Joint Venture Asset Acquisition v. Zellner

Decision Date04 December 1992
Docket Number87 Civ. 6081 (RWS) and 87 Civ. 6353 (RWS).,87 Civ. 6100 (RWS),No. 87 Civ. 6102 (RWS),87 Civ. 6102 (RWS)
Citation808 F. Supp. 289
PartiesJOINT VENTURE ASSET ACQUISITION, Plaintiff, v. Michael J. ZELLNER, Joseph Krader, Zellner Plastering Co., Inc. and James R. Wilcox, Defendants and Plaintiffs on Counterclaims, v. INTERDISCOUNT SERVICES, LTD., Tara K. Cole, First California Lessors Corp. and Gene Lobato, Additional Defendants on Counterclaims.
CourtU.S. District Court — Southern District of New York


Shustak Jalil Sanders & Heller (Gayle S. Sanders, of counsel), New York City, for plaintiff.

Richard I. Wolff, P.C. (Richard I. Wolff, of counsel), New York City, for defendants/counterclaimants.


SWEET, District Judge.

The plaintiff Joint Venture Asset Acquisition ("JVAA") seeks to enforce promissory notes in favor of First City National Bank and Trust Company ("First City") (the "Notes") against the defendants and counterclaimants Michael J. Zellner ("Zellner"), Joseph Krader ("Krader"), Zellner Plastering Co., Inc. ("ZPCI"), and James R. Wilcox ("Wilcox"). After a bench trial and upon the following findings and conclusions, the amended complaint will be dismissed.

The Parties

First City had offices in New York City and its principal officers and majority stockholders were two brothers, A. Frederick Greenberg and Richard Greenberg (the "Greenbergs"), who founded First City. Neither of the Greenbergs had prior banking experience. First City at its inception in October 1985 was incorporated as a savings and loan association known as First City Federal Savings Bank with a capitalization of $3 million. Its purpose was to make loans to borrowers with high net worth to enable the borrowers to invest in limited partnerships. First City utilized a network of brokers to that end and in the first year of its operation 70-75% of the loans it made were utilized to make investments in limited partnerships. During the first year three or four limited partnerships were financed by First City.

In 1986 First City became a national bank and known as First City National Bank and Trust Company and on or about December 20, 1989 the Comptroller of the Currency declared First City insolvent, and appointed the Federal Deposit Insurance Corporation (the "FDIC") as Receiver.

JVAA, in which the Greenbergs have an interest and whose general partner Stanley Abel ("Abel") was a former director and shareholder of First City, acquired its interest in the Notes by a Memorandum Agreement dated April 7, 1988 and in 1989 JVAA acquired the Notes.

Zellner and Krader are California residents and co-owners of ZPCI. Zellner was the founder and principal administrator, and Krader the outside man. Both immigrated from Eastern Europe and together built ZPCI into a successful million dollar enterprise. Wilcox is a registered representative and a Nevada resident.

The Defendants obtained loans from First City in 1986 in order to invest in a tax-advantaged limited partnership known as Beam Systems Income Fund I ("Beam"), which purported to involve high technology digital facsimile document transmission equipment.

Prior Proceedings

After learning that the proceeds from the Notes never reached Beam, the Defendants refused payment on the Notes. In August and September 1987, First City sued the Defendants to recover unpaid principal and interest accrued on the Notes, together with the costs of collection, including attorneys' fees. Counterclaims were filed in February 1988. An amended complaint and amended counterclaims were subsequently served. The cases were consolidated in February 1989.

In September 1989, First City moved for summary judgment. In December 1989 the Comptroller of the Currency declared First City insolvent, and the FDIC was appointed as Receiver. On December 22, 1989, the Honorable Vincent L. Broderick signed an order staying all actions and proceedings in the Southern District of New York involving First City, including these actions.

The stay expired on April 25, 1990. Prior to that date, upon payments by JVAA, the FDIC and JVAA entered into an agreement under which FDIC acknowledged that JVAA had assumed First City's rights in a number of defaulted loans, including those at issue here and would intervene in all pending actions to seek enforcement. JVAA intervened in this litigation by stipulation on August 14, 1990. In the stipulation, JVAA claimed whatever holder in due course status First City previously enjoyed.

