Industrial Development Bank of Israel Ltd. v. Bier

• Decision Date: 14 January 1991
• Citation: 565 N.Y.S.2d 980,149 Misc.2d 797
• Parties: , 14 UCC Rep.Serv.2d 948 INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED, Plaintiff, v. Jules BIER and Natanel Bier, Defendants.
• Court: New York Supreme Court

Page 980

565 N.Y.S.2d 980

149 Misc.2d 797, 14 UCC Rep.Serv.2d 948

INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED, Plaintiff, v. Jules BIER and Natanel Bier, Defendants.

Supreme Court, New York County,

IAS Part 22.

Jan. 14, 1991.

Easton & Echtman (Irwin M. Echtman and Stuart F. Cartoon, of counsel), New York City, for plaintiff.

Tenzer, Greenblatt, Fallon & Kaplan (Harris N. Cogan and John P. Bevilacqua, of counsel), New York City, for defendants.

EDWARD H. LEHNER, Justice:

The principal issue in this case is whether this state should enforce a loan agreement, executed in Israel between Israeli residents and to be performed there, which, as a consequence of the provision calling for a variable rate of interest linked to the Israeli consumer price index, is claimed to result in a rate of interest that exceeds the maximum allowed by New York law.

FACTS

Plaintiff is an Israeli bank which makes loans to enable businesses to build factories in development areas in Israel, and to In 1978 defendant Jules Bier, having manufactured zippers in the United States and Mexico for a number of years, emigrated to Israel and established his business there by forming Flair (Israel) Ltd. ("Flair"). Between March 19, 1979 and January 29, 1985 Flair entered into eight loan agreements with plaintiff, securing the borrowings with the company's assets. The complaint alleges that each loan was guaranteed by defendants.

assist those that carry on a substantial export trade.

Beset with labor and other economic problems, Flair ceased operations in June of 1985. Defendants then left Israel and now reside in New York, the circumstances under which they left the country being subject to differing accounts.

According to plaintiff, defendants "fled the country" and "deserted" the business "without even making provision to pay the workers' salaries".

Defendants' version is that the company was having difficulty meeting its payroll and defendant Jules Bier "had been advised that if I were not able to meet the obligations of Flair to its employees, Histadrut would cause me to be thrown in jail and prevent me from leaving the country". (affidavit of Jules Bier sworn to July 12, 1990) Defendants claim that they went to Germany and New York in order to seek outside investors for their business.

In defendants' absence, plaintiff declared Flair in default of the loan agreements and exercised its rights thereunder to accelerate the debt and have a receiver appointed to sell the business. After the withdrawal of two prospective bidders, the receiver sold the business to the sole remaining bidder, which sale was approved by the District Court of Tel Aviv. The proceeds were then credited to Flair, reducing its obligation under the loan agreements. This action ensued.

In its second amended complaint, dated January 30, 1990, plaintiff seeks by its first cause of action to recover 5.6 million New Israeli Shekels (NIS) from the guarantors, an amount reflecting the reduction by 4.3 million NIS of a claimed total obligation under the loan agreements of 9.9 million NIS as of February 1, 1988. The second cause of action seeks attorneys' fees pursuant to the guarantees. On this motion plaintiff seeks summary judgment only on the issue of liability.

CONTENTIONS OF THE PARTIES

Defendants contend that the sale of Flair's assets, even though judicially approved, was riddled with fraud and was not commercially reasonable both with respect to the procedural circumstances of the sale as well as to the amount of the proceeds realized.

As to the claimed procedural failings, defendants assert that the receiver was appointed without notice to Flair's principal and that the sale was to an entity related to plaintiff, and was consummated only after the two other bidders withdrew without explanation. Although the sale took place in June of 1985, defendants find it "curious" that the net proceeds had not been remitted to plaintiff by the time the complaint was amended on January 30, 1990, and assert that such fact is further evidence of fraud.

As to the substance of the transaction, defendants contend that the sale price was only one fifth of the value of Flair's fixed assets. They point to plaintiff's statement that it believed the net proceeds of the sale would be 4.3 million NIS (paragraph 10 of the second amended complaint), rather than the 903,795 NIS which plaintiff now claims was realized (affirmation of Irwin M. Echtman dated May 14, 1990). It is argued that, had the sale been commercially reasonable, Flair would have had sufficient assets to satisfy the outstanding balance on the loans.

Defendants also contend that the loans were usurious and therefore should not be enforced since the interest rate was both compounded as well as indexed to Israel's consumer prices, which were subject to inflation that at times exceeded four hundred percent annually.

