828 F.2d 686 (11th Cir. 1987), 86-5324, Citibank, N.A. v. Data Lease Financial Corp.

Docket Nº:86-5324.
Citation:828 F.2d 686
Party Name:RICO Bus.Disp.Guide 6768, CITIBANK, N.A., Plaintiff-Counterclaim Defendant, Third-Party Defendant- Appellee, v. DATA LEASE FINANCIAL CORPORATION, Defendant-Counterclaim Plaintiff, Third Party Plaintiff-Appellant, v. Joseph STEFAN, Truman A. Skinner, R. Dale Melching, William A. Krusen, Robert M. Marlin, Andrew Machata, Edward G. Grafton, MGIC Indem
Case Date:September 28, 1987
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit

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828 F.2d 686 (11th Cir. 1987)

RICO Bus.Disp.Guide 6768,

CITIBANK, N.A., Plaintiff-Counterclaim Defendant,

Third-Party Defendant- Appellee,



Plaintiff, Third Party Plaintiff-Appellant,


Joseph STEFAN, Truman A. Skinner, R. Dale Melching, William

A. Krusen, Robert M. Marlin, Andrew Machata,

Edward G. Grafton, MGIC Indemnity

Corporation, Third-Party


No. 86-5324.

United States Court of Appeals, Eleventh Circuit

September 28, 1987

Rehearings and Rehearings En Banc Denied Nov. 3, 1987.

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[Copyrighted Material Omitted]

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Robert M. Sondak, Paul, Landy, Beiley & Harper, P.A., Miami, Fla., Larry Klein, Klein & Beranek, West Palm Beach, Fla., for Data Lease Financial Corp.

Marc Cooper, Cooper, Wolfe & Bolotin, Karen A. Gievers, Anderson, Moss, Russo, Gievers & Cohen, Miami, Fla., Joseph Stefan.

Joel S. Perwin, Podhurst, Orseck, Parks, Josefsberg, Eaton, Meadow & Olin, Miami, Fla., for Robert Marlin.

John H. Schulte, Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, Miami, Fla., for Citibank, N.A.

R. Thomas Farrar, Holland & Knight, Miami, Fla., for Joseph Stefan, Truman Skinner, R. Dale Melching, William Krusen, Robert Marlin, Edward Grafton, Andrew Machata and MGIC Indem. Corp.

Glenn J. Waldman, Sparber, Shevin, Shapo, Heilbronner & Book, Miami, Fla., for First American Bank & Trust.

Appeal from the United States District Court for the Southern District of Florida.

Before RONEY, Chief Judge, VANCE, Circuit Judge, and PITTMAN [*], Senior District Judge.

VANCE, Circuit Judge:

This case concerns a loan of more than $6.2 million that Data Lease Financial Corporation ("Data Lease") received from Citibank, N.A. ("Citibank"). When Data Lease could not repay this loan, Citibank commenced this action seeking judicial sale and a deficiency judgment. Data Lease asserted affirmative defenses, counterclaims and third party claims based on the alleged mismanagement of the pledged assets. This appeal is from the lower court's entry

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of summary judgment in favor of Citibank on all claims and counterclaims.

I. Statement of Facts

On April 12, 1973, Citibank loaned $6.2 million to Data Lease. The collateral securing this loan included 870,000 shares--80.2%--of the capital stock of Miami National Bank ("Miami National"). 1 The pledge agreement expressly provided that, upon any default by Data Lease, Citibank had the absolute and exclusive right to vote the pledged shares of Miami National. Between April, 1973 and May, 1974, Data Lease borrowed an additional $670,000 from Citibank. Data Lease defaulted on these obligations by failing to make installment payments due July 12, 1974, and subsequently remained in default.

In October, 1974, the Supreme Court of Florida ruled that a third entity, Blackhawk Heating & Plumbing Company, Inc. ("Blackhawk"), had properly exercised an option to purchase 217,500 shares of the Miami National stock owned by Data Lease and pledged to Citibank. Blackhawk Heating & Plumbing Co. v. Data Lease Fin. Corp., 302 So.2d 404 (Fla.1974). The Florida Supreme Court reinstated an injunction restraining Data Lease from conveying any of the 870,000 shares of Miami National stock. Blackhawk Heating & Plumbing Co. v. Data Lease Fin. Corp., 328 So.2d 825, 826 (Fla.1975). As a result of these rulings, it was impossible to sell the pledged stock without first reaching some accommodation with Blackhawk.

In early 1975, bank regulators called into question Miami National's financial soundness and the competence of its management. The Regional Administrator of National Banks notified Miami National's board of directors that he was "shocked and alarmed" at the financial condition of the bank and that "the future well-being of [Miami National] appear[ed] questionable." The Miami National board of directors decided that the chairman of the board, Roy Talmo, could no longer participate in the bank's management. Talmo was also the chairman of Data Lease.

