Hill v. Equitable Bank

• Citation: 655 F. Supp. 631
• Decision Date: 02 March 1987
• Docket Number: Civ. A. No. 82-220 CMW.
• Parties: John T. HILL, et al., Plaintiffs, v. EQUITABLE BANK, National Association, Defendant.
• Court: U.S. District Court — District of Delaware

655 F. Supp. 631

John T. HILL, et al., Plaintiffs, v. EQUITABLE BANK, National Association, Defendant.

Civ. A. No. 82-220 CMW.

United States District Court, D. Delaware.

January 9, 1987.

Amendment to Opinion March 2, 1987.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Steven D. Goldberg, of Theisen, Lank, Mulford & Goldberg, Wilmington, Del., of counsel: Richard I. Kovelant, and Douglas Clark Hollmann, of Goldman, Kruger, Kovelant, Hurtt, Hollmann & Kaiser of Laurel, Md., for plaintiffs.

Martin I. Lubaroff, of Richards, Layton & Finger, Wilmington, Del., of counsel: Michael D. Colglazier, and Ty Cobb, of Miles & Stockbridge, Baltimore, Md., for defendant.

OPINION

CALEB M. WRIGHT, Senior District Judge.

INTRODUCTION

These consolidated cases arise out of an alleged scheme to defraud plaintiffs in the purchase of interests in two limited partnerships, Wilmington House Associates ("Wilmington House"), and Eagle Associates ("Eagle").¹ Defendant Equitable Bank issued letters of credit for some of plaintiffs' investments, was involved in a meeting promoting the investment, and had significant financial dealings with the partnerships' organizer. This Court has already ruled on two motions to dismiss the entire complaint² and one motion to dismiss the Racketeer Influenced and Corrupt Organizations Act ("RICO") counts of the Second Amended Complaint.³ Now pending before the Court is defendant's Motion for Summary Judgment on all twenty-three counts of the plaintiffs' Second Amended Complaint. For the reasons stated in the following opinion, this motion will be granted in part and denied in part.

FACTS

Plaintiffs John T. Hill, Thomas and Patricia Ruger, Virgil and Marie Scott, and Descomp, Inc., a corporation controlled and managed by Messrs. Ruger and Scott, invested in the Wilmington House Associates ("Wilmington House") limited partnership on November 11, 1977. Lee P. Der, through Lee P. Der, Inc., served as the general partner of Wilmington House. The limited partnership was formed for the purpose of acquiring and operating an apartment complex.

Defendant Equitable's role in the Wilmington House investment was to finance the plaintiffs' purchase of limited partnership interests. Under the subscription agreement for Wilmington House, plaintiffs were required either to make full payment at the outset or to make a down payment on November 11, 1977 and to make installment payments on May 1, 1978, February 1, 1979, February 1, 1980 and February 1, 1981.⁴ If an investor chose to pay in installments, he was required to secure the payments by irrevocable, negotiable letters of credit issued by a commercial bank acceptable to the general partners. Opening, Ex. A, p. 22. If an investor failed to make the required payment, the bank would make the payment pursuant to the letters of credit. The defaulting investor would then be personally liable to the bank for the missed payment. Id. at 23. Equitable issued letters of credit to the plaintiffs to secure their purchases of Wilmington House limited partnership interests. Plaintiffs, however, had no direct contact with any Equitable official or employee; instead, plaintiffs applied for the letters of credit through Der.

Approximately one year later, in November of 1978, plaintiffs Thomas Ruger, Virgil and Marie Scott, James Stritzinger, and Data Controls North, Inc., a corporation controlled by Ruger and Scott, invested in Eagle Associates ("Eagle"). Eagle was formed as the resyndication of Alma Coal Properties Ltd. ("Alma") and was to be engaged in the coal mining business in West Virginia. Although the businesses of Eagle and Wilmington House were quite different, the method of payment for investors was similar. The Eagle investors also had the option to pay in installments secured by an irrevocable letter of credit. Opening, Ex. C, p. 6. Equitable agreed to finance Stritzinger's purchase of an interest in Eagle; however, the bank declined to finance the purchase of the remaining plaintiffs. Consequently, the remaining plaintiffs paid the balance in January, 1979 on the purchase price for their Eagle interests but characterized these payments as loans to Eagle as security for their future installment payments. In any event, the plaintiffs were bound to make the installment payments. Whether these future payments were fully "secured" by the "loans" or by an irrevocable letter of credit, the Eagle partnership could be sure that the money due it would be received.

