Case 3:07 Cv 01606 Adc Bjm

IN THE UNITED STATES DISTRICT COURTFOR THE DISTRICT OF PUERTO RICOWESTERNBANK PUERTO RICO,Plaintiff,v.JACK KACHKAR ET AL., Defendant.

Civil No. 07-1606 (ADC/BJM)

REPORT AND RECOMMENDATIONPlaintiff Westernbank Puerto Rico (“Westernbank”) moved for partial summary judgment onits claims for breach of contract and collection of monies against defendants Inyx, Inc. (“Inyx”), JackKachkar, and Victoria Benkovitch (collectively “defendants”). (Docket No. 223). Defendants opposed(Docket No. 275) and Westernbank replied. (Docket No. 310). Westernbank submitted a statementof uncontested facts in support of its motion (Docket No. 223-2) and defendants duly opposed. (DocketNo. 275-2). Defendants submitted a counter-statement of material facts (id.), and Westernbank1opposed. (Docket No. 370). Westernbank submitted a supplemental statement of uncontested facts,to which defendants did not object or oppose. (Docket No. 310-2). The parties supported their2statements of fact with citations to record evidence. (Docket Nos. 223-3 – 223-28; 275-3 – 275-27;310-3 – 310-9; 370-2 – 370-10). This case was referred to me by the presiding district court judge fora report and recommendation on all dispositive motions. (Docket No. 160). After careful review ofthe briefs on file and evidence submitted, I recommend that Westernbank’s motion be granted. References to defendants’ opposition to plaintiffs’ statement of uncontested facts are cited1herein as (Docket No. 275-2, ¶ _), while references to defendants’ counter-statement of material factsalso include the page number: (Docket No. 275-2, p. _, ¶ _). Therefore, where those supplemental facts are supported by record evidence, the court deems2them admitted. See D.P.R.R. 56(e) (“[f]acts contained in a supporting or opposing statement of materialfacts, if supported by record citations as required by this rule, shall be deemed admitted unless properlycontroverted”).

Case 3:07-cv-01606-ADC-BJM Document 437 Filed 03/03/2009 Page 1 of 25

Westernbank Puerto Rico v. Jack Kachkar, et al. Page 2Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONFACTUAL BACKGROUND AND PROCEDURAL HISTORY This case concerns various loan agreements between Westernbank and Inyx and its whollyowned subsidiaries, Inyx USA, Ltd., Inyx Europe, and Ashton Pharmaceuticals (with Inyx, the “InyxBorrowers”) through which Westernbank loaned over $142 million to the Inyx Borrowers. (DocketNo. 223-2, ¶ 1, 6, 17). Under the terms of the agreements, Westernbank agreed to provide the InyxBorrowers with lines of credit upon which they could draw down based on a percentage of theiraccounts receivable, as reflected through invoices and reports provided by the Inyx Borrowers toWesternbank. (Id., ¶ 2). Specifically, Inyx and its subsidiary, Inyx USA, entered into a Loan and Security Agreementwith Westernbank in March 2005 (the “USA Loan Agreement”) (Id., ¶ 6) and Inyx subsidiaries InyxEurope and Ashton Pharmaceuticals entered into a separate Loan and Security Agreement withWesternbank in August 2005 (the “EU Loan Agreement”) (Id., ¶ 17) (collectively, the “LoanAgreements”). To secure payment and performance of their obligations under each Loan Agreement,the borrowers granted to Westernbank a security interest over virtually all of their assets. (Id., ¶ 9, 19). Each agreement provided that, in the event of default, Westernbank was entitled to accelerate allamounts due and owed to it, demand immediate payment from the borrowers, and foreclose on theborrowers’ pledged collateral. (Id., ¶ 11, 20). The parties also entered into a Cross-Default Agreementproviding that (1) an event of default under one Loan Agreement would be considered an event ofdefault under both, (2) in the case of an event of default under either agreement, Westernbank couldexercise all of its rights and remedies under either agreement, and (3) all of the collateral under eachLoan Agreement would serve as collateral under both. (Id., ¶ 21). In addition, the USA LoanAgreement borrowers entered into a separate agreement (the “EU Guarantee”) guaranteeing paymentof all obligations under the EU Loan Agreement. (Id., ¶ 24). Both Loan Agreements precluded any amendments, modifications, waivers, or discharges ofthe agreement or any of its terms “orally or by course of conduct.” (Id., ¶ 12, 22). The agreementsstated that they could be modified, amended, or waived “only by a written agreement signed by an


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 3Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONauthorized officer of [Westernbank].” (Id., ¶ 13, 22). Moreover, the agreements provided thatWesternbank “shall not, by any act, delay, omission or otherwise be deemed to have expressly orimpliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing andsigned by an authorized officer of [Westernbank].” (Id., ¶ 13, 22). The agreements also containedintegration clauses providing that the agreement itself and certain other related financing agreementsand instruments “represents the entire agreement and understanding concerning the subject matterhereof and thereof between the parties hereto, and supersedes all other prior agreements,understandings, negotiations and discussions, representations, warranties, commitments, proposals,offers and contracts concerning the subject matter hereof, whether oral or written.” (Id., ¶ 15, 23).Between March and November 2006, three letter agreements evidenced Westernbank’s limitedwaiver of certain breaches of the Loan Agreements. (Id., ¶ 41-45). A March 31, 2006 letter stated thatWesternbank had agreed “to waive certain specific violations” of the Loan Agreements for the fiscalperiod ended April 30, 2006, but expressly provided that the waivers “should not be construed orunderstood to be a waiver of [Westernbank’s] rights to declare any future default(s) under the termsof the [Loan Agreements].” (Id., ¶ 42). In an August 11, 2006 letter, Westernbank agreed to waive“certain specific violations” through August 21, 2006, but expressly stated that it did not waiveWesternbank’s “rights to declare any future default(s)” under the agreements. (Id., ¶ 43). Finally, aNovember 20, 2006 letter memorialized Westernbank’s waiver of “certain specific violations” throughDecember 15, 2006, but again expressly reserved Westernbank’s “rights to declare any futuredefault(s)” under the agreements. (Id., ¶ 44). Westernbank did not sign any additional waiver lettersafter November 20, 2006. (Id., ¶ 45).Also on November 20, 2006, Westernbank sent Inyx a letter confirming that it had been madeaware of “the inclusion of $37,665,000 of pre-billings in the borrowing base used by [Inyx] forpurposes of determining advances under the working capital lines of credit” and “various advancesmade by [Inyx] in connection with future acquisitions of intellectual property, net assets, outstandingstock of operating companies, and other investments.” (Id., ¶ 46). Westernbank informed Inyx that


