First City Nat. Bank and Trust Co. v. Zellner, 87 Civ. 6081(RWS)

• Decision Date: 14 January 1992
• Docket Number: 87 Civ. 6100(RWS),87 Civ. 6102(RWS) and 87 Civ. 6353(RWS).,No. 87 Civ. 6081(RWS),87 Civ. 6081(RWS)
• Citation: 782 F. Supp. 232
• Parties: FIRST CITY NATIONAL BANK AND TRUST COMPANY, Plaintiff, v. Michael ZELLNER, Joseph Krader, Zellner Plastering Co., Inc., et al., James R. Wilcox, Defendants and Plaintiffs on Counterclaim, v. INTERDISCOUNT SERVICES, LTD., Tara Cole, First California Lessors Corp., and Gene Lobato, Defendants on Counterclaim.
• Court: U.S. District Court — Southern District of New York

782 F. Supp. 232

FIRST CITY NATIONAL BANK AND TRUST COMPANY, Plaintiff, v. Michael ZELLNER, Joseph Krader, Zellner Plastering Co., Inc., et al., James R. Wilcox, Defendants and Plaintiffs on Counterclaim, v. INTERDISCOUNT SERVICES, LTD., Tara Cole, First California Lessors Corp., and Gene Lobato, Defendants on Counterclaim.

Nos. 87 Civ. 6081(RWS), 87 Civ. 6100(RWS), 87 Civ. 6102(RWS) and 87 Civ. 6353(RWS).

United States District Court, S.D. New York.

January 14, 1992.

Bizar Shustak Martin & Schneider, New York City (Gayle S. Sanders, of counsel), for plaintiff.

Richard I. Wolff, P.C., New York City (Burton Mark Senkfor, of counsel), for defendants and plaintiffs on counterclaim.

OPINION

SWEET, District Judge.

Plaintiff Joint Venture Asset Acquisition Group ("JVAA") has moved pursuant to Rule 56 of the Federal Rules of Civil Procedure for summary judgment against each of the defendants and for an award of all amounts of unpaid principal, accrued interest, collection costs, attorneys' fees, and punitive damages. For the reasons set forth below, the motion is denied.

The Parties

JVAA is the assignee of the rights of the First City National Bank and Trust Company, formerly known as the First City Federal Savings Bank ("First City"), to the promissory notes at issue. This interest was transferred to JVAA on December 14, 1990. First City was declared insolvent by the Federal Deposit Insurance Corporation ("FDIC") on December 20, 1989.

Michael J. Zellner ("Zellner"), Joseph Krader ("Krader"), and James R. Wilcox ("Wilcox") are citizens and residents of the State of California. Zellner Plastering Co. ("Zellner Plastering"; collectively, the "Defendants") is a California corporation with its principal place of business in Los Angeles, California. The Defendants are all investors in a California limited partnership and the purported signers of the documents at issue.

Interdiscount Services, Ltd. ("Interdiscount"), is a New York corporation with its principal place of business in New York City. Tara Cole ("Cole") is a New York resident and was Interdiscount's President and owner of one-half of its stock.

First California Lessors Corp. ("First California") is a California corporation with its principal place of business in California. Gene Lobato ("Lobato") is a citizen and resident of California.

Prior Proceedings

These cases were filed in August and September 1987. The Defendants answered and counterclaimed in February 1988. An amended complaint was then served, to be followed by an amended counterclaim. The cases were consolidated on February 10, 1989.

The present motion was filed on September 1, 1989. Defendants filed opposition papers in November 1990. On December 20, 1989, the Office of the Comptroller of the Currency declared First City insolvent and appointed the Federal Deposit Insurance Corporation ("FDIC") as its receiver. The FDIC requested the Honorable Vincent L. Broderick to stay all actions and proceedings in the Southern District of New York in which First City was a party, including these cases. Judge Broderick signed such an order on December 22, 1989.

The stay expired on April 25, 1990. Prior to that date, the FDIC and JVAA had entered into an agreement acknowledging that JVAA had assumed First City's rights in a number of defaulted notes, including those at issue here, and that JVAA would intervene in all pending actions to seek enforcement. JVAA intervened in the present action by stipulation on August 14, 1990. In the stipulation, JVAA recognized that it was not a holder in due course because the notes were in default, but claimed whatever status First City had enjoyed previously.

The present motion was reinstated and the filing of papers continued. Oral argument was heard on September 26, 1991, and the motion considered submitted as of that date.

Facts

The facts at issue are in dispute. The following therefore does not constitute a finding of fact. The current allegations and defenses here, though, are quite similar to those previously before this Court in several related matters. See, e.g., First Federal Savings Bank v. Tazzia, 696 F.Supp. 904 (S.D.N.Y.1988); First City Federal Savings Bank v. Dennis, 690 F.Supp. 221 (S.D.N.Y.1988); First City Federal Savings Bank v. Bhogaonker, 684 F.Supp. 793 (S.D.N.Y.1988).

