NATIONAL CONSUMER CO-OP. BANK v. Madden, Civ. No. 89-00045 DAE.

• Decision Date: 22 May 1990
• Docket Number: Civ. No. 89-00045 DAE.
• Citation: 737 F. Supp. 1108
• Parties: NATIONAL CONSUMER COOPERATIVE BANK, Plaintiff, v. George R. MADDEN, Jr., and Jack L. Ayers, Jr., Defendants.
• Court: U.S. District Court — District of Hawaii

737 F. Supp. 1108

NATIONAL CONSUMER COOPERATIVE BANK, Plaintiff, v. George R. MADDEN, Jr., and Jack L. Ayers, Jr., Defendants.

Civ. No. 89-00045 DAE.

United States District Court, D. Hawaii.

May 22, 1990.

COPYRIGHT MATERIAL OMITTED

James N. Duca, Kessner, Duca & Maki, Honolulu, Haw., for plaintiff.

Jonathan L. Ortiz, Ortiz & Yamamura, Honolulu, Haw., for defendants.

DAVID A. EZRA, District Judge.

Before the court are several motions by defendant George R. Madden, Jr. ("Madden") brought pursuant to Fed.R.Civ.P. 56. These motions include three motions for summary judgment and three motions for partial summary judgment. The motions for summary judgment are based upon Madden's assertions that 1) plaintiff fails to state a claim; 2) plaintiff made an illegal loan; and 3) plaintiff has failed to name indispensable parties. The motions for partial summary judgment seek resolution of 1) the claim of overcubing; 2) the issue of punitive damages; and 3) the issue of defendant Madden's liability with respect to a $300,000 "second loan."

Also before the court is the request of plaintiff National Consumer Cooperative Bank ("National Consumer Co-op" or "the bank") for sanctions under Fed.R.Civ.P. 11.

On May 14, 1990, this court heard argument on Madden's various motions and National Consumer Co-op's request for sanctions. James N. Duca, Esq. appeared on behalf of National Consumer Co-op. Jonathan L. Ortiz, Esq. appeared on behalf of defendant Madden. Pro se defendant Jack L. Ayers, Jr. did not appear at the hearing.

The court has carefully considered the memoranda submitted in support of, and in opposition to, defendant Madden's motions, the case law contained therein, and counsels' oral arguments as well as the records and pleadings on file in this action. For the reasons set forth below, the court denies Madden's motions for summary judgment, and denies National Consumer Coop's request for Rule 11 sanctions.

I. BACKGROUND

This litigation involves claims of fraud, misrepresentation, and conspiracy in the procurement of a loan from National Consumer Co-op.¹ The salient facts are somewhat cumbersome in light of the tangled corporate web that this action involves.²

In June 1987, National Consumer Co-op made a $1.3 million loan to Oahu Freight Association³ ("OFA") and its two wholly owned subsidiaries, Kano Trucking Service, Ltd.⁴ ("Kano") and OFA/California Cooperative, Inc.⁵ ("Calif. Co-op").⁶ At that time defendant Jack L. Ayers, Jr. ("Ayers") was president and a director of each of the corporations in the OFA group.

The purpose of the loan was to finance the purchase by OFA of the California assets of Pacific Basin Consolidators⁷ ("PBC"). Madden was the president and owner of PBC at the time the loan was secured.⁸ He also was a director of Kano.

National Consumer Co-op alleges that Madden and Ayers acted together fraudulently to induce the bank to make a loan to OFA, the proceeds of which flowed to Madden personally when PBC dissolved shortly after the closing of the loan. In particular, National Consumer Co-op alleges the defendants concealed from it the following material information:

1) That the purchase of PBC's operations by OFA was not an arm's length transaction;

2) That defendant Ayers stood to (and did) gain financially from OFA's purchase of PBC, because he owned nearly 25% of PBC's parent company, Century Three Freightways, Inc. ("Century");

3) That both defendants knew that the value of PBC transmitted to the bank through its finance statements reflected profits made by PBC as a result of an illegal billing process known as "overcubing," and therefore the future legitimate profitability of PBC could not be accurately estimated from the finance statements;⁹

4) That the accounting and preparation of financial statements for both buyer-borrower OFA and seller PBC were under the exclusive control of Interpool Advance Office and Data Processing Systems, Inc. ("Interpool"), a Hawaii corporation that Madden had incorporated and owned; and 5) That PBC, after the receipt of financial statements by the bank, but before the closing of the loan, incurred materially adverse declines in its financial condition.