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 4Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONit did “not approve of the above mentioned transactions, and reserves its rights under the [LoanAgreements] to demand payment in full of the loans outstanding and any other Obligations thereunderas a result of the disclosures notified today by [Inyx].” (Id., ¶ 49).In June 2007, defendants entered into various agreements to provide additional collateral forthe loans. On June 7, 2007, defendants Jack Kachkar, Chairman and CEO of Inyx, and his wife,Viktoria Benkovitch, executed an Amended and Restated Limited Guarantee (the “First PersonalGuarantee”) personally guaranteeing all the Inyx Borrowers’ obligations to Westernbank up to a limitof $30.1 million. (Id., ¶ 25). On June 20, 2007, Kachkar and Benkovitch (the “Guarantors”) executedan additional guarantee (the “Second Personal Guarantee”) personally guaranteeing all obligations ofthe Inyx Borrowers to Westernbank up to a limit of $70 million plus the amount that the repaymentobligations under the Loan Agreements exceeded $142.4 million. (Id., ¶ 29). The Second PersonalGuarantee was made “in addition to and not in substitution” of the First Personal Guarantee, whichremained “continuously in effect.” (Id., ¶ 29). Both the First and Second Personal Guarantees providedthat the “liability of the Guarantors for the entire Guaranteed Obligations shall mature and becomeimmediately due and payable upon the Obligations becoming due under the Loan Agreement, whetherat maturity, by acceleration or otherwise.” (Id., ¶ 26, 33). Each contained a no-reliance clause (Id., ¶27, 34) and integration clause. (Id., ¶ 28, 34).In signing the Second Personal Guarantee, Kachkar and Benkovitch acknowledged that the InyxBorrowers were “‘out of formula’ under the Loan Agreement” and that there was a “substantialcollateral deficiency thereunder.” (Id., ¶ 30). Further, they acknowledged that Westernbank “has theright, under the Loan Agreement and [Personal Guarantees] at this time to make demand for immediatepayment of all amounts due under the Loan Agreements.” (Id.). The Guarantee provided that Kachkarand Benkovitch “requested that [Westernbank], in its sole discretion, not at this time make immediatedemand for payments . . . [and Westernbank] has agreed not to make such demand at this time inexchange for [Kachkar and Benkovitch] entering into this Guarantee.” (Id., ¶ 31). However, theGuarantee provided in the very next sentence that the Guarantors “agree and acknowledge that


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 5Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATION[Westernbank] may, at any time, hereafter, in its sole discretion, make such demand and nothingcontained herein shall be or shall be deemed to be a waiver of [Westernbank’s] right to make suchdemand at any time in the future.” (Id., ¶ 32). On June 7, 2007, Inyx executed a $2.5 million demand promissory note “to evidence a demandloan” made by Westernbank to Inyx. (Id., ¶ 35). The note was secured by a mortgage and securityagreement for real property located in Miami, Florida. (Id.). On the same day, Kachkar andBenkovitch executed two separate mortgage and security agreements in Westernbank’s favorconcerning several pieces of Florida real property. (Id., ¶ 36). On June 20, 2007, Kachkar andBenkovitch also executed a letter agreement providing an additional guarantee to Westernbank in theform of mining collateral stated to have a value sufficient to cover the amount of collateral deficiency(“Mining Collateral Agreement”). (Id., ¶ 39). Defendants claim that Inyx was actively pursuingsources of additional financing throughout the parties’ negotiations and until it was prevented by doingso from the commencement of administration proceedings against Inyx’s UK subsidiaries on June 28,2007. (Docket No. 275-2, p. 21, 22, 33, ¶ 20, 21, 79).On June 29, 2007, Westernbank issued formal demands to Inyx for payment on the loans. (Id.,¶ 53-55). Two June 29, 2007 letters issued to the borrowers under the USA and Europe LoanAgreements stated that the amounts of the outstanding loans exceeded the amounts available under thetwo Loan Agreements, and demand was made for the payment of the excess amounts, totaling morethan $87 million. (Id., ¶ 53, 54). A July 3, 2007 Notice of Default and Demand issued to the InyxBorrowers stated that based on various events of default, all obligations under the Loan Agreementshad been accelerated and had become due and owing, in the amount of over $142 million. (Id., ¶ 55). The Notice of Default and Demand recited fourteen events of default under the Loan Agreements. (Id.). In addition, on July 3 and July 10, 2007, Westernbank issued letters to Kachkar and Benkovitchdemanding payment under the Personal Guarantees and demanding the furnishing of collateral underthe Mining Collateral Agreement. (Id., ¶ 60).


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 6Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONFor purposes of this motion, it is undisputed that as of that date, the Inyx Borrowers had (1)failed to repay their obligations under the Loan Agreements; (2) diverted accounts receivable paymentsaway from certain lock box accounts controlled by Westernbank in which the Loan Agreementsrequired them to deposit all payments; (3) failed to maintain working capital, net worth, and cash flowlevels as required by the Loan Agreements; and (4) undergone material adverse changes to theirbusinesses and assets as reflected in draft balance sheet and income statements provided toWesternbank in June 2007. (Id., ¶ 52). Inyx does not dispute that these events occurred, only that theywere in fact “Events of Default” as defined by the Loan Agreements. (Docket No. 275-2, ¶ 52(“defendants deny that the events of default were in fact events of default under the LoanAgreements”)). Westernbank has put forth evidence of various specific events which it argues constituted“events of default” under the Loan Agreements. First, Westernbank has provided evidence that Inyxinstructed its customers to deposit funds in Inyx’s account rather than the lock box account requiredby the Loan Agreements. (Docket No. 223-2, ¶ 57; Docket No. 310-2, ¶ 3, 4, 9). Because the InyxBorrowers’ accounts receivable were part of the security for the loans, the Loan Agreements requiredthe Inyx Borrowers to direct their customers to deposit all accounts receivable payments into a “lockbox” bank account controlled by Westernbank. (Docket No. 223-2, ¶ 3). In particular, in January2007 Inyx executive Steven Handley instructed customer Focus Pharmaceuticals to deposit paymentto an account controlled by Ashton Pharmaceuticals rather than to the lock box account. (Id., 57). 3 In response to this proposed statement of uncontested fact, defendants denied “that the events 3described within SMF No. 57 constituted defaults under the Loan Agreements”, but did not dispute thatthe described events themselves occurred. (Docket No. 275-2, ¶ 57). Moreover, defendants do notproperly cite to record evidence as required by Local Rule 56(e) in support of their contention that thediversion of funds from the lock box account did not violate the Loan Agreements because Westernbankwas aware of “the lock-box issues” and Kachkar and Benkovitch provided a “cash-in-transit” guaranteeto Westernbank to address the situation. (Docket No. 275-2, ¶ 57). The statement refers to theGoldshmidt Declaration and an attached exhibit, but there is no such declaration attached to defendants’filings on this motion, nor do defendants provide a docket citation to identify where such declaration maybe found in the record (and the court has not identified a Goldshmidt Declaration elsewhere in therecord). A similar assertion is made in defendants’ counter-statement of material facts, but again is not


