1ST Source Bank v. Neto

• Decision Date: 25 January 2018
• Docket Number: Case No. 3:15-CV-261-JD
• Parties: 1ST SOURCE BANK, Plaintiff/Counter-defendant, v. JOAQUIM SALLES LEITE NETO, et al., Defendants/Counter-plaintiffs.
• Court: U.S. District Court — Northern District of Indiana

1ST SOURCE BANK, Plaintiff/Counter-defendant, v. JOAQUIM SALLES LEITE NETO, et al., Defendants/Counter-plaintiffs.

Case No. 3:15-CV-261-JD

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF INDIANA SOUTH BEND DIVISION

January 25, 2018

OPINION AND ORDER

Now before the Court is the Motion for Summary Judgment [DE 78] filed by Plaintiff 1st Source Bank ("1st Source") against Defendants Joaquim Salles Leite Neto ("Neto") and Wells Fargo Bank Northwest, National Association, in its capacity as Owner Trustee ("Wells Fargo" or "Owner Trustee") (collectively, "Defendants"). 1st Source's motion seeks summary judgment on its sole claim for breach of contract against Defendants and on Neto's sole counterclaim for negligent misrepresentation.¹ Having considered the parties' submissions [DE 78-79; DE 103; DE 105-1²] and for the reasons discussed below, the motion is GRANTED.

I. FACTUAL BACKGROUND

The underlying facts of this case are largely undisputed as demonstrated by the pleadings. In 2009, Neto entered into a trust agreement via Quest Trading LLC (one of Joaquim's affiliated business interests) with Wells Fargo to purchase an airplane (a Dassault Falcon 2000) for use in his business because, as a citizen of Brazil, he could not register the plane in the U.S. himself [DE 79-4; DE 79-5]. In 2010, the airplane was registered with the FAA and the registered owner was identified as Wells Fargo [DE 79-6 at 8].

Later that year, Joaquim requested a loan from 1st Source for the airplane and he began corresponding with 1st Source loan officer Eduardo Ferreira [DE 79-2 at 7]. 1st Source was advised that the airplane would be hangered and flown primarily in Brazil [DE 103-1 at 16]. In December, Joaquim accepted 1st Source's Indicative Financing Proposal which (similar to previous versions) 1st Source believed achieved Joaquim's "objective" [DE 79-6 at 14-16] (noting that the debtor (a U.S. Trust) would be responsible for all taxes, fees, and duties associated with the use and operation of the airplane). 1st Source's Finance Commitment Letter was later accepted by Joaquim, which stated in relevant part: "[w]e believe these terms meet your desires as well as fall within our agreed upon credit requirements and applicable U.S. and Brazilian laws. The terms of the aircraft financing would be as follows . . .". [DE 79-6 at 18-20]. The letter then identified the terms of the financing, one of which was that the debtor would be responsible for all taxes and duties associated with the use and operation of the airplane. Neto argues that he relied on these statements (and the fact that the loan was ultimately issued) to imply that Brazilian law permitted his contemplated use of the aircraft with a U.S. registration and trust ownership [DE 103 at 3, 8; DE 103-2 at 20, 24-25]—despite the fact that only Neto's lawyers evaluated the ownership structure and advised Neto of its legal compliance prior to 1st Source's provision of financing services [DE 103-1 at 26, 38; DE 103-2 at 11-13, 19, 27-28].

In January 2011, Wells Fargo borrowed $6 million plus fees from 1st Source³ and pledged the airplane as collateral [DE 79-7 ("the Note"); DE 79-8 "The Loan & Security Agreement"]. At that time, Neto also signed a personal guarantee for that loan which unconditionally guaranteed to 1st Source payment of the Note in full when due [DE 79-9 ("the guarantee")⁴; DE 103-2 at 18]. The Security Agreement provided that the Owner Trustee would "keep the Collateral safe and secure . . . use and operate the Collateral with care and only with qualified personnel in the ordinary course of Customer's business and in conformity with all laws and regulations . . ." and would not "permit [the airplane's] identity to be lost, or otherwise dispose of [the] Collateral or any interest therein . . .". A default under the Security Agreement would occur for failing to make a payment when due or when the Owner Trustee failed to perform any obligation under the Security Agreement. Upon default, 1st Source was entitled to declare all or any part of the remaining unpaid indebtedness to be immediately due and payable, and 1st Source could charge a default interest rate equal to the rate set forth in the Note (5.49% in excess of the Index Rate) plus an additional three percent.⁵ The Security Agreement expresslystated that "[i]t is not necessary for Bank to exercise its rights and remedies in respect of the Collateral before collecting."