On May 16, 1975, five Miami National directors, including Talmo, resigned from the board pursuant to an agreement ("the turnover agreement") embodied in a memorandum of understanding signed by Citibank. Eight other directors, all elected by Data Lease prior to May, 1975, remained on the board. The remaining board members selected third party defendants Joseph Stefan and Truman Skinner to fill vacancies created by the resignations and elected Stefan as president and chairman of the board. Beginning in 1976, Citibank exercised its right under the pledge agreement to vote the Miami National stock it held as collateral. Citibank utilized these rights to reduce the number of directors from eleven to six and then voted the pledged shares to elect the entire board.

In December, 1978, Citibank finally settled Blackhawk's claim and, having received no payment from Data Lease, brought this foreclosure action in the district court. On February 29, 1979, the court ordered an emergency judicial sale of the pledged Miami National stock. This sale was held on February 7, 1979, and Citibank purchased the stock for $3 million. 2

Following the sale, the parties filed numerous pleadings and motions. Data Lease alleged twelve affirmative defenses to foreclosure. These defenses were premised upon the 1975 turnover agreement and Citibank's control of the individuals installed on the Miami National board of directors. Data Lease alleged that these individuals brought about a dramatic decline in the value of Miami National stock through their mismanagement.

Data Lease also named these individuals as third party defendants in its counterclaim. 3

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3] Count I of the counterclaim alleged conversion of the pledged stock. Specifically, Data Lease claimed that Citibank and the third party defendants misused the pledged property and denied Data Lease access to information concerning their mismanagement. Count II alleged that Citibank fraudulently induced Data Lease to enter the 1975 turnover agreement. Count III alleged that the pledge agreement and the turnover agreement established a bailment relationship between Citibank and Data Lease and further alleged that Citibank and the third party defendants negligently breached their duties with regard to the bailed property.

Counts IV and V were grounded in the Uniform Commercial Code ("U.C.C.") and only stated claims against Citibank. Data Lease alleged that Citibank failed to use reasonable care in the custody and preservation of the pledged Miami National stock, in violation of Fla.Stat. Secs. 679.501-.507 and Sec. 671.203.

On June 27, 1985, Data Lease amended its counterclaim to add three additional counts. Counts VI and VII alleged that Citibank and third party defendant Stefan had violated the federal RICO statute, 18 U.S.C. Secs. 1961-68 and the Florida RICO statute, Fla.Stat. Secs. 895.01-.09. 4

On January 8, 1986, the district court entered an order granting partial summary judgment to Citibank and the third party defendants on three threshold issues. First, the district court ruled that Data Lease could not hold Citibank vicariously liable for the actions of the third party defendants because the Miami National directors were not in an agency relationship with Citibank. The court also determined that Data Lease had no cause of action against the Miami National directors themselves because such claims could only be brought in a stockholder derivative suit and Data Lease no longer owned Miami National stock. Finally, the district court held that the 1975 turnover agreement was unenforceable and could not be interposed as a defense against foreclosure.

In addition to deciding these three threshold issues, the district court held that a five year statute of limitations barred Counts VI and VII, Data Lease's RICO claims.

Beginning in February, 1986, the district court entered a series of orders that effectively eliminated the remainder of Data Lease's counterclaims and affirmative defenses. The court granted summary judgment in favor of Citibank on the claims for conversion and negligent bailment, Counts I and III, because its threshold rulings eliminated the Miami National directors as defendants and foreclosed the possibility that Citibank might be liable for the actions of these individuals. In addition, the district court granted summary judgment on the fraud claim, Count II. While noting that Citibank, as pledgee of the Miami National stock, had a duty to physically preserve the stock certificates, the court held that Citibank had no duty to preserve their underlying value. Therefore the court granted summary judgment on the U.C.C. claims, Counts IV and V. The district court similarly rejected the corresponding affirmative defenses, and, on April 9, 1986, the court entered a final judgment of foreclosure for the principal sum of $7,182,373.65 and interest in the amount of $11,182,241.83. We reverse on all counts.

II. The Conversion and Negligent Bailment Claims Against

Citibank and the Third Party Defendants

Data Lease alleges that Citibank installed individuals on the Miami National board

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of directors who interfered with Data Lease's rights in the pledged stock and misused the bank to the point where its resulting deterioration in value amounted to conversion. Data Lease also claims that this mismanagement breached the common law duties a bailee owes a bailor with respect to bailed property. The district court did not reach the merits of these claims. 5 Rather, the court made two threshold rulings that left Data Lease without anyone to sue.

First, the court held that Citibank was not liable for the wrongful...

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