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 7Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONAdditionally, in October 2006 Handley instructed Inyx customer UCB Pharma to make payments intoan account controlled by Ashton Pharmaceuticals rather than to the lock box account. (Docket No.4310-2, ¶ 3,4). Moreover, a June 7, 2007 e-mail from Inyx Board Audit Committee chairman JosephRotmil to fellow Audit Committee member Douglas Brown (the “Audit Committee email”) alsoreferred to the diversion of funds from the lock box accounts, noting that Rotmil believed Inyxexecutives had to lied to the Audit Committee in reporting that Westernbank was “aware of thedeposits that Rima [Goldshmidt] and Jay [Green] diverted from the lockbox.” (Id., ¶ 9). Next, Westernbank has provided evidence that defendants committed another act of default bysubmitting false and fraudulent invoices which did not reflect actual accounts receivable owed to Inyx. (Docket No. 223-2, ¶ 58; Docket No. 310-2, ¶ 2, 7, 8). In particular, Westernbank provided evidencethat the Inyx Companies submitted to Westernbank fraudulent invoices, know as the “Prefix 7Invoices”, totaling more than $14 million that were not recorded on Inyx’s internal records, never sentto customers, and never paid by customers. (Docket No. 223-2, ¶ 58). Westernbank’s evidenceincludes a sworn statement by an Inyx customer purported to be the recipient of Prefix 7 Invoices whoattested that his company had not received the invoices and moreover, had not contracted with the InyxCompanies for the work covered by the invoices. (Id.). Westernbank also provided sworn testimonyfrom three other Inyx customers who reviewed invoices purported to reflect amounts their companiesowed to the Inyx Companies, and each stated that their company had not received the invoices, hadnot approved or paid the invoices, and that the invoices did not appear in their company records orfiles. (Docket No. 310-2, ¶ 2, 7, 8). One of those customers, Dr. Reddy Laboratories (UK) Ltd. (“Dr.Reddy”), further testified that some of the products described in the invoices had been discontinuedadequately supported by record evidence. (Docket No. 275-2, p. 21, ¶ 16). There, a reference to exhibit5 to the Kachkar declaration (Docket No. 275-9) does not cite to “the specific page or paragraph” of thelengthy letter agreement, D.P.R.R. 56(e), and the court has not identified any text in the document whichsupports defendants’ assertion. As noted, Inyx did not oppose or object to Westernbank’s Supplemental Statement of4Uncontested Material Facts (Docket No. 310-2), and thus the court deems those facts admitted wherethey are supported by record evidence. See, supra, note 1.


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 8Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONby Dr. Reddy (and that fact had been communicated to Inyx) prior to issuance of the invoice, that theservices described in the invoices were inflated and did not relate to actual discussions between Inyxand Dr. Reddy, and, in sum, that the invoices were “untrue and fraudulent.” (Id., ¶ 7). In their opposition to this motion, defendants asserted that Westernbank representatives were“well aware” that Inyx included pre-billings and development invoices in the accounts receivableborrowing base, and specifically, that in November 2006, Inyx had reached more than $37 million inpre-billings on development projects which it included in its borrowing base. (Docket No. 275-2, p.18, ¶ 9, 10, 13, 14). Westernbank responds that, when Inyx disclosed this practice, Westernbankclearly communicated to Inyx in its November 20, 2006 letter that it did “not approve” of the practiceand reserved its rights under the Loan Agreements to “demand payment in full” under the agreements“as a result of the disclosures notified today”. (Docket No. 223-23).Defendants also claim that Westernbank made an oral promise to forebear on calling the Inyxloans (the “alleged Oral Forbearance Agreement”). (Docket No. 275-2, p. 24, ¶ 31). Defendantsprovide evidence in the form of declarations by Kachkar and Inyx attorney Enzo Barichello. (Id.). Specifically, defendants state that in a June 7, 2007 meeting attended by three Inyx executives and theircounsel, along with four Westernbank executives and their counsel, Westernbank Chairman and CEOFrank Stipes “proposed the terms of a three-step workout plan which he had outlined and we hadalready begun to implement after our meeting on May 31, 2007” and as “the first step, it was agreedthat Westernbank would not call the Inyx Loans.” (Id., p. 23-24, ¶ 29-31). Defendants do not identifya specific statement made by Stipes or any other Westernbank executive, identify its terms (e.g., theperiod of time for which Westernbank agreed to forbear) nor do they identify clearly whether thestatement was made at the June 7, 2007 meeting or the May 31, 2007 meeting. They also state thatin a smaller break-out session on June 7, 2007, “Mr. Stipes reiterated that the Bank would notforeclose if Kachkar and Benkovitch immediately pledged their Florida real estate assets and enteredinto personal guarantees to cover up the collateral shortfall.” (Id., p. 25, ¶ 36). Defendants claim that,following this statement by Stipes, Stipes asked Westernbank’s attorney, Barry Woods, to confirm that


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 9Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATION“an oral agreement is as good as a written agreement under Puerto Rico law.” (Id., p. 25, ¶ 37). Defendants do not provide any non-testimonial evidence of the alleged Oral Forbearance Agreement. 5Kachkar and Benkovitch claim that out of reliance on this oral promise, they entered into the PersonalGuarantees, Mining Collateral Agreement, and mortgage agreement. (Docket No. 275-2, p. 26, 29,¶ 42, 54). Westernbank refutes this evidence with deposition testimony of Westernbank attorney BarryWoods, and notes that the alleged oral agreement is not memorialized in any of the parties’ subsequentagreements. (Docket No. 370, ¶ 31).Westernbank also presents evidence consisting of admissions by defendants that the InyxBorrowers violated the Loan Agreements. First, Inyx disclosed in its December 4, 2006 Form 10-Qpublic filings with the Securities and Exchange Commission (“SEC”) that it “was in violation” ofcertain loan covenants:As of September 30, 2006, the Company [Inyx, Inc.] was in violation of certainfinancial covenants in connection with its Westernbank loan and security agreements. As it has previously done when requested so by the Company, Westernbank haswaived, through December 15, 2006, certain requirements such [that] the Company’snon-compliance with its covenants under such agreements has not resulted in an eventof default by the Company. There can be no assurances the Company will meet suchcovenants in the future or that Westernbank will continue to grant such waivers.(Docket No. 310-2, ¶ 12). Further, Kachkar has previously stated under oath in this case that “I do notdeny that there were issues with the Inyx loans; rather, I assert that these issues were raised and openlydiscussed with Westernbank, and resolved between the parties in the ordinary course of business.” (Docket No. 164, ¶ 3). Moreover, the Audit Committee email demonstrates that Inyx Audit Defendants also reference a separate alleged forbearance agreement (Docket No. 275-2, p. 28,5¶ 50), referencing a provision in the Mining Collateral Agreement providing that Kachkar has “the rightto secure the release of the Mining Collateral from [Westernbank’s] liens by indefeasible payment in fullto [Westernbank] of all ‘Obligations’ under the Loan Agreements” in two circumstances: (1) ifWesternbank accelerated payment of the loan obligations, Kachkar would have 150 days to exercise theright, and (2) if Kachkar believed that Westernbank’s valuation of the mining collateral was materiallybelow his own valuation, he would have 150 days to exercise the right. (Docket No. 223-19). By itsterms, this language provides Kachkar with a right to release the mining collateral from Westernbank’sliens, but does not provide that Westernbank will forebear on the loan obligations themselves. Westernbank is not seeking here to foreclose on the mining collateral, and moreover, the 150 days havelong passed and defendants do not indicate that they in fact attempted to exercise this right, which underthe agreement terminates if not exercised within 150 days.


