Krock v. Lipsay

• Decision Date: 23 September 1996
• Docket Number: D,1654,Nos. 1138,s. 1138
• Citation: 97 F.3d 640
• Parties: Richard H. KROCK; Frederick J. De Angelis; Karl E. Case; Robert D. McNally; Stephen J. Browne, as trustees of Wedgestone Financial, a Massachusetts business trust, Plaintiffs-Appellants Cross-Appellees, v. Alan W. LIPSAY; Norman E. Blankman; Rose Diamond; Helene Newman; David B. Pall; David Halperin; Arnold Rosenwasser; Sue Anne F. Emerson; Carola Duncan; Bernard Tannenbaum; Donald O. Stein; Carol Feuer; Ellen S. Buczko; Louis V. Greco, Jr.; CP Grecay Corp.; College Point Associates; Richard Ferrara; Earnest R. Field; Theodore J. Malvin and Joseph J. Blake and Associates, Inc., Defendants-Appellees, Peter R. Gray, Defendant-Appellee Cross-Appellant. ockets 95-7621, 95-7901.
• Court: U.S. Court of Appeals — Second Circuit

Page 640

97 F.3d 640

Richard H. KROCK; Frederick J. De Angelis; Karl E. Case Robert D. McNally; Stephen J. Browne, as trustees of Wedgestone Financial, a Massachusetts business trust Plaintiffs-Appellants Cross-Appellees, v. Alan W. LIPSAY; Norman E. Blankman; Rose Diamond; Helene Newman; David B. Pall; David Halperin; Arnold Rosenwasser; Sue Anne F. Emerson; Carola Duncan; Bernard Tannenbaum; Donald O. Stein; Carol Feuer; Ellen S Buczko; Louis V. Greco, Jr.; CP Grecay Corp.; College Point Associates; Richard Ferrara; Earnest R. Field Theodore J. Malvin and Joseph J. Blake and Associates, Inc., Defendants-Appellees, Peter R. Gray, Defendant-Appellee Cross-Appellant.

Nos. 1138, 1654, Dockets 95-7621, 95-7901.

United States Court of Appeals, Second Circuit.

Argued April 8, 1996.

Decided Sept. 23, 1996.

Stuart E. Abrams, Frankel & Abrams, New York City (Sandor Frankel, Al J. Daniel, Jr. on the brief), for appellants-cross-appellees Richard H. Krock, et al.

Sheldon M. Krupnick, Krupnick & Goldman, Garden City, NY, for appellees Alan W. Lipsay, et al.

Stewart D. Aaron, Dorsey & Whitney P.L.L.P., New York City, for appellees Rose Diamond, et al.

Luigi P. De Maio, Crocco & De Maio, P.C., New York City, for appellee Richard Ferrara and appellee-cross-appellant Peter R. Gray.

Before: KEARSE and ALTIMARI, Circuit Judges, and JOHNSON, ^* District Judge.

ALTIMARI, Circuit Judge:

Wedgestone Financial ("Wedgestone") appeals from a judgment of the United States District Court for the Southern District of New York (Weinstein, J.), after a jury trial, finding that 1) the defendants had not committed fraud when they acquired a loan from Wedgestone secured by property in New York, and 2) dismissing Wedgestone's equitable claims for constructive trust, unjust enrichment, and fraudulent conveyance. Wedgestone asserts that the district court erred generally in applying New York law to the controversy at hand and specifically in instructing the jury that Wedgestone's failure to investigate could vitiate the defendants' alleged fraud. Defendant Peter R. Gray ("Gray"), against whom the district court enforced a $4.3 million personal guarantee, cross-appeals, asserting that because Wedgestone failed to commence the district court proceeding within ninety days of delivery of the deed on the New York property securing the loan, it was barred by § 1371 of New York's Real Property Actions and Proceedings Law ("RPAPL") from seeking any deficiency judgment in federal court. We hold that, even if the district court erred in applying New York law, we find that any error was harmless and affirm the judgment below. Moreover, although RPAPL § 1371 may serve as a bar to future deficiency judgments, Wedgestone had received express permission to bring the present action in a prior state court judgment against, among others, cross-appellant Gray. Because Gray did not appeal that state court judgment, Wedgestone was clearly justified in bringing this action. Accordingly, we affirm the deficiency judgment against Gray as well.

BACKGROUND

Wedgestone is a business trust organized under the laws of Massachusetts, with its principal place of business in Massachusetts. Wedgestone's business involves making short-term commercial loans, secured by real estate. As a result of the short-term, speculative nature of Wedgestone's loans, Wedgestone 1) charges high interest rates, 2) collects the interest on the loans up front, and 3) secures all its loans with real estate and personal guarantees. According to Wedgestone, it is not in a position to rely on the long-term success of the borrower in order to ensure repayment; consequently, the value of the real estate securing the loan is of particular importance when determining the viability of such loans.

In early December of 1987, Wedgestone was solicited for a loan from Sonnenblick-Goldman Corp., a well-known mortgage broker. The solicitation was for an $8 million loan for the College Point Associates ("CPA"), ¹ a New York partnership, to be secured by undeveloped property located in the College Point section of Queens. In the Sonnenblick-Goldman brochure soliciting the loan, the undeveloped property was described as 42 acres of waterfront property. The brochure represented that the loan was sought for the proposed development of a 220 unit waterfront condominium complex, a 98 room hotel and restaurant, and a 350 slip marina. According to the brochure, the land could be developed "as-of-right."

Accompanying the brochure was an appraisal of the property by Joseph J. Blake & Associates, stating that the property was 42 acres and could be "constructed as of right." The Blake appraisal, which indicated that it had been prepared expressly for CPA, concluded that the property had a value of $16.4 million. In addition to the Blake appraisal, Wedgestone hired an independent evaluator to determine the value of the property. Because the CPA property was abutted by vacant parcels of land, Wedgestone's evaluator was unable to independently determine the acreage of the property. Thus, the evaluator relied upon the acreage information provided in the brochure and valued the property at approximately $11 million.

Believing the property to consist of 42 acres and believing no further permits were required to develop the land, Wedgestone approved a loan for $6.3 million in mid-December of 1987. The loan was to be secured by the waterfront property and by personal guarantees for $4.3 million each from Louis Greco ("Greco") and Peter Gray. Upon approval of the loan, Wedgestone referred the closing to the Boston law firm of Goodwin, Proctor & Hoar ("Goodwin").

At Goodwin, a corporate attorney undertook to acquire the titles, appraisals, and other documents necessary for the closing. On December 21, 1987, Gray traced the metes and bounds of the property with Wedgestone's counsel. While the attorney noted that more of the property was underwater than had been previously represented, she did not bother to calculate the actual acreage of the parcel of land. Nor did she carefully examine the closing documents which included, among other things, title reports and other papers indicating that the land was subject to significant restrictions on development. Specifically, the closing binder contained a consent order that stated, "CPA shall not undertake, nor consent to, any development.... on any portion of the subject property located within the jurisdiction of [the Department of Environmental Conservation ("DEC") ] unless DEC has been notified of and consented to such development." The title to the property also required that development meet with the prior approval of the Board of Estimates and with the discretionary approval of the New York City Planning Commission. Despite these obvious zoning restrictions, the transaction went forward.

On December 24, 1987, the transaction closed in New York City. The mortgage document executed by Greco and Gray contained the following choice-of-law provision:

This mortgage shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, except and only to the extent of procedural matters related to the perfection and enforcement by Mortgagee of its rights and remedies against the Property which matters shall be governed by the laws of the state in which the Property is located.

Upon receiving the loan, Blankman and Lipsay bought out the remaining partners and became the sole partners of CPA along with Grecay, which was owned by Greco and Gray.

On June 22, 1988, when the loan became due, CPA defaulted. Accordingly, Wedgestone commenced a foreclosure action in New York Supreme Court, Queens County against all of the original CPA partners (the "CPA partners") except the Diamond defendants. Upon foreclosing, Wedgestone discovered that the CPA property only consisted of 21 acres and was subject to serious restrictions on development. As a result of the size and zoning restrictions, the property was only worth $1.6 million (according to a later valuation by Magistrate Judge Ross) and not the $16.4 million as appraised by Blake & Associates, nor the $11 million as appraised by Wedgestone's evaluator. The New York Supreme Court authorized foreclosure and in its final judgment included the following language:

pursuant to RPAPL § 1301, and in lieu of the normal deficiency judgment procedures provided in RPAPL § 1371, Wedgestone is hereby given permission to maintain a separate action to recover any deficiency remaining, if the proceeds of the sale are insufficient to pay the amount due Wedgestone together with all the interest and costs as aforesaid, against any of the defendants or any other person or persons.

None of the parties to the New York State foreclosure action appealed the final judgment. The property was subsequently sold to Wedgestone for $500,000. Accordingly, Wedgestone brought this federal action for fraud, constructive trust, unjust enrichment, and fraudulent conveyance, and to enforce the personal guarantees against Greco and Gray.

Wedgestone's fraud claim was tried to a jury. At trial, Wedgestone argued that the misrepresentations concerning the acreage and zoning of the land were fraudulent. The CPA partners' principal defense was that Wedgestone and its lawyers were negligent in failing to detect the misstatements on their own. The district court determined that New York law applied and instructed the jury that:

One to whom an alleged false representation is made may not rely on that representation if he had reason to know it was false. Specifically, if the plaintiff has the means available to it of knowing by the exercise of ordinary intelligence or the usual effort in its line of business, the truth of the representations, you should consider whether plaintiff should have made reasonable use of those means. If the plaintiff does not make reasonable use of those means, it cannot recover on the basis that it was induced to...