Plaintiff takes the position that the sale of Flair's assets should be recognized as In response, defendants contend that the Israeli court's approval of the sale by the receiver is not entitled to comity because: i) they did not receive notice of the sale; ii) of fraud underlying the proceeding; and iii) recognition of the foreign judgment would seriously conflict with New York's public policy against usury.

                valid under the principle of comity.   It argues that the law of Israel is similar to that of New York in that in both jurisdictions where the sale of collateral is judicially approved, it is conclusively deemed to be commercially reasonable.   As to the deficiency sought, it argues that Israeli law governs since that jurisdiction has more significant contacts with the loan transaction, and that under such law the loan is enforceable
                

DISCUSSION

The parties apparently agree that the laws of New York and Israel are similar with respect to the procedure applicable to the sale of collateral, as they have both chosen to frame their legal arguments within the parameters of the Uniform Commercial Code ("UCC").

The first question is whether the decision of the Israeli court approving the receiver's sale of Flair's assets conclusively establishes, pursuant to the doctrine of comity, that the disposition was commercially reasonable under UCC § 9-507(2) and § 9-504(3). UCC § 9-507(2) provides that a "disposition which has been approved in any judicial proceeding ... shall conclusively be deemed to be commercially reasonable".

In Altman v. Altman, 150 A.D.2d 304, 542 N.Y.S.2d 7 (1st Dept.1989), app. den. 74 N.Y.2d 612, 547 N.Y.S.2d 846, 547 N.E.2d 101, it was said (150 A.D.2d pp. 306-307, 542 N.Y.S.2d 7):

"Under the doctrine of comity, full faith and credit will be accorded to a judgment of a foreign country unless it is established that the judgment is violative of a strong public policy or has been procured by extrinsic, as opposed to intrinsic, fraud. (Greschler v. Greschler, 51 N.Y.2d 368, 376 [434 N.Y.S.2d 194, 414 N.E.2d 694]; Tamimi v. Tamimi, 38 A.D.2d 197 .) The distinction between extrinsic and intrinsic fraud is defined as follows:

'Intrinsic fraud is fraud which goes to the existence of a cause of action, and is held to be no defense. The American courts hold that a foreign judgment cannot be attacked on the ground that it was procured by false testimony....

'The fraud which will be available to a [party] in his attack upon a foreign judgment, in the main, is fraud which has deprived him of the opportunity to make a full and fair defense. There are many varieties of such fraud. Thus, where the defendant failed to present his case because the plaintiff agreed to drop the suit or to compromise the case or notified the defendant that the proceeding had been dismissed, or by any other agreement or promise lulled the defendant into a false security, the judgment may be attacked by the defendant'. ( Tamimi v. Tamimi, supra, at 203-204 [quoting 2 Beale, Conflict of Laws § 440.4].) Thus extrinsic fraud 'must be in some matter other than the issue in controversy in the action'...."

See also Robinson v. Robinson, 120 A.D.2d 415, 501 N.Y.S.2d 874 (1st Dept.1986), app. dism. 68 N.Y.2d 804, 506 N.Y.S.2d 867, 498 N.E.2d 430.

In the case at bar, defendants do not challenge the jurisdiction of the Israeli court and have offered no proof of extrinsic fraud. Rather, the claims are of fraud in the conduct of the foreclosure and sale, and not a deprivation of the opportunity to make a full and fair defense. It is observed that, although the sale took place in 1985, until the commencement of this action defendants (principals of the debtor as well as guarantors) did nothing to assail the propriety of the judgment of that court.

While defendants may not have appeared at the receiver's sale, they do not dispute plaintiff's assertion that the sale was duly advertised. Although it has been held that a guarantor is considered a "debtor" under UCC Article 9 and hence entitled to notice of a sale under UCC 9-504(3) [Marine Midland Bank, N.A. v. Kristin International Ltd., 141 A.D.2d 259, 534 N.Y.S.2d 612 (4th Dept., 1988); Chase Manhattan Bank, N.A. v. Natarelli, 93 Misc.2d 78, 401 N.Y.S.2d 404 (Sup.Ct. Monroe Co.1977) ], and that notice by publication is insufficient to satisfy the notice requirement of that section [Cate v. Archon Oil Company, Inc., 695 P.2d 1352 (Okl.1985); Vermont National Bank v. Hamilton, 149 Vt. 477, 546 A.2d 1349 (1988) ], the court finds that under the facts herein, where the location of defendants was unknown after their sudden and unexpected departure from Israel, publication was a sufficient means of satisfying the notice requirement.

Moreover, it has been held that where a sale is by a court-appointed receiver, the debtor and guarantor are not entitled to notice of sale. Executive Bank of Fort Lauderdale, Florida v. Tighe, 54 N.Y.2d 330, 336, 445 N.Y.S.2d 425, 429 N.E.2d 1054...