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 10Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONCommittee members were aware that “[Westernbank] has been misled” by Inyx executives and inparticular, that Inyx executive Rima Goldshmidt had falsely reported to Westernbank Inyx’s accountsreceivable aging as $107 million when it should have been closer to $10 million and that she wasresponsible for diverting funds from the lockbox accounts. (Docket No. 310-2, ¶ 9). Westernbank commenced this action on July 6, 2007, and filed an amended complaint againstInyx, Kachkar and Benkovitch, as well as certain other Inyx executives, on August 23, 2007, alleging,inter alia, claims for violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”)(18 U.S.C. § 1962(a)), violations of Puerto Rico Civil Code Article 1802 (31 L.P.R.A. § 5141), breachof contract and collection of monies, breach and foreclosure of collateral under all security agreements,breach and enforcement of personal guarantees, and fraud. (Docket No. 3). Westernbank now movesfor summary judgment on its claims for breach of contract and collection of monies against Inyx,Kachkar, and Benkovitch (Docket No. 223) and defendants opposed. (Docket No. 275). In particular,Westernbank seeks summary judgment on the following claims: (1) breach of contract and collectionof monies against Inyx (Count IV); (2) breach and enforcement of EU Guarantee against Inyx (CountV); (3) breach and foreclosure of collateral under all security agreements relating to the USA and EULoan Agreements against Inyx (Count VI); (4) breach and enforcement of the First Personal Guaranteeagainst Kachkar and Benkovitch (Count VII); and (5) breach and enforcement of the Second PersonalGuarantee against Kachkar and Benkovitch (Count VIII). (Docket No. 3). DISCUSSIONI. Standard of Review on Summary JudgmentSummary judgment is appropriate when “the pleadings, depositions, answers to interrogatories,and admissions on file, together with the affidavits, if any, show that there is no genuine issue as toany material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R. Civ.P. 56©. A fact is material only if it “might affect the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In determining if a material fact is“genuine,” the court does not weigh the facts but instead ascertains whether the “evidence is such that


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 11Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONa reasonable jury could return a verdict for the nonmoving party.” Id.; Leary v. Dalton, 58 F.3d 748,751 (1st Cir. 1995).“[A] party seeking summary judgment always bears the initial responsibility of informing thedistrict court of the basis for its motion, and identifying those portions of the [evidence] ... which itbelieves demonstrate the absence of a genuine issue of material fact.” Crawford-El v. Britton, 523U.S. 574, 600 n.22 (1998), quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once thisthreshold is met, the burden shifts to the nonmoving party. The nonmovant may not rest on mereconclusory allegations or wholesale denials. Fed. R. Civ. P. 56(e); Libertad v. Welch, 53 F.3d 428,435 (1st Cir. 1995). Instead, the nonmoving party must “set forth specific facts showing that there isa genuine issue for trial” and support such facts with “affidavits... made on personal knowledge ...set[ting] forth such facts as would be admissible in evidence.” Fed. R. Civ. P. 56(e). Further, the nonmovant “must do more than simply show that there is some metaphysical doubtas to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Of course, the court draws inferences and evaluates facts “in the light most favorable to the nonmovingparty.” Leary, 58 F.3d at 751. Still, summary judgment is appropriate where the nonmoving partyrests entirely upon “conclusory allegations, improbable inferences, and unsupported speculation” onany essential element of the claim. Medina-Muñoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1stCir. 1990).II. AnalysisA. Rule 56(f)Defendants invoke Federal Rule of Civil Procedure 56(f) to argue that this case is not ripe forsummary judgment. Fed. R. Civ. P. 56(f). Rule 56(f) provides that if a party opposing a motion forsummary judgment “shows by affidavit that, for specified reasons, it cannot present facts essential tojustify its opposition,” the court may deny the summary judgment motion, order a continuance to allowadditional discovery to be obtained, or exercise its discretion to issue any other order. Fed. R. Civ. P.56(f). Under that Rule, a party must elect between responding to the substantive arguments of a


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 12Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONsummary judgment motion or invoking Rule 56(f). Rodriguez-Cuervos v. Wal-Mart Stores, Inc., 181F.3d 15, 23 (1 Cir. 1999). “In other words, a party ordinarily may not attempt to meet a summarystjudgment challenge head-on but fall back on Rule 56(f) if its first effort is unsuccessful.” C.B.Trucking v. Waste Mgmt., 137 F.3d 41, 44 (1 Cir. 1998).stUnder First Circuit jurisprudence, Rule 56(f) requires that a litigant follow a specific set ofprocedures in order to claim that more discovery must be had before summary judgment is proper. Theparty seeking to invoke Rule 56(f) must submit to the court an affidavit showing (1) good cause forhis inability to have discovered the necessary facts earlier in the proceedings; (2) a plausible basis forbelieving that additional facts probably exist and can be retrieved within a reasonable time; and (3) anexplanation of how those facts, if collected, will suffice to defeat the pending summary judgmentmotion. Rivera-Torres v. Rey-Hernandez, 502 F.3d 7, 10 (1 Cir. 2007) (affirming district court’sstdenial of Rule 56(f) motion and grant of summary judgment). To this end, “[s]peculative conclusions,unanchored in facts, are not sufficient to ground a Rule 56(f) motion.” Id., 502 F.3d at 12. While acourt should “hold[] parties to the rule’s spirit rather than its letter,” Resolution Trust Corp. v. NorthBridge Assocs., 22 F.3d 1198, 1203 (1 Cir. 1994), a party “departs from the plain language of the rulestat his peril.” Paterson-Leitch Co. v. Massachusetts Municipal Wholesale Elec. Co., 840 F.2d 985, 988(1 Cir. 1988).st Here, defendants ignore both the spirit and the letter of Rule 56(f) “at [their] peril.” Id. First,defendants improperly invoke Rule 56(f) as a “fall back” position thirty-six pages into their otherwise-substantive opposition brief, which also incorporates multiple affidavits and exhibits in support of theirsubstantive arguments. See C.B. Trucking, 137 F.3d at 44. Next, defendants do not submit anaffidavit as required by the text of the rule and elaborated by First Circuit jurisprudence. Even if thearguments in their brief were considered a substitute for the affidavit, they do not address the requiredmatters. Defendants reference certain categories of documents which they claim Westernbank hasfailed to produce, and assert that they have not had access to certain of Inyx’s own business recordsbecause those documents are under the control of administrators in the U.K. administration