Problems with these investments led to this suit. Troubles for Wilmington House began with a fire in the boiler room at Lancaster Court on December 9, 1977.⁵ The venture suffered financial difficulty, and, in January 1979, Lancaster Court Associates filed for bankruptcy. Plaintiffs first learned of this bankruptcy not from Der or the other principals in Wilmington House but from a third party not involved in the investment. Reply, Ex. 5, pp. 520-521. In April of 1979, plaintiffs received their K-1 tax forms for Wilmington House and discovered that the losses for 1978 were twice what Der and the other organizers had indicated they would be.

At about the same time that the Wilmington House investment was falling apart, the Eagle partnership was suffering problems of its own. The K-1 form plaintiffs received for Eagle also indicated losses greater than had been represented. In May and June of 1979, the Eagle partnership shifted from owning and operating its own mine to contract mining. Plaintiffs were told that this change was necessitated by new Environmental Protection Agency regulations which rendered the coal in the mine Eagle owned unmarketable.

In 1980, plaintiffs sued Der and the other principal organizers involved in the two partnerships. Hill v. Der, C.A. 80-146.⁶ Plaintiffs did not sue Equitable for its involvement in these investments until April 1982. Filing of the suit against Equitable resulted from a conversation between Mr. Mason, one of the principals along with Der, and Thomas Ruger, in which Mason told Ruger that Stephen Meszaros, a Vice President of Equitable, had received kickbacks in exchange for arranging the financing for Wilmington House. Prior to this telephone conversation, plaintiffs began to inquire about Equitable's role in the Eagle and Wilmington House investments. These inquiries included letters to the bank and letters to both state and federal bank regulating bodies. Answering, Ex. 31. None of these inquiries proved fruitful for plaintiffs. As will be discussed more fully below, plaintiffs contend that they could not have discovered Equitable's involvement in the alleged federal securities violation and common law fraud prior to the conversations between Mason and Ruger.

The substance of plaintiffs' claims revolves around a meeting held on November 6, 1978. Present at the meeting were Der, Meszaros, plaintiffs Ruger and Scott, and R. Kenneth Rous, a vice-president of Equitable. According to Ruger and Scott, Rous misrepresented to them the soundness of the Eagle investment, the extent of Equitable's involvement with Eagle organizers, and the honesty of Der.⁷

In Hill II, the court held that the bank was potentially liable for failure to disclose facts relating to the misrepresentations Rous made. The facts Rous failed to disclose that related to his representations included those concerning the creation of the Eagle partnership. Eagle represented the resyndication of a prior limited partnership, Alma Properties, that was also a Der syndication. Equitable had issued an irrevocable letter of credit to Richard Ward, the only limited partner in Alma, to finance his investment in Alma. Equitable also had loans outstanding to the Alma partnership and its operating subsidiary, Manila Mining. Problems arose in the Alma partnership, and Ward refused to make the installment payments that were coming due. Ward also went to court to enjoin Equitable from paying Alma on the letter of credit. See Answering, Ex. 37.

Ward's refusal to pay placed Alma in a precarious financial position. Ward's refusal also meant that Alma would not be able to repay its Equitable loans. Representatives of Alma, including Der, and Rous, as a representative of Equitable, held a meeting on August 18, 1978, to find a solution to these problems. The solution arrived at was a resyndication of Alma into another limited partnership, Eagle. Investments into this new limited partnership would in part be used to pay off the debts Alma owed to Equitable. In addition to this resyndication, the lawsuit filed by Ward against the bank and Alma was settled. When Rous represented to plaintiffs that the Eagle investment was sound, he did not inform them of the amount of money Der and Alma owed the bank or of the settlement of the Ward lawsuit.

Plaintiffs also learned that Mr. Meszaros had been asked to leave Equitable because he was too closely involved with Der. Answering, Exs. 33-34. That involvement included trips that Der and Meszaros took together. Meszaros was the Equitable officer who approved the Wilmington House loans. At the time of the November 6th meeting, Meszaros was working with Der and not Equitable, but he may still have been receiving compensation from Equitable. At the time of the November 6th meeting, plaintiffs were not informed of any potential impropriety in Meszaros' relationship with Der.

SUMMARY JUDGMENT

This Court has already issued three opinions on whether or not plaintiffs' claims are viable as pled. Now, after over four years, the Court has extensive factual submissions on which it can determine what counts should be dismissed and what counts should go before a jury at trial. The moving party is entitled to summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c...