Banque Indosuez v. Pandeff

• Decision Date: 04 November 1993
• Citation: 193 A.D.2d 265,603 N.Y.S.2d 300
• Parties: BANQUE INDOSUEZ, Plaintiff-Respondent, v. Eftim PANDEFF, Defendant-Appellant.
• Court: New York Supreme Court — Appellate Division

Page 300

603 N.Y.S.2d 300

193 A.D.2d 265

BANQUE INDOSUEZ, Plaintiff-Respondent, v. Eftim PANDEFF, Defendant-Appellant.

Supreme Court, Appellate Division,

First Department.

Nov. 4, 1993.

Mark A. Fowler, of counsel (Joshua M. Rubins, with him on the brief, Satterlee Stephens Burke & Burke, attys.), for defendant-appellant.

Penny E. Fisher, of counsel (H. Peter Haveles, Jr., and Christopher F. Robertson, with her on the brief, Cadwalader, Wickersham & Taft, attys.), for plaintiff-respondent.

Before SULLIVAN, J.P., and ELLERIN, KUPFERMAN and NARDELLI, JJ.

SULLIVAN, Justice.

This is an appeal from the grant of a CPLR 3213 motion for summary judgment in lieu of complaint based on an unconditional, written guarantee and the subsequent judgment entered thereon in the sum of $2,028,769.29.

Plaintiff, Banque Indosuez, a French bank doing business in Switzerland, extended a series of loans in the form of a line of credit to Axa Capital Corporation (524,000 Deutsch Marks), Sophia Technologies, S.A. ($750,000) and Flexible Computer Corp. ($375,000), as to each of which defendant, Eftim Pandeff, a New York resident and principal therein, signed a letter agreeing to the terms of the line of credit. The Axa and Sophia loans were collateralized by pledges of Flexible stock. In consideration of the loan to Sophia and plaintiff's promise to forebear against Axa, by then in default on its loan, defendant, on December 17, 1987, executed a guarantee of Axa's indebtedness. Thereafter, on August 23, 1989, in exchange for plaintiff's forebearance with respect to all three loans, defendant executed a superseding joint guarantee unconditionally guaranteeing, to the extent of $1,592,894.50 with interest to June 30, 1989 and costs, payment of the Axa, Sophia and Flexible loans. By express provision, the guarantee was to be governed by Swiss law, plaintiff need not first sue the debtor in default before looking to the guarantor and the guarantor waived the benefit of any non-Swiss law which would act to prevent repayment.

By early 1990 Flexible had gone into bankruptcy and plaintiff decided to call in the loans, which were in default. When its demand for payment was ignored, plaintiff exercised its rights under the joint guarantee and demanded payment from defendant for $1,624,422. Defendant failed to respond and plaintiff commenced this action by service of a summons, notice of motion for summary judgment in lieu of complaint and supporting affidavits.

In the interim, on April 2, 1990, after notice of default to the debtors and prior to the demand for payment from defendant, plaintiff and Axa, represented by defendant, entered into a written agreement whereby plaintiff, as part of Flexible's liquidation in bankruptcy, consented to the private sale of Flexible's assets, the proceeds of which were to be held, pro rata, for the account of the secured creditors, including plaintiff, whose share would be 22.45%.

A minimum upset bid of $100,000 was set and the purchase price was not to exceed $2,209,057, the aggregate amount of the secured claims. The agreement further provided that the assets would be repurchased by the largest secured creditor for the account of all the secured creditors and exchanged for 800,000 shares of the common stock of Flexible Multicomputer Corp. (Multicomputer), a Delaware corporation, to be issued pro rata to the aggregate amount of their claims. Defendant claims that the sale contemplated by the April 2, 1990 agreement was concluded on or about April 20, 1990 and the assets of Flexible transferred to Multicomputer in consideration of 800,000 shares of Multicomputer stock. According to defendant, plaintiff has received its pro rata portion of the Multicomputer shares.

Among the numerous defenses raised, only two are relevant to this appeal. In one, a partial defense, defendant contends that one of the three loans underlying the joint guarantee was fully satisfied by plaintiff's receipt of its pro rata allocation of the Multicomputer stock. The IAS court rejected this claim, finding that no evidence had been presented to support such a defense. In his other defense, defendant contends that the loans underlying the joint guarantee were made in violation of the margin rules under the Securities Exchange Act of 1934 (Securities Exchange Act) and that any guarantee of such an obligation is void under section 29(b) of the Act (15 U.S.C. § 78cc[b]. The latter defense also provided the basis for defendant's cross-motion to dismiss the action on the ground of lack of subject matter jurisdiction. The court accepted defendant's argument that the federal courts have exclusive jurisdiction over alleged margin rules violations, but instead of dismissing the action, dismissed only the defense based thereon. Since we find an issue of fact as to whether the Flexible loan has been satisfied, in whole or part, we modify to deny summary judgment as to that aspect of the guarantee, reduce the judgment accordingly and remand for further proceedings as to that issue.

