Hauser v. Western Group Nurseries, Inc.

• Decision Date: 09 April 1991
• Docket Number: No. 86 Civ. 9697 (SWK).,86 Civ. 9697 (SWK).
• Citation: 767 F. Supp. 475
• Parties: Eric C. HAUSER and Harvey Minars, Plaintiffs, v. WESTERN GROUP NURSERIES, INC. and Western United Nurseries, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

767 F. Supp. 475

Eric C. HAUSER and Harvey Minars, Plaintiffs, v. WESTERN GROUP NURSERIES, INC. and Western United Nurseries, Inc., Defendants.

No. 86 Civ. 9697 (SWK).

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

April 9, 1991.

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Pollack & Greene by Michael E. Greene, New York City, for plaintiff Eric C. Hauser.

Jones, Day, Reavis & Pogue by Carl F. Goodman, New York City, for plaintiff Harvey Minars.

Morrision Cohen Singer & Weinstein by Donald Chase, New York City, for defendants.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

Plaintiffs Eric C. Hauser ("Hauser") and Harvey Minars ("Minars") seek a declaratory judgment in this diversity action exonerating them from personally liability on a certain wraparound partnership note held by defendant Western Group Nurseries, Inc. ("WGN"). The parties have conducted extensive discovery. Plaintiffs now move, pursuant to Rule 56 of the Federal Rules of Civil Procedure, for an order granting them partial summary judgment seeking a determination that although WGN may now be the present holder of the wraparound partnership note, WGN took the note subject to a certain contractual limitation expressly precluding plaintiffs' personal liability. Defendants cross-move pursuant to Rule 56 for summary judgment declaring plaintiffs personally liable on the wraparound note and seek leave, pursuant to Rules 13 and 15 of the Federal Rules of Civil Procedure, to serve an amended answer and counterclaim.

BACKGROUND

The Asset Purchase Transaction

Arizona World Nurseries Limited Partnership ("Arizona World") is an Arizona tax shelter limited partnership, organized in November 1984 to engage in the nursery business previously conducted by defendant Western United Nurseries, Inc. ("WUN").¹ Hauser is one of Arizona World's 200 or so limited partners (the "Limited Partners"). Minars is Arizona World's general partner.

Based upon a tax opinion by Arthur Andersen & Company, Arizona World offered subscribing limited partners "a tax loss of approximately 350% as a percent of cash outlay for 1984" premised upon each subscriber's pro-rata personal liability on a wraparound partnership note dated December 31, 1984 issued by Arizona World to World Nurseries, Inc. ("World") (the "Wraparound Note") in connection with the acquisition of WUN's business. Arizona World represented that for purposes of Regulation D under the Securities Act of 1933 and Section 465 of the Internal Revenue Code, each limited partner would be liable, or "at risk," for his or her pro-rata share of the Wraparound Note, equalling $260,000 per unit of partnership interest.

The purchase and sale of WUN's business was structured so that Arizona World would purchase the nursery stock, plant materials and other nursery assets (collectively, the "Nursery Assets") from World, which would have acquired the Nursery Assets from WUN.² In the first transaction, the sale of the Nursery Assets from WUN to World closed for approximately $22.1 million. The purchase price was payable by World as follows: $3 million cash upon closing; a non-recourse promissory note of about $17 million (the "Non-Recourse Note"); and the balance of $2.1 million to be paid out of the ongoing sale of certain Nursery Assets. In the second transaction, the sale of the Nursery Assets from World to Arizona World closed for approximately $33 million. The purchase price was payable by Arizona World as follows: $6.5 million cash upon closing and a promissory note (the Wraparound Note) of $26.5 million.

The Non-Recourse Note (given by World to WUN) was secured by various assets pursuant to a security agreement dated December 31, 1984, executed in connection with the WUN/World closing (the "Security Agreement").³ The Non-Recourse Note provides in relevant part as follows:

With respect to all sums due hereunder ("Note Obligations"), the Payee WUN, or any holder or transferee hereof shall have no recourse to the Maker or its assets other than the Collateral specified in the Security Agreement and Payee, any holder of this Note or other transferee thereof shall look solely and only to the Collateral as security for the Note Obligations, and for the payment and performance of the Note Obligations.

Non-Recourse Note, Pl.App. Vol. II Ex. "18," at 6. Under the Security Agreement, WUN, as secured party, received certain collateral (the "Collateral") comprised of a purchase money security interest in the Nursery Assets, the Wraparound Note and the security agreement dated December 31, 1984, executed in favor of World in connection with the World/Arizona World portion of the transaction (the "Partnership Security Agreement"). WUN's interest in the Collateral is set forth in the Security Agreement which provides, in relevant part:

1. Security Interest. To secure the timely payment of the Purchase Price ... World shall, and hereby does, grant, convey, assign, pledge and transfer to WUN, a purchase money security interest in and to the Nursery Assets and the Wraparound Note (except that WUN shall not have the right to sue the Limited Partners or General Partners of Arizona World personally thereon other than to the extent of payments made to them by Arizona World) ... and agrees that such security interest attaches upon the Closing of the Purchase Agreement.

