Fed. Deposit Ins. Corp. v. Blue Rock Shop. Center
Decision Date | 29 June 1983 |
Docket Number | Civ. A. No. 80-398. |
Citation | 567 F. Supp. 952 |
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 and Third Party Plaintiffs, v. The FARMERS BANK OF THE STATE OF DELAWARE, a corporation of the State of Delaware, Third Party Defendant. |
Court | U.S. District Court — District of Delaware |
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Donald J. Wolfe, Jr., and Gregory A. Inskip of Potter, Anderson & Corroon, Wilmington, Del., Lawrence F. Bates, Federal Deposit Ins. Corp., Washington, D.C., for plaintiff.
John E. Babiarz, Jr., of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for defendants and third party plaintiffs.
Helen L. Winslow of Richards, Layton & Finger, Wilmington, Del., for third party defendant.
This is a civil action brought by the Federal Deposit Insurance Corporation ("FDIC"), in its corporate capacity, to recover a debt evidenced by a Bond and Warrant delivered to Farmers Bank of the State of Delaware ("Farmers") by defendants Blue Rock Shopping Center Inc. ("Blue Rock") and Max and Rose Ambach.1 The suit seeks to collect unpaid principal due on the Bond and Warrant amounting to $523,105.71 together with interest at the rate of 6.25 percent per annum from October 22, 1982, to the date of judgment. Defendants deny liability and assert three affirmative defenses.2 The defendants also have brought a third party action against Farmers alleging that if the defendants are liable to the FDIC, then Farmers is liable to defendants in the amount of $275,000 plus interest from August of 1975. FDIC has moved pursuant to Rules 12(f) and 56(a), Fed.R. Civ.P., to strike defendants' third affirmative defense and for entry of summary judgment in its favor on the complaint on the basis that no genuine issue of material fact exists and that FDIC is entitled to judgment as a matter of law. (D.I. 46.)
The undisputed facts viewed most favorably for the defendants may be summarized as follows: On September 29, 1966, defendants executed and delivered to Farmers a Bond and Warrant 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. The Bond and Warrant 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, 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 a warehouse was erected which Blue Rock had previously leased to A.T.C. of Wilmington, Inc. ("ATC"). (D.I. 21, Ex. B.) 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 Warrant and the Mortgage. The payments to be made under the lease by ATC were guaranteed by Atlantic Thrift Center, Inc. (D.I. 21, Ex. C.) As a result of several corporate mergers, the lease ultimately was guaranteed by Arlen Realty and Development Corporation ("Arlen"). (D.I. 21, ¶ 6.)
On July 29, 1975, Blue Rock defaulted under the first mortgage and the terms and conditions of the Bond and Warrant. Blue Rock's default was caused by the concomitant default of ATC and Arlen. On August 12, 1975, defendants notified Farmers that ATC and Arlen were discontinuing its retail operation at the Shopping Center and would no longer be able to meet its obligations under the lease and guarantee. (D.I. 21, ¶ 6.) Defendants requested that Farmers accept a proposal submitted by Arlen to terminate the lease upon payment of $100,000 for the immediate surrender of the premises at the Shopping Center and an additional $24,000 if the premises were not retenanted within one year. (D.I. 21, Ex. D.) At the time of the settlement offer, Arlen, as guarantor of the lease, was obligated to make 63 additional monthly payments which amount exceeded $428,725. (D.I. 21, ¶ 7.)
Farmers rejected defendants' request that it accept Arlen's settlement offer. Instead, Farmers and Blue Rock executed a letter agreement on February 10, 1976, wherein Blue Rock assigned to Farmers its right, title and interest in the Arlen guaranty of the lease "in consideration of the Bank's forbearance in enforcing all its rights arising because of Blue Rock's default" of defendants' Bond and Mortgage. (D.I. 21, Ex. E.) After execution of the letter agreement, Farmers commenced suit in the Superior Court of the State of Delaware in and for New Castle County ("the Superior Court action") on March 10, 1976, against Arlen on the guaranty of the lease payments.
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 (D.I. 21, Ex. G), (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. (D.I. 21, Ex. H.)
