ARC case ends up where it started after excursion through federal court

November 4, 2011

Airlines Reporting Corporation v. Sudbury Travel, Ltd. (E.D.V.A. Sept. 28, 2011).  In 2009, ARC initiated an arbitration before the Travel Agent Arbiter seeking amounts owed by accredited agent Sudbury Travel, Ltd.  Less than three weeks later, ARC withdrew its arbitration complaint.  In his dismissal notice, the Arbiter noted that the applicable rule allowed such withdrawal provided that its purpose “is not to litigate the identical claims in a state or federal court or before any other governmental body.”

Over a year later, ARC filed a Virginia state court complaint against Sudbury based on the same events but naming three additional defendants, “officer/director” Lee Goodstone and two other individuals.  The complaint, which sought damages in excess of $240,000, alleged three counts:  breach of contract against Sudbury only and conversion and breach of fiduciary duty against all four defendants.  ARC alleged three forms of conversion – conversion of ticket sales proceeds, conversion of funds in the agent’s bank account securing a letter of credit in ARC’s favor and conversion of ticket stock.  Goodstone removed the case to federal court and filed a counterclaim against ARC.

Six months and over 70 docket entries (including two amended complaints and numerous motions) later, ARC filed a motion to compel arbitration before the Arbiter.  ARC explained that it had withdrawn its previous arbitration complaint because “it appeared the process was getting no traction” with Sudbury.  Sudbury and Goodstone opposed the motion, which the court denied.

In July 2011, the parties filed cross motions for summary judgment.  In its order on the motions, the court first, citing the Arbiter’s 2009 dismissal notice regarding relitigation of identical claims in court, transferred ARC’s claims against Sudbury back to the Arbiter.

Next, the court rejected ARC’s conversion claims against Goodstone for the same reasons the same court rejected them ten years ago in Airlines Reporting Corporation v. Pishvaian, 155 F. Supp.2d 659 (E.D.V.A. 2001).  The court rejected ARC’s sales proceeds conversion claim because the Agent Reporting Agreement, while labeling such proceeds as “trust” funds, did not actually establish a trust relationship because it did not require that sales proceeds be segregated, i.e., it allowed such proceeds to be commingled with general agency assets.  The court rejected ARC’s conversion claim regarding the funds securing the letter of credit for the same reason.  The court rejected the travel documents conversion claim because the facts showed that Goodstone’s conduct, like that of the agency owner in Pishvaian, was only “supervisory and was not directed at the converted ticket stock.”

The court then rejected ARC’s breach of fiduciary duty cause of action as barred by Virginia’s two-year limitation period.  ARC alleged that the misdeeds occurred during a period ending in July 2008, but it filed its complaint in September 2010.

Finally, the court rejected Goodstone’s Fair Debt Collections Practices Act and Massachusetts General Laws Chapter 93A counterclaims because ARC was seeking to collect a business debt, not a consumer debt.

So, at the end of the day, ARC and Sudbury returned to the Arbiter and Goodstone was out of the case.  ARC filed a motion for a default judgment against the other two defendants, but the court has not ruled on it.

Note:  Now pending in the Eastern District of Virginia are four cases – ARC v. Sarrion Travel, Inc. ($152,000+ damages), ARC v. Mundo Travel Corp. ($80,000+ damages), ARC v. Academic Travel Services International ($87,000+ damages) and ARC v. Cartegena Travel and Tours, Inc. ($85,000+ damages) – in which ARC is alleging the same conversion claims against agency principals that were rejected in Sudbury and Pishvaian.  There must be a better way for ARC to pursue claims against agency principals than to be forced to rely on trust-based causes of action that have repeatedly come up short.  In September, ARC announced that it is embarking on an effort to modernize its agent accreditation procedures.  That effort should include modernization of the Agent Reporting Agreement as well.

First, to receive accreditation, an agency’s principals should be required to consent, in their personal capacities, to arbitration or litigation of ARC’s claims against them related to the ARA.  Agency owners might complain about the costs of defending against ARC’s claims, but a provision requiring that the losing party in the proceeding pay the winning party’s attorneys’ fees and expenses would resolve any costs objection.