In June 2012, the Brazilian government seized the airplane in connection with an investigation into an alleged scheme to avoid paying Brazilian import tax on the airplane. The Brazilian government determined that the airplane was "being used by a person [identified as Joaquim Salles] and for a purpose other than that which led" to the tax break [DE 79-10 at 7-76]; although, Joaquim was later acquitted of all criminal charges brought against him for alleged tax evasion and false statements [DE 92; DE 92-1]. For several years, Neto continued to pay 1st Source for his debt on the plane, making almost $3 million in payments. The payment due on September 27, 2014 was not made and payments altogether stopped being made in December 2014 [DE 79-11 at 2].

On October 9, 2014, 1st Source issued a Demand and Acceleration Notice to Wells Fargo and Neto, accelerating the balance due under the Note [DE 19 at 25-26]. On March 29, 2016, 1st Source's attorney in Brazil sent a notice of default to Neto. 1st Source filed suit on an insurance claim under the Aircraft Policy and recovered at least $3,075,000.00—Neto was a named defendant in this action. See Case No. 3:15-cv-00125-WCL-JEM. 1st Source also brought this action on June 24, 2015, seeking to recover the sum of $2,057,600.52, plus interest. As of January 26, 2017, the total amount due is $2,306,807.20, plus daily interest through the date of judgment, and attorneys' fees, expenses, and costs [DE 79-11 at 4].

1st Source has moved for summary judgment on Neto's counterclaim for negligent misrepresentation and on 1st Source's claim that Wells Fargo is in default under the Note and Security Agreement and Neto breached a valid and enforceable personal guarantee. Netoresponds with the affirmative defenses of 'impairment of collateral' and 'failure to mitigate damages,' but neither relieve the Defendants of their obligations.

III. STANDARD OF REVIEW

Summary judgment is proper when the movant shows that there "is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A "material" fact is one identified by the substantive law as affecting the outcome of the suit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A "genuine issue" exists with respect to any material fact when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. Where a factual record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial, and summary judgment should be granted. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citing Bank of Ariz. v. Cities Servs. Co., 391 U.S. 253, 289 (1968)). In determining whether a genuine issue of material fact exists, this Court must construe all facts in the light most favorable to the non-moving party and draw all reasonable and justifiable inferences in that party's favor. Jackson v. Kotter, 541 F.3d 688, 697 (7th Cir. 2008); King v. Preferred Tech. Grp., 166 F.3d 887, 890 (7th Cir. 1999).

IV. DISCUSSION

A. Claim for Breach of Contract and Affirmative Defenses

The parties agree that Indiana law controls the substantive issues in this case and Indiana law relating to contracts is well established. "Indiana courts zealously defend the freedom to contract." State v. Int'l Bus. Machines Corp., 51 N.E.3d 150, 160 (Ind. 2016) (citing Peoples Bank & Trust Co. v. Price, 714 N.E.2d 712, 717 (Ind. Ct. App. 1999)). "'The existence of express terms in a valid contract precludes the substitution of and the implication in law of terms regarding the subject matter covered by the express terms of the contract.'" Id. (quoting Zoellerv. E. Chicago Second Century, Inc., 904 N.E.2d 213, 221 (Ind. 2009)); see also, New Welton Homes v. Eckman, 830 N.E.2d 32, 35 (Ind. 2005) (courts must not displace the contractually specified rights and remedies but "must leave to the individual parties the right to make the terms of their agreements as they deem fit and proper, and, as long as those terms are clear and unambiguous and are not unlawful, we can only enforce them as agreed upon."). Additionally, courts in Indiana routinely enforce personal guaranties. See, e.g., Bruno v. Wells Fargo Bank N.A, 850 N.E.2d 940 (Ind. Ct. App. 2007) (enforcing a personal guaranty on a line of credit); Modern Photo Offset Supply v. Woodfield Group, 663 N.E.2d 547 (Ind. Ct. App. 1996) ("we interpret a guaranty applying the same rules applicable to other contracts, and in the absence of ambiguity, the construction of a guaranty is a question of law."). Under Indiana law, a guaranty is an independent contract to assume liability for performance of a duty or payment of a debt if the primary obligor defaults in performance or payment. McEntire v. Indiana Nat. Bank, 471 N.E.2d 1216, 1223 (Ind. Ct. App. 1984) (citations omitted). Thus, upon default of his principal, a guarantor becomes primarily liable on the debt, subject to the type of guaranty executed (conditional or unconditional) and to conditions contained in the agreement itself. Id.

Furthermore, the Uniform Commercial Code, as adopted in Indiana, states "[i]n an action with respect to an instrument, the authenticity of, and authority to make, each signature on the instrument is admitted unless specifically denied in the pleadings." Ind. Code § 26-1-3.1-308(a). See Payne v Mundaca Investment Corp, 562 N.E.2d 51, 58 (Ind. Ct. App. 1990). And under Indiana Code § 26-1-3.1-308(b):

If the

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