FDIC v. BLUE ROCK SHOPPING CENTER, INC., Civ. A. No. 80-398-JLL.

• Decision Date: 04 December 1987
• Docket Number: Civ. A. No. 80-398-JLL.
• Citation: 676 F. Supp. 552
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff, v. BLUE ROCK SHOPPING CENTER, INC., a Delaware corporation, Max Ambach and Rose Ambach, Defendants.
• Court: U.S. District Court — District of Delaware

676 F. Supp. 552

FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff, v. BLUE ROCK SHOPPING CENTER, INC., a Delaware corporation, Max Ambach and Rose Ambach, Defendants.

Civ. A. No. 80-398-JLL.

United States District Court, D. Delaware.

December 4, 1987.

Gregory A. Inskip of Potter, Anderson & Corroon, Wilmington, Del., for plaintiff.

Paul P. Welsh and Palmer L. Whisenant of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for defendants.

MEMORANDUM OPINION

LATCHUM, Senior District Judge.

NATURE OF THE ACTION

These findings of fact and conclusions of law relate to a civil action instituted by plaintiff, Federal Deposit Insurance Corporation ("FDIC"), in its corporate capacity, on a bond and warrant (Plaintiff's Trial Exhibit "PX" 1) delivered to Farmers Bank of the State of Delaware ("Farmers") and executed by defendant Blue Rock Shopping Center, Inc. ("Blue Rock") and individually by defendants Max and Rose Ambach. FDIC seeks to collect a total of $523,105.71 in unpaid principal on the bond and warrant, as well as interest accruing at a 6.25 annual percentage rate from October 22, 1982 to the date of judgment. (See Docket Items "D.I." 1 and 43.) Defendants in their answers denied liability and asserted three affirmative defenses. In addition, defendants brought a third party action against Farmers (D.I. 26) in which they had contended that even assuming their liability to FDIC, defendants were entitled to $275,000 plus interest from Farmers.

This Court issued an opinion and order dated June 28, 1983 (D.I. 56 and 57), as modified on June 29, 1983 (D.I. 58), and reported in 567 F.Supp. 952 (D.Del.1983), in which the Court granted FDIC's summary judgment motion and struck defendants' Third Affirmative Defense (D.I. 44), which had been raised by amendment to its Answer. On October 25, 1983, this Court entered final judgment in favor of FDIC, and in favor of Farmers on defendants' third party claim. (D.I. 70.)

Defendants appealed to the United States Court of Appeals for the Third Circuit, which affirmed in part and vacated and remanded in part. See Federal Deposit Ins. Corp. v. Blue Rock Shopping Center, 766 F.2d 744 (3d Cir.1985). Specifically, the Third Circuit affirmed this Court's judgment in favor of FDIC against Blue Rock on the bond. The appellate court, however, did not consider this Court's judgment in favor of Farmers on the third party claim because defendants failed to appeal that judgment. Consequently, the Third Circuit remanded the case for trial only on the issues raised by the Third Affirmative Defense of Max and Rose Ambach: (1) whether the Ambachs were sureties with a right of recourse against Blue Rock; and (2) if so, whether the Ambachs could prove that FDIC unjustifiably impaired the collateral securing the bond and warrant. See 766 F.2d at 751.

On September 8, 1987, this Court held a non-jury trial in order to try these remaining issues. After carefully considering the sufficiency and weight of the testimony adduced at trial (see D.I. 108), the documents admitted into evidence, the entire case file, the demeanor and credibility of the witnesses, and the post-trial briefs of the parties (D.I. 111, 112, 115, and 115A), and pursuant to the requirements of Fed.R. Civ.P. 52(a), the Court enters this opinion setting forth its findings of fact and conclusions of law.

FACTS

I. The Status Of The Ambachs

On September 29, 1966, defendants Blue Rock, Max Ambach, and his wife, Rose Ambach, executed and delivered to Farmers a Bond and Warrant ("Bond") in which they promised "jointly and severally" to pay Farmers the sum of $800,000, plus interest at the rate of 6.25 percent per annum. (PX 1.)

At this time, William F. Lynch II, Esquire, was the personal attorney of Max Ambach (Trial Transcript "Tr." at 46), as well as legal counsel for Blue Rock. (Id. at 60-61.) Mr. Lynch thus served as the settlement attorney on an $800,000 permanent financing loan ("loan"), which the Bond evidenced and which Farmers provided for replacement of the original construction loan to build the Atlantic Thrift Building at the Blue Rock Shopping Center. (Id. at 46-47.) In his efforts to document the permanent loan, Mr. Lynch initially prepared a Bond and Warrant (Defendants' Trial Exhibit "DX" 11) which was executed only by Blue Rock. (Tr. at 49-50.) Upon the request of Farmers, however, (see DX 4; DX 5; Tr. at 51), Mr. Lynch promptly substituted the Bond in question (PX 1), after having Max and Rose Ambach personally sign it, making them "jointly and severally" liable with Blue Rock on the obligation. (See PX 1; Tr. at 48-51.) Mr. Lynch did not have the Ambachs execute a separate document indicating suretyship status because he knew, based upon prior transactions between Farmers and the Ambachs, that Farmers desired the Ambachs to be co-makers on the Bond. (Tr. at 58.) Furthermore, Mr. Lynch's conversations with the president of Farmers led him to believe that Farmers felt that "it had more ... latitude if the individuals are right on the ... note or bond and warrant than if they're subject to a separate guarantee or subject to an endorsement." (Id. at 59.) The ledger card which Farmers opened on the permanent loan identified the account as that of "Blue Rock Shopping Center and Max & Rose Ambach." (PX 47.)

