Bank of America Nat. Trust v. HOTEL RITTENHOUSE, ETC.

• Decision Date: 09 October 1984
• Docket Number: Civ. A. No. 83-2809.
• Parties: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION v. HOTEL RITTENHOUSE ASSOCIATES, et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

595 F. Supp. 800

BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION v. HOTEL RITTENHOUSE ASSOCIATES, et al.

Civ. A. No. 83-2809.

United States District Court, E.D. Pennsylvania.

October 9, 1984.

Gregory M. Harvey, Thomas G. Wilkinson, Jr., Philadelphia, Pa., for plaintiff.

Charles V. Stoelker, Jr., Philadelphia, Pa., for the Partnership.

Harold E. Kohn, Philadelphia, Pa., for the Wolgins.

MEMORANDUM

RAYMOND J. BRODERICK, District Judge.

In this action the Bank of America (the Bank) seeks to foreclose a mortgage on real estate located in the Rittenhouse square area of Philadelphia, known as the Hotel Rittenhouse Project, to recover on a promissory note and mortgage against Hotel Rittenhouse Associates (HRA), Jack L. Wolgin and Jack L. Wolgin Associates, general partners of HRA, and to recover against Jack L. Wolgin and Muriel Wolgin on a guarantee. The note, mortgage and guarantee were executed in connection with a construction loan for the Hotel Rittenhouse, a hotel-apartment-condominium project. The defendants have counterclaimed on a variety of grounds. The Bank has moved for summary judgment on these counterclaims which allege violations of the Bank Holding Company Act (Count VII), the federal securities laws (Count IX), and the Equal Credit Opportunity Act (Count XII). The Bank also requests partial summary judgment on Count VIII, which alleges a violation of the Racketeer Influenced and Corrupt Organizations Act.

For the reasons discussed below, the Bank's motion for summary judgment on Counts VII, IX, and XII will be granted and partial summary judgment will be granted on Count VIII.

A trial court may enter summary judgment if, after a review of all the evidentiary material in the record in a light most favorable to the party opposing the motion, there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law. Hollinger v. Wagner Mining Equipment Co., 667 F.2d 402, 405 (3d Cir.1981). Where no reasonable resolution of the conflicting evidence and inferences therefrom could result in a judgment for the non-moving party, the moving party is entitled to summary judgment. Tose v. First Pennsylvania Bank, N.A., 648 F.2d 879, 833 (3d Cir.), cert. denied, 454 U.S. 893, 102 S.Ct. 390, 70 L.Ed.2d 208 (1981).

The Bank Holding Company Act

In Count VII of their counterclaim, defendants assert that the Bank's engagement of an accounting firm at HRA's expense to perform an overpriced, incompetent audit of HRA's accounts for an improper purpose constituted an unusual banking practice and an illegal tying arrangement in violation of section 106(b) of the Bank Holding Company Act (BHCA), 12 U.S.C. § 1972 (1980). Section 1972 provides in relevant part:

A bank shall not in any manner extend credit ... on the condition ... that the customer shall ...

(A) obtain some additional credit, property, or service from such bank other than a loan, discount, deposit, or trust service ... or (c) provide some additional credit, property, or service to such bank, other than those usually provided in connection with a loan ....

Id. Sections 1975 and 1976 authorize a private cause of action for treble damages and/or injunctive relief based on Section 1972. 12 U.S.C. §§ 1975-76 (1980).

The Third Circuit has explained that section 1972 does not prohibit all attempts by banks to use their economic power to protect their investments. Tose v. First Pennsylvania Bank, N.A., supra. Section 1972 prohibits only those "`anticompetitive practices which require bank customers to accept or provide some other service or product or refrain from dealing with other parties in order to obtain the bank product or service they desire.'" Id., (quoting S.Rep. No. 1084, 91st Cong., 2d Sess. 17, reprinted in 1970 U.S.Code Cong. & Ad. News, 5519, 5535). Merely establishing that a particular method of protecting against default is not commonly used is not sufficient to establish a violation of section 1972:

Unless the "unusual" banking practice is shown to be an anticompetitive tying arrangement which benefits the bank, it does not fall within the scope of the Act's prohibitions .... where there is no evidence that the bank would benefit in any way other than by getting additional protection for its investment, that is not a tying arrangement.

Parsons Steel v. First Alabama Bank of Montgomery, 679 F.2d 242, 245-46 (11th Cir.1982) (bank's conditioning extension of credit on corporation's acceptance of a new manager, who would have the option of acquiring majority interest, not a violation of § 1972).