In response to plaintiff's allegation that there are material facts which prevent the granting of summary judgment, Madden asserts the following:

1) the facts alleged by the plaintiff are not material, because National Consumer Co-op did not rely upon any of these matters to their detriment;

2) the alleged omissions of fact by Madden are not actionable, because as a nonparty to the loan, he owed no duty to the bank;

3) the bank is estopped from asserting a cause of action to collect the proceeds of the loan, but its action in making the loan to OFA, an ineligible cooperative, was an ultra vires act beyond the scope of its powers under the National Consumer Cooperative Bank Act;

4) the bank failed to join the makers of the loan—OFA, Kano, and Calif. Co-op— and thus may not proceed in this action because complete relief cannot be accorded to all of the parties.

II. SUMMARY JUDGMENT STANDARDS

Fed.R.Civ.P. 56 provides that summary judgment shall be entered when:

... the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

If the moving party shows that no material fact exists, the opposing party may not defeat a motion for summary judgment absent any significant probative evidence tending to support his claim. Commodity Futures Trading Comm'n v. Savage, 611 F.2d 270 (9th Cir.1979). The opposing party cannot stand on his pleadings, nor can he simply assert that he will be able to discredit the moving party's evidence at trial. T.W. Electrical Services, Inc. v. Pacific Electrical Contractors Ass'n, 809 F.2d 626 (9th Cir.1987). Further, legal memoranda and oral argument are not evidence and do not create issues of fact capable of defeating an otherwise valid motion for summary judgment. British Airways Bd. v. Boeing Co., 585 F.2d 946 (9th Cir.1978), cert. denied, 440 U.S. 981, 99 S.Ct. 1790, 60 L.Ed.2d 241 (1979).

As stated in Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986):

The judge must ask not whether he thinks the evidence favors one side or the other but whether a fair-minded jury could return a verdict for the plaintiff on the evidence presented. The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff.

III. DEFENDANT'S MOTIONS

A. Madden's Motion for Summary Judgment for Failure to State a Claim

The defendant must owe a duty to the plaintiff in order for a cause of action for fraud to succeed based upon allegations of material misrepresentations and omissions. Ellis v. Crockett, 51 Haw. 45, 451 P.2d 814 (1969). Madden asserts he was not a party to the loan, and thus he owed no duty to the bank to disclose any information to it.

When a party injects himself into a business transaction, however, he incurs a duty to disclose all material information necessary to prevent representations he makes, either directly or indirectly, from misleading other parties to the transaction. See General Motors Acceptance Corp. v. Central National Bank, 773 F.2d 771, 778 (7th Cir.1985) ("even in the absence of a confidential relationship, fraud may be based on a failure to disclose which together with an affirmative statement or act is misleading").

In the instant case, National Consumer Co-op has raised significant issues of material fact with respect to the degree to which Madden was involved in the loan transaction. Chiefly, National Consumer Co-op points to an October 29, 1986 letter written to the bank by Madden over Ayers's signature proposing that the bank loan OFA $3,000,000 to retire its note from the prior sale of Kano to OFA and to purchase the assets of PBC.¹⁰

Based upon this letter, and upon other evidence of the behind the scenes role Madden played in convincing the bank through alleged omissions and misrepresentations to approve OFA's loan application, the court concludes that the issue of whether Madden owed a duty of disclosure to the bank is an issue which a finder of fact must resolve.

As a second argument in support of his motion, Madden cites Giuliani v. Chuck, 1 Haw.App. 379, 620 P.2d 733 (1980) for the proposition that a party asserting false representation and fraudulent concealment claims must show reliance upon those claimed misrepresentations and concealments. Although the facts of Giuliani differ significantly from the case at bar,¹¹ the court agrees with the general principle that reliance must be shown in order to sustain claims of fraudulent concealment and misrepresentation.

In his attempt to demonstrate that the bank did not rely upon any of his alleged misrepresentations or omissions, Madden correctly characterizes the deposition testimony of the bank's agents as indicating that the bank, in deciding whether to make the loan to OFA, did not directly rely upon the representations in the October 29, 1986 letter Madden authored on behalf of Ayers.

The bank asserts, however, that the October 29, 1986 letter caused it to rely upon other material misrepresentations indirectly made by the defendants. This contention is supported by the record currently before the court and is sufficient to raise a genuine issue of material fact to defeat the instant motion for summary judgment.¹²

In sum, the court finds that summary judgment is not appropriate at this juncture because the bank has demonstrated genuine issues of material fact as to Madden's role in OFA's successful solicitation of the loan enabling it to buy Madden's company, PBC. The circumstantial evidence the bank has brought forward in support of its theory that...