First Federal Sav. Bank v. Tazzia

• Decision Date: 19 September 1988
• Docket Number: No. 87 Civ. 7431 (RWS).,87 Civ. 7431 (RWS).
• Citation: 696 F. Supp. 904
• Parties: FIRST FEDERAL SAVINGS BANK, Plaintiff, v. Henry TAZZIA, Defendant and Third-Party Plaintiff, v. Hans HOFMEISTER, Pinehurst Associates and Forum Companies, Inc., Third-Party Defendants.
• Court: U.S. District Court — Southern District of New York

696 F. Supp. 904

FIRST FEDERAL SAVINGS BANK, Plaintiff, v. Henry TAZZIA, Defendant and Third-Party Plaintiff, v. Hans HOFMEISTER, Pinehurst Associates and Forum Companies, Inc., Third-Party Defendants.

No. 87 Civ. 7431 (RWS).

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

September 19, 1988.

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

Metry, Metry & Sanom, Detroit, Mich. (Samuel T. Sanom, of counsel), Bernstein Seawell Kove & Maltin, New York City (Myron Kove, of counsel), for defendants.

OPINION

SWEET, District Judge.

Plaintiff First City Federal Savings Bank ("First City" or "the Bank") has moved for an order pursuant to Fed.R.Civ.P. 56 granting summary judgment in its favor on its action against defendant Henry Tazzia ("Tazzia") for amounts due on a promissory note in unpaid principal and interest accrued thereon, together with the costs of collection, including reasonable attorneys' fees. Tazzia has moved for a change of venue pursuant to 28 U.S.C. 1404(a) from the U.S. District Court Southern District of New York to the U.S. District Court Eastern District of Michigan. Upon the facts and conclusions set forth below, both motions are denied.

Facts

The material facts surrounding the making of the promissory note are not in dispute and are set forth in First City's statement pursuant to Rule 3(g) of the Civil Rules for the United States District Courts for the Southern and Eastern Districts of New York. First City is a National Banking Association with its principal office in New York City. Tazzia is an individual investor from Michigan.

On November 13, 1986, Tazzia executed a promissory note (the "Note") in favor of First City to obtain a loan for investment in a tax advantaged limited partnership known as Texoma Associates, Ltd. ("Texoma"). The Note provided that Tazzia would pay the Bank the principal amount of $35,000.00 in 20 quarterly installments of $1750.00, commencing on November 30, 1986 with a final installment due on August 31, 1991, together with interest on the unpaid principal at an annual rate equal to 2% above the Bank's Reference Rate of interest as publicly announced by the Bank from time to time. The Note also provided that upon default in payment of any amount due, the entire amount of the Note would become due and payable without notice or demand. Further, Tazzia agreed to waive the right to interpose any set-off or counter-claim and agreed that the Note would be governed by and construed in accordance with the laws of the state of New York. Finally, the Note required Tazzia to reimburse First City for all costs and expenses including attorneys' fees and disbursements incurred in connection with enforcement of Tazzia's obligations.

In addition to the Note, Tazzia executed an Assignment and Security Agreement and a Borrowers Letter. The Security Agreement granted First City a security interest in Tazzia's interest in the Partnership and also required him to reimburse the Bank for all costs and expenses in connection with its enforcement of its rights thereunder. The Borrower's Letter authorized the Bank to date the Note and pay the proceeds of the Loan directly to the Partnership. It also acknowledged that the Bank was acting solely as a lender and not as an investment advisor.

Neither the Note, nor the Security Agreement, nor the Borrower's Letter contained any provision for cancellation of the Note or for cancellation of Tazzia's obligations thereunder in the event that he withdrew from the Partnership, nor did the Bank have any agreement with the Partnership, its promoters or anyone else to cancel the Note in the event of Tazzia's withdrawal from the Partnership.

At some point after the execution of the Note, Texoma dissolved due to financial problems, and Forum Companies, Inc. ("Forum") became the receiving partnership of the proceeds of the Note. Shortly thereafter, in April of 1987, Tazzia withdrew from the investment plan and apparently obtained a release by Forum, Pinehurst Associates and Pinehurst's agent, Hans Hofmeister, promoters and investors in the Partnership.¹ The releasing parties named above guaranteed that all proceeds forwarded by Tazzia in connection with the investment plan would be returned to Tazzia as would the Note itself. On May 12, 1987, Forum returned Tazzia's $1000.00 downpayment plus $1750.00, the amount of his first and only quarterly payment on the Note. There is no indication that the Note itself was returned, however.