Second, the ARA should require that agents segregate sales proceeds in a separate account and prohibit them from commingling such proceeds with other funds.  The ARA designates sales proceeds as trust funds – it provides that “[t]he Agent recognizes that the proceeds of the sales, less the Agent’s commissions, if any, on these ARC Traffic Documents are the property of the Carrier and shall be held in trust until accounted for to the Carrier” – so it stands to reason that agents should be required to treat such funds accordingly.  Without a segregation requirement, the ARA’s “trust” language will continue to fail ARC in its pursuit of tort claims arising under Virginia law, which governs the interpretation of the ARA.

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

November 16, 2010

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).

Virginia ruling returns to haunt ARC’s collection efforts against agency owner in California

September 21, 2008

Airlines Reporting Corporation v. Commercial Travel Corporation (S.D. Cal. Aug. 1, 2008).  In 2004, ARC was pursuing two separate lawsuits in the U.S. District Court for the Eastern District of Virginia in which Mario Renda was a defendant, ARC v. Uniglobe Fairway Travel, Inc. and ARC v. Commercial Travel Corporation.  In both cases, ARC alleged that Renda, as an owner and officer of the defendant travel agencies, was personally liable for the agencies’ failure to remit the proceeds from airline ticket sales.

In the Commercial Travel case in Virginia, a magistrate judge issued a report and recommendation in 2004 recommending that the court enter a default judgment against Renda.  The magistrate judge did not analyze whether the court had personal jurisdiction over Renda, a California resident; he simply concluded that, “based on the allegations and facts contained in [ARC’s] Complaint, personal jurisdiction over the Defendants is appropriate pursuant to Va. Code § 8.01-328.1.”  In 2007, after the case had been resolved with respect to the other defendants, the court adopted the report and recommendation and entered a default judgment against Renda for $701,942.

In the Uniglobe case, a different magistrate judge issued a report and recommendation in March 2005 analyzing the court’s personal jurisdiction over Renda in detail and recommending that the court dismiss the case as to Renda on the grounds that it lacked personal jurisdiction over him.  That same month, the court adopted the report and recommendation and issued an order dismissing the Uniglobe case as to Renda.

In February 2008, ARC registered the Commercial Travel default judgment against Renda in the U.S. District Court for the Southern District of California.  Renda moved to vacate the default judgment under FRCP 60 on the grounds that it was void because the Virginia court lacked personal jurisdiction over him.  Renda argued that the Virginia court’s 2005 order as to personal jurisdiction in the Uniglobe case had the effect of collaterally estopping ARC from relitigating the personal jurisdiction issue in the Commercial Travel case before the California court.

The California court agreed with Renda.  It found that Renda had proved the applicability of the collateral estoppel doctrine by showing that (i) both ARC and Renda were parties to the Uniglobe case, (ii) the court in that case actually heard and decided the question of its personal jurisdiction over Renda, and (iii) the court’s ruling was essential to its dismissal of the case as against Renda.  Accordingly, the California court held that it could rely on the Uniglobe ruling as a basis for holding that the default judgment against Renda in the case before it was void.  The court then granted Renda’s motion and vacated the default judgment.

Update:  After the court entered its order vacating the default judgment, Renda moved for an award of attorneys’ fees and costs totaling over $37,000 against ARC under the Agent Reporting Agreement’s fee-shifting clause.  On September 23, 2008, the court denied Renda’s motion.  It ruled that, under the ARA, fees and costs are only recoverable by an “Agent” within the meaning of the ARA and that Renda, as he himself persuasively argued in his motion to vacate, never was an “Agent” under the ARA.