The Court finds that there was never any formal agreement, oral or written, between Blue Rock and the Ambachs which would indicate that the Ambachs were signing the Bond as sureties. (Tr. at 32.) The Court also finds that the proceeds of the $800,000 permanent loan were applied in part to pay off the remaining balance of $534,321.48 on a Farmers construction mortgage loan bearing the Ambachs' personal signatures. (DX 3; Tr. at 28.) This prior mortgage loan had been used to finance the construction of Blue Rock Shopping Center. (Tr. at 28.)

At all times in question, Max Ambach was the president and sole shareholder in Blue Rock. (PX 43, Defendants' Response to Plaintiff's Third Set of Interrogatories and Third Request for Production, Answer to Interrogatory No. 1 hereinafter "Interrogatory No. 1"; Tr. at 19.) Rose Ambach was the vice president of Blue Rock. (PX 43, Interrogatory No. 1.) As of March 31, 1975, Blue Rock had made substantial loans "to or for the benefit of Max Ambach, Blue Rock's sole stockholder," evidenced by notes in the amounts of $202,600.56, $229,228.58, and $5,000. (PX 45, Statement of Affairs for Bankrupt Engaged in Business, at 6.) By August, 1976, the loans which Blue Rock had made to Max Ambach or his related entities exceeded $470,000. (PX 45, Debtor's Schedules at 5.) Ambach never repaid these loans to Blue Rock. (Tr. at 38.)

II. The Collateral For The Loan

The Bond was secured by a first mortgage on a parcel of real estate located at the Blue Rock Shopping Center in Wilmington, Delaware. On the same date as the Bond's delivery, Blue Rock, by its president, Max Ambach, executed and delivered to Farmers as additional collateral for the Bond an assignment of Blue Rock's interest in a lease ("Assignment of Lease") of the parcel of land known as the Blue Rock Shopping Center ("Shopping Center"), on which was erected the Atlantic Thrift Building, which Blue Rock had previously leased to A.T.C. of Wilmington, Inc. ("ATC"). The term of the ATC lease was for 15 years and ran from November 1, 1965 to October 31, 1980. ATC's lease payments assigned to Farmers coincided with defendants' installment obligations under the Bond and the Mortgage. The payments to be made under the lease by ATC were guaranteed by Atlantic Thrift Centers, Inc. (D.I. 21, Ex. C.) As a result of several corporate mergers, the lease payments ultimately were guaranteed by Arlen Realty and Development Corporation ("Arlen"). (D.I. 21, ¶ 6.)

On July 29, 1975, Blue Rock defaulted under the first mortgage and its obligations on the Bond. Blue Rock's default resulted from the concomitant default of ATC and Arlen, when ATC simply closed its store at the Shopping Center, moved out, and suspended its rent payments to Farmers. (Tr. at 25-26, 29; DX 18.) By letter dated August 12, 1975, defendants notified the vice president of Farmers that ATC and Arlen had discontinued their retail operation at the Shopping Center. (PX 2.) In the letter, defendants requested that Farmers accept Arlen's settlement proposal to pay $100,000 for an agreement to immediately terminate the lease and surrender the premises, as well as Arlen's promise to pay an additional $24,000 if the premises were not retenanted within one year. (PX 2; Tr. at 26-26a.) Out of this $100,000 settlement, defendants proposed to advance Farmers eight monthly mortgage payments (approximately $50,000), with the remainder to be retained by Blue Rock. (PX 2; Tr. at 108.) As of the date of this proposal, and at all times thereafter, neither the Ambachs nor Blue Rock had the resources to pursue litigation against Arlen. (Tr. at 42.)

Farmers rejected defendants' settlement proposal. Instead, on February 10, 1976, Farmers agreed to accept Blue Rock's assignment of its right, title and interest in the Arlen guarantee in return for Farmers' forbearance from enforcing its rights arising from Blue Rock's default. (DX 21.) On March 10, 1976, Farmers then filed an action in the Superior Court of the State of Delaware in and for New Castle County¹ ("Superior Court suit") against Arlen on its guarantee of the lease payments. (See DX 1, Tab 1.)

In accordance with the provisions of an Assistance Agreement dated May 20, 1976, between the FDIC and Farmers, Farmers on October 25, 1976, assigned to the FDIC all of its right, title and interest in: (1) the Bond and Mortgage, (2) the Assignment of Lease which was executed by Blue Rock and ATC, and (3) the guaranty of the lease payments executed by Atlantic Thrift Center, Inc., and later assumed by Arlen. (PX 11; PX 12.)

In the interim, Blue Rock filed a Chapter 11 bankruptcy proceeding in the United States...