On October 13, 1987, the Bank declared the entire unpaid balance of the loan ($31,500.00) due and immediately payable to the Bank together with accrued interest to the date of payment, as provided in the Note. The Bank brought this action against Tazzia in October of 1987. On or about November 13, 1987, the Bank released the proceeds of the Note—$35,000.00—to the Partnership's account at the Bank in New York. Tazzia claims that the Bank made this payment without his knowledge or consent. On January 6, 1988, Tazzia, in turn, sued Forum for any judgment against him in favor of First City.

Summary Judgment on the Notes

In order to grant summary judgment, the court must determine that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c). The court's responsibility is not to resolve disputed issues of fact, Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir.1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987), but to determine whether there are any factual issues to be tried, while resolving ambiguities and drawing inferences against the moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Eastway Construction Corp. v. City of New York, 762 F.2d 243, 249 (2d Cir.1985), cert. denied, ___ U.S. ___, 108 S.Ct. 269, 98 L.Ed.2d 226 (1988). Summary judgment enables a court to "streamline the process for terminating frivolous claims and to concentrate its resources on meritorious litigation." Knight v. U.S. Fire, 804 F.2d at 12.

This action was brought solely for judgment upon an instrument for the payment of money. Under the law of New York, proof of the Note and defendants' failure to make payment thereon establishes a prima facie case for recovery on the Notes. Gateway State Bank v. Shangri-La Private Club for Women, Inc., 113 A.D.2d 791, 493 N.Y.S.2d 226, 227 (2d Dep't 1985), aff'd, 67 N.Y.2d 627, 499 N.Y.S.2d 679, 490 N.E.2d 546 (1986); Mills v. Ryan, 41 A.D.2d 689, 342 N.Y.S.2d 889 (4th Dep't 1973), aff'd, 33 N.Y.2d 948, 353 N.Y.S.2d 730, 309 N.E.2d 130 (1974). In this case, defendant signed the Note pursuant to which he agreed to pay First City installments of principal and interest. A default occurred in payment of principal and interest due, and First City declared the unpaid balance of the debt due and immediately payable together with accrued interest to the date of payment and thereafter transferred the proceeds of the Note.

Tazzia does not deny that he executed the Note, nor does he deny that there has been a default in payment of principal and interest under the terms of the Note. However, Tazzia asserts two main arguments in an attempt to oppose summary judgment, one of which is without merit, and one which goes to the issue of First City's status as a holder of the Note in due course.

First, in opposition to the motion for summary judgment, Tazzia claims that he was released from his obligations under the Note by Forum, Pinehurst Associates and its agent Hans Hofmeister. This claim is without merit. The Bank and Tazzia are the only parties to the Note, and only the Bank can release Tazzia from his obligations to the Bank. Thus, the "release" by Forum, Pinehurst and Hofmeister does not absolve Tazzia from his obligations under the Note to the Bank.

Second, Tazzia has submitted a Counter-Affirmation by his counsel, Samuel Sanom, (the "Sanom Counter-Affirmation") in which Sanom alleges that the Bank's deposit of funds into Texoma's account at the Bank was done in bad faith and with knowledge of Texoma's financial instability and dissolution. Sanom Counter-Affirmation ¶ 6.² Sanom further contends that the Bank should not have released the loan proceeds until the Partnership was formed and maintains that it was contrary to the Bank's security interest in the Partnership to have done so. Id. at ¶ 5. Sanom goes so far as to speculate that the Bank was attempting to use the Tazzia obligation to obtain credit to satisfy unpaid amounts that Forum owed the Bank from unrelated ventures. Id. at ¶ 6.

Holder in Due Course

Tazzia's allegation of bad faith on the part of the Bank is an attempt to raise a genuine issue of material fact as to whether First City is a holder of the Note in due course.³ According to the Uniform Commercial Code ("UCC"), a holder in due course is a holder who takes an instrument (1) for value, (2) in good faith, and (3) without notice that it is overdue or has been dishonored or of any other defense or claim against it on the part of another. N.Y.U.C.C. § 3-302(1). Here, as payee under the Notes, First City may be a holder in due course. But Tazzia's challenge to First City's status as a holder in due course turns on First City's lack of good faith.

Good faith under U.C.C. § 3-302 is defined by the U.C.C. as "honesty in fact in the conduct or transaction concerned." N.Y.U.C.C. § 1-201(19). In an action brought by a bank to recover amounts due on an outstanding promissory note, the New York Court of Appeals, noting that this language was intended as a subjective standard, stated:

the inquiry is not whether a reasonable banker in Chemical's position would have known, or would have inquired concerning the alleged breach by Stanndco of its partnership duties, but rather, the inquiry is what Chemical itself actually knew. If Chemical did not have actual knowledge of some fact which would have prevented a

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