Lapis Enterprises, Inc. v. International Blimpie Corp.

• Decision Date: 31 December 1981
• Citation: 445 N.Y.S.2d 574,84 A.D.2d 286
• Parties: LAPIS ENTERPRISES, INC. et al., Appellants, v. INTERNATIONAL BLIMPIE CORP. et al., Defendants; New Jersey Bank, N.A., Respondent.
• Court: New York Supreme Court — Appellate Division

Page 574

445 N.Y.S.2d 574

84 A.D.2d 286

LAPIS ENTERPRISES, INC. et al., Appellants, v. INTERNATIONAL BLIMPIE CORP. et al., Defendants New Jersey Bank, N.A., Respondent.

Supreme Court, Appellate Division,

Second Department.

Dec. 31, 1981.

Harry Salvan, New York City, for appellants.

Natter & Natter, New York City (Seth Natter, New York City, of counsel), for respondent.

Before HOPKINS, J. P., and DAMIANI, TITONE and MANGANO, JJ.

TITONE, Justice.

This action arises from a business transaction in which the individual plaintiffs, Daniel and Carol Lapidus, through plaintiff Lapis Enterprises, Inc. (a corporation formed by the said individuals), acquired a Blimpie franchise. The Lapiduses were guarantors of an equipment lease between Lapis Enterprises, Inc. and the defendant Academy Leasing Corp., and, as security for their guaranty, executed a second mortgage on their residence to Academy. The equipment lease and second mortgage were purchased by the defendant New Jersey Bank N.A., and the bank thereupon received the monthly rental payments.

Within a year of its acquisition by the corporate plaintiff, the franchise failed and the business was closed, causing a default in payment under the equipment lease. After giving notice to all parties having an interest, an auction sale of the equipment was conducted and the equipment was sold. The bank claims that there is a deficiency between the balance due and the proceeds of the sale.

On February 5, 1979, the individual plaintiffs filed voluntary petitions in bankruptcy in the United States District Court for the Eastern District of New York. The bank filed a proof of claim in each proceeding. Schedule A-2 of each petition acknowledged that the second mortgage was executed by the individual plaintiffs and that such mortgage was security for a corporate loan. Item "8" of Schedule B-2 requires the petitioner to set forth the estimated value of any "contingent and unliquidated claims" he may have. The petitions of the individual plaintiffs were void of any claim with respect to rescission of the second mortgage.

During the course of the bankruptcy proceedings, the trustee in bankruptcy requested and was granted an order authorizing him "to disclaim title to and to abandon the property" in view of the first mortgage held by Chase Manhattan Bank and the second mortgage held by New Jersey Bank, N.A. By orders dated April 12, 1979, the individual plaintiffs were discharged and released from personal liability with respect to all of their dischargeable debts.

The plaintiffs thereafter commenced the present action against multiple parties. With respect to the bank, the plaintiffs assert three causes of action, the fifth, sixth and seventh. The fifth cause of action alleges, inter alia, that an attorney and representative of International Blimpie Corporation recommended defendant Academy Leasing Corp. as the finance company to be used, representing to plaintiffs that Academy was "most reliable and honest" and was part of the Blimpie Franchise System when, in fact, Academy had been used by Blimpie and the attorney in 20 other transactions, all of which resulted in litigation.

The fifth cause of action also alleges that "on November 7, 1977, and no other date", Academy had the individual plaintiffs sign "papers", that amongst those "papers" were an hypothecation agreement, a second mortgage, an equipment lease, and a guarantee, that the hypothecation agreement is void by reason of its illegality, that the equipment lease and the second mortgage are subject to rescission by reason of Academy's overreaching, and that the failure to explain the guarantee to the individual plaintiffs constitutes fraud rendering the guarantee void.

The sixth cause of action alleges that the second mortgage is invalid on the grounds that (a) Academy was only a nominee of the defendant bank, which is unauthorized to do business in New York, (b) the mortgage was set for $30,000 in installments of $727.50 for 60 months, (c) the individual plaintiffs never intended to give a mortgage on their dwelling as security for any loan, and (d) the mortgage depended on conditions outside the mortgage.

