Lund v. Chemical Bank

• Decision Date: 23 June 1992
• Docket Number: No. 84 Civ. 1621 (RWS).,84 Civ. 1621 (RWS).
• Citation: 797 F. Supp. 259
• Parties: Russell T. LUND, Jr., Lund's Inc. and Wardwell M. Montgomery, Plaintiffs, v. CHEMICAL BANK, Defendant. CHEMICAL BANK, Third-Party Plaintiff, v. LAIDLAW ADAMS & PECK, INC., Third-Party Defendant.
• Court: U.S. District Court — Southern District of New York

797 F. Supp. 259

Russell T. LUND, Jr., Lund's Inc. and Wardwell M. Montgomery, Plaintiffs, v. CHEMICAL BANK, Defendant.

CHEMICAL BANK, Third-Party Plaintiff, v. LAIDLAW ADAMS & PECK, INC., Third-Party Defendant.

No. 84 Civ. 1621 (RWS).

United States District Court, S.D. New York.

June 23, 1992.

COPYRIGHT MATERIAL OMITTED

Fredrikson & Byron, P.A., Minneapolis (Ted S. Meikle, of counsel), Dorsey & Whitney, New York City (Susan Lesinski, of counsel), for plaintiff Russell T. Lund, Jr.

Parker Chapin Flattau & Klimpl, New York City (Stephen G. Rinehart, of counsel), for plaintiff Wardwell M. Montgomery.

Chemical Bank Legal Dept., New York City (Eileen J. Berkman, James L. Condren, of counsel), for defendant Chemical Bank.

OPINION

SWEET, District Judge.

Plaintiffs Russell T. Lund, Jr. ("Lund") and Wardwell M. Montgomery ("Montgomery") seek in this diversity action to recover from defendant Chemical Bank ("Chemical") for the amounts of two checks dated March 9, 1981, drawn on Chemical (the "Checks"). The Checks, one in the amount of $716,946 and the other for $46,056, were fraudulently negotiated by William T. Rubin ("Rubin"). As set forth in the following findings of fact and conclusions of law, because Lund and Montgomery failed to mitigated their damages and because they are equitably estopped, their complaints will be dismissed, and judgment entered in favor of Chemical.

Prior Proceedings

Lund, Lunds Inc., and Montgomery initiated this action in 1984 against Chemical. Chemical in turn brought a third-party action against Laidlaw Adams & Peck ("Laidlaw"), a securities firm which had deposited the fraudulently endorsed checks and which was later dissolved.

This action has achieved an impressive procedural history since then. In an opinion dated June 16, 1987, this Court held that, among other things, the absence of actual delivery of the Checks would not bar the Plaintiffs from recovery. See Lund v. Chemical Bank, 665 F.Supp. 218, 226 (S.D.N.Y.1987) "Lund I", on recons., 675 F.Supp. 815 (S.D.N.Y.1987) "Lund II". On March 16, 1989, the Second Circuit affirmed this part of Lund I while reversing and remanding to determine whether Rubin's acts were authorized, the facts relating to Chemical's defense under N.Y.U.C.C. Law § 3-406, and the applicability of N.Y.U.C.C. Law § 3-419(2) to a co-endorsee. See Lund's Inc. v. Chemical Bank, 870 F.2d 840, 851-53 (2d Cir.1989) "Lund III".

After remand from the Second Circuit, summary judgment was granted to Chemical against Lund's Inc. on the basis of the then-recent New York State court decision in State v. Barclays Bank of New York, N.A., 151 A.D.2d 19, 546 N.Y.S.2d 479 (1989) ("Barclays I"). See Lund v. Chemical Bank, No. 84 Civ. 1621, slip op., 1990 WL 17711 (Feb. 16, 1990) "Lund IV". Barclays I was the first fully reported decision of an intermediate New York appellate court on the delivery issue. In it, the Third Department took note of Lund III and expressed its disagreement with the Second Circuit's analysis. See 546 N.Y.S.2d at 481.

Lund's Inc. moved to reconsider Lund IV in light of the New York Court of Appeals having granted review of Barclays I. This motion was granted by endorsement on May 4, 1990, "pending the determination of the Barclays Bank case in the Court of Appeals". That court affirmed Barclays I on October 18, 1990, see State v. Barclays Bank of New York, N.A., 76 N.Y.2d 533, 561 N.Y.S.2d 697, 563 N.E.2d 11 (1990) "Barclays II", and Chemical moved for entry of judgment. Chemical's motion was granted in an opinion dated March 27, 1991, which found that the check in question had not been constructively delivered to Lund's Inc. See Lund v. Chemical Bank, 760 F.Supp. 51, 55 (S.D.N.Y.1991) "Lund V". Judgment was entered dismissing the complaint of Lund's Inc. on April 5, 1991.

Discovery meanwhile proceeded on the remaining claims, and a bench trial was held from March 2-4, 1992. Final submissions were completed on April 13, 1992.

