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In the latest legal wrangle over United Parcel Service’s purchase of Challenge Air Cargo’s assets, the cargo airline’s successor company is claiming in federal court in Miami that UPS failed to cover litigation expenses inherited in the purchase. When the Delaware-based package delivery giant purchased virtually all of Challenge’s assets in a $90 million deal in 1999, the Miami-based cargo airline faced a number of pending lawsuits. The purchase agreement between Challenge and UPS specified that UPS would cover the first $200,000 in certain types of liabilities. Disagreements over the settlement of claims would be decided by the American Arbitration Association. But after two years of arbitration, neither company has accepted responsibility for an $821,106 settlement awarded by a Costa Rican court to Challenge’s former Costa Rican distributor, Carga Aerea, in a breach of contract suit. UPS settled the case on behalf of Challenge after buying the company. In addition, neither side has accepted the legal bills for a continuing employment suit filed in a Costa Rican court by Challenge pilots who were not rehired after UPS acquired the company’s assets. Challenge was the largest air cargo carrier in Latin America at the time of the purchase. After selling its assets to UPS, Challenge continued operating as a cargo airline, but on June 7, 2001, changed its name to Centurion Air Cargo. In July 2004, a federal judge in Miami ruled that Challenge was not at fault in UPS’s failure to rehire the pilots. In its latest lawsuit, filed in U.S. District Court in Miami last month, Centurion alleges that UPS was contractually obligated to pay the litigation and arbitration costs associated with the case and that UPS has confirmed that it does not intend to pay. Centurion is seeking punitive damages against UPS. That suit alleges that the parcel carrier improperly converted its funds to pay for the Costa Rican settlement. It also alleges that UPS wrongfully refused to pay for the pilots’ litigation despite an arbitrator’s award in favor of Centurion. UPS was expected to file its response to the lawsuit Friday. UPS is represented by the Miami office of Holland & Knight. In response to requests for comment, UPS issued a statement saying that to date, the U.S. District Court’s decisions in its disputes with Centurion have favored UPS, but that since the matter was pending “it would be inappropriate to comment further.” Centurion is represented by shareholder Joseph Fleming of Miami-based Greenberg Traurig. He declined comment. The U.S. District Court has granted a UPS motion to transfer the latest case from Judge Paul C. Huck to Senior Judge William M. Hoeveler. UPS also has filed a motion to consolidate the new case with previous filings by Centurion, claiming that the new suit’s claims duplicate those in previous court actions. UPS said the motion to transfer and consolidate was an effort to get the case before a judge already familiar with the case. Earlier this month, Centurion filed a motion accepting the transfer and requesting that the case be consolidated with a pending case between the two companies in Judge Hoeveler’s court. Centurion and UPS have a total of four suits against each other filed in the Southern District of Florida, all of which address outstanding lawsuits against Challenge. Two of the cases are on appeal before the 11th U.S. Circuit Court of Appeals. WHO’S ON THE HOOK? In the Carga Aerea matter, the breach of contract claim against Centurion in Costa Rica alleges that the cargo airline had terminated its contract with Carga Aerea unilaterally. A breach of contract claim based on a unilateral termination is more likely to prevail in the Costa Rican courts than in U.S. courts, according to Centurion’s lawsuit. Centurion alleges that UPS settled the case in January 2002 on its behalf in Costa Rica, disbursed a bond to cover the $821,000 settlement, then wrongfully offset a payment to Centurion for the full amount of the settlement — despite the $200,000 indemnity agreement. In its new suit, Centurion claims that “it was understood that UPS would be responsible for payment of the first $200,000 incurred in the Carga Aerea litigation.” But UPS denies any responsibility for the Carga Aerea litigation. It claims in court filings that Centurion had an express obligation under the purchasing agreement to indemnify UPS against all liabilities arising out of the Costa Rican litigation. In that Carga Aerea lawsuit, in April 2001, a Costa Rican court entered a judgment against Challenge but did not determine damages. Centurion claims that after the Costa Rican court determined liability, attorneys for Carga Aerea advised it that they did not intend to move forward in the case since any final judgment would have to go through Florida courts, where the Costa Rican case was weaker. But after the judgment, Carga Aerea won a court order in Costa Rica attaching assets valued at $72,918 that UPS had purchased from Challenge. Carga Aerea also began seeking a court order to garnish UPS’s revenue in Costa Rica for the remainder of the settlement amount. In its new lawsuit in Miami, Centurion claims Carga Aerea’s maneuver was a ploy to take advantage of UPS’s newness in the Costa Rican market. “Although Carga Aerea had reason to know that it was unlikely to ultimately prevail in its embargo … against UPS, it gambled on the fact that UPS would seek to protect its reputation and good name in a new market,” Centurion claims in the lawsuit. A Costa Rican court later found that Carga Aerea acted in bad faith when it placed a lien on UPS’s assets. But the court declined to dissolve the lien. The threat of garnishment led UPS to file an emergency motion with the arbitration court for immediate relief. It sought an order from an arbitration court to post a bond for the settlement amount rather than negotiate the liability before an arbitrator — which was the method for determining liability specified in its purchase agreement with Challenge. After a hearing on the matter in 2002, an arbitrator in Miami entered an order for Centurion to post a bond with the Costa Rican court in the amount of $821,106. Centurion, however, did not post the bond, and instead filed a petition to vacate the bond order. To avoid a garnishment order and to dissolve the lien on its property, UPS withheld $821,106 from its monthly payment to Centurion, then used the money to post the court-ordered bond in Costa Rica. That setoff of funds sparked legal action by both sides. In the summer of 2002, Centurion filed a lawsuit against UPS in federal court in Miami seeking to have the court order for a bond vacated; UPS filed a motion to confirm the arbitrator’s award. Both court actions are pending.

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