Defendants are all investors in a failed limited partnership. Each purchased units in the Beam Systems Income Fund I ("Beam") with the hope of reaping profits and enjoying tax benefits. Such was not the case, however, and through the less than straightforward way in which Beam was financed, they find themselves defendants and third-party plaintiffs in the present action.

The price for each limited partnership unit in Beam was $13,000. This was broken down into two components: a $1,391 cash down payment and the execution of an Agreement of Assumption of Partnership Recourse Liability for $11,609. But the Defendants say they were told that obligations beyond the down payment would be paid by income from Beam or by MPA Associates, Inc. ("MPA"), the major promoter of Beam. In December of 1985, Zellner and Krader signed up for five units each; Zellner Plastering and Wilcox each opted for ten.

Soon thereafter, the financing of the limited partnership commenced, and began to go amok. According to the Defendants, the following players operated within the First City-Interdiscount-National Capital framework they have alleged: At its core is Richard Greenberg ("Greenberg") and his brother Fred. Greenberg was a founder, 50% shareholder, and president of First City, the predecessor to the Plaintiff. Greenberg allegedly was chummy with Michael Cash, the President of National Capital. National Capital shared/subleased space in the Greenbergs' offices.

Cole of Interdiscount was introduced to Greenberg and First City through an intermediary in early 1986. They apparently worked out a deal by which First City would fund $4.8 million in loans to limited partnership investors referred to it by Interdiscount. A kicker was that National Capital would actually evaluate the loans.

The Defendants eventually were presented with some of the documents at issue for their signatures. These documents included a promissory note ("Note"), assignment and security agreement ("Security Agreement"), a loan application, an engagement and authorization letter ("Engagement Letter"), and a borrower's letter ("Borrower's Letter"). The Defendants signed the documents in the Spring of 1986 even though there were blanks where normally one would expect to see a lender's name.¹ Moreover, the documents generally included many clauses pertaining to First City's rights and liabilities, including the following passage from the Borrower's Letter:

The Bank has made no attempt to analyze or evaluate my intended investment in the Partnership. The Bank has made no representation to me, expressed or implied, to induce me to request this loan. The Bank has given no opinion or advice as to whether it is wise or prudent for me to invest funds in the Partnership.... I agree to hold the Bank harmless and do hereby release the Bank from any and all claims that I may have relating to or arising out of my investment.

The Defendants were also required to sign UCC statements.

The paper flow apparently was handled through Cole. National Capital or First City allegedly created the documents and passed them to Cole for signatures. The documents were completed by the Defendants and returned to Cole/Interdiscount. Interdiscount then sent the completed documents to National Capital in April of 1986. The Engagement Letter the Defendants contend they signed directed Interdiscount to pay the loan proceeds directly to Beam.

In April 1986, a switch allegedly took place. Cole sent a letter dated April 7, 1986, to National Capital stating that the Engagement Letter was "inaccurate" as signed. A second Engagement Letter was suggested as an alternative. That letter directed payment of the loan proceeds to First California Lessors, not Beam.

Cole then apparently decided she and Interdiscount wanted out of the deal. According to the Defendants, she did not understand the terms of the deal and knew nothing about First California. She allegedly telephoned Greenberg, with whom she really believed she was doing business, and told him that she did not want to proceed. Cole also wrote to National Capital on April 10, 1986, and asked that the Defendants' documents be returned to her.

Cole then changed her mind. On April 14, 1986, she suggested to Lobato that signatures on the new Engagement Letters ("Second Engagement Letter") be obtained. The next day, she apparently received signed copies via fax. The Defendants deny ever having signed these documents.

First City readily approved the loans, and payment was eventually made to First California through Interdiscount. Neither Beam nor the Defendants ever received any of the loan proceeds. The Defendants all failed to make payments on their Notes, leading to the instant litigation.

Discussion

JVAA argues it is entitled to summary judgement because it has made out a prima facie case for recovery on the Notes that the Defendants cannot rebut. The Defendants contend that multiple questions of fact exist concerning whether First City, and hence JVAA, was a holder in due course.

Of course, "summary judgment may be granted only when there is no genuine issue of material fact remaining for trial and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). `As a general rule, all ambiguities and inferences to be drawn from the underlying facts should be resolved in favor of the party opposing the motion, and all doubts as to the existence of a genuine issue for trial should be resolved against the moving party.' However, where the nonmoving party will bear the burden of proof at trial, Rule 56 permits the moving party to point to an absence of evidence to support an essential...