Banker's Trust Co. of Western New York v. Steenburn

• Decision Date: 19 May 1978
• Citation: 95 Misc.2d 967,409 N.Y.S.2d 51
• Parties: BANKER'S TRUST COMPANY OF WESTERN NEW YORK, Plaintiff, v. Kenneth STEENBURN, J. Walter Erickson, and Robert Gordon, Defendants.
• Court: New York Supreme Court

Page 51

409 N.Y.S.2d 51

95 Misc.2d 967

BANKER'S TRUST COMPANY OF WESTERN NEW YORK, Plaintiff, v. Kenneth STEENBURN, J. Walter Erickson, and Robert Gordon, Defendants.

Supreme Court, Chautauqua County.

May 19, 1978.

Falk, Siemer, Glick, Tuppen & Maloney, Buffalo, for plaintiff; Kevin P. Maloney, Buffalo, of counsel

John L. Goodell, Jamestown, for defendants.

MEMORANDUM DECISION

EDWARD M. HOREY, Acting Justice.

This action was brought by the plaintiff seeking a deficiency judgment against the defendants on their personal guarantees of a corporate loan following repossession and sale of mortgaged equipment for less than the outstanding indebtedness. By counter-claims, the defendants assert causes of action against the plaintiff for breach of contract and negligent misrepresentation.

The action was tried without a jury. The trial extended over a thirteen day period. The issues raised were novel and many. Multiple briefs (by each party) have been submitted. Extensive research has been done by the court. To what avail will undoubtedly be determined by the Appellate Courts as each party has indicated an intention to appeal any adverse determination.

There follows this court's decision.

The facts giving rise to the litigation are interesting; they follow:

The defendants, Erickson and Gordon, were long term experienced employees of Watson Manufacturing Company of Jamestown, New York. For several years, that company had operated a department for the fabrication of elevator cabs, elevator doors and door fronts. Erickson's specialty was in the production and installation area of this equipment. Gordon was experienced in sales.

In 1974, as a consequence of recently negotiated labor contracts which proved unfavorable, the Watson Manufacturing Company elected to discontinue production of elevator equipment. Encouraged by the President and others of the Watson Manufacturing Company, the defendants, Erickson and Gordon, contemplated and investigated the formation of a new company which would manufacture their employer's discontinued line of products.

Contact was made by Erickson and Gordon with the defendant, Steenburn. He was a man known to Erickson and Gordon to be experienced in setting up production lines for manufacturing industrial type equipment and having a specialty background in machine shops and steam engineering. He was also a person reputed to have both investment capital and factory space available. Steenburn had earlier expressed an interest in going into business with Erickson. Steenburn joined Erickson and Gordon in investigating the formation of a new business of manufacturing elevator equipment.

After having had prepared some general estimates of cost for "start up" and cash flow statements for initial operation of the proposed business venture, the three defendants contacted The First National Bank of Jamestown relative to arranging necessary financing. Representatives of that bank were favorably disposed to the general plan of the defendants, but insisted on a condition that the Small Business Administration (SBA) be involved in any loan transaction. The defendants were agreeable.

A meeting with a representative of the SBA was arranged and held on March 27, 1974. There, it was disclosed that a condition of participation by the SBA would be personal guarantees of loans by the defendants.

The defendant, Steenburn, objected to the personal loan guarantee requirement. He advised Erickson and Gordon that he wished to discuss plans of financing with his personal financial advisor before proceeding. He sought and received from Erickson and Gordon some general information of the financial status of each.

In the latter part of April, 1974, Steenburn alone met with the person he had described as his "financial advisor". This was one Gerald Russell, Senior Vice President of the plaintiff, Banker's Trust Company of Western New York. At this meeting, Steenburn advised Russell, generally, of the proposal to form a corporation, the names of his associates, Erickson and Gordon, and the need of the corporation to secure financing in an estimated sum of $200,000 to assure initial production. Cash flow statements indicating such need were delivered to Russell. Upon being advised by Steenburn that the defendants had already contacted The First National Bank relative to financing, Russell told Steenburn: "Ken, I have done business with you for over twenty years. We have had a very good relation. Why don't you let me have these figures and you can come down I'll notify you, and how I possibly might be able to set you up through our bank". Cash flow statements and financial resumes of Erickson and Gordon were left with Russell. The meeting was concluded.