In the seventh cause of action, it is alleged that Academy and the bank, on the basis of a void equipment lease, seized possession of $3,000 worth of the corporate plaintiff's personal property, thereby converting it to their own use.

By notice of motion dated December 31, 1979, the bank moved to dismiss the complaint as against it on the grounds that (1) since it was a national banking association with its principal place of business in New Jersey and no offices in New York, the court lacked personal jurisdiction, (2) the complaint failed to state a cause of action, and (3) the causes of action claimed are barred by the doctrine of res judicata. The plaintiffs cross-moved for summary judgment. Special Term granted the bank's motion to dismiss on the ground of lack of jurisdiction, and denied the plaintiffs' cross motion. An appeal was taken and, on November 24, 1980, this court modified Special Term's order to the extent of denying the bank's motion to dismiss on the ground of lack of jurisdiction upon our holding that the action was "local in nature" and jurisdiction existed. The order insofar as it denied plaintiffs' cross motion for summary judgment was affirmed (Lapis Enterprises v. International Blimpie Corp., 78 A.D.2d 898, 433 N.Y.S.2d 215).

The bank moved to renew its prior motion to dismiss. On March 24, 1981, an order was entered granting renewal and dismissing the complaint as to the bank.

The first issue raised by these facts is whether, in light of the prior proceedings in bankruptcy, the individual plaintiffs are barred from bringing this action, with respect to the bank, on the grounds of res judicata and lack of standing.

In Landmark Fin. Corp. v. Cox, (D.C.Ga.) 2 B.R. 739, an order of abandonment was issued at the first meeting of creditors in light of a certain loan contract. Later in the proceeding, the court, sua sponte, raised the issue of the loan's validity and held that the loan was void. In so holding, the court stated (p. 741): " 'res judicata can be invoked, a valid judgment, usually in another action, between the same parties or their privies must have adjudged some matter with finality.' * * * The summary abandonment of collateral security on burdensome property does not meet these criteria. It is not a final judgment, rather its purpose is to dispose of property 'which is either worthless, or overburdened, or for any other reason certain not to yield any benefit to the general estate.' * * * Thus, in entering an Order of Abandonment, the Bankruptcy Court performed an administrative function and did not finally adjudicate the validity of the loan contracts. Accordingly, the Bankruptcy Judge's action at the First Meeting of Creditors did not preclude late consideration of the validity issue." This is equally applicable to the case at bar and, therefore, the consideration of the validity of the second mortgage by this court is not barred by the doctrine of res judicata.

While the individual plaintiffs are not barred on the basis of res judicata from bringing this action, they may be barred for lack of standing. Under section 70(a) (subd. ) of the former Bankruptcy Act (repealed by Public Law 95-598, 92 Stat. 2549), the bankrupt's title to "rights of action arising upon contracts, or usury" vests in the trustee in bankruptcy (see 4A Collier, Bankruptcy par. 70.28). As noted above, a trustee, with the approval of the Bankruptcy Court, may elect to abandon and disclaim any property or chose in action which is either worthless, overburdened or for any other reason certain not to yield any benefit to the general estate (4A Collier, Bankruptcy par. 70.42 Oldmixon v. Severance, 119 App.Div. 821, 823, 104 N.Y.S. 1135). Upon such abandonment, title revests in the bankrupt (see Rosenblum v. Dingfelder, (2nd Cir.) 111 F.2d 406; Kaplan v. Ringland, 66 Misc.2d 448, 321 N.Y.S.2d 405).

As the doctrine of abandonment presupposes knowledge on the part of the trustee (Sessions v. Romadka, 145 U.S. 29, 12 S.Ct. 799, 36 L.Ed. 609), the trustee cannot be said to have abandoned a right of action if he was not aware of its existence (First Nat. Bank of Jacksboro v. Lasater, 196 U.S. 115, 118, 25 S.Ct. 206, 207, 49 L.Ed. 408; Hermsmeyer v. A.L.D. Inc., 239 F.Supp. 740; Grauman v. City Co. of New York, 113 F.Supp. 437) and "the cause of action vested in the trustee in bankruptcy in the absence of an affidavit from the that the alleged asset had been scheduled as an asset...