Court decisions highlight need to clarify important Agent Reporting Agreement provision

March 16, 2008

Westways World Travel, Inc. v. AMR Corp., American Airlines, Inc. et al. (9th Cir. (Cal.) Jan. 22, 2008).  Despite consisting of over 70 pages, ARC’s Agent Reporting Agreement contains very few provisions that give airlines specific rights against ARC-accredited travel agents.  Most of the airline-protective provisions are in ARA Section VII, which is entitled “Agent’s Authority, General Rights and Obligations.”  For airlines, subsection H of Section VII is a critically important provision; it states in part as follows:  “The Agent shall comply with all instructions of the carrier, and shall make no representation not previously authorized by the carrier.”  Unfortunately for the airlines, Section VII.H has been held to be “ambiguous” by the Ninth Circuit in the Westways case, as well as by a California federal district court in 2006 in a separate case.

In 1999, Westways World Travel and another ARC-accredited travel agent sued American Airlines (and ARC and other entities) in a California federal district court, alleging that the defendants had engaged in an unlawful scheme to charge the agents, through debit memos, for ticketing violations for hidden city, back-to-back and point-beyond tickets.  The agents claimed that, through this scheme, the defendants had violated the federal Racketeer Influenced and Corrupt Organizations Act and breached the ARA.

In 2003, the court certified the case as a class action, but the court later granted the defendants’ motion for decertification.

In 2004, ARC was dismissed from the case pursuant to a settlement in which ARC, while denying any liability, agreed (i) not to participate in the enforcement of contested airline debit memos seeking payment from agents for hidden city, back-to-back or point-beyond tickets, (ii) to issue a statement to agents informing them of ARC’s agreement not to participate in such enforcement, and (iii) not to terminate the accreditation of any agent that refuses to pay a contested debit memo seeking payment for hidden city, back-to-back or point-beyond tickets.

In 2004, American and the other remaining defendants moved for summary judgment.  American contended that because it had the right under the ARA to issue debit memos to recover its losses arising from agents’ violation of the airline’s instructions prohibiting hidden city, back-to-back and point-beyond ticketing, its conduct in issuing such debit memos could not be considered extortion or any other predicate act needed to show a RICO violation or a breach of the ARA.

In a detailed written opinion issued in 2005, the district court ruled for the defendants.  First, it held the ARA gave American the right to issue debit memos to recover damages for agents’ failure to comply with the airline’s “instructions” within the meaning of ARA Section VII.H.  Second, it held that American, through its conditions of carriage and tariff, had given “instructions” within the meaning of Section VII.H prohibiting agents from issuing hidden city, back-to-back and point-beyond tickets, even though the conditions of carriage and tariff had been issued for passengers, not agents.  The court interpreted the Section VII.H phrase that “the Agent shall comply with all instructions of the carrier” to mean that agents were required to follow all carrier instructions, even if such instructions had been specifically issued to other parties, not to agents.  Finally, the court held that because American had the right under the ARA to issue the debit memos in question, its conduct in doing so could not constitute a RICO predicate act or a breach of the ARA.

The agents appealed, and the Ninth Circuit issued a split decision in January 2008.  The appeals court agreed that the agents’ RICO claims were deficient, reasoning that American could not be liable under that statute by simply demanding payment for amounts that the airline believed it was owed under its interpretation of the ARA.

But the Ninth Circuit disagreed with the trial court’s ruling on the agents’ breach of contract claim.  The appeals court held that the Section VII.H phrase “the Agent shall comply with all instructions of the carrier” could, in its opinion, be understood two ways:  to require that agents need only comply with “instructions” issued specifically to them, and not also with instructions issued to passengers and other parties, or, in the alternative, to require that agents comply with all instructions issued to agents, passengers and all other parties.  In addition, the court refused to overturn the trial court’s decertification of the case as a class action.  The court remanded the case for further proceedings.

The other case in which the court held Section VII.H of ARA to be ambiguous was Continental Airlines, Inc. v. Mundo Travel Corporation.  In that case, Continental had sued an ARC-accredited agent in a California federal district court, alleging that the agent had violated the ARA by issuing point-beyond tickets in violation of the “instructions” prohibiting such ticketing in the airline’s own “Booking and Ticketing Policy.”

