if ARC had satisfied the “lighter standard required to prove that the Defendants breached their fiduciary duties as directors/officers of an insolvent corporation” and the more demanding elements of the conversion cause of action.  The court held that, while ARC had offered “compelling evidence of Defendants’ liability,” the defendants had presented “substantial – if not as compelling – contrary evidence,” and that a jury, not the court, would have to make the credibility determinations needed to weigh the parties’ competing evidence.  Thus, the court held that genuine issues of material fact existed as to whether the defendants had breached their fiduciary duty to ARC and had personally participated in the conversion of the ticket sale proceeds.

Belfon’s summary judgment motion.  Consistent with its holding on ARC’s motion, the court denied Ronald Belfon’s motion for summary judgment as to ARC’s breach of fiduciary duty cause of action, holding that genuine issues of material fact existed as to whether Belfon had reason to know of “WWT’s misfeasances” but failed to take appropriate steps to correct them.  However, the court granted Belfon summary judgment as to ARC’s other causes of action against him, holding that ARC had failed to present evidence “beyond mere nonfeasance” showing that Belfon had actively participated in WWT’s wrongful conduct, which is an essential element of the conversion, fraud, common law conspiracy, breach of corporate fiduciary duty and tortious interference with contract causes of action it had asserted against him.

Note:  This case is a vestige of the bygone era in which agencies would report sales to ARC manually, through weekly bundles of ticket sales reports and auditors’ coupons, and ARC auditors would conduct tedious on-site investigations of paper records.  Ironically, WWT apparently switched to electronic reporting in 1999 (ARC had started its electronic Interactive Agent Reporting system in 1997) but returned to manual reporting after several months.  However, lest one think that lawsuits by ARC asserting tort claims against an agency’s principals for unreported sales are also part of history, ARC recently filed three such lawsuits.  See Airlines Reporting Corporation v. Sudbury Travel, Ltd., Janet Monahan, Joan Goodstone and Lee Goodstone, E.D.V.A. No. 1:10-cv-1195 (filed Oct. 20, 2010); Airlines Reporting Corporation v. A-K Travel Network, Inc., Syed Khalid Saghir and Wasim Khan, E.D.V.A. No. 1:10-cv-1121 (filed Oct. 6, 2010); Airlines Reporting Corporation v. Mundo Travel Corporation, Erik Vallejo-Balboa and Ivan Vallejo; E.D.V.A. No. 1:10-cv-1119 (filed Oct. 6, 2010).

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