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 13Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONproceeding, the receiver in the Canadian-receivership proceeding, and the bankruptcy trustee in theU.S. bankruptcy proceeding. (Docket No. 275, p. 38). However, the rule does not ask a party tospecify missing documents, but to set forth a “plausible basis for believing that additional factsprobably exist.” Rivera-Torres, 502 F.3d at 10 (emphasis added). Defendants do not set forth anyadditional facts that they claim will be uncovered through additional discovery. Moreover, defendantsdo not offer any explanation of how any missing facts will “suffice to defeat the pending summaryjudgment motion.” Id. It is difficult to imagine how they could discover any additional facts thatwould support their central defense on this motion: even additional facts concerning the alleged OralForbearance Agreement would not defeat the no-oral-modification clause of the Loan Agreements (seesection II.B.4., infra), the Puerto Rico statute of frauds (see id., infra), or the no-reliance clause of thePersonal Guarantees (see section II.B.5., infra). Therefore, to the extent defendants’ arguments areconstrued as a motion for relief under Rule 56(f), their motion is denied. B. Breach of ContractWesternbank argues that summary judgment should be granted on its claim for breach ofcontract. Specifically, Westernbank argues that (1) the Inyx Borrowers entered into the LoanAgreements; (2) Kachkar and Benkovitch guaranteed the obligations of the Inyx Borrowers; (3)Westernbank advanced millions of dollars to the Inyx Borrowers under the Loan Agreements; (4) theInyx Borrowers defaulted on the obligations under the Loan Agreements and have failed to satisfy theLoans; and accordingly, (5) the Inyx Borrowers and Kachkar and Benkovitch (as guarantors) are liableto Westernbank for the outstanding obligations under the Loan Agreements. (Docket No. 223, p. 2). In response, defendants (1) dispute whether these events constituted “Events of Default” under theLoan Agreements, (2) contend that Westernbank waived certain violations of loan covenants, and (3)assert that Westernbank agreed to forebear on calling the loans. (See, e.g., Docket No. 275-2, ¶ 12,31, 52).


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 14Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATION1. Default Events Under the Loan AgreementsThe Loan Agreements provide that they are to be governed by Puerto Rico law. (Docket No.223-6, § 11.1(a); 223-9, § 11.1(a)). Puerto Rico law provides that contractual obligations have theforce of law between the contracting parties and where the obligations are not fulfilled, the prejudicedparty may seek performance of the obligation with interest. 31 L.P.R.A. §§ 2994, 3052. Where it isdetermined that a contract governs and its terms are clear and unambiguous, the court must enforcethe letter of the contract. Myers v. Benus Silva, 208 F. Supp. 2d 155, 160 (D.P.R. 2002).Westernbank alleges that certain conduct by Inyx resulted in breach of the Loan Agreements,and Inyx does not dispute that it engaged in such conduct. Because the facts are not in dispute, it isthe court’s duty to determine whether the conduct at issue constituted events of default under the LoanAgreements. Wright, Miller & Kane, Federal Practice and Procedure: Civil 3d §2725 (“when the onlyissues to be decided in the case are issues of law, summary judgment may be granted”). The eventsalleged to have breached the contract include: (1) the Inyx Borrowers’ failure to repay their obligationsunder the Loan Agreements; (2) diversion of accounts receivable payments away from the lock boxaccounts; (3) failure to maintain working capital, net worth, and cash flow levels as required by theLoan Agreements; and (4) material adverse changes the company’s businesses and assets as reflectedin draft balance sheet and income statements provided to Westernbank in June 2007. (Docket No.223-2, ¶ 52, 55). As noted, Inyx does not dispute that these events occurred, only whether that they“were in fact events of default under the Loan Agreements.” (Docket No. 275-2, ¶ 52). Under the USA Loan Agreement, “Events of Default” include, among many other provisions,the borrowers’ “fail[ure] to perform any of the terms, covenants, conditions or provisions containedin the Agreement”, “any representation, warranty or statement made by Borrower to Lender” which“when made or deemed made be false or misleading in any material respect,” and “a material adversechange in the business, assets or prospects of Borrower.” (Docket No. 223-2, ¶ 10). Among the termsand covenants of the Agreement is the Borrower’s obligation to “establish and maintain . . . blockedaccounts or lock boxes” and to “promptly deposit and direct their account debtors, to directly remit


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 15Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONpayments on Receivables, including Accounts and all payment constituting proceeds of Inventory,Equipment or other Collateral” into the lock box account. (Id., ¶ 4). The record on this motion makes clear that certain acts by the Inyx Borrowers indeedconstituted events of default under the Loan Agreements. There is ample evidence in the record –undisputed by defendants – that Inyx directed its customers to deposit funds into the company’saccount rather than into the lock box account, as required by the Loan Agreements. (Docket No. 223-2, ¶ 57; Docket No. 310-2, ¶ 3, 4, 9). There is also undisputed evidence that the Inyx Borrowerssubmitted false and fraudulent invoices and accounts receivable reports to Westernbank (Docket No.223-2, ¶ 58; Docket No. 310-2, ¶ 2, 7, 8), which were “false or misleading” representations and thusconstituted events of default under the Loan Agreements. (See Docket No. 223-2, ¶ 10). In addition to their failure to dispute these facts on this motion, there is ample evidence thatdefendants have on other occasions admitted to violating the Loan Agreements. Inyx asserted in aDecember 2006 SEC filing that “[a]s of September 30, 2006, the Company was in violation of certainfinancial covenants in connection with its Westernbank loan and security agreements.” (Docket No310-2, ¶ 12). Members of the Inyx Audit Committee discussed their growing awareness that Inyxexecutives had “misled” Westernbank through the diversion of funds from the lockbox account andfalse reporting of accounts receivable. (Docket No. 310-2, ¶ 9). Moreover, the Second PersonalGuarantee signed by Kachkar and Benkovitch acknowledged that “the Borrower is ‘out of formula’under the Loan Agreement and there is a substantial collateral deficiency thereunder” givingWesternbank the right “to make demand for immediate payment” of the loan obligations. (Docket No.223-2, ¶ 30). Defendants do not assert that the “substantial collateral deficiency” was ever corrected. Indeed, Inyx’s defenses on this motion focus only on whether Westernbank agreed to waive Inyx’sdefaults or otherwise forbear on calling the loans, and do not contest that the defaults occurred. Thus, based on undisputed evidence of events of default, Inyx’s own admissions of violatingthe Loan Agreements, and Inyx’s utter lack of a defense to those alleged defaults, the court concludesthat the Inyx Borrowers engaged in “Events of Default” as defined in the Loan Agreements. The