Findings of Fact

The Background of FTC and the Relationship of the Parties

Despite dyslexia, Lund graduated from the University of Minnesota in 1959 after having served as a pilot in the Korean War. He then worked as a researcher for ten years. Montgomery was a consulting engineer for Motorola.

Lund, Montgomery, and four former military pilots found Flight Training Center ("FTC") in 1968 as a flight school and aircraft rental business. Lund had no day-to-day management role, but did invest money in the corporation and flew its aircraft. Montgomery served as FTC's president but was never particularly active in the company's affairs. By 1975, all of the original owners had left except Lund and Montgomery.

FTC hired Janet Karki ("Karki") as a bookkeeper in 1976. She told the others in the company that many of FTC's financial problems stemmed from an unfavorable airplane lease with William Rubin ("Rubin"). When FTC tried to renegotiate this lease, Rubin offered instead to participate in an effort to make the company profitable.

Rubin told Lund and Montgomery that he had made other troubled companies profitable, and that he had a background in aviation and was already operating an air taxi service. Rubin was hired as a consultant in 1977. He soon controlled expenses, advertised, and increased FTC's customer base. As a result, FTC started making money on the formerly unprofitable lease from Rubin. At Rubin's suggestion, FTC also leased a Learjet to offer training to pilots who had GI Bill benefits. The Learjet became a major profit center for FTC.

In 1978 Montgomery resigned as an officer of FTC. Rubin became president, a director, and chairman of the board.

When the lease for the first Learjet was about to expire, Rubin proposed that, rather than renewing the lease, Lund should buy a Learjet and lease it to FTC. After locating a Learjet 25, Rubin and Lund decided both would buy it in a 50/50 joint venture. They rejected a partnership arrangement for tax purposes.¹ Lund arranged for the financing, and both Lund and Rubin signed the note. A checking account was established in which to make deposits and write checks to pay for expenses. Rubin's P.O. Box was listed as the address on the account.

The plane crashed, and two new planes were purchased — a Learjet 25D and a Learjet 28 — as well as a used Learjet 24. Separate Joint Venture Agreements were executed by Lund and Rubin for each of these planes. Lund does not remember the documents, including having signed them or any of the surrounding circumstances relating to them.

The Joint Venture Agreements specified that ownership of the aircraft was vested equally between Lund and Rubin, see ¶ 2, and that each was to pay his proper share of the venture's expenses:

5. Expenses. Each Joint Venturer shall pay his proper share of the expenses of the joint venture, including legal, accounting, insurance premiums, finance charges, and other expenses directly relating to the aircraft and its operation, to the extent that revenues from the operation of the aircraft are insufficient to pay expenses in full as the same come due.

Each Joint Venture Agreement also contained the following provisions:

3. Purpose of Joint Venture. It is expressly declared to be the purpose of this joint venture to acquire the aircraft at the purchase price and under the terms and conditions set forth in the purchase order hereinabove described, and to lease said aircraft after delivery or resell said aircraft at a profit.

4. Management. The Joint Venturers hereby appoint William Rubin as the manager of the enterprise. The manager shall have full charge of and control over the management of the aircraft and of all matters arising out of this enterprise. He shall cause accurate records to be kept concerning the purchase, financing, leasing, and other aspects of the operation of said aircraft. Manager agrees that he shall take no extra compensation for his management function hereunder. The manager shall employ reasonable care and diligence in the management of the aircraft, including but not limited to keeping said aircraft insured. The manager shall furnish each Joint Venturer periodically, at reasonable intervals, with a statement showing the receipts and expenditures and such other information as he may deem pertinent.

. . . . .

8. Control of Venture. It is expressly recognized and agreed that in all of its dealings with third parties in respect to this enterprise, any one of the Joint Venturers may bind the other Joint Venturer individually and the joint venture collectively, as is the case in a general partnership. Accordingly, although it is contemplated that the manager will generally be the Joint Venturer who shall conduct such affairs, the signature of any one of the Joint Venturers shall be sufficient for all business purposes in regard to the enterprise, including but not limited to the signing of checks, the transfer of title to the aircraft, the mortgaging or encumbering the aircraft or any similar matter.

Montgomery and Karki, who by then was FTC's Executive Vice President and Secretary and a director, also jointly purchased a Cessna P210 in 1979 under a Joint Venture Agreement containing similar provisions.

Joint bank accounts — sometimes called the jet accounts — were used for the airplane transactions. Rubin did not maintain the funds separately for the different airplanes owned by the Lund Joint Ventures. Rubin never paid Lund money from outside the jet accounts, and Lund never received any payments from third parties relating to the aircraft. Specifically, FTC never paid any funds related to the airplanes directly to Lund. Lund had no financial dealings with FTC related to the aircraft other than through the joint accounts.

Rubin did not make any substantial contributions to the expense account and, as of March 9, 1982, had withdrawn $1,093,225 more than he had deposited. Lund had contributed $1,610,840 more than had been withdrawn for his account.

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