The agent in Mundo moved to dismiss on the grounds that the airline’s claims were barred by Section I.C of the ARA, which provides that the ARA “does not, for example, address fares charged by the carrier; that is a matter between a carrier and the Agent.”  Continental responded that Section VII.H had required that the agent comply with the “instructions” against point-beyond ticketing set forth in the Booking and Ticketing Policy.  In a 2006 decision, the court denied the agent’s motion, noting that “the ARA is ambiguous” because the two ARA provisions conflicted, leaving it unclear whether the agent had been required to comply with the Booking and Ticketing Policy.  Mundo was settled a few months after the court’s decision, so there was never a definitive ruling on the enforceability of Section VII.H in that case.

Perhaps it is time for an airline to submit a proposal to ARC’s president, for referral to ARC’s board of directors or stockholders, seeking to clarify Section VII.H so airlines would stand a better chance of enforcing this important provision in court cases.  Maintaining the text of a provision that may be read multiple ways, and may conflict with other ARA provisions, only serves to keep airlines and agents in a position where their respective rights and obligations are unclear.  Unless the provision is clarified, it will be up to the courts to figure out what the provision means and its role with respect to other ARA provisions.  Aren’t the parties to a contract supposed to be the ones to do that?

ARC seeks court confirmation of arbitration award against agency

November 30, 2007

Airlines Reporting Corporation v. Versailles, LLC (E.D. Va. Nov. 26, 2007).  ARC has filed a petition seeking the confirmation of an arbitration award in its favor against Versailles, LLC, a travel agency that does business as Business Travel International and is located in Irvine, California.

According to ARC’s petition, the agency had filed an appeal with the Travel Agent Arbiter after an ARC audit revealed that the agency had violated the Agent Reporting Agreement.  The Arbiter dismissed the appeal, noting in his ruling that “there is clearly the appearance of fraud constituting a clear and present danger of substantial loss to ARC and/or the carriers.”  The Arbiter also ordered that the agency surrender all airline identification plates and traffic documents to ARC and pay $206,400 to ARC, but the agency has failed to comply with such order, according to ARC.  ARC alleges that $192,475 of the amount owed by the agency is from chargebacks by credit card holders claiming that their cards were charged fraudulently.

Update:  On January 25, 2008, the court entered an order confirming the Travel Agent Arbiter’s order.

Magistrate judge recommends that ARC obtain default judgment against agency and owner

October 20, 2007

Airlines Reporting Corporation v. PVO Travel Corp. and Pete Victor Obuljen (E.D. Va. Sept. 27, 2007).  As previously reported, ARC filed a lawsuit against PVO and Obuljen, the agency’s sole owner, for unreported sales and dishonored drafts.  The defendants failed to respond to the complaint, so ARC moved for a default judgment.

The magistrate judge issued a report recommending entry of a default judgment for $296,947, the amount of damages ARC had demanded plus attorneys’ fees, against the defendants.  However, before issuing his recommendation, the magistrate judge engaged in a lengthy analysis as to whether the Virginia court had personal jurisdiction over the defendants, a California corporation and an individual residing in California.

The magistrate judge concluded that the court did have jurisdiction over the defendants under Virginia’s long-arm statute because they transacted business in Virginia by negotiating and entering into the Agent Reporting Agreement in Virginia, and because the ARA called for the defendants to perform certain obligations in Virginia.  The same court had engaged in a similar personal jurisdiction analysis, and had reached the same result, in Airlines Reporting Corporation v. Cisne Corp., Claudio Menicocci and Olga Menicocci (E.D. Va. Mar. 23, 2000).

Note:  On October 22, 2007, the court adopted the magistrate’s report and entered a default judgment against the defendants.

ARC files lawsuit seeking damages for unreported sales

May 16, 2007

Airlines Reporting Corporation v. PVO Travel Corp. and Pete Victor Obuljen (E.D. Va. Apr. 18, 2007).  ARC has filed a lawsuit against PVO Travel Corp., which does business as Globetrotter Travel, and Obuljen seeking damages of $286,605 for unreported sales and dishonored drafts.  ARC alleges in its complaint that the defendants, a terminated agent and its president and sole owner, are liable under causes of action for breach of contract, breach of fiduciary duty, conversion and fraud.  According to the complaint, the defendants are located in San Pedro, California.