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 16Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONagreements provide that if an event of default occurred or existed, Westernbank had the right to“accelerate the payment of all Obligations and demand immediate payment thereof” as well as to“collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral.” (Docket No.223-6, § 10.2; 223-9, § 10.2). Accordingly, Westernbank made demand for amounts due under theLoan Agreements and that demand has not been fulfilled. (Docket No. 223-2, ¶53, 54, 55). 2. Breach of Personal Guarantees Westernbank also claims that Kachkar and Benkovitch defaulted on the Personal Guarantees. The Personal Guarantees contained clauses providing that the guaranteed obligations “becomeimmediately due and payable upon the Obligations becoming due under the Loan Agreement, whetherat maturity, by acceleration or otherwise.” (Docket No. 223-2, ¶ 26, 33). As discussed above (Sec.I.B.1, supra), the Inyx Borrowers’ obligations under the Loan Agreements were indeed “due andpayable” to Westernbank. This fact thus triggered the payment obligations under the PersonalGuarantees. Defendants do not dispute that they have not satisfied the obligations of the PersonalGuarantees. (Docket No. 223-2, ¶ 61). Thus, so long as the Loan Agreement obligations are due andowing, Kachkar and Benkovitch also owe the amounts promised in the Personal Guarantees.3. Waiver Defense Defendants argue that notwithstanding their default, they are not required to pay the loanobligations because Westernbank was aware of and agreed to waive the Inyx Borrowers’ defaultsunder the Loan Agreements. (Docket No. 275-2, ¶ 41-44). In support of their assertion thatWesternbank was aware of and agreed to waive their events of default under the Loan Agreements,defendants reference waiver letters issued by Westernbank. (Docket Nos. 223-20, 223-21, 223-22). However, each of these letters agreed only to waive “certain specific violations” and moreover, eachhad a limited temporal scope and agreed to waivers only for a certain period of time. In particular, thewaiver letters agreed to waive violations of requirements under the Loan Agreements relating toworking capital levels, cash flow levels, net worth levels, and Inyx’s provision of financial statementsto Westernbank. (Id.). The letters did not concern the diversion of funds from the lock box account


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 17Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONor the false invoices and accounts receivable reports. Each letter provided a waiver for a limited timeperiod – the latest in date granting a waiver through December 15, 2006 – and provided that the waiver“should not be construed or understood to be a waiver of our rights to declare any future default(s)”under the Loan Agreements. (Id.). Finally, each explicitly stated that the waiver letter did not “alteror amend any provisions” of the Loan Agreements, unless otherwise provided. (Id.).Under Puerto Rico law, when contractual terms are clear and unambiguous, a court mustenforce the letter of the agreement. Myers, 208 F. Supp. 2d at 160. Therefore, the waiver letterscannot be construed to have provided anything more than a limited waiver of certain financialcovenants through December 15, 2006, and cannot be viewed as extinguishing the current obligationsof the Inyx Borrowers.4. Alleged Oral Forbearance Agreement Defendants also argue that Westernbank orally agreed to forebear from calling the LoanAgreements. (Docket No. 275, p. 25). Confronted with the Loan Agreements’ no-oral-modificationclauses providing that the agreements and their terms may not be modified except in a writing signedby a Westernbank executive, defendants assert that Westernbank made a separate oral agreement towaive the no-oral-modification provision itself. (Id., p. 26).The record evidence for such promises is scant, at best, and consists only of testimony byInyx’s principal and attorney. (Docket No. 275-4, ¶ 23; 275-25, ¶ 10). Through the Kachkar andBarichello declarations, defendants assert that in a June 7, 2007 meeting among Inyx, Westernbank,and their respective counsel, “it was agreed that Westernbank would not call the Inyx loans.” (DocketNo. 275-4, ¶ 23; see also Docket No. 275-25, ¶ 10 (“Westernbank agreed not to call the Inyx loans”)). This evidence fails to identify the person who made the promise or the terms of the alleged promise. Defendants also state that in a smaller break-out session on the same day, “Mr. Stipes reiterated thatthe Bank would not foreclose if Kachkar and Benkovitch immediately pledged their Florida real estateassets and entered into personal guarantees to cover up the collateral shortfall.” (Docket No. 275-2,


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 18Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONp. 25, ¶ 36). While this assertion identifies the speaker and date more clearly, defendants still do notidentify the length of time for which Westernbank would agree to refrain from foreclosing. However, even assuming that Westernbank did make such a promise, under Puerto Rico lawand the Loan Agreements themselves, it would not have modified the parties’ Loan Agreements. TheLoan Agreements contain no-oral-modification clauses providing that “neither this Agreement nor anyprovision hereof shall be amended, modified, waived, or discharged orally or by course of conduct,but only by a written agreement signed by an authorized officer of [Westernbank].” (Docket No. 223-6, § 11.3; 223-9, § 11.3). In addition, in the Loan Agreements here, the no-oral-modification clauseextends to “any provision” of the agreement, and thus, by its terms, the no-oral-modification clauseitself may not be waived orally. Courts applying Puerto Rico law have enforced no-oral-modificationclauses, rejecting attempts to alter the terms of written contracts based on alleged oral agreements. 6See, e.g., Nike Int’l Ltd. v. Athletic Sales, Inc., 689 F.Supp. 1235, 1244 (D.P.R. 1988) (refusing toenforce alleged oral agreement where written contract provided that terms could be waived, changed,or otherwise modified only in writing); Freightliner, LLC v. Puerto Rico Truck Sales, 399 F.Supp.2d57, 74 (D.P.R. 2005) (same). Under Puerto Rico law, “[i]f the terms of a contract are clear and leaveno doubt as to the intentions of the contracting parties, the literal sense of its stipulations shall beobserved.” 31 L.P.R.A. § 3471. Defendants do not provide any authority to the contrary in supportof their assertion that Westernbank orally agreed to waive that provision and subsequently proceededto make an oral forbearance promise. In addition, even if the parties had agreed to allow oral modifications of the Loan Agreements,the alleged Oral Forbearance Agreement could not be enforced under the Puerto Rico statute of fraudsrule. The Puerto Rico statute of frauds rule precludes a party from proving the existence ofcommercial contracts over $300 based solely on testimonial evidence. 10 L.P.R.A. § 1302 (“Section1302”). Pursuant to this rule, this court has refused to enforce an alleged oral loan agreement where Defendants do not cite to any courts interpreting Puerto Rico law, and their attempt to rely on6cases interpreting the laws of California, Virginia, Illinois, and New York is without merit. (Docket No.275, p. 26-27).