In this case, the Bank and HRA executed a construction loan agreement which required HRA to "permit Bank's employees or agents at any reasonable time ... to examine or audit HRA's books, accounts, and records . . . ." Amended Complaint, Exhibit B, ¶¶ 6.19-6.20. The construction loan agreement further provides that HRA

shall pay upon demand all costs and expenses incurred in connection with Bank's consideration of whether to make the loan, ... and the ongoing analysis of the loan and monitoring the progress of construction and all problems and questions arising in relation thereto, including all fees and disbursements of all ... accountants ... and other experts retained by Bank to advise it, it being the intent of this provision to ensure that Bank shall not be obliged to pay for any expense incurred in connection with any of the matters referred to in or contemplated by this Agreement.

Amended Complaint, Exhibit B, ¶ 9.16. Defendants do not contend that the Bank's negotiation of these provisions evidences an unlawful tying arrangement. To do so would be futile, since these terms simply demonstrate the Bank's legitimate efforts to protect its investment. See Tose, supra (approving conditioning of credit on debtor's replacement of chief financial officer with bank's appointee). Rather, defendants assert that the manner in which the Bank purported to exercise its right to compel an audit constituted a violation of section 1972. However, resolving all factual disputes in defendants' favor, there is no violation of section 1972 of the BHCA.

The parties agree that by early 1982, the construction project was running behind schedule, and that HRA had requested extra advances and a restructuring of the loan agreement. At this point, the Bank's loan officer assigned to the HRA account authorized her subordinate to engage Berger & Epstein, an accounting firm, to investigate HRA's financial situation. Ratley affidavit, p. 2. Defendants contend that Berger & Epstein conducted an over-extensive and incompetent "compilation" which was intended to fabricate defaults against HRA and to support the Bank's position in future litigation. The evidentiary material produced by defendants, viewed in a light most favorable to the defendants (the non-moving parties), might be considered as supporting the following inferences: (a) that the Berger & Epstein audit was not conducted in accordance with generally accepted accounting standards; (b) that it was billed at twelve times the originally estimated fee; (c) that it was conducted in a manner which disrupted HRA's construction operation; and (d) that the Bank's loan officer had preconceived unfavorable notions about HRA's financial picture and the internal operations of HRA which the loan officer expressed to Berger & Epstein when their services were engaged. However, even though these inferences might raise genuine issues of fact, none are material to a determination concerning a violation of section 1972.

As heretofore pointed out, section 1972 is concerned solely with anticompetitive tying arrangements. The inferences which defendants seek to prove fall short of showing that the Bank would benefit in any way other than by protecting its investment. It is possible that at trial the defendants may be able to prove some of the accountants' practices were tortious as to the defendants. But since the construction loan agreement provisions which authorize the Bank to require an audit at HRA's expense constitute legitimate bank practice, the inferences discussed above cannot serve as a basis for holding that the agreement was a prohibited tying arrangement under section 1972. See B.C. Recreational Industries v. First National Bank, 639 F.2d 828, 834 (1st Cir.1981) (requiring corporation to hire a financial advisor chosen by the bank constitutes legitimate banking practice; even when the advisor allegedly acted to protect the bank's security at the expense of the corporation's business interests).

For the reasons heretofore stated, summary judgment will be granted in favor of the Bank on Count VII of defendants' counterclaim.

The Federal Securities Laws

In Count IX of their counterclaim, defendants allege that the Bank "made false and misleading statements and employed schemes and artifices to defraud" in violation of sections 12(2) and 17(a) of the 1933 Securities Act, 15 U.S.C. §§ 77l(2), 77q(a) (1980), and section 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. § 78j(b) (1980) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1978). Defendants assert that the promissory note delivered by HRA in connection with the construction loan (the Note), the Wolgins' personal guarantee (Continuing Guaranty), the HRA limited partnership agreement, "as well as certain other documents transferred to Bank of America by HRA and Wolgin in connection with the loan transaction" are "securities."

In considering the Bank's motion for summary judgment on these claims, this Court begins with the threshold question of whether any of the documents mentioned by defendants constitute "securities" within the meaning of the federal securities laws. See Tcherepnin v. Knight, 389 U.S. 332, 335-36, 88 S.Ct. 548, 552-53, 19 L.Ed.2d 564 (1967) (definitions of "security" in 1933 and 1934 Acts are "virtually identical"). The 1933 and 1934 acts provide that "unless the context...