Oral argument was heard on JVAA's renewed motion for summary judgment on September 26, 1991. By opinion dated January 14, 1992, this court denied the motion, concluding that there were genuine issues of fact as to the extent, if any, of First City's "actual knowledge of some fact which would prevent a commercially honest individual from accepting the Notes." 782 F.Supp. 232

The trial commenced on June 10, 1992, continued on June 11, 16, 17, and 18, 1992, and concluded on June 25, 1992. Final submissions were filed by agreement of the parties on October 30, 1992, at which time the action was considered finally submitted.

The Issue

This case is but one of many involving failed and fraudulent limited partnerships financed by First City in the decade of the eighties.1 The issue framed for trial was set forth in the denial of the JVAA motion for summary judgment as set forth above.

Because the officers of First City had knowledge of the purpose of the Notes and uncertainty concerning the propriety of the payment of the proceeds, First City was not a holder in due course. The Defendants were defrauded, their claim for fraud was not waived, and judgment will be entered dismissing the amended complaint with costs.

The Facts

Zellner and Krader from time to time prior to the end of 1985 had purchased limited partnerships at the suggestion of their accountant. In late 1985 the accountant suggested meeting with Richard McNamee ("McNamee") and Tom Devaney ("Devaney"), officers of MPA Associates, Inc. ("MPA"), who were seeking investors in the Beam limited partnerships.

Beam was described as being in the business of developing and operating high technology facsimile document transmission equipment. At a December 30, 1985 meeting, Devaney was introduced as the CEO of MPA who was to be Beam's managing agent.

According to Devaney, Beam's financing was in place, the fax machines to be installed in hotels were in service, only a few units were left, and they wanted to "get rid of them." Zellner and Krader decided to invest that day.

Gene Lobato ("Lobato") arrived the following day, December 31, 1985, to loan Zellner and Krader one-half of the down payment on their investment using the names of First Cal Leasing d/b/a First California Lessors Corp. Zellner, Krader, and ZPCI purchased interests in Beam on the basis of the Private Placement Memorandum ("PPM").

Zellner and Krader made their investment decisions in reliance on the representations of officials of MPA, the promoter/manager of Beam, and on the additional representations of Lobato that (i) Beam had equipment already in service at major hotel locations; (ii) the unpaid portion of the purchase price on their investment would be paid off out of the operating revenues of Beam; and (iii) in the highly unlikely event that this revenue stream was insufficient to pay off the unpaid portion of the purchase price, MPA guaranteed making the payment.

Zellner and Krader each purchased 5 units and ZPCI each purchased 10 units of Beam. The purchase price per unit was approximately $10,000, of which approximately $1,300 was made as an initial payment with the obligation to pay the unpaid portion formalized by a subscription/assumption agreement. The investment was structured so that the investors would obtain certain tax benefits.

InterDiscount Services, Ltd. ("InterDiscount"), a presently defunct corporation, had been retained by Beam to provide financing. InterDiscount, the shares of which were held 50% by Tara Cole ("Cole") and 50% by Gideon Chern ("Chern"), sought to arrange financing for Beam. Cole had been introduced by John Rice.

Cole met the Greenbergs in January 1986 or at the very end of 1985 through another broker, John Rice ("Rice"). The Greenbergs first introduced Cole to Michael Cash ("Cash") as the person managing National Capital Corp. ("NCC") and the business of First City and InterDiscount was described. The documents were to be forwarded to NCC which Cole believed to be owned by First City. Cash was president of NCC and Harvey Hirschfeld ("Hirschfeld") its executive vice president. The office of NCC was within the suite 1101 at 60 Madison Avenue, in New York, maintained by the Greenbergs, the phones were answered "Executive Offices," and First City and NCC shared telex and cable designations. NCC paid no rent. There was no listing to NCC or its officers on any director or door at 60 Madison Avenue. First City prepared the forms for transaction which were distributed by NCC and Greenberg participated in the preparation of the financial grid and guidelines which NCC used in reviewing the applications to be submitted to First City. NCC paid First City an origination fee on loans made by it processed by NCC. Greenberg told Cole that First City's agent, NCC, reviewed the offering memorandums and checked out the syndicators. Hirschfeld testified that he had read the Beam offering memorandum and it was available for anyone at NCC to review. First City agreed to make $4.8 million available to qualified investors and introduced by InterDiscount. Cole was advised that NCC was responsible for assembling and evaluating the paper work on these loans, reviewing the offering memorandums and checking the syndicators.

A second meeting was then held prior to January 13, 1986 at which Cole, the Greenbergs, Cash and Rice were present and the contents of NCC's letter of January 13, 1986 to InterDiscount were discussed at length by the...

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