A plaintiff suing on a guarantee establishes a prima facie case when he shows an obligation for the payment of money under the terms of the instrument and the failure to pay in accordance with such terms. (See, e.g., European American Bank v. Lofrese, 182 A.D.2d 67, 71, 586 N.Y.S.2d 816; Woodhouse, Drake & Carey (Trading), Inc. v. Royal International Trade, Inc., 188 A.D.2d 315, 316, 590 N.Y.S.2d 480.) Once such a showing is made, the burden shifts to the defendant to demonstrate by admissible evidence the existence of a genuine issue of fact.

Among the defenses raised and pertinent to this appeal is the defense that plaintiff, in making the loans to Sophia and Axa, violated the Securities Exchange Act and the Federal Reserve Board Regulations promulgated thereunder, thus rendering the loan agreements void. In support of this defense, defendant has stated in an affidavit that the loans to Sophia and Axa were "for the purpose of purchasing or carrying margin securities within the meaning of [s]ection 7 of the Securities * * * Exchange Act of 1934, as amended, and the Regulations promulgated by the Federal Reserve Board [and] exceed[ed] the permissible margin." According to defendant, the defense was further supported by the explicit wording of the loan agreements, which confirm that Flexible stock was pledged as security for the loans and that the loan to Sophia was to be used to acquire 5,000,000 shares of Flexible stock.

At the outset, with respect to defendant's claim that the court lacked subject matter jurisdiction based on his margin rules violation defense, we note that the assertion of a federal law defense cannot deprive a New York court of the power to adjudicate a complaint, which, as here, is based on common law principles. As to the question whether the federal courts have exclusive jurisdiction over a defense based on a Securities Exchange Act violation, an argument which the IAS court accepted, 15 U.S.C. § 78aa vests the United States District Courts with "exclusive jurisdiction of violations of [the Securities Exchange Act and regulations promulgated thereunder], and of all suits in equity and actions at law brought to enforce any liability or duty" thereby created. Despite the clear grant to the federal courts of exclusive jurisdiction over actions and counterclaims under the Securities Exchange Act, a split of authority exists as to whether a Securities Exchange Act violation defense is cognizable in a state court action. (See, T. Hazen, Treatise on the Law of Securities Regulation, Second Edition, Vol. 2, p. 223, citing cases; see, also, Weiner v. Shearson, Hammill & Co., Inc., 521 F.2d 817, 822 [9th Cir.1975] [observing that state court apparently had jurisdiction]; Aetna State Bank v. Altheimer, 430 F.2d 750, 754 [7th Cir.1970] [state court jurisdiction]; Calvert Fire Ins. Co. v. Am. Mut. Reinsurance Co., 600 F.2d 1228 [7th Cir.1979] [explaining and reaffirming Aetna]; Movielab, Inc. v. Berkey Photo, Inc., 321 F.Supp. 806, 810, affd, 452 F.2d 662 [2d Cir.1971] [same]; contra, Alkoff v. Gold, 611 F.Supp. 63, 66 [S.D.N.Y.1985]; Western Capital and Securities, Inc. v. Knudsvig, 768 P.2d 989, 992 [Utah 1989] ¹.)

This court, in New York Stock Exchange v. Goodbody & Co., 42 A.D.2d 556, 345 N.Y.S.2d 58 [1973], without citing precedent or expressing a ratio decidendi, found federal jurisdiction exclusive and dismissed the Securities Exchange Act defenses. In the same year, in DeNunzio v. Gaian, 43 A.D.2d 673, 349 N.Y.S.2d 974, this court, without further elaboration, followed Goodbody & Co. and dismissed Securities Exchange Act defenses. In both Chase Manhattan Bank, N.A. v. Komons, 73 A.D.2d 556, 423 N.Y.S.2d 27 [1979] and Berliner Handels-und Frankfurter Bank v. Coppola, 172 A.D.2d 369, 568 N.Y.S.2d 751 [1991], however, this court, without any reference to Goodbody & Co. and DeNunzio or the question of jurisdiction, reached the merits of Securities Exchange Act defenses. In Jones v. Gelles, 125 A.D.2d 794, 509 N.Y.S.2d 900 [1986], the Third Department made, in our view, the appropriate distinction. It dismissed a Securities Exchange Act counterclaim for lack of jurisdiction while entertaining a similarly based defense. (Id. at 796, 509 N.Y.S.2d 900.) On reconsideration of our own conflicting holdings, we conclude that the consideration of such a defense by a state court neither violates the Securities Exchange Act nor offends notions of federalism. (See, Aetna State Bank v. Altheimer, supra, 430 F.2d 750; Styner v. England, 40 Wash.App. 386, 699 P.2d 234, 237 [1985].)

Turning to the merits of the defense, defendant, as a matter of law, may not plead a violation of federal regulations governing margin requirements under the Securities Exchange Act to avoid liability under his guarantee. In accordance with the unanimous view of the federal circuit courts that have considered the issue, defendant lacks the standing to assert such a...