In re Fordham
| Decision Date | 01 August 1991 |
| Docket Number | Bankruptcy No. 89-41001,Adv. No. 90-4009.,89-41002 and 89-41004 |
| Parties | In re John FORDHAM, Dennis Carlson, Roger Carlson, Debtors. FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. John FORDHAM, Dennis Carlson and Roger Carlson, Defendants. |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts |
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Alan B. Rubenstein, Rackemann, Sawyer & Brewster, Boston, Mass., for Federal Deposit Ins. Corp.
Mark N. Polebaum, Hale and Dorr, Boston, Mass., for debtors.
This is a so-called "lender liability" case, replete with all the theories that resourceful counsel can muster. First Mutual Bank for Savings ("First Mutual"), the original plaintiff, has moved for summary judgment with respect to its claims under certain personal guarantees and with respect to Counts I through IV of the counterclaim of the defendants and chapter 11 debtors John Fordham, Dennis Carlson and Roger Carlson (the "Debtors"). The Debtors have filed a cross-motion for summary judgment on Count I of the counterclaim. They have also moved for leave to file an amended and supplemental answer, counterclaim, crossclaim and jury demand. This amendment would add a count for negligence, recast the fiduciary duty claim, amend the fraud claim, and make various other minor amendments. After the argument on the summary judgment motions, the Federal Deposit Insurance Corporation ("FDIC"), as Liquidating Agent/Receiver for First Mutual, was substituted as plaintiff. It has sought leave to file an amended reply to the Debtors' counterclaims in which it asserts new defenses under 12 U.S.C. § 1823(e), under the doctrine of D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), and under the federal holder in due course doctrine. Set forth here are my conclusions of law on all four motions.
This adversary proceeding originated as an action commenced by First Mutual in state court shortly prior to the Debtors' chapter 11 filings here. That action was brought against the Debtors and one William C. McLay ("McLay"), who is not a debtor in this court. In Count I of the complaint, the only count encompassed in First Mutual's present motion, First Mutual seeks judgment against the Debtors for all amounts due under: (i) the terms of a promissory note dated November 9, 1987 in the principal sum of $12,500,000 (the "Note") signed by the Debtors and McLay as partners on behalf of Rivers Edge Realty Partnership ("Rivers Edge"), and (ii) the terms of an instrument of the same date guarantying payment of the Note and signed by the Debtors and McLay in their individual capacities (the "Guaranty"). The other counts of the complaint seek to reach and apply various properties in satisfaction of the requested judgment. The Debtors have responded with an answer, counterclaim, crossclaim against McLay and jury demand. In their counterclaim, the Debtors allege that First Mutual breached its contractual obligations contained in the various loan documents (Count I), breached a fiduciary duty owed them (Count II), committed unfair acts and deceptive practices in violation of Mass. Gen.L. ch. 93A (Count III), and misrepresented the terms of the loan (Count IV).
Following the filing of their chapter 11 petitions in 1989, the Debtors removed the case as against them to this court and the matter was scheduled for jury trial. The parties engaged in substantial discovery. At the final pretrial, it appeared that there may be no genuine issues as to any material fact with respect to at least some of the legal questions. Having in mind also the controversy concerning this court's jurisdiction to conduct a jury trial, I ordered the trial continued generally pending the filing and disposition of the present motions for summary judgment. The same pretrial order required First Mutual to file an opposition to the Debtors' motion for leave to file an amended and supplemental answer, counterclaim, crossclaim and jury demand, which had been filed three days before. I thereafter heard arguments on the three motions then pending and took them under advisement.
The principles governing the granting of summary judgment under Fed. R.Civ.P. 561 are familiar. In order to prevail against First Mutual's motion, the Debtors must show that there exists a genuine issue of material fact concerning First Mutual's claim or any counterclaim of the Debtors. Applicable substantive law determines materiality. Only those facts that might affect the outcome of the case are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). If the motion is supported by an affidavit, the affidavit must "set forth such facts as would be admissible in evidence." Fed.R.Civ.P. 56(e). It is not sufficient that the nonmoving party contest a material fact; the factual issue must be a genuine one. The rule itself states:
When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party\'s pleading, but the adverse party\'s response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial.
Fed.R.Civ.P. 56(e). The Debtors do not contest the existence of the loan or the execution of the loan documents; they rely solely upon their counterclaims. On these they have the burden of proof. The Supreme Court has clarified the application of summary judgment principles to a case where the non-moving party has the burden of proof:
. . . The plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party\'s case, and on which that party will bear the burden of proof at trial. . . . Of course, a party seeking summary judgment always bears the initial responsibility of informing the district court of the basis of his motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any\' which it believes demonstrate the absence of a genuine issue of material fact. But . . . we find no express or implied requirement in Rule 56 that the moving party support its motion with affidavits or other similar material negating the opponent\'s claim.
Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986).
This does not mean that the nonmoving party must, for example, depose his own witnesses in order to show that he can sustain his burden of proof. He may simply name the witness from whom he would elicit the necessary facts, and it is up to the moving party to somehow show that the named witness' possible testimony raises no genuine issue as to any material fact. Celotex Corp. v. Catrett, 477 U.S. at 328, 106 S.Ct. at 2555 (White, J. concurring). First Mutual is not faced with such a daunting task. It has deposed the witnesses upon whom the Debtors rely so that we know what the Debtors' evidence will be. Extensive discovery conducted by both parties reveals a substantial body of undisputed facts.
This case is a microcosm of the current travails of real estate development in New England resulting from the optimism concerning real estate investment which was so pervasive in the mid 1980's. Because of the broad range of charges contained in the Debtors' counterclaim, some elaboration is required.
On November 9, 1987, First Mutual agreed to make an acquisition and construction loan to Rivers Edge in the sum of $12,500,000.00. The purpose of the loan was three-fold: to refinance the prior acquisition of a mill complex in Lincoln, Rhode Island known as Albion Mills; to substantially rehabilitate the property; and to convert it into approximately 200 residential condominiums with a health club, tennis court and parking for 400 automobiles. The loan is evidenced by the Note, the Guaranty, a loan agreement and a construction loan agreement, all dated November 9, 1987. This loan is at the center of the current controversy.
Rivers Edge is a Massachusetts general partnership, the general partners of which are McLay and the three Debtors. McLay holds a fifty percent interest in the partnership, Roger Carlson and John Fordham each hold a twenty-two percent interest, and Dennis Carlson holds a six percent partnership interest.
McLay is an architectural designer. Prior to 1975, he worked in various construction jobs, including four years as a mechanical designer. In 1975, he formed W.C. McLay Associates, an architectural design firm providing design, civil engineering, and construction management services. He was thereafter active in architectural design and construction management. In 1983, he began engaging in real estate development, including condominium projects.
The principal business of the Debtors is Moisture Systems Corporation. Moisture Systems Corporation is a Massachusetts corporation founded by Roger Carlson and John Fordham in 1976. It is in the business of manufacturing and selling moisture detection instrumentation, and has been quite successful. Roger Carlson is its president, John Fordham its vice-president and treasurer, and Dennis Carlson its clerk. The three Debtors are also the sole directors. Roger and Dennis Carlson are brothers.
Beginning in the early 1980's, the Debtors began investing in real estate and undertaking real estate development projects on a part-time basis. Their projects included multi-family residences and office buildings. With respect to most, if not all, of the projects, Dennis Carlson acted on behalf of Roger Carlson and John Fordham in performing the responsibilities of the owner.
The Debtors met McLay in 1984 when they hired him...
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