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 19Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONthe plaintiff could not furnish any non-testimonial evidence that its counter-party, a bank, hadconsented to the alleged agreement. Garita Hotel Ltd. P’ship v. Ponce Federal Bank, F.S.B., 954 F.Supp. 438, 454 (D.P.R. 1996) (“this article [Section 1302] attempts to foster security in commercialtransactions by promoting the use of more formal instruments”), aff’d, 122 F.3d 88 (1 Cir. 1997). stHere, the alleged Oral Forbearance Agreement involved over one hundred million dollars, and thusundoubtedly falls into the category of commercial agreements which must be made in writing. Therefore, by the Loan Agreements’ own terms as well as Puerto Rico law, the alleged OralForbearance Agreement is unenforceable. 75. Defenses Concerning Personal GuaranteesDefendants also argue that the alleged Oral Forbearance Agreement fraudulently induced themto enter into the Personal Guarantees, and thus evidence of the forbearance agreement is admissiblefor the purpose of nullifying the Personal Guarantees. As defendants point out, under Puerto Rico law any contract where consent is obtained throughdeceit shall be void. 31 L.P.R.A. § 3404. Deceit may exist when, but for the “words or insidiousmachinations” of a counter-party, a party would not have been induced to execute a contract. 31L.P.R.A. § 3408. Nonetheless, deceit will only serve to nullify a contract where it is “serious” andused by only one of the contracting parties. 31 L.P.R.A. § 3409. Federal courts interpreting PuertoRico law have made clear that “[t]he applicable Puerto Rico contract law regarding fraud has a strongunderlying presumption in favor of good faith and honesty; the party alleging fraud has the burden ofpresenting evidence which is strong, clear, unchallengeable, convincing, and conclusive, since a merepreponderance of the evidence is not sufficient to establish the existence of fraud in Puerto Rico.” P.R.Elec. Power Auth. v. Action Refund, 515 F.3d 57, 66-67 (1 Cir. 2008) (internal citations omitted)st Defendants also argue that Florida law governs the alleged Oral Forbearance Agreement, but7this argument is unavailing because evidence concerning the alleged agreement must be interpreted as amodification of the Loan Agreements, which are clearly governed by Puerto Rico law. (See Docket Nos.223-6, p. 2 (agreement governed by Puerto Rico law); 223-8, p. 78 (same)). Thus, the court must turn toPuerto Rico law in order to determine whether the alleged forbearance agreement effectively modifies orwaives the Loan Agreements.


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 20Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATION(affirming district court’s grant of summary judgment upholding validity of contract over fraudclaims). On summary judgment, assertions of fraud may not meet this standard where they are“challenged vigorously” by the counter-party. Id.Here, defendants have put forth very little evidence, let alone evidence of the “strong, clear,unchallengeable, convincing, and conclusive” kind required by law. Defendants’ evidence, asdiscussed in section II.B.4, supra, consists of the testimonial evidence by Kachkar and Barichello tothe effect that Westernbank agreed not to call the Inyx loans in exchange for executing the PersonalGuarantees. As discussed below, this testimony fails to create a genuine issue of material fact that thePersonal Guarantees were fraudulently induced.First and foremost, defendants cannot prove that they relied on – that is, that they were inducedby – the alleged representation in the face of the Personal Guarantees’ “no-reliance” clauses, whichspecifically state that Westernbank “has not made any representations to any of the Guarantors . . . andGuarantors are not in any respect relying upon Lender or any statements by Lender in connection withthis Guarantee.” (Docket No. 223-2, ¶ 27, 34). See, e.g., Vigortone Ag Prods. v. AG Prods., 316 F.3d641, 645 (7th Cir. 2002) (“[s]ince reliance is an element of fraud, the [“no-reliance”] clause, if upheld– and why should it not be upheld, at least when the contract is between sophisticated commercialenterprises – precludes a fraud suit”). Moreover, in determining whether reliance is reasonable,“Puerto Rico law places little weight on a sophisticated and experienced business party’s assertion ofunknowing reliance.” P.R. Elec. Power Auth., 515 F.3d at 67. In that case, the First Circuit found thatreliance was unreasonable given the business sophistication of the parties, the fact that plaintiff’scounsel had reviewed the contract, and plaintiff decided not to add specific contractual termsaddressing the later-contested issues. Id. Here, Kachkar was a sophisticated and experiencedbusinessman who had his counsel present during the negotiation of the Personal Guarantees and chose8not to include contractual terms in the Personal Guarantees concerning the alleged Oral Forbearance (Docket No. 275-2, p. 22, ¶ 29; p. 25, ¶36).8


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 21Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONAgreement. The parties’ sophistication also persuades the court that the no-reliance clause itself9should be upheld.10Second, defendants’ claimed reliance on the alleged Oral Forbearance Agreement stands indirect contrast to the express forbearance language included in the terms of the Second PersonalGuarantee. The Second Personal Guarantee provides that Kachkar and Benkovitch “requested that[Westernbank], in its sole discretion, not at this time make immediate demand for payments . . . [andWesternbank] has agreed not to make such demand at this time in exchange for [Kachkar andBenkovitch] entering into this Guarantee” (Docket No. 223-2, ¶ 31), but in the very next sentence theGuarantee provided that the Guarantors “agree and acknowledge that [Westernbank] may, at any time,hereafter, in its sole discretion, make such demand and nothing contained herein shall be or shall bedeemed to be a waiver of [Westernbank’s] right to make such demand at any time in the future.” (Id.,¶ 32). Thus, while the Guarantee provided that Westernbank would not make demand for payments“at this time”, it expressly allowed that Westernbank could make such demand “at any time, hereafter”and “at any time in the future.” By these terms, the Second Personal Guarantee must contemplate thatany forbearance would be very brief in nature. In short, defendants’ claim that they were induced into11signing the Personal Guarantees by a promise of indefinite forbearance is belied by the specific The record does not indicate whether Benkovitch was equally “sophisticated,” but she was also9represented by counsel during the negotiation of the Personal Guarantees (see Docket No. 275-25, ¶ 3(attesting that Barichello was also counsel to Benkovitch)), and in any event, defendants have not madeany separate arguments pertaining to Benkovitch’s alleged reliance and the court thus treats theGuarantors collectively. Defendants refer to a statement by counsel for Westernbank that “an oral agreement is as good10as a written agreement under Puerto Rico law” (Docket No. 275-2, p. 25, ¶ 37), insinuating that theyrelied on the statement. However, even if such a statement was made, it defies credulity to allowdefendants to claim to have reasonably relied on the legal advice of opposing counsel in a sophisticated(not to mention adversarial) business transaction when their own counsel, Barichello, was present at thetime. (Id., p. 25, ¶ 36). By these terms, it appears that Westernbank would have been within its rights under the11Second Personal Guarantee to forebear the very next day. (Id., ¶ 32 (“[Westernbank] may, at any time,hereafter, in its sole discretion, make such demand and nothing contained herein shall be or shall bedeemed to be a waiver of [Westernbank’s] right to make such demand at any time in the future”)(emphasis added)).