Security Agreement, Def.App.Ex. "5," ¶ 1 (emphasis added).⁴ On December 31, 1984, by a document entitled Assignment of Partnership Security Agreement and a Wraparound Note (the "Assignment"), and in accordance with the terms of the purchase agreement entered into between World and WUN dated December 17, 1984 (the "Purchase Agreement"), World assigned and transferred the Partnership Security Agreement and Wraparound Note to WUN. See Def.App. Ex. "8". By a notice of assignment of the same date (the "Notice of Assignment"), World advised Arizona World of the Assignment and requested its consent. See Def.App.Ex. "9". Arizona World responded by letter also dated December 31, signed by Minars in his capacity as general partner, acknowledging receipt of the Notice of Assignment and granting Arizona World's consent to the Assignment (the "Acknowledgement").⁵ Subsequent to the both closings, in February 1986, World defaulted on its obligations to WUN under the Purchase Agreement by failing to make certain payments thereunder.

Arizona Proceedings

Shortly after World's default, WUN (and others) commenced an action in the Superior Court for the State of Arizona, Maricopa County (the "Superior Court"), entitled, Beardsley Holdings, Inc., et al. v. Bryce Corp., et al., Index No. C556082 (the "First Arizona Action"), against various parties including Minars, World and Arizona World, seeking to recover the sums owing to it under the Purchase Agreement and Non-Recourse Note. On October 22, 1986, the Superior Court granted WUN's motion for partial summary judgment "foreclosing WUN's security interest in all of the collateral described in the Security Agreement entered into between WUN and World." Third Amended Rule 54 Judgment (the "Judgment"), Pl.App. Ex. "1(d)," at 5. The Judgment also provided for WUN to request that the Clerk of the Court issue a Special Writ of Execution directing the Sheriff to conduct a foreclosure sale of all the collateral described in the Security Agreement. Id. On November 5, 1986, the Superior Court issued a Writ of Special Execution to the Arizona Sheriff directing the sale of the Collateral.

Defendants in the First Arizona Action appealed and sought a stay of execution on the Judgment which, on November 19, 1986, the Superior Court denied as moot with respect to foreclosure on the Nursery Assets, and granted with respect to the balance of the foreclosure upon the condition that defendants post a bond of $20 million. See Def.App.Ex. "20". By Order dated November 28, 1986, the Arizona Court of Appeals denied a renewed application for a stay of execution. By Memorandum Decision filed on November 10, 1987, the Arizona Court of Appeals affirmed the Judgment.⁶

Pursuant to the Writ of Special Execution, the Arizona Sheriff took possession of the Nursery Assets and Wraparound Note and scheduled a foreclosure sale for December 2, 1986 (the "Foreclosure Sale"). On December 1, 1986, Joseph and Kathleen Tyler formed Western Group Nurseries, Inc. ("WGN"), an Arizona corporation having as its shareholders WUN and its affiliates.⁷ Also on December 1, WUN commenced a second action in the Superior Court against Arizona World, Minars, Hauser and each of the 200 or so Limited Partners, entitled Beardsley Holdings, Inc., et al. v. Arizona World Nurseries Limited Partnership, et al., Index No. C610527 (the "Second Arizona Action"), seeking to recover on the Wraparound Note.

On December 2, 1986, the Foreclosure Sale went forward. WUN purchased the Nursery Assets for $2,000,000 and newly formed WGN purchased the Wraparound Note for $677,000.

On December 4, 1986, WGN commenced an action against Arizona World, Minars, Hauser and each of the 200 or so Limited Partners seeking to recover upon the Wraparound Note (the "Third Arizona Action"). The complaint in the Third Arizona Action was virtually identical to that in the Second Arizona Action. On February 17, 1987, the Second Arizona Action was voluntarily dismissed without prejudice. By judgment dated December 30, 1987, the Superior Court dismissed the Third Arizona Action as to Hauser and the other limited partners, except those associated with World,⁸ for lack of personal jurisdiction.

During the pendency of the instant action, on July 24, 1989, WGN was granted summary judgment in the Third Arizona Action against Arizona World, accelerating the entire principal balance due under the Wraparound Note, together with accrued interest, totalling $39,252,469.00 as of July 1, 1989. Arizona World appealed the July 24, 1989 judgment, and by order dated December 14, 1989, the appeal was dismissed.

By stipulation and...