Steenburn advised Erickson and Gordon that he had contacted Russell concerning initial "start up" and subsequent production financing and that Russell had, in turn, contacted him and requested that he come down and talk to him. He requested Erickson and Gordon to accompany him.

In the first part of May, 1974, all three defendants met with Russell at his office of Senior Vice President in the plaintiff bank. At such meeting, Russell suggested two alternate plans under which the defendants could raise capital for initial "start up" of the proposed business.

On a small paper card, Russell wrote out figures for one plan of financing under which $50,000 could be raised. This plan proposed a mortgage by each of the three defendants on their respective homes as follows: By Gordon $5500; by Erickson $22,000; by Steenburn $22,500.

On a second card, Russell wrote out an alternate plan of financing under which $62,200 could be raised. This plan also proposed a mortgage by each of the three defendants on their respective homes. This plan contemplated that the mortgages would be in the following amounts by the defendants: By Erickson $28,700; by Steenburn $28,000 and by Gordon $5500.

At this same first meeting between all defendants and Russell, discussion was also had of means by which the corporation to be organized to operate the business could raise operating capital. It was Russell who suggested a plan of financing that would utilize purchase orders. Russell told the defendants that the plaintiff bank would loan up to 50% Of the amount of purchase orders obtained by the corporation to be formed by the defendants, providing only that the credit rating of the purchasers was good.

During the course of a private banking transaction at the plaintiff bank, the defendant, Gordon, asked Senior Vice President Russell to confirm the fact that he had agreed to loan up to 50% On purchase orders. Russell confirmed the agreement, again adding the proviso that the credit rating of the purchasers must be good.

Following the joint meeting with Russell, the defendants elected to go forward with the proposed business venture. The defendants, Erickson and Gordon, borrowed monies from the plaintiff bank on a series of promissory notes while arrangements were made to satisfy existing mortgages on their homes and while the mortgage applications to the plaintiff bank could be completed. Erickson and Gordon completed mortgages on their respective homes with the plaintiff bank as mortgagee. Erickson's mortgage, dated June 12, 1974, was in the amount of $33,000 of which $20,000 was contributed to the corporation; Gordon's mortgage, dated June 17, 1974, was for $7,300; Steenburn elected not to mortgage his home, but instead to contribute cash which was available to him.

Of the monies raised on their mortgages, the defendants, Erickson and Gordon, purchased stock in North American Cab & Elevator Door Corp., hereinafter referred to as "The Corporation". The purchase of stock by all three defendants was as follows: By Erickson $7300; by Steenburn $7300 and by Gordon $7300.

In addition, the defendant, Erickson, used a part of his mortgage proceeds to effect a loan to the corporation. The defendant, Steenburn, using his own funds, also loaned monies to the corporation. A summary of the loans made by the defendants to the corporation was as follows: By Erickson $12,700; by Steenburg $13,950 and by Gordon $0.00.

The total money contributions of the three defendants to the corporation by their combined stock purchases and loans was $48,550. This money was used by the corporation to hire employees, purchase equipment and to commence setting up a production line.

The defendant, Steenburn, also contributed lumber and other material to the corporation. It had a proven reasonable value of $750.00.

The combined total of money and material made by the defendants totaled $49,300.00.

In connection with the establishment of a production line, the defendants had contemplated the purchase and use of a squaring shear and a press brake, mechanical devices used to cut and form sheets of steel. Aware that the assets of the corporation were inadequate to purchase such equipment, in addition to the other expenses attending the formation of the business, the defendants sought to obtain such equipment by financing its purchase through the plaintiff, Banker's Trust Company of Western New York.

A second meeting between the defendants and Gerald Russell, Senior Vice President of the plaintiff bank was held on the 28th day of May, 1974. The need of a brake and shear, the location and price of suitable second-hand models, as well as the general progress of the corporate business venture of the defendants were discussed. Russell approved a plan of financing for the brake and shear.

Under the approved plan, the plaintiff bank made a loan to the corporation, North American Cab & Elevator Door Corp. on June 28, 1974. The loan was in the sum of $35,000. It was evidenced by a promissory note of the corporation made "on demand" and provided for interest of 12% Per annum.

The security for this $35,000 loan was three fold. The corporation executed a security agreement in the nature of a chattel mortgage on the...