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 22Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONlanguage in the Second Personal Guarantee that makes clear that the forbearance would be extremelylimited.This language, especially when viewed alongside the Second Personal Guarantee’s integrationclause, precludes defendants from relying on the alleged Oral Forbearance Agreement. (See DocketNo. 223-13, p. 6, ¶ 12 (“This Guarantee represents the entire agreement and understanding of [the]parties concerning the subject matter hereof, and supersedes all other prior agreements, understandings,negotiations and discussions, warranties, commitments, proposals, offers and contracts concerning thesubject matter hereof, whether oral or written”)). Pursuant to the integration clause, the SecondPersonal Guarantee’s limited forbearance language superseded the alleged Oral ForbearanceAgreement. In addition, the court may not consider the extrinsic evidence of the alleged OralAgreement because the terms of the Second Personal Guarantee are “‘clear and leave no doubt as tothe intentions of the contracting parties.’” P.R. Tel. Co. v. Advanced Cellular Sys., 483 F.3d 7, 13 (1stCir. 2007) (citing 31 L.P.R.A. § 3471). Therefore, the Second Personal Guarantee’s limitedforbearance language and integration clause preclude defendants from either relying on the allegedOral Forbearance Agreement or using its terms to modify the Second Personal Guarantee.Defendants also argue that the Personal Guarantees should fail for lack of consideration. Thisargument fails as both a matter of fact and law. By its own terms, the First Personal Guarantee recitesthat Kachkar and Benkovitch entered into it “[d]ue to the close business and financial relationshipsbetween Borrower [the Inyx Borrowers] and [the Guarantors, Kachkar and Benkovitch], inconsideration of the benefits which will accrue to Guarantors and as an inducement for and inconsideration of Lender [Westernbank] continuing to make and making loans and advances whichLender might otherwise not be obligated to make and providing other financial accommodations toBorrower [the Inyx Borrowers] pursuant to the Loan Agreements.” (Docket No. 223-11 (emphasisadded)). The Second Personal Guarantee provides similar language, noting that “Guarantorsacknowledge, represent and warrant to Lender that they will receive significant consideration andbenefits by entering into this Guarantee,” noting their “close . . . relationships” with the Inyx


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 23Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONBorrowers and Westernbank’s “agreement to forbear at this time from making demand for immediatepayment of all amounts due under the Loan Agreement” and the First Personal Guarantee. (DocketNo. 223-12 (emphasis added)). Given this explicit contractual language indicating the presence ofconsideration, as well as the consideration provided by Westernbank’s agreement to continueproviding financing and forbear from immediately demanding payment on the Loan Agreement,defendants’ argument that the agreement should fail for lack of consideration is unpersuasive. Defendants appear to suggest that insufficient consideration was provided becauseWesternbank only forebore on calling the loans for approximately nine days between the signing ofthe June 20, 2007 Second Personal Guarantee and the demand letters sent to the Inyx Borrowers onJune 29, 2007. However, it is a “general principle of contract law”, applicable under Puerto Rico law,that “courts will not inquire into the adequacy of consideration in an agreed-upon exchange, unless thatconsideration is so grossly inadequate as to shock the conscience of the court.” P. R. Elec. PowerAuth., 515 F.3d at 64. Given the facts in this case and the fast-paced, sophisticated businesstransactions at issue, it is easily conceivable that Kachkar and Benkovitch were willing to take a riskof providing additional guaranteed collateral to Westernbank in exchange for the Inyx Borrowershaving another week to try to find additional outside financing before defaulting on the loans. (See,e.g., Docket No. 275-2, p. 33, ¶ 79 (stating that June 28, 2007 commencement of administrationproceedings against Inyx UK subsidiaries “effectively prevent[ed] refinancing of the Inyx Loans”)). In any event, under Puerto Rico law, no consideration need be given for a guarantee to be enforceable. 31 L.P.R.A. § 4872 (“security may be . . . gratuitous”). Therefore, based on the contractual terms andPuerto Rico law, the Personal Guarantees are enforceable.III. Amount of Damages Westernbank claims that the total outstanding balance under the Loan Agreements owed byInyx is not less than $138,418,881.03, with interest accruing at a rate of $36,266.67 per diem. (DocketNos. 223-2, ¶ 65; 224). Defendants do not dispute that this amount is the total outstanding loanbalance, but claim that Westernbank may have already recouped some of this outstanding balance


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 24Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONthrough other judicial proceedings, including the administration proceedings ongoing in the UnitedKingdom concerning Inyx’s UK subsidiaries. (Docket No. 275-4, ¶ 56). However, defendants do notprovide any evidence that Westernbank will or has in fact received any funds through the U.K.proceeding or that those funds satisfy the loan obligations. There is a further issue as to the preciseamount due and owning, since Westernbank has not submitted an updated calculation of interest. Moreover, Westernbank has not provided more than testimonial evidence concerning the totaloutstanding balance under the Loan Agreements (Docket No. 223-3, ¶ 65), nor has it providedevidence in any form as to how that figure was derived. In the end, I believe that before judgment for a precise quantity of damages is entered on thebreach of contract claims, Westernbank should be required to provide admissible evidencedemonstrating the quantum of damages owed, including interest, and how that figure is derived. Theparties should also address with admissible evidence whether Westernbank has recouped any of theamount owed in other proceedings.As to the Personal Guarantees, the First Personal Guarantee provides a guarantee of allobligations of the Inyx Borrowers up to a limit of $30.1 million and the Second Personal Guaranteeprovides a similar guarantee up to a limit of $70 million, plus the amount that the repaymentobligations under the Loan Agreements exceed $142.4 million. (Docket Nos. 232-2, ¶ 25, 29). Because Westernbank does not claim that the repayment obligations exceed $142.4 million, Kachkarand Bankovitch are personally liable under the Personal Guarantees for $100.1 million. CONCLUSIONFor the reasons stated above, I recommend that Westernbank’s motion for summary judgmenton causes of action IV through VIII be GRANTED and that Westernbank be ordered to provideadditional admissible evidence demonstrating the precise quantum of damages owed, plus interest, andhow that figure is derived, and whether it has recouped any of this amount in other proceedings.Defendants then should be given a reasonable amount of time thereafter to submit any opposition.


Westernbank Puerto Rico v. Jack Kachkar, et al. Page 25Civil No. 07-1606 (ADC/BJM)REPORT AND RECOMMENDATIONThis report and recommendation is filed pursuant to 28 U.S.C. 636(b)(1)(B) and Rule 72(d)of the Local Rules of this Court. Any objections to the same must be specific and must be filed withthe Clerk of Court within ten (10) days of its receipt. Failure to file timely and specific objections tothe report and recommendation is a waiver of the right to appellate review. See Thomas v. Arn, 474U.S. 140, 155 (1985); Davet v. Maccorone, 973 F.2d 22, 30-31 (1 Cir. 1992); Paterson-Leitch Co.stv. Mass. Mun. Wholesale Elec. Co., 840 F.2d 985 (1 Cir. 1988); Borden v. Sec’y of Health & HumanstServs., 836 F.2d 4, 6 (1 Cir. 1987).stIT IS SO RECOMMENDED.In San Juan, Puerto Rico, on this 3 day of March, 2009.rd

S/Bruce J. McGiverinBRUCE J. MCGIVERINUnited States Magistrate Judge


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Case 3:07 Cv 01606 Adc Bjm