On January 8, 1980, the premises used for the Shopping Center were sold to the highest bidder for $325,000 at a public sheriff's sale on a writ of monition issued by the City of Wilmington to collect unpaid taxes that had accrued on the property. (D.I. 17, ¶ 5.) On April 21, 1980, the FDIC received $188,115.33 from the proceeds of the sheriff's sale which was applied to reduce defendants' obligations on the Bond and Warrant. (D.I. 21, ¶ 12.) On November 12, 1982, FDIC's claims in the Superior Court action against Arlen were settled by Arlen paying $148,467 to FDIC. As a result of the settlement, a deficiency balance of $523,105.71 remains on the bond as of October 22, 1982, together with interest at 6.25 percent per annum. (D.I. 43.)
FDIC has moved pursuant to Rules 12(f) and 56(a) to strike defendants' third affirmative defense and for entry of judgment in the amount of $523,105.71 plus interest at 6.25 percent per annum from October 22, 1982. The defendants resist FDIC's motions on the grounds that: (1) Farmers' refusal to accept Arlen's offer to settle for the default of the lease with Blue Rock amounted to a breach of fiduciary obligation to Blue Rock and the FDIC, as Farmers' assignee, accepted the Bond and Warrant subject to Farmers' breach; and (2) Max and Rose Ambach are accommodation makers on the bond and are entitled to invoke the defenses afforded by 6 Del.C. § 3-606.
The defendants in their First Affirmative Defense allege that the Assignment of Lease, executed on September 29, 1966, by Max Ambach acting as president of Blue Rock, and delivered to Farmers, as additional collateral for the Bond and Warrant, imposed a fiduciary duty upon Farmers to protect and preserve the security of the lease with ATC for the benefit of the defendants. The defendants rely upon the provisions of the Assignment of Lease which provides Farmers with the right to institute action against the lessee (ATC) for unpaid rent:
2. Upon or at any time after default in the payment of any indebtedness secured hereby or in the performance of any obligation covenant or agreement contained herein, or in said note, the Assignee may, at its option, without notice, and without regard to the adequacy of the security for the indebtedness hereby secured, either in person or by agent, with or without bringing any action or proceedings, by a Receiver to be appointed by a Court, enter upon, take possession of, manage and operate said demised premises or any part thereof; make, cancel, enforce or modify leases; obtain and evict tenants, and fix or modify rents, and do any acts which the Assignee deems proper to protect the security hereof and, either with or without taking possession of said property, in its own name sue for or otherwise collect and receive such rents, issues and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon indebtedness secured hereby, and in such order as the Assignee may determine.
The defendants argue that Farmers breached its fiduciary duty owed to the defendants when Farmers refused to accept Arlen's settlement offer made in 1975 because the settlement offer was in the best interest of the defendants.
The Court disagrees. Nothing in the Assignment of Lease imposes a fiduciary duty on Farmers to act in the interest of the defendants. Absent such an express agreement, the Court holds that Farmers did not owe a fiduciary duty to the defendants. It is well settled that one who holds and controls security for a debt does not act as a fiduciary for the debtor. Instead, in the absence of an express obligation to sell upon the request of the debtor, a lower standard is imposed, the creditor must exercise ordinary care for the security's preservation. See Faunce v. Schueller, 214 Minn. 412, 8 N.W.2d 523, 526 (1943); New Jersey Bank v. Toffler, 130 N.J.Super. 161, 353 A.2d 116, 118 (1976); Grace v. Sterling, Grace & Co., 30 App.Div.2d 61, 289 N.Y.S.2d 632, 637 (1st Dept.1968); Beneficial Finance Co. v. Marshall, 551 P.2d 315, 318 (Okl.App. 1976). See generally Comment 1 to 6 Del.C. § 9-207 (Uniform Commercial Code); Restatement of Security §§ 17 & 18 (1941).
Farmers did not breach its duty to exercise reasonable care to protect the additional collateral when it refused to accept Arlen's original settlement offer in 1975. Arlen offered $124,000 to Farmers in exchange for the immediate surrender of the lease at a time when ATC and Arlen owed...
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