999 F.2d 791 (4th Cir. 1993), 92-2241, Mellon Bank, N.A. v. Ternisky

Docket Nº:92-2241.
Citation:999 F.2d 791
Party Name:MELLON BANK, N.A., Indenture Trustee, Plaintiff-Appellee, v. Michael J. TERNISKY, Defendant-Appellant.
Case Date:July 27, 1993
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit

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999 F.2d 791 (4th Cir. 1993)

MELLON BANK, N.A., Indenture Trustee, Plaintiff-Appellee,


Michael J. TERNISKY, Defendant-Appellant.

No. 92-2241.

United States Court of Appeals, Fourth Circuit

July 27, 1993

Argued March 31, 1993.

Amended by Order Filed Aug. 4, 1993.

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Donald F. Mintmire, Mintmire, Alagia, Day, Trautwein & Smith, Palm Beach, FL, argued (Vanessa M. Moore, on brief), for defendant-appellant.

Ira Steven Lefton, Reed, Smith, Shaw & McClay, Philadelphia, PA, argued (Henry F. Reichner, Reed, Smith, Shaw & McClay, Philadelphia, PA, Thomas P. Murphy, Reed, Smith, Shaw & McClay, McLean, VA, on brief), for plaintiff-appellee.

Before PHILLIPS and WILKINSON, Circuit Judges, and SPROUSE, Senior Circuit Judge.


SPROUSE, Senior Circuit Judge:

Mellon Bank, serving as an indenture trustee, brought this action to collect on a mortgage note executed by Michael Ternisky in connection with his purchase of a condominium at a ski resort. Ternisky contended that collection of the note was barred because the condominium salesmen had defrauded him. Before Mellon filed this action, Ternisky sued Mellon for fraud in federal district court in Pennsylvania; that court granted Mellon summary judgment on statute of limitations grounds. Bhatla v. Resort Dev. Corp., 720 F.Supp. 501 (W.D.Pa.1989), appeal dismissed, 990 F.2d 780 (3d Cir.1993). In the present action, Mellon moved for summary judgment on the alternative grounds that it held Ternisky's note in due course or

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that res judicata barred Ternisky's fraud defense. The district court denied summary judgment on the former basis, but granted it on the res judicata ground. The issues on appeal are (1) whether Mellon's collection claim is barred for failure to assert it in Bhatla as a compulsory counterclaim under Federal Rule of Civil Procedure 13(a); (2) whether res judicata bars Ternisky's fraud defense; and (3) whether Mellon holds the note in due course. We conclude that Rule 13(a) does not bar Mellon's claim. We further conclude that res judicata does not bar Ternisky's fraud defense because the Third Circuit Court of Appeals has now held that the judgment in Bhatla was not final. We affirm, however, because we find that Mellon is a holder in due course and was entitled to summary judgment on that basis.


Ternisky was among several purchasers of condominium units at a ski resort in western Pennsylvania in 1982 and 1983. The developer, Resort Development Corporation ("Resort"), had planned to build the condominium complex, Blue Knob Ski and Country Club ("Blue Knob"), in four phases. Phase I was to consist of 96 one- and two-bedroom units; Phase II was to consist of 54 two-bedroom units. Part of the attraction of the four-phase development was that condominiums built in Phases II-IV would exceed the price of the Phase I condominiums, ensuring purchasers of the latter greater resale value and greater rental activity. Ternisky claims that certain Blue Knob salesmen assured him Phase II would take place.

In June 1982, Ternisky signed a sales contract for a Phase I condominium with Resort's parent company, U.S. Capital Corporation, and made out a check for the down payment. He admits reading the sales contract, which stated: "Purchaser warrants and agrees that no representations regarding tax advantage, investment potential, rental income potential, or economic benefit have been made by seller or any representative thereof and that this purchase is not based on any such representations." He also admits receiving the Initial Public Offering Statement, dated November 25, 1981, which provided that Phase II "Need Not Be Built." 1

In the summer of 1982, Mellon, the appellee here, agreed to provide the construction financing for Phase I. It provided Resort with a commitment letter dated August 12, 1982, requiring Resort to give Mellon a mortgage on the Phase I property and an assignment of all the sales contracts. The letter also required Resort: (1) to deliver to Mellon for its approval on the closing date the complete plans and specifications for the "Improvements" (defined as the buildings, furnishings, equipment, and incidental improvements, but excluding the condominium units); (2) to give Mellon control over any funds from the sales contracts; and (3) to deliver the sales contracts for Mellon to hold in escrow. Mellon had the right to approve any changes in the Improvements, and was required to begin its funding only when it had control over contracts for sixty units.

On February 1, 1983, Ternisky closed on the purchase of his condominium. He executed the note at issue, a $65,600 mortgage note, in favor of Resort. The note required monthly payments through February 1, 2013.

On March 1, 1983, Ternisky made the first payment on his note. Two days later, he learned that Resort had dropped its plans to develop Phase II as originally designed. Instead, it planned to build 72 efficiencies known as Blue Knob Ski & Country Club Resort Conference Center. Because the efficiencies were priced lower than the Phase I condominiums, Ternisky contends that Resort's change of plans greatly reduced the value and rental potential of his condominium. On July 1, 1983, pursuant to an indenture trust that named Mellon as the trustee, Resort transferred the mortgage notes, including Ternisky's, to Mellon via an intermediary. On December 1, 1986, Ternisky stopped making payments on his note.

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  1. The Bhatla Action

    On December 5, 1986, Monmohan Bhatla, Ternisky, and several other Blue Knob condominium purchasers filed an action in federal court in Pennsylvania against: (1) Mellon and several of its subsidiaries ("Mellon